e40vf
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934 |
OR
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ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(Exact name of Registrant as specified in its charter)
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CANADA |
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4011 |
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98-0355078
(Canadian Pacific Railway Limited)
98-0001377
(Canadian Pacific Railway Company) |
(Province or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial Classification
Code Number) |
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(I.R.S. Employer Identification Number) |
Suite 500, Gulf Canada Square, 401-9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
(403) 319-7000
(Address and telephone number of Registrants principal executive offices)
C T Corporation System, 111 Eighth Avenue, New York, New York 10011, (212) 894-8940
(Name, address (including zip code) and telephone number
(including area code) of Agent for Service of Registrant in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Shares, without par value, of
Canadian Pacific Railway Limited |
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New York Stock Exchange |
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Common Share Purchase Rights of
Canadian Pacific Railway Limited |
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New York Stock Exchange |
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Perpetual 4% Consolidated Debenture Stock
of Canadian Pacific Railway Company |
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New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this form:
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x Annual information form |
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x Audited annual financial statements |
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
At December 31, 2007, 153,269,328 Common Shares of Canadian Pacific Railway Limited were issued and
outstanding. At December 31, 2007, 347,170,009 Ordinary Shares of Canadian Pacific Railway Company
were issued and outstanding.
Indicate by check mark whether the Registrant by filing the information contained in this Form is
also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934 (the Exchange Act). If Yes is marked, indicate the file number
assigned to the Registrant in connection with such Rule.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
2
PRIOR FILINGS MODIFIED AND SUPERSEDED
The Registrants Annual Report on Form 40-F for the year ended December 31, 2007, at the time
of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents
filed pursuant to Sections 13 and 15(d) of the Exchange Act for purposes of any offers or sales of
any securities after the date of such filing pursuant to any Registration Statement under the
Securities Act of 1933 of either Registrant which incorporates by reference such Annual Report,
including without limitation the following: Form S-8 No. 333-13962 (Canadian Pacific Railway
Limited); Form S-8 No. 333-127943 (Canadian Pacific Railway Limited); and Form S-8 No. 333-140955
(Canadian Pacific Railway Limited).
The documents (or portions thereof) identified under the heading Documents Filed as Part of
This Report below as forming part of this Form 40-F are incorporated by reference into the
Registration Statement on Form F-9 No. 333-142347 (Canadian Pacific Railway Company) as exhibits
thereto.
CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENTS DISCUSSION AND ANALYSIS
A. Audited Annual Financial Statements
For consolidated audited financial statements, including the report of the auditors with
respect thereto, see pages 57 through 109 of the Registrants 2007 Annual Report incorporated by
reference and included herein. For a reconciliation of important differences between Canadian and
United States generally accepted accounting principles, see Note 24 Reconciliation of Canadian
and United States generally accepted accounting principles on pages 99 through 109 of such 2007
Annual Report.
B. Managements Discussion and Analysis
For managements discussion and analysis, see pages 9 through 56 of the Registrants 2007
Annual Report incorporated by reference and included herein.
For the purposes of this Annual Report on Form 40-F, only pages 9 through 109 of the
Registrants 2007 Annual Report referred to above shall be deemed filed, and the balance of such
2007 Annual Report, except as it may be otherwise specifically incorporated by reference in the
Registrants Annual Information Form, shall be deemed not filed with the Securities and Exchange
Commission as part of this Annual Report on Form 40-F under the Exchange Act.
DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2007, an evaluation was carried out under the supervision of and with the
participation of the Registrants management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Registrants disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective as of December 31, 2007, to ensure that information required
to be disclosed by the Registrants in reports that they file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission rules and forms.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
For managements report on internal control over financial reporting, see page 57 of the
Registrants 2007 Annual Report, incorporated by reference and included herein.
3
The effectiveness of the Registrants internal control over financial reporting as of December
31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report on pages 58 and 59 of the Registrants 2007 Annual
Report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the period covered by this Annual Report on Form 40-F, no changes occurred in the
Registrants internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Registrants internal control over financial reporting.
CODE OF BUSINESS ETHICS
The Registrants Code of Business Ethics was revised in late 2003 to ensure that it was in
compliance with the corporate governance standards of the New York Stock Exchange (NYSE
Standards) and specifically addresses, among other things, conflicts of interest, protection and
proper use of corporate assets and opportunities, confidentiality of corporate information, fair
dealing with third parties, compliance with laws, rules and regulations and reporting of illegal or
unethical behavior. In October 2007, the boards of the Registrants approved an addition to the
Code concerning the retention of records. The Code applies to all directors, officers and
employees, both unionized and non-unionized, of the Registrants and their subsidiaries in Canada,
the U.S. and elsewhere, and forms part of the terms and conditions of employment of all such
individuals. All Directors have signed acknowledgements that they have read, understood and agree
to comply with the Code. Commencing in 2006 the Registrant introduced mandatory annual on-line
ethics training for all officers and non-union employees. As part of the on-line ethics training
officers and non-union employees are annually required to acknowledge that they have read,
understood and agree to comply with the Code. Contractors engaged on behalf of the Registrants or
their subsidiaries must undertake, as a condition of their engagement, to adhere to principles and
standards of business conduct consistent with those set forth in the Code. The Code is available
on the Registrants web site at www.cpr.ca and in print to any shareholder who requests it. All
amendments to the Code, and all waivers of the Code with respect to any director or executive
officer of the Registrants, will be posted on the Registrants web site and provided in print to
any shareholder who requests them.
CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
The Registrants adopted a Code of Ethics for Chief Executive Officer and Senior Financial
Officers in 2003. This code applies to the Registrants President and Chief Executive Officer, the
Executive Vice-President and Chief Financial Officer and the Vice-President and Comptroller. It is
available on the Registrants web site at www.cpr.ca and in print to any shareholder who requests
it. All amendments to the code, and all waivers of the code with respect to any of the officers
covered by it, will be posted on the Registrants web site and provided in print to any shareholder
who requests them.
CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES
The Registrants last amended their Corporate Governance Principles and Guidelines in February
2006. These principles and guidelines pertain to such matters as, but are not limited to: director
qualification standards and responsibilities; election of directors; access by directors to
management and independent advisors; director compensation; director orientation and continuing
education; management succession; and annual performance evaluations of the board, including its
committees and individual directors, and of the Chief Executive Officer. The Corporate Governance
Principles and Guidelines are available on the Registrants web site at www.cpr.ca and in print to
any shareholder who requests them.
4
COMMITTEE TERMS OF REFERENCE
The terms of reference of each of the following committees of the Registrants are available on
the Registrants web site at www.cpr.ca and in print to any shareholder who requests them: the
Audit, Finance and Risk Management Committee; the Corporate Governance and Nominating Committee;
the Management Resources and Compensation Committee; the Health, Safety, Security and Environment
Committee; and the Pension Committee.
DIRECTOR INDEPENDENCE
The boards of the Registrants have adopted the categorical standards for director
independence: (a) prescribed by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1)
promulgated thereunder and Multilateral Instrument 52-110 for members of public company audit
committees; and (b) set forth in the NYSE Standards, the Canadian corporate governance standards
set forth in National Instrument 58-101 and Multilateral Instrument 52-110 in respect of public
company directors. The boards also conducted a comprehensive assessment of each of their members
as against these standards and determined that all current directors, except
F.J. Green, have no material relationship with the Registrants and are independent. Mr. Green
is not independent by virtue of the fact that he is the Chief Executive Officer of the Registrants.
EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS
The independent directors met in executive sessions without management present at every meeting of
the board, held up to May 11, 2007, as the Corporate Governance and Nominating Committee.
Following that date the independent directors met in camera without management present at the
beginning and end of each meeting of the board of directors as well as at the beginning and end of
each committee meeting.
Interested parties may communicate directly with Mr. J.E. Cleghorn, the chair of both the Corporate
Governance and Nominating Committee and the boards of the Registrants, who presided at such
executive sessions, by writing to him at the following address, and all communications received at
this address will be forwarded to him:
Office of the Corporate Secretary
Canadian Pacific Railway
Suite 920, 401 9th Avenue S.W.
Calgary, Alberta
Canada, T2P 4Z4
AUDIT COMMITTEE FINANCIAL EXPERTS
The following individuals comprise the current membership of the Registrants Audit, Finance
and Risk Management Committees (Audit Committees), which have been established in accordance with
Section 3(a)(58)(A) of the Exchange Act:
Krystyna T. Hoeg
John P. Manley
Madeleine Paquin
Roger Phillips
Hartley T. Richardson
Michael W. Wright
Each of the aforementioned directors, except Ms. Paquin, has been determined by the boards of
the Registrants to meet the audit committee financial expert criteria prescribed by the Securities
and Exchange Commission and has been designated as an audit committee financial expert for the
Audit Committees of the boards of both Registrants. Each of the aforementioned directors has also
been determined by the boards of the Registrants to be independent within the criteria referred to
above under the subheading Director Independence.
5
Mr. Manley is designated as an audit committee financial expert based on his experience as a
lawyer advising on corporate, commercial and tax matters, his experience as a senior member of the
Canadian federal government, including serving as Minister of Finance and as Deputy Chairman of the
Treasury Board, and his current experience as a member of the audit committee of the Canadian
Imperial Bank of Commerce.
FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS
The boards of the Registrants have determined that all members of the Audit Committees, except
Ms. Paquin, have accounting or related financial management expertise within the meaning of the
NYSE Standards. The boards have determined that all members of the Audit Committees are
financially literate within the definition contained in, and as required by, Multilateral
Instrument 52-110 and the NYSE Standards.
SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
Krystyna T. Hoeg serves on three public company audit committees, in addition to the Audit
Committees of the two Registrants. Each Registrants board has determined that no director who
serves on more than two public company audit committees in addition to its own Audit Committee
shall be eligible to serve as a member of the Audit Committee of that Registrant, unless that
Registrants board determines that such simultaneous service would not impair the ability of such
member to effectively serve on that Registrants Audit Committee. For purposes of calculating the
aggregate number of public company audit committees on which a director serves, each Registrant is
counted as a separate public company.
The boards of the Registrants have determined that the service of Ms. Hoeg on the audit
committees of three public companies in addition to the two Registrants does not impair her ability
to effectively serve on the Audit Committees of the Registrants, for the following reasons:
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Two of the public company audit committees on which Ms. Hoeg serves are the Audit
Committees of the Registrants. As Canadian Pacific Railway Company is a wholly-owned
subsidiary of Canadian Pacific Railway Limited, and the latter company carries on no
business operations and has no assets or liabilities of more than nominal value beyond its
100% shareholding in Canadian Pacific Railway Company, the workload of the Audit Committees
is essentially equivalent to the workload of one public company audit committee; and |
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Ms. Hoeg, 58, is the former chief executive officer of a large public company and the
former chief financial officer of a large public company and has been designated as an
audit committee financial expert for the Registrants. As a result, she no longer has any
day-to-day executive or managerial responsibilities and, in addition, brings to her role on
the Audit Committees of the Registrants considerable business experience and a
highly-focused and effective approach to audit-related matters. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees payable to the Registrants independent auditor, PricewaterhouseCoopers, LLP for the
years ended December 31, 2007, and December 31, 2006,
totaled $3,433,980 and $2,824,200,
respectively, as detailed in the following table:
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Year ended |
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Year ended |
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December 31, 2007 |
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December 31, 2006 |
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Audit Fees |
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$ |
2,391,600 |
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$ |
2,118,000 |
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Audit-Related Fees |
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$ |
619,780 |
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$ |
438,900 |
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Tax Fees |
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$ |
422,600 |
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$ |
267,300 |
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All Other Fees |
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$ |
0 |
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$ |
0 |
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TOTAL |
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3,433,980 |
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$ |
2,824,200 |
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The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
Audit Fees
Audit fees were for professional services rendered for the audit of the Registrants annual
financial statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors report on
managements report on internal controls for financial reporting.
Audit-Related Fees
Audit-related fees were for attestation and related services reasonably related to the performance
of the audit or review of the annual financial statements, but which are not reported under Audit
Fees above. These services consisted of: the audit or review of financial statements of certain
subsidiaries and of various pension and benefits plans of the Registrants; special attestation
services as may be required by various government entities; assistance with preparations for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002; due diligence services related to
potential business acquisition targets; access fees for technical accounting database resources;
and general advice and assistance related to accounting and/or disclosure matters with respect to
new and proposed Canadian and US Accounting Guidelines, securities regulations, and/or laws.
Tax Fees
Tax fees were for professional services related to tax compliance, tax planning and tax advice.
These services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding corporate tax audits; tax planning and advisory services relating to common
forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax,
and valued added tax); and access fees for taxation database resources.
All Other Fees
Fees disclosed under this category would be for products and services other than those described
under Audit Fees, Audit-Related Fees and Tax Fees above. In both 2007 and 2006, there were
no services in this category.
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS
The Audit Committee of each Registrant has adopted a written policy governing the pre-approval
of audit and non-audit services to be provided to the Registrants by their independent auditors.
The policy is reviewed annually and the audit and non-audit services to be provided by their
independent auditors, as well as the budgeted amounts for such services, are pre-approved at that
time. The Vice-President and Comptroller of the Registrants must submit to the Audit Committee
at least quarterly a report of all services performed or to be performed by the
independent auditors pursuant to the policy. Any additional audit or non-audit services to be
provided by the independent auditors either not included among the pre-approved services or
exceeding the budgeted amount for such pre-approved services by more than 10% must be individually
pre-approved by the Audit Committee or its Chairman, who must report all such additional
pre-approvals to the Audit Committee at its next meeting following the granting thereof. The
independent auditors annual audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. In addition, prior to the granting of any pre-approval, the
Audit Committee or its Chairman, as the case may be, must be satisfied that the performance of the
services in question will not compromise the independence of the independent auditors. The Chief
Internal Auditor for the Registrants monitors compliance with this policy.
7
OFF-BALANCE SHEET ARRANGEMENTS
A description of the Registrants off-balance sheet arrangements is set forth on pages 39 and
40 of the Registrants 2007 Annual Report incorporated by reference and included herein.
TABLE OF CONTRACTUAL COMMITMENTS
The table setting forth the Registrants contractual commitments is set forth on page 41 of
the Registrants 2007 Annual Report incorporated by reference and included herein.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
Each Registrant undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so
by the Commission staff, information relating to: the securities registered pursuant to Form 40-F;
the securities in relation to which the obligation to file an annual report on Form 40-F arises; or
transactions in said securities.
B. Consent to Service of Process
A Form F-X signed by Canadian Pacific Railway Limited and its agent for service of process was
filed with the Commission together with Canadian Pacific Railway Limiteds Annual Report on Form
40-F for the fiscal year ended December 31, 2000. A Form F-X/A signed by Canadian Pacific Railway
Company and its agent for service of process was filed with the Commission on March 19, 2008
together with this Annual Report on Form 40-F.
SIGNATURES
Pursuant to the requirements of the Exchange Act, each Registrant certifies that it meets all
of the requirements for filing on Form 40-F and has duly caused this Annual Report on Form 40-F to
be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary,
Province of Alberta, Canada.
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CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY COMPANY
(Registrants)
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Signed
Donald F. Barnhardt
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Name: |
Donald F. Barnhardt |
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Title: |
Corporate Secretary |
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Date: March 19, 2008
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DOCUMENTS FILED AS PART OF THIS REPORT
1. |
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Annual Information Form of the Registrant for the year ended December 31, 2007. |
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2. |
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Annual Report of the Registrant for the year ended December 31, 2007, including Managements
Discussion and Analysis, Managements Report on Internal Control over Financial Reporting and
the Audited Consolidated Financial Statements of the Registrant as of December 31, 2007 and
for each of the three years then ended1. |
EXHIBITS
A. |
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Consent of PricewaterhouseCoopers, Independent Auditors. |
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B. |
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Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants
filed pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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C. |
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Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants
furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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1 |
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For the purposes of this Annual Report on Form 40-F,
only pages 9 through 109 of the Registrants 2007 Annual Report referred to
above shall be deemed filed, and the balance of such 2007 Annual Report, except
as it may be otherwise specifically incorporated by reference in the
Registrants Annual Information Form, shall be deemed not filed with the
Securities and Exchange Commission as part of this Annual Report on Form 40-F
under the Exchange Act. |
9
IN MOTION
2007 ANNUAL INFORMATION FORM |
Table Of Contents
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SECTION 1: CORPORATE STRUCTURE |
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1.1 NAME, ADDRESS AND INCORPORATION INFORMATION |
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2 |
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SECTION 2: INTERCORPORATE RELATIONSHIPS |
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2.1 PRINCIPAL SUBSIDIARIES |
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3 |
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SECTION 3: GENERAL DEVELOPMENT OF THE BUSINESS |
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3.1 RECENT DEVELOPMENTS |
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SECTION 4: DESCRIPTION OF THE BUSINESS |
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4.1 OUR BACKGROUND AND NETWORK |
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5 |
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4.2 STRATEGY |
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4.3 PARTNERSHIPS, ALLIANCES AND NETWORK EFFICIENCY |
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4.4 NETWORK AND RIGHT-OF-WAY |
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6 |
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4.5 QUARTERLY TRENDS |
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9 |
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4.6 BUSINESS CATEGORIES |
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4.7 REVENUES |
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9 |
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4.8 RAILWAY PERFORMANCE |
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12 |
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4.9 FRANCHISE INVESTMENT |
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13 |
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4.10 INTEGRATED OPERATING PLAN |
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13 |
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4.11 INFORMATION TECHNOLOGY |
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14 |
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4.12 LABOUR PRODUCTIVITY AND EFFICIENCY |
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15 |
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4.13 BUSINESS RISKS & ENTERPRISE RISK MANAGEMENT |
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4.14 INDEMNIFICATIONS |
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4.15 SAFETY |
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4.16 ENVIRONMENTAL PROTECTION |
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4.17 INSURANCE |
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SECTION 5: DIVIDENDS |
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5.1 DECLARED DIVIDENDS AND DIVIDEND POLICY |
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18 |
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SECTION 6: CAPITAL STRUCTURE |
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6.1 DESCRIPTION OF CAPITAL STRUCTURE |
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6.2 SECURITY RATINGS |
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20 |
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SECTION 7: MARKET FOR SECURITIES |
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7.1 STOCK EXCHANGE LISTINGS |
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7.2 TRADING PRICE AND VOLUME |
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22 |
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SECTION 8: DIRECTORS AND OFFICERS |
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8.1 DIRECTORS |
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8.2 CEASE TRADE ORDERS |
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24 |
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8.3 SENIOR OFFICERS |
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8.4 SHAREHOLDINGS OF DIRECTORS AND OFFICERS |
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27 |
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8.5 ANNOUNCEMENTS |
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27 |
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SECTION 9: LEGAL PROCEEDINGS |
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28 |
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SECTION 10: TRANSFER AGENTS |
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29 |
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10.1 TRANSFER AGENT |
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29 |
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SECTION 11: INTERESTS OF EXPERTS |
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30 |
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SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE |
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12.1 COMPOSITION OF THE AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE AND RELEVANT EDUCATION AND EXPERIENCE |
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31 |
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12.2 PRE-APPROVAL OF POLICIES AND PROCEDURES |
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32 |
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12.3 AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE CHARTER |
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32 |
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12.4 AUDIT AND NON-AUDIT FEES AND SERVICES |
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37 |
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SECTION 13: ADDITIONAL INFORMATION |
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13.1 ADDITIONAL COMPANY INFORMATION |
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39 |
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All dollar amounts in this Annual Information Form (AIF) are in Canadian dollars, unless
otherwise noted.
February 19, 2008
1
SECTION 1: CORPORATE STRUCTURE
In this AIF, our, us, we, CP and the Company refer to Canadian Pacific Railway Limited
(CPRL), CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of
CPRLs subsidiaries, as the context may require.
1.1 Name, Address and Incorporation Information
Canadian Pacific Railway Limited was incorporated on June 22, 2001, as 3913732 Canada Inc. pursuant
to the Canada Business Corporations Act (the CBCA). On July 20, 2001, CP amended its Articles of
Incorporation to change its name to Canadian Pacific Railway Limited. On October 1, 2001, Canadian
Pacific Limited (CPL) completed an arrangement (the Arrangement) whereby it distributed to its
common shareholders all of the shares of newly formed corporations holding the assets of four of
CPLs five primary operating divisions. The transfer of Canadian Pacific Railway Company (CPRC),
previously a wholly owned subsidiary of CPL, to CPRL was accomplished as part of a series of steps,
pursuant to the terms of the Arrangement. The Arrangement was effected as an arrangement pursuant
to section 192 of the CBCA.
Our registered office, executive offices and principal place of business are located at Suite 500,
401 9th Avenue S.W., Calgary, Alberta T2P 4Z4.
2
SECTION 2: INTERCORPORATE RELATIONSHIPS
2.1 Principal Subsidiaries
The table below sets out our principal subsidiaries, including the jurisdiction of incorporation
and the percentage of voting and non-voting securities we currently own directly or indirectly:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non- |
|
|
|
|
|
|
|
Percentage of |
|
Voting Securities |
|
|
|
|
|
|
|
Voting Securities |
|
Beneficially Owned, or |
|
|
|
|
Incorporated |
|
|
Held Directly or |
|
over which Control or |
|
|
Principal Subsidiary(1) |
|
under the Laws of |
|
|
Indirectly |
|
Direction is Exercised |
|
|
|
Canadian Pacific Railway Company
|
|
Canada
|
|
|
100 |
% |
|
Not applicable |
|
|
Soo Line Corporation (2)
|
|
Minnesota
|
|
|
100 |
% |
|
Not applicable |
|
|
Soo Line Railroad Company (3)
|
|
Minnesota
|
|
|
100 |
% |
|
Not applicable |
|
|
Delaware and Hudson Railway Company,
Inc. (2)
|
|
Delaware
|
|
|
100 |
% |
|
Not applicable |
|
|
Mount Stephen Properties Inc.(4)
|
|
Canada
|
|
|
100 |
% |
|
Not applicable |
|
|
|
|
(1) |
This table does not include all of our subsidiaries. The assets and revenues of unnamed subsidiaries did
not exceed 10% of the total consolidated assets or total consolidated revenues of CP individually, or 20% of the total
consolidated assets or total consolidated revenues of CP in aggregate. |
(2) |
Indirect wholly owned subsidiary of Canadian Pacific Railway Company. |
(3) |
Wholly owned subsidiary of Soo Line Corporation. |
(4) |
Wholly owned subsidiary of Canadian Pacific Railway Company. |
Dakota, Minnesota and Eastern Railroad Corporation (DM&E) was acquired in October 2007 and is
100% indirectly wholly owned by Soo Line Corporation. The purchase is subject to review and
approval by the US Surface Transportation Board (STB), during which time the shares of DM&E have
been placed in a voting trust. Unless the context otherwise requires, the description of our
business and assets in the AIF does not include the business and assets of DM&E.
3
SECTION 3: GENERAL DEVELOPMENT OF THE BUSINESS
3.1 Recent Developments
We continually seek to grow the value and scale of our core business through infrastructure-sharing
and joint-service programs with other railways, strategic capital investment programs, strategic
additions and operating plan strategies. Combined with the ongoing improvement of our locomotive
fleet, these strategies facilitate more predictable and fluid train operations between major
terminals.
In September 2007, the Company entered into an agreement to acquire all of the issued and
outstanding shares of DM&E, a Class II railroad with approximately 2,500 miles of track in the US
Midwest and primary customers in agri-products and merchandise. DM&E is connected to the CP
network at Minneapolis, Chicago and Winona. DM&E has connections to and traffic interchanges with
all seven Class I railroads and is proximate to the Powder River Basin (PRB), which contains the
largest deposit of low-cost, low-sulphur coal in North America. Effective October 4, 2007, the
Company acquired all of the issued and outstanding shares of DM&E. The purchase is subject to
review and approval by the STB.
During the first half of 2007, we announced our intention to assemble a rail corridor to access the
Alberta Industrial Heartland northeast of Edmonton that serves the Alberta oilsands development.
In May 2006, we completed the sale of our 92.3-mile Latta subdivision in Indiana between Bedford
and Fayette, near Terre Haute, to Indiana Rail Road Company. The sale, which closed in the second
quarter of 2006, included trackage rights over CSX Corporation (CSX) rail lines from Chicago,
Illinois, to Terre Haute, Indiana, and from Bedford to New Albany in Indiana, and over the Norfolk
Southern Corporation (NS) line from New Albany to Louisville, Kentucky.
In January 2006, CP and Canadian National Railway Company (CN) entered into an agreement, which
assists in the optimization of railway infrastructure in the lower mainland of British Columbia
(B.C.). Under the arrangement, CP is to operate the trains of both railways using CP crews from
Boston Bar, B.C. to the terminals on the south shore of the Burrard Inlet in Vancouver, and return
to North Bend, B.C. CN is to operate the trains of both railways using CN crews from Boston Bar to
the terminals on the north shore of the Burrard Inlet and return to North Bend. CP is to provide
all switching on the south shore of the Burrard Inlet, with the exception of the Burlington
Northern Santa Fe Railway (BNSF) barge slip, and CN is to provide all switching on the north
shore of the Burrard Inlet. In addition, CP is to operate some CN trains to or from the Roberts
Bank port at Delta, B.C.
In 2005, a significant investment was made in the western portion of our rail network to improve
trade and capacity between the Port of Vancouver in B.C. and the Canadian prairies. Western
commodities, such as coal from the B.C. interior, and grain, sulphur and fertilizers from the
prairies, are being transported to the west coast of Canada in growing volumes. Similarly,
increased trade with China and other Asian countries generates additional volumes of containerized
freight in this region. We expanded train capacity on our western rail network by 12%, or
approximately four extra trains per day. The expansion work was completed on time and within
budget. It included:
|
|
|
10 projects between Moose Jaw, Saskatchewan and Calgary, Alberta to extend sidings and
lay sections of double track; |
|
|
|
|
three projects in Alberta, between Edmonton and Calgary, to extend sidings and build a
new siding; and |
|
|
|
|
12 projects between Calgary and the Port of Vancouver to extend sidings and lay sections
of double track. |
A siding is a limited length of track parallel to the main line that enables trains running in
either direction to pass each other. Longer sidings permit the operation of longer trains,
resulting in more freight moved per train and fewer trains required to move the same volume of
freight traffic. Longer sidings also reduce the number of locomotives required to move the same
amount of freight in a given rail corridor. We have identified other corridor bottlenecks on our
network and a plan is in place to provide appropriate capacity in order to increase train density
and capacity on all of our major routes.
4
SECTION 4: DESCRIPTION OF THE BUSINESS
4.1 Our Background and Network
CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the Parliament of Canada.
CPRC is one of Canadas oldest corporations and was North Americas first transcontinental railway.
From our inception 127 years ago, we have developed into a fully integrated and technologically
advanced Class I railway (a railroad earning a minimum of US$319.3 million in revenues annually)
providing rail and intermodal freight transportation services over a 13,200-mile network serving
the principal business centres of Canada, from Montreal, Quebec, to Vancouver, B.C., and the US
Midwest and Northeast regions.
We own approximately 9,000 miles of track. An additional 4,200 miles of track are owned jointly,
leased or operated under trackage rights. Of the total mileage operated, approximately 6,500 miles
are located in western Canada, 2,200 miles in eastern Canada, 3,300 miles in the US Midwest and
1,200 miles in the US Northeast. Our business is based on funnelling railway traffic from feeder
lines and connectors, including secondary and branch lines, onto our high-density mainline railway
network. We have extended our network reach by establishing alliances and connections with other
major Class I railways in North America, which allow us to provide competitive services and access
to markets across North America beyond our own rail network. We also provide service to markets in
Europe and the Pacific Rim through direct access to the Port of Montreal, Quebec, and the Port of
Vancouver, B.C., respectively.
Our network accesses the US market directly through two wholly owned subsidiaries: Soo Line
Railroad Company (Soo Line), a Class I railway operating in the US Midwest; and the D&H, which
operates between eastern Canada and major US Northeast markets, including New York City, New York;
Philadelphia, Pennsylvania; and Washington, DC.
4.2 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 and through strategic
additions. 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. |
4.3 Partnerships, Alliances and Network Efficiency
Some customers goods may have to travel on more than one railway to reach their final destination.
The transfer of goods between railways can cause delays and service interruptions. Our rail
network connects to other North American rail carriers and, through partnerships, we continue to
co-develop processes and products designed to provide seamless and efficient scheduled train
service to these customers.
We continue to increase the capacity and efficiency of our core franchise through
infrastructure-sharing and joint-service programs with other railways and third parties, strategic
capital investment programs, and operating plan strategies. Combined with the continued
improvement of our locomotive fleet, these strategies enable us to achieve more predictable and
fluid train operations between major terminals.
Recent Class I railway initiatives include:
|
|
|
a CP-CN directional running agreement over about 100 miles of parallel CP and CN track
in Ontario between Waterfall (near Sudbury) and Parry Sound. The trains of both railways
operate eastbound over CNs line and westbound over our
line; |
|
|
|
|
a CP-CN haulage agreement under which we transport CN freight over about 300 miles of CP
track in Ontario between Thunder Bay and Franz; |
|
|
|
|
CP-CN initiatives in the Port of
Vancouver Terminal and B.C. Lower Mainland; |
|
|
|
|
a CP-NS trackage rights agreement to handle NS traffic over our D&H lines in the US
Northeast; and |
|
|
|
|
a CP-NS track connection at Detroit, Michigan that provides service between eastern
Canada and the US Midwest. |
We also develop mutually beneficial arrangements with smaller railways, including shortline and
regional carriers.
5
SECTION 4: DESCRIPTION OF THE BUSINESS
In November 2005, CP and the Fraser River Port Authority (FRPA) entered into a cooperation
agreement to enhance service through the Fraser River Port, south of the Port of Vancouver, and to
capture growth opportunities in global trade. Under the agreement, CP and FRPA will consult on
market and trade outlooks and business development opportunities, coordinate investments, and
engage in multi-modal planning to build or expand port and rail infrastructure, such as terminals
and track. FRPA will also support efforts to enhance our access to Fraser River facilities to help
meet increased demand for rail service.
In April 2005, we signed a cooperation agreement with the Vancouver Port Authority (VPA) to work
on joint capacity developments to more fully capture expanding Asia-Pacific trade opportunities.
Joint initiatives include marketing programs and domestic public policy advocacy to increase
competitiveness, operational efficiencies and customer service at the Port of Vancouver. There is
also a commitment by both parties to ensure that the Port of Vancouver is the most secure port
system on the West Coast of the Americas. CP and VPA will also advocate a policy framework in
Canada that fosters private sector investment in an integrated transportation system, including
marine, rail, road and air, and encourages coordinated federal and provincial investment in
Canadas aging transportation network in local communities.
