e6vk
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 July, 2007
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(translation of each Registrants 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, Managements Discussion and Analysis, and updated earnings
coverage calculations 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), Form S-8 No.
333-13962 (Canadian Pacific Railway Limited), and Form F-9 No. 333-142347 (Canadian Pacific Railway
Company).
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: July 24, 2007 |
By: |
Signed: Donald F. Barnhardt
|
|
|
|
|
|
|
|
Name: |
Donald F. Barnhardt |
|
|
Title: |
Corporate Secretary |
|
|
Canadian Pacific
Managements Discussion and Analysis
Second Quarter Report 2007
Release: Immediate, July 24, 2007
CANADIAN PACIFIC ANNOUNCES STRONG SECOND QUARTER RESULTS
CALGARY Canadian Pacific Railway Limited (TSX/NYSE: CP) reported strong second-quarter
results today. Operating income for the second quarter of 2007 was up 9 per cent over the same
period in 2006 driven by solid revenues.
SUMMARY OF SECOND-QUARTER 2007 COMPARED WITH SECOND-QUARTER 2006
|
|
|
Income before foreign exchange gains on long-term debt and other specified items
increased 9 per cent to $175 million from $161 million. |
|
|
|
|
Excluding foreign exchange gains on long-term debt and other specified items, diluted
earnings per share increased 12 per cent to $1.12 from $1.00. |
|
|
|
|
Operating ratio improved to 74.7 per cent from 75.0 per cent. |
|
|
|
|
Freight revenue increased 8 per cent to $1.2 billion. |
Net income was $257 million in the second quarter, compared with $378 million for the same quarter
in 2006, which includes foreign exchange gains on long-term debt and other specified items. The
2006 results included a $176-million reduction in future income tax expense due to changes in
Canadian federal and provincial tax legislation. Diluted earnings per share was $1.64 in 2007
compared with $2.37 in 2006.
We produced 12 per cent growth in adjusted diluted EPS and posted further improvement in our
operating ratio in spite of a 26-day strike and tough weather-related operating conditions, said
Fred Green, President and CEO. We safely moved record volumes although the challenges of the
quarter created inefficiencies that give us opportunities for improvement.
Revenues in the second-quarter reflected continuing, strong global demand for bulk commodities
with double-digit growth in sulphur and fertilizers and coal. Grain revenues improved 9 per cent
with industrial and consumer products and intermodal up 6 and 3 per cent respectively. There was a
decrease in automotive revenue of 4 per cent and forest products revenue was down 2 per cent.
Operating expenses increased 7 per cent to $908 million. This reflected a 21 per cent increase in
fuel costs due primarily to a significant increase in refining margins and a 29 per cent increase
in equipment rents due to lower offline car hire receipts and additional locomotives required to
move higher freight volumes. There were also one-time costs associated with the 26-day strike by
track maintenance employees.
SUMMARY OF FIRST-HALF 2007 COMPARED WITH 2006
Net income for the first half of 2007 was $385 million compared with $487 million in 2006, a
decrease of 21 per cent due mainly to the $176-million reduction in future income tax expense
included in the 2006 results. Diluted earnings per share was $2.46 compared with $3.05 for the
first half of 2006.
Freight revenues increased 5 per cent to $2.3 billion and operating expenses were up 4 per cent to
$1.8 billion.
1
EXCLUDING FOREIGN EXCHANGE GAINS ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
|
|
|
Income increased 7 per cent to $297 million from $277 million. |
|
|
|
|
Diluted earnings per share grew 10 per cent to $1.90 from $1.72. |
|
|
|
|
Operating ratio improved 30 basis points to 77.0 per cent from 77.3 per cent. |
2007 OUTLOOK
We still face some significant challenges through the rest of 2007 with rising fuel refining
margins and the strengthening Canadian dollar, added Mr. Green. However, with continued focus on
our Integrated Operating Plan and cost containment we expect to deliver on our targets.
CPs 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 expected
to exceed $300 million in 2007. This outlook assumes oil prices averaging US $65 per barrel and an
average currency exchange rate of $1.10 per U.S. dollar (US$0.90). This is a revision to our
previous assumptions which were oil prices averaging US$58 per barrel and an average exchange rate
of $1.15 per U.S. dollar (US$0.87).
FOREIGN EXCHANGE GAINS ON LONG-TERM DEBT
CP had a foreign exchange gain on long-term debt of $89 million ($65 million after tax) in the
second quarter of 2007, compared with a foreign exchange gain on long-term debt of $53 million ($41
million after tax) in the second quarter of 2006. There was a future income tax benefit of $17
million in the second quarter of 2007 resulting from a reduction in the Canadian federal income tax
rate. The second quarter of 2006 included a future income tax benefit of $176 million as a result
of a decrease in Canadian federal and provincial income tax rates.
For the first six months of 2007, CP had a foreign exchange gain on long-term debt of $97 million
($71 million after tax) compared with a foreign exchange gain of $46 million ($34 million after
tax) in the first half of 2006. There were no additional other specified items in the first half
of 2007 other than the future income tax benefit of $17 million mentioned above. Other than the
future income tax benefit of $176 million, there were no additional other specified items in the
first half of 2006.
RESTATEMENT OF SECOND-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 June 30, 2006 have been restated with a reduction in Compensation and benefits
expense of $0.7 million, an increase in Net income of $0.6 million and an increase in basic and
diluted earnings per share of $0.01. Basic earnings per share excluding foreign exchange gains and
losses on long-term debt and other specified items was increased by $0.01. There was no change to
diluted earning per share excluding foreign exchange gains and losses on long-term debt and other
specified items. The six months ended June 30, 2006 have been restated with an increase in
Compensation and benefits expense of $1.6 million, a reduction of Net income of $1.6 million
and no change to basic earnings per share. Diluted earnings per share was increased by $0.01.
Basic and diluted earnings per share excluding foreign exchange gains and losses on long-term debt
and other specified items were reduced by $0.01 and $0.02, respectively.
Presentation of non-GAAP earnings
2
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 CPs
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 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 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.
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.
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, CPs 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; risks in agricultural
production such as weather conditions and insect populations; 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; including regulation of rates; changes in taxes and tax
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; 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 except as required by law.
Canadian Pacific, through the ingenuity of its employees located across Canada and in the United
States, intends to be the safest, 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
3
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 |
4
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Revenues |
|
|
|
|
|
|
|
|
Freight |
|
$ |
1,174.1 |
|
|
$ |
1,086.4 |
|
Other |
|
|
41.4 |
|
|
|
44.6 |
|
|
|
|
|
|
|
1,215.5 |
|
|
|
1,131.0 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
329.8 |
|
|
|
320.8 |
|
Fuel |
|
|
193.7 |
|
|
|
160.1 |
|
Materials |
|
|
55.6 |
|
|
|
54.5 |
|
Equipment rents |
|
|
57.3 |
|
|
|
44.4 |
|
Depreciation and amortization |
|
|
119.1 |
|
|
|
117.8 |
|
Purchased services and other |
|
|
152.3 |
|
|
|
150.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
907.8 |
|
|
|
848.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
307.7 |
|
|
|
282.6 |
|
|
|
|
|
|
|
|
|
|
Other charges (Note 4) |
|
|
8.2 |
|
|
|
7.7 |
|
Foreign exchange gains on long-term debt |
|
|
(88.6 |
) |
|
|
(52.7 |
) |
Interest expense (Note 5) |
|
|
49.2 |
|
|
|
48.6 |
|
Income tax expense (benefit) (Note 6) |
|
|
82.2 |
|
|
|
(99.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
256.7 |
|
|
$ |
378.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (Note 7) |
|
$ |
1.66 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (Note 7) |
|
$ |
1.64 |
|
|
$ |
2.37 |
|
|
|
|
See notes to interim consolidated financial statements.
5
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Revenues |
|
|
|
|
|
|
|
|
Freight |
|
$ |
2,265.0 |
|
|
$ |
2,153.6 |
|
Other |
|
|
66.4 |
|
|
|
87.9 |
|
|
|
|
|
|
|
2,331.4 |
|
|
|
2,241.5 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
662.3 |
|
|
|
673.0 |
|
Fuel |
|
|
364.9 |
|
|
|
318.0 |
|
Materials |
|
|
118.0 |
|
|
|
112.1 |
|
Equipment rents |
|
|
112.8 |
|
|
|
89.0 |
|
Depreciation and amortization |
|
|
237.7 |
|
|
|
232.6 |
|
Purchased services and other |
|
|
298.7 |
|
|
|
307.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,794.4 |
|
|
|
1,732.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
537.0 |
|
|
|
509.4 |
|
|
Other charges (Note 4) |
|
|
13.0 |
|
|
|
14.5 |
|
Foreign exchange gains on long-term debt |
|
|
(97.2 |
) |
|
|
(46.3 |
) |
Interest expense (Note 5) |
|
|
96.0 |
|
|
|
95.9 |
|
Income tax expense (benefit) (Note 6) |
|
|
139.9 |
|
|
|
(41.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
385.3 |
|
|
$ |
486.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (Note 7) |
|
$ |
2.49 |
|
|
$ |
3.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (Note 7) |
|
$ |
2.46 |
|
|
$ |
3.05 |
|
|
|
|
See notes to interim consolidated financial statements.
6
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
256.7 |
|
|
$ |
378.1 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in foreign currency translation
adjustments, net of hedging activities |
|
|
(2.9 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
Net change in gains on derivatives
designated as cash flow hedges |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before income taxes |
|
|
(12.7 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
Income tax recovery |
|
|
(2.0 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss (Note 11) |
|
|
(14.7 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
242.0 |
|
|
$ |
373.3 |
|
|
|
|
See notes to interim consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
385.3 |
|
|
$ |
486.9 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in foreign currency
translation adjustments, net of
hedging activities |
|
|
(3.2 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Net change in gains on derivatives
designated as cash flow hedges |
|
|
(13.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
before income taxes |
|
|
(16.2 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Income tax recovery |
|
|
(1.3 |
) |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss (Note 11) |
|
|
(17.5 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
367.8 |
|
|
$ |
483.8 |
|
|
|
|
See notes to interim consolidated financial statements.
7
CONSOLIDATED BALANCE SHEET
(in millions)
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
December 31 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
392.1 |
|
|
$ |
124.3 |
|
Accounts receivable and other current assets |
|
|
566.7 |
|
|
|
615.7 |
|
Materials and supplies |
|
|
171.4 |
|
|
|
158.6 |
|
Future income taxes |
|
|
128.9 |
|
|
|
106.3 |
|
|
|
|
|
|
|
1,259.1 |
|
|
|
1,004.9 |
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
58.5 |
|
|
|
64.9 |
|
Net properties |
|
|
9,137.5 |
|
|
|
9,122.9 |
|
Other assets and deferred charges |
|
|
1,233.6 |
|
|
|
1,223.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,688.7 |
|
|
$ |
11,415.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
994.2 |
|
|
$ |
1,002.6 |
|
Income and other taxes payable |
|
|
29.3 |
|
|
|
16.0 |
|
Dividends payable |
|
|
34.9 |
|
|
|
29.1 |
|
Long-term debt maturing within one year |
|
|
30.6 |
|
|
|
191.3 |
|
|
|
|
|
|
|
1,089.0 |
|
|
|
1,239.0 |
|
|
|
|
|
|
|
|
|
|
Deferred liabilities |
|
|
716.3 |
|
|
|
725.7 |
|
Long-term debt (Note 9) |
|
|
3,046.6 |
|
|
|
2,813.5 |
|
Future income taxes |
|
|
1,858.3 |
|
|
|
1,781.2 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Share capital (Note 10) |
|
|
1,182.0 |
|
|
|
1,175.7 |
|
Contributed surplus |
|
|
38.7 |
|
|
|
32.3 |
|
Accumulated other comprehensive income (Note 11) |
|
|
62.9 |
|
|
|
66.4 |
|
Retained income |
|
|
3,694.9 |
|
|
|
3,582.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,978.5 |
|
|
|
4,856.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
11,688.7 |
|
|
$ |
11,415.9 |
|
|
|
|
Commitments and contingencies (Note 17) .
See notes to interim consolidated financial statements.
8
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
256.7 |
|
|
$ |
378.1 |
|
Add (deduct) items not affecting cash: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
119.1 |
|
|
|
117.8 |
|
Future income taxes |
|
|
57.7 |
|
|
|
(114.6 |
) |
Foreign exchange gains on long-term debt |
|
|
(88.6 |
) |
|
|
(52.7 |
) |
Amortization of deferred charges |
|
|
3.1 |
|
|
|
4.3 |
|
Restructuring and environmental remediation payments |
|
|
(12.0 |
) |
|
|
(22.8 |
) |
Other operating activities, net |
|
|
0.9 |
|
|
|
(1.7 |
) |
Change in non-cash working capital balances related
to operations |
|
|
27.6 |
|
|
|
(26.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
364.5 |
|
|
|
282.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Additions to properties |
|
|
(158.4 |
) |
|
|
(177.3 |
) |
Additions to investments and other assets (Note 13) |
|
|
(11.4 |
) |
|
|
(65.3 |
) |
Net proceeds from disposal of
transportation properties |
|
|
(0.4 |
) |
|
|
77.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(170.2 |
) |
|
|
(165.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(34.7 |
) |
|
|
(29.8 |
) |
Issuance of CP Common Shares |
|
|
15.0 |
|
|
|
10.7 |
|
Purchase of CP Common Shares |
|
|
(212.0 |
) |
|
|
(98.0 |
) |
Net decrease in short-term borrowing |
|
|
(77.7 |
) |
|
|
|
|
Issuance of long-term debt (Note 9) |
|
|
485.1 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(3.5 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
172.2 |
|
|
|
(120.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash position |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
366.5 |
|
|
|
(3.2 |
) |
Cash and cash equivalents at beginning of period |
|
|
25.6 |
|
|
|
47.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
392.1 |
|
|
$ |
44.3 |
|
|
|
|
See notes to interim consolidated financial statements.
9
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
385.3 |
|
|
$ |
486.9 |
|
Add (deduct) items not affecting cash: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
237.7 |
|
|
|
232.6 |
|
Future income taxes |
|
|
96.2 |
|
|
|
(70.4 |
) |
Foreign exchange gains on long-term debt |
|
|
(97.2 |
) |
|
|
(46.3 |
) |
Amortization of deferred charges |
|
|
6.2 |
|
|
|
8.6 |
|
Restructuring and environmental remediation payments |
|
|
(25.2 |
) |
|
|
(50.6 |
) |
Other operating activities, net |
|
|
(1.8 |
) |
|
|
2.4 |
|
Change in non-cash working capital balances related
to operations |
|
|
(9.0 |
) |
|
|
(106.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
592.2 |
|
|
|
456.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Additions to properties |
|
|
(362.6 |
) |
|
|
(369.0 |
) |
Additions to investments and other assets (Note 13) |
|
|
(11.7 |
) |
|
|
(85.0 |
) |
Net proceeds from disposal of
transportation properties |
|
|
8.5 |
|
|
|
81.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(365.8 |
) |
|
|
(372.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(63.8 |
) |
|
|
(53.5 |
) |
Issuance of CP Common Shares |
|
|
25.1 |
|
|
|
49.2 |
|
Purchase of CP Common Shares |
|
|
(228.1 |
) |
|
|
(143.6 |
) |
Issuance of long-term debt (Note 9) |
|
|
485.1 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(176.9 |
) |
|
|
(14.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities |
|
|
41.4 |
|
|
|
(162.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash position |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
267.8 |
|
|
|
(77.5 |
) |
Cash and cash equivalents at beginning of period |
|
|
124.3 |
|
|
|
121.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
392.1 |
|
|
$ |
44.3 |
|
|
|
|
See notes to interim consolidated financial statements.
10
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
(see Note 2) |
|
|
|
(unaudited) |
|
Share capital |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,182.9 |
|
|
$ |
1,175.1 |
|
Shares issued under stock option plans |
|
|
18.5 |
|
|
|
12.6 |
|
Shares purchased |
|
|
(19.4 |
) |
|
|
(13.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
1,182.0 |
|
|
|
1,174.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed surplus |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
37.1 |
|
|
|
204.2 |
|
Stock-based compensation expense
related to stock option plans |
|
|
1.6 |
|
|
|
1.8 |
|
Shares purchased |
|
|
|
|
|
|
(90.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
38.7 |
|
|
|
115.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
77.6 |
|
|
|
69.2 |
|
Other comprehensive loss (Note 11) |
|
|
(14.7 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
62.9 |
|
|
|
64.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
3,641.7 |
|
|
|
3,008.9 |
|
Net income for the period |
|
|
256.7 |
|
|
|
378.1 |
|
Shares purchased |
|
|
(168.6 |
) |
|
|
|
|
Dividends |
|
|
(34.9 |
) |
|
|
(29.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
3,694.9 |
|
|
|
3,357.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive
income and retained earnings |
|
|
3,757.8 |
|
|
|
3,421.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity, end of period |
|
$ |
4,978.5 |
|
|
$ |
4,711.3 |
|
|
|
|
See notes to interim consolidated financial statements.
11
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
|
ended June 30 |
|
|
|
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 |
|
|
30.8 |
|
|
|
52.7 |
|
Shares purchased |
|
|
(24.5 |
) |
|
|
(20.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
1,182.0 |
|
|
|
1,174.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed surplus |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
32.3 |
|
|
|
245.1 |
|
Stock-based compensation expense related to stock
option plans |
|
|
6.4 |
|
|
|
5.9 |
|
Shares purchased |
|
|
|
|
|
|
(135.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
38.7 |
|
|
|
115.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (Note 11) |
|
|
(17.5 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
62.9 |
|
|
|
64.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
3,582.1 |
|
|
|
2,930.0 |
|
Adjustment for change in accounting policy (Note 2) |
|
|
4.0 |
|
|
|
|
|
|
|
|
Adjusted balance, beginning of period |
|
|
3,586.1 |
|
|
|
2,930.0 |
|
Net income for the period |
|
|
385.3 |
|
|
|
486.9 |
|
Shares purchased |
|
|
(206.6 |
) |
|
|
|
|
Dividends |
|
|
(69.9 |
) |
|
|
(59.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
3,694.9 |
|
|
|
3,357.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income and
retained earnings |
|
|
3,757.8 |
|
|
|
3,421.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity, end of period |
|
$ |
4,978.5 |
|
|
$ |
4,711.3 |
|
|
|
|
See notes to interim consolidated financial statements.
12
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 Limiteds (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. |
|
|
|
CPs 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. 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.