4.4 Network and Right-of-Way
Our 13,200-mile network extends from the Port of Vancouver on Canadas Pacific Coast to the Port of
Montreal in eastern Canada, and to the US industrial centres of Chicago, Illinois; Newark, New
Jersey; Philadelphia, Pennsylvania; and New York City and Buffalo, New York.
Our network is composed of four primary corridors: Western, Southern, Central, and Eastern. These
corridors are comprised of main lines, totalling approximately 4,750 miles, supported by secondary
and branch rail lines (feeder lines) that carry traffic to and from the main lines.
4.4.1 The Western Corridor: Vancouver-Moose Jaw
Overview The Western Corridor links Vancouver with Moose Jaw, which is the western Canadian
terminus of our Southern and Central corridors. With service through Calgary, the Western Corridor
is an important part of our routes between Vancouver and the US Midwest, and between Vancouver and
central and eastern Canada.
Products The Western Corridor is our primary route for bulk and resource products traffic from
western Canada to the Port of Vancouver for export. We also handle significant volumes of
international intermodal containers and domestic general merchandise traffic.
Feeder Lines We support our Western Corridor with three significant feeder lines: the Coal
Route, which links southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank
terminal at the Port of Vancouver; the Calgary-Edmonton-Scotford Route, which provides rail
access to central Albertas petrochemical industries and natural resources markets; and the
6
SECTION 4: DESCRIPTION OF THE BUSINESS
Pacific CanAm Route, which connects Calgary and Medicine Hat, Alberta, with Union Pacific
Railroad Company (UP) at Kingsgate, B.C.
Connections Our Western Corridor connects with UP at Kingsgate and with BNSF at Coutts, Alberta,
and at New Westminster and Huntingdon in B.C. This corridor also connects with CN at Red Deer and
Camrose, Alberta; Calgary; Edmonton; Kamloops, B.C.; and several locations in the Greater Vancouver
Area.
Yards and Repair Facilities We support rail operations on the Western Corridor with main rail
yards at Vancouver, Calgary, Edmonton and Moose Jaw. We also have major intermodal terminals at
Vancouver, Calgary and Edmonton, and locomotive and rail car repair facilities at Golden, B.C.,
Vancouver, Calgary and Moose Jaw.
Other In 2005, we completed a series of capacity expansion projects in the Western Corridor,
which increased capacity in this corridor by approximately four trains per day. These projects are
discussed further in Section 3.0 in this AIF.
4.4.2 The Southern Corridor: Moose Jaw-Chicago
Overview The Southern Corridor connects with the Western Corridor at Moose Jaw. By running
south to Chicago through the twin cities of Minneapolis and St. Paul in Minnesota, and through
Milwaukee, Wisconsin, we provide a direct, single-carrier route between western Canada and the US
Midwest.
Products Primary traffic categories transported on the Southern Corridor include intermodal
containers from the Port of Vancouver, fertilizers, chemicals, grain, coal, and automotive and
other agricultural products.
Feeder Lines We support the Southern Corridor with a major feeder line connecting Glenwood,
Minnesota, and Winnipeg, Manitoba. This line is both a gathering network for US grain and a route
for Canadian fertilizers and merchandise traffic destined to the US.
We have operating rights over the BNSF line between Minneapolis and the twin ports of Duluth,
Minnesota, and Superior, Wisconsin. This line provides an outlet for grain from the US Midwest to
the grain terminals at these ports.
Prior to the second half of 2006, we provided service on a route from Chicago to Louisville,
Kentucky, through a combination of operating rights and owned lines. General merchandise traffic
and a significant amount of coal traffic from mines in southern Indiana move over this route, which
was sold to Indiana Rail Road Company in the second quarter of 2006 (discussed further in Section
3.0).
Connections Our Southern Corridor connects with all major railways at Chicago. Outside of
Chicago, we have major connections with BNSF at Minneapolis and at Minot, North Dakota, and with UP
at St. Paul. We connect with CN at Minneapolis, Milwaukee and Chicago. Our Southern Corridor also
links to several shortline railways that primarily serve grain and coal producing areas in the US.
Yards and Repair Facilities We support rail operations on the Southern Corridor with main rail
yards in Chicago, St. Paul and Glenwood. We own 49% of the Indiana Harbor Belt Railroad Company, a
switching railway serving Greater Chicago and northwest Indiana, and have two major intermodal
terminals in Chicago and one in Minneapolis. In addition, we have a major locomotive repair
facility at St. Paul and car repair facilities at St. Paul and Chicago.
4.4.3 The Central Corridor: Moose Jaw-Toronto
Overview The Central Corridor extends from Moose Jaw through Winnipeg to its eastern terminus at
Toronto. We complement the Central Corridor with a secondary route in Ontario that is leased and
operated by Ottawa Valley Railway. This secondary route connects Sudbury and Smiths Falls,
Ontario, and expedites the movement of our traffic between Montreal and western Canada. Our
Central Corridor provides shippers direct rail service from Toronto and Montreal to Calgary and
Vancouver via our Western Corridor. This is a key element of our transcontinental intermodal and
other services. The Central Corridor also provides access to the Port of Thunder Bay, Ontario,
Canadas primary Great Lakes bulk terminal.
Products Major traffic categories transported in the Central Corridor include Canadian grain,
coal, forest and industrial and consumer products, intermodal containers, automotive products and
general merchandise.
7
SECTION 4: DESCRIPTION OF THE BUSINESS
Feeder Lines We support the Central Corridor with a main feeder line connecting Edmonton with
Winnipeg, through Saskatoon in Saskatchewan. This line is an important collector of Canadian grain
and fertilizer.
Connections The Central Corridor connects with BNSF at Emerson, Manitoba, and with a number of
shortline railways. This corridor also connects with CN at Regina, Saskatoon, Winnipeg, Thunder
Bay and Sudbury.
Yards and Repair Facilities We support our rail operations in the Central Corridor with major
rail yards at Saskatoon, Winnipeg, Toronto and Thunder Bay. Our largest intermodal facility is
located in the northern Toronto suburb of Vaughan and serves the Greater Toronto and southwestern
Ontario areas. We also operate intermodal terminals at Thunder Bay, Winnipeg, Saskatoon and Regina.
We have major locomotive repair facilities at Winnipeg and Toronto and car repair facilities at
Winnipeg, Thunder Bay and Toronto.
4.4.4 The Eastern Corridor
Overview The Eastern Corridor provides an important link between the major population centres of
eastern Canada, the US Midwest and the US Northeast. The corridor supports our market position at
the Port of Montreal by providing one of the shortest rail routes for European cargo destined to
the US Midwest. The Eastern Corridor consists of a route between Montreal and Detroit, which we
own and maintain, coupled with a trackage rights arrangement on NS track between Detroit and
Chicago and a long-term rail car haulage contract with CSX that links Detroit with our lines in
Chicago.
Products Major traffic categories transported in the Eastern Corridor include intermodal
containers, automotive, forest, and industrial and consumer products, as well as truck trailers
moving in drive-on/drive-off Expressway service between Montreal and Toronto.
Feeder Lines The Eastern Corridor connects with important feeder lines. Our route between
Montreal and Sunbury, Pennsylvania, in combination with trackage rights over other railways,
provides us with direct access to New York City and Albany, New York; Philadelphia, Pennsylvania;
Newark, New Jersey; and Washington, DC. The line between Guelph Junction, Ontario and Binghamton,
including haulage rights over NS lines, links industrial southern Ontario with key US connecting
rail carriers at Buffalo and with the Montreal-to-Sunbury line at Binghamton.
Connections The Eastern Corridor connects with all major railways at Chicago. We also have major
connections with NS at Detroit, Buffalo, and at Harrisburg and Allentown in Pennsylvania, and with
CSX at Detroit, Buffalo, Albany, Philadelphia, and Washington D.C. In addition, our eastern
corridor connects with CN at Montreal and at Toronto, Windsor and London in Ontario.
Yards and Repair Facilities We support our Eastern Corridor with major rail yards and terminals
in Chicago, Toronto, Montreal and Binghamton. There are also intermodal facilities in Montreal and
Detroit, as well as a second intermodal facility in Toronto dedicated to serving the Eastern
Corridor. Terminals for our Expressway service are located in Montreal and at Milton and Agincourt
in the Greater Toronto area. We have locomotive and car repair facilities in Montreal and
Binghamton, in addition to car repair facilities in Chicago and locomotive and car repair
facilities in Toronto.
4.4.5 Right-of-Way
Our rail network is standard gauge, which is used by all major railways in Canada, the US and
Mexico. Continuous welded rail is used on almost all of our mainline. All of the main corridors
and primary feeder trackage consists of 100-pound or heavier rail, suitable for the movement of
high-capacity 286,000-pound freight cars.
We use different train control systems on portions of our owned track, depending on the volume of
rail traffic. Remotely controlled centralized traffic control signals are used to authorize the
movement of trains where traffic is heaviest.
Where rail traffic is lightest, train movements are directed by written instructions transmitted
electronically and by radio from rail traffic controllers to train crews. In areas of intermediate
traffic density, we use an automatic block signalling system in conjunction with written
instructions from rail traffic controllers.
8
SECTION 4: DESCRIPTION OF THE BUSINESS
4.5 Quarterly Trends
Volumes of and, therefore, revenues from certain goods are stronger during different periods of the
year. First-quarter revenues can be lower mainly due to winter weather conditions, closure of the
Great Lakes ports and reduced transportation of retail goods. Second- and third-quarter revenues
generally improve over the first quarter as fertilizer volumes are typically highest during the
second quarter and demand for construction-related goods is generally highest in the third quarter.
Revenues are typically strongest in the fourth quarter, primarily as a result of the
transportation of grain after the harvest, fall fertilizer programs and increased demand for retail
goods moved by rail. Operating income is also affected by seasonal fluctuations. Operating income
is typically lowest in the first quarter due to higher operating costs associated with winter
conditions. Net income is also influenced by seasonal fluctuations in customer demand and
weather-related issues.
4.6 Business Categories
The following table compares the percentage of our total freight revenue derived from each of our
major business lines in 2007 compared with 2006:
|
|
|
|
|
|
|
|
|
Business Category |
|
|
2007 |
|
|
2006 |
|
Bulk |
|
|
44 |
% |
|
|
44 |
% |
Merchandise |
|
|
27 |
% |
|
|
28 |
% |
Intermodal |
|
|
29 |
% |
|
|
28 |
% |
|
4.7 Revenues
The following table summarizes our annual freight revenues since 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues |
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
|
Fiscal 2006 |
|
|
|
(in $ millions, except for percentages) |
|
|
|
|
|
Growth |
|
|
|
|
|
Growth |
|
|
|
|
|
Fiscal |
|
|
Rate as |
|
Fiscal |
|
|
Rate as |
|
Fiscal |
|
|
|
2007 |
|
|
Compared |
|
2006 |
|
|
Compared |
|
2005 |
|
|
|
|
|
|
|
to Fiscal |
|
|
|
|
|
to Fiscal |
|
|
|
|
Business Category |
|
|
|
|
|
2006 |
|
|
|
|
|
2005 |
|
|
|
|
|
Bulk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
939 |
|
|
|
3.8 |
% |
|
|
905 |
|
|
|
20.0 |
% |
|
|
754 |
|
Coal |
|
|
573 |
|
|
|
(3.1) |
% |
|
|
592 |
|
|
|
(18.8) |
% |
|
|
729 |
|
Sulphur and fertilizers |
|
|
502 |
|
|
|
14.3 |
% |
|
|
439 |
|
|
|
(1.8) |
% |
|
|
447 |
|
|
Total bulk |
|
|
2,014 |
|
|
|
4.0 |
% |
|
|
1,936 |
|
|
|
0.3 |
% |
|
|
1,930 |
|
|
Merchandise |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest products |
|
|
276 |
|
|
|
(12.8) |
% |
|
|
316 |
|
|
|
(5.4) |
% |
|
|
334 |
|
Industrial and consumer products |
|
|
628 |
|
|
|
4.0 |
% |
|
|
604 |
|
|
|
11.2 |
% |
|
|
543 |
|
Automotive |
|
|
319 |
|
|
|
1.5 |
% |
|
|
314 |
|
|
|
5.4 |
% |
|
|
298 |
|
|
Total merchandise |
|
|
1,223 |
|
|
|
(0.9) |
% |
|
|
1,234 |
|
|
|
5.0 |
% |
|
|
1,175 |
|
|
Intermodal. |
|
|
1,318 |
|
|
|
4.9 |
% |
|
|
1,257 |
|
|
|
8.3 |
% |
|
|
1,161 |
|
|
Total freight revenues |
|
|
4,555 |
|
|
|
2.9 |
% |
|
|
4,427 |
|
|
|
3.8 |
% |
|
|
4,266 |
|
|
4.7.1 Bulk
Our bulk business represented approximately 44% of total freight revenues in 2007.
4.7.1.1 Grain
Our grain business accounted for approximately 21% of total freight revenues in 2007.
Grain transported by CP consists of both whole grains, including wheat, corn, soybeans and canola,
and processed products, such as canola meal, vegetable oil and flour.
Our grain business is centred in two key agricultural areas: the Canadian prairies (Alberta,
Saskatchewan and Manitoba) and the Northern Plains states of North Dakota and Minnesota. Western
Canadian grain is shipped
primarily west to the Port of
9
SECTION 4: DESCRIPTION OF THE BUSINESS
Vancouver and east to the Port of Thunder Bay for export. Grain is also shipped to the US Midwest
and to eastern Canada for domestic consumption. US-originated export grain traffic is shipped to
ports at Duluth and Superior. In partnership with other railways, we also move grain to export
terminals in the US Pacific Northwest and the Gulf of Mexico. Grain destined for domestic
consumption moves east via Chicago to the US Northeast or is interchanged with other carriers to
the US Southeast, Pacific Northwest and California markets.
Railway rates for the movement of export grain from western Canada are subject to legislative
provisions. These provisions apply to defined commodities and origin/destination pairings set
out in the Canada Transportation Act (CTA). The revenue formula included in the CTA is indexed
annually to reflect changes in the input costs associated with transporting grain destined for
export markets. For additional information, refer to Section 22.4.1 of our 2007 Managements
Discussion and Analysis (MD&A), which is available on SEDAR at www.sedar.com in Canada, on EDGAR
at www.sec.gov in the US and on our website at www.cpr.ca.
4.7.1.2 Coal
Our coal business represented approximately 12% of total freight revenues in 2007.
We handle mostly metallurgical coal destined for export through the Port of Vancouver for use in
the steel-making process in the Pacific Rim, Europe and South America.
Our Canadian coal traffic originates mainly from mines in southeastern B.C. They are considered to
be among the most productive, highest-quality metallurgical coal mines in the world. We move coal
west from these mines to port terminals for export to world markets, the US for midwest markets,
and east for consumption in steel-making mills along the Great Lakes.
In the US, we move primarily thermal coal from the PRB, which is interchanged to us from other
carriers, for use in power-generating plants. Our US coal business also includes petroleum coke
shipments to power-generating facilities.
4.7.1.3 Sulphur and Fertilizers
Sulphur and fertilizers business represented approximately 11% of total freight revenues in 2007.
Sulphur
Most sulphur produced in Alberta is a by-product of processing sour natural gas, refining crude oil
and upgrading bitumen produced in the Alberta oil sands. Sulphur is a raw material used primarily
in the manufacture of sulphuric acid, the most common industrial chemical in the world. Sulphuric
acid is used most extensively in the production of phosphate fertilizers, and demand for elemental
sulphur rises with demand for fertilizers. Sulphuric acid is also a key ingredient in industrial
processes ranging from smelting and nickel leaching to paper production.
Albertas oil and gas industry produces more than eight million tonnes of sulphur annually. We
transport approximately half of the sulphur that enters international markets from Canada and we
are the leading transporter of formed sulphur shipped from gas plants in southern Alberta to the
Port of Vancouver. The two largest shipping points in southern Alberta are Shantz and Waterton and
both are located on our rail lines. Currently, our export traffic is destined mainly to China,
Australia and the US. In addition, we transport liquid sulphur from Scotford, Alberta, site of one
of the largest refineries in the Edmonton area, and from other origins to the southeastern and
northwestern US for use in the fertilizer industry.
Fertilizers
Fertilizers traffic consists primarily of potash and chemical fertilizers. Our potash traffic
moves mainly from Saskatchewan to offshore markets through the ports of Vancouver, Thunder Bay and
Portland, Oregon and to markets in the US. Chemical fertilizers are transported to markets in
Canada and the northwestern US from key production areas in the Canadian prairies. Phosphate
fertilizer is also transported from US and Canadian producers to markets in Canada and the northern
US.
We provide transportation services from major potash and nitrogen production facilities in western
Canada and have efficient routes to the major US markets. We also have direct service to key
fertilizer distribution terminals, such as the barge facilities on the Mississippi River system at
Minneapolis-St. Paul, as well as access to Great Lakes vessels at Thunder Bay.
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SECTION 4: DESCRIPTION OF THE BUSINESS
4.7.2 Merchandise
Our merchandise business represented approximately 27% of total freight revenues in 2007.
Merchandise products move in trains of mixed freight and in a variety of car types and service
involves delivering products to many different customers and destinations. In addition to
traditional rail service, we move merchandise traffic through a network of truck-rail transload
facilities and provide logistics services.
4.7.2.1 Forest Products
Our forest products business represented approximately 6% of total freight revenues in 2007.
Forest products traffic includes wood pulp, paper, paperboard, newsprint, lumber, panel and
Oriented Strand Board shipped from key producing areas in B.C., northern Alberta, northern
Saskatchewan, Ontario and Quebec to destinations throughout North America.
4.7.2.2 Industrial and Consumer Products
Our industrial and consumer products business represented approximately 14% of total freight
revenues in 2007.
Industrial and consumer products traffic includes an array of commodities grouped as plastics,
aggregates, minerals, carload food products, metals, steel, chemicals and energy-related products.
Our industrial and consumer products traffic is widely dispersed throughout North America, with
large bases in Alberta, Ontario, Quebec and the US Midwest. The location of mines, steel mills and
aggregate facilities adjacent to our rail lines provides for the convenient shipment of a diverse
group of industrial products for a wide range of customers. We transport products to destinations
throughout North America, including to and from ports. We also participate in the movement of
products from the US to Canadian destinations, including chemicals originating in and around the
Gulf Coast and destined to points in eastern Canada.
4.7.2.3 Automotive
Our automotive business represented approximately 7% of total freight revenues in 2007.
Automotive traffic includes domestic, import and pre-owned vehicles as well as automotive parts.
We transport finished vehicles from US and Canadian assembly plants to the Canadian marketplace,
and to other markets throughout North America via major interchanges at Detroit, Chicago and
Buffalo. We also move imported vehicles from tidewater ports to retail markets in Canada and the
US Midwest. A comprehensive network of automotive compounds is utilized to facilitate final
delivery of vehicles to dealers throughout Canada, in Minnesota, and in the US.
4.7.3 Intermodal
Our intermodal business accounted for approximately 29% of total freight revenues in 2007.
Domestic intermodal freight consists primarily of manufactured consumer products moving in
containers. International intermodal freight moves in marine containers between ports and North
American inland markets.
Domestic Intermodal
Our domestic intermodal segment consists primarily of long-haul intra-Canada and cross-border
business. Key service factors in domestic intermodal include consistent on-time delivery, the
ability to provide door-to-door service and the availability of value-added services. The majority
of our domestic intermodal business originates in Canada where we market our services directly to
retailers, providing complete door-to-door service and maintaining direct relationships with our
customers. In the US, our service is delivered mainly through wholesalers.
International Intermodal
Our international intermodal business consists primarily of containerized traffic moving between
the ports of Vancouver, Montreal, New York and Philadelphia and inland points across Canada and the
US.
We are a major carrier of containers moving via the ports of Montreal and Vancouver. Import traffic
from the Port of Vancouver is mainly long-haul business destined for eastern Canada and the US
Midwest and Northeast, and our trans-Pacific service offers
11
SECTION 4: DESCRIPTION OF THE BUSINESS
the shortest route between the Port of Vancouver and Chicago. We work closely with the Port of
Montreal, a major year-round East Coast gateway to Europe, to serve markets primarily in Canada and
the US Midwest. Our US Northeast service connects eastern Canada with the ports of Philadelphia
and New York, offering a competitive alternative to trucks.
Recent investments in terminals and track infrastructure as well as operating and service
initiatives have enhanced our strategic position for future growth.
4.7.4 Other Business
We earn additional revenues through the sale and lease of assets. Other arrangements include
infrastructure and operating agreements with government-sponsored commuter rail authorities and
contracts with passenger service operators.
4.7.5 Significant Customers
At December 31, 2007, one customer comprised 11.5% of total revenues and 6.2% of total accounts
receivable. At December 31, 2006 and 2005, the same customer comprised 11.5% and 14.5% of total
revenues and 5.6% and 8.0% of total accounts receivable, respectively.
4.8 Railway Performance
We focus on safety, franchise investment, increasing network efficiency and improving asset
utilization, train operations productivity and labour productivity. The following table summarizes
the effect of these strategies based on industry-recognized performance indicators:
4.8.1 Performance Indicators
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Year Ended December 31 |
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Performance Indicators(1)(2) |
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2007 |
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2006 |
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2005 |
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2004 |
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2003 |
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Safety indicators |
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|
|
|
|
|
|
|
|
|
|
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|
FRA personal injuries per 200,000 employee-hours(3) |
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2.1 |
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2.0 |
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2.4 |
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2.7 |
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3.1 |
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FRA train accidents per million train-miles(4) |
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2.0 |
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1.6 |
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2.3 |
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2.1 |
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1.8 |
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Efficiency and other indicators |
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Gross ton-miles (GTM) (millions)(5) |
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246,322 |
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236,405 |
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242,100 |
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236,451 |
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221,884 |
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Car miles per car day(6) |
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142.3 |
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137.3 |
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124.0 |
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119.0 |
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N/A |
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US gallons of locomotive fuel per 1,000 GTMs freight and
yard(7) |
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1.21 |
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1.20 |
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1.18 |
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1.20 |
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1.24 |
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Terminal dwell (hours)(8) |
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22.2 |
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20.8 |
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25.8 |
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24.9 |
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N/A |
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Average train speed (miles per hour)(9) |
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23.2 |
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24.8 |
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22.0 |
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22.7 |
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22.7 |
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Number of active employees end of period(10) |
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15,382 |
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15,327 |
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16,295 |
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15,637 |
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15,645 |
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Freight revenue per RTM (cents)(11) |
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3.52 |
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3.60 |
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3.40 |
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3.06 |
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3.08 |
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(1) |
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Revenue ton-miles (RTM) (millions), GTMs per average active employee
(thousands), and GTM per mile of road operated, excluding track on which CP has haulage rights
(thousands) are no longer reported. |
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(2) |
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Certain prior period figures have been updated to reflect new information. |
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(3) |
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US Federal Railroad Administration (FRA) personal injuries per 200,000
employee-hours measures 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. |
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(4) |
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FRA train accidents per million train-miles measures 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. |
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(5) |
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Gross ton-miles of freight measure the movement of total train weight over a
distance of one mile. (Total train weight is comprised of the weight of the freight cars,
their contents and any inactive locomotives.) |
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(6) |
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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. |
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(7) |
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US gallons of locomotive fuel per 1,000 GTMs freight and yard measures 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. |
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(8) |
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Terminal dwell (hours) measures 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 |
12
SECTION 4: DESCRIPTION OF THE BUSINESS
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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. |
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(9) |
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The average train speed measures 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. |
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(10) |
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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. |
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(11) |
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Freight revenue per RTM (cents) measures the amount of freight revenue earned for
every RTM moved, calculated by dividing the total freight revenue by the total RTMs in the
period. |
4.9 Franchise Investment
Franchise investment is an integral part of our multi-year capital program and supports our growth
initiatives. Our annual capital program typically includes investments in track and facilities
(including rail yards and intermodal terminals), locomotives, information technology, freight cars
and other equipment. We invested approximately $2.6 billion in our core assets from 2005 to 2007,
with annual capital spending over this period averaging approximately 19% of revenues. This
included approximately $1.8 billion invested in track and facilities, $0.3 billion in locomotives,
$0.1 billion in information technology and $0.4 billion in freight cars and other equipment.
4.9.1 Locomotive Fleet
We continue to upgrade our locomotive fleet by acquiring high-adhesion alternating current (AC)
locomotives, which are more fuel efficient and reliable and have superior hauling capacity compared
with standard direct current (DC) locomotives. Our locomotive fleet now includes 697 AC
locomotives. While AC locomotives represent approximately 63% of our road-freight locomotive
fleet, they handle about 82% of our workload. Our investment in AC locomotives has helped to
improve service reliability and generate cost savings in fuel, equipment rents and maintenance. It
has also allowed us to remove from service 910 older less-efficient locomotives and to more
efficiently utilize our repair and maintenance facilities.
Following is a synopsis of our owned and leased locomotive fleet:
Number of Locomotives (owned and leased)
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Road Freight |
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Road |
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Yard |
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Age in Years |
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AC |
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DC |
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Switcher |
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Switcher |
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Total |
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0-5 |
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311 |
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311 |
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6-10 |
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303 |
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303 |
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11-15 |
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83 |
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83 |
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16-20 |
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67 |
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67 |
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Over 20 |
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343 |
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|
269 |
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|
|
256 |
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868 |
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Total |
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697 |
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|
|
410 |
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|
269 |
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|
|
256 |
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1,632 |
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4.9.2 Railcar Fleet
We own, lease or manage approximately 48,000 freight cars. Approximately 20,000 are owned by CP,
7,300 are hopper cars owned by Canadian federal and provincial government agencies, and 20,700 are
leased. Long-term leases on approximately 3,500 cars are scheduled to expire during 2008, and the
leases on approximately 5,300 additional cars are scheduled to expire before the end of 2012.
Our covered hopper car fleet, used for transporting regulated grain, consists of owned, leased and
managed cars. A portion of the fleet used to transport export grain is leased from the Government
of Canada, with whom we completed a new operating agreement in 2007.
4.10 Integrated Operating Plan
Our IOP is the foundation for our scheduled railway operations, through which we strive to provide
quality service for customers and improve asset utilization to achieve high levels of efficiency.
The key principles upon which our IOP is built include moving freight cars across the network with
as few handlings as possible, creating balance in directional flow of trains in our corridors by
day of week, and minimizing the time that locomotives and freight cars are idle.
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SECTION 4: DESCRIPTION OF THE BUSINESS
Under our IOP, trains are scheduled to run consistently at times agreed upon with our customers.
To accomplish this, we establish a plan for each rail car that covers its entire trip from point of
origin to final destination. Cars with similar destinations are consolidated into blocks. This
reduces delays at intermediate locations by simplifying processes for employees, eliminating the
duplication of work and helping to ensure traffic moves fluidly through rail yards and terminals.
These measures improve transit times for shipments throughout our network and increase car
availability for customers. Our IOP also increases efficiency by more effectively scheduling
employee shifts, locomotive maintenance, track repair and material supply.
We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and the
IOP to operate longer and heavier trains. This has reduced associated expenses, simplified the
departure of shipments from points of origin and provided lower-cost capacity for growth.
We are committed to continuously improve scheduled railway operations as a means to achieve
additional efficiencies that will enable further growth without the need to incur significant
capital expenditures to accommodate the growth. During 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.
4.11 Information Technology
As a 24-hour-a-day, seven-day-a-week business, we rely heavily on our computer systems to schedule
all components of our operations. Computer applications map out complex interconnections of
freight cars, locomotives, facilities, track and train crews to meet more than 10,000 individual
customer service commitments every day. We use an intricate automated traffic forecasting system
that determines optimal freight car routings and the workload in our yards by using sophisticated,
industry-specific software and generating time-distance diagrams to examine track capacity.
During 2007 we continued to enhance our shipment management systems to improve service to our
customers. Key improvements included better tools for yard management and improved train
marshalling for safer operations. For 2008, we will implement improved inventory reporting using
wireless technology and introduce the capability for customers to request cars and related services
directly over the Internet.
In the marketing and sales area we implemented a new system called Price Right 3 which allows our
bulk and automotive account managers to provide fast, accurate quotes to their customers. We will
extend this capability to our merchandise customers in 2008 and allow all customers to access the
tool directly over the Internet. In the intermodal line of business we implemented the TRIEX
system at 11 terminals. TRIEX provides customer self-service including proof of delivery and full
shipment tracking. During 2008 we will complete the rollout of the system and implement the
functionality that provides more sophisticated pricing options and simplified billing processes.
In addition, we will begin a multi-year initiative to upgrade our e-business website to provide
improved capabilities and ease of use to our customers in 2008.
During 2007, we signed two significant outsourcing contracts that will see our application
development and support activities provided by a global delivery model. As well as improving the
effectiveness and efficiency of project delivery and application support, this initiative is
expected to improve CPs level of process maturity by leveraging the experience and best practices
of industry leaders.
The Shipment Suite of applications is the primary toolset used in the design, planning and
execution of our IOP. During 2006, improvements were made to these applications to support the
Yard Operating Plan, improve train line-up accuracy, reduce train marshalling exceptions and smooth
the customer empty order process. We implemented the first phase of our new crew management
application which automated outbound calls for duty to the running trades employees in Canada and
the US. For engineering services we provided a new application that allows on-line bidding for
positions and electronically matches employees to positions based on their bids, seniority and
qualifications.
During 2005, we completed the implementation of TYES, a new yard inventory management system.
Using waybill information, TYES triggers classification instructions from CPs trip planning system
so that individual shipments are matched to freight car blocks, which in turn are matched to
trains. The result is optimized routing and improved fluidity in CP freight yards. A trip plan is
created for each customers shipment and integrated with train planning and yard applications to
ensure that the instructions
issued for the customers shipment are consistent with the information given to the customer. With
TYES fully implemented, we have completed our Service Excellence suite of operating systems. These
operating systems manage the overall movement of our customers shipments and provide railway
managers with highly reliable data on shipment performance, transit times,
14
SECTION 4: DESCRIPTION OF THE BUSINESS
connections with other trains, train and yard capacities, and locomotive requirements. This data
is used to make adjustments to the IOP to achieve specific service and productivity targets and
ensure all design objectives are achieved.
During 2005, we signed a license agreement with SAP Canada to leverage use of its software to
functions beyond managing assets and expenditures, such as revenue management, supplier management
and pricing. This agreement was extended at the end of 2007 for two more years.
4.12 Labour Productivity and Efficiency
We continually take steps to improve the effectiveness of our organizational structure in order to
increase productivity and efficiency. We have been improving communication and decision-making,
simplifying the organizations management structure, and increasing the responsibility given to
management personnel. We regularly review our organizational processes, workforce needs and
related organizational costs with a focus on improving the productivity and efficiency of our
workforce while reducing expenses.
In 2005, we began a restructuring initiative to further improve efficiency in our administrative
areas. The restructuring was intended to eliminate more than 400 management and administration
positions. As part of this initiative, we introduced a voluntary incentive retirement program for
long-service employees in Canada. The targeted reductions for these initiatives were successfully
achieved by 2006.
Running trades productivity has been improved in 2006 and 2007 by executing a scheduled railway
through our IOP.
In order to stimulate and reward employee participation in our efficiency initiatives, we have
implemented a number of incentive-based compensation programs designed to allow eligible unionized
and non-unionized employees to share in the profits they help generate.
4.13 Business Risks & Enterprise Risk Management
In the normal course of our operations, we are exposed to various business risks and uncertainties
that can have an effect on our financial condition. The risks and our enterprise risk management
are discussed in Section 22.0 of our 2007 MD&A, which is available on SEDAR at www.sedar.com in
Canada, on EDGAR at www.sec.gov in the US and on our website at www.cpr.ca.
4.14 Indemnifications
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific
Railway Company Pension Trust Fund, we have undertaken to indemnify and save harmless the trustee,
to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs and
expenses arising out of the performance of the trustees obligations under the agreement, except as
a result of misconduct by the trustee. The indemnity includes liabilities, costs or expenses
relating to any legal reporting or notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise with respect to the assets of the
pension plans that are not part of the fund. The indemnity survives the termination or expiry of
the agreement with respect to claims and liabilities arising prior to the termination or expiry.
At December 31, 2007, we had not recorded a liability associated with this indemnification, as we
do not expect to make any payments pertaining to it.
Pursuant to our by-laws, we indemnify all our current and former directors and officers. In
addition to the indemnity provided for in our by-laws, we also indemnify our directors and officers
pursuant to indemnity agreements. We carry a liability insurance policy for directors and
officers, subject to a maximum coverage limit and certain deductibles in cases where a director or
officer is reimbursed for any loss covered by the policy.
4.15 Safety
Safety is a key priority for our management and Board of Directors. Our two main safety indicators
personal injuries and train accidents follow strict US FRA reporting requirements used by all
Class I railways in Canada and the US.
The FRA personal injury rate per 200,000 employee-hours was 2.1 in 2007 compared with 2.0 in 2006
and 2.4 in 2005. The FRA train accident rate in 2007 was 2.0 accidents per million train-miles,
compared with 1.6 and 2.3, respectively, in 2006 and 2005.
Our Health, Safety, Security and Environment Committee provides ongoing focus, leadership,
commitment and support for efforts to improve the safety of our operations as well as the safety
and health of our employees. The committee is comprised of
15
SECTION 4: DESCRIPTION OF THE BUSINESS
all of the most senior representatives from our different operations departments and is a key
component of safety governance at CP. Our Safety Framework governs the safety management process,
which involves more than 1,000 employees in planning and implementing safety-related activities.
This management process, combined with planning that encompasses all operational functions, ensures
a continuous and consistent focus on safety.
4.16 Environmental Protection
We have implemented a comprehensive Environmental Management System, which uses the five elements
of the ISO 14001 standard policy, planning, implementation and operation, checking and
corrective action, and management review as described below.
4.16.1 Policy
We have adopted an Environmental Protection Policy and continue to develop and implement policies
and procedures to address specific environmental issues and reduce environmental risk. Each policy
is implemented with training for employees and a clear identification of roles and
responsibilities.
Our partnership in Responsible CareÒ is a key part of our commitment as we strive to be a
leader in railway and public safety. Responsible CareÒ, an initiative of the Canadian
Chemical Producers Association (CCPA) in Canada and the American Chemistry Council (ACC) in the
US, is an ethic for the safe and environmentally sound management of chemicals throughout their
life cycle. Partnership in Responsible CareÒ involves a public commitment to continually
improve the industrys environmental, health and safety performance. We successfully completed our
first Responsible CareÒ external verification in June 2002 and were granted Responsible
CareÒ practice-in-place status. We were successfully re-verified in 2005. We are scheduled
for our first concurrent CCPA and ACC verification in June 2008.
4.16.2 Planning
We prepare an annual Corporate Environmental Plan, which includes details of our environmental
goals and objectives as well as high-level strategies and tactics. The plan is used by various
departments to integrate key corporate environmental strategies into their business plans.
4.16.3 Implementation and Operation
We have developed specific environmental programs to address areas such as air emissions,
wastewater, management of vegetation, chemicals and waste, storage tanks and fuelling facilities,
and environmental impact assessment. Our environmental specialists and consultants lead these
programs.
Our focus is on preventing spills and other incidents that have a negative impact on the
environment. As a precaution, we have established a Strategic Emergency Response Contractor
network and located spill equipment kits across Canada and the US to ensure a rapid and efficient
response in the event of an environmental incident. In addition, we regularly update and test
emergency preparedness and response plans. We have taken a proactive position on the remediation
of historically impacted sites and have an accounting accrual for environmental costs that extends
to 2017.
4.16.4 Environmental Contamination
In the fourth quarter of 2004, we recorded a $90.9-million charge for costs associated with
investigation, characterization, remediation and other applicable actions related to environmental
contamination at a CP-owned property in the US, which includes areas previously leased to third
parties.
In the third quarter of 2005, we reached a binding settlement in relation to a lawsuit with a
potentially responsible party involving portions of past environmental contamination at the
aforementioned property in the US. The lawsuit against this other party has been dismissed and the
party has accepted responsibility for designated portions of the property and paid us a settlement
sum in partial payment of the response costs we have incurred.
As a result of the settlement, we were able to reverse accrued liabilities related to the property
and recognize a total reduction of $33.9 million to the special charges accrued in prior years.
Under applicable accounting rules, this reduction could not be recognized until the outcome of the
lawsuit or any binding settlement with the other responsible party became known.
16
SECTION 4: DESCRIPTION OF THE BUSINESS
We continue to be responsible for remediation work on portions of the property in the State of
Minnesota and continue to retain liability accruals for remaining future anticipated costs. The
costs are expected to be incurred over approximately 10 years. The states voluntary investigation
and remediation program will oversee the work to ensure it is completed in accordance with
applicable standards. We currently estimate the remaining liability associated with these areas to
be $29.6 million.
4.16.5 Checking and Corrective Action
Our environmental audit comprehensively, systematically and regularly assesses our facilities for
compliance with legal requirements and conformance to our policies, which are based on legal
requirements and accepted industry standards. Audits are scheduled based on risk assessment for
each facility and are led by third-party environmental audit specialists supported by our
environmental staff.
Audits are followed by a formal Corrective Action Planning process that ensures findings are
addressed in a timely manner. Progress is monitored against completion targets and reported
quarterly to senior management.
In 2007, our audit program was expanded to include health and safety and continues to evolve.
4.16.6 Management Review
Our Board of Directors Health, Safety, Security and Environment Committee conducts a semi-annual
comprehensive review of environmental issues. An Environmental Lead Team, which is comprised of
senior leaders of our Real Estate, Legal Services, Marketing and Sales, Finance, Operations, Supply
Services, and Environmental Services departments, meets quarterly to review environmental matters.
4.16.7 Expenditures
We spent $39 million in 2007 for environmental management, including amounts spent for ongoing
operations, capital upgrades and remediation.
4.17 Insurance
We maintain insurance policies to protect our assets and to protect against liabilities. Our
insurance policies include, but are not limited to, liability insurance, director and officer
liability insurance, automobile insurance and property insurance. The property insurance program
includes business interruption coverage, which would respond in the event of catastrophic damage to
our infrastructure. We believe our insurance is adequate to protect us from known and unknown
liabilities. However, in certain circumstances, certain losses may not be covered or completely
covered by insurance and we may suffer losses, which could be material.
17
SECTION 5: DIVIDENDS
5.1 Declared Dividends and Dividend Policy
Dividends declared by the Board of Directors in the last three years are as follows:
|
|
|
|
|
|
|
|
Dividend Amount |
|
Record Date |
|
Payment Date |
|
|
|
|
$0.1325
|
|
March 25, 2005
|
|
April 25, 2005 |
|
|
$0.1500
|
|
June 24, 2005
|
|
July 25, 2005 |
|
|
$0.1500
|
|
September 30, 2005
|
|
October 31, 2005 |
|
|
$0.1500
|
|
December 30, 2005
|
|
January 30, 2006 |
|
|
$0.1875
|
|
March 31, 2006
|
|
April 24, 2006 |
|
|
$0.1875
|
|
June 30, 2006
|
|
July 31, 2006 |
|
|
$0.1875
|
|
September 29, 2006
|
|
October 30, 2006 |
|
|
$0.1875
|
|
December 29, 2006
|
|
January 29, 2007 |
|
|
$0.2250
|
|
March 30, 2007
|
|
April 30, 2007 |
|
|
$0.2250
|
|
June 29, 2007
|
|
July 30, 2007 |
|
|
$0.2250
|
|
September 28, 2007
|
|
October 29, 2007 |
|
|
$0.2250
|
|
December 28, 2007
|
|
January 28, 2008 |
|
|
$0.2475
|
|
March 28, 2008
|
|
April 28, 2008 |
|
|
|
Our Board of Directors is expected to give consideration on a quarterly basis to the payment of
future dividends. The amount of any future quarterly dividends will be determined based on a
number of factors that may include the results of operations, financial condition, cash
requirements and future prospects of the Company. The Board of Directors is, however, under no
obligation to declare dividends and the declaration of dividends is wholly within their discretion.
Further, our Board of Directors may cease declaring dividends or may declare dividends in amounts
that are different from those previously declared. Restrictions in the credit or financing
agreements entered into by the Company or the provisions of applicable law may preclude the payment
of dividends in certain circumstances.
18
SECTION 6: CAPITAL STRUCTURE
6.1 Description of Capital Structure
The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of
First Preferred Shares and an unlimited number of Second Preferred Shares. At December 31, 2007,
no Preferred Shares had been issued.
|
1). |
|
The rights, privileges, restrictions and conditions attaching to the Common Shares are as
follows: |
|
a). |
|
Payment of Dividends: The holders of the Common Shares will be entitled to
receive dividends if, as and when declared by CPs Board of Directors out of the assets
of the Company properly applicable to the payment of dividends in such amounts and
payable in such manner as the Board may from time to time determine. Subject to the
rights of the holders of any other class of shares of the Company entitled to receive
dividends in priority to or rateably with the holders of the Common Shares, the Board
may in its sole discretion declare dividends on the Common Shares to the exclusion of
any other class of shares of the Company. |
|
|
b). |
|
Participation upon Liquidation, Dissolution or Winding Up: In the event of the
liquidation, dissolution or winding up of the Company or other distribution of assets
of the Company among its shareholders for the purpose of winding up its affairs, the
holders of the Common Shares will, subject to the rights of the holders of any other
class of shares of the Company entitled to receive the assets of the Company upon such
a distribution in priority to or rateably with the holders of the Common Shares, be
entitled to participate rateably in any distribution of the assets of the Company. |
|
|
c). |
|
Voting Rights: The holders of the Common Shares will be entitled to receive
notice of and to attend all annual and special meetings of the shareholders of the
Company and to one (1) vote in respect of each Common Share held at all such meetings,
except at separate meetings of or on separate votes by the holders of another class or
series of shares of the Company. |
|
2). |
|
The rights, privileges, restrictions and conditions attaching to the First Preferred Shares
are as follows: |
|
a). |
|
Authority to Issue in One or More Series: The First Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of each series of First
Preferred Shares. |
|
|
b). |
|
Voting Rights: The holders of the First Preferred Shares will not be entitled
to receive notice of or to attend any meeting of the shareholders of the Company and
will not be entitled to vote at any such meeting, except as may be required by law. |
|
|
c). |
|
Limitation on Issue: The Board may not issue any First Preferred Shares if by
so doing the aggregate amount payable to holders of First Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000. |
|
|
d). |
|
Ranking of First Preferred Shares: The First Preferred Shares will be entitled
to priority over the Second Preferred Shares and the Common Shares of the Company and
over any other shares ranking junior to the First Preferred Shares with respect to the
payment of dividends and the distribution of assets of the Company in the event of any
liquidation, dissolution or winding up of the Company or other distribution of the
assets of the Company among its shareholders for the purpose of winding up its affairs. |
|
|
e). |
|
Dividends Preferential: Except with the consent in writing of the holders of
all outstanding First Preferred Shares, no dividend can be declared and paid on or set
apart for payment on the Second Preferred Shares or the Common Shares or on any other
shares ranking junior to the First Preferred Shares unless and until all dividends (if
any) up to and including any dividend payable for the last completed period for which
such dividend is payable on each series of First Preferred Shares outstanding has been
declared and paid or set apart for payment. |
19
SECTION 6: CAPITAL STRUCTURE
|
3). |
|
The rights, privileges, restrictions and conditions attaching to the Second Preferred
Shares are as follows: |
|
a). |
|
Authority to Issue in One or More Series: The Second Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of each series of
Second Preferred Shares. |
|
|
b). |
|
Voting Rights: The holders of the Second Preferred Shares will not be
entitled to receive notice of or to attend any meetings of the shareholders of the
Company and will not be entitled to vote at any such meeting, except as may be required
by law. |
|
|
c). |
|
Limitation on Issue: The Board may not issue any Second Preferred Shares if by
so doing the aggregate amount payable to holders of Second Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000. |
|
|
d). |
|
Ranking of Second Preferred Shares: The Second Preferred Shares will be
entitled to priority over the Common Shares of the Company and over any other shares
ranking junior to the Second Preferred Shares with respect to the payment of dividends
and the distribution of assets of the Company in the event of the liquidation,
dissolution or winding up of the Company or any other distribution of the assets of the
Company among its shareholders for the purpose of winding up of its affairs. |
|
|
e). |
|
Dividends Preferential: Except with the consent in writing of the holders of
all outstanding Second Preferred Shares, no dividend can be declared and paid on or set
apart for payment on the Common Shares or on any other shares ranking junior to the
Second Preferred Shares unless and until all dividends (if any) up to and including any
dividend payable for the last completed period for which such dividend is payable on
each series of Second Preferred Shares outstanding has been declared and paid or set
apart for payment. |
6.2 Security Ratings
The Companys debt securities are rated annually by three approved rating organizations Moodys
Investors Service, Inc., Standard & Poors Corporation and Dominion Bond Rating Service Limited.
Currently, our securities are rated as Investment Grade, shown in the table below:
|
|
|
|
|
|
Approved Rating Organization
|
|
Long-Term Debt Rating |
|
|
|
|
|
|
|
|
|
Moodys Investors Service |
|
Baa3 |
|
|
|
|
|
|
|
Standard & Poors
|
|
BBB |
|
|
|
|
|
|
|
Dominion Bond Rating Service
|
|
BBB |
|
|
|
|
|
|
|
|
There is a negative outlook for the Companys rating with Standard & Poors Corporation.
Credit ratings are intended to provide investors with an independent measure of the credit quality
of an issue of securities and are indicators of the likelihood of payment and of the capacity and
willingness of a company to meet its financial commitment on an obligation in accordance with the
terms of the obligation. A description of the rating categories of each of the rating agencies in
the table above is set out below.
Credit ratings are not recommendations to purchase, hold or sell securities and do not address the
market price or suitability of a specific security for a particular investor and may be subject to
revision or withdrawal at any time by the rating agencies. Credit ratings may not reflect the
potential impact of all risks on the value of securities. In addition, real or anticipated changes
in the rating assigned to a security will generally affect the market value of that security.
There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be revised or withdrawn
entirely by a rating agency in the future.
20
SECTION 6: CAPITAL STRUCTURE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominion |
|
|
|
|
|
|
|
|
Moodys |
|
Standard & |
|
Bond |
|
|
|
|
|
|
|
|
Investors |
|
Poors |
|
Rating |
|
|
|
|
|
|
|
|
Service |
|
|
|
Service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa |
|
AAA |
|
AAA |
|
|
|
High Investment Grade |
|
|
|
|
|
|
|
|
|
|
|
Aa1 |
|
AA+ |
|
AA(high) |
|
|
|
|
Aa2 |
|
AA |
|
AA |
|
|
|
|
Aa3 |
|
AA- |
|
AA(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A1 |
|
A+ |
|
A(high) |
|
|
|
|
|
|
|
A2 |
|
A |
|
A |
|
|
|
|
|
|
|
A3 |
|
A- |
|
A(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa1 |
|
BBB+ |
|
BBB(high) |
|
|
Investment |
|
|
Baa2 |
|
BBB |
|
BBB |
|
|
Grade |
|
|
Baa3 |
|
BBB- |
|
BBB(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ba1 |
|
BB+ |
|
BB(high) |
|
|
|
|
|
|
|
|
Ba2 |
|
BB |
|
BB |
|
|
|
|
|
|
|
Ba3 |
|
BB- |
|
BB(low) |
|
|
|
|
|
|
|
|
B1 |
|
B+ |
|
B(high) |
|
|
Below |
|
|
B2 |
|
B |
|
B |
|
|
Investment |
|
|
B3 |
|
B- |
|
B(low) |
|
|
Grade |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caa |
|
CCC |
|
CCC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ca |
|
CC |
|
CC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C |
|
C |
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
21
SECTION 7: MARKET FOR SECURITIES
7.1 Stock Exchange Listings
The Common Shares of CP are listed on the Toronto Stock Exchange and the New York Stock Exchange
under the symbol CP.
7.2 Trading Price and Volume
The following table provides the monthly trading information for our Common Shares on the Toronto
Stock Exchange during 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
High |
|
Low |
|
Closing |
|
Number of |
|
Volume of |
|
|
Month |
|
Price per |
|
Price per |
|
Price per |
|
Price per |
|
Trades |
|
Shares |
|
|
|
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Performed |
|
Traded |
|
|
|
|
|
January |
|
|
61.62 |
|
|
|
64.99 |
|
|
|
60.06 |
|
|
|
64.45 |
|
|
|
48,063 |
|
|
|
13,687,800 |
|
|
|
February |
|
|
63.94 |
|
|
|
66.33 |
|
|
|
61.25 |
|
|
|
62.45 |
|
|
|
44,202 |
|
|
|
11,770,064 |
|
|
|
March |
|
|
62.00 |
|
|
|
65.47 |
|
|
|
62.00 |
|
|
|
64.95 |
|
|
|
45,279 |
|
|
|
11,961,990 |
|
|
|
April |
|
|
64.95 |
|
|
|
73.48 |
|
|
|
63.75 |
|
|
|
70.29 |
|
|
|
45,116 |
|
|
|
10,518,675 |
|
|
|
May |
|
|
70.45 |
|
|
|
78.18 |
|
|
|
69.30 |
|
|
|
76.30 |
|
|
|
52,142 |
|
|
|
13,389,179 |
|
|
|
June |
|
|
76.30 |
|
|
|
78.48 |
|
|
|
71.23 |
|
|
|
73.57 |
|
|
|
51,376 |
|
|
|
11,821,049 |
|
|
|
July |
|
|
74.09 |
|
|
|
91.00 |
|
|
|
73.46 |
|
|
|
78.50 |
|
|
|
83,495 |
|
|
|
29,889,129 |
|
|
|
August |
|
|
77.75 |
|
|
|
79.75 |
|
|
|
67.50 |
|
|
|
74.20 |
|
|
|
70,002 |
|
|
|
16,211,933 |
|
|
|
September |
|
|
74.00 |
|
|
|
74.48 |
|
|
|
67.37 |
|
|
|
70.00 |
|
|
|
55,234 |
|
|
|
14,415,927 |
|
|
|
October |
|
|
69.97 |
|
|
|
73.00 |
|
|
|
64.60 |
|
|
|
66.48 |
|
|
|
78,263 |
|
|
|
18,612,443 |
|
|
|
November |
|
|
66.00 |
|
|
|
67.37 |
|
|
|
59.48 |
|
|
|
66.64 |
|
|
|
75,264 |
|
|
|
16,350,039 |
|
|
|
December |
|
|
65.54 |
|
|
|
69.06 |
|
|
|
62.59 |
|
|
|
64.22 |
|
|
|
61,665 |
|
|
|
12,209,864 |
|
|
|
|
|
The following table provides the monthly trading information for our Common Shares on the New York
Stock Exchange during 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
High |
|
Low |
|
Closing |
|
Number of |
|
Volume of |
|
|
Month |
|
Price per |
|
Price per |
|
Price per |
|
Price per |
|
Trades |
|
Shares |
|
|
|
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Performed |
|
Traded |
|
|
|
|
|
January |
|
|
53.28 |
|
|
|
55.11 |
|
|
|
51.23 |
|
|
|
54.74 |
|
|
|
20,214 |
|
|
|
4,049,400 |
|
|
|
February |
|
|
54.87 |
|
|
|
56.29 |
|
|
|
52.27 |
|
|
|
53.41 |
|
|
|
21,164 |
|
|
|
4,016,500 |
|
|
|
March |
|
|
53.16 |
|
|
|
56.61 |
|
|
|
52.76 |
|
|
|
56.45 |
|
|
|
27,384 |
|
|
|
5,355,800 |
|
|
|
April |
|
|
56.30 |
|
|
|
65.70 |
|
|
|
55.36 |
|
|
|
63.52 |
|
|
|
26,803 |
|
|
|
5,502,000 |
|
|
|
May |
|
|
63.88 |
|
|
|
72.51 |
|
|
|
62.51 |
|
|
|
71.47 |
|
|
|
27,982 |
|
|
|
5,729,100 |
|
|
|
June |
|
|
71.73 |
|
|
|
73.95 |
|
|
|
66.45 |
|
|
|
68.82 |
|
|
|
30,311 |
|
|
|
5,943,700 |
|
|
|
July |
|
|
69.47 |
|
|
|
87.23 |
|
|
|
69.26 |
|
|
|
73.93 |
|
|
|
39,511 |
|
|
|
7,727,400 |
|
|
|
August |
|
|
73.30 |
|
|
|
75.74 |
|
|
|
62.66 |
|
|
|
70.48 |
|
|
|
32,138 |
|
|
|
6,221,200 |
|
|
|
September |
|
|
70.50 |
|
|
|
70.79 |
|
|
|
64.97 |
|
|
|
70.29 |
|
|
|
25,783 |
|
|
|
4,381,700 |
|
|
|
October |
|
|
70.29 |
|
|
|
74.38 |
|
|
|
67.36 |
|
|
|
70.38 |
|
|
|
32,278 |
|
|
|
5,346,100 |
|
|
|
November |
|
|
69.35 |
|
|
|
70.48 |
|
|
|
60.31 |
|
|
|
66.92 |
|
|
|
31,337 |
|
|
|
5,221,600 |
|
|
|
December |
|
|
65.37 |
|
|
|
68.64 |
|
|
|
61.80 |
|
|
|
64.64 |
|
|
|
24,839 |
|
|
|
4,122,700 |
|
|
|
|
|
22
SECTION 8: DIRECTORS AND OFFICERS
Following are the names and municipalities of residence of the directors and officers of the
Company, their positions and principal occupations within the past five years, the period during
which each director has served as director of the Company, and the date on which each directors
term of office expires.
8.1 Directors
|
|
|
|
|
|
|
Name and Municipality of Residence |
|
Position Held and Principal Occupation within |
|
Year of Annual Meeting |
|
|
the Preceding Five Years (1) |
|
at which Term of Office |
|
|
|
|
Expires (Director |
|
|
|
|
Since) |
|
|
S.E. Bachand (3)(5)(6)
Ponte Vedra Beach, Florida, U.S.A.
|
|
Retired President and Chief Executive Officer,
Canadian Tire Corporation, Limited (hard goods
retailer specializing in automotive, sports and
leisure and home products)
|
|
2008
(2001) |
|
|
|
|
|
|
J.E. Cleghorn, O.C., F.C.A. (3)
Toronto, Ontario, Canada
|
|
Chairman, Canadian Pacific Railway Limited and
Canadian Pacific Railway Company; Chairman,
SNC-Lavalin Group Inc., (international
engineering and construction firm)
|
|
2008
(2001) |
|
|
|
|
|
T.W. Faithfull (4)(5)
Oxford, Oxfordshire, England
|
|
Retired President and Chief Executive Officer
Shell Canada Limited (oil and gas company)
|
|
2008
(2003) |
|
|
|
|
|
F.J. Green (4)
Calgary, Alberta, Canada
|
|
President and Chief Executive Officer, Canadian
Pacific Railway Company and Canadian Pacific
Railway Limited
|
|
2008
(2006) |
|
|
|
|
|
K.T. Hoeg, C.A. (2)(4)
Toronto, Ontario, Canada
|
|
Former President and Chief Executive Officer of
Corby Distilleries Limited (spirits and wine)
|
|
2008
(2007) |
|
|
|
|
|
The Hon. J.P. Manley (2)(6)
Ottawa, Ontario, Canada
|
|
Senior Counsel, McCarthy Tétrault LLP (law firm)
|
|
2008
(2006) |
|
|
|
|
|
L.J. Morgan (4)(5)
Bethesda, Maryland, U.S.A.
|
|
Partner, Covington & Burling LLP (law firm)
|
|
2008
(2006) |
|
|
|
|
|
M. Paquin (2)(5)
Montreal, Quebec, Canada
|
|
President and Chief Executive Officer, Logistec
Corporation (international cargo-handling
company)
|
|
2008
(2001) |
|
|
|
|
|
M.E.J. Phelps, O.C. (3)(5)(6)
West Vancouver, B.C., Canada
|
|
Chairman, Dornoch Capital Inc. (private
investment company)
|
|
2008
(2001) |
|
|
|
|
|
R. Phillips, O.C.,S.O.M., F.Inst.P.
(2)(3)(6)
Regina, Saskatchewan, Canada
|
|
Retired President and Chief Executive Officer,
IPSCO Inc. (steel manufacturing company)
|
|
2008
(2001) |
|
|
|
|
|
H.T. Richardson, O.C. (2)(6)
Winnipeg, Manitoba, Canada
|
|
President and Chief Executive Officer, James
Richardson & Sons, Limited (privately owned
corporation)
|
|
2008
(2006) |
|
|
|
|
|
M.W. Wright (2)(3)(4)
Longboat Key, Florida, U.S.A.
|
|
Retired Chairman of the Board and Chief
Executive Officer, SUPERVALU INC. (food
distributor and grocery retailer)
|
|
2008
(2001) |
|
Notes:
(1) |
|
T.W. Faithfull was President and Chief Executive Officer of Shell Canada Limited from April
1999 until July 2003. F.J. Green was President and Chief Operating Officer, Canadian Pacific
Railway Company and Canadian Pacific Railway Limited from November 2005 until May 2006,
Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway Company and
Canadian Pacific Railway Limited from October 2004 until November 2005; Executive
Vice-President, Operations and Marketing, Canadian Pacific Railway Company from
January 2004 until October 2004 and Senior Vice-President, Marketing and Sales, Canadian Pacific
Railway Company from April 2002 until January 2004. K. T. Hoeg was President and Chief
Executive Officer of Corby Distilleries Limited from October 1996 to February |
23
SECTION 8: DIRECTORS AND OFFICERS
|
|
2007. The Hon.
J.P. Manley was the Member of Parliament for Ottawa South from November 1988 until June 2004 and
Chairman of the Ontario Power Generation Review Committee from December 2003 until March 2004. |
|
|
(2) |
|
Member of the Audit, Finance and Risk Management Committee. |
|
(3) |
|
Member of the Corporate Governance and Nominating Committee. |
|
(4) |
|
Member of the Health, Safety, Security and Environment Committee |
|
(5) |
|
Member of the Management Resources and Compensation Committee. |
|
(6) |
|
Member of the Pension Committee. |
8.2 Cease Trade Orders
S.E. Bachand was a director of Krystal Bond Inc. when it was subject to a cease trade order on
April 12, 2002 for failure to file financial statements. It has since ceased to operate as a going
concern.
As a result of the announcement in May 2004 by Nortel Networks Corporation and Nortel Networks
Limited (collectively, the Nortel Companies) of the need to restate certain of their previously
reported financial results and the resulting delays in filing interim and annual financial
statements for certain periods by the required filing dates under Ontario securities laws, the
Ontario Securities Commission made a final order on May 31, 2004 prohibiting all trading by
directors, officers and certain current and former employees including J.E. Cleghorn, a former
director, and J.P. Manley, a current director. The Quebec and Alberta Securities commissions
issued similar orders. The cease trade order issued by the Ontario Securities Commission was
revoked on June 21, 2005. The Quebec and Alberta orders were revoked shortly thereafter. Mr.
Cleghorn and Mr. Manley were not subject to the Quebec and Alberta orders. Following the March 10,
2006 announcement by the Nortel Companies of the need to restate certain of their previously
reported financial results and the resulting delay in the filing of certain 2005 financial
statements by the required filing dates, the Ontario Securities Commission issued a final
management cease trade order on April 10, 2006 prohibiting all of the directors, officers and
certain current and former employees including Mr. Cleghorn and Mr. Manley from trading in the
securities of the Nortel Companies. The British Columbia and Quebec Securities commissions issued
similar orders. The Ontario Securities Commission lifted the cease trade order effective June 8,
2006 and the British Columbia and the Quebec Securities commissions also lifted their cease trade
orders shortly thereafter. Mr. Cleghorn and Mr. Manley were not subject to the British Columbia
and Quebec orders.
24
SECTION 8: DIRECTORS AND OFFICERS
8.3 Senior Officers
As at February 19, 2008, the following were executive officers of CPRL:
|
|
|
|
|
|
|
|
Name and municipality of residence |
|
Position held |
|
Principal occupation within the |
|
|
|
|
|
|
preceding five years |
|
|
|
|
|
J.E. Cleghorn, O.C., F.C.A.