Any change in the fair value of derivatives not designated as hedges is recognized in the
period in which the change occurs in the Statement of Consolidated Income in the line item
to which the derivative instrument is related. On the Consolidated Balance Sheet they are
classified 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. 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, on the same
line as 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 prior to settlement was
not recognized in the financial statements. |
13
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
1 |
|
Basis of presentation (continued) |
|
|
|
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. |
|
|
|
The transitional date for the assessment of embedded derivatives was January 1, 2001. |
|
2 |
|
New accounting policies |
|
|
|
Financial instruments, hedging and comprehensive income |
|
|
|
On January 1, 2007 the Company adopted the following accounting standards issued by the
Canadian Institute of Chartered Accountants (CICA): 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 Companys 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. |
14
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
2 |
|
New accounting policies (continued) |
|
|
|
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 June 30, 2006 have been restated with a reduction in Compensation
and benefits expense of $0.7 million, an increase in Net income of $0.6 million and an
increase in basic and diluted earnings per share of $0.01. The comparative financial
statements for the six months ended June 30, 2006 have been restated with an increase in
Compensation and benefits expense of $1.6 million, a reduction in Net income of $1.6
million and no change to basic earnings per share. Diluted earnings per share was increased
by $0.01. |
|
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
1535 Capital Disclosures and Section 3031 Inventories. |
|
|
|
Section 3862 Financial Instruments Disclosures and Section 1535 Capital Disclosures
will require the Company to provide additional disclosures relating to its financial
instruments, including hedging instruments, and about the Companys capital. It is not
anticipated that the adoption of these new accounting standards will impact the amounts
reported in the Companys financial statements as they primarily relate to disclosure. |
|
|
|
Section 3031 Inventories will provide guidance on the method of determining the cost of
CPs materials and supplies. The new accounting standard specifies that inventories are to
be valued at the lower of cost and net realizable value. CP currently reflects materials
and supplies at the lower of cost and replacement value. The standard requires the reversal
of previously recorded write downs to realizable value when there is clear evidence that net
realizable value has increased. Additional disclosures will also be required. It is not
anticipated that the adoption of Section 3031 Inventories will have a material impact to
CPs financial statements. Adoption of the new standard may be made on either a prospective
basis or retroactively with restatement of prior comparative periods. |
|
4 |
|
Other charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Amortization of discount
on accruals recorded at
present value |
|
$ |
2.2 |
|
|
$ |
2.7 |
|
|
$ |
4.2 |
|
|
$ |
5.2 |
|
Other exchange losses |
|
|
2.5 |
|
|
|
3.4 |
|
|
|
2.0 |
|
|
|
3.5 |
|
Loss on sale of accounts
receivable |
|
|
1.4 |
|
|
|
1.2 |
|
|
|
2.7 |
|
|
|
2.3 |
|
Gains on non-hedging
derivative instruments |
|
|
(0.1 |
) |
|
|
(0.9 |
) |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
Other |
|
|
2.2 |
|
|
|
1.3 |
|
|
|
4.5 |
|
|
|
3.6 |
|
|
|
|
|
|
|
Total other charges |
|
$ |
8.2 |
|
|
$ |
7.7 |
|
|
$ |
13.0 |
|
|
$ |
14.5 |
|
|
|
|
|
|
15
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
5 Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Interest expense |
|
$ |
52.3 |
|
|
$ |
50.1 |
|
|
$ |
101.1 |
|
|
$ |
99.1 |
|
Interest income |
|
|
(3.1 |
) |
|
|
(1.5 |
) |
|
|
(5.1 |
) |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
49.2 |
|
|
$ |
48.6 |
|
|
$ |
96.0 |
|
|
$ |
95.9 |
|
|
|
|
|
|
6 |
|
Income taxes |
|
|
|
Cash taxes refunded in the three months ended June 30, 2007 was $1.1 million (three months
ended June 30, 2006 paid $1.9 million). Cash taxes paid in the six months ended June 30,
2007 was $8.1 million (six months ended June 30, 2006 $7.7 million). |
|
7 |
|
Earnings per share |
|
|
|
At June 30, 2007, the number of shares outstanding was 153.1 million (June 30, 2006 157.2
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 |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Weighted average shares
outstanding |
|
|
154.3 |
|
|
|
158.3 |
|
|
|
154.9 |
|
|
|
158.4 |
|
Dilutive effect of stock options |
|
|
1.8 |
|
|
|
2.0 |
|
|
|
1.5 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted
shares outstanding |
|
|
156.1 |
|
|
|
160.3 |
|
|
|
156.4 |
|
|
|
160.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.66 |
|
|
$ |
2.39 |
(1) |
|
$ |
2.49 |
|
|
$ |
3.08 |
(1) |
Diluted earnings per share |
|
$ |
1.64 |
|
|
$ |
2.37 |
(1) |
|
$ |
2.46 |
|
|
$ |
3.05 |
(1) |
|
|
|
|
|
16
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
8 |
|
Restructuring and environmental remediation |
|
|
|
At June 30, 2007, the provision for restructuring and environmental remediation was $277.4
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 CPs liabilities associated with restructuring and
environmental remediation programs: |
Three months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
April 1 |
|
|
Accrued |
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2007 |
|
|
(reduced) |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2007 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
176.1 |
|
|
|
(2.1 |
) |
|
|
(9.6 |
) |
|
|
1.7 |
|
|
|
(2.5 |
) |
|
$ |
163.6 |
|
Other non-labour
liabilities for
exit plans |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
1.1 |
|
|
|
|
Total restructuring
liability |
|
|
177.4 |
|
|
|
(2.1 |
) |
|
|
(9.6 |
) |
|
|
1.7 |
|
|
|
(2.7 |
) |
|
|
164.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
remediation program |
|
|
119.2 |
|
|
|
1.1 |
|
|
|
(2.4 |
) |
|
|
|
|
|
|
(5.2 |
) |
|
|
112.7 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
296.6 |
|
|
|
(1.0 |
) |
|
|
(12.0 |
) |
|
|
1.7 |
|
|
|
(7.9 |
) |
|
$ |
277.4 |
|
|
|
|
Three months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
April 1 |
|
|
Accrued |
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2006 |
|
|
(reduced) |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2006 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
240.5 |
|
|
|
(8.6 |
) |
|
|
(16.9 |
) |
|
|
2.6 |
|
|
|
(1.8 |
) |
|
$ |
215.8 |
|
Other non-labour
liabilities for
exit plans |
|
|
4.7 |
|
|
|
0.5 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
1.8 |
|
|
|
|
Total restructuring
liability |
|
|
245.2 |
|
|
|
(8.1 |
) |
|
|
(20.1 |
) |
|
|
2.6 |
|
|
|
(2.0 |
) |
|
|
217.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
remediation program |
|
|
128.9 |
|
|
|
5.3 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
(3.3 |
) |
|
|
128.2 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
374.1 |
|
|
|
(2.8 |
) |
|
|
(22.8 |
) |
|
|
2.6 |
|
|
|
(5.3 |
) |
|
$ |
345.8 |
|
|
|
|
17
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
8 |
|
Restructuring and environmental remediation (continued) |
Six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
Jan. 1 |
|
|
Accrued |
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2007 |
|
|
(reduced) |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2007 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
187.4 |
|
|
|
(2.1 |
) |
|
|
(22.1 |
) |
|
|
3.2 |
|
|
|
(2.8 |
) |
|
$ |
163.6 |
|
Other non-labour
liabilities for
exit plans |
|
|
1.4 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
1.1 |
|
|
|
|
Total restructuring
liability |
|
|
188.8 |
|
|
|
(2.1 |
) |
|
|
(22.2 |
) |
|
|
3.2 |
|
|
|
(3.0 |
) |
|
|
164.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
remediation program |
|
|
120.2 |
|
|
|
1.3 |
|
|
|
(3.0 |
) |
|
|
|
|
|
|
(5.8 |
) |
|
|
112.7 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
309.0 |
|
|
|
(0.8 |
) |
|
|
(25.2 |
) |
|
|
3.2 |
|
|
|
(8.8 |
) |
|
$ |
277.4 |
|
|
|
|
Six months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
Jan. 1 |
|
|
Accrued |
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2006 |
|
|
(reduced) |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2006 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
263.6 |
|
|
|
(9.7 |
) |
|
|
(41.7 |
) |
|
|
5.2 |
|
|
|
(1.6 |
) |
|
$ |
215.8 |
|
Other non-labour
liabilities for
exit plans |
|
|
5.8 |
|
|
|
0.5 |
|
|
|
(4.3 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
1.8 |
|
|
|
|
Total restructuring
liability |
|
|
269.4 |
|
|
|
(9.2 |
) |
|
|
(46.0 |
) |
|
|
5.2 |
|
|
|
(1.8 |
) |
|
|
217.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
remediation program |
|
|
129.4 |
|
|
|
6.4 |
|
|
|
(4.6 |
) |
|
|
|
|
|
|
(3.0 |
) |
|
|
128.2 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
398.8 |
|
|
|
(2.8 |
) |
|
|
(50.6 |
) |
|
|
5.2 |
|
|
|
(4.8 |
) |
|
$ |
345.8 |
|
|
|
|
|
|
Amortization of Discount is charged to income as Other Charges, Compensation and
Benefits and Purchased Services and Other. New accruals and adjustments to previous
accruals are reflected in Compensation and Benefits and Purchased Services and Other. |
18
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
9 |
|
Long-term debt |
|
|
|
During the three and six months ended June 30, 2007, the Company issued US$450 million of
5.95% 30 year notes. The notes are unsecured, but carry a negative pledge. |
|
10 |
|
Shareholders equity |
|
|
|
An analysis of Common Share balances is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
|
|
ended June 30 |
|
ended June 30 |
(in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Share capital, beginning of period |
|
|
155.2 |
|
|
|
158.6 |
|
|
|
155.5 |
|
|
|
158.2 |
|
Shares issued under stock option
plans |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
1.7 |
|
Shares purchased |
|
|
(2.5 |
) |
|
|
(1.8 |
) |
|
|
(3.2 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital, end of period |
|
|
153.1 |
|
|
|
157.2 |
|
|
|
153.1 |
|
|
|
157.2 |
|
|
|
|
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 could have been made during the 12-month period beginning June 6, 2006, and ending
June 5, 2007. Of the 3.9 million shares authorized for purchase under this filing, 3.4
million were purchased in 2006 at an average price per share of $56.66 and 0.2 million shares
were purchased during the three months ended March 31, 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. Effective April 30, 2007, the 2007 NCIB
was amended to purchase, for cancellation, up to 15.3 million of its outstanding Common
Shares. Of the 15.3 million shares authorized under the 2007 NCIB, 2.5 million shares were
purchased during the three months ended June 30, 2007 at an average price per share of $74.16
(2006 1.8 million shares were purchased at an average price per share of $56.62) and for
the six months ended June 30, 2007, 2.7 million shares were purchased at an average price per
share of $73.64 (2006 2.7 million shares were purchased at an average price per share of
$57.01).
In addition, 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 arms length third party on March 29, 2007 at an average price of $63.12.
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 purchased, 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.
19
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
11 |
|
Other comprehensive income and accumulated other comprehensive income |
|
|
|
Components of other comprehensive income and the related tax effects are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30 |
|
|
|
|
|
|
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 |
|
$ |
33.8 |
|
|
$ |
(5.2 |
) |
|
$ |
28.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange loss on translation of the
net investment in U.S. subsidiaries |
|
|
(36.7 |
) |
|
|
|
|
|
|
(36.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on cash flow hedges settled in the period |
|
|
(4.8 |
) |
|
|
1.5 |
|
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in unrealized holding gains on cash flow
hedges |
|
|
(6.6 |
) |
|
|
2.2 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss on cash flow hedges settled in prior
periods |
|
|
1.6 |
|
|
|
(0.5 |
) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(12.7 |
) |
|
$ |
(2.0 |
) |
|
$ |
(14.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
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 |
|
$ |
21.5 |
|
|
$ |
(3.4 |
) |
|
$ |
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign
exchange loss on
translation of the net
investment in U.S.
subsidiaries |
|
|
(22.9 |
) |
|
|
|
|
|
|
(22.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(1.4 |
) |
|
$ |
(3.4 |
) |
|
$ |
(4.8 |
) |
|
|
|
20
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
11 |
|
Other comprehensive income and accumulated other comprehensive income (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30 |
|
|
|
|
|
|
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 |
|
$ |
37.7 |
|
|
$ |
(5.8 |
) |
|
$ |
31.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange loss on translation of the
net investment in U.S. subsidiaries |
|
|
(40.9 |
) |
|
|
|
|
|
|
(40.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on cash flow hedges settled in the period |
|
|
(8.1 |
) |
|
|
2.8 |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in unrealized holding gains on cash flow
hedges |
|
|
(6.5 |
) |
|
|
2.2 |
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss on cash flow hedges settled in prior
periods |
|
|
1.6 |
|
|
|
(0.5 |
) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(16.2 |
) |
|
$ |
(1.3 |
) |
|
$ |
(17.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
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 |
|
$ |
20.6 |
|
|
$ |
(3.2 |
) |
|
$ |
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange
loss on translation of the
net investment in U.S.
subsidiaries |
|
|
(20.5 |
) |
|
|
|
|
|
|
(20.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
0.1 |
|
|
$ |
(3.2 |
) |
|
$ |
(3.1 |
) |
|
|
|
21
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
11 |
|
Other comprehensive income and accumulated other comprehensive income (continued) |
|
|
|
Changes in the balances of each classification within Accumulated other comprehensive income
are as follows: |
|
|
|
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
Closing |
|
|
|
Balance, |
|
|
|
|
|
|
Balance, |
|
|
|
Apr. 1, |
|
|
Period |
|
|
June 30, |
|
(in millions) |
|
2007 |
|
|
change |
|
|
2007 |
|
|
|
|
Foreign exchange on U.S.
dollar debt designated as a
hedge of the net investment in
U.S. subsidiaries |
|
$ |
238.6 |
|
|
$ |
28.6 |
|
|
$ |
267.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange on net
investment in U.S.
subsidiaries |
|
|
(172.7 |
) |
|
|
(36.7 |
) |
|
|
(209.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in
unrealized effective gains of
cash flow hedges |
|
|
17.0 |
|
|
|
(7.7 |
) |
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on settled
hedge instruments |
|
|
(5.3 |
) |
|
|
1.1 |
|
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive income |
|
$ |
77.6 |
|
|
$ |
(14.7 |
) |
|
$ |
62.9 |
|
|
|
|
Three months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
Closing |
|
|
|
Balance, |
|
|
|
|
|
|
Balance, |
|
|
|
Apr. 1, |
|
|
Period |
|
|
June 30, |
|
(in millions) |
|
2006 |
|
|
change |
|
|
2006 |
|
|
|
|
Foreign exchange on U.S. dollar
debt designated as a hedge of
the net investment in U.S.
subsidiaries |
|
$ |
237.4 |
|
|
$ |
18.1 |
|
|
$ |
255.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange on net
investment in U.S. subsidiaries |
|
|
(168.2 |
) |
|
|
(22.9 |
) |
|
|
(191.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income |
|
$ |
69.2 |
|
|
$ |
(4.8 |
) |
|
$ |
64.4 |
|
|
|
|
22
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
11 |
|
Other comprehensive income and accumulated other comprehensive income (continued) |
|
|
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
for change |
|
|
Adjusted |
|
|
|
|
|
|
Closing |
|
|
|
Balance, |
|
|
in |
|
|
Opening |
|
|
|
|
|
|
Balance, |
|
|
|
Jan. 1, |
|
|
accounting |
|
|
Balance, |
|
|
Period |
|
|
June 30, |
|
(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 |
|
|
$ |
31.9 |
|
|
$ |
267.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
on net investment
in U.S.
subsidiaries |
|
|
(168.5 |
) |
|
|
|
|
|
|
(168.5 |
) |
|
|
(40.9 |
) |
|
|
(209.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in
unrealized
effective gains of
cash flow hedges |
|
|
|
|
|
|
18.9 |
|
|
|
18.9 |
|
|
|
(9.6 |
) |
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on
settled hedge
instruments |
|
|
|
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
|
|
1.1 |
|
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive
income |
|
$ |
66.4 |
|
|
$ |
14.0 |
|
|
$ |
80.4 |
|
|
$ |
(17.5 |
) |
|
$ |
62.9 |
|
|
|
|
Six months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
Closing |
|
|
|
Balance, |
|
|
|
|
|
|
Balance, |
|
|
|
Jan. 1, |
|
|
Period |
|
|
June 30, |
|
(in millions) |
|
2006 |
|
|
change |
|
|
2006 |
|
|
|
|
Foreign exchange
on U.S. dollar
debt designated as
a hedge of the net
investment in U.S.
subsidiaries |
|
$ |
238.1 |
|
|
$ |
17.4 |
|
|
$ |
255.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
on net investment
in U.S.
subsidiaries |
|
|
(170.6 |
) |
|
|
(20.5 |
) |
|
|
(191.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive
income |
|
$ |
67.5 |
|
|
$ |
(3.1 |
) |
|
$ |
64.4 |
|
|
|
|
During the next twelve months, the Company expects $6.8 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.
23
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
12 |
|
Fair value of financial instruments |
|
|
|
The fair value of a financial instrument is the amount of consideration that would be agreed
upon in an arms 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 Companys 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. |
|
|
|
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 $3,077 million and a
fair value of approximately $3,247 million at June 30, 2007. |
|
13 |
|
Additions to investments and other assets |
|
|
|
Additions to investment and other assets includes the acquisition of $12 million in freight
car assets for the three and six month period ended June 30, 2007. These assets were
purchased in anticipation of a sale and lease back arrangement with a financial institution.
For the three and six months ended June 30, 2006, $66 million and $87 million, respectively,
in freight car assets were acquired for these purposes and were included in additions to
investments and other assets. These assets were subsequently sold and leased back. |
24
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
14 |
|
Stock-based compensation |
|
|
|
In 2007, under CPs stock option plans, the Company issued 1,302,700 options to purchase
Common Shares at the weighted average price of $62.59 per share, based on the closing price
on the day prior to the grant date. In tandem with these options, 433,500 stock appreciation
rights were issued at the weighted average exercise price of $62.59. |
|
|
|
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 Companys fixed stock option plans as of June 30 (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 |
|
|
1,302,700 |
|
|
|
62.59 |
|
|
|
1,423,700 |
|
|
|
57.78 |
|
Exercised |
|
|
(811,856 |
) |
|
|
31.78 |
|
|
|
(1,719,412 |
) |
|
|
28.61 |
|
Forfeited/cancelled |
|
|
(111,725 |
) |
|
|
39.38 |
|
|
|
(269,295 |
) |
|
|
40.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30 |
|
|
7,194,613 |
|
|
$ |
43.61 |
|
|
|
7,406,910 |
|
|
$ |
37.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at June 30 |
|
|
4,239,713 |
|
|
$ |
34.01 |
|
|
|
3,541,610 |
|
|
$ |
29.43 |
|
|
|
|
|
|
25
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
14 |
|
Stock-based compensation (continued) |
|
|
|
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, CPs pro forma basis net income and
earnings per share would have been as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
Net income (in millions) As reported |
|
$ |
256.7 |
|
|
$ |
378.1 |
|
|
$ |
385.3 |
|
|
$ |
486.9 |
|
Pro forma |
|
$ |
256.7 |
|
|
$ |
378.1 |
|
|
$ |
385.3 |
|
|
$ |
486.7 |
|
Pro forma basic and diluted earnings per share are unchanged from the amounts disclosed in
the Statement of Consolidated Income.
Under the fair value method, the fair value of options at the grant date was $11.3 million
for options issued in the first six months of 2007 (first six months of 2006 $11.9
million). The weighted average fair value assumptions were approximately:
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
ended June 30 |
|
|
2007 |
|
2006 |
|
|
|
Expected option life (years) |
|
|
4.00 |
|
|
|
4.50 |
|
Risk-free interest rate |
|
|
3.90 |
% |
|
|
4.07 |
% |
Expected stock price volatility |
|
|
22 |
% |
|
|
22 |
% |
Expected annual dividends per share |
|
$ |
0.90 |
|
|
$ |
0.75 |
|
Weighted average fair value of options
granted during the year |
|
$ |
12.96 |
|
|
$ |
12.98 |
|
15 |
|
Pensions and other benefits |
|
|
|
The total benefit cost for the Companys defined benefit pension plans, defined contribution
pension plans and post-retirement benefits for the three months ended June 30, 2007, was
$27.1 million (three months ended June 30, 2006 $30.3 million) and for the six months
ended June 30, 2007, was $54.5 million (six months ended June 30, 2006 $61.2 million). |
26
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(unaudited)
16 |
|
Significant customers |
|
|
|
During the first six months of 2007, one customer comprised 11.7% of total revenue (first six
months of 2006 12.1%). At June 30, 2007, that same customer represented 5.2% of total
accounts receivable
(June 30, 2006 5.8%). |
|
17 |
|
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 June 30, 2007, cannot be predicted with
certainty, it is the opinion of management that their resolution will not have a material
adverse effect on the Companys financial position or results of operations. |
|
|
|
Capital commitments |
|
|
|
At June 30, 2007, the Company had multi-year capital commitments of $492.4 million, mainly
for locomotive overhaul agreements, in the form of signed contracts. Payments for these
commitments are due in 2007 through 2016. |
|
|
|
Operating lease commitments |
|
|
|
At June 30, 2007, minimum payments under operating leases were estimated at $555.5 million in
aggregate, with annual payments in each of the next five years of: remainder of 2007 $62.9
million; 2008 $99.5 million; 2009 $72.3 million; 2010 $55.6 million; 2011 $49.9
million. |
|
|
|
Guarantees |
|
|
|
The Company had residual value guarantees on operating lease commitments of $387.9 million at
June 30, 2007. The maximum amount that could be payable under these and all of the Companys
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 June 30, 2007, these accruals amounted to $6.1 million. |
27
Summary of Rail Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
Year-to-date |
|
2007 |
|
|
2006(1) |
|
|
Variance |
|
|
% |
|
|
|
|
2007 |
|
|
2006(1) |
|
|
Variance |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
(millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,174.1 |
|
|
$ |
1,086.4 |
|
|
$ |
87.7 |
|
|
|
8.1 |
|
|
Freight revenue |
|
$ |
2,265.0 |
|
|
$ |
2,153.6 |
|
|
$ |
111.4 |
|
|
|
5.2 |
|
|
41.4 |
|
|
|
44.6 |
|
|
|
(3.2 |
) |
|
|
(7.2 |
) |
|
Other revenue |
|
|
66.4 |
|
|
|
87.9 |
|
|
|
(21.5 |
) |
|
|
(24.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215.5 |
|
|
|
1,131.0 |
|
|
|
84.5 |
|
|
|
7.5 |
|
|
|
|
|
2,331.4 |
|
|
|
2,241.5 |
|
|
|
89.9 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329.8 |
|
|
|
320.8 |
|
|
|
9.0 |
|
|
|
2.8 |
|
|
Compensation and benefits |
|
|
662.3 |
|
|
|
673.0 |
|
|
|
(10.7 |
) |
|
|
(1.6 |
) |
|
193.7 |
|
|
|
160.1 |
|
|
|
33.6 |
|
|
|
21.0 |
|
|
Fuel |
|
|
364.9 |
|
|
|
318.0 |
|
|
|
46.9 |
|
|
|
14.7 |
|
|
55.6 |
|
|
|
54.5 |
|
|
|
1.1 |
|
|
|
2.0 |
|
|
Materials |
|
|
118.0 |
|
|
|
112.1 |
|
|
|
5.9 |
|
|
|
5.3 |
|
|
57.3 |
|
|
|
44.4 |
|
|
|
12.9 |
|
|
|
29.1 |
|
|
Equipment rents |
|
|
112.8 |
|
|
|
89.0 |
|
|
|
23.8 |
|
|
|
26.7 |
|
|
119.1 |
|
|
|
117.8 |
|
|
|
1.3 |
|
|
|
1.1 |
|
|
Depreciation and amortization |
|
|
237.7 |
|
|
|
232.6 |
|
|
|
5.1 |
|
|
|
2.2 |
|
|
152.3 |
|
|
|
150.8 |
|
|
|
1.5 |
|
|
|
1.0 |
|
|
Purchased services and other |
|
|
298.7 |
|
|
|
307.4 |
|
|
|
(8.7 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
907.8 |
|
|
|
848.4 |
|
|
|
59.4 |
|
|
|
7.0 |
|
|
|
|
|
1,794.4 |
|
|
|
1,732.1 |
|
|
|
62.3 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307.7 |
|
|
|
282.6 |
|
|
|
25.1 |
|
|
|
8.9 |
|
|
Operating income |
|
|
537.0 |
|
|
|
509.4 |
|
|
|
27.6 |
|
|
|
5.4 |
|
|
8.2 |
|
|
|
7.7 |
|
|
|
0.5 |
|
|
|
6.5 |
|
|
Other charges |
|
|
13.0 |
|
|
|
14.5 |
|
|
|
(1.5 |
) |
|
|
(10.3 |
) |
|
49.2 |
|
|
|
48.6 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
Interest expense |
|
|
96.0 |
|
|
|
95.9 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
75.5 |
|
|
|
65.6 |
|
|
|
9.9 |
|
|
|
15.1 |
|
|
Income tax expense before foreign exchange gains
on long-term debt and other specified items (2) |
|
|
130.6 |
|
|
|
122.2 |
|
|
|
8.4 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174.8 |
|
|
|
160.7 |
|
|
|
14.1 |
|
|
|
8.8 |
|
|
Income before foreign exchange gains on long-term
debt and other specified items (2) |
|
|
297.4 |
|
|
|
276.8 |
|
|
|
20.6 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange gains on long-term debt (FX on LTD) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88.6 |
) |
|
|
(52.7 |
) |
|
|
(35.9 |
) |
|
|
|
|
|
FX on LTD |
|
|
(97.2 |
) |
|
|
(46.3 |
) |
|
|
(50.9 |
) |
|
|
|
|
|
23.8 |
|
|
|
11.3 |
|
|
|
12.5 |
|
|
|
|
|
|
Income tax on FX on LTD (3) |
|
|
26.4 |
|
|
|
12.2 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64.8 |
) |
|
|
(41.4 |
) |
|
|
(23.4 |
) |
|
|
|
|
|
FX on LTD (net of tax) |
|
|
(70.8 |
) |
|
|
(34.1 |
) |
|
|
(36.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.1 |
) |
|
|
(176.0 |
) |
|
|
158.9 |
|
|
|
|
|
|
Income tax benefits due to Federal / Provincial income tax
rate reductions. |
|
|
(17.1 |
) |
|
|
(176.0 |
) |
|
|
158.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
256.7 |
|
|
$ |
378.1 |
|
|
$ |
(121.4 |
) |
|
|
(32.1 |
) |
|
Net income |
|
$ |
385.3 |
|
|
$ |
486.9 |
|
|
$ |
(101.6 |
) |
|
|
(20.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share (EPS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.66 |
|
|
$ |
2.39 |
|
|
$ |
(0.73 |
) |
|
|
(30.5 |
) |
|
Basic earnings per share |
|
$ |
2.49 |
|
|
$ |
3.08 |
|
|
$ |
(0.59 |
) |
|
|
(19.2 |
) |
$ |
1.64 |
|
|
$ |
2.37 |
|
|
$ |
(0.73 |
) |
|
|
(30.8 |
) |
|
Diluted earnings per share |
|
$ |
2.46 |
|
|
$ |
3.05 |
|
|
$ |
(0.59 |
) |
|
|
(19.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
before FX on LTD and other specified items (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.13 |
|
|
$ |
1.02 |
|
|
$ |
0.11 |
|
|
|
10.8 |
|
|
Basic earnings per share |
|
$ |
1.92 |
|
|
$ |
1.75 |
|
|
$ |
0.17 |
|
|
|
9.7 |
|
$ |
1.12 |
|
|
$ |
1.00 |
|
|
$ |
0.12 |
|
|
|
12.0 |
|
|
Diluted earnings per share |
|
$ |
1.90 |
|
|
$ |
1.72 |
|
|
$ |
0.18 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154.3 |
|
|
|
158.3 |
|
|
|
(4.0 |
) |
|
|
(2.5 |
) |
|
Weighted average number of shares outstanding (millions) |
|
|
154.9 |
|
|
|
158.4 |
|
|
|
(3.5 |
) |
|
|
(2.2 |
) |
|
74.7 |
|
|
|
75.0 |
|
|
|
(0.3 |
) |
|
|
|
|
|
Operating ratio (2) (4) (%) |
|
|
77.0 |
|
|
|
77.3 |
|
|
|
(0.3 |
) |
|
|
|
|
|
10.3 |
|
|
|
9.8 |
|
|
|
0.5 |
|
|
|
|
|
|
ROCE before FX on LTD and other specified items (after tax)(2) (4)(%) |
|
|
10.3 |
|
|
|
9.8 |
|
|
|
0.5 |
|
|
|
|
|
|
35.0 |
|
|
|
37.7 |
|
|
|
(2.7 |
) |
|
|
|
|
|
Net debt to net debt plus equity (%) |
|
|
35.0 |
|
|
|
37.7 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
299.5 |
|
|
$ |
274.9 |
|
|
$ |
24.6 |
|
|
|
8.9 |
|
|
EBIT before FX on LTD and other specified items (2) (4) (millions) |
|
$ |
524.0 |
|
|
$ |
494.9 |
|
|
$ |
29.1 |
|
|
|
5.9 |
|
$ |
418.6 |
|
|
$ |
392.7 |
|
|
$ |
25.9 |
|
|
|
6.6 |
|
|
EBITDA before FX on LTD and other specified items (2) (4) (millions) |
|
$ |
761.7 |
|
|
$ |
727.5 |
|
|
$ |
34.2 |
|
|
|
4.7 |
|
|
|
|
(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 earnings measures have no standardized meanings prescribed by 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. |
28
Summary of Rail Data (Page 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
Year-to-date |
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
% |
|
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues (millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
224.0 |
|
|
$ |
206.4 |
|
|
$ |
17.6 |
|
|
|
8.5 |
|
|
- Grain |
|
$ |
443.6 |
|
|
$ |
417.7 |
|
|
$ |
25.9 |
|
|
|
6.2 |
|
|
162.4 |
|
|
|
143.5 |
|
|
|
18.9 |
|
|
|
13.2 |
|
|
- Coal |
|
|
293.7 |
|
|
|
303.7 |
|
|
|
(10.0 |
) |
|
|
(3.3 |
) |
|
144.5 |
|
|
|
105.5 |
|
|
|
39.0 |
|
|
|
37.0 |
|
|
- Sulphur and fertilizers |
|
|
266.9 |
|
|
|
198.6 |
|
|
|
68.3 |
|
|
|
34.4 |
|
|
74.3 |
|
|
|
75.8 |
|
|
|
(1.5 |
) |
|
|
(2.0 |
) |
|
- Forest products |
|
|
146.3 |
|
|
|
159.2 |
|
|
|
(12.9 |
) |
|
|
(8.1 |
) |
|
158.8 |
|
|
|
150.3 |
|
|
|
8.5 |
|
|
|
5.7 |
|
|
- Industrial and consumer products |
|
|
310.7 |
|
|
|
298.6 |
|
|
|
12.1 |
|
|
|
4.1 |
|
|
88.5 |
|
|
|
91.9 |
|
|
|
(3.4 |
) |
|
|
(3.7 |
) |
|
- Automotive |
|
|
170.6 |
|
|
|
170.2 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
321.6 |
|
|
|
313.0 |
|
|
|
8.6 |
|
|
|
2.7 |
|
|
- Intermodal |
|
|
633.2 |
|
|
|
605.6 |
|
|
|
27.6 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,174.1 |
|
|
$ |
1,086.4 |
|
|
$ |
87.7 |
|
|
|
8.1 |
|
|
Total Freight Revenues |
|
$ |
2,265.0 |
|
|
$ |
2,153.6 |
|
|
$ |
111.4 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Revenue Ton-Miles (RTM) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,309 |
|
|
|
7,048 |
|
|
|
261 |
|
|
|
3.7 |
|
|
- Grain |
|
|
14,793 |
|
|
|
14,522 |
|
|
|
271 |
|
|
|
1.9 |
|
|
5,834 |
|
|
|
4,735 |
|
|
|
1,099 |
|
|
|
23.2 |
|
|
- Coal |
|
|
10,417 |
|
|
|
9,789 |
|
|
|
628 |
|
|
|
6.4 |
|
|
6,106 |
|
|
|
3,858 |
|
|
|
2,248 |
|
|
|
58.3 |
|
|
- Sulphur and fertilizers |
|
|
11,090 |
|
|
|
7,313 |
|
|
|
3,777 |
|
|
|
51.6 |
|
|
2,019 |
|
|
|
2,264 |
|
|
|
(245 |
) |
|
|
(10.8 |
) |
|
- Forest products |
|
|
4,019 |
|
|
|
4,698 |
|
|
|
(679 |
) |
|
|
(14.5 |
) |
|
4,177 |
|
|
|
4,162 |
|
|
|
15 |
|
|
|
0.4 |
|
|
- Industrial and consumer products |
|
|
8,310 |
|
|
|
8,503 |
|
|
|
(193 |
) |
|
|
(2.3 |
) |
|
659 |
|
|
|
746 |
|
|
|
(87 |
) |
|
|
(11.7 |
) |
|
- Automotive |
|
|
1,284 |
|
|
|
1,349 |
|
|
|
(65 |
) |
|
|
(4.8 |
) |
|
7,424 |
|
|
|
7,055 |
|
|
|
369 |
|
|
|
5.2 |
|
|
- Intermodal |
|
|
14,350 |
|
|
|
13,782 |
|
|
|
568 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,528 |
|
|
|
29,868 |
|
|
|
3,660 |
|
|
|
12.3 |
|
|
Total RTMs |
|
|
64,263 |
|
|
|
59,956 |
|
|
|
4,307 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per RTM (cents) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.06 |
|
|
|
2.93 |
|
|
|
0.13 |
|
|
|
4.4 |
|
|
- Grain |
|
|
3.00 |
|
|
|
2.88 |
|
|
|
0.12 |
|
|
|
4.2 |
|
|
2.78 |
|
|
|
3.03 |
|
|
|
(0.25 |
) |
|
|
(8.3 |
) |
|
- Coal |
|
|
2.82 |
|
|
|
3.10 |
|
|
|
(0.28 |
) |
|
|
(9.0 |
) |
|
2.37 |
|
|
|
2.73 |
|
|
|
(0.36 |
) |
|
|
(13.2 |
) |
|
- Sulphur and fertilizers |
|
|
2.41 |
|
|
|
2.72 |
|
|
|
(0.31 |
) |
|
|
(11.4 |
) |
|
3.68 |
|
|
|
3.35 |
|
|
|
0.33 |
|
|
|
9.9 |
|
|
- Forest products |
|
|
3.64 |
|
|
|
3.39 |
|
|
|
0.25 |
|
|
|
7.4 |
|
|
3.80 |
|
|
|
3.61 |
|
|
|
0.19 |
|
|
|
5.3 |
|
|
- Industrial and consumer products |
|
|
3.74 |
|
|
|
3.51 |
|
|
|
0.23 |
|
|
|
6.6 |
|
|
13.43 |
|
|
|
12.32 |
|
|
|
1.11 |
|
|
|
9.0 |
|
|
- Automotive |
|
|
13.29 |
|
|
|
12.62 |
|
|
|
0.67 |
|
|
|
5.3 |
|
|
4.33 |
|
|
|
4.44 |
|
|
|
(0.11 |
) |
|
|
(2.5 |
) |
|
- Intermodal |
|
|
4.41 |
|
|
|
4.39 |
|
|
|
0.02 |
|
|
|
0.5 |
|
|
3.50 |
|
|
|
3.64 |
|
|
|
(0.14 |
) |
|
|
(3.8 |
) |
|
Freight Revenue per RTM |
|
|
3.52 |
|
|
|
3.59 |
|
|
|
(0.07 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carloads (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91.2 |
|
|
|
89.2 |
|
|
|
2.0 |
|
|
|
2.2 |
|
|
- Grain |
|
|
180.5 |
|
|
|
181.6 |
|
|
|
(1.1 |
) |
|
|
(0.6 |
) |
|
75.0 |
|
|
|
68.5 |
|
|
|
6.5 |
|
|
|
9.5 |
|
|
- Coal |
|
|
133.5 |
|
|
|
147.2 |
|
|
|
(13.7 |
) |
|
|
(9.3 |
) |
|
61.3 |
|
|
|
41.6 |
|
|
|
19.7 |
|
|
|
47.4 |
|
|
- Sulphur and fertilizers |
|
|
111.5 |
|
|
|
80.6 |
|
|
|
30.9 |
|
|
|
38.3 |
|
|
29.9 |
|
|
|
33.8 |
|
|
|
(3.9 |
) |
|
|
(11.5 |
) |
|
- Forest products |
|
|
60.0 |
|
|
|
71.4 |
|
|
|
(11.4 |
) |
|
|
(16.0 |
) |
|
79.2 |
|
|
|
80.9 |
|
|
|
(1.7 |
) |
|
|
(2.1 |
) |
|
- Industrial and consumer products |
|
|
154.9 |
|
|
|
160.6 |
|
|
|
(5.7 |
) |
|
|
(3.5 |
) |
|
45.7 |
|
|
|
46.8 |
|
|
|
(1.1 |
) |
|
|
(2.4 |
) |
|
- Automotive |
|
|
88.1 |
|
|
|
89.1 |
|
|
|
(1.0 |
) |
|
|
(1.1 |
) |
|
311.9 |
|
|
|
295.5 |
|
|
|
16.4 |
|
|
|
5.5 |
|
|
- Intermodal |
|
|
599.5 |
|
|
|
577.3 |
|
|
|
22.2 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
694.2 |
|
|
|
656.3 |
|
|
|
37.9 |
|
|
|
5.8 |
|
|
Total Carloads |
|
|
1,328.0 |
|
|
|
1,307.8 |
|
|
|
20.2 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per Carload |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,456 |
|
|
$ |
2,314 |
|
|
$ |
142 |
|
|
|
6.1 |
|
|
- Grain |
|
$ |
2,458 |
|
|
$ |
2,300 |
|
|
$ |
158 |
|
|
|
6.9 |
|
|
2,165 |
|
|
|
2,095 |
|
|
|
70 |
|
|
|
3.3 |
|
|
- Coal |
|
|
2,200 |
|
|
|
2,063 |
|
|
|
137 |
|
|
|
6.6 |
|
|
2,357 |
|
|
|
2,536 |
|
|
|
(179 |
) |
|
|
(7.1 |
) |
|
- Sulphur and fertilizers |
|
|
2,394 |
|
|
|
2,464 |
|
|
|
(70 |
) |
|
|
(2.8 |
) |
|
2,485 |
|
|
|
2,243 |
|
|
|
242 |
|
|
|
10.8 |
|
|
- Forest products |
|
|
2,438 |
|
|
|
2,230 |
|
|
|
208 |
|
|
|
9.3 |
|
|
2,005 |
|
|
|
1,858 |
|
|
|
147 |
|
|
|
7.9 |
|
|
- Industrial and consumer products |
|
|
2,006 |
|
|
|
1,859 |
|
|
|
147 |
|
|
|
7.9 |
|
|
1,937 |
|
|
|
1,964 |
|
|
|
(27 |
) |
|
|
(1.4 |
) |
|
- Automotive |
|
|
1,936 |
|
|
|
1,910 |
|
|
|
26 |
|
|
|
1.4 |
|
|
1,031 |