Toronto, Ontario, Canada
|
|
Chairman
|
|
Chairman, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company;
Chairman, SNC-Lavalin Group
Inc., (international
engineering and construction
firm) |
|
|
|
|
|
|
|
|
|
F.J. Green
Calgary, Alberta, Canada
|
|
President and Chief
Executive Officer
|
|
President and Chief Executive
Officer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
President and Chief Operating
Officer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Executive Vice-President and
Chief Operating Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Executive
Vice-President, Operations and
Marketing, Canadian Pacific
Railway Company; Senior
Vice-President, Marketing,
Canadian Pacific Railway
Company; Vice-President,
Marketing, Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
M.R. Lambert
Calgary, Alberta, Canada
|
|
Executive Vice-
President and Chief
Financial Officer
|
|
Executive Vice-President and
Chief Financial Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Executive
Vice-President, Canadian Tire
Corporation (retail goods);
Divisional President, Marks
Work Warehouse (retail goods) |
|
|
|
|
|
|
|
|
|
K. B. McQuade
Mesquite, Nevada, U.S.A.
|
|
Executive Vice-
President and Chief
Operating Officer
|
|
Executive Vice-President and
Chief Operating Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Executive
Vice-President and Chief
Information Officer, Norfolk
Southern Railroad |
|
|
|
|
|
|
|
|
|
M. M. Szel
Calgary, Alberta, Canada
|
|
Senior Vice-
President
|
|
Senior Vice-President,
Canadian Pacific Railway
Limited and Senior
Vice-President, Marketing and
Sales, Canadian Pacific
Railway Company; Senior
Vice-President Bulk
Commodities and Government
Affairs, Canadian Pacific
Railway Company;
Vice-President, Marketing and
Sales Bulk, Canadian
Pacific Railway Company;
Vice-President Strategy and
Law, Corporate Secretary,
Canadian Pacific Railway
Limited and Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
B. M. Winter
Calgary, Alberta, Canada
|
|
Senior Vice-
President
|
|
Senior Vice-President,
Canadian Pacific Railway
Limited and Senior
Vice-President, Operations,
Canadian Pacific Railway
Company; Vice-President
Operations, Canadian Pacific
Railway Company;
Vice-President Transportation
and Field Operations, Canadian
Pacific Railway Company;
Vice-President, Customer
Service and Car Management,
Canadian Pacific Railway
Company; Vice-President
Customer Services Team,
Canadian Pacific Railway
Company |
|
25
SECTION 8: DIRECTORS AND OFFICERS
|
|
|
|
|
|
|
|
Name and municipality of residence |
|
Position held |
|
Principal occupation within the |
|
|
|
|
|
|
preceding five years |
|
|
|
|
|
A. Borak
Calgary, Alberta, Canada
|
|
Vice-President
|
|
Vice-President, Canadian
Pacific Railway Limited and
Vice- President Business
Information Technology
Services, Canadian Pacific
Railway Company;
Vice-President Information
Services, Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
D. B. Campbell
Calgary, Alberta, Canada
|
|
Vice-President
|
|
Vice-President, Corporate
Planning, Canadian Pacific
Railway Company and
Vice-President Business
Planning and Development,
Canadian Pacific Railway
Company; Assistant
Vice-President, Business
Development, Canadian Pacific
Railway Company; Assistant
Vice-President, Operations
Planning, Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
B. Grassby
Calgary, Alberta, Canada
|
|
Vice-President and
Comptroller
|
|
Vice-President and
Comptroller, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited |
|
|
|
|
|
|
|
|
|
P.A. Guthrie, Q.C.
Municipal District of Rockyview,
Alberta, Canada
|
|
Vice-President, Law
|
|
Vice-President, Law, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Assistant
Vice-President Legal Services
and General Counsel, Canadian
Pacific Railway Company; Chief
Regulatory Counsel, Canadian
Pacific Railway Company |
|
|
|
|
|
|
|
|
|
J. R. Legg
Calgary, Alberta, Canada
|
|
Vice-President
|
|
Vice-President, Canadian
Pacific Railway Limited and
Vice-President, Strategic
Initiatives, Canadian Pacific
Railway Company;
Vice-President, Strategic
Sourcing Group, Canadian
Pacific Railway Company;
President, RBC Centura Banks
Inc., Royal Bank of Canada;
Senior Vice-President,
Operations & Service Delivery,
North America, Royal Bank of
Canada; Chairman of the Board,
X.S. Cargo Income Trust |
|
|
|
|
|
|
|
|
|
J. A. OHagan
Calgary, Alberta, Canada
|
|
Vice-President
|
|
Vice-President, Canadian
Pacific Railway Limited and
Vice-President, Strategy and
External Affairs, Canadian
Pacific Railway Company;
Vice-President, Strategy
Research and New Market
Development, Assistant
Vice-President, Strategy and
Research , Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
T. A. Robinson
Calgary, Alberta, Canada
|
|
Vice-President and
Treasurer
|
|
Vice-President and Treasurer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Assistant
Treasurer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Assistant Comptroller,
Canadian Pacific Railway
Company; Assistant
Vice-President, Customer
Service, Canadian Pacific
Railway Company; General
Manager Operations, Customer
Service, Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
R. A. Shields
Calgary, Alberta, Canada
|
|
Vice-President
|
|
Vice-President, Canadian
Pacific Railway Limited and
Vice-President, Human
Resources and Industrial
Relations, Canadian Pacific
Railway Company |
|
26
SECTION 8: DIRECTORS AND OFFICERS
|
|
|
|
|
|
|
|
Name and municipality of residence |
|
Position held |
|
Principal occupation within the |
|
|
|
|
|
|
preceding five years |
|
|
|
|
|
D. F. Barnhardt
Calgary, Alberta, Canada
|
|
Corporate Secretary
|
|
Corporate Secretary, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Lawyer/Commercial
Coordinator, Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
|
|
K. Fleming
Calgary, Alberta, Canada
|
|
Associate Corporate
Secretary
|
|
Associate Corporate Secretary,
Canadian Pacific Railway
Limited and Canadian Pacific
Railway Company; Legal Counsel
& Employment Coordinator,
Canadian Pacific Railway
Company and Solicitor,
Canadian Pacific Railway
Company |
|
|
|
|
|
|
|
|
|
G.A. Feigel
Calgary, Alberta, Canada
|
|
Assistant Corporate
Secretary
|
|
Assistant Corporate Secretary,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited |
|
|
|
8.4 Shareholdings of Directors and Officers
As at December 31, 2007, the directors and senior officers, as a group, beneficially owned, either
directly or indirectly, or exercised control or direction over a total of 95,404 Common Shares of
CP, representing 0.06% of the outstanding Common Shares as of that date.
8.5 Announcements
In accordance with the Companys General By-Law, Mr. S.E. Bachand will retire from the Board of
Directors on May 9, 2008, as he has reached the retirement age of 70 years.
27
SECTION 9: LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the normal course of business.
Following are the only significant legal proceedings currently in progress.
9.1 Stoney Tribal Council v. Canada, EnCana and CP
On February 26, 1999, a Statement of Claim was issued in the Court of Queens Bench of Alberta,
Judicial Centre of Calgary. The Stoney Tribal Council filed an action against CP and others in the
amount of $150 million for alleged trespass and unlawful removal of oil and gas from reserve lands.
We believe adequate provision has been made in our financial statements for this lawsuit.
9.2 Derailment Minot, North Dakota
On January 18, 2002, one of our trains derailed outside of Minot, North Dakota. The site of the
derailment was immediately west of the city and adjacent to a residential neighbourhood.
Thirty-one cars of the 112 cars on the train derailed. Five cars containing anhydrous ammonia
catastrophically ruptured and a vapour plume covered the derailment site and surrounding area.
Immediately following the derailment, we began a process of environmental remediation and
monitoring at a cost in excess of US$8 million. In addition, we have settled in excess of 25,000
claims from individual residents of the Minot area for damages relating to the derailment,
including a class action lawsuit.
Approximately 300 individual claims filed against CP in Hennepin County, Minnesota remain to be
resolved. CP is working closely with its insurers in an attempt to resolve these claims through a
court sanctioned mediation process.
We believe adequate provision has been made in our financial statements for this lawsuit.
28
SECTION 10: TRANSFER AGENTS AND REGISTRARS
10.1 Transfer Agent
Computershare Investor Services Inc., with transfer facilities in Montreal, Toronto, Calgary and
Vancouver, serves as transfer agent and registrar for CPs Common Shares in Canada.
Computershare Trust Company NA, Denver, Colorado, serves as co-transfer agent and co-registrar for
CPs Common Shares in the United States.
Requests for information should be directed to:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario Canada
M5J 2Y1
29
SECTION 11: INTERESTS OF EXPERTS
The Companys auditors are PricewaterhouseCoopers LLP, Chartered Accountants.
PricewaterhouseCoopers LLP has prepared an independent auditors report dated February 19, 2008, in
respect of our consolidated financial statements, with accompanying notes as at December 31, 2007
and 2006 and for each of the years in the three year period ended December 31, 2007. They have
also prepared an audit report on the effectiveness of internal control over financial reporting, at
December 31, 2007. PricewaterhouseCoopers LLP has advised that it is independent with respect to
CP within the meaning of the Rules of Professional Conduct of the Institute of Chartered
Accountants of Alberta and the rules of the US Securities and Exchange Commission.
30
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
12.1 Composition of the Audit, Finance and Risk Management Committee and Relevant Education and
Experience
The following individuals comprise the entire membership of the Audit, Finance and Risk Management
Committee (the Committee).
Krystyna T. Hoeg - Ms. Hoeg is the former President and Chief Executive Officer of Corby
Distilleries Limited, a marketer and seller of spirits and wine, a position that she held from
October 1996 to February 2007. She is a director of Sun Life Financial Inc., Shoppers Drug Mart
Corporation, Cineplex Galaxy Income Fund, Ganong Bros. Limited and Samuel, Son & Co., Limited. She
is also a member of the Advisory Board, Woodrow Wilson Center Canada Institute. Ms. Hoeg is a
Chartered Accountant (1982) and holds a B.Sc. from McMaster University, and a B.Com. and an M.Sc.
from the University of Windsor.
John P. Manley - Mr. Manley is a senior counsel at the law firm of McCarthy Tétrault LLP. He has
held that position since May 2004. He is a director of Nortel Networks Corporation and Nortel
Networks Limited, Canadian Imperial Bank of Commerce and a director and Board Chair of Optosecurity
Inc. (a private company). In addition, Mr. Manley serves on the boards of the University of
Waterloo, MaRS (not-for-profit corporation founded by leaders from the business and public sectors
to improve commercial outcomes from Canadas foundation of science and technology innovation),
National Arts Center Foundation, CARE Canada, The Conference Board of Canada and the Institute for
Research on Public Policy. In October 2007 he was appointed Chair of the Independent Panel on
Canadas role in Afghanistan. Mr. Manley was previously the Member of Parliament for Ottawa South
from November 1988 to June 2004 and Chairman of the Ontario Power Generation Review Committee, from
December 2003 to March 2004. As a Member of Parliament, Mr. Manley also held various positions in
the Canadian Federal Government, including Deputy Prime Minister of Canada from January 2002 to
December 2003, Minister of Finance from June 2002 to December 2003, Chair of the Cabinet Committee
on Public Security and Anti-Terrorism from October 2001 to December 2003, Minister of Foreign
Affairs from October 2000 to January 2002 and Minister of Industry prior thereto. He graduated
from Carleton University with a B.A. and from the University of Ottawa with an LL.B. He was
granted the designation C.Dir (Chartered Director) by McMaster University in February 2006.
Madeleine Paquin - Ms. Paquin is the President and Chief Executive Officer and a director of
Logistec Corporation, an international cargo-handling company. She has held that position since
January 1996. She is also a director of Aéroports de Montréal. She graduated from École des
Hautes Études Commerciales, Université de Montréal with a G.D.A.S. and from the Richard Ivey School
of Business, University of Western Ontario with an H.B.A.
Roger Phillips (Chair) - Mr. Phillips is the Retired President and Chief Executive Officer of IPSCO
Inc., a steel manufacturing company. He held that position from February 1982 until his retirement
in December 2001. He is a director of Toronto Dominion Bank, Imperial Oil Limited and
Cleveland-Cliffs Inc. Mr. Phillips is a Fellow of the Institute of Physics and a Member of the
Canadian Association of Physicists. He is also President of La Sauciere Investments Inc., a
private company. He was appointed an Officer of the Order of Canada in 1999 and was presented with
the Saskatchewan Order of Merit in 2002. He graduated from McGill University in Montreal with a
B.Sc. in Physics and Mathematics.
Hartley T. Richardson - Mr. Richardson is President and Chief Executive Officer of James Richardson
& Sons, Limited, a privately owned corporation involved in the international grain trade, real
estate, oil and gas development, family wealth management services, and private equity investments.
He has held that position since April 1993. Mr. Richardson is a director of Angiotech
Pharmaceuticals, Inc. He is the Past-Chairman of the Business Council of Manitoba and
Vice-Chairman of the Canadian Council of Chief Executives. Mr. Richardsons other affiliations
include The Trilateral Commission and the World Economic Forum Global Leaders of Tomorrow, and the
Young Presidents Organization. He is involved in a number of charitable endeavours and community
organizations. He graduated from the University of Manitoba in Winnipeg with a B.Com. (Hons.).
The University of Manitoba conferred upon Mr. Richardson the honorary degree of Doctor of Laws in
2004 and he was appointed to the Order of Canada in 2007.
Michael W. Wright - Mr. Wright is the Retired Chairman of the Board and Chief Executive Officer of
SUPERVALU INC., a food distributor and grocery retailer. He was Chairman and Chief Executive
Officer from June 1981 to June 2001 and Chairman until June 2002. He is a Past Chairman of Food
Distributors International and the Food Marketing Institute, and is a director of Wells Fargo &
Company, Honeywell International, Inc., S.C. Johnson & Son, Inc., and Cargill Inc. He is a Trustee
Emeritus of the
University of Minnesota Foundation and the Board of Trustees of St. Thomas Academy. He graduated
from the University of Minnesota with a B.A. and from the University of Minnesota Law School with a
J.D. (Honours).
Each of the aforementioned committee members has been determined by the board to be independent and
financially literate within the meaning of Multilateral Instrument 52-110.
31
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
12.2 Pre-Approval of Policies and Procedures
The Committee has adopted a written policy governing the pre-approval of audit and non-audit
services to be provided to CP by our independent auditors. The policy is reviewed annually and the
audit and non-audit services to be provided by our independent auditors, as well as the budgeted
amounts for such services, are pre-approved at that time. Our Vice-President and Comptroller must
submit to the Committee at least quarterly a report of all services performed or to be
performed by our independent auditors pursuant to the policy. Any additional audit or non-audit
services to be provided by our independent auditors either not included among the pre-approved
services or exceeding the budgeted amount for such pre-approved services by more than 10% must be
individually pre-approved by the Committee or its Chairman, who must report all such additional
pre-approvals to the Committee at its next meeting following the granting thereof. Our independent
auditors annual audit services engagement terms and fees are subject to the specific pre-approval
of the Committee. In addition, prior to the granting of any pre-approval, the Committee or its
Chairman, as the case may be, must be satisfied that the performance of the services in question
will not compromise the independence of our independent auditors. Our Chief Internal Auditor
monitors compliance with this policy.
12.3 Audit, Finance and Risk Management Committee Charter
The term Corporation herein shall refer to each of Canadian Pacific Railway Limited (CPRL) and
Canadian Pacific Railway Company (CPRC), and the terms Board, Directors, Board of Directors
and Committee shall refer to the Board, Directors, Board of Directors, or Committee of CPRL or
CPRC, as applicable.
A. Committee and Procedures
The purposes of the Audit, Finance and Risk Management Committee (the Committee) of the Board
of Directors of the Corporation are to fulfill applicable public company audit committee legal
obligations and to assist the Board of Directors in fulfilling its oversight responsibilities
in relation to the disclosure of financial statements and information derived from financial
statements, and in relation to risk management matters including:
|
|
|
the review of the annual and interim financial statements of the Corporation; |
|
|
|
|
the integrity and quality of the Corporations financial reporting and systems
of internal control, and risk management; |
|
|
|
|
the Corporations compliance with legal and regulatory requirements; |
|
|
|
|
the qualifications, independence, engagement, compensation and performance of
the Corporations external auditors; and |
|
|
|
|
the performance of the Corporations internal audit function; |
and to prepare, if required, an audit committee report for inclusion in the Corporations
annual management proxy circular, in accordance with applicable rules and regulations.
The Corporations external auditors shall report directly to the Committee.
2. |
|
Composition of Committee |
The members of the Committee of each of CPRL and CPRC shall be identical and shall be Directors
of CPRL and CPRC, respectively. The Committee shall consist of not less than three and not
more than six Directors, none of whom is either an officer or employee of the Corporation or
any of its subsidiaries. Members of the Committee shall meet applicable requirements and
guidelines for audit committee service, including requirements and guidelines with respect to
being independent and unrelated to the Corporation and to having accounting or related
financial management expertise and financial literacy, set forth in applicable securities laws
or the rules of any stock exchange on which the Corporations securities are listed for
trading. No director who serves on the audit committee of more than two public companies other
than the Corporation shall be eligible to serve as a member of the Committee, unless the Board
of Directors has determined that such simultaneous service would not impair the ability of such
member to effectively serve on the Committee. Determinations as to whether a particular
Director satisfies the requirements for membership on the Committee shall be affirmatively made
by the full Board.
3. |
|
Appointment of Committee Members |
Members of the Committee shall be appointed from time to time by the Board and shall hold
office at the pleasure of the Board. Where a vacancy occurs at any time in the membership of
the Committee, it may be filled by the Board. The Board shall fill a vacancy whenever
necessary to maintain a Committee membership of at least three Directors.
32
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
The Board shall appoint a Chair for the Committee from among the Committee members.
5. |
|
Absence of Committee Chair |
If the Chair of the Committee is not present at any meeting of the Committee, one of the other
members of the Committee who is present at the meeting shall be chosen by the Committee to
preside at the meeting.
6. |
|
Secretary of Committee |
The Committee shall appoint a Secretary who need not be a director of the Corporation.
The Committee shall meet at regularly scheduled meetings at least once every quarter and shall
meet at such other times during each year as it deems appropriate. In addition, the Chair of
the Committee may call a special meeting of the Committee at any time.
Three members of the Committee shall constitute a quorum.
Notice of the time and place of every meeting shall be given in writing by any means of
transmitted or recorded communication, including facsimile, telex, telegram or other electronic
means that produces a written copy, to each member of the Committee at least 24 hours prior to
the time fixed for such meeting; provided however, that a member may in any manner waive a
notice of a meeting. Attendance of a member at a meeting constitutes a waiver of notice of the
meeting, except where a member attends a meeting for the express purpose of objecting to the
transaction of any business on the grounds that the meeting is not lawfully called.
10. |
|
Attendance of Others at Meetings |
At the invitation of the Chair of the Committee, other individuals who are not members of the
Committee may attend any meeting of the Committee.
11. |
|
Procedure, Records and Reporting |
Subject to any statute or the articles and by-laws of the Corporation, the Committee shall fix
its own procedures at meetings, keep records of its proceedings and report to the Board when
the Committee may deem appropriate (but not later than the next meeting of the Board). The
minutes of its meetings shall be tabled at the next meeting of the Board.
The Committee may delegate from time to time to any person or committee of persons any of the
Committees responsibilities that lawfully may be delegated.
13. |
|
Report to Shareholders |
The Committee shall prepare a report to shareholders or others concerning the Committees
activities in the discharge of its responsibilities, when and as required by applicable laws or
regulations.
14. |
|
Guidelines to Exercise of Responsibilities |
The Board recognizes that meeting the responsibilities of the Committee in a dynamic business
environment requires a degree of flexibility. Accordingly, the procedures outlined in these
Terms of Reference are meant to serve as guidelines rather than inflexible rules, and the
Committee may adopt such different or additional procedures as it deems necessary from time to
time.
15. |
|
Use of Outside Legal, Accounting or Other Advisors; Appropriate Funding |
The Committee may retain, at its discretion, outside legal, accounting or other advisors, at
the expense of the Corporation, to obtain advice and assistance in respect of any matters
relating to its duties, responsibilities and powers as provided for or imposed by these Terms
of Reference or otherwise by law.
33
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
The Committee shall be provided by the Corporation with appropriate funding, as determined by
the Committee, for payment of:
|
(i) |
|
compensation of any outside advisers as contemplated by the immediately
preceding paragraph; |
|
|
(ii) |
|
compensation of any independent auditor engaged for the purpose of preparing or
issuing an audit report or performing other audit, review or attest services for the
Corporation; or |
|
|
(iii) |
|
ordinary administrative expenses that are necessary or appropriate in carrying
out the Committees duties. |
All outside legal, accounting or other advisors retained to assist the Committee shall be
accountable ultimately to the Committee.
16. |
|
Remuneration of Committee Members |
No member of the Committee shall receive from the Corporation or any of its affiliates any
compensation other than the fees to which he or she is entitled as a Director of the
Corporation or a member of a committee of the Board. Such fees may be paid in cash and/or
shares, options or other in-kind consideration ordinarily available to Directors.
B. Mandate
17. |
|
The Committees role is one of oversight. Management is responsible for preparing the
interim and annual financial statements of the Corporation and for maintaining a system of
risk assessment and internal controls to provide reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded and reported properly, for
maintaining disclosure controls and procedures to ensure that it is informed on a timely basis
of material developments and the Corporation complies with its public disclosure obligations,
and for ensuring compliance by the Corporation with legal and regulatory requirements. The
external auditors are responsible for auditing the Corporations financial statements. In
carrying out its oversight responsibilities, the Committee does not provide any professional
certification or special assurance as to the Corporations financial statements or the
external auditors work. |
|
|
|
The Committee shall: |
|
|
|
Audit Matters |
|
|
|
External Auditors Report on Annual Audit |
|
a) |
|
obtain and review annually prior to the completion of the external auditors annual
audit of the year-end financial statements a report from the external auditors describing: |
|
(i) |
|
all critical accounting policies and practices to be used; |
|
|
(ii) |
|
all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with management, the
ramifications of the use of such alternative disclosures and treatments, and the
treatment preferred by the external auditors; and |
|
|
(iii) |
|
other material written communications between the external auditors and
management, such as any management letter or schedule of unadjusted differences; |
Managements and Internal Auditors Reports on External Audit Issues
|
b) |
|
review any reports on the above or similar topics prepared by management or the
internal auditors and discuss with the external auditors any material issues raised in
such reports; |
Annual Financial Reporting Documents and External Auditors Report
|
c) |
|
meet to review with management, the internal auditors and the external auditors the
Corporations annual financial statements, the report of the external auditors thereon,
the related Managements Discussion and Analysis, and the information derived from the
financial statements, as contained in the Annual Information Form and the Annual Report.
Such review will include obtaining assurance from the external auditors that the audit was
conducted in a manner consistent with applicable law and will include a review of: |
|
(i) |
|
all major issues regarding accounting principles and financial statement
presentations, including any significant changes in the Corporations selection or
application of accounting policies or principles; |
|
|
(ii) |
|
all significant financial reporting issues and judgments made in
connection with the preparation of the financial statements, including the effects
on the financial statements of alternative methods within generally accepted
accounting principles; |
34
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(iii) |
|
the effect of regulatory and accounting issues, as well as off-balance
sheet structures, on the financial statements; |
|
|
(iv) |
|
all major issues as to the adequacy of the Corporations internal
controls and any special steps adopted in light of material control deficiencies;
and |
|
|
(v) |
|
the external auditors judgment about the quality, and not just the
acceptability, of the accounting principles applied in the Corporations financial
reporting; |
|
d) |
|
following such review with management and the external auditors, recommend to the
Board of Directors whether to approve the audited annual financial statements of the
Corporation and the related Managements Discussion and Analysis, and report to the Board
on the review by the Committee of the information derived from the financial statements
contained in the Annual Information Form and Annual Report; |
Interim Financial Statements and MD&A
|
e) |
|
review with management, the internal auditors and the external auditors the
Corporations interim financial statements and its interim Managements Discussion and
Analysis, and if thought fit, approve the interim financial statements and interim
Managements Discussion and Analysis and the public release thereof by management; |
Earnings Releases, Earnings Guidance
|
f) |
|
review and discuss earnings press releases, including the use of pro forma or
adjusted information determined other than in accordance with generally accepted
accounting principles, and the disclosure by the Corporation of earnings guidance and
other financial information to the public including analysts and rating agencies, it being
understood that such discussions may, in the discretion of the Committee, be done
generally (i.e., by discussing the types of information to be disclosed and the type of
presentation to be made) and that the Committee need not discuss in advance each earnings
release or each instance in which the Corporation discloses earnings guidance or other
financial information; and be satisfied that adequate procedures are in place for the
review of such public disclosures and periodically assess the adequacy of those
procedures; |
Material Litigation, Tax Assessments, Etc.
|
g) |
|
review with management, the external auditors and, if necessary, legal counsel all
legal and regulatory matters and litigation, claims or contingencies, including tax
assessments, that could have a material effect upon the financial position of the
Corporation, and the manner in which these matters may be, or have been, disclosed in the
financial statements; and obtain reports from management and review with the Corporations
chief legal officer, or appropriate delegates, the Corporations compliance with legal and
regulatory requirements; |
Oversight of External Auditors
|
h) |
|
subject to applicable law relating to the appointment and removal of the external
auditors, be directly responsible for the appointment, retention, termination,
compensation and oversight of the external auditors; and be responsible for the resolution
of disagreements between management and the external auditors regarding financial
reporting; |
Rotation of External Auditors Audit Partners
|
i) |
|
review and evaluate the lead audit partner of the external auditors and assure the
regular rotation of the lead audit partner and the audit partner responsible for reviewing
the audit and other audit partners, as required by applicable law; and consider whether
there should be a regular rotation of the external audit firm itself; |
External Auditors Internal Quality Control
|
j) |
|
obtain and review, at least annually, and discuss with the external auditors a report
by the external auditors describing the external auditors internal quality-control
procedures, any material issues raised by the most recent internal quality-control review,
or peer review, of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, respecting one
or more independent audits carried out by the external auditors, and any steps taken to
deal with any such issues; |
External Auditors Independence
|
k) |
|
review and discuss at least annually with the external auditors all relationships
that the external auditors and their affiliates have with the Corporation and its
affiliates in order to assess the external auditors independence, including, without
limitation: |
35
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(i) |
|
obtaining and reviewing, at least annually, a formal written statement
from the external auditors delineating all relationships that in the external
auditors professional judgment may reasonably be thought to bear on the
independence of the external auditors with respect to the Corporation, |
|
|
(ii) |
|
discussing with the external auditors any disclosed relationships or
services that may affect the objectivity and independence of the external auditors,
and |
|
|
(iii) |
|
recommending that the Board take appropriate action in response to the
external auditors report to satisfy itself as to the external auditors
independence; |
Policies Regarding Hiring of External Auditors Employees and Former Employees
|
l) |
|
set clear policies for the hiring by the Corporation of partners, employees and
former partners and employees of the external auditors; |
Pre-Approval of Audit and Non-Audit Services Provided by External Auditors
|
m) |
|
be solely responsible for the pre-approval of all audit and non-audit services to be
provided to the Corporation and its subsidiary entities by the external auditors (subject
to any prohibitions provided in applicable law), and of the fees paid for these services;
provided however, that the Committee may delegate to an independent member or members of
the Committee authority to pre-approve such non-audit services, and such member(s) shall
report to the Committee at its next meeting following the granting any pre-approvals
granted pursuant to such delegated authority; |
|
|
n) |
|
review the external auditors annual audit plan (including scope, staffing, reliance
on internal controls and audit approach); |
|
|
o) |
|
review the external auditors engagement letter; |
Oversight of Internal Audit
|
p) |
|
oversee the internal audit function by reviewing senior management action with
respect to the appointment or dismissal of the Chief Internal Auditor; afford the Chief
Internal Auditor unrestricted access to the Committee; review the charter, activities,
organizational structure, and the skills and experience of the Internal Audit Department;
discuss with management and the external auditors the competence, performance and
cooperation of the internal auditors; and discuss with management the compensation of the
internal auditors; |
|
|
q) |
|
review and consider, as appropriate, any significant reports and recommendations
issued by the Corporation or by any external party relating to internal audit issues,
together with managements response thereto; |
Internal Controls and Financial Reporting Processes
|
r) |
|
review with management, the internal auditors and the external auditors, the
Corporations financial reporting processes and its internal controls; |
|
|
s) |
|
review with the internal auditors the adequacy of internal controls and procedures
related to any corporate transactions in which directors or officers of the Corporation
have a personal interest, including the expense accounts of officers of the Corporation at
the level of Vice-President and above and officers use of corporate assets, and consider
the results of any reviews thereof by the internal or external auditors; |
Complaints Processes
|
t) |
|
establish procedures for: |
|
(i) |
|
the receipt, retention and treatment of complaints received by the
Corporation regarding accounting, internal accounting controls or auditing matters,
and |
|
|
(ii) |
|
the confidential, anonymous submission by employees of the Corporation of
concerns regarding questionable accounting or auditing matters, |
and review periodically with management and the internal auditors these procedures and any
significant complaints received;
Separate Meetings with External Auditors, Internal Audit, Management
|
u) |
|
meet separately with management, the external auditors and the internal auditors
periodically to discuss matters of mutual interest, including any audit problems or
difficulties and managements response thereto, the responsibilities, budget and staffing
of the Internal Audit Department and any matter they recommend bringing to the attention
of the full Board; |
36
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
Finance
|
v) |
|
review all major financings, including financial statement information contained in
related prospectuses, information circulars, etc., of the Corporation and its subsidiaries
and annually review the Corporations financing plans and strategies; |
|
|
w) |
|
review managements plans with respect to Treasury operations, including such items
as financial derivatives and hedging activities; |
Risk Management
|
x) |
|
discuss risk assessment and risk management policies and processes to be implemented
for the Corporation, review with management and the Corporations internal auditors the
effectiveness and efficiency of such policies and processes and their compliance with
other relevant policies of the Corporation, and make recommendations to the Board with
respect to any outcomes, findings and issues arising in connection therewith; |
|
|
y) |
|
review managements program to obtain appropriate insurance to mitigate risks; |
Terms of Reference and Performance Evaluation of Committee
|
z) |
|
review and reassess the adequacy of these Terms of Reference at least annually, and
otherwise as it deems appropriate, and recommend changes to the Board. The Committee
shall also undertake an annual evaluation of the Committees performance. |
Other
|
aa) |
|
perform such other activities, consistent with these Terms of Reference, the
Corporations articles and by-laws and governing law, as the Committee or the Board deems
appropriate. |
|
|
bb) |
|
report regularly to the Board of Directors on the activities of the Committee. |
12.4 Audit and Non-Audit Fees and Services
Fees payable to PricewaterhouseCoopers LLP for the years ended December 31, 2007, and December 31,
2006, totalled $3,433,980 and $2,824,200, respectively, as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2007 |
|
December 31, 2006 |
|
Audit Fees |
|
$ |
2,391,600 |
|
|
$ |
2,118,000 |
|
Audit-Related Fees |
|
$ |
619,780 |
|
|
$ |
438,900 |
|
Tax Fees |
|
$ |
422,600 |
|
|
$ |
267,300 |
|
All Other Fees |
|
$ |
|
|
|
$ |
|
|
|
TOTAL |
|
$ |
3,433,980 |
|
|
$ |
2,824,200 |
|
|
The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
12.4.1 Audit Fees
Audit fees were for professional services rendered for the audit of CPs annual financial
statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors report on
managements report on internal controls for financial reporting.
12.4.2 Audit-Related Fees
Audit-related fees were for attestation and related services reasonably related to the performance
of the audit or review of the annual financial statements, but which are not reported under Audit
Fees above. These services consisted of: the audit or review of financial statements of certain
subsidiaries and of various pension and benefits plans of CP; special attestation services as may
be required by various government entities; assistance with preparations for compliance with
Section 404 of the Sarbanes-Oxley Act of 2002; due diligence services related to potential business
acquisition targets; access fees for technical
accounting database resources; and general advice and assistance related to accounting and/or
disclosure matters with respect to new and proposed Canadian and US Accounting Guidelines,
securities regulations, and/or laws.