|
|
|
1,059 |
|
|
|
(28 |
) |
|
|
(2.6 |
) |
|
- Intermodal |
|
|
1,056 |
|
|
|
1,049 |
|
|
|
7 |
|
|
|
0.7 |
|
$ |
1,691 |
|
|
$ |
1,655 |
|
|
$ |
36 |
|
|
|
2.2 |
|
|
Freight Revenue per Carload |
|
$ |
1,706 |
|
|
$ |
1,647 |
|
|
$ |
59 |
|
|
|
3.6 |
|
29
Summary of Rail Data (Page 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
Year-to-date |
|
2007 |
|
|
2006(1) |
|
|
Variance |
|
|
% |
|
|
|
|
2007 |
|
|
2006(1) |
|
|
Variance |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and Productivity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,481 |
|
|
|
58,099 |
|
|
|
6,382 |
|
|
|
11.0 |
|
|
Freight gross ton-miles (GTM) (millions) |
|
|
122,041 |
|
|
|
115,113 |
|
|
|
6,928 |
|
|
|
6.0 |
|
|
33,528 |
|
|
|
29,868 |
|
|
|
3,660 |
|
|
|
12.3 |
|
|
Revenue ton-miles (RTM) (millions) |
|
|
64,263 |
|
|
|
59,956 |
|
|
|
4,307 |
|
|
|
7.2 |
|
|
15,878 |
|
|
|
16,278 |
|
|
|
(400 |
) |
|
|
(2.5 |
) |
|
Average number of active employees |
|
|
15,381 |
|
|
|
15,773 |
|
|
|
(392 |
) |
|
|
(2.5 |
) |
|
15,720 |
|
|
|
16,504 |
|
|
|
(784 |
) |
|
|
(4.8 |
) |
|
Number of employees at end of period |
|
|
15,720 |
|
|
|
16,504 |
|
|
|
(784 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
1.7 |
|
|
|
0.3 |
|
|
|
17.6 |
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
1.9 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
2.1 |
|
|
|
(0.3 |
) |
|
|
(14.3 |
) |
|
FRA train accidents per million train-miles |
|
|
1.9 |
|
|
|
1.6 |
|
|
|
0.3 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.71 |
|
|
|
2.84 |
|
|
|
(0.13 |
) |
|
|
(4.6 |
) |
|
Total operating expenses per RTM (cents) |
|
|
2.79 |
|
|
|
2.89 |
|
|
|
(0.10 |
) |
|
|
(3.5 |
) |
|
1.41 |
|
|
|
1.46 |
|
|
|
(0.05 |
) |
|
|
(3.4 |
) |
|
Total operating expenses per GTM (cents) |
|
|
1.47 |
|
|
|
1.50 |
|
|
|
(0.03 |
) |
|
|
(2.0 |
) |
|
0.51 |
|
|
|
0.55 |
|
|
|
(0.04 |
) |
|
|
(7.3 |
) |
|
Compensation and benefits expense per GTM (cents) |
|
|
0.54 |
|
|
|
0.58 |
|
|
|
(0.04 |
) |
|
|
(6.9 |
) |
|
4,061 |
|
|
|
3,569 |
|
|
|
492 |
|
|
|
13.8 |
|
|
GTMs per average active employee (000) |
|
|
7,935 |
|
|
|
7,298 |
|
|
|
637 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,260 |
|
|
|
13,544 |
|
|
|
(284 |
) |
|
|
(2.1 |
) |
|
Miles of road operated at end of period (2) |
|
|
13,260 |
|
|
|
13,544 |
|
|
|
(284 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.5 |
|
|
|
25.0 |
|
|
|
(1.5 |
) |
|
|
(6.0 |
) |
|
Average train speed AAR definition (mph) |
|
|
23.3 |
|
|
|
25.1 |
|
|
|
(1.8 |
) |
|
|
(7.2 |
) |
|
21.7 |
|
|
|
20.2 |
|
|
|
1.5 |
|
|
|
7.4 |
|
|
Terminal dwell time AAR definition (hours) |
|
|
22.8 |
|
|
|
20.7 |
|
|
|
2.1 |
|
|
|
10.1 |
|
|
147.5 |
|
|
|
134.0 |
|
|
|
13.5 |
|
|
|
10.1 |
|
|
Car miles per car day |
|
|
141.0 |
|
|
|
133.1 |
|
|
|
7.9 |
|
|
|
5.9 |
|
|
81.5 |
|
|
|
82.4 |
|
|
|
(0.9 |
) |
|
|
(1.1 |
) |
|
Average daily total cars on-line AAR definition (000) |
|
|
81.4 |
|
|
|
81.6 |
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.19 |
|
|
|
1.19 |
|
|
|
|
|
|
|
|
|
|
U.S. gallons of locomotive fuel per 1,000 GTMs freight & yard |
|
|
1.22 |
|
|
|
1.22 |
|
|
|
|
|
|
|
|
|
|
76.8 |
|
|
|
69.1 |
|
|
|
7.7 |
|
|
|
11.1 |
|
|
U.S. gallons of locomotive fuel consumed total (millions) (3) |
|
|
149.1 |
|
|
|
140.2 |
|
|
|
8.9 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.901 |
|
|
|
0.886 |
|
|
|
0.015 |
|
|
|
1.7 |
|
|
Average foreign exchange rate (US$/Canadian$) |
|
|
0.877 |
|
|
|
0.879 |
|
|
|
(0.002 |
) |
|
|
(0.2 |
) |
|
1.111 |
|
|
|
1.129 |
|
|
|
(0.018 |
) |
|
|
(1.6 |
) |
|
Average foreign exchange rate (Canadian$/US$) |
|
|
1.141 |
|
|
|
1.138 |
|
|
|
0.003 |
|
|
|
0.3 |
|
|
|
|
(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. |
30
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 |
|
|
8 |
|
Freight Revenue per Carload |
|
|
9 |
|
PERFORMANCE INDICATORS |
|
|
10 |
|
OPERATING EXPENSES, BEFORE OTHER SPECIFIED ITEMS |
|
|
11 |
|
OTHER INCOME STATEMENT ITEMS |
|
|
12 |
|
CHANGES IN ACCOUNTING POLICY |
|
|
14 |
|
LIQUIDITY AND CAPITAL RESOURCES |
|
|
15 |
|
BALANCE SHEET |
|
|
16 |
|
FINANCIAL INSTRUMENTS |
|
|
18 |
|
OFF-BALANCE SHEET ARRANGEMENTS |
|
|
21 |
|
CONTRACTUAL COMMITMENTS |
|
|
21 |
|
FUTURE TRENDS, COMMITMENTS AND RISKS |
|
|
21 |
|
CRITICAL ACCOUNTING ESTIMATES |
|
|
25 |
|
SYSTEMS, PROCEDURES AND CONTROLS |
|
|
26 |
|
FORWARD-LOOKING INFORMATION |
|
|
26 |
|
GLOSSARY OF TERMS |
|
|
28 |
|
This Managements Discussion and Analysis (MD&A) supplements the Consolidated Financial
Statements and related notes for the three and six months ended June 30, 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.
July 23, 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
CPRLs subsidiaries, as the context may require. Other terms not defined in the body of this MD&A
are defined in the Glossary of Terms.
BUSINESS PROFILE
Canadian Pacific Railway Limited, through its subsidiaries, operates a transcontinental railway in
Canada and the United States and provides logistics and supply chain expertise. Through our
subsidiaries, we provide rail and intermodal transportation services over a network of
approximately 13,300 miles, serving the principal business centres of Canada from Montreal, Quebec,
to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. Our railway feeds
directly into the U.S. heartland from the East and West coasts. Agreements with other carriers
extend our market reach east of Montreal in Canada, throughout the U.S. and into Mexico. Through
our subsidiaries, we transport bulk commodities, merchandise freight and intermodal traffic. Bulk
commodities include grain, coal, sulphur and fertilizers. Merchandise freight consists of finished
vehicles and automotive parts, as well as forest and industrial and consumer products. Intermodal
traffic consists largely of high-value, time-sensitive retail goods 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Highlights summary |
|
|
|
|
|
|
|
|
(in millions, except percentages and
per-share data) |
|
For the three months ended June 30 |
|
For the six months ended June 30 |
|
|
(unaudited) |
|
|
2007 |
|
|
2006(1) |
|
|
2007 |
|
|
2006(1) |
|
|
Revenues |
|
|
$ |
1,215.5 |
|
|
|
$ |
1,131.0 |
|
|
|
$ |
2,331.4 |
|
|
|
$ |
2,241.5 |
|
|
|
Operating income |
|
|
|
307.7 |
|
|
|
|
282.6 |
|
|
|
|
537.0 |
|
|
|
|
509.4 |
|
|
|
Income, before FX on LTD and other specified
items(2) |
|
|
|
174.8 |
|
|
|
|
160.7 |
|
|
|
|
297.4 |
|
|
|
|
276.8 |
|
|
|
Net income |
|
|
$ |
256.7 |
|
|
|
$ |
378.1 |
|
|
|
$ |
385.3 |
|
|
|
$ |
486.9 |
|
|
|
Operating ratio |
|
|
|
74.7 |
% |
|
|
|
75.0 |
% |
|
|
|
77.0 |
% |
|
|
|
77.3 |
% |
|
|
Basic earnings per share |
|
|
$ |
1.66 |
|
|
|
$ |
2.39 |
|
|
|
$ |
2.49 |
|
|
|
$ |
3.08 |
|
|
|
Diluted earnings per share, before FX on LTD and
other specified items(2) |
|
|
$ |
1.12 |
|
|
|
$ |
1.00 |
|
|
|
$ |
1.90 |
|
|
|
$ |
1.72 |
|
|
|
Diluted earnings per share |
|
|
$ |
1.64 |
|
|
|
$ |
2.37 |
|
|
|
$ |
2.46 |
|
|
|
$ |
3.05 |
|
|
|
Dividends declared per share |
|
|
$ |
0.2250 |
|
|
|
$ |
0.1875 |
|
|
|
$ |
0.4500 |
|
|
|
$ |
0.3750 |
|
|
|
Free cash(2) |
|
|
$ |
159.6 |
|
|
|
$ |
87.6 |
|
|
|
$ |
162.6 |
|
|
|
$ |
31.1 |
|
|
|
Return on capital employed(2) |
|
|
|
10.3 |
% |
|
|
|
9.8 |
% |
|
|
|
10.3 |
% |
|
|
|
9.8 |
% |
|
|
Total assets as at June 30 |
|
|
$ |
11,688.7 |
|
|
|
$ |
10,946.7 |
|
|
|
$ |
11,688.7 |
|
|
|
$ |
10,946.7 |
|
|
|
Total long-term financial liabilities as at June 30 |
|
|
$ |
5,621.2 |
|
|
|
$ |
5,061.7 |
|
|
|
$ |
5,621.2 |
|
|
|
$ |
5,061.7 |
|
|
|
|
|
|
(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 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. 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 income for the three months ended June 30, 2007 was $307.7 million, up $25.1 million, or
8.9%, from $282.6 million for the same period in 2006. Operating income for the six months ended
June 30, 2007 was $537.0 million, an increase of $27.6 million, or 5.4%, from $509.4 million for
the same period in 2006.
The increase in operating income for the second quarter and the first half of 2007 reflected:
|
|
|
a continuing, strong global demand for bulk and intermodal shipments; |
|
|
|
|
import and export growth at the ports of Vancouver and Montreal; and |
|
|
|
|
a return to normal export potash shipments from the resolution of the protracted global
potash price negotiations in the second half of 2006. |
The increase in operating income was achieved amidst harsh weather-related operating conditions in
our western network in the first half of 2007. 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, operations at the Port of Vancouver were
affected by the strike at Canadian National Railway (CN) which caused a slowing of transit times
for CP traffic originating from, or terminated at, CN-served facilities. In the second quarter of
2007, snow melt and flood waters caused interruptions to operational fluidity.
The growth in second-quarter 2007 operating income reflected volume growth in the sulphur and
fertilizer, coal, and intermodal market segments, and higher revenues resulting from increased
freight rates. These increases were partially offset by:
|
|
|
increased expenses due to higher volumes; |
|
|
|
|
higher fuel expense as higher refining charges and reduced benefits from our hedge program
more than offset the impact of lower crude oil prices; |
|
|
|
|
higher equipment rent expense due to reductions in receipts for the use of our railcars
from other railways and customers and higher locomotive rental charges reflecting increased
volume; |
|
|
|
|
a decrease in coal freight rates; and |
3
|
|
|
one-time costs associated with the 26-day strike by Canadian track maintenance employees
(discussed further in the section Future Trends, Commitments and Risks under the
sub-heading Labour Relations),. |
The increase in operating income for the first six months of 2007 was primarily due to:
|
|
|
freight revenue growth in sulphur and fertilizer, grain 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, Before Other Specified Items under the sub-heading Compensation and
Benefits) in first-quarter 2007. |
The increase in operating income for the first six months of 2007 was partially offset by:
|
|
|
increased expenses due to higher volumes; |
|
|
|
|
higher fuel expense as higher refining charges and reduced benefits from our hedge program
more than offset the impact of lower crude oil prices; |
|
|
|
|
the sale of our Latta subdivision in second-quarter 2006; |
|
|
|
|
expenses incurred to manage the impacts of the harsh weather-related operating conditions; |
|
|
|
|
higher equipment rent expense due to reductions in receipts for the use of our railcars
from other railways and customers and higher locomotive rental charges reflecting increased
volume; and |
|
|
|
|
a decrease in revenues as a result of increased network congestion due to winter weather
disruptions and the CN strike in first-quarter 2007. |
Fuel prices remained volatile. During 2007 we continued to take steps to mitigate the impact of
high prices with fuel recovery programs and hedging (discussed further in the section Financial
Instruments under the sub-heading Crude Oil Swaps).
Net income for the three months ended June 30, 2007, was $256.7 million, down $121.4 million, or
32.1%, from $378.1 million for the same period in 2006. Net income for the first six months of
2007 was $385.3 million, a decrease of $101.6 million, or 20.9%, from $486.9 million for the same
period in 2006. Net income in the second quarter and first half of 2007, compared with the same
periods in 2006, decreased primarily due to a future income tax benefit of $176.0 million recorded
in the second quarter of 2006 as a result of reduced Canadian Federal and Provincial income tax
rates (discussed further in the section Non-GAAP Earnings under the sub-heading Other Specified
Items). The decrease was partially offset by higher revenues and an increase in foreign exchange
gains on long-term debt, reflecting a strengthening of the Canadian dollar, in the second quarter
of 2007, compared with the same period in 2006.
Diluted Earnings per Share
Diluted earnings per share (EPS) was $1.64 in the second quarter of 2007, a decrease of $0.73
from $2.37 in the same period of 2006. Diluted EPS, which is defined in the Glossary of Terms at
the end of this MD&A, was $2.46 in the first six months of 2007, a decrease of $0.59, compared with
$3.05 for the same period of 2006. These decreases reflected a decrease in net income, which was
partially offset by the positive impact of the 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).
Diluted EPS excluding foreign exchange gains and losses on long-term debt (FX on LTD) and other
specified items of $1.12 for the second quarter of 2007 was $0.12 higher compared to a diluted EPS
excluding FX on LTD and other specified items of $1.00 in the second quarter of 2006. Diluted EPS
excluding FX on LTD and other specified items was $1.90 for the first six months of 2007, an
increase of $0.18 from the previous year. These increases were mainly due to a higher income
before FX on LTD and other specified items in the first six months of 2007, as well as the positive
impact of the share repurchase program. Diluted EPS excluding FX on LTD and other specified items
is discussed further in the section Non-GAAP Earnings.
Operating Ratio
Our operating ratio was 74.7% in the second quarter of 2007, compared with 75.0% in the same period
of 2006. This ratio was 77.0% in the first half of 2007, an improvement of 30 basis points from
77.3% for 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 in the operation of
the railway.
Return on Capital Employed
Return on capital employed (ROCE) at June 30, 2007 was 10.3%, up 0.5% from 9.8% at June 30, 2006.
The improvement reflected higher profitability of investments in the railway over the four
quarters ended June 30, 2007, compared to the four quarters ended June 30, 2006, primarily driven
by higher revenues and improved operating ratio. ROCE is discussed further in the section
Non-GAAP Earnings.
4
Impact of Foreign Exchange on Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the six |
|
|
Favourable (unfavourable) impact on earnings due to the change in Foreign Exchange |
|
|
months ended |
|
|
months ended |
|
|
(in millions, except foreign exchange rate) |
|
|
June 30 |
|
|
June 30 |
|
|
(unaudited) |
|
|
2007 vs. 2006 |
|
|
|
|
|
|
|
|
|
|
|
Average quarterly foreign exchange rates |
|
|
$1.11 vs. $1.13 |
|
|
$1.14 vs. $1.14 |
|
|
|
|
|
|
|
|
|
|
|
Freight revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
$ |
(2 |
) |
|
|
$ |
|
|
|
|
Coal |
|
|
|
|
|
|
|
|
|
|
|
|
Sulphur and fertilizers |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Forest products |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Industrial and consumer products |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Automotive |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Intermodal |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect |
|
|
$ |
(8 |
) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
|
1 |
|
|
|
|
|
|
|
|
Fuel |
|
|
|
2 |
|
|
|
|
|
|
|
|
Materials |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment rents |
|
|
|
1 |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Purchased services and other |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on operating income |
|
|
$ |
(3 |
) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other charges |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
1 |
|
|
|
|
|
|
|
|
Income tax expense, before FX on LTD and
other specified items(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on income, before FX on LTD and
other specified items(1) |
|
|
$ |
(2 |
) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
The Canadian dollar strengthened against the U.S. dollar by approximately 2% in the second
quarter of 2007 and remained unchanged in the first six months of 2007, compared with the same
periods in 2006. The average foreign exchange rate for converting U.S. dollars to Canadian
dollars decreased to $1.11 in second-quarter 2007 from $1.13 in the second quarter of 2006 and
remained at $1.14 in the first six months of 2007 compared with the same period 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 and other specified items 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
decreased operating income by approximately $3 million in second-quarter 2007 and approximately
nil in the first six months of 2007, compared with the same periods 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 |
|
|
|
|
|
|
|
|
(reconciliation of non-GAAP earnings to GAAP earnings) |
|
|
|
|
|
|
|
|
(in millions, except diluted EPS and operating ratio) |
|
|
For the three months ended June 30 |
|
|
For the six months ended June 30 |
|
|
(unaudited) |
|
|
2007 |
|
|
2006(1) |
|
|
2007 |
|
|
2006(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
$ |
1,215.5 |
|
|
|
$ |
1,131.0 |
|
|
|
$ |
2,331.4 |
|
|
|
$ |
2,241.5 |
|
|
|
Operating expenses, before other specified items |
|
|
|
907.8 |
|
|
|
|
848.4 |
|
|
|
|
1,794.4 |
|
|
|
|
1,732.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income, before other specified items |
|
|
|
307.7 |
|
|
|
|
282.6 |
|
|
|
|
537.0 |
|
|
|
|
509.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other charges |
|
|
|
8.2 |
|
|
|
|
7.7 |
|
|
|
|
13.0 |
|
|
|
|
14.5 |
|
|
|
Interest expense |
|
|
|
49.2 |
|
|
|
|
48.6 |
|
|
|
|
96.0 |
|
|
|
|
95.9 |
|
|
|
Income tax expense, before income tax on FX on LTD and other specified
items(2) |
|
|
|
75.5 |
|
|
|
|
65.6 |
|
|
|
|
130.6 |
|
|
|
|
122.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, before FX on LTD and other specified items(2) |
|
|
|
174.8 |
|
|
|
|
160.7 |
|
|
|
|
297.4 |
|
|
|
|
276.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange (gains) losses on long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD (gains) losses |
|
|
|
(88.6 |
) |
|
|
|
(52.7 |
) |
|
|
|
(97.2 |
) |
|
|
|
(46.3 |
) |
|
|
Income tax on FX on LTD |
|
|
|
23.8 |
|
|
|
|
11.3 |
|
|
|
|
26.4 |
|
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD, net of tax (gains) losses |
|
|
|
(64.8 |
) |
|
|
|
(41.4 |
) |
|
|
|
(70.8 |
) |
|
|
|
(34.1 |
) |
|
|
Other
specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits due to tax rate reductions |
|
|
|
(17.1 |
) |
|
|
|
(176.0 |
) |
|
|
|
(17.1 |
) |
|
|
|
(176.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
$ |
256.7 |
|
|
|
$ |
378.1 |
|
|
|
$ |
385.3 |
|
|
|
$ |
486.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS,
before FX on LTD and other specified items(2) |
|
|
$ |
1.12 |
|
|
|
$ |
1.00 |
|
|
|
$ |
1.90 |
|
|
|
$ |
1.72 |
|
|
|
Diluted EPS, related to FX on LTD, net of tax(2) |
|
|
|
0.41 |
|
|
|
|
0.27 |
|
|
|
|
0.45 |
|
|
|
|
0.23 |
|
|
|
Diluted EPS, related to other specified items, net of tax(2) |
|
|
|
0.11 |
|
|
|
|
1.10 |
|
|
|
|
0.11 |
|
|
|
|
1.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, as determined by GAAP |
|
|
$ |
1.64 |
|
|
|
$ |
2.37 |
|
|
|
$ |
2.46 |
|
|
|
$ |
3.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, and other specified
items that are not among our normal ongoing revenues and operating expenses. The adjoining table
details a reconciliation of income, before FX on LTD and other specified items, to net income, as
presented in the financial statements. Free cash is calculated as cash provided by operating
activities, less cash used in investing activities and dividends. Free cash is discussed further
and 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 other specified
items, ROCE 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. The foreign
exchange gains and losses 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. At June 30, 2007, 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 $8 million, net of hedging.
We recorded foreign exchange gains on long-term debt in the second quarter of 2007 as the Canadian
dollar exchange rate strengthened to $1.07 relative to the U.S. dollar on June 30, 2007, compared
with $1.16 on March 31, 2007. We also recorded foreign exchange gains on LTD in the first six
months of 2007 as the Canadian dollar strengthened relative to the U.S. dollar on June 30, 2007,
compared with $1.17 on December 31, 2006.
Foreign exchange gains on long-term debt were $88.6 million before tax in second-quarter 2007 and
$97.2 million in the first half of 2007, whereas the foreign exchange gains on long-term debt were
$52.7 million before tax in second-quarter 2006 and $46.3 million in the first six months of 2006.
6
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. The
other specified items were:
|
|
|
In the second quarter of 2007, the Government of Canada substantially enacted legislation
to reduce corporate income tax rates starting in the year 2011. We recorded a future income
tax benefit of $17.1 million to reflect the positive impact of these tax rate reductions on
transactions in prior years for which future taxes will be paid. |
|
|
|
|
In the second quarter of 2006, the Government of Canada and the governments of the
provinces of Alberta, Saskatchewan and Manitoba introduced legislation to reduce corporate
income tax rates over a period of several years. We recorded a future income tax benefit of
$176.0 million to reflect the positive impact of these tax rate reductions on transactions in
prior years for which future taxes will be paid. |
LINES OF BUSINESS
Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
Volumes |
|
|
ended June 30 |
|
|
ended June 30 |
|
(unaudited) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Carloads (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
|
91.2 |
|
|
|
|
89.2 |
|
|
|
|
180.5 |
|
|
|
|
181.6 |
|
|
Coal |
|
|
|
75.0 |
|
|
|
|
68.5 |
|
|
|
|
133.5 |
|
|
|
|
147.2 |
|
|
Sulphur and fertilizers |
|
|
|
61.3 |
|
|
|
|
41.6 |
|
|
|
|
111.5 |
|
|
|
|
80.6 |
|
|
Forest products |
|
|
|
29.9 |
|
|
|
|
33.8 |
|
|
|
|
60.0 |
|
|
|
|
71.4 |
|
|
Industrial and consumer products |
|
|
|
79.2 |
|
|
|
|
80.9 |
|
|
|
|
154.9 |
|
|
|
|
160.6 |
|
|
Automotive |
|
|
|
45.7 |
|
|
|
|
46.8 |
|
|
|
|
88.1 |
|
|
|
|
89.1 |
|
|
Intermodal |
|
|
|
311.9 |
|
|
|
|
295.5 |
|
|
|
|
599.5 |
|
|
|
|
577.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carloads |
|
|
|
694.2 |
|
|
|
|
656.3 |
|
|
|
|
1,328.0 |
|
|
|
|
1,307.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ton-miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
|
7,309 |
|
|
|
|
7,048 |
|
|
|
|
14,793 |
|
|
|
|
14,522 |
|
|
Coal |
|
|
|
5,834 |
|
|
|
|
4,735 |
|
|
|
|
10.417 |
|
|
|
|
9,789 |
|
|
Sulphur and fertilizers |
|
|
|
6,106 |
|
|
|
|
3,858 |
|
|
|
|
11,090 |
|
|
|
|
7,313 |
|
|
Forest products |
|
|
|
2,019 |
|
|
|
|
2,264 |
|
|
|
|
4,019 |
|
|
|
|
4,698 |
|
|
Industrial and consumer products |
|
|
|
4,177 |
|
|
|
|
4,162 |
|
|
|
|
8,310 |
|
|
|
|
8,503 |
|
|
Automotive |
|
|
|
659 |
|
|
|
|
746 |
|
|
|
|
1,284 |
|
|
|
|
1,349 |
|
|
Intermodal |
|
|
|
7,424 |
|
|
|
|
7,055 |
|
|
|
|
14,350 |
|
|
|
|
13,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue ton-miles |
|
|
|
33,528 |
|
|
|
|
29,868 |
|
|
|
|
64,263 |
|
|
|
|
59,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 second quarter of 2007 as measured by total carloads, increased by 37,900, or
5.8%, and total revenue ton-miles (RTM) increased by 3,660 million, or 12.3%, compared with the
same period in 2006. Volumes in the first half of 2007 as measured by total carloads increased
by 20,200, or 1.5%, and RTMs increased by 4,307 million, or 7.2%, compared with the same period
in 2006.
The increases in carloads and RTMs in second-quarter 2007 were due primarily to:
|
|
|
strong global economic demand for bulk products; |
|
|
|
|
import and export growth at the ports of Vancouver and Montreal; |
|
|
|
|
catch up of shipments that were delayed in first-quarter 2007 due to the harsh winter
operating conditions and the impact of the CN strike; and |
|
|
|
|
the return to normal export potash shipments which were significantly depressed in
first-half 2006 due to protracted global potash price negotiations. |
Total carloads in the first half of 2007, while up, were affected by the sale of our Latta
subdivision in the second quarter of 2006, which reduced our carloads by 22,500. RTMs in the first
half of 2007 reflected a strong recovery of potash shipments, coal and intermodal growth, which was
partially offset by lower RTMs in forest products, automotive and industrial and consumer products.
7
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 11.7% of total revenues for the six months ended June 30, 2007 and 5.2% of
total accounts receivable at June 30, 2007. The same customer comprised 12.1% of total revenues
for the six months ended June 30, 2006 and 5.8% of total accounts receivable at June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
For the three months |
|
For the six months |
|
(in millions) |
|
|
ended June 30 |
|
ended June 30 |
|
(unaudited) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Grain |
|
|
$ |
224.0 |
|
|
|
$ |
206.4 |
|
|
|
$ |
443.6 |
|
|
|
$ |
417.7 |
|
|
Coal |
|
|
|
162.4 |
|
|
|
|
143.5 |
|
|
|
|
293.7 |
|
|
|
|
303.7 |
|
|
Sulphur and fertilizers |
|
|
|
144.5 |
|
|
|
|
105.5 |
|
|
|
|
266.9 |
|
|
|
|
198.6 |
|
|
Forest products |
|
|
|
74.3 |
|
|
|
|
75.8 |
|
|
|
|
146.3 |
|
|
|
|
159.2 |
|
|
Industrial and consumer products |
|
|
|
158.8 |
|
|
|
|
150.3 |
|
|
|
|
310.7 |
|
|
|
|
298.6 |
|
|
Automotive |
|
|
|
88.5 |
|
|
|
|
91.9 |
|
|
|
|
170.6 |
|
|
|
|
170.2 |
|
|
Intermodal |
|
|
|
321.6 |
|
|
|
|
313.0 |
|
|
|
|
633.2 |
|
|
|
|
605.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenues |
|
|
$ |
1,174.1 |
|
|
|
$ |
1,086.4 |
|
|
|
$ |
2,265.0 |
|
|
|
$ |
2,153.6 |
|
|
Other revenues |
|
|
|
41.4 |
|
|
|
|
44.6 |
|
|
|
|
66.4 |
|
|
|
|
87.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
$ |
1,215.5 |
|
|
|
$ |
1,131.0 |
|
|
|
$ |
2,331.4 |
|
|
|
$ |
2,141.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues
Freight revenues are earned from transporting bulk, merchandise and intermodal goods, and include
fuel surcharges billed to our customers. Freight revenues were $1,174.1 million in the second
quarter of 2007, an increase of $87.7 million, or 8.1%, from second-quarter 2006. Freight revenues
were $2,265.0 million in the first half of 2007, an increase of $111.4 million, or 5.2%, from the
same period in 2006.
Freight revenues in the second quarter and first six months of 2007, compared with the same periods
of 2006, increased mainly due to higher volumes, strong growth in bulk products and intermodal
shipments and a catch up of delayed shipments from first-quarter 2007. These increases were
partially offset by a decrease in coal freight rates.
Grain
Grain revenues for the second quarter of 2007 were $224.0 million, an increase of $17.6 million, or
8.5%, from $206.4 million for the same period of 2006. Grain revenues for the first six months of
2007 were $443.6 million, an increase of $25.9 million, or 6.2%, from $417.7 million for the same
period of 2006. The increase was due to:
|
|
|
a large carryover from the first half of the 2005/06 crop year; |
|
|
|
|
catch up of delayed shipments from first-quarter 2007 as a result of harsh winter
operating conditions in our western network; |
|
|
|
|
strong exports; and |
|
|
|
|
higher freight rates. |
Coal
Coal revenues in second-quarter 2007 were $162.4 million, an increase of $18.9 million, or 13.2%,
from $143.5 million for the same period of 2006. Coal revenues for the first six months of 2007
were $293.7 million, a decrease of $10.0 million, or 3.3%, from $303.7 million for the first half
of 2006. The increase in the second quarter of 2007 reflected catch up of delayed shipments to the
Port of Vancouver caused by poor weather conditions in western Canada in the first quarter of 2007
partially offset by a decrease in freight rates. The decline in coal revenues in the first half 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 $144.5 million in the second quarter of 2007, an increase of
$39.0 million, or 37.0%, from $105.5 million for the same period of 2006. Revenues for the first
half of 2007 were $266.9 million, an increase of $68.3 million, or 34.4%, from $198.6 million for
the same six months of 2006. These increases were the result of the return to normal export potash
shipments which were significantly depressed in first-half 2006 due to protracted global potash
price negotiations and an increase in demand due to the growth in bio fuels.
Forest Products
Forest products revenues for second-quarter 2007 were $74.3 million, a decrease of $1.5 million, or
2.0%, from $75.8 million in second-quarter 2006. Revenues for the first six months of 2007 were
$146.3 million, a decrease of $12.9 million, or 8.1%, from $159.2 million for the same period of
2006. The decrease was a result of continued soft demand for lumber and panel products
8
caused by a decrease in U.S. and Canadian housing starts, as well as difficult market conditions
for our forest product customers due to softwood lumber trade negotiations which have led to
reduced volumes and extended plant shut downs. The decrease was partially offset by price
increases which lessened the impact from the volume decline.
Industrial and Consumer Products
Industrial and consumer products revenues for the second quarter of 2007 were $158.8 million, an
increase of $8.5 million, or 5.7%, from $150.3 million in the same period of 2006. Revenues for
the first six months of 2007 were $310.7 million, an increase of $12.1 million, or 4.1%, from
$298.6 million for the same period of 2006. The increase was due to increased freight rates and
growth in the chemical and energy portfolio.
Automotive
Automotive revenues for second-quarter 2007 were $88.5 million, a decrease of $3.4 million, or
3.7%, from $91.9 million in second-quarter 2006. Revenues for the first half of 2007 were $170.6
million, an increase of $0.4 million, or 0.2%, from $170.2 million for the same period of 2006.
The decrease in second-quarter 2007, compared with the same period of 2006, was due primarily to
declining domestic automotive volumes, which were partially offset by import growth.
Intermodal
Intermodal revenues for the second quarter of 2007 were $321.6 million, an increase of $8.6
million, or 2.7%, from $313.0 million in second-quarter 2006. Revenues for the first six months of
2007 were $633.2 million, an increase of $27.6 million, or 4.6%, from $605.6 million for the first
half of 2006. The increase in intermodal revenues was largely due to higher freight rates and the
strong growth of import and export container shipments from the ports of Vancouver, Montreal and
Philadelphia.
Other Revenues
Other revenues for the second quarter of 2007 were $41.4 million, a decrease of $3.2 million from
$44.6 million for second-quarter 2006. Other revenues for the first six months of 2007 were $66.4
million, a decrease of $21.5 million from $87.9 million for the same period of 2006. Other
revenues decreased in the second quarter and first half of 2007, compared with the same periods in
2006, due primarily to a gain of approximately $17 million realized from the sale of our Latta
subdivision in second-quarter 2006 and the sale of a property to a university in Montreal in
first-quarter 2006. This was partially offset by higher revenue from land sales in second-quarter
2007.
Freight Revenue per Carload
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months ended |
|
Freight revenue per carload |
|
ended June 30 |
|
June 30 |
|
($) (unaudited) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Total freight revenue per carload |
|
|
$ |
1,691 |
|
|
|
$ |
1,655 |
|
|
|
$ |
1,706 |
|
|
|
$ |
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
|
2,456 |
|
|
|
|
2,314 |
|
|
|
|
2,458 |
|
|
|
|
2,300 |
|
|
Coal |
|
|
|
2,165 |
|
|
|
|
2,095 |
|
|
|
|
2,200 |
|
|
|
|
2,063 |
|
|
Sulphur and fertilizers |
|
|
|
2,357 |
|
|
|
|
2,536 |
|
|
|
|
2,394 |
|
|
|
|
2,464 |
|
|
Forest products |
|
|
|
2,485 |
|
|
|
|
2,243 |
|
|
|
|
2,438 |
|
|
|
|
2,230 |
|
|
Industrial and consumer products |
|
|
|
2,005 |
|
|
|
|
1,858 |
|
|
|
|
2,006 |
|
|
|
|
1,859 |
|
|
Automotive |
|
|
|
1,937 |
|
|
|
|
1,964 |
|
|
|
|
1,936 |
|
|
|
|
1,910 |
|
|
Intermodal |
|
|
|
1,031 |
|
|
|
|
1,059 |
|
|
|
|
1,056 |
|
|
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenue per carload increased $36, or 2.2%, in the second quarter of 2007 and $59, or
3.6%, in the first half of 2007, compared with the same periods of 2006. These increases were due
to higher freight rates, the impact of the sale of our Latta subdivision and changes in traffic
mix.