37
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
12.4.3 Tax Fees
Tax fees were for professional services related to tax compliance, tax planning and tax advice.
These services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding corporate tax audits; tax planning and advisory services relating to common
forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax,
and valued added tax); and access fees for taxation database resources.
12.4.4 All Other Fees
Fees disclosed under this category would be for products and services other than those described
under Audit Fees, Audit-Related Fees and Tax Fees above. In both 2007 and 2006, there were
no services in this category.
38
SECTION 13: ADDITIONAL INFORMATION
13.1 Additional Company Information
Additional information about CP is available on SEDAR (System for Electronic Document Analysis and
Retrieval) at www.sedar.com in Canada, and on the US Securities and Exchange Commissions
website (EDGAR) at www.sec.gov. The aforementioned information is issued and made
available in accordance with legal requirements and is not incorporated by reference into this AIF
except as specifically stated.
Additional information, including directors and officers remuneration and indebtedness, principal
holders of our securities and securities authorized for issuance under equity compensation plans,
where applicable, is contained in the information circular for our most recent annual meeting of
shareholders at which directors were elected.
Additional financial information is provided in our Consolidated Financial Statements and MD&A for
the most recently completed financial year.
This information is also available on our website at www.cpr.ca.
39
Suite 500 Gulf Canada Square
401 9th Avenue SW
Calgary Alberta T2P 4Z4
CANADIAN PACIFIC 2007 Annual Information Form
|
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|
|
|
OUR VISION IS TO BE THE SAFEST, MOST FLUID RAILWAY IN NORTH AMERICA |
|
At Canadian Pacific, we are committed to the safety of our
employees and our communities and protecting the environment where
we operate. As part of our protocol, every employee is instructed to
first protect themselves and the safety of their colleagues, next
look to the safety of the community, and then ensure that the
environment is protected. Finally, when each of these criteria has
been met, we turn to continuing train operations. Canadian Pacific
operates through more than 900 communities and through some of the
most incredible landscapes in North America. It is our
responsibility to protect this legacy for future generations. |
|
FRED J. GREEN
President and Chief Executive Officer
|
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1 Financial Highlights
|
|
9 |
|
Managements
Discussion and
Analysis
|
|
112
|
|
Directors & Committees |
|
5 Chairmans Letter to Shareholders
|
|
60 |
|
Financial Statements
|
|
ibc
|
|
Senior Officers of the Company |
|
6 CEOs Letter to Shareholders
|
|
110 |
|
Shareholder Information |
|
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|
2007 was a year with many
challenges including a very
strong Canadian dollar and
volatile fuel prices.
However, we delivered
in-line with our EPS
guidance making this the
fourth consecutive year that
we met or exceeded our
guidance.
MICHAEL LAMBERT
Executive Vice-President
and Chief Financial Officer
|
|
|
|
|
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|
For the year ended December 31 |
|
|
|
|
|
|
(in millions except percentages and per share data) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,707.6 |
|
|
$ |
4,583.2 |
|
Operating income |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
Income, before FX on LTD and other specified items
(1) |
|
|
672.8 |
|
|
|
627.5 |
|
Net income |
|
|
946.2 |
|
|
|
796.3 |
|
|
Diluted earnings per share, before FX
on LTD and other specified items (1) |
|
|
4.32 |
|
|
|
3.95 |
|
Diluted earnings per share |
|
|
6.08 |
|
|
|
5.02 |
|
Dividends declared per share |
|
|
0.90 |
|
|
|
0.75 |
|
|
Free cash (1) |
|
|
303.4 |
|
|
|
244.9 |
|
Additions to properties |
|
|
893.2 |
|
|
|
793.7 |
|
Operating ratio, before other specified items (1) |
|
|
75.3 |
% |
|
|
75.4 |
% |
Return on capital employed (1) |
|
|
9.5 |
% |
|
|
10.2 |
% |
|
|
(1) These earnings measures have no standardized
meaning prescribed by Canadian GAAP and, therefore, are unlikely
to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in
Managements Discussion and Analysis in Section 6.0 Non-GAAP
Earnings and Section 10.0 Other specified items.
CP is proud to be the official
rail freight services provider
for the Vancouver 2010 Olympic
and Paralympic Winter Games. On
September 24, 2007, CP unveiled
the first of its new Olympic
Games branded locomotives.
These GE Evolution Series
locomotives offer the latest in
green locomotive technology.
Compared to locomotives
manufactured 20 years ago, the
Evolution Series locomotives
produce 60 % fewer smog
pollutants and are 20 % more
fuel efficient. Canadian
Pacific will connect Canadians
with the spirit of the 2010
Winter Games through its close
connection to the hundreds of
communities in Canada in which
it operates.
|
|
|
CPs diverse customer and traffic base and a continued
focus on our proven strategy of quality revenue
growth, consisting of a disciplined yield focus and
aggressive market development drove good results in
2007 despite some volatility in some of the markets.
Our destination markets have a healthy diversification
linked to global, cross-border and domestic markets.
Less than 40 % of CPs book of business is directly
linked to North American GDP. With key customer
investments in new capacity, a growing portfolio of
strategic accounts and strong global fundamentals and
markets, CP is in-motion and poised to continue its
strong performance.
|
|
|
BULK
Our bulk portfolio makes up
approximately 44 % of our
revenues and is made up of
grain, coal, sulphur and
fertilizers. These commodities
have a global reach with more
than two-thirds of our bulk
portfolio exported overseas.
Strong economic growth in Asia
has led to the steady upgrade
of diets higher in protein,
which in turn is creating
demand for increased
fertilizers and grain.
Continued demand for Canadian
metallurgical coal, used in the
steel industry, has also
supported solid Canadian coal
exports. With strong global
demand for these bulk products
in 2007, CP delivered 4 %
year-over-year bulk revenue
growth in 2007 against a strong
year in 2006.
INTERMODAL
Our Intermodal line of
business, representing 29 % of
freight revenues, handles
goods moving in containers.
This encompasses both domestic
movements within North
America, and the international
portion of the business that
moves import and export
containers from the ports of
Vancouver, Montreal, New
York/New Jersey and
Philadelphia to various
destinations within Canada and
the US, and from key markets
within North America to
various ports for export. With
continuing strong demand for
overseas products, combined
with our strategic and
diversified customer base, our
Intermodal business has
delivered consistent growth
since 2003.
We have invested in terminals,
containers, rail cars and
technology systems and we are
seeing that investment pay
off. CP delivered another
strong year in 2007 with 5 %
year-over-year revenue growth.
MERCHANDISE
The Merchandise line of
business is made up of
manufactured and
semi-manufactured goods that
generally move in less than
full train shipments. It
includes automotive, forest,
industrial and consumer
products and makes up 27 % of
CPs revenue. Industrial and
consumer products, including
pipe, chemicals and energy,
structural steel and
dimensional machinery are key
requirements in Albertas
rapidly expanding oil sands
developments and this business
drove year-over-year growth of
4 % in 2007. CPs strategic
partners in the automotive
business include the New
Domestics who continue to grow
through new investments like
Toyotas Woodstock, Ontario
facility that will be
exclusively served by CP when
it opens this fall. With key
strategic partners and the
recent announcement to expand
our infrastructure in Albertas
Industrial Heartland, CP is
positioned for growth in its
Merchandise franchise.
Weve delivered over the past
four years by focusing on
Execution Excellence. Its at
the core of our game plan that
builds on our fundamentals of
quality revenue growth, improved
productivity and our talented
and dedicated people. Its how
weve been successful in the
past and how we are creating
both near term performance
improvement and shareholder
value going forward.
QUALITY REVENUE GROWTH
Our quality revenue growth
initiatives have delivered
topline growth over the last
three years as rail
fundamentals remain strong and
continue to provide pricing
opportunities. Our diverse
franchise
and the global nature of our
Book of Business provides
balance and has tempered the
impact of some of the
slowdowns we have seen in some
sectors of the North American
economy. In 2007, continuing
strong demand in global
markets drove a market
environment that supported
improved yield.
PRODUCTIVITY
A relentless focus on
improving fluidity in all
aspects of our business has
produced results. Our three
core design principles of
velocity, balance and network
approach have driven
improvements. Initiatives that
have improved asset velocity,
streamlined processes, and
eliminated waste and rework
have yielded productivity
gains and resulted in cost
savings. In 2007, we faced a
number of operating
challenges, but with our
balanced Integrated Operating
Plan, we found ways to deliver
improved unit cost
performance. We moved a record
workload of 246 billion GTMs
while maintaining our position
as the industry leader in
train operations safety.
PEOPLE
An engaged and productive
workforce is the very
foundation of our success. The
ideas and ingenuity of our
people are constantly
challenging the status quo;
looking for ways to do things
better, more efficiently, more
safely. Every employee at CP
is charged with pursuing
Execution Excellence, in the
delivery of a superior product
that meets our customers
needs. Through our people we
will achieve our vision of
being the safest, most fluid
railway in North America.
|
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2007 ANNUAL REPORT |
|
4 |
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|
CHAIRMANS LETTER TO SHAREHOLDERS
February 19, 2008
Todays North American rail industry is playing a pivotal and growing role in driving the
continents economic prosperity and competitiveness, and Canadian Pacific is at the centre of the
action. CP is leading the industry in train operations safety and in finding new, innovative ways
to improve efficiency at all levels of the Organization to provide best-in-class scheduled railway
service for its customers.
CP is growing both organically and by seizing new opportunities, such as the Companys two major
initiatives in 2007 the acquisition of the Dakota, Minnesota & Eastern Railroad Corporation
(DM&E); and its expansion into Albertas growing Industrial Heartland.
There are strong, natural synergies between CP and the DM&E; a growing regional railroad. In
addition to the purchase price of US$1.48 billion, CP has committed to spending an additional
US$300 million for further upgrading of the DM&E over the next several years. The purchase is still
subject to approval by the US Surface Transportation Board (STB) and that decision is expected by
late September 2008.
CPs network expansion in Albertas Industrial Heartland northeast of Edmonton positions the
Company for growth tied to Canadas booming oil sands region. Over $20 billion is earmarked for
development in the Industrial Heartland, and two major oil sands upgraders are already under
construction there.
In our capacity of advising management on the development of the Companys strategy, your Board was
actively involved in both decisions. The Board holds regular strategy sessions with management
where we review in detail the Companys strategic directions.
The Board monitors implementation of the strategy by management, approves major transactions and
tracks the outcomes of these transactions on an ongoing basis.
To assist in the fulfillment of Board responsibilities, weve continued with our education and
orientation program for Directors to ensure they are fully conversant with CP and the railway
industry. The program includes orientation, site visits, education sessions and a Directors
Handbook. In 2007, the Board toured CPs network management centre in Calgary as well as rail
facilities in southern Ontario, including a customer auto facility and associated rail
infrastructure. Board meetings were held in Cambridge, Ontario, Montreal and Calgary.
We also enhanced our Board committee structure in 2007.
We changed the composition of the Corporate Governance and Nominating Committee. Instead of being
composed of all independent members of the Board, it is now composed of the chairpersons of all
five Board committees.
In recognition of its expanded oversight mandate, the Environmental and Safety Committee has been
renamed the Health, Safety, Security and Environment Committee. CPs President and Chief Executive
Officer Fred Green joined the committee so it can benefit from his strong interest and expertise in
health, safety, security and environmental matters. This further demonstrates the Boards
commitment to working with management to ensure the Company always sets as a priority the health
and safety of employees and the public, the security of the railway, and environmental stewardship.
The Board is pleased that management is continuing to enhance disclosure and financial reporting
controls in accordance with best practices. Again this year, management
is reporting that its
internal controls are effective in accordance with the provisions of the Sarbanes-Oxley Act of
2002.
Stephen Bachand is retiring from the Board in May and on behalf of the whole Board I wish to thank
him for his years of valuable service and in particular for the important contributions he made to
deliberations on corporate governance, management resources and compensation, and pensions. In
2007, we were pleased to welcome Krystyna Hoeg to the Board and we already appreciate the level of
insight she brings to our discussions.
In closing I want to thank Fred Green, his management team and all of the Companys employees for
their impressive efforts in 2007. They grasped opportunities, responded quickly to challenges and
delivered solid results. In his letter, Fred Green refers to North Americas rail renaissance. CP
is a leader in that renaissance and by
applying the latest technologies and through the ingenuity of CP employees, I am confident your
Company will continue to lead the way.
JOHN E. CLEGHORN, O.C., FCA
Chairman of Board
CHIEF EXECUTIVE OFFICERS LETTER TO SHAREHOLDERS
February 19, 2008
Canadian Pacific is a company in motion, focused on delivering solid results for our shareholders
and making a great franchise even better by building on our significant operational and financial
strengths. Our vision is to be the safest, most fluid railway in North America and achieving this
goal is based on driving quality revenue growth, improving productivity and developing our people.
Through the disciplined implementation of these three pillars, CP is emerging as a high-performance
organization and we are positioned to grow.
CPs financial results in 2007 were in-line with our target range despite significant headwinds,
including extreme weather events across our network, labour disruptions, fuel price escalation and
a stronger Canadian dollar. We overcame these challenges and met our earnings per share guidance
for the fourth consecutive year.
Through our Integrated Operating Plan and co-production agreements with other railways, we have
already delivered more than $100 million in savings and productivity improvements in the past three
years and plan to deliver more in the future.
We will continue to improve productivity and performance through Execution Excellence.
With a record of solid financial and operational performance, we are now well-positioned for
growth. We announced two strategic initiatives in 2007 that have added an exciting new dimension to
our franchise.
We acquired Dakota, Minnesota & Eastern Railroad Corporation (DM&E), the largest regional railroad
in the US.
We also moved forward with our plan to expand capacity in Albertas booming Industrial Heartland
northeast of Edmonton. In 2007, we assembled a rail corridor and lands for development of freight
yards and transload facilities.
We continue to see growth in Asia-Pacific trade through the Port of Vancouver, and we are
encouraged that the support of the governments of Canada and British Columbia will keep a focus on
the need for infrastructure investment in the Pacific Gateway corridor. It is critical that all
supply chain partners are engaged to ensure adequate capacity to handle future growth.
Safety is the hallmark of CPs culture and our corporate identity and we continue to be the
industry leader in train operation safety.
However, for CPs leadership team, this is not good enough. We recognize that we must continuously
earn our position as a safety leader, so we are accelerating plans to further improve our safety
program. We were deeply saddened last year by the loss of one of our colleagues, locomotive
engineer Lonnie Plasko, in a train derailment in British Columbia, and this tragedy is a reminder
that our work on safety is never complete.
2007 was a busy year for collective agreements with our unions and we now have several new,
progressive agreements in place that have been ratified.
CP continues to invest in the communities where we operate and where our employees and their
families live. Our popular Holiday Train program again played an important role in 2007 in raising
food, money and awareness for local food banks in Canada and the US. CP will help British Columbia
mark its 150th anniversary in 2008 by sponsoring the CP BC Spirit of 150 Rail Tour, a historic
train pulled by CPs Empress 2816 steam locomotive that will visit communities along CPs route in
the province. CP is also proud to be the official rail freight services provider for the Vancouver
2010 Olympic and Paralympic
Winter Games. To be part of this great Canadian event, which will
engage our employees and the communities in which we operate, over the next two years, is truly
exciting.
I believe North Americas rail renaissance is here to stay, but over the next 20 years the rail
industry will need to reach new performance levels in order to meet many challenges demographic
changes; safety and security; environmental issues and climate change; volume growth; and a need
for asset renewal. This will require our
industry to fundamentally re-engineer core work processes through implementation of new and
emerging technologies. At CP, we have created a 20-year Railway of the Future vision, complete
with specific design objectives that will be our roadmap to addressing these industry issues.
North Americas environmental challenges alone offer the rail industry a significant leadership
opportunity. By its nature, rail is an environmentally friendly mode of transport; one double-stack
intermodal train takes approximately 250 trucks off of our congested and publicly-funded highways.
CP has made significant progress in reducing
its carbon footprint through a number of initiatives.
From 1990 through 2006, CPs freight volumes (as measured by revenue ton-miles) increased 37 %,
while our overall emissions increased only 4 %.
Although the economic forecast for 2008 holds the uncertainty of a softer US economy, an increase
in fuel costs and a strong Canadian dollar, CP entered the year with good market demand for its
bulk commodity franchise. Rail fundamentals are strong by historic standards, and CPs diverse
portfolio and the global nature of our business positions us well. In 2008, we are projecting
growth in diluted earnings per share of 8 % to 11 %, revenue growth of 4 % to 6 %, and free cash flow
in excess of $250 million.
2007 was a year with many unique external forces including stock market uncertainty, a
strengthening Canadian dollar, a major increase in fuel prices and unprecedented credit issues in
the marketplace. We are fortunate to have such a seasoned and knowledgeable Board of Directors
during these times and I wish to thank our Chairman John Cleghorn and our Board of Directors for
their solid guidance and counsel during the year.
CP is indeed a company in motion. We have a great franchise with an excellent book of business
serving North America and the fast-growing Asian economy. Our team is committed to becoming a
safer, more efficient railroad and we are confident that our approach to creating value, not only
for our shareholders but also our customers and our employees, will succeed through 2008 and
beyond.
FRED GREEN
Chief Executive Officer
TABLE OF CONTENTS
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1.0 |
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Business Profile |
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9 |
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2.0 |
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Strategy |
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9 |
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3.0 |
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Additional Information |
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9 |
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4.0 |
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Financial Highlights |
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10 |
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5.0 |
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Operating Results |
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11 |
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5.1 |
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Income |
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11 |
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5.2 |
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Diluted Earnings per Share |
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12 |
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5.3 |
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Operating Ratio |
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12 |
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5.4 |
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Return on Capital Employed |
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12 |
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5.5 |
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Impact of Foreign Exchange on Earnings |
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12 |
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6.0 |
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Non-GAAP Earnings |
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14 |
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7.0 |
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Lines of Business |
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16 |
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7.1 |
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Volumes |
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16 |
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7.2 |
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Revenues |
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17 |
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7.2.1 |
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Freight Revenues |
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18 |
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7.2.2 |
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Other Revenues |
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20 |
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7.2.3 |
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Freight Revenue per Carload |
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20 |
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8.0 |
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Performance Indicators |
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21 |
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8.1 |
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Safety Indicators |
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21 |
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8.2 |
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Efficiency and Other Indicators |
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21 |
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9.0 |
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Operating Expenses, Before Other Specified Items |
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22 |
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10.0 |
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Other Specified Items |
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24 |
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11.0 |
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Other Income Statement Items |
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25 |
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12.0 |
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Quarterly Financial Data |
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27 |
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13.0 |
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Fourth-quarter Summary |
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28 |
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13.1 |
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Operating Results |
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28 |
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13.2 |
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Non-GAAP Earnings |
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28 |
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13.3 |
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Revenues |
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28 |
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13.4 |
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Operating Expenses, Before Other Specified Items |
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29 |
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13.5 |
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Other Income Statement Items |
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30 |
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13.6 |
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Liquidity and Capital Resources |
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30 |
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14.0 |
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Changes in Accounting Policy |
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30 |
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14.1 |
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2007 Accounting Changes |
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30 |
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14.2 |
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Future Accounting Changes |
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31 |
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15.0 |
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Liquidity and Capital Resources |
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31 |
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15.1 |
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Operating Activities |
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32 |
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15.2 |
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Investing Activities |
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32 |
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15.3 |
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Financing Activities |
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32 |
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15.4 |
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Free Cash |
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33 |
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16.0 |
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Balance Sheet |
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34 |
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17.0 |
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Financial Instruments |
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36 |
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18.0 |
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Off-balance Sheet Arrangements |
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39 |
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19.0 |
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Acquisition |
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40 |
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20.0 |
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Contractual Commitments |
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41 |
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21.0 |
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Future Trends and Commitments |
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41 |
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22.0 |
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Business Risks and Enterprise Risk Management |
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44 |
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22.1 |
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Competition |
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44 |
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22.2 |
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Liquidity |
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45 |
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22.3 |
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Environmental Laws and Regulations |
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45 |
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22.4 |
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Regulatory Authorities |
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45 |
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22.5 |
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Labour Relations |
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46 |
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22.6 |
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Network Capacity and Volume |
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47 |
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22.7 |
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Financial Risks |
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47 |
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22.8 |
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General and Other Risks |
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48 |
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23.0 |
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Critical Accounting Estimates |
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48 |
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24.0 |
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Systems, Procedures and Controls |
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51 |
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25.0 |
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Forward-looking Information |
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51 |
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26.0 |
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Glossary of Terms |
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55 |
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MANAGEMENTS DISCUSSION AND ANALYSIS
February 19, 2008
This Managements Discussion and Analysis (MD&A) supplements the Consolidated Financial
Statements and related notes for year ended December 31, 2007. Except where otherwise indicated,
all financial information reflected herein is expressed in Canadian dollars. All information has
been prepared in accordance with Canadian generally accepted accounting principles (GAAP), except
as described in Section 6.0 of this MD&A. In this MD&A, our, us, we, CP and the Company
refer to Canadian Pacific Railway Limited (CPRL), CPRL and its subsidiaries, CPRL and one or more
of its subsidiaries, or one or more of CPRLs subsidiaries, as the context may require. Other terms
not defined in the body of this MD&A are defined in Section 26.0.
Unless otherwise indicated, all comparisons of results for the fourth quarter of 2007 and 2006 are
against the results for the fourth quarter of 2006 and 2005, respectively. Unless otherwise
indicated, all comparisons of results for 2007 and 2006 are against the results for 2006 and 2005,
respectively.
1.0 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 13,200 miles, serving the principal business centres of Canada from Montreal, Quebec,
to Vancouver, British Columbia, and the US Northeast and Midwest regions. Our railway feeds
directly into the US heartland from the East and West coasts. Agreements with other carriers extend
our market reach east of Montreal in Canada, throughout the US 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.
2.0 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 and through strategic
additions. 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. |
3.0 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 US 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.
4.0 Financial Highlights
|
|
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|
|
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|
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|
|
For the year ended December 31 (in millions, except percentages and per-share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,707.6 |
|
|
$ |
4,583.2 |
|
|
$ |
4,391.6 |
|
Operating income, before other specified items (1) |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
|
|
1,001.5 |
|
Operating income |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
|
|
991.2 |
|
Income, before FX on LTD and other specified items (1) |
|
|
672.8 |
|
|
|
627.5 |
|
|
|
528.4 |
|
Net income |
|
|
946.2 |
|
|
|
796.3 |
|
|
|
543.0 |
|
|
|
|
|
Basic earnings per share |
|
|
6.14 |
|
|
|
5.06 |
|
|
|
3.43 |
|
Diluted earnings per share, before FX on LTD and other specified items (1) |
|
|
4.32 |
|
|
|
3.95 |
|
|
|
3.30 |
|
Diluted earnings per share |
|
|
6.08 |
|
|
|
5.02 |
|
|
|
3.39 |
|
Dividends declared per share |
|
|
0.9000 |
|
|
|
0.7500 |
|
|
|
0.5825 |
|
|
|
|
|
Free cash (1) |
|
|
303.4 |
|
|
|
244.9 |
|
|
|
92.0 |
|
Total assets as at December 31 |
|
|
13,365.0 |
|
|
|
11,415.9 |
|
|
|
10,891.1 |
|
Total long-term financial liabilities as at December 31 |
|
|
6,562.3 |
|
|
|
5,320.4 |
|
|
|
5,390.3 |
|
|
|
|
|
Operating ratio, before other specified items (1) |
|
|
75.3 |
% |
|
|
75.4 |
% |
|
|
77.2 |
% |
Return on capital employed (1) |
|
|
9.5 |
% |
|
|
10.2 |
% |
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, before FX on LTD
|
|
Operating Ratio, before
|
|
Return on Capital
|
|
Free Cash (1) |
and other specified items ($) (1)
|
|
other specified items (%) (1)
|
|
Employed (%) (1)
|
|
(in millions of dollars) |
|
|
|
|
|
|
|
|
(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 Section 6.0. 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 Section 6.0. A reconciliation of free cash
to GAAP cash position is provided in Section 15.4.
5.0 Operating Results
5.1 INCOME
Operating income in 2007 was $1,164.2 million, up $35.6 million, or 3.2 %, from $1,128.6 million in
2006.
The growth in 2007 operating income reflected:
□ |
|
record shipments reflecting continued strong growth in bulk and intermodal products; |
|
□ |
|
import and export growth in intermodal shipments; |
|
□ |
|
higher revenues resulting from increased freight rates; and |
|
□ |
|
lower compensation and benefits expenses. |
These were partially offset by:
□ |
|
higher fuel prices driven by higher refining charges and West Texas Intermediate (WTI)
prices, net of fuel recoveries; |
|
□ |
|
higher costs reflecting record volumes in 2007; |
|
□ |
|
the negative impact of the change in FX of approximately $34 million; and |
|
□ |
|
higher costs associated with network disruptions, mainly driven by harsh weather
conditions. |
Net income for the year ended December 31, 2007 was $946.2 million, up $149.9 million, or 18.8 %,
from $796.3 million in 2006. Net income in 2007 increased primarily due to:
□ |
|
FX gains on US dollar-denominated long-term debt (LTD), reflecting a strengthening in the
Canadian dollar; |
|
□ |
|
higher operating income; and |
|
□ |
|
the recognition of equity earnings, starting in October 2007, following our acquisition of
the Dakota, Minnesota & Eastern Railroad Corporation (DM&E discussed further in Section
19.0), which reduced Other income and charges. |
These increases were partially offset by the after-tax change in estimated fair value of our
investment in Canadian third party asset-backed commercial paper (ABCP discussed further in
Section 11.2).
Operating income in 2006 was $1,128.6 million, an increase of $137.4 million, or 13.9 %, from
$991.2 million in 2005.
Operating income, before other specified items, was $1,128.6 million in 2006, up $127.1 million, or
12.7 %, from $1,001.5 million in 2005. The growth in 2006 operating income, before other specified
items reflected:
□ |
|
higher revenues due to increased freight rates across the majority of our business lines; |
|
□ |
|
strong grain volumes; |
|
□ |
|
expense reductions from co-production initiatives and operational benefits produced by our
IOP (discussed further in Section 21.3); |
□ |
|
reductions in management and administrative positions; and |
|
□ |
|
the $18 million gain from the sale of our Latta subdivision (discussed further in Section
21.5). |
The growth in 2006 operating income, before other specified items, was partially offset by:
□ |
|
a significant reduction in coal volumes (discussed further in Section 7.2.1.2); |
|
□ |
|
higher fuel costs; |
|
□ |
|
higher material costs for freight car and locomotive repairs and train servicing; and |
|
□ |
|
the net impact of the change in FX on US dollar-denominated revenues and expenses. |
There were no other specified items in operating income in 2006.
Net income for the year ended December 31, 2006 was $796.3 million, an increase of $253.3 million,
or 46.6 %, from $543.0 million in 2005. Net income in 2006 included 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 Section 10.0).
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 Section 17.6.1).
5.2 DILUTED EARNINGS PER SHARE
Diluted EPS, which is defined in Section 26.0, was $6.08 in 2007, an increase of $1.06, or 21.1 %,
from 2006. Diluted EPS was $5.02 in 2006, an increase of $1.63, or 48.1 %, from 2005. The increases
in both 2007 and 2006 reflected an increase in net income, as well as the positive impact of the
reduction in the number of shares outstanding due to our share repurchase plan (discussed further
in Section 16.5).
Diluted EPS excluding FX gains and losses on long-term debt (FX on LTD) and other specified items
was $4.32 in 2007, an increase of $0.37, or 9.4 %, from 2006. Diluted EPS excluding FX on LTD and
other specified items was $3.95 in 2006, an increase of $0.65, or 19.7 %, from 2005. The increases
in both 2007 and 2006 were mainly due to a higher income before FX on LTD and other specified
items, 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 Section 6.0.
5.3 OPERATING RATIO
Our operating ratio, before other specified items, improved to 75.3 % in 2007, compared with 75.4 %
in 2006 and 77.2 % in 2005. 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. Other specified
items are discussed further in Section 10.0.
5.4 RETURN ON CAPITAL EMPLOYED
Return on capital employed (ROCE) at December 31, 2007 was 9.5 %, compared with 10.2 % in 2006
and 9.4 % in 2005. The decrease in 2007 was primarily due to an increase in net debt resulting from
the bridge financing obtained for the acquisition of DM&E, partially offset by an increase in
earnings. The improvement in 2006 reflected higher profitability of investments in the railway over
the four quarters ended December 31, 2006, compared to the four quarters ended December 31, 2005,
primarily driven by higher revenues and improved operating ratio. ROCE is discussed further in
Section 6.0.
5.5 IMPACT OF FOREIGN
EXCHANGE ON EARNINGS
Fluctuations in FX affect our results because US dollar-denominated revenues and expenses are
translated into Canadian dollars. US dollar-denominated revenues and expenses are reduced when the
Canadian dollar strengthens in relation to the US dollar. Operating income is also reduced because
more revenues than expenses are generated in US dollars.
The Canadian dollar strengthened against the US dollar by approximately 4 % in 2007 and by
approximately 7 % in 2006. The
average FX rate for converting US dollars to Canadian dollars
decreased to $1.08 in 2007 from $1.13 in 2006 and $1.21 in 2005. The adjoining table shows the
approximate impact of the change in FX 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 FX on balance sheet accounts or FX hedging activity.
On average, a $0.01 strengthening (or weakening) of the Canadian dollar reduces (or increases)
annual operating income by approximately $3 million to $6 million. However, a large movement in FX
can lead to a change in operating income that falls outside of the aforementioned range. FX
fluctuations decreased operating income by approximately $34 million in 2007 and approximately $28
million in 2006, as illustrated in the adjoining table. From time to time, we use FX forward
contracts to partially hedge the impact on our business of FX transaction gains and losses and
other economic factors. In addition, we have designated a portion of our US dollar-denominated LTD
as a hedge of our net investment in self-sustaining foreign subsidiaries. Our hedging instruments
are discussed further in Section 17.0.
In 2007, there was a higher proportion of US dollar-denominated grain traffic, compared with
Canadian dollar-denominated grain traffic.