9
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 |
|
|
For the six months |
|
Performance indicators |
|
ended June 30 |
|
ended June 30 |
|
(unaudited) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Safety
indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
|
2.0 |
|
|
|
|
1.7 |
|
|
|
|
1.9 |
|
|
|
|
1.9 |
|
|
FRA train accidents per million train-miles |
|
|
|
1.8 |
|
|
|
|
2.1 |
|
|
|
|
1.9 |
|
|
|
|
1.6 |
|
|
Efficiency and other indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles (GTM) of freight (millions) |
|
|
|
64,481 |
|
|
|
|
58,099 |
|
|
|
|
122,041 |
|
|
|
|
115,113 |
|
|
Car miles per car day |
|
|
|
147.5 |
|
|
|
|
134.0 |
|
|
|
|
141.0 |
|
|
|
|
133.1 |
|
|
U.S. gallons of locomotive fuel consumed per
1,000 GTMs freight and yard |
|
|
|
1.19 |
|
|
|
|
1.19 |
|
|
|
|
1.22 |
|
|
|
|
1.22 |
|
|
Terminal dwell (hours) |
|
|
|
21.7 |
|
|
|
|
20.2 |
|
|
|
|
22.8 |
|
|
|
|
20.7 |
|
|
Average train speed (miles per hour) |
|
|
|
23.5 |
|
|
|
|
25.0 |
|
|
|
|
23.3 |
|
|
|
|
25.1 |
|
|
Number of active employees end of period |
|
|
|
15,720 |
|
|
|
|
16,504 |
|
|
|
|
15,720 |
|
|
|
|
16,504 |
|
|
Freight revenue per RTM (cents) |
|
|
|
3.50 |
|
|
|
|
3.64 |
|
|
|
|
3.52 |
|
|
|
|
3.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2.0 in the second quarter of 2007,
compared with 1.7 in the same period of 2006. The rate remained unchanged at 1.9 for the first six
months of 2007, compared with the same period of 2006.
The FRA train accident rate was 1.8 accidents per million train-miles for the second quarter and
1.9 for the first six months of 2007, compared with 2.1 and 1.6, respectively, in the same periods
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. The 26-day strike by CPs maintenance of way employees in
Canada during the second quarter of 2007 (CP strike) did not materially impact CPs operations,
reflecting a system-wide contingency plan which had been implemented. Despite these challenges, CP
had an increase in freight volumes in the second quarter and the first six months of 2007, compared
with the same period of 2006.
|
|
|
GTMs increased 11.0% in second-quarter 2007 and 6.0% in the first six months of 2007,
compared with the same periods in 2006, mainly due to higher potash and coal volumes.
Fluctuations in GTMs normally drive fluctuations in certain variable costs, such as fuel and
crew costs. |
|
|
|
|
Car miles per car day increased 10.1% in second-quarter 2007 and 5.9% in the first six
months of 2007, compared with the same periods in 2006, as higher level of demand was handled
with a smaller fleet size. Improved car ordering and pipeline management processes, IOP
improvements and tighter fleet sizing were the key drivers. |
|
|
|
|
U.S. gallons of locomotive fuel consumed per 1,000 GTMs in both freight and yard activity
stayed constant at 1.19 in the second quarter of 2007 and 1.22 in the first half of 2007,
compared with the same periods 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 7.4% in
the second quarter of 2007 and 10.1% in the first half of 2007, compared with the same
periods in 2006, due primarily to weather-related issues. |
|
|
|
|
Average train speed decreased 6.0% in the second quarter of 2007 and 7.2% in the first
half of 2006, compared with the same period in 2006. Network disruptions, primarily related
to weather events, resulted in trains being held until such time as the lines could be
cleared, which negatively impacted train speed. |
|
|
|
|
The number of active employees at June 30, 2007 decreased by 784, or 4.8% compared with
the number at June 30, 2006. The decrease was due mainly to the strike by the Canadian track
maintenance employees in second-quarter 2007 (discussed further in the sections Quarterly
Financial Data and Future Trends, Commitments and Risks) and job reductions made under
restructuring initiatives, partially offset by addition of employees required to handle
higher traffic volumes. The job reductions targeted by the restructuring initiatives were
achieved in the third quarter of 2006 (discussed in the section Future Trends, Commitments
and Risks under the sub-heading Restructuring). Approximately 10% of employees were
assigned to capital projects in June 2007, down from 13% in June 2006. This reduction was
mostly due to the curtailment of capital project work during the CP strike. |
|
|
|
|
Freight revenue per RTM decreased by 3.8% in the second quarter of 2007 and 1.9% in the
first six months of 2007, compared with the same periods of 2006. The decreases were the
result of significant changes to our overall mix caused by growth in RTMs of over 50% for
sulphur and fertilizers, as well as growth in other longer haul traffic. |
10
OPERATING EXPENSES, BEFORE OTHER SPECIFIED ITEMS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
For the three months ended June 30 |
|
|
For the six months ended June 30 |
|
(in millions) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
(unaudited) |
|
|
Expense |
|
|
% of revenue |
|
|
Expense |
|
|
% of revenue |
|
|
Expense |
|
|
% of revenue |
|
|
Expense |
|
|
% of revenue |
|
Compensation and benefits(1) |
|
|
$ |
329.8 |
|
|
|
|
27.1 |
|
|
|
$ |
320.8 |
|
|
|
|
28.4 |
|
|
|
$ |
662.3 |
|
|
|
|
28.4 |
|
|
|
$ |
673.0 |
|
|
|
|
30.0 |
|
|
Fuel |
|
|
|
193.7 |
|
|
|
|
16.0 |
|
|
|
|
160.1 |
|
|
|
|
14.2 |
|
|
|
|
364.9 |
|
|
|
|
15.7 |
|
|
|
|
318.0 |
|
|
|
|
14.2 |
|
|
Materials |
|
|
|
55.6 |
|
|
|
|
4.6 |
|
|
|
|
54.5 |
|
|
|
|
4.8 |
|
|
|
|
118.0 |
|
|
|
|
5.1 |
|
|
|
|
112.1 |
|
|
|
|
5.0 |
|
|
Equipment rents |
|
|
|
57.3 |
|
|
|
|
4.7 |
|
|
|
|
44.4 |
|
|
|
|
3.9 |
|
|
|
|
112.8 |
|
|
|
|
4.8 |
|
|
|
|
89.0 |
|
|
|
|
4.0 |
|
|
Depreciation and amortization |
|
|
|
119.1 |
|
|
|
|
9.8 |
|
|
|
|
117.8 |
|
|
|
|
10.4 |
|
|
|
|
237.7 |
|
|
|
|
10.2 |
|
|
|
|
232.6 |
|
|
|
|
10.4 |
|
|
Purchased services and other |
|
|
|
152.3 |
|
|
|
|
12.5 |
|
|
|
|
150.8 |
|
|
|
|
13.3 |
|
|
|
|
298.7 |
|
|
|
|
12.8 |
|
|
|
|
307.4 |
|
|
|
|
13.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
907.8 |
|
|
|
|
74.7 |
|
|
|
$ |
848.4 |
|
|
|
|
75.0 |
|
|
|
$ |
1,794.4 |
|
|
|
|
77.0 |
|
|
|
$ |
1,732.1 |
|
|
|
|
77.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $907.8 million in the second quarter of 2007, up $59.4 million from
$848.4 million in the same period of 2006. Operating expenses were $1,794.4 million in the first
six months of 2007, an increase of $62.3 million from $1,732.1 million in the same period of 2006.
Operating expenses in both the second quarter and first half of 2007, compared with the same
periods of 2006, increased primarily due to:
|
|
|
higher fuel prices driven by higher refining charges; |
|
|
|
|
increased equipment rent expense; |
|
|
|
|
increased expenses due to higher volumes; |
|
|
|
|
higher costs due to harsh weather-related operating conditions; and |
|
|
|
|
one-time costs associated with the 26-day strike by Canadian track maintenance employees
(discussed further in the section Future Trends, Commitments and Risks under the sub-heading
Labour Relations). |
The increases in operating expenses were partially offset by:
|
|
|
improved operating efficiencies; |
|
|
|
|
lower pension expenses; |
|
|
|
|
lower crude oil prices; and |
|
|
|
|
reduced costs as a result of restructuring initiatives (discussed in the section Future
Trends, Commitments and Risks under the sub-heading Restructuring). |
The strengthening of the Canadian dollar in the second quarter of 2007 had a positive impact of $5
million on operating expenses.
Compensation and Benefits
Compensation and benefits expense was $329.8 million in second-quarter 2007, an increase of $9.0
million from $320.8 million in the same period of 2006. The expense was $662.3 in the first six
months of 2007, a decrease of $10.7 million from $673.0 million in the same period of 2006. The
increase in second-quarter 2007 was primarily due to higher volumes and the negative impact of
inflation, which were partially offset by improved operational efficiencies and lower pension
expenses.
The year-to-date decrease was primarily due to:
|
|
|
lower employee incentive compensation costs due largely to the beneficial effect of our
Total Return Swap (TRS) (discussed further in the section Financial Instruments under the
sub-heading Stock-based Compensation Expense Management); |
|
|
|
|
improved operational efficiencies; and |
|
|
|
|
lower pension expenses. |
These decreases were partially offset by higher volumes and the negative impact of inflation.
Fuel
Fuel expense was $193.7 million in the second quarter of 2007, an increase of $33.6 million from
$160.1 million in second-quarter 2006. The expense was $364.9 million in the first six months of
2007, an increase of $46.9 million from $318.0 million in the same period of 2006. These increases
were due primarily to:
|
|
|
higher refining charges; |
|
|
|
|
increased volumes in second-quarter 2007; and |
11
|
|
|
reduced benefits from our hedge program. |
These increases were partially offset by lower crude oil prices.
Materials
Materials expense was $55.6 million in the second quarter of 2007, an increase of $1.1 million from
$54.5 million in the same period of 2006. The expense was $118.0 million in the first six months
of 2007, an increase of $5.9 million from $112.1 million in the same period of 2006. The increase
in the first six months of 2007 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 weather related operating conditions, as well as
increased locomotive repair costs reflecting higher volumes in second-quarter 2007. These
increases were partially offset by a favourable pricing arrangements for wheels in second-quarter
2007.
Equipment Rents
Equipment rents expense was $57.3 million in second-quarter 2007, an increase of $12.9 million from
$44.4 million in the second quarter of 2006. The expense was $112.8 million in the first half of
2007, an increase of $23.8 million from $89.0 million in the same period of 2006. The increase in
second-quarter 2007 was due to reductions in receipts for the use of our railcars from other
railways and customers and higher locomotive rental charges reflecting increased volume. The
year-to-date increase was due mainly to:
|
|
|
higher lease rates paid to equipment leasing companies; |
|
|
|
|
reductions in receipts for the use of our railcars from other railways and customers and
higher locomotive rental charges reflecting increased volume; |
|
|
|
|
payments to the Canadian Wheat Board for the use of their cars in regulated grain movements
effective August 1, 2006; and |
|
|
|
|
additional locomotives and freight cars required to operate in harsh weather-related
operating conditions; |
Depreciation and Amortization
Depreciation and amortization expense was $119.1 million in the second quarter of 2007, an increase
of $1.3 million from $117.8 million in the same period of 2006. The expense was $237.7 million in
the first six months of 2007, an increase of $5.1 million from $232.6 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 and depreciation rate revisions implemented in
second-quarter 2007.
Purchased Services and Other
Purchased services and other expense was $152.3 million in the second quarter of 2007, an increase
of $1.5 million from $150.8 million in the same period of 2006. The expense was $298.7 million in
the first six months of 2007, a decrease of $8.7 million from $307.4 million in the same period of
2006. The increase in the second quarter of 2007 was due mainly to one-time CP strike-related
expenses, which were partially offset by lower casualty expenses. The year-to-date 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. The year-to-date decrease was
partially offset by one-time CP strike-related expense in second-quarter 2007.
OTHER INCOME STATEMENT ITEMS
Other Charges
Other charges were $8.2 million in the second quarter of 2007, an increase of $0.5 million from
$7.7 million in the same period of 2006 and were $13.0 million in the first half of 2007, a
decrease of $1.5 million from $14.5 million in the same period of 2006. The increase in
second-quarter 2007, compared with the same period in 2006, was due mainly to lower realized gains
on non-hedge derivative instruments in second-quarter 2007. The decrease in the first six months
of 2007, compared to the same period in 2006, was due mainly to the positive impact of the change
in Foreign Exchange on working capital balances in 2007.
Interest Expense
Interest expense was $49.2 million in the second quarter of 2007, an increase of $0.6 million from
$48.6 million in the same period of 2006. The expense was $96.0 million in the first six months of
2007, an increase of $0.1 million from $95.9 million in the first six months of 2006. Interest
expense increased largely due to the issuance of new debt in May 2007 in the amount of US$450
million for the purchase of CP shares (discussed further in the Balance Sheet section under the
sub-heading Share Capital) and the use of short term borrowing facilities. The increase was
partially offset by the repayment of a $143.0 million secured equipment loan in February 2007 and
higher interest income generated from higher cash balances.
Income Taxes
Income tax expense was $82.2 million in the second quarter of 2007, whereas there was a benefit for
income taxes of $99.1 million in the same period of 2006. The expense in the first six months of
2007 was $139.9 million, compared with an income
12
tax benefit of $41.6 million in the same period of 2006. The increase was mainly due to a lower
future income tax benefit of $17.1 million recorded in the second quarter of 2007 resulting from
2007 tax rate changes implemented by the Canadian Federal governments, compared with the impact of
tax rate changes of $176.0 million implemented by the Canadian Federal and Provincial governments
announced in 2006 for the same period in 2006.
The effective income tax expense rate for second-quarter 2007 was 24.3% and 26.6% for the first
half of 2007, compared with an income tax benefit rate of 35.5% and 9.4% for the same periods in
2006, respectively. The normalized rates (income tax rate based on income adjusted for FX on LTD
and other specified items) was 30.2% for second-quarter 2007 and 30.5% for the first half of 2007,
compared with 29.0% and 30.6% for the same periods in 2006, respectively. The change in the
normalized tax rates was mainly due to the difference in timing of transactions and tax initiatives
compared to the previous year.
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. A 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 $1.9 million in second-quarter 2007 and increased
by $2.3 million year to date (second-quarter 2006 decreased by $1.1 million and first half of 2006
increased by $1.3 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
second-quarter 2007 by the same amount.
QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data |
|
|
For the quarter ended |
|
(in millions, except per share data) |
|
|
2007 |
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
2005 |
|
(unaudited) |
|
|
Jun. 30 |
|
|
Mar. 31 |
|
|
Dec. 31 |
|
|
Sept. 30(2) |
|
|
Jun. 30(2) |
|
|
Mar. 31(2) |
|
|
Dec. 31(2) |
|
|
Sept. 30(2) |
|
Total revenue |
|
|
$ |
1,215.5 |
|
|
|
$ |
1,115.9 |
|
|
|
$ |
1,190.4 |
|
|
|
$ |
1,151.3 |
|
|
|
$ |
1,131.0 |
|
|
|
$ |
1,110.5 |
|
|
|
$ |
1,166.9 |
|
|
|
$ |
1,104.7 |
|
|
Operating income |
|
|
|
307.7 |
|
|
|
|
229.3 |
|
|
|
|
320.1 |
|
|
|
|
299.1 |
|
|
|
|
282.6 |
|
|
|
|
226.8 |
|
|
|
|
260.0 |
|
|
|
|
283.2 |
|
|
Net income |
|
|
|
256.7 |
|
|
|
|
128.6 |
|
|
|
|
145.6 |
|
|
|
|
163.8 |
|
|
|
|
378.1 |
|
|
|
|
108.8 |
|
|
|
|
137.1 |
|
|
|
|
203.8 |
|
|
Operating income, before other
specified items(1) |
|
|
|
307.7 |
|
|
|
|
229.3 |
|
|
|
|
320.1 |
|
|
|
|
299.1 |
|
|
|
|
282.6 |
|
|
|
|
226.8 |
|
|
|
|
304.2 |
|
|
|
|
249.3 |
|
|
Income, before FX on LTD and other
specified items(1) |
|
|
|
174.8 |
|
|
|
|
122.6 |
|
|
|
|
181.0 |
|
|
|
|
169.7 |
|
|
|
|
160.7 |
|
|
|
|
116.1 |
|
|
|
|
170.5 |
|
|
|
|
135.1 |
|
|
|
Basic earnings per share |
|
|
$ |
1.66 |
|
|
|
$ |
0.83 |
|
|
|
$ |
0.93 |
|
|
|
$ |
1.05 |
|
|
|
$ |
2.39 |
|
|
|
$ |
0.69 |
|
|
|
$ |
0.87 |
|
|
|
$ |
1.29 |
|
|
Diluted earnings per share |
|
|
|
1.64 |
|
|
|
|
0.82 |
|
|
|
|
0.92 |
|
|
|
|
1.04 |
|
|
|
|
2.37 |
|
|
|
|
0.68 |
|
|
|
|
0.86 |
|
|
|
|
1.27 |
|
|
Diluted earnings per share, before
FX on LTD and other specified
items(1) |
|
|
|
1.12 |
|
|
|
|
0.78 |
|
|
|
|
1.15 |
|
|
|
|
1.07 |
|
|
|
|
1.00 |
|
|
|
|
0.72 |
|
|
|
|
1.07 |
|
|
|
|
0.84 |
|
|
|
|
|
(1) |
|
These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. These earnings measures and
other specified items are described in the section Non-GAAP Earnings. A reconciliation of income and diluted EPS, before FX on LTD and other specified items, to net income and diluted EPS, as presented in
the financial statements is provided in the section Non-GAAP Earnings. This information is in Canadian dollars. |
|
(2) |
|
Certain comparative period figures have been restated to reflect the retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to
retire before the vesting date of stock-based awards. |
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
13
is typically lowest in the first quarter due to higher operating costs associated with winter
conditions. Net income is also influenced by seasonal fluctuations in customer demand and
weather-related issues.