EFFECT ON EARNINGS DUE TO THE CHANGE IN FOREIGN EXCHANGE
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions, except foreign exchange rate) |
|
2007 vs. 2006 |
|
|
2006 vs. 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average annual foreign exchange rates |
|
$1.08 vs. $1.13 |
|
$1.13 vs. $1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenues |
|
|
|
|
|
|
|
|
Grain |
|
|
$ (24 |
) |
|
|
$ (24 |
) |
Coal |
|
|
(5 |
) |
|
|
(7 |
) |
Sulphur and fertilizers |
|
|
(9 |
) |
|
|
(10 |
) |
Forest products |
|
|
(10 |
) |
|
|
(16 |
) |
Industrial and consumer products |
|
|
(20 |
) |
|
|
(25 |
) |
Automotive |
|
|
(8 |
) |
|
|
(12 |
) |
Intermodal |
|
|
(13 |
) |
|
|
(19 |
) |
Other revenues |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
Unfavourable effect |
|
|
(91 |
) |
|
|
(114 |
) |
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
13 |
|
|
|
22 |
|
Fuel |
|
|
23 |
|
|
|
30 |
|
Materials |
|
|
2 |
|
|
|
3 |
|
Equipment rents |
|
|
7 |
|
|
|
12 |
|
Depreciation and amortization |
|
|
3 |
|
|
|
4 |
|
Purchased services and other |
|
|
9 |
|
|
|
15 |
|
|
|
|
|
Favourable effect |
|
|
57 |
|
|
|
86 |
|
|
|
|
|
Unfavourable effect on operating income |
|
|
(34 |
) |
|
|
(28 |
) |
|
|
|
|
Other expenses |
|
|
|
|
|
|
|
|
Other income and charges |
|
|
|
|
|
|
|
|
Interest expense |
|
|
7 |
|
|
|
11 |
|
Income tax expense, before FX on LTD and other specified items (1) |
|
|
7 |
|
|
|
7 |
|
|
|
|
|
Unfavourable effect on income, before FX on LTD and other specified items (1) |
|
|
$ (20 |
) |
|
|
$ (10 |
) |
|
|
|
|
|
|
|
|
(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 Section 6.0.
6.0 Non-GAAP Earnings
We present non-GAAP earnings and cash flow information in this MD&A to provide a basis for
evaluating underlying earnings and liquidity trends in our business that can be compared with the
results of our operations in prior periods. These non-GAAP earnings exclude foreign currency
translation effects on LTD, which can be volatile and short term, and other specified items
(discussed further in Section 10.0) 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
paid, and adjusted for the acquisition of DM&E and the investment in ABCP. Free cash is discussed
further and is reconciled to the increase in cash as presented in the financial statements in
Section 15.4. Earnings measures that exclude FX on LTD and other specified items, ROCE, net-debt to
net-debt-plus-equity ratio 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. Net-debt to net-debt-plus-equity
ratio (discussed further in Section 15.3.1) represents one of many metrics used in assessing the
Companys capital structure and debt servicing capabilities, and it does not have a comparable GAAP
measure to which it can be reconciled.
SUMMARIZED STATEMENT OF CONSOLIDATED INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended |
|
|
For the three months ended |
|
(reconciliation of non-GAAP earnings to GAAP earnings) |
|
December 31 |
|
|
December 31 |
|
(in millions, except diluted EPS and operating ratio) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,707.6 |
|
|
$ |
4,583.2 |
|
|
$ |
4,391.6 |
|
|
$ |
1,188.3 |
|
|
$ |
1,190.4 |
|
Operating expenses, before other specified items |
|
|
3,543.4 |
|
|
|
3,454.6 |
|
|
|
3,390.1 |
|
|
|
882.8 |
|
|
|
870.3 |
|
Operating income, before other specified items |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
305.5 |
|
|
|
320.1 |
|
Other income and charges |
|
|
17.3 |
|
|
|
27.8 |
|
|
|
18.1 |
|
|
|
(3.8 |
) |
|
|
6.4 |
|
Interest expense |
|
|
204.3 |
|
|
|
194.5 |
|
|
|
204.2 |
|
|
|
63.4 |
|
|
|
49.8 |
|
Income tax expense, before income tax on FX on LTD and other
specified items (1) |
|
|
269.8 |
|
|
|
278.8 |
|
|
|
250.8 |
|
|
|
60.8 |
|
|
|
82.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, before FX on LTD and other specified
items (1) |
|
|
672.8 |
|
|
|
627.5 |
|
|
|
528.4 |
|
|
|
185.1 |
|
|
|
181.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (gains) losses on long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD (gains) losses |
|
|
(169.8 |
) |
|
|
0.1 |
|
|
|
(44.7 |
) |
|
|
(8.3 |
) |
|
|
44.9 |
|
Income tax expense on FX on LTD |
|
|
44.3 |
|
|
|
7.1 |
|
|
|
22.4 |
|
|
|
(3.1 |
) |
|
|
(9.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD, net of tax (gains) losses |
|
|
(125.5 |
) |
|
|
7.2 |
|
|
|
(22.3 |
) |
|
|
(11.4 |
) |
|
|
35.4 |
|
Other specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimated fair value of ABCP |
|
|
21.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax on change in estimated fair value of ABCP |
|
|
(6.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimated fair value of ABCP, net of tax |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits due to tax rate reductions |
|
|
(162.9 |
) |
|
|
(176.0 |
) |
|
|
|
|
|
|
(145.8 |
) |
|
|
|
|
Special charge for labour restructuring and asset impairment |
|
|
|
|
|
|
|
|
|
|
44.2 |
|
|
|
|
|
|
|
|
|
Special credit related to environmental remediation |
|
|
|
|
|
|
|
|
|
|
(33.9 |
) |
|
|
|
|
|
|
|
|
Income tax on other specified items |
|
|
|
|
|
|
|
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other specified items, net of tax |
|
|
(147.9 |
) |
|
|
(176.0 |
) |
|
|
7.7 |
|
|
|
(145.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
946.2 |
|
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
342.3 |
|
|
$ |
145.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, before FX on LTD and other specified items
(1) |
|
$ |
4.32 |
|
|
$ |
3.95 |
|
|
$ |
3.30 |
|
|
$ |
1.20 |
|
|
$ |
1.15 |
|
Diluted EPS, related to FX on LTD, net of tax (1) |
|
|
0.81 |
|
|
|
(0.04 |
) |
|
|
0.14 |
|
|
|
0.07 |
|
|
|
(0.23 |
) |
Diluted EPS, related to other specified items, net of tax
(1) |
|
|
0.95 |
|
|
|
1.11 |
|
|
|
(0.05 |
) |
|
|
0.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, as determined by GAAP |
|
$ |
6.08 |
|
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
$ |
2.21 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio, before other specified items (1) |
|
|
75.3 |
% |
|
|
75.4 |
% |
|
|
77.2 |
% |
|
|
74.3 |
% |
|
|
73.1 |
% |
Operating ratio, related to other specified items (1) |
|
|
0.3 |
% |
|
|
|
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio |
|
|
75.6 |
% |
|
|
75.4 |
% |
|
|
77.4 |
% |
|
|
74.3 |
% |
|
|
73.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
These earnings measures have no standardized meanings prescribed by Canadian GAAP
and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in this section of the MD&A.
6.1 FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT
FX on LTD arises mainly as a result of translating US dollar-denominated debt into Canadian
dollars. We calculate FX on LTD using the difference in FX rates at the beginning and at the end of
each reporting period. The FX gains and losses are mainly unrealized and can only be realized when
net US dollar-denominated LTD 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 December 31, 2007, for every $0.01 the Canadian dollar strengthens
(or weakens) relative to the US dollar, the conversion of US dollar-denominated long-term debt to
Canadian dollars creates a pre-tax FX gain (or loss) of approximately $6 million, net of hedging.
On a pre-tax basis, we recorded the following FX on LTD as the Canadian dollar exchange rate
changed at the end of each reporting period:
□ |
|
FX gains on LTD of $169.8 million in 2007, as the Canadian dollar exchange rate
strengthened to $0.9913 relative to the US dollar; |
|
□ |
|
FX losses on LTD of $0.1 million in 2006, as the Canadian dollar exchange rate weakened to
$1.1654 relative to the US dollar; and |
□ |
|
FX gains on LTD of $44.7 million in 2005, as the Canadian dollar exchange rate strengthened
to $1.1630 relative to the US dollar. |
Income tax expense (or benefit) related to FX on LTD is discussed further in Section 11.4.
7.0 Lines of Business
7.1 VOLUMES
Changes in freight volumes generally contribute to corresponding changes in freight revenues and
certain variable expenses, such as fuel, equipment rents and crew costs.
Volume continued to grow as we moved record volumes, as measured by total revenue ton-miles
(RTM), in 2007. Volumes in 2007, as measured by total carloads, increased by 79,800, or 3 %, and
RTMs increased by approximately 6.5 billion, or 5 %. In 2006, total carloads decreased by 58,100,
or 2 %, and RTMs decreased by approximately 2.4 billion, or 2 %.
These increases in carloads and RTMs in 2007 were mainly due to:
□ |
|
strong Intermodal growth due to strength in global markets and continued offshore sourcing
trends; |
|
□ |
|
strong global demand for bulk products; and |
|
□ |
|
increase in average length of haul. |
These increases were partially offset by continued weakness in Forest products due to a slowdown in
the US housing market and the impact of the strengthening of the Canadian dollar on Canadian
producers. In addition, total carloads in 2007, while up, were adversely affected by the sale of
our Latta subdivision in the second quarter of 2006 (discussed further in Section 21.5), which
reduced our carloads by approximately 23,000.
The decline in carloads in 2006 was due to both the sale of our Latta subdivision (discussed
further in Section 21.5) and the Nickel Spur, which reduced our carloads by 45,000 loads in 2006
(67,000 on an annual basis), as well as a decline in coal carloads due to decreased shipments by
our primary coal customer.
With regard to RTMs in 2006, a 16 % increase in grain RTMs due to the strong export market for
these products, was more than offset by RTM decreases of 18 %, 13 % and 11 % in Coal, Sulphur and
fertilizers, and Forest products, respectively (discussed further in Section 7.2.1). The sale of
our Latta subdivision and the Nickel Spur had a lesser impact on RTMs than on carloads, as traffic
on both lines was short-haul in nature.
VOLUMES
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carloads (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
385.0 |
|
|
|
382.8 |
|
|
|
338.7 |
|
Coal |
|
|
269.1 |
|
|
|
281.7 |
|
|
|
352.3 |
|
Sulphur and fertilizers |
|
|
209.8 |
|
|
|
178.3 |
|
|
|
201.8 |
|
Forest products |
|
|
114.1 |
|
|
|
135.0 |
|
|
|
153.7 |
|
Industrial and consumer products |
|
|
313.3 |
|
|
|
316.0 |
|
|
|
322.2 |
|
Automotive |
|
|
168.5 |
|
|
|
165.3 |
|
|
|
168.1 |
|
Intermodal |
|
|
1,238.1 |
|
|
|
1,159.0 |
|
|
|
1,139.4 |
|
|
|
|
|
Total carloads |
|
|
2,697.9 |
|
|
|
2,618.1 |
|
|
|
2,676.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ton-miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
30,690 |
|
|
|
30,127 |
|
|
|
26,081 |
|
Coal |
|
|
20,629 |
|
|
|
19,650 |
|
|
|
23,833 |
|
Sulphur and fertilizers |
|
|
21,259 |
|
|
|
17,401 |
|
|
|
20,080 |
|
Forest products |
|
|
7,559 |
|
|
|
8,841 |
|
|
|
9,953 |
|
Industrial and consumer products |
|
|
16,987 |
|
|
|
16,844 |
|
|
|
15,936 |
|
Automotive |
|
|
2,471 |
|
|
|
2,450 |
|
|
|
2,361 |
|
Intermodal |
|
|
29,757 |
|
|
|
27,561 |
|
|
|
27,059 |
|
|
|
|
|
Total revenue ton-miles |
|
|
129,352 |
|
|
|
122,874 |
|
|
|
125,303 |
|
|
|
|
|
|
|
|
|
7.2 REVENUES
Our revenues are primarily derived from transporting freight. Other revenues are generated mainly
from leasing of certain assets, switching fees, land sales and income from business partnerships.
At December 31, 2007, one customer comprised 11.5 % of total revenues and 6.2 % of total accounts
receivable. At December 31, 2006 and 2005, the same customer comprised 11.5 % and 14.5 % of total
revenues and 5.6 % and 8.0 % of total accounts receivable, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
$ |
938.9 |
|
|
$ |
904.6 |
|
|
$ |
754.5 |
|
Coal |
|
|
573.6 |
|
|
|
592.0 |
|
|
|
728.8 |
|
Sulphur and fertilizers |
|
|
502.0 |
|
|
|
439.3 |
|
|
|
447.1 |
|
Forest products |
|
|
275.8 |
|
|
|
316.4 |
|
|
|
333.9 |
|
Industrial and consumer products |
|
|
627.9 |
|
|
|
603.8 |
|
|
|
542.9 |
|
Automotive |
|
|
319.0 |
|
|
|
314.4 |
|
|
|
298.0 |
|
Intermodal |
|
|
1,318.0 |
|
|
|
1,256.8 |
|
|
|
1,161.1 |
|
|
|
|
|
Total freight revenues |
|
|
4,555.2 |
|
|
|
4,427.3 |
|
|
|
4,266.3 |
|
|
|
|
|
Other revenues |
|
|
152.4 |
|
|
|
155.9 |
|
|
|
125.3 |
|
|
|
|
|
Total revenues |
|
$ |
4,707.6 |
|
|
$ |
4,583.2 |
|
|
$ |
4,391.6 |
|
|
|
|
|
|
|
|
|
7.2.1 Freight Revenues
Freight revenues are earned from transporting bulk, merchandise and intermodal goods, and include
fuel recoveries billed to our customers. Freight revenues were $4,555.2 million for 2007, an
increase of $127.9 million, or 2.9 %. Freight revenues were $4,427.3 million in 2006, an increase
of $161.0 million, or 3.8 %.
Freight revenues for 2007 increased mainly due to continued strong growth in bulk products and
intermodal shipments along with increases in freight rates including fuel recoveries. These
increases were partially offset by:
□ |
|
a decrease in coal freight rates; |
|
□ |
|
continued weakness in Forest products, mainly lumber and panel, and certain Industrial and
consumer products; and |
|
□ |
|
the negative impact of the change in FX of approximately $89 million. |
Freight revenues in 2006 increased mainly due to:
□ |
|
higher freight rates, including fuel recoveries; |
|
□ |
|
strong growth in grain shipments; and |
|
□ |
|
strong growth in the Alberta economy. |
This increase was partially offset by the negative impact of the change in FX of approximately $113
million and reduced coal volumes.
7.2.1.1 Grain
Canadian grain products, consisting mainly of durum, spring wheat, barley, canola, flax, rye and
oats, are primarily transported to ports for export and to Canadian and US markets for domestic
consumption. US grain products mainly include durum, spring wheat, corn, soybeans and barley and
are shipped from the midwestern US to other points in the Midwest, the Pacific Northwest and the
northeastern US. Grain revenues in 2007 were $938.9 million, an increase of $34.3 million, or 3.8
%. Grain
revenues in 2006 were $904.6 million, an increase of $150.1 million, or 19.9%.
Grain revenues increased in 2007 primarily due to:
□ |
|
a large carryover from the first half of the 2006/07 crop year benefiting the first two
quarters of 2007; |
|
□ |
|
a strong export program as a result of strong commodity prices and demand for North
American grain; and |
|
□ |
|
higher freight rates. |
These increases were partially offset by the negative impact of the change in FX of approximately
$24 million in 2007. In 2007, there was a higher proportion of US-dollar denominated grain traffic,
compared with Canadian-dollar denominated grain traffic.
Grain revenues increased in 2006 primarily due to:
□ |
|
a strong Canadian grain crop reflecting improved quality; |
|
□ |
|
a large carryover from the 2005/06 crop year; |
|
□ |
|
increased shipments of western Canadian grain to the US as a result of a trade tariff being
lifted; and |
|
□ |
|
higher freight rates. |
These increases in grain revenues were partially offset by the negative impact of the change in FX
of approximately $24 million.
7.2.1.2 Coal
Our Canadian coal business consists primarily of metallurgical coal transported from southeastern
British Columbia (BC) to the ports of Vancouver, BC and Thunder Bay, Ontario, and to the US
Midwest. Our US coal business
consists primarily of the transportation of thermal coal and petroleum coke within the US Midwest.
Coal revenues in 2007 were $573.6 million, a decrease of $18.4 million, or 3.1 %. Coal revenues in
2006 were $592.0 million, a decrease of $136.8 million, or 18.8 %.
Coal revenues decreased in 2007 primarily due to:
□ |
|
decreased freight rates; |
|
□ |
|
decrease in carloads due to the sale of the Latta subdivision in the first half of 2006;
and |
|
□ |
|
the negative impact of the change in FX of approximately $5 million. |
These decreases were partially offset by increased volumes due to continued strong global demand
for metallurgical coal.
The decline in coal revenues in 2006 was due to reduced export coal sales volumes by our primary
coal customer and to the sale of our Latta subdivision. The decline also reflected a one-time
positive adjustment of $23 million in 2005 for services provided to our primary coal customer in
2004 and the negative impact of the change in FX of approximately $7 million. Additionally, the
sale of the Latta subdivision resulted in a decline of approximately 23,000 carloads of US coal in
2006 (representing approximately 40,000 carloads on an annual basis).
7.2.1.3 Sulphur and Fertilizers
Sulphur and fertilizers include potash, chemical fertilizers and sulphur shipped mainly from
western Canada to the ports of Vancouver, BC, and Portland, Oregon, and to other Canadian and US
destinations. Sulphur and fertilizers revenues in 2007 were $502.0 million, an increase of $62.7
million, or 14.3 %. Revenues in 2006 were $439.3 million, a decrease of $7.8 million, or 1.7 %.
Sulphur and fertilizers revenues increased in 2007 primarily due to an increase in demand for
nutrients for bio fuels, partially offset by the negative impact of the change in FX of
approximately $9 million.
The decline in 2006 was primarily due to the protracted global potash price negotiations which
delayed the start of the shipping year until the third quarter of 2006 and the negative impact of
the change in FX of
approximately $10 million. Volumes rebounded following the completion of the negotiations; however,
in 2006 Sulphur and fertilizers volumes were 23,500 carloads below 2005 volumes.
7.2.1.4 Forest Products
Forest products include lumber, wood pulp, paper products and panel transported from key producing
areas in western Canada, Ontario and Quebec to various destinations in North America. Forest
products revenues in 2007 were $275.8 million, a decrease of $40.6 million, or 12.8 %. Revenues in
2006 were $316.4 million, a decrease of $17.5 million, or 5.2 %.
Forest products revenues declined in 2007 primarily due to:
□ |
|
continued soft demand for lumber and panel products caused by a significant slowdown in the
US housing market and continued impact from the sub-prime mortgage crisis; |
|
□ |
|
difficult market conditions for our Forest product customers due to the softwood lumber
agreement with the US which led to reduced volumes and extended plant shut downs; |
|
□ |
|
the impact of the strengthening of the Canadian dollar, which has led to decreased market
competitiveness for Canadian producers; and |
|
□ |
|
the negative impact of the change in FX of approximately $10 million. |
These decreases were partially offset by growth in pulp volumes and price increases which lessened
the impact from the volume decline.
Forest products revenues declined in 2006 primarily due to:
□ |
|
reduced volumes from a softening demand for lumber and panel caused by a decrease in US
housing starts; |
|
□ |
|
difficult market conditions for our Forest product customers caused by a strong Canadian
dollar and softwood lumber agreement with the US which led to reduced volumes and extended
plant shut downs; and |
|
□ |
|
the negative impact of the change in FX of approximately $16 million. |
Offsetting these factors was our strong yield and pricing, which softened the impact from the
volume decline.
7.2.1.5 Industrial and Consumer Products
Industrial and consumer products include chemicals, plastics, aggregates, steel, and mine and
energy-related products (other than coal) shipped throughout North America. Industrial and consumer
products revenues in 2007 were $627.9 million, an increase of $24.1 million, or 4.0 %. Revenues in
2006 were $603.8 million, an increase of $60.9 million, or 11.2 %.
Industrial and consumer products revenues increased in 2007 primarily due to strength in chemical,
energy, and plastics shipments to and from Alberta as well as increases in freight rates, which
were partially offset by decreased steel volumes as a result of decreased drilling activity for
natural gas. The increases were also partially offset by the negative impact of the change in FX of
approximately $20 million.
Industrial and consumer products revenues increased in 2006 primarily due to:
□ |
|
strong demand for steel, energy products and aggregates, largely driven by Alberta oil and
gas activity and a strong Alberta economy; |
|
□ |
|
strong worldwide demand for base metals; and |
|
□ |
|
increased freight rates. |
The higher revenues were partially offset by the negative impact of the change in FX of
approximately $25 million.
7.2.1.6 Automotive
Automotive consists primarily of the transportation of domestic and import vehicles as well as
automotive parts from North American assembly plants and the Port of Vancouver to destinations in
Canada and the US. Automotive
revenues in 2007 were $319 million, an increase of $4.6 million, or 1.5 %. Revenues in 2006 were
$314.4 million, an increase of $16.4 million, or 5.5 %.
Automotive revenues in 2007 were up, reflecting carload growth as new domestics (such as Toyota and
Honda) and import volumes continue to increase. Increased volumes from key shippers as a result of
certain port of call changes by shipping lines also had a favourable impact on Automotive revenues.
These increases were partially offset by the negative impact of the change in FX of approximately
$8 million in 2007.
The increase in Automotive revenues in 2006 was primarily due to higher freight rates and increased
volumes of imported vehicles, which created growth in long-haul traffic. These increases were
partially offset by extended plant shutdowns by domestic auto producers and the negative impact of
the change in FX of approximately $12 million.
7.2.1.7 Intermodal
Intermodal consists of domestic and international (import-export) container traffic. Our domestic
business consists primarily of retail goods moving in containers between eastern and western Canada
and to and from the US. The international business handles containers of mainly retail goods
between the ports of Vancouver, Montreal, New York/New Jersey and Philadelphia and inland Canadian
and US destinations. Intermodal revenues in 2007 were $1,318.0 million, an increase of $61.2
million, or 4.9 %. Revenues in 2006 were $1,256.8 million, an increase of $95.7 million, or 8.2 %.
Intermodal revenues increased in 2007 primarily due to growth in import and export container
shipments from the ports of Vancouver and Montreal and increased freight rates, partially offset by
the negative impact of the change in FX of approximately $13 million.
International intermodal revenues increased in 2006 as a result of higher freight rates and
container volume growth at the ports of Vancouver and Montreal driven by strong global trade.
Revenue growth in domestic intermodal was due to increased freight rates, volume and long-haul
traffic. These increases were partially offset by an extended strike at a facility at the Port of
Philadelphia as well as the negative impact of the change in FX of approximately $19 million.
7.2.2 Other Revenues
Other revenues are generated from leasing certain assets, switching fees, land sales, and business
partnerships. Other revenues in 2007 were $152.4 million, a decrease of $3.5 million. Other
revenues in 2006 were $155.9 million, an increase of $30.6 million.
The decrease in Other revenues in 2007 was primarily due to a gain of approximately $18 million
realized from the sale of our Latta subdivision in second-quarter 2006 (discussed further in
Section 21.5), partially offset by an increase in land sales in 2007.
Other revenues increased in 2006 due to a gain of approximately $18 million realized from the sale
of our Latta subdivision and increased land sales, in particular, the sale of a property to a
university in Montreal.
7.2.3 Freight Revenue per Carload
Freight revenue per carload is the amount of freight revenue earned for every carload moved,
calculated by dividing the freight revenue for a commodity by the number of carloads of the
commodity transported in the period.
In 2007, total freight revenue per carload remained relatively unchanged from 2006. This reflected
2.0 % improvements in freight rates and mix, which were offset by the negative impact of the change
in FX.
Total freight revenue per carload in 2006 increased by $97, or 6.1 %, from 2005. The increase in
2006 was due to higher freight rates, the impact of the sale of our Latta subdivision and Nickel
Spur, and an increase in the average length of haul. The increases more than offset the negative
impact of the change in FX.
FREIGHT REVENUE PER CARLOAD
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 ($) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenue per carload |
|
|
1,688 |
|
|
|
1,691 |
|
|
|
1,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
2,439 |
|
|
|
2,363 |
|
|
|
2,228 |
|
Coal |
|
|
2,132 |
|
|
|
2,102 |
|
|
|
2,069 |
|
Sulphur and fertilizers |
|
|
2,393 |
|
|
|
2,464 |
|
|
|
2,216 |
|
Forest products |
|
|
2,417 |
|
|
|
2,344 |
|
|
|
2,172 |
|
Industrial and consumer products |
|
|
2,004 |
|
|
|
1,911 |
|
|
|
1,685 |
|
Automotive |
|
|
1,893 |
|
|
|
1,902 |
|
|
|
1,773 |
|
Intermodal |
|
|
1,065 |
|
|
|
1,084 |
|
|
|
1,019 |
|
|
|
|
|
|
|
8.0 Performance Indicators
The indicators listed in this table are key measures of our operating performance. Definitions of
these performance indicators are provided in Section 26.0.
PERFORMANCE INDICATORS (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Safety indicators |
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
2.1 |
|
|
|
2.0 |
|
|
|
2.4 |
|
FRA train accidents per million train-miles |
|
|
2.0 |
|
|
|
1.6 |
|
|
|
2.3 |
|
Efficiency and other indicators |
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles (GTM) of freight (millions) |
|
|
246,322 |
|
|
|
236,405 |
|
|
|
242,100 |
|
Car miles per car day |
|
|
142.3 |
|
|
|
137.3 |
|
|
|
124.0 |
|
US gallons of locomotive fuel consumed per 1,000 GTMs freight and yard |
|
|
1.21 |
|
|
|
1.20 |
|
|
|
1.18 |
|
Terminal dwell (hours) |
|
|
22.2 |
|
|
|
20.8 |
|
|
|
25.8 |
|
Average train speed (miles per hour) |
|
|
23.2 |
|
|
|
24.8 |
|
|
|
22.0 |
|
Number of active employees end of period |
|
|
15,382 |
|
|
|
15,327 |
|
|
|
16,295 |
|
Freight revenue per RTM (cents) |
|
|
3.52 |
|
|
|
3.60 |
|
|
|
3.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Certain comparative period figures have been updated to reflect new information. |
8.1 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 US Federal Railroad
Administration (FRA) reporting guidelines.
The FRA personal injury rate per 200,000
employee-hours was 2.1 in 2007, compared
with 2.0 in 2006 and 2.4 in 2005.
The FRA train accident rate in 2007
was 2.0 accidents per million train-miles,
compared with 1.6 and 2.3, respectively,
in 2006 and 2005.
8.2
EFFICIENCY AND
OTHER INDICATORS
In 2007, CP moved record freight volumes,
as measured by GTMs and RTMs. In addition,
CPs IOP generated savings in operating costs
driven by increased train weights, yard
productivity and improvements in car miles
per car day. Offsetting these benefits were:
□ |
|
difficult weather-related operating
conditions, primarily in the first quarter
of 2007 and December 2007; |
□ |
|
a change in traffic mix largely driven
by an increase in intermodal trains; and |
|
□ |
|
the impact of having to compress
required track maintenance programs
into a shorter work season due to the
26-day strike by CPs maintenance of
way employees in Canada during the
second quarter of 2007 (CP strike). |
GTMs increased 4.2 % to a record of
approximately 246.3 billion in 2007. The
increase in 2007 was mainly due to increased
potash, intermodal and coal traffic. GTMs
declined 2.4 % in 2006. The decrease in
2006 was mainly due to lower coal and
potash volumes partially offset by higher
grain volumes. Fluctuations in GTMs normally
drive fluctuations in certain variable costs,
such as fuel and train crew costs.
Car miles per car day increased 3.6 % in 2007
and increased 10.7 % in 2006. Car miles per
car day increased in both years, as the higher
level of demand was handled more efficiently
through improved car ordering and tactical
fleet management and IOP improvements.
US gallons of locomotive fuel consumed per
1,000 GTMs in both freight and yard activity
increased 0.8 % and 1.7 % in 2007 and
2006, respectively. The increase in both years
was primarily due to a change in traffic mix
largely driven by an increase in intermodal
trains. The increases were partially offset by
improved execution of our IOP and successful
fuel-conservation efforts. In addition, mild
winter weather in the first quarter of 2006
helped to reduce fuel consumption in 2006.
Terminal dwell, the average time a freight car
resides in a terminal, increased 6.7 % in 2007.
The increase in 2007 was primarily due to
weather-related issues and concentrated track
maintenance programs following the end of
the CP strike. Terminal dwell decreased 19.4 %
in 2006. The improvement in 2006 was largely
due to better processes within our yards and
providing seven-day-a-week outlets for all
our traffic which minimized the number of
times freight cars are handled. Reducing the
time freight cars spend waiting in terminals
also enabled us to decrease our fleet of
cars used.
Average train speed decreased 6.5 % in
2007. Average train speed in 2007 was
negatively impacted by:
□ |
|
an increase in the number of bulk trains,
which operate at slower speeds and
experienced more queuing for unloading
in 2007; |
|
□ |
|
network disruptions, which were primarily related to weather events; |
|
□ |
|
temporary power and crew shortages; and |
|
□ |
|
concentrated track maintenance programs
following the end of the CP strike. |
Average train speed increased 12.7 % in 2006.
Trains moved at faster speeds for longer
distances as a result of our expanded track
capacity in western Canada, adhering to
our IOP, and co-production agreements
with other railroads that allowed us to
move trains more efficiently. Train speed
also increased as a result of transporting
less bulk volumes, which move in heavy
trains that travel more slowly.
The number of active employees at
December 31, 2007 increased by 55, or
0.4 %. The primary driver for this increase
was a higher number of employees working
on capital projects in December 2007, due
to work schedule delays resulting from the
CP strike. The number of active employees
at December 31, 2006 decreased by 5.9 %.
This decrease was mainly due to job
reductions made under restructuring
initiatives and fewer employees working
on capital projects. Approximately 7 % of
employees were assigned to capital projects
at December 31, 2007, compared with
approximately 6 % at December 31, 2006.
Freight revenue per RTM decreased by 2.2 %
in 2007. The decrease was primarily driven
by the negative impact of the change in FX
and a decrease in coal freight rates, as well
as a change in our overall traffic mix as a
result of an increase in the shipment of long
haul US grain traffic to the Pacific Northwest
and shipment of long haul potash from
Saskatchewan to the Port of Vancouver.
Freight revenue per RTM increased 5.9 %
in 2006. The increase was due to higher
freight rates, partially offset by the negative
impact of the change in FX.