The CP strike in the second quarter of 2007 (discussed further in the section Future Trends,
Commitments and Risks under the sub-heading Labour Relations) did not materially impact CPs
operations other than to delay the timing of certain capital programs.
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.
CHANGES IN ACCOUNTING POLICY
2007 Accounting Changes
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 Companys 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: Section 3862 Financial Instruments Disclosures, Section 1535 Capital
Disclosures and Section 3031 Inventories.
Section 3862 Financial Instruments Disclosures and Section 1535 Capital Disclosures will
require the Company to provide additional disclosures relating to its financial instruments,
including hedging instruments, and about the Companys capital. It is not anticipated that the
adoption of these new accounting standards will impact the amounts reported in the Companys
financial statements as they primarily relate to disclosure.
Section 3031 Inventories will provide guidance on the method of determining the cost of CPs
materials and supplies. The new accounting standard specifies that inventories are to be valued at
the lower of cost and net realizable value. CP currently reflects materials and supplies at the
lower of cost and replacement value. The standard requires the reversal of previous write downs to
realizable value when there is clear evidence that net realizable value has increased. Additional
disclosures are also required. It is not anticipated that the adoption of Section 3031
Inventories will have a material impact on CPs financial statements.
14
Adoption of the new accounting standard may be made on either a prospective basis or retroactively
with restatement of prior periods.
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 $364.5 million in the second quarter of 2007, an increase
of $82.1 million from $282.4 million in the same period of 2006. Cash provided by operating
activities was $592.2 million in the first six months of 2007, an increase of $135.5 million from
$456.7 million in the same period of 2006. The increase in cash provided by operating activities
was mainly due to higher net cash generated through improved working capital 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 subsidiarys ability to transfer funds to CPRL.
Investing Activities
Cash used in investing activities was $170.2 million in the second quarter of 2007, an increase of
$5.2 million from $165.0 million in the same period of 2006. Cash used in investing activities was
$365.8 million in the first half of 2007, a decrease of $6.3 million from $372.1 million in the
same period of 2006. Cash used in investing activities was flat year over year as a reduction in
cash used to purchase other assets, such as freight cars held for sale, was largely offset by lower
proceeds from disposal of transportation properties.
Capital spending in 2007 is projected to be between $885 million and $895 million. Our 2007
capital spending outlook reflects a steady level of investment in basic right-of-way and asset
renewal to help maintain the reliability and safety of our infrastructure. Our capital spending
outlook assumes increases in 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.
Financing Activities
Cash provided by financing activities was $172.2 million in the second quarter of 2007, an increase
of $292.8 million, compared with cash used in financing activities of $120.6 million in the same
period of 2006. Cash provided by financing activities was $41.4 million in the first half of 2007,
an increase of $203.5 million, compared with cash used in financing activities of $162.1 million in
the same period of 2006. These increases in cash provided by financing activities was due to the
issuance of US$450 million of 5.95% 30-year notes for net proceeds of $485.1 million. This
increase was partially offset by the repayment of two debt instruments, a $143.0 million secured
equipment loan and a $19 million obligation under capital lease, and increased purchases of CP
shares (discussed further in the section Balance Sheet under the sub-heading Share Capital).
We have available, as sources of financing, unused credit facilities of up to $522 million, as well
as an uncommitted amount of US$15 million. Our unsecured long-term debt securities are rated
Baa2, BBB and BBB(high) by Moodys Investors Service, Inc., Standard and Poors Corporation
and Dominion Bond Rating Service, respectively.
CP filed a US$1.5 billion base shelf prospectus in May 2007 and a CAD$1.5 billion medium term notes
prospectus in June 2007 to provide the financial flexibility to offer debt securities for sale.
This allowed CP to issue US$450 million of 5.95% 30-year notes in May 2007 under the US-dollar base
shelf prospectus to repay an outstanding balance on a revolving credit facility, provide funding to
finance the repurchase of CP shares through normal course issuer bids (discussed further in the
section Balance Sheet under the sub-heading Share Capital) and for general corporate purposes.
15
At June 30, 2007, our net-debt to net-debt-plus-equity ratio improved to 35.0%, compared with 37.7%
at June 30, 2006. The improvement was due primarily to an increase in equity driven by earnings
and the impact of the strengthening of the Canadian dollar, partially offset by the Companys share
purchase 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of free cash |
|
|
For the three months |
|
|
For the six months ended |
|
(reconciliation of free cash to GAAP cash position) |
|
|
ended June 30 |
|
|
June 30 |
|
(in millions) (unaudited) |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cash provided by operating activities |
|
|
$ |
364.5 |
|
|
|
$ |
282.4 |
|
|
|
$ |
592.2 |
|
|
|
$ |
456.7 |
|
|
Cash used in investing activities |
|
|
|
(170.2 |
) |
|
|
|
(165.0 |
) |
|
|
|
(365.8 |
) |
|
|
|
(372.1 |
) |
|
Dividends paid on Common Shares |
|
|
|
(34.7 |
) |
|
|
|
(29.8 |
) |
|
|
|
(63.8 |
) |
|
|
|
(53.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash(1) |
|
|
|
159.6 |
|
|
|
|
87.6 |
|
|
|
|
162.6 |
|
|
|
|
31.1 |
|
|
Cash provided by (used in) financing
activities, excluding dividend
payment |
|
|
|
206.9 |
|
|
|
|
(90.8 |
) |
|
|
|
105.2 |
|
|
|
|
(108.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash, as
shown on the Statement of
Consolidated Cash Flows |
|
|
|
366.5 |
|
|
|
|
(3.2 |
) |
|
|
|
267.8 |
|
|
|
|
(77.5 |
) |
|
Net cash at beginning of period |
|
|
|
25.6 |
|
|
|
|
47.5 |
|
|
|
|
124.3 |
|
|
|
|
121.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash at end of period |
|
|
$ |
392.1 |
|
|
|
$ |
44.3 |
|
|
|
$ |
392.1 |
|
|
|
$ |
44.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Free cash has no standardized meanings prescribed by Canadian GAAP and, therefore, is
unlikely to be comparable to similar measures of other companies. Free cash is discussed further in
this section and in the Non-GAAP Earnings section. |
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 $159.6 million in the second quarter of 2007 compared with
positive free cash of $87.6 million in the same period of 2006. We generated a positive free cash
of $162.6 million in the first six months of 2007, compared with positive free cash of $31.1
million in the same period of 2006. The improvement in 2007 was due largely to the increase in
cash generated by operating activities (as discussed in this section under the sub-heading
Operating Activities) and lower spending on the purchase of freight cars that were being held for
sale, partially offset by a higher dividend payment and lower proceeds from disposal of
transportation properties.
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 lower proceeds from disposal of transportation
properties. 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 $11,688.7 million at June 30, 2007, compared with $11,415.9 million at December 31,
2006. The increase in assets was mainly due to an increase in cash as funds were received from the
issuance of new debt in the second quarter of 2007.
Total Liabilities
Our combined short-term and long-term liabilities were $6,710.2 million at June 30, 2007, compared
with $6,559.4 million at December 31, 2006. The increase in total liabilities was due mainly to an
increase in future income tax liability and an increase in long-term debt resulting from the
issuance of US$450 million of 5.95% 30-year notes in second-quarter 2007 (net proceeds of $485.1
million). The notes are unsecured, however, they carry a negative pledge. These increases were
partially offset by the repayment of a $143.0 million secured equipment loan in the first quarter
of 2007 and foreign exchange gains on long-term debt.
16
Accumulated Other Comprehensive Income
Effective January 1, 2007, new 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 June 30, 2007, our Consolidated Balance Sheet reflected $4,978.5 million in equity, compared
with an equity balance of $4,856.5 million at December 31, 2006. The increase was due primarily to
growth in retained income driven by net income and the issuance of Common Shares for stock options
exercised. The increase was partially offset by shares repurchased under normal course issuer bids
and dividends.
Share Capital
At June 30, 2007, 153,163,703 Common Shares and no Preferred Shares were issued and outstanding.
At June 30, 2007, 7.2 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 Companys 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 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
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 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.
On April 24, 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. On April 27, 2007, our 2007 NCIB was amended to increase the number of shares CP may
purchase. The increase allows CP to purchase up to 15,250,010 of its common shares during the
12-month period ending March 27, 2008. This represents approximately 9.8% of the public float of
common shares outstanding on March 15, 2007, the date of CPs previously filed notice. Of the
shares authorized under the 2007 NCIB, 2,684,800 shares were purchased by June 30, 2007 at an
average price per share of $73.64.
In addition to the normal course issuer bids, 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.
At June 30, 2007, a total of 3,209,790 shares have been purchased in 2007 at an average price of
$71.99.
Shareholders may obtain, without charge, a copy of our Notice of Intention to Make a Normal Course
Issuer Bid by writing to The Office of the Corporate Secretary, Canadian Pacific Railway Limited,
Suite 920, Gulf Canada Square, 401 9th Avenue S.W., Calgary, Alberta, T2P 4Z4, by telephone at
(403) 319-7165 or 1-866-861-4289, by fax at (403) 319-6770, or by e-mail at Shareholder@cpr.ca.
Dividends
As announced in the first quarter of 2007, a dividend of $0.225 per share (2006 $0.1875 per
share) was paid on April 30, 2007. On May 11, 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 July 30, 2007 to holders of record at the close of business on June 29,
2007.
17
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 arms 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. 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 as the hedged
item is recorded. The ineffective portion within an effective cash flow hedge is recognized in
income as it arises in the same income account as the hedged item would be recorded when realized.
If the hedging relationship of a cash flow hedge becomes 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. 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 rates, foreign exchange rates and the price of
fuel. We document the relationship between the hedging instruments and their associated hedged
items, as well as the risk management objective and strategy for the use of the hedging
instruments. This
18
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 our Statement of Consolidated Income by $0.3 million in the second
quarter of 2007 (second quarter of 2006 $0.2 million) and by $0.8 million in the first six months
of 2007 (first half of 2006 $0.1 million). At June 30, 2007, an unrealized loss, derived from
the fair value of the swap, of $5.2 million was reflected in Accounts payable and accrued
liabilities and Deferred liabilities on our Consolidated Balance Sheet. The fair value was
calculated utilizing swap, currency and basis-spread curves from Bloomberg. From January 1, 2007,
the change in fair value of the swap is reflected in Interest expense in the Statement of
Consolidated Income. These swaps are fully effective.
Interest and Treasury Rate Locks
In the second quarter of 2007, CP entered into a bond forward totalling $350 million to fix the
benchmark interest rate on certain long-term notes the company may issue in the future. Any gains
or losses from this arrangement, which is accounted for as a cash flow hedge, will be amortized to
income as interest is paid on the related debt. At June 30, 2007, the fair value of the bond
forward was a $3.9 million loss. This unrealized loss was reflected in Accounts payable and
accrued liabilities, with the offset, net of taxes, reflected in Accumulated other comprehensive
income on our Consolidated Balance Sheet. The fair value of the bond forward was calculated using
swap and basis spread curves from Bloomberg.
At June 30, 2007, net unamortized losses for previously settled interest and treasury rate locks of
$3.6 million was reflected in Accumulated other comprehensive income on the Consolidated Balance
Sheet. These gains and losses are being amortized to income as interest is paid on the related
debt. In 2007, the amortization of these gains and losses resulted in an increase in interest
expense and Other comprehensive income on the Statement of Consolidated Income of $1.7 million in
the second quarter of 2007 and $1.6 million in the first six months of 2007. In 2006, the
amortization of these net losses increased interest expense by $0.8 million in the second quarter
of 2006 and $1.6 million in the first six months of 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 June 30, 2007, we had no forward sales of U.S. dollars
outstanding (June 30, 2006 US$12.4 million). At June 30, 2006, the unrealized gain on forward
contracts as of June 30, 2006, calculated using the trading value of the U.S. dollar from the Bank
of Canada, was $1.1 million. Consistent with Canadian GAAP at the time, this unrealized gain was
not included in our financial statements at June 30, 2006. Freight revenues on our Statement of
Consolidated Income did not include any gain or loss for the second quarter and the first half of
2007 as no forward hedges settled, compared with realized gains of $1.4 million in the second
quarter of 2006 and $2.9 million in the first half of 2006.
Currency Forward
In June 2007, the Company entered into a deliverable currency forward derivative agreement. This
derivative will lock in the amount of Canadian dollars that the Company will repay when its US$400
million 6.25% note matures in October 2011. In the second quarter of 2007, an unrealized loss,
measured as fair value of this derivative instrument, of $2.0 million was included in FX on LTD
on our Statement of Consolidated Income and Deferred liabilities on our Consolidated Balance
Sheet. The fair value was calculated by using the forward curve from Bloomberg and discounting the
future cash flow using the applicable bond yield.
Fuel Price Management
Swaps and fuel surcharges, together with fuel conservation practices, are the key elements of our
program to manage the risk
19
arising from fuel price volatility.
Crude Oil Swaps
From time to time, CP may enter into crude oil or heating oil swap contracts to help mitigate
future price increases related to the purchase of fuel. As both fuel purchases and commodity swap
contracts have an element of foreign exchange variability, the company may also enter into foreign
exchange forward contracts to manage this element of fuel-price risk. Gains and losses on the
commodity swaps coupled with gains and losses on foreign exchange forward contracts partially
offset changes in the cash cost of fuel.
Commodity swap contracts and foreign exchange forward contracts are accounted for as cash flow
hedges. Unrealized gains or losses related to the effective portion of these swaps are deferred in
Accumulated other comprehensive income on the Consolidated Balance Sheet until the related fuel
purchases are realized, at which time the gains and losses are recorded in income.
The fair value of commodity swaps was derived using the current market value of WTI, as quoted by
independent third parties. The fair value of foreign currency forward contracts was calculated
utilizing forward curves from Bloomberg. These commodity swap contracts and forward contracts
settle between 2007 and 2009.
At June 30, 2007, the fair value of our commodity swaps was $21.8 million resulting in the
recognition of an unrealized gain in Accounts receivable and other current assets and Other
assets and deferred charges with the offset, net of tax, reflected in Accumulated other
comprehensive income on our Consolidated Balance Sheet. During the first six months of 2007, the
change in fair value of $9.9 million, before tax, resulted in a decrease to Other comprehensive
income on our Statement of Consolidated Income.
At June 30, 2007, the fair value of the forward purchases of U.S. dollars was $3.9 million. This
unrealized loss was recognized in Accounts receivable and other current assets, Other assets and
deferred charges and Deferred liabilities with the offset, net of tax, reflected in Accumulated
other comprehensive income on our Consolidated Balance Sheet. During the first six months of
2007, the change in fair value of $0.8 million, before tax, resulted in a decrease to Other
Comprehensive Income on our Statement of Consolidated Income.
In the second quarter of 2007, Fuel expense was reduced by $4.8 million in the second quarter of
2007 (2006 $7.7 million) as a result of $5.6 million in realized gains (2006 $8.8 million)
arising from settled swaps, partially offset by $0.8 million in realized losses (2006 $1.1
million) arising from the settled foreign exchange forward contracts. In the first six months of
2007, Fuel expense was reduced by $9.4 million (2006 $14.3 million) due to $10.5 million in
realized gains (2006 $16.4 million) arising from settled swaps, partially offset by $1.1 million
in realized losses (2006 $2.1 million) arising from settled foreign exchange forward contracts.
Included in the $10.5 million realized gains on commodity swaps in the first six months of 2007
were $1.3 million in realized gains from settled derivatives that were not designated as hedges.
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. At
June 30, 2007 we had fuel hedges for approximately 5% of our estimated fuel purchases for the
remainder of 2007, 3% in 2008 and 2% in 2009. There are no hedges in place for purchases in 2010
and forward. 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: share appreciation rights (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 partially 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 $16.5 million in the
second quarter of 2007 (2006 unrealized losses of $8.3 million) and $22.8 million in the first
half of 2007 (2006 unrealized losses of $8.3 million). At June 30, 2007, the unrealized gain on
the TRS was included in Other assets and deferred charges on our Consolidated Balance Sheet.
20
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 June 30, 2007, the outstanding undivided co-ownership interest held by an unrelated trust under
our accounts receivable securitization program was $120.0 million (June 2006 $120.0 million).
Losses of $1.4 million on the securitization program in second-quarter 2007 (second-quarter 2006
losses of $1.2 million) and losses of $2.7 million in the first half of 2007 (first-half 2006
losses of $2.3 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 June 30, 2007, the fair
value of the retained interest was approximately 19% of the receivables sold, or $23 million (June
30, 2006 fair value of approximately 19%, or $23 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 $380.7 million
for the second quarter of 2007 and $757.9 first half of 2007, compared with $359.4 million for
second-quarter of 2006 and $726.5 million for the first half of 2006. We have complied with all
termination tests during the program.
Guarantees
We have guaranteed residual values on certain leased equipment with a maximum exposure of $387.9
million. Management estimates that we will have no net payments under these residual guarantees.
We have accrued for all guarantees where performance under these guarantees is expected (discussed
further in Note 15 to the Companys unaudited Interim Consolidated Financial Statements). These
accruals do not include any amounts for residual value guarantees.
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 |
|
|
Payments due by period |
|
at June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
1 3 |
|
|
3 5 |
|
|
After |
|
(in millions) |
|
|
Total |
|
|
< 1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
$ |
2,842.6 |
|
|
|
$ |
15.1 |
|
|
|
$ |
37.1 |
|
|
|
$ |
828.6 |
|
|
|
$ |
1,961.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
|
286.7 |
|
|
|
|
0.3 |
|
|
|
|
17.1 |
|
|
|
|
29.6 |
|
|
|
|
239.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(1) |
|
|
|
555.5 |
|
|
|
|
62.9 |
|
|
|
|
171.8 |
|
|
|
|
105.5 |
|
|
|
|
215.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplier purchase obligations |
|
|
|
686.2 |
|
|
|
|
77.2 |
|
|
|
|
193.9 |
|
|
|
|
179.7 |
|
|
|
|
235.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities reflected on
our Consolidated Balance Sheet
(2) |
|
|
|
866.8 |
|
|
|
|
77.7 |
|
|
|
|
211.3 |
|
|
|
|
170.5 |
|
|
|
|
407.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
|
$ |
5,237.8 |
|
|
|
$ |
233.2 |
|
|
|
$ |
631.2 |
|
|
|
$ |
1,313.9 |
|
|
|
$ |
3,059.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Guaranteed residual values on certain leased equipment discussed in the section Off-Balance Sheet
Arrangements under the sub-heading Guarantees are not included in the minimum payments shown above. |
|
(2) |
|
Includes expected cash payments for restructuring, environmental remediation, asset retirement obligations,
post-retirement benefits, workers compensation benefits, long-term disability benefits and pension benefit
payments for our non-registered supplemental pension plans. Projected payments for post-retirement, workers
compensation benefits and long-term disability benefits include the anticipated payments for years 2007 to
2016. Pension contributions for our registered pension plans are not included due to the volatility in
calculating them. Pension payments are discussed further under the sub-heading Pension Plan Deficit in the
section Future Trends, Commitments and Risks. |
FUTURE TRENDS, COMMITMENTS AND RISKS
Change in Executive Officers
Effective April 3, 2007, Executive Vice-President, Operations, Neal Foot retired.