9.0 Operating Expenses, Before Other Specified Items
OPERATING EXPENSES, BEFORE OTHER SPECIFIED ITEMS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 |
|
2007 |
|
|
2006 |
|
|
2005 |
|
(in millions) |
|
Expense(1) |
|
|
% of revenue |
|
|
Expense(1) |
|
|
% of revenue |
|
|
Expense(1) |
|
|
% of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
1,284.2 |
|
|
|
27.3 |
|
|
$ |
1,327.6 |
|
|
|
29.0 |
|
|
$ |
1,322.1 |
|
|
|
30.1 |
|
Fuel |
|
|
746.8 |
|
|
|
15.9 |
|
|
|
650.5 |
|
|
|
14.2 |
|
|
|
588.0 |
|
|
|
13.4 |
|
Materials |
|
|
215.5 |
|
|
|
4.6 |
|
|
|
212.9 |
|
|
|
4.6 |
|
|
|
203.3 |
|
|
|
4.6 |
|
Equipment rents |
|
|
207.5 |
|
|
|
4.4 |
|
|
|
181.2 |
|
|
|
4.0 |
|
|
|
210.0 |
|
|
|
4.8 |
|
Depreciation and amortization |
|
|
472.0 |
|
|
|
10.0 |
|
|
|
464.1 |
|
|
|
10.1 |
|
|
|
445.1 |
|
|
|
10.1 |
|
Purchased services and other |
|
|
617.4 |
|
|
|
13.1 |
|
|
|
618.3 |
|
|
|
13.5 |
|
|
|
621.6 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,543.4 |
|
|
|
75.3 |
|
|
$ |
3,454.6 |
|
|
|
75.4 |
|
|
$ |
3,390.1 |
|
|
|
77.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Section 6.0.
Operating expenses, before other
specified items, were $3,543.4
million in 2007, up $88.8
million, or 2.6%. These expenses
were $3,454.6 million in
2006, up $64.5 million, or 1.9%, from $3,390.1 million in
2005.
Operating expenses in 2007
increased primarily due
to:
□ |
|
higher fuel prices
driven by higher
refining charges and
WTI prices; |
□ |
|
record volumes as measured
by GTMs and RTMs in
2007, including change in
traffic mix largely driven
by an increase in
intermodal trains; |
□ |
|
increased equipment rent expense; and |
|
□ |
|
higher costs associated
with network
disruptions,mainly driven
by harsh weather
conditions. |
These increases in operating
expenses were partially
offset by the positive impact
of the change in FX of
approximately $57 million and
a decrease in compensation
and benefits expense.
Operating expenses in 2006 were higher primarily due to:
□ |
|
higher fuel costs; |
|
□ |
|
the increased price of materials used for freight car repairs, primarily related to the
replacement of wheel sets, and train servicing; and |
|
□ |
|
increased depreciation and amortization expense. |
These increases were partially offset by improved operating efficiencies, cost-containment
initiatives, lower GTMs, and the positive impact of the change in FX of approximately $86 million.
In addition, the higher fuel costs were largely recovered in revenue through our fuel recovery
program and through the benefits of hedging.
9.1 COMPENSATION AND BENEFITS
Compensation and benefits expense includes employee wages, salaries and fringe benefits.
Compensation and benefits expense was $1,284.2 million in 2007, a decrease of $43.4 million. This
expense was $1,327.6 million in 2006, an increase of $5.5 million from $1,322.1 million in 2005.
Compensation and benefits expense decreased in 2007 primarily due to:
□ |
|
lower incentive and stock-based compensation; |
|
□ |
|
lower pension expenses; |
|
□ |
|
the positive impact of the change in FX of approximately $13 million; and |
|
□ |
|
a settlement gain in the third quarter of 2007 on the release of certain post-retirement
benefit liabilities due to the assumption of these obligations by a US national multi-employer
benefit plan. |
These decreases were partially offset by increased labour expenses due to higher volumes and the
negative impact of inflation.
In 2006, compensation and benefits expense increased as a result of inflation, higher pension
expenses, and higher stock-
based compensation costs prior to the implementation in the second
quarter of 2006 of our Total Return Swap Program (discussed further in Section 17.7.1). These
increases were mostly offset by:
□ |
|
reduced costs as a result of restructuring initiatives (discussed further in Section
21.10); |
|
□ |
|
savings realized from efficiencies gained through our IOP (discussed further in Section
21.3) as well as other productivity improvements; |
|
□ |
|
reduced costs as a result of lower freight volumes; and |
|
□ |
|
the positive impact of the change in FX of approximately $22 million. |
9.2 FUEL
Fuel expense consists of the cost of fuel used by locomotives and includes provincial, state and
federal fuel taxes and the impact of our hedging program. Fuel expense was $746.8 million in 2007,
an increase of $96.3 million. This expense was $650.5 million in 2006, an increase of $62.5 million
from 2005.
Fuel expense in 2007 increased primarily due to:
□ |
|
higher refining margins and WTI prices; |
|
□ |
|
increased consumption driven by increased volumes; |
|
□ |
|
a lower hedge position in 2007; and |
|
□ |
|
a higher rate of fuel consumption, driven by harsh weather conditions and change in traffic
mix largely driven by an increase in intermodal trains. |
The increases were partially offset by the positive impact of the change in FX of approximately $23
million. Fuel price increases are also mitigated by our fuel recovery program.
Fuel expense in 2006 increased due to higher crude oil prices and refining charges, and an
unfavourable change in our fuel
consumption rate due to a higher proportion of non-bulk freight
traffic. These increases were partially offset by:
□ |
|
the favourable settlement of prior period recoveries including a fuel excise tax refund; |
|
□ |
|
reduced workload; and |
|
□ |
|
the positive impact of the change in FX of approximately $30 million. |
9.3 MATERIALS
Materials expense includes the cost of materials used for track, locomotive, freight car, and
building maintenance. Materials expense was $215.5 million in 2007, an increase of $2.6 million.
This expense was $212.9 million in 2006, an increase of $9.6 million from $203.3 million in 2005.
The increase in 2007 was mainly due to the higher cost of materials used for freight car repairs
and train servicing, primarily driven by higher wheel consumption as a result of increased volume
and harsh winter operating conditions in first-quarter 2007, and an increase in locomotive repair
and servicing costs. These increases were partially offset by cost recoveries from third parties
and pricing arrangements for wheels.
The increase in 2006 was mainly due to the higher cost of materials for freight car repairs,
primarily driven by price increases for replacement of wheel sets and other freight car materials,
and train servicing. The increase was partially offset by the positive impact of the change in FX.
9.4 EQUIPMENT RENTS
Equipment rents expense includes the cost to lease freight cars, intermodal equipment and
locomotives from other companies, including railways. Equipment rents expense was $207.5 million in
2007, an increase of $26.3 million. This expense was $181.2 million in 2006, a decrease of $28.8
million from $210.0 million in 2005.
Equipment rents expense in 2007 increased mainly due to:
□ |
|
reductions in receipts for the use of our railcars from other railways and customers; |
|
□ |
|
higher equipment rental payments to other railways as a result of network disruptions,
mainly driven by harsh weather conditions; and |
|
□ |
|
higher locomotive leasing costs, primarily driven by increased volume. |
These increases were partially offset by the positive impact of the change in FX of approximately
$7 million.
The decrease in 2006 was mainly due to more efficient movement of traffic over our network which
reduced the number of cars on line, resulting in lower equipment rental payments to other railways
and reduced locomotive lease costs. Higher charges to customers for loading and unloading delays
and the positive impact of the change in FX of approximately $12 million also contributed to the
decrease in 2006. The decrease in 2006 was partially offset by favourable adjustments in 2005 for
freight car rentals pertaining to prior periods.
9.5 DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense represents the charge associated with the use of track and
roadway, buildings, locomotives, freight cars and other depreciable assets. Depreciation and
amortization expense was $472.0 million in 2007, an increase of $7.9 million. This expense was
$464.1 million in 2006, an increase of $19.0 million from $445.1 million in 2005. The increases in
both 2007 and 2006 were primarily due to additions to capital assets for track and locomotives,
which were partially offset by asset retirements and rate adjustments.
9.6 PURCHASED SERVICES AND OTHER
Purchased services and other expense encompasses a wide range of costs, including expenses for
joint facilities, personal injury
and damage, environmental remediation, property and other taxes,
contractor and consulting fees, and insurance. Purchased services and other expense was $617.4
million in 2007, a decrease of $0.9 million. This expense was $618.3 million in 2006, a decrease of
$3.3 million from $621.6 million in 2005.
The decrease in purchased services and other expense in 2007 was mainly due to the positive impact
of the change in FX of approximately $9 million, which was mainly offset by an increase in
maintenance costs for locomotives.
The decrease in 2006 was largely due to lower joint-facility and inter-railway expenditures
resulting from our co-production initiatives, adherence to our IOP which reduced crew
transportation costs, and the positive impact of the change in FX of approximately $15 million. The
decreases were partially offset by higher building maintenance expenses and contract locomotive
servicing costs.
10.0 Other Specified Items
Other specified items are material transactions that may include, but are not limited to,
restructuring and asset impairment charges, gains and losses on non-routine sales of assets,
unusual income tax adjustments, and other items that do not typify normal business activities.
In 2007, there were three other specified items included in net income, as follows:
□ |
|
In the fourth quarter of 2007, the Government of Canada substantially enacted legislation
to reduce corporate income tax rates starting in 2008. We recorded a future income tax benefit
of $145.8 million to reflect the positive impact of these tax rate reductions on our future
income tax balance as at December 31, 2006. |
|
□ |
|
In the third quarter of 2007, we recorded a charge of $21.5 million ($15.0 million after
tax) to reflect the change in the |
|
|
estimated fair value of ABCP (discussed further in Section
11.2). |
|
□ |
|
In the second quarter of 2007, the Government of Canada substantially enacted legislation
to reduce corporate income tax rates starting in 2011. We recorded a future income tax benefit
of $17.1 million to reflect the positive impact of these tax rate reductions on our future
income tax balance as at December 31, 2006. |
In 2006, there was one other specified item included in net income:
□ |
|
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 our future
income tax balance as at December 31, 2005. |
In 2005, there were two other specified items included in operating income, as follows:
□ |
|
A new restructuring initiative to reduce management and administrative costs, which
resulted in a special charge of $44.2 million ($28.3 million after tax) in the fourth quarter
of 2005. The restructuring was intended to eliminate more than 400 positions (discussed
further in Section 21.10). |
|
□ |
|
As a result of a settlement reached in the third quarter of 2005, we recognized a reduction
of $33.9 million ($20.6 million after tax) to a special charge initially taken in the fourth
quarter of 2004 (discussed further in Section 21.7). As part of the settlement we received
$3.6 million in cash and were able to reduce an environmental remediation liability related to
one of our properties by $30.3 million. |
11.0 Other Income Statement Items
11.1 OTHER INCOME AND CHARGES
Other income and charges consist of amortization of the discounted portion of certain long-term
accruals, gains and losses due to the impact of the change in FX on working capital, various costs
related to financing, gains and losses associated with changes in the fair value of non-hedging
derivative instruments, other non-operating expenditures and equity earnings. Other income and
charges were $17.3 million in 2007, a decrease of $10.5 million from 2006 and were $27.8 million in
2006, an increase of $9.7 million from $18.1 million in 2005.
The decrease in 2007 was mainly due to the inclusion of the equity earnings of DM&E starting in
October 2007 (discussed further in Section 19.0).
The increase in 2006 was mainly due to the negative impact of the change in FX on working capital
balances in 2006, and lower realized gains on non-hedge derivative instruments.
11.2 CHANGE IN FAIR VALUE OF CANADIAN THIRD PARTY ASSET-BACKED COMMERCIAL PAPER
At December 31, 2007, the Company held ABCP issued by a number of trusts with an original cost of
$143.6 million. At the dates the Company acquired these investments they were rated R1 (High) by
Dominion Bond Rating Service (DBRS), the highest credit rating issued for commercial paper, and
backed by R1 (High) rated assets and liquidity agreements. These investments matured during the
third quarter of 2007 but, as a result of liquidity issues in the ABCP market, did not settle on
maturity. As a result, the Company has classified its ABCP as long-term investments after initially
classifying them as Cash and cash equivalents.
On August 16, 2007, an announcement was made by a group representing banks, asset providers and
major investors that they had agreed in principle to a long-term proposal and interim agreement to
convert the ABCP into long-term floating rate notes maturing no earlier than the scheduled maturity
of the underlying assets. On September 6, 2007, a pan-Canadian restructuring committee consisting
of major investors was formed. The committee was created to propose a solution to the liquidity
problem affecting the ABCP and has retained legal and financial advisors to oversee the proposed
restructuring process.
The ABCP in which the Company has invested has not traded in an active market since mid-August 2007
and there are currently no market quotations available. The ABCP in which the Company has invested
continues to be rated R1 (High, Under Review with Developing Implications) by DBRS.
A Standstill Agreement is in place that commits investors not to take any action that would
precipitate an event of default. It is expected that the restructuring of the ABCP will occur in
April 2008 if approval by investors is obtained to do so. This approval will be requested on a
trust by trust basis most likely during April 2008.
On December 23, 2007, the pan-Canadian restructuring committee provided certain details about the
expected restructuring. Based on this and other public information it is estimated that, of the
$143.6 million of ABCP in which the Company has invested:
□ |
|
$12.5 million is represented by traditional securitized assets and the Company will, on
restructuring, receive replacement long-term floating rate notes that are expected to receive
a AAA credit rating; |
□ |
|
$119.0 million is represented by a combination of leveraged collaterized debt, synthetic
assets and traditional securitized assets and the Company will, on restructuring, receive
replacement senior and subordinated long-term floating rate notes. The senior notes are
expected to obtain a AAA rating while the subordinated notes are likely to be unrated; and |
|
□ |
|
$12.1 million is represented by assets that have an exposure to US sub-prime mortgages. On
restructuring, the Company is likely to receive long-term floating rate notes that may be
rated, although at this time the pan-Canadian restructuring committee has provided no
indication of the likely rating these notes may receive. |
The valuation technique used by the Company to estimate the fair value of its investment in ABCP at
December 31, 2007, incorporates probability weighted discounted cash flows considering the best
available public information regarding market conditions and other factors that a market
participant would consider for such investments. The assumptions used in determining the estimated
fair value reflect the public statements made by the pan-Canadian restructuring committee that it
expects the ABCP will be converted into various long-term floating rate notes, as discussed above,
with maturities matching the maturities of the underlying assets and bearing market interest rates
commensurate with the nature of the underlying assets and their associated cash flows and the
credit rating and risk associated with the long-term floating rate notes. The interest rates and
maturities of the various long-term floating rate notes, discount rates and credit losses modelled
are:
|
|
|
|
|
|
|
Probability weighted average interest rate
|
|
|
4.6 % |
|
Weighted average discount rate
|
|
|
5.3 % |
|
Maturity of long-term floating rate notes
|
|
five to seven years
|
|
Credit losses
|
|
nil to 25 % on a going concern
basis, 5 % to 50 % on a
liquidation basis
|
|
|
|
Interest rates and credit losses vary by each of the different replacement long-term floating rate
notes to be issued as each has different credit ratings and risks. Interest rates and credit losses
also vary by the different probable cash flow scenarios that have been modelled.
Discount rates vary dependent upon the credit rating of the replacement long-term floating rate
notes.
Maturities vary by different replacement long-term floating rate notes as a result of the expected
maturity of the underlying assets.
One of the probable cash flow scenarios modelled is a liquidation scenario whereby, if the
restructuring is not successfully completed, recovery of the Companys investment is through the
liquidation of the underlying assets of the ABCP trusts.
In addition, assumptions have also been made as to the amount of restructuring costs that the
Company will bear.
Based on additional information that became available during the fourth quarter of 2007, the
probability weighted discounted cash flows resulted in an estimated fair value of the Companys
ABCP of $122.1 million at December 31, 2007. The reduction in fair value of $21.5 million compared
to the original cost of the ABCP was recorded as a charge to income in the third quarter of 2007
with no further changes required in the fourth quarter of 2007.
Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and
timing of cash flows and the outcome of the restructuring process could give rise to a further
material change
in the value of the Companys investment in ABCP which could impact the Companys
near term earnings.
11.3 INTEREST EXPENSE
Interest expense includes interest on long-term debt and capital leases, net of interest income.
Interest expense was $204.3 million in 2007, an increase of $9.8 million from 2006. The expense was
$194.5 million in 2006, a decrease of $9.7 million from $204.2 million in 2005.
Interest expense in 2007 increased primarily due to the issuance of US$450 million notes and the
use of bridge financing to fund the acquisition of DM&E (discussed further in Section 15.3). These
increases were partially offset by higher interest income generated from higher cash balances, the
repayment of a $143.0 million secured equipment loan and the positive impact from the change in FX
on US dollar-denominated interest expense.
Interest expense in 2006 decreased due to the positive impact of the change in FX and the
retirement of $250-million Medium Term Notes in June 2005 (discussed further in Section 15.3). The
improvements were partially offset by higher interest charges on variable-interest rate debt tied
to the London Interbank Offered Rate (LIBOR), which increased relative to the comparable period.
11.4 INCOME TAXES
Income tax expense was $144.7 million in 2007, an increase of $34.8 million from 2006. Income tax
expense was $109.9 million in 2006, a decrease of $160.7 million from $270.6 million in 2005. The
2007 increase was mainly due to an increase in FX gains on LTD and a lower future income tax
benefit
of $162.9 million recorded in 2007 resulting from tax rate changes implemented by the
Government of Canada and certain provincial governments in 2007, compared with the impact of tax
rate changes of $176.0 million in 2006 implemented by the Government of Canada and certain
provincial governments in 2006. The reduction in tax expense in 2006, compared with 2005, was
mainly due to a positive adjustment of $176.0 million taken in the second quarter of 2006,
partially offset by an increase in taxes as a result of higher income.
The effective income tax rate for 2007 was 13.3 %, compared with 12.1 % and 33.3 % for 2006 and
2005, respectively. The normalized rates (income tax rate based on income adjusted for FX on LTD,
DM&E equity income, and other specified items) for 2007, 2006 and 2005 were 29.0 %, 30.8 % and 32.2
%, respectively. The change in the normalized tax rate in 2007, compared with 2006, was mainly due
to lower Canadian federal and provincial corporate income tax rates and tax planning initiatives.
The reduction in our effective income tax rate in 2006, compared with 2005, was due to changes in
Canadian federal and provincial corporate income tax rates and tax planning initiatives.
We expect a normalized 2008 income tax rate of between 29 % and 31 %. The outlook on our normalized
income tax rate is based on certain assumptions about events and developments that may or may not
materialize or that may
be offset entirely or partially by other events and developments (see Section 22.0 and Section 23.4
for a discussion of these assumptions and other factors affecting our expectations for 2008).
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 $6.3 million in 2007 and increased by $7.2
million in 2006. The income tax expense, before income tax on FX on LTD, which is a non-GAAP
measure (discussed further in Section 6.0), was reduced by the same amount in 2007 and 2006,
respectively.
12.0 Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
|
|
|
(in millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
|
|
Dec. 31 |
|
|
Sep. 30 |
|
|
Jun. 30 |
|
|
Mar. 31 |
|
|
Dec. 31 |
|
|
Sept. 30 |
|
|
Jun. 30 |
|
|
Mar. 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,188.3 |
|
|
$ |
1,187.9 |
|
|
$ |
1,215.5 |
|
|
$ |
1,115.9 |
|
|
$ |
1,190.4 |
|
|
$ |
1,151.3 |
|
|
$ |
1,131.0 |
|
|
$ |
1,110.5 |
|
Operating income |
|
|
305.5 |
|
|
|
321.7 |
|
|
|
307.7 |
|
|
|
229.3 |
|
|
|
320.1 |
|
|
|
299.1 |
|
|
|
282.6 |
|
|
|
226.8 |
|
Net income |
|
|
342.3 |
|
|
|
218.6 |
|
|
|
256.7 |
|
|
|
128.6 |
|
|
|
145.6 |
|
|
|
163.8 |
|
|
|
378.1 |
|
|
|
108.8 |
|
Operating income, before
other specified items (1) |
|
|
305.5 |
|
|
|
321.7 |
|
|
|
307.7 |
|
|
|
229.3 |
|
|
|
320.1 |
|
|
|
299.1 |
|
|
|
282.6 |
|
|
|
226.8 |
|
Income, before FX
on LTD and other
specified items (1) |
|
|
185.1 |
|
|
|
190.3 |
|
|
|
174.8 |
|
|
|
122.6 |
|
|
|
181.0 |
|
|
|
169.7 |
|
|
|
160.7 |
|
|
|
116.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
2.23 |
|
|
$ |
1.43 |
|
|
$ |
1.66 |
|
|
$ |
0.83 |
|
|
$ |
0.93 |
|
|
$ |
1.05 |
|
|
$ |
2.39 |
|
|
$ |
0.69 |
|
Diluted earnings per share |
|
|
2.21 |
|
|
|
1.41 |
|
|
|
1.64 |
|
|
|
0.82 |
|
|
|
0.92 |
|
|
|
1.04 |
|
|
|
2.37 |
|
|
|
0.68 |
|
Diluted earnings per share,
before FX on LTD and
other specified items (1) |
|
|
1.20 |
|
|
|
1.23 |
|
|
|
1.12 |
|
|
|
0.78 |
|
|
|
1.15 |
|
|
|
1.07 |
|
|
|
1.00 |
|
|
|
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Section 6.0. 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 Section 6.0.
12.1 QUARTERLY TRENDS
Volumes of and, therefore, revenues from certain goods are stronger during different periods of the
year. First-quarter revenues can be lower mainly due to winter weather conditions, closure of the
Great Lakes ports and reduced transportation of retail goods. Second- and third-quarter revenues
generally improve over the first quarter as fertilizer volumes are typically highest during the
second quarter and demand for construction-related goods is generally highest in the third quarter.
Revenues are typically strongest in the fourth quarter, primarily as a result of the transportation
of grain after the harvest, fall fertilizer programs and increased demand for retail goods moved by
rail. Operating income is also affected by seasonal fluctuations. Operating income is typically
lowest in the first quarter due to higher operating costs associated with winter conditions. Net
income is also influenced by seasonal fluctuations in customer demand and weather-related issues.
13.0 Fourth-quarter Summary
13.1 OPERATING RESULTS
In the fourth quarter of 2007, GTMs remained relatively unchanged at approximately 62.1 billion, a
decrease of 0.1 %. RTMs were approximately 32.5 billion, an increase of 1.5 %. The increase in RTMs
were primarily due to growth in intermodal shipments and increased shipments of long haul potash
from Saskatchewan to the Port of Vancouver, partially offset by reduced lumber and panel volumes.
Operating income for the three-month period ended December 31, 2007, was $305.5 million, a decrease
of $14.6 million from $320.1 million.
The decrease in operating income was primarily due to:
□ |
|
an increase in fuel costs driven by higher WTI prices, net of fuel recoveries; |
□ |
|
the negative impact of the change in FX of approximately $23 million; |
|
□ |
|
harsh weather conditions that affected the entire supply chain in December 2007; and |
|
□ |
|
higher purchased services and other costs (discussed further in Section 13.4.6). |
These decreases were partially offset by revenue growth in Intermodal as well as Industrial and
consumer products and lower compensation and benefits expenses.
We reported net income of $342.3 million in the fourth quarter of 2007, an increase of $196.7
million from $145.6 million.
The increase in net income was mainly due to:
□ |
|
a future income tax benefit of $145.8 million recorded in the fourth quarter of 2007 as a
result of Canadian rate reductions applied to opening future income tax balances (discussed
further in Section 10.0); |
|
□ |
|
an increase in FX gains on LTD as a result of a strengthening of the Canadian dollar; |
|
□ |
|
lower income tax expense; and |
|
□ |
|
the recognition of equity earnings, starting in October 2007, following our acquisition of
DM&E (discussed further in Section 19.0), which reduced Other income and charges. |
These increases were partially offset by a lower operating income and higher interest expense
(discussed further in Section 11.3).
Diluted EPS was $2.21 in the fourth quarter of 2007, an increase of $1.29 from $0.92.
13.2 NON-GAAP EARNINGS
A discussion of non-GAAP earnings and a reconciliation of income, before FX on LTD and other
specified items, to net income as presented in the financial statements for the fourth quarters of
2007 and 2006, is included in Section 6.0.
Income, before FX on LTD and other specified items, was $185.1 million in the fourth quarter of
2007, an increase of $4.1 million from $181.0 million. The increase was mainly driven by higher
other revenues and lower materials expense, partially offset by higher fuel costs.
13.3 REVENUES
Total revenues were $1,188.3 million in fourth-quarter 2007, a decrease of $2.1 million from
$1,190.4 million. This decrease was primarily driven by the negative impact of the change in FX of
approximately $66 million, mainly offset by higher revenues from Industrial and consumer products
and Intermodal.
13.3.1 Grain
Grain revenues in the fourth quarter of 2007 were $257.5 million, a decrease of $4.1 million from
$261.6 million. This decrease was primarily driven by:
□ |
|
the negative impact of the change in FX of approximately $17 million; |
|
□ |
|
weaker Canadian wheat and durum shipments to Thunder Bay and Montreal; and |
|
□ |
|
harsh weather conditions that affected the entire supply chain in December 2007. |
These decreases were partially offset by strong shipments of US grain to the Pacific Northwest,
Minnesota/Wisconsin, and Eastern Canada.
13.3.2 Coal
Coal revenues were $131.2 million in fourth-quarter 2007, a decrease of $18.1 million from $149.3
million. The decrease in revenues was primarily due to:
□ |
|
the negative impact of the change in FX of approximately $3 million; |
|
□ |
|
harsh weather conditions that affected the entire supply chain in December 2007, which
pushed some volumes into 2008; and |
|
□ |
|
a decrease in freight rates. |
13.3.3 Sulphur and Fertilizers
Sulphur and fertilizers revenues were $121.2 million in the fourth quarter of 2007, a decrease of
$0.8 million from $122.0 million. The decrease was primarily driven by the negative impact of the
change in FX of approximately $7 million and declining sulphur shipments out of northern Alberta
due to declining supply, mainly offset by strong shipments of both export and domestic potash.
13.3.4 Forest Products
Forest products revenues were $61.5 million in the fourth quarter of 2007, a decrease of $9.7
million from $71.2 million.
This decrease was mainly due to:
□ |
|
continued soft demand for lumber and panel products caused by a significant slowdown in the
US housing market and continued impact from the sub-prime mortgage crisis; |
|
□ |
|
difficult market conditions for our Forest product customers caused by a strong Canadian
dollar and softwood lumber |
|
□ |
|
trade agreements which have lead to reduced volumes, shipper bankruptcies and extended
plant shut downs; and |
|
□ |
|
the negative impact of the change in FX of approximately $7 million. |
Partially offsetting these factors was our strong yield and pricing, which reduced the impact from
the volume decline.
13.3.5 Industrial and Consumer Products
Industrial and consumer products revenues were $157.9 million in the fourth quarter of 2007, an
increase of $9.4 million from $148.5 million. The increase was due mainly to:
□ |
|
higher freight rates; |
|
□ |
|
strong worldwide demand for base metals; and |
□ |
|
strong demand for chemical, plastics and energy products largely driven by Alberta oil
activity and a strong Alberta economy. |
The higher revenues were partially offset by the negative impact of the change in FX of
approximately $14 million.
13.3.6 Automotive
Automotive revenues were $77.0 million in fourth-quarter 2007, an increase of $2.1 million from
$74.9 million. The increase was primarily due to a surge in shipping by new domestic manufacturers
(such as Toyota and Honda) in the fourth quarter of 2007 to meet their year end volume targets,
partially offset by the negative impact of the change in FX of approximately $6 million.
13.3.7 Intermodal
Intermodal revenues grew in the fourth quarter of 2007 to $336.3 million, an increase of $12.3
million from $324.0 million. In the international business, growth was primarily due to higher
freight rates and container volume growth at all four ports we serve (Vancouver, Montreal, New
York/New Jersey and Philadelphia) driven by increasing global trade. Growth in domestic intermodal
was due to increased freight rates and volumes as well as an increase in traffic from the US to
Western Canada. These increases were partially offset by the negative impact of the change in FX of
approximately $10 million.
13.3.8 Other Revenues
Other revenues were $45.7 million in the fourth quarter of 2007, an increase of $6.8 million from
$38.9 million. The increase was primarily due to higher land sales.
13.4 OPERATING EXPENSES, BEFORE OTHER SPECIFIED ITEMS
Operating expenses, before other specified items, in the fourth quarter of 2007 were $882.8
million, an increase of $12.5 million from $870.3 million.
13.4.1 Compensation and Benefits
Compensation and benefits expense in fourth-quarter 2007 was $308.4 million, a decrease of $13.8
million from $322.2 million. The decrease was primarily driven by:
□ |
|
the positive impact of the change in FX of approximately $10 million; |
|
□ |
|
lower incentive compensation; and |
|
□ |
|
reduced costs from restructuring initiatives (discussed further in Section 21.10). |
These decreases were partially offset by the negative impact of inflation.
13.4.2 Fuel
Fuel expense was $196.3 million in fourth-quarter 2007, an increase of $25.1 million from $171.2
million. The increase was primarily driven by higher WTI prices and a higher rate of fuel
consumption, primarily due to harsh weather conditions. These increases were partially offset by
the positive impact of the change in FX of approximately $18 million and the result of a favourable
fuel tax ruling.
13.4.3 Materials
Materials expense was $47.9 million in the fourth quarter of 2007, a decrease of $5.8 million from
$53.7 million. The decrease was mainly due to lower cost of materials used for freight car repairs
and train servicing, primarily driven by reductions in wheel consumption and wheel prices, as well
as a positive impact of the change in FX of approximately $1 million. These decreases were
partially offset by an increase in locomotive repair and servicing costs.
13.4.4 Equipment Rents
Equipment rents expense was $45.1 million in the fourth quarter of 2007, a decrease of $2.7 million
from $47.8 million. The decrease was largely due to the positive impact of the change in FX of
approximately $5 million and
a reduction in freight car lease costs. These decreases were partially
offset by higher equipment rental payments to other railways as a result of network disruptions,
mainly driven by harsh weather conditions. Reductions in receipts for the use of our railcars from
other railways and customers also partially offset the decrease in equipment rents expense.
13.4.5 Depreciation
and Amortization
Depreciation and amortization expense was $116.3 million in fourth-quarter 2007, an increase of
$0.4 million from $115.9 million, largely due to additions to capital assets. This was partially
offset by asset retirements and the positive impact of the change in FX of approximately $2
million.
13.4.6 Purchased Services and Other
Purchased services and other expense was $168.8 million in fourth-quarter 2007, an increase of $9.3
million from $159.5 million. The increase was mainly due to increased casualty costs, primarily
driven by weather-related incidents and recognition of anticipated future environmental costs at
certain identified sites across our network. The increase was partially offset by the positive
impact of the change in FX of approximately $7 million.
13.5 OTHER INCOME
STATEMENT ITEMS
In the fourth-quarter 2007, there was a gain due to FX on LTD of $8.3 million ($11.4 million after
tax), compared with a loss of $44.9 million ($35.4 million after tax) in the same period of 2006.
The gain was due to the impact of the change in FX on US dollar-denominated debt.
Other income and charges were a recovery of $3.8 million in the fourth quarter of 2007, a decrease
of $10.2 million from a $6.4 million expense in fourth-quarter 2006. This decrease was primarily
due to the inclusion of the equity earnings of DM&E starting in October 2007.