On June 1, 2007, Kathryn McQuade joined CP as Executive Vice President and Chief Operating Officer.
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
21
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.
During the first half of 2007, we announced our intention to increase our investment in
infrastructure in the Alberta Industrial Heartland in order to better serve the oilsands
development.
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 half 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 government announced its intention to retain ownership of its
cars and negotiate new operating agreements with CP and CN. The new operating agreement with CP is
effective July 1, 2007 and sets out the terms and operating conditions governing the 6,300 Federal
covered hopper cars allocated to CP.
Agreements
During the second quarter of 2007, CP negotiated two new partnership agreements for the management
of the railways information technology application development and support. The agreements
represent a corporate outsourcing initiative and are intended to improve CPs information
technology cost structure while providing capability and quality enhancement.
Stock Price
The market value of our Common Shares increased $8.62 per share on the Toronto Stock Exchange in
the second quarter of 2007 (from $64.95 to $73.57) and increased $12.17 per share in the first six
months of 2007 (from $61.40 to $73.57). The market value of our Common Shares decreased $1.35 per
share on the Toronto Stock Exchange in the second quarter of 2006 (from $58.26 to $56.91) and
increased $8.20 per share in the first six months of 2006 (from $48.71 to $56.91). These changes
in share price caused corresponding increases in the value of our outstanding SARs and DSUs in both
years. Effective the second quarter of 2006, we put in place a TRS (discussed under the
sub-heading Total Return Swap in the section Financial Instruments) to mitigate gains and
losses associated with the effect of our share price on the SARs and DSUs. Excluding the impact of
our TRS, the cost of our SARs and DSUs resulted in an increase in compensation and benefits expense
of $24.4 million in second-quarter 2007 and an increase of $14.1 million in first-half 2007,
compared with the same periods 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
Protections (CBP) Customs-Trade Partnership Against Terrorism
(C-TPAT) program and with the Canada Border Services Agencys
(CBSA) Partners in Protection (PIP) program. C-TPAT and PIP
are partnership programs that seek to strengthen overall supply
chain and border security. We are also an approved carrier under
CBSAs Customs Self-Assessment program. |
|
|
|
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. |
22
|
|
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 six of seven bargaining units in Canada and 12 of 28 bargaining units
in the U.S. The following is a negotiations status summary:
Canada
The Teamsters Canada Rail Conference (TCRC-MWED), which represents employees who maintain track
infrastructure and perform capital programs, commenced a national strike on May 15, 2007 following
the end of the conciliation process set out in the Canada Labour Code. On June 6, 2007, a
tentative settlement was reached with the TCRC-MWED. On July 18, 2007, a three-year agreement
extending through to December 31, 2009 was ratified..
Negotiations are underway with the Teamsters Canada Rail Conference (TCRC-RTE), which represents
employees who operate trains. The Company and TCRC-RTE have requested assistance of a Federal
mediator for support in reaching a negotiated settlement. The contract with the TCRC-RTE expired
on December 31, 2006.
U.S.
We are party to collective agreements with 15 bargaining units of our Soo Line Railroad Company
(Soo Line) subsidiary and 13 on our Delaware and Hudson Railway (D&H) subsidiary.
On the Soo Line, negotiations are underway with 12 bargaining units representing track maintainers,
conductors, car repair employees, mechanical labourers, machinists, electricians, signal repair
employees, police, blacksmiths and boilermakers, sheet metal workers, and mechanical supervisors.
Agreements with the bargaining unit representing locomotive engineers, train dispatchers and yard
supervisors extends through 2009. Tentative agreements through 2009 have been reached with the
bargaining units representing clerks, and machinists and are in the process of employee
ratification.
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 states voluntary investigation and
remediation program will oversee the work to ensure it is completed in accordance with applicable
standards.
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 |
|
|
|
|
commitments at |
|
|
Amount of commitment per period |
|
June 30, 2007 |
|
|
|
|
|
|
|
Remainder |
|
|
2008 & |
|
|
2010 & |
|
|
2012 & |
|
(in millions) (unaudited) |
|
|
Total |
|
|
of 2007 |
|
|
2009 |
|
|
2011 |
|
|
beyond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
$ |
346.5 |
|
|
|
$ |
346.5 |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital commitments(1) |
|
|
|
492.4 |
|
|
|
|
124.5 |
|
|
|
|
181.4 |
|
|
|
|
52.0 |
|
|
|
|
134.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offset financial liability |
|
|
|
184.8 |
|
|
|
|
184.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
|
$ |
1,023.7 |
|
|
|
$ |
655.8 |
|
|
|
$ |
181.4 |
|
|
|
$ |
52.0 |
|
|
|
$ |
134.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $16.4 million, and in total they provide a
minimum exposure to CP of $3.6 million and a maximum exposure of $42.4 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 June 30, 2007, we had multi-year capital
commitments of $492.4 million in the form of signed contracts, largely for
23
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 June 30, 2007, the loan had a balance of $189.7
million, offset by a financial asset of $184.8 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 funds 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 50% and 56% of the plans assets are invested in equity securities. As a result, stock
market performance is the key driver in determining the pension funds asset performance. Most of
the plans remaining assets are invested in debt securities, which, as mentioned above, provide a
partial offset to the increase (or decrease) in our pension deficit caused by decreases (or
increases) in the discount rate.
The deficit will fluctuate according to future market conditions and funding will be revised as
necessary to reflect such fluctuations. We will continue to make contributions towards this
deficit that, as a minimum, meet requirements as prescribed by pension legislative requirements.
We made contributions of $19.2 million to the defined benefit pension plans in the second quarter
of 2007 and $39.5 million in the first half of 2007, compared with $19.8 million and $37.4 million
in the same periods of 2006, respectively.
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
$12.0 million in the second quarter of 2007 and $25.2 million in the first half of 2007, compared
with $22.8 million and $50.6 million in the same periods of 2006, respectively. Payments relating
to the labour liabilities were $9.6 million in the second quarter of 2007 and $22.1 million in the
first half of 2007, compared with $16.9 million and $41.7 million in the same periods of 2006,
respectively.
Cash payments for restructuring and environmental initiatives are estimated to be $50 million for
the remainder of 2007, $61 million in 2008, $40 million in 2009, and a total of $134 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 $31 million for the remainder of 2007, $43 million in 2008, $27
million in 2009, and a total of $73 million over the remaining years through 2025. These amounts
include residual payments to protected employees for previous restructuring plans that are
substantially complete.
24
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 June 30, 2007, the accrual for environmental remediation on our Consolidated Balance Sheet
amounted to $112.7 million, of which the long-term portion amounting to $92.0 million was included
in Deferred liabilities and the short-term portion amounting to $20.7 million was included in
Accounts payable and accrued liabilities. Total payments were $2.4 million in the second quarter
of 2007 and $2.7 million in the same period of 2006. Total payments were $3.0 million in the first
half of 2007 and $4.6 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 $5.2 million in second-quarter 2007 and $5.8 million in the first six
months of 2007, compared with a decrease of $3.3 million and $3.0 million in the same periods of
2006, respectively.
Pensions and Other Benefits
Other assets and deferred charges on our June 30, 2007 Consolidated Balance Sheet included
prepaid pension costs of $1,089.8 million. Our Consolidated Balance Sheet also included $0.3
million in Accounts payable and accrued liabilities and $1.0 million in Deferred liabilities
for pension obligations.
We included post-retirement benefits accruals of $200.9 million in Deferred liabilities and
post-retirement benefits accruals of $18.6 million in Accounts payable and accrued liabilities on
our June 30, 2007 Consolidated Balance Sheet.
Pension and post-retirement benefits expenses (excluding workers compensation benefits) were
included in Compensation and benefits on our June 30, 2007, Statement of Consolidated Income.
Combined pension and post-retirement benefits expenses were $27.1 million in the second quarter of
2007, compared with $30.3 million in the same period of 2006. Combined pension and post-retirement
benefits expenses were $54.5 million in the first half of 2007, compared with $61.2 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 $16.0 million in second-quarter 2007 and
$32.2 million in the first half of 2007, compared with $19.5 million and $39.5 million in the same
periods of 2006, respectively. Defined benefit pension expense was $15.4 million in the second
quarter of 2007 and $30.5 million in the first six months of 2007, compared with $18.9 million and
$37.8 million in the same periods of 2006, respectively. Defined contribution pension expense was
$0.6 million in the second quarter of 2007 and $1.7 million in the first half of 2007, compared
with $0.6 million and $1.7 million in the same periods of 2006. Post-retirement benefits expense
was $11.0 million in the second quarter of 2007 and $22.2 million in the first half of 2007,
compared with $10.8 million and $21.7 million in the same periods of 2006, respectively.
Property, Plant and Equipment
At June 30, 2007, accumulated depreciation was $5,105.6 million. Depreciation expense relating to
properties amounted to $119.1 million in the second quarter of 2007, compared with $117.8 million
in the same period of 2006. Depreciation expense related to properties amounted to $237.7 million
in the first six months of 2007, compared with $232.6 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 address 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.
Depreciation expense increased $1.3 million in the second quarter of 2007 and $5.1 million in the
first half of 2007 from the same periods in 2006, respectively, due primarily to capital additions
to locomotives and track investment.
Future Income Taxes
Future income tax expense totalling $57.7 million were included in income tax for the second
quarter of 2007 compared with future income tax benefits of $114.6 million for the same period of
2006. Future income tax expense totalling $96.2 million were included in income tax for the first
half of 2007 compared with future income tax benefits of $70.4 million for the same period of 2006.
At June 30, 2007, future income tax liabilities of $1,858.3 million were recorded as a long-term
liability and comprised
25
largely of temporary differences related to accounting for properties. Future income tax benefits
of $128.9 million realizable within one year were recorded as a current asset. We believe that our
future income tax provisions are adequate.
Legal and Personal Injury Liabilities
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 $5.2 million in the second
quarter of 2007 and $18.7 million in the first half of 2007, compared with $3.4 million and $19.7
million in the same periods of 2006.
Accruals for incidents, claims and litigation, including WCB accruals, totalled $195.7 million, net
of insurance recoveries, at June 30, 2007. The total accrual included $93.1 million in Deferred
liabilities and $131.1 million in Accounts payable and accrued liabilities, offset by $0.8
million in Other assets and deferred charges and $27.7 million in Accounts receivable.
SYSTEMS, PROCEDURES AND CONTROLS
The Companys Chief Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the U.S. Securities Exchange Act of 1934 (as amended)) to ensure that material information relating
to the Company is made known to them. The Chief Executive Officer and Chief Financial Officer have
a process to evaluate these disclosure controls and are satisfied that they are adequate for
ensuring that such material information is made known to them.
FORWARD-LOOKING INFORMATION
This MD&A contains certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (United States) and other relevant securities litigation relating but
not limited to our operations, anticipated financial performance, business prospects and
strategies. Forward-looking information typically contains statements with words such as
anticipate, believe, expect, plan or similar words suggesting future outcomes.
Readers are cautioned to not place undue reliance on forward-looking information because it is
possible that we will not achieve predictions, forecasts, projections and other forms of
forward-looking information. In addition, we undertake no obligation to update publicly or
otherwise revise any forward-looking information, whether as a result of new information, future
events or otherwise except as required by law.
By its nature, our forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: changes in business strategies;
general North American and global economic and business conditions; the availability and price of
energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in
market demands; changes in laws and regulations, including regulation of rates; changes in taxes
and tax 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 governmental response to
them; 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. Bill C-11 received
royal assent on June 22, 2007 and is now in force. Other additional changes to the CTA in respect
of FOA and other matters that had been dealt with in Bill C-44 were introduced in the House of
Commons (Bill C-58) on May 30, 2007. Bill C-58 will be examined by the standing Committee on
Transport, Infrastructure and Communities this fall. No assurance can be given as to the effect on
CP of the provisions of Bill C-11 or C-58 or as to the content, timing or effect on CP of any
anticipated additional legislation.
CPs railway operations in the United States are subject to regulation by the STB. The STB has
undertaken an independent review of a number of commercial matters including the methodology used
by railways to assess fuel surcharges, the commercial
26
relationship between large railways and shortlines, the rates charged by railways to grain shippers
and a review of the methodology for determining the railway industrys cost of capital. The STB
has also promulgated proposed new rules for the handling of disputes by small and medium shippers.
It is too early to assess the possible impact on CP if any new regulation is forthcoming as a
result of these hearings and proposed rules.
The sustainability of recent increases in the value of the Canadian dollar relative to the U.S.
dollar is unpredictable, as the value of the Canadian dollar is affected by a number of domestic
and international factors, including, without limitation, economic performance, Canadian and
international monetary policies and U.S. debt levels.
There is also continuing uncertainty with respect to security issues involving the transportation
of goods in populous areas of the U.S. and Canada and the protection of North Americas rail
infrastructure, including the movement of goods across the Canada-U.S. border.
There are more specific factors that could cause actual results to differ from those described in
the forward-looking statements contained in this MD&A. These more specific factors are identified
and discussed in the section Future Trends, Commitments and Risks and elsewhere in this MD&A with
the particular forward-looking statement in question.
27
GLOSSARY OF TERMS
|
|
|
Average train speed
|
|
The average speed attained as a train travels between terminals,
calculated by dividing the total train miles traveled by the total
hours operated. This calculation does not include the travel time or
the distance traveled by: i) trains used in or around CPs yards; ii)
passenger trains; and iii) trains used for repairing track. The
calculation also does not include the time trains spend waiting in
terminals. |
|
|
|
Car miles per car day
|
|
The total car-miles for a period divided by the total number of
active cars. |
|
|
|
|
|
Total car-miles includes the distance travelled by every car on a
revenue-producing train and a train used in or around our yards. |
|
|
|
|
|
A car-day is assumed to equal one active car. An active car is a
revenue-producing car that is generating costs to CP on an hourly or
mileage basis. Excluded from this count are i) cars that are not on
the track or are being stored; ii) cars that are in need of repair;
iii) cars that are used to carry materials for track repair; iv) cars
owned by customers that are on the customers tracks; and v) cars
that are idle and waiting to be reclaimed by CP. |
|
|
|
Carloads
|
|
Revenue-generating shipments of containers, trailers and freight cars. |
|
|
|
CICA
|
|
Canadian Institute of Chartered Accountants. |
|
|
|
CPRL
|
|
Canadian Pacific Railway Limited. |
|
|
|
CP, the Company
|
|
CPRL, CPRL and its subsidiaries, CPRL and one or more of its
subsidiaries, or one of more of CPRLs subsidiaries. |
|
|
|
Diluted EPS
|
|
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. |
|
|
|
Diluted EPS, before FX on LTD and
other specified items
|
|
A variation of the calculation of diluted EPS, which is calculated by
dividing income, before FX on LTD and other specified items, by the
weighted average number of shares outstanding, adjusted for
outstanding stock options using the Treasury Stock Method, as
described above under Diluted EPS. |
|
|
|
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. |
28
|
|
|
FRA personal injury rate 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 rate
|
|
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
|
|
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
|
|
Managements Discussion and Analysis. |
|
|
|
Number of active employees
|
|
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 or ROCE
|
|
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. |
29
|
|
|
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
consumed per 1,000 GTMs
|
|
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. |
30
Suite 500 Gulf Canada Square
401 9th Avenue SW Calgary Alberta T2P 4Z4
www.cpr.ca TSX/NYSE: CP
CANADIAN PACIFIC RAILWAY LIMITED (CPRL)
Supplemental Financial Information (unaudited)
Exhibit to June 30, 2007 Consolidated Financial Statements
CONSOLIDATED EARNINGS COVERAGE RATIOS MEDIUM TERM NOTES AND DEBT SECURITIES
The following ratios, based on the consolidated financial statements, are provided in connection
with the continuous offering of medium term notes and debt securities by Canadian Pacific Railway
Company, a wholly-owned subsidiary of CPRL, and are for the twelve month period then ended.
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
Earnings Coverage on long-term debt |
|
|
|
|
|
|
|
Before foreign exchange on long-term debt (1) (3) |
|
|
|
6.1 |
|
|
|
After foreign exchange on long-term debt (2) (3) |
|
|
|
6.4 |
|
|
|
Notes:
|
|
|
(1) |
|
Earnings coverage is equal to income (before foreign exchange on long-term debt)
before net interest expense and income tax expense divided by net interest expense on all debt. |
|
(2) |
|
Earnings coverage is equal to income (after foreign exchange on long-term debt)
before net interest expense and income tax expense divided by net interest expense on all debt. |
|
(3) |
|
The earnings coverage ratios have been calculated excluding carrying charges for the
$30.6 million in long-term debt maturing within one year reflected as current liabilities in CPRLs
consolidated balance sheet as at June 30, 2007. If such long-term debt maturing within one year
had been classified in their entirety as long-term debt for purposes of calculating earnings
coverage ratios, the entire amount of the annual carrying charges for such long-term debt maturing
within one year would have been reflected in the calculation of CPRLs earnings coverage ratios.
For the twelve-month period ended June 30, 2007, earnings coverage on long-term debt before foreign
exchange on long-term debt and after foreign exchange on long-term debt would have been 5.8 and
6.1, respectively. |
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 June 30, 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 issuers 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 issuers GAAP; and |
5. |
|
I have caused the issuer to disclose in the interim MD&A any change in the issuers internal
control over financial reporting that occurred during the issuers most recent interim period
that has materially affected, or is reasonably likely to materially affect, the issuers
internal control over financial reporting. |
|
|
|
|
|
Date: |
July 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 June 30, 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 issuers 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 issuers GAAP; and |
5. |
|
I have caused the issuer to disclose in the interim MD&A any change in the issuers internal
control over financial reporting that occurred during the issuers most recent interim period
that has materially affected, or is reasonably likely to materially affect, the issuers
internal control over financial reporting. |
|
|
|
|
|
Date: |
July 24, 2007 |
|
|
|
|
|
Signed: |
M. R. Lambert |
|
|
M. R. Lambert
Chief Financial Officer |
|
|
|