Interest expense was $63.4 million in fourth-quarter 2007, an increase of $13.6 million from $49.8
million in the same period of 2006. The increase was primarily due to the issuance of US$450
million notes and the use of bridge financing to fund the acquisition of DM&E (discussed further in
Section 15.3), partially offset by higher interest income generated from higher cash balances and
the positive impact from the change in FX on US dollar-denominated interest expense.
13.6 LIQUIDITY AND
CAPITAL RESOURCES
For the three months ended December 31, 2007, we held $378.1 million in cash and short-term
investments, which was an increase of $38.9 million compared with the three months ended September
30, 2007. For the three months ended December 31, 2006, we held $124.3 million in cash and
short-term investments, which was an increase of $77.9 million compared with the three months ended
September 30, 2006. The lower increase in cash and short-term investments during the fourth quarter
of 2007 was primarily due to increased investing costs from the acquisition of DM&E (discussed
further in Section 19.0) and the timing of capital expenditures, partially offset by funds received
from the bridge financing (discussed further in Section 15.3) along with short-term borrowings and
increased cash from operations.
14.0 Changes in Accounting Policy
14.1 2007 ACCOUNTING CHANGES
14.1.1 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, Section 1530 Comprehensive Income and Section 3251 Equity. 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 (AOCI).
Adoption of these standards was on a retrospective basis without restatement of prior periods,
except for the restatement of equity balances to reflect the reclassification of Foreign currency
translation adjustments to AOCI and Other Comprehensive Loss.
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 AOCI 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 AOCI 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. AOCI 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 statements as a result of the refinement of
certain estimates used at the year end.
14.1.2 Accounting Changes
Effective from January 1, 2007, the CICA amended Accounting Standard Section 1506 Accounting
Changes to prescribe the criteria for changing accounting policies and related accounting
treatment and disclosures of accounting changes. Changes in accounting policies are permitted when
required by a primary source of GAAP, for example when a new accounting section is first adopted,
or when the change in accounting policy results in more reliable and relevant financial information
being reflected in the financial statements.
The adoption of this amended accounting standard did not impact the financial statements of the
Company.
14.2 FUTURE ACCOUNTING CHANGES
14.2.1 Financial Instrument and Capital Disclosures
The CICA has issued the following accounting standards effective for fiscal years beginning on or
after January 1, 2008: Section 3862 Financial Instruments Disclosures, Section 3863 Financial
Instruments Presentation, and Section 1535 Capital Disclosures.
Section 3862 Financial Instruments Disclosures and Section 3863 Financial Instruments
Presentation replace Section 3861 Financial Instruments Disclosure and Presentation, revising
disclosures related to financial instruments, including hedging instruments, and carrying forward
unchanged presentation requirements.
Section 1535 Capital Disclosures will require the Company to provide disclosures about the
Companys capital and how it is managed.
The adoption of these new accounting standards will not impact the amounts reported in the
Companys financial statements as they primarily relate to disclosure.
14.2.2 Inventories
Effective January 1, 2008, the CICA has issued accounting standard Section 3031 Inventories.
Section 3031 Inventories provides guidance on the method of determining the cost of the Companys
materials and supplies. The new accounting standard specifies that inventories are to be valued at
the lower of cost and net realizable value. The Company 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 on CPs financial statements. Any
adjustment on the adoption of Section 3031 Inventories will be recognized in 2008 as an
adjustment to opening inventory and opening retained earnings.
14.2.3 Goodwill and intangible assets
In February 2008, the CICA issued accounting standard Section 3064 Goodwill, and intangible
assets, replacing accounting standard Section 3062 Goodwill and other intangible assets and
accounting standard Section 3450 Research and development costs. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable
to financial statements relating to fiscal years beginning on or after October 1, 2008.
Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1,
2009. Section 3064 establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible assets by
profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards
included in the previous Section 3062. The Company is currently evaluating the impact of the
adoption of this new Section.
15.0 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
Section 20.0 and Section 21.8. We are not aware of any trends or expected fluctuations in our
liquidity that would create any deficiencies. Liquidity risks is discussed in Section 22.2. The
following discussion of operating, investing and financing activities describes our indicators of
liquidity and capital resources.
15.1 OPERATING ACTIVITIES
Cash provided by operating activities was $1,314.6 million in 2007, an increase of $263.6 million
from 2006. Cash provided by operating activities was $1,051.0 million in 2006, an increase of $0.3
million from $1,050.7 million in 2005.
The increase in 2007, compared with 2006, was mainly due to higher net cash generated through
improved working capital, reduced pension contributions, higher cash earnings and reduced income
tax and restructuring payments.
The change in 2006, compared with 2005, was minimal, as the increase in cash earnings was largely
offset by:
□ |
|
higher income tax payments associated with the sale of our Latta subdivision (discussed
further in Section 21.5); |
|
□ |
|
higher restructuring payments; |
|
□ |
|
a higher year-end working capital balance, primarily due to an increase in accounts
receivable from higher freight revenues; and |
|
□ |
|
increased pension contributions. |
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.
15.2 INVESTING ACTIVITIES
Cash used in investing activities was $2,514.3 million in 2007, an increase of $1,820.6 million
from 2006. Cash used in investing activities was $693.7 million in 2006, a decrease of $175.5
million from $869.2 million in 2005.
Cash used in investing activities was higher in 2007 primarily due to the acquisition of DM&E,
increased capital expenditures, and the investment in ABCP in the third quarter of 2007 (discussed
further in this section and Section 11.2).
The decrease in cash used in investing activities in 2006 was mainly due to decreased cash capital
spending in 2006 and proceeds from the sale of our Latta subdivision.
At September 30, 2007, the Company held ABCP with an original cost of $143.6 million. At the dates
the Company acquired these investments, they were rated R1 (High) by DBRS, the highest credit
rating issued for commercial paper, and backed by R1 (High) rated assets, and liquidity agreements.
These investments matured during the third quarter of 2007 but due to liquidity issues in the ABCP
market, did not settle on maturity. As a result, the Company has classified its ABCP as long-term
investments after initially classifying them as Cash and cash equivalents. This change in the
classification of the Companys ABCP, for accounting purposes, does not impact CPs liquidity
requirements for normal operations or the acquisition of DM&E. ABCP is further discussed in Section
11.2.
Capital spending in 2008 is projected to be between $885 million and $895 million, which is similar
to the 2007 capital program. While the expected total capital program for 2008 remains relatively
unchanged from 2007 spending levels, it will incorporate an increase for the maintenance and
upgrade of rail, ballast, crossties and other basic right-of-way infrastructure components for
which some spending was deferred in 2007 due to the CP strike. There will also be an increase in
investments in information technology to improve the systems that manage railway operations and
customer shipments, as well as investments planned to increase capacity of track and signalling
systems in key corridors to improve end-to-end fluidity and increase train speed over the existing
network. There will also be increases in investments in modifications and upgrades to the freight
car fleet to ensure customers continue to receive the quality of rail cars they require. This
includes the ongoing program to upgrade government-owned grain cars to reduce grain spillage and
protect wildlife along CPs right-of-way as well as upgrades to the automotive rail car fleet.
These increases will be offset by reduced spending levels on strategic land purchases as these were
largely completed in 2007. These capital investments do not include capital spending programs for
the DM&E (discussed further in Section 19.0). 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 Section 22.0 for a discussion of these
assumptions and other factors affecting our expectations for 2008).
We intend to finance capital expenditures with cash from operations but may partially finance these
expenditures with new debt. 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 financial ratios 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
capital market conditions.
15.3 FINANCING ACTIVITIES
Cash provided by financing activities was $1,453.5 million in 2007, an increase of $1,808.3
million. Cash used in financing activities was $354.8 million in 2006, a decrease of $57.9 million,
compared with $412.7 million in 2005.
The increase in 2007 was primarily due to:
□ |
|
the US$1.27 billion bridge financing to fund the acquisition of DM&E (discussed further in
this section); |
|
□ |
|
the issuance of US$450 million of 5.95 % 30-year notes, which are unsecured and carry a
negative pledge, for net proceeds of CAD$485.1 million; and |
|
□ |
|
short-term borrowings of $229.7 million. |
These increases were partially offset by the repayment of two debt instruments, a $143.0 million
secured equipment loan and a $19.0 million obligation under a capital lease.
The decrease in cash used in 2006 was due to lower long-term debt repayments, mainly from the 2005
repayment of our 7.2 % $250-million Medium Term Notes and higher proceeds from the issue of shares
for stock options exercised in 2006. These items were partially offset by increased purchases of
shares through the Companys share repurchase program (discussed further in Section 16.5) and
higher dividend payments to our shareholders.
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 which was used to repay long-term debt, to repurchase CP shares through
normal course issuer bids (discussed further in Section 16.5), and to partially finance the
acquisition of DM&E on October 4, 2007.
In October 2007, CP entered into an eighteen-month US$1.8 billion credit agreement to provide
bridge financing specifically to fund the acquisition of DM&E (discussed further in Section 19.0).
The credit facility bears interest at a variable rate based on LIBOR. On October 4, 2007, CP drew
down US$1.27 billion from this credit agreement to close the acquisition of DM&E.
We also have available, as sources of financing, unused credit facilities of up to $408 million.
15.3.1 Net-debt to Net-debt-plus-equity Ratio
At December 31, 2007, our net-debt to net-debt-plus-equity ratio (discussed further in Section 6.0)
increased to 42.5%,
compared with 37.2 % and 39.6 % at December 31, 2006 and 2005, respectively.
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.
The increase in 2007 was primarily due to:
□ |
|
the bridge financing obtained for the acquisition of DM&E; |
|
□ |
|
an increase in short-term borrowing of $229.7 million; and |
|
□ |
|
the investment in ABCP (discussed further in Section 11.2). |
|
|
These increases were partially offset by an increase in equity driven by earnings and the impact of
the strengthening of the Canadian dollar. |
|
|
|
The improvement in 2006 was primarily due to an increase in equity driven by earnings, partially
offset by the impact of the reduced capital stock and contributed surplus as a result of CPs share
repurchase program. |
15.3.2 Security Ratings
Our unsecured long-term debt securities are currently rated Baa3, BBB and BBB by Moodys
Investors Service, Inc. (Moodys), Standard and Poors Corporation (S&P) and DBRS,
respectively. With the acquisition of the DM&E, CPs ratings were downgraded in the fourth quarter
of 2007 by DBRS and Moodys from BBB(high) and Baa2, respectively. Our rating with S&P remained
unchanged but with a negative outlook. CP intends to permanently finance the DM&E acquisition in a
manner that preserves our investment grade rating.
15.4 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 paid, and adjusted for the acquisition of DM&E and the investment in ABCP. Free cash
is adjusted for the DM&E acquisition, as it is not indicative of normal day-to-day investments in
the Companys asset base. In addition, free cash excludes the investment in ABCP, as this reflects
a change in presentation for accounting purposes and does not result in a change in cash flow.
We generated free cash of $303.4 million in 2007 compared with $244.9 million in 2006 and $92.0
million in 2005. The increase in 2007, compared with 2006, was largely due to the increase in cash
generated by operating activities (as discussed in Section 15.1), partially offset by increased
capital spending, lower proceeds from disposal of transportation properties and a higher dividend
payment. The increase in 2006, compared with 2005, was due to a decrease in capital spending in
2006 and proceeds from the sale of our Latta subdivision, partially offset by higher dividend
payments to our shareholders.
We expect to generate a lower amount of free cash in 2008, compared with 2007, as a result of
increased income tax payments, mainly due to the Company now being cash tax payable (discussed
further in Section 11.4) and less favourable improvements in the change in working capital compared
with 2007. The decrease in free cash in 2008 will be largely offset by higher cash earnings. 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
Section 22.0 and Section 25.0 for a discussion of these assumptions and other factors affecting our
expectations for 2008). Our free cash outlook relies on the assumptions established for earnings
and capital expenditures, which are discussed in Section 7.2, Section 9.0, Section 11.0 and Section
15.0.
CALCULATION OF FREE CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
(reconciliation of free cash to GAAP cash position) |
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
1,314.6 |
|
|
$ |
1,051.0 |
|
|
$ |
1,050.7 |
|
Cash used in investing activities |
|
|
(2,514.3 |
) |
|
|
(693.7 |
) |
|
|
(869.2 |
) |
Dividends paid |
|
|
(133.1 |
) |
|
|
(112.4 |
) |
|
|
(89.5 |
) |
Add back acquisition of DM&E (1) |
|
|
1,492.6 |
|
|
|
|
|
|
|
|
|
Add back investment in ABCP (2) |
|
|
143.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Free cash (3) |
|
|
303.4 |
|
|
|
244.9 |
|
|
|
92.0 |
|
Cash (used in) provided by financing activities, excluding dividend payment |
|
|
1,586.6 |
|
|
|
(242.4 |
) |
|
|
(323.2 |
) |
Acquisiton of DM&E (1) |
|
|
(1,492.6 |
) |
|
|
|
|
|
|
|
|
Investment in ABCP (2) |
|
|
(143.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash, as shown on the Statement of Consolidated
Cash Flows |
|
|
253.8 |
|
|
|
2.5 |
|
|
|
(231.2 |
) |
Net cash at beginning of period |
|
|
124.3 |
|
|
|
121.8 |
|
|
|
353.0 |
|
|
|
|
Net cash at end of period |
|
$ |
378.1 |
|
|
$ |
124.3 |
|
|
$ |
121.8 |
|
|
|
|
|
|
|
(1)
The acquisition of DM&E is discussed further in Section 19.0.
(2)
The investment in ABCP is discussed further in Section 11.2.
(3)
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 Section 6.0.
16.0 Balance Sheet
16.1 ASSETS
Assets totalled $13,365.0 million at December 31, 2007, compared with $11,415.9 million at December
31, 2006 and $10,891.1 million at December 31, 2005.
The increase in assets in 2007 was mainly due to an increase in cash and investments including our
investment in DM&E (discussed further in Section 19.0).
The increase in assets in 2006 was mainly due to:
□ |
|
capital additions, most of which were locomotives and track replacement; |
|
□ |
|
an increase in accounts receivable due to higher freight rates which have increased amounts
billed to customers; |
|
□ |
|
higher materials and supplies, mainly fuel stock and engineering inventory; and |
|
□ |
|
pension contributions made in excess of pension expense recognized in income. |
These increases were partially offset by a reduction in assets held for sale in 2006.
16.2 TOTAL LIABILITIES
Our combined short-term and long-term liabilities were $7,907.1 million at December 31, 2007,
compared with $6,559.4 million at December 31, 2006 and $6,507.0 million at December 31, 2005.
The increase in total liabilities in 2007 was due mainly to:
□ |
|
an increase in short-term borrowing; |
|
□ |
|
an increase in long-term debt resulting from the issuance in second-quarter 2007 of US$450
million of 5.95 % 30-year notes (net proceeds of $485.1 million), which are unsecured but
carry a negative pledge; and |
|
□ |
|
bridge financing to fund the acquisition of DM&E (discussed further in Section 15.3). |
These increases were partially offset by the repayment of a $143.0 million secured
equipment loan
in the first quarter of 2007 and a $19.0 million obligation under capital lease, as well as FX
gains on LTD.
The increase in total liabilities in 2006 was due mainly to an increase in the future income tax
liability, driven by tax on income generated in 2006, partially offset by a reduction in accounts
payable.
16.3 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 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 Section 14.0).
16.4 EQUITY
At December 31, 2007, our Consolidated Balance Sheet reflected $5,457.9 million in equity, compared
with an equity balance of $4,856.5 million at December 31, 2006 and $4,384.1 million at December
31, 2005. The increase in equity was primarily due 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.
16.5 SHARE CAPITAL
Our Articles of Incorporation authorize for issuance an unlimited number of Common Shares and an
unlimited number of First Preferred Shares and Second Preferred Shares. At January 31, 2008,
153,332,228 Common Shares and no Preferred Shares were issued and outstanding.
We also have a Management Stock Option Incentive Plan (MSOIP) under which key officers and
employees are granted options to purchase CP shares. Each option granted can be exercised for one
Common Share. At January 31, 2008, 6.9 million options were outstanding under our MSOIP and
Directors Stock Option Plan, and 3.6 million Common Shares have been reserved for issuance of
future options.
From time to time, the Company repurchases its own shares for cancellation. 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 September 30, 2007 at an average price per
share of $73.64.
During the third quarter of 2007, the share buyback program was suspended and no shares were
repurchased in anticipation of the acquisition of the DM&E. As of December 31, 2007, the program
had not been reinstated.
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 December 31, 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.
16.6 DIVIDENDS
Dividends declared by the Board of Directors in the last three years are as follows:
|
|
|
|
|
Dividend amount |
|
Record date |
|
Payment date |
|
|
|
|
|
|
|
$0.1325
|
|
March 25, 2005
|
|
April 25, 2005 |
$0.1500
|
|
June 24, 2005
|
|
July 25, 2005 |
$0.1500
|
|
September 30, 2005
|
|
October 31, 2005 |
$0.1500
|
|
December 30, 2005
|
|
January 30, 2006 |
$0.1875
|
|
March 31, 2006
|
|
April 24, 2006 |
$0.1875
|
|
June 30, 2006
|
|
July 31, 2006 |
$0.1875
|
|
September 29, 2006
|
|
October 30, 2006 |
$0.1875
|
|
December 29, 2006
|
|
January 29, 2007 |
$0.2250
|
|
March 30, 2007
|
|
April 30, 2007 |
$0.2250
|
|
June 29, 2007
|
|
July 30, 2007 |
$0.2250
|
|
September 28, 2007
|
|
October 29, 2007 |
$0.2250
|
|
December 28, 2007
|
|
January 28, 2008 |
$0.2475
|
|
March 28, 2008
|
|
April 28, 2008 |
|
|
17.0 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.
17.1 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:
17.1.1 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.
17.1.2 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.
17.1.3 Available for Sale
Investments Our equity investments recorded on a cost basis have a carrying value that equals
cost as fair value cannot be reliably established as there are no quoted prices in an active market
for these investments. Our equity investments recorded on an equity basis have a carrying value
equal to cost plus our share of the investees net income, less any dividends received. These
investments are not traded on a liquid market.
17.1.4 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.
Investments ABCP (discussed further in Section 11.2) is carried at fair value, which has been
determined using valuation techniques that incorporate probability weighted discounted future cash
flows reflecting market conditions and other factors that a market participant would consider.
17.1.5 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 $4,177.2 million and a fair
value of approximately $4,302.6 million at December 31, 2007.
17.2 DERIVATIVE FINANCIAL INSTRUMENTS
Commencing 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
statement lines: Revenues, Compensation and benefits, Fuel, Other income and 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 loss. 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 AOCI 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 AOCI until the related
hedged item settles, at which time amounts recognized in AOCI 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.
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 income
and 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, FX 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
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.
17.3 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.
17.4 INTEREST RATE MANAGEMENT
17.4.1 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 $1.1 million in 2007 (2006
$0.7 million). At December 31, 2007, an unrealized gain, derived from the fair value of the
swap, of $5.5 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.
17.4.2 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 expects to issue in the future. The
effective portion of 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 the end of
2007, we reclassified $2.3 million from Other comprehensive income to interest expense, largely
as a result of the delay in issuing debt. At December 31, 2007, the fair value of the bond forward
was a $30.6 million loss. This unrealized loss was reflected in Accounts payable and accrued
liabilities, with the offset, net of taxes, reflected in AOCI on our Consolidated Balance Sheet.
The fair value of the bond forward was calculated using swap and basis spread curves from
Bloomberg.
At December 31, 2007, net unamortized losses for previously settled interest and treasury rate
locks of $2.0 million was reflected in AOCI on the Consolidated Balance Sheet. These gains and
losses are being amortized to income as interest is paid on the related debt. The amortization of
these gains and losses resulted in an increase in interest expense and a decrease in Other
comprehensive income on the Statement of Consolidated Income of $3.2 million in 2007. The
amortization of these net losses increased interest expense by $3.1 million in 2006.
17.5 FOREIGN EXCHANGE MANAGEMENT
We enter into foreign exchange risk management transactions primarily to manage fluctuations in the
exchange rate between Canadian and US currencies. From time to time, we use foreign exchange
forward contracts as part of our foreign exchange risk management strategy. We have designated a
portion of our US dollar-denominated long-term debt as a hedge of our net investment in
self-sustaining foreign subsidiaries.
17.5.1
Foreign Exchange Forward Contracts on Revenue
From time to time, we hedge a portion of our US dollar-denominated freight revenues earned in
Canada by selling forward US dollars. We had no forward sales of US dollars outstanding at December
31, 2007 nor at December 31, 2006. Freight revenues on our Statement of Consolidated Income did
not include any gain or loss on forward contracts for 2007 as no forward hedges settled, compared
with realized gains of $3.9 million in 2006.
17.5.2
Currency Forward on Long-term Debt
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. At December 31, 2007, an unrealized loss, measured as
the fair value of this derivative instrument, of $15.7 million was included in Foreign exchange
(gains) losses on long-term debt 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.
17.6 FUEL PRICE MANAGEMENT
Swaps and fuel cost recovery programs, together with fuel conservation practices, are the key
elements of our program to manage the risk arising from fuel price volatility.
17.6.1
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 FX variability, the company may also enter into FX forward contracts
to manage this element of fuel-price risk. Gains and losses on the commodity swaps coupled with
gains and losses on FX forward contracts partially offset changes in the cash cost of fuel.
Commodity swap contracts and FX forward contracts are accounted for as cash flow hedges. Unrealized
gains or losses related to the effective portion of these swaps are deferred in AOCI 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 2008 and 2009.
At December 31, 2007, the fair value of our commodity swaps was $21.4 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 AOCI on our Consolidated
Balance Sheet. During 2007, the change in fair value of $10.3 million, before tax, resulted in a
decrease to Other comprehensive income on our Statement of Consolidated Income.
At December 31, 2007, the fair value of the forward purchases of US dollars was $3.5 million. This
unrealized loss was recognized in Accounts payable and accrued liabilities and Deferred
liabilities with the offset, net of tax, reflected in AOCI on our
Consolidated
Balance Sheet. During 2007, the change in fair value of $0.4 million, before tax,
resulted in a decrease to Other Comprehensive Income on our Statement of Consolidated Income.
In 2007, Fuel expense was reduced by $16.5 million (2006 $29.1 million) as a result of $19.1
million in realized gains (2006 $33.7 million) arising from settled swaps, partially offset by
$2.6 million in realized losses (2006 $4.6 million) arising from the settled FX forward
contracts. Included in the $19.1 million realized gains on commodity swaps in 2007 were $1.7
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 $7 to $8 million, assuming current FX rates and fuel consumption levels. At December
31, 2007 we had fuel hedges for approximately 3 % and 2 % of our estimated fuel purchases in 2008
and 2009, respectively. There are no hedges in place for purchases in 2010 and beyond. We have a
fuel risk mitigation program to moderate the impact of increases in fuel prices, which includes
these swaps and fuel recoveries.
17.7 STOCK-BASED COMPENSATION EXPENSE MANAGEMENT
17.7.1
Total Return Swap (TRS)
During May 2006, CP entered into a TRS to reduce the volatility and total cost to the Company over
time of four stock-based compensation programs: share appreciation rights (SAR) and deferred
share units (DSU), restricted share units (RSU) and performance share units (PSU) (discussed
further in Section 21.6). 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
these stock-based compensation programs due to fluctuations in share price during the period the
TRS is in place. Compensation and Benefits expense on our Statement of Consolidated Income
included an unrealized loss on these swaps of $2.6 million in 2007 (2006 unrealized losses of
$1.2 million). At December 31, 2007, the unrealized loss of $3.8 million on the TRS was included in
Deferred liabilities on our Consolidated Balance Sheet.
18.0 Off-balance Sheet Arrangements
18.1 SALE OF ACCOUNTS RECEIVABLE
We have sold through our accounts receivable securitization program a portion of our freight
receivables to raise funds for operations. Under the program, which has a term of five years
expiring in September 2009, we have sold an undivided co-ownership interest in $120.0 million of
eligible freight receivables to an unrelated trust. The trust is a multi-seller trust and we are
not the primary beneficiary. We may increase this sale amount up to a program limit of $200.0
million.
At December 31, 2007, the outstanding undivided co-ownership interest held by an unrelated trust
under our accounts receivable securitization program was $120.0 million (2006 $120.0 million).
Losses of $5.8 million on the securitization program in 2007 (2006 losses of $5.0 million) were
included in Other income and charges on our Statement of Consolidated Income.
We provide a credit enhancement amount to absorb all credit losses. The trust has no recourse to
the co-ownership interest
in receivables that we retain, other than in respect of the credit
enhancement amount. This amount was recognized as a retained interest. At December 31, 2007, the
fair value of the retained interest was approximately 18.7 % of the receivables sold, or $22.5
million (2006 fair value of approximately 19.1 %, or $22.9 million) and was included in
Accounts receivable and other current assets on our Consolidated Balance Sheet. The fair value of
the retained interest approximated the carrying value as a result of the short collection cycle of
the receivables and expected credit losses amounting to less than 0.05 % of total receivables.
Proceeds from collections reinvested in the accounts receivable securitization program were
$1,478.9 million for 2007, compared with $1,475.7 million for 2006. Receivables funded under the
securitization program may not include delinquent, defaulted or written-off
receivables, or receivables that do not meet certain obligor-specific criteria, including
concentrations in excess of prescribed limits. We maintain an adequate allowance for doubtful
accounts based on expected collectibility of accounts receivable. Credit losses are based on
specific identification of uncollectible accounts and the application of historical percentages by
aging category. At December 31, 2007, allowances of $18.4 million (2006 $19.2 million) were
recorded in Accounts receivable. In 2007, $2.7 million (2006 $6.5 million) of accounts
receivable were written off to Purchased services and other.
We have retained the responsibility for servicing, administering and collecting freight receivables
sold. Even though we act as collector of all of the securitized receivables, we have no claim
against the trusts co-ownership interest in the securitized
receivables. We do not receive a fee
for our servicing responsibilities. The benefits we receive for servicing the receivables
approximate the related costs. The average servicing period is approximately one month. At December
31, 2007, a servicing asset of $0.1 million (2006 $0.1 million) and a servicing liability of
$0.1 million (2006 $0.1 million) were recorded.
The securitization program is subject to our standard reporting and credit-rating requirements.
This includes provision of a monthly portfolio report that the pool of eligible receivables
satisfies pre-established criteria that are reviewed and approved by DBRS and are standard for
agreements of this nature. Failure to comply with these provisions would trigger termination of the
program. In the event the program is terminated prior to maturity, we expect to have sufficient
liquidity remaining in our revolving credit facility to meet our payment obligations. We have
complied with all termination tests during the program.
18.2 GUARANTEES
At December 31, 2007 we have certain guarantees, including, but not limited to, residual value
guarantees on certain leased equipment, of $321.7 million, compared with $442.5 million at December
31, 2006. In addition, we have residual value guarantees of $11.0 million related to our investment
in DM&E at December 31, 2007. 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 22 to the 2007 annual financial statements). These accruals do
not include any amounts for residual value guarantees.
19.0 Acquisition
19.1 DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION
In September 2007, the Company entered into an agreement to acquire all of the issued and
outstanding shares of DM&E, a Class II railroad with approximately 2,500 miles of track in the US
Midwest and primary customers in agri-products and merchandise. DM&E is connected to the CP network
at Minneapolis, Chicago and Winona. DM&E has connections to and traffic interchanges with all seven
Class I railroads and is proximate to the Powder River Basin (PRB), which contains the largest
deposit of low-cost, low-sulphur coal in North America.
Effective October 4, 2007, the Company acquired all of the issued and outstanding shares of DM&E
for a purchase price of approximately US$1.5 billion, including acquisition costs. Future
contingent payments of up to US$1.05 billion, may become payable up to December 31, 2025 upon the
achievement of certain milestones towards the completion of a track expansion into the
PRB and the
achievement of certain traffic volume targets. Any contingent payments that may be made would be
recorded as additional goodwill. The acquisition has been financed with cash on hand and debt
(discussed further in Section 15.3).
The purchase is subject to review and approval by the US Surface Transportation Board (STB),
during which time the shares of DM&E have been placed in a voting trust. The Company anticipates
that the STB will complete its review and provide a final ruling during 2008. During the review
period, the investment in the DM&E will be accounted for on an equity basis. Equity income for the
three months and year ended December 31, 2007 of $12.3 million has been included in Other income
and charges.
If the proposed transaction is approved by the STB, the acquisition will be accounted for using the
purchase method of accounting. Under this method, the Company will prepare its consolidated
financial statements reflecting a line-by-line consolidation of DM&E and the allocation of the
purchase price to acquire DM&E to the fair values of their assets and liabilities.
The Company is in the process of obtaining third-party valuations of certain assets. Preliminary
purchase price allocation is disclosed in Note 11 to the 2007 annual financial statements.
20.0 Contractual Commitments
The accompanying table indicates our known obligations and commitments to make future payments for
contracts, such as debt and capital lease and commercial arrangements.
PAYMENTS DUE BY PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 3 |
|
|
3 5 |
|
|
After |
|
Contractual commitments at December 31, 2007 (in millions) |
|
Total |
|
|
< 1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
3,944.4 |
|
|
$ |
22.7 |
|
|
$ |
1,650.8 |
|
|
$ |
459.8 |
|
|
$ |
1,811.1 |
|
Capital lease obligations |
|
|
277.0 |
|
|
|
8.3 |
|
|
|
32.9 |
|
|
|
13.8 |
|
|
|
222.0 |
|
Operating lease obligations (1) |
|
|
661.1 |
|
|
|
129.4 |
|
|
|
169.4 |
|
|
|
128.8 |
|
|
|
233.5 |
|
Supplier purchase obligations |
|
|
693.5 |
|
|
|
171.9 |
|
|
|
189.7 |
|
|
|
143.4 |
|
|
|
188.5 |
|
Other long-term liabilities reflected
on our Consolidated Balance Sheet (2) |
|
|
2,749.2 |
|
|
|
123.4 |
|
|
|
206.9 |
|
|
|
184.5 |
|
|
|
2,234.4 |
|
|
|
|
Total contractual obligations |
|
$ |
8,325.2 |
|
|
$ |
455.7 |
|
|
$ |
2,249.7 |
|
|
$ |
930.3 |
|
|
$ |
4,689.5 |
|
|
|
|
|
|
|
(1)
Residual value guarantees on certain leased equipment with a maximum exposure of
$332.7 million (discussed in Section 18.2) are not included in the minimum payments shown above, as
management estimates that we will not be required to make payments under these residual guarantees.
(2)
Includes expected cash payments for restructuring, environmental remediation, asset
retirement obligations, post-retirement benefits, workers compensation benefits, long-term
disability benefits, pension benefit payments for our non-registered supplemental pension plans,
future income tax liabilities and certain other deferred liabilities. Projected payments for
post-retirement benefits, workers compensation benefits and long-term disability benefits include
the anticipated payments for years 2008 to 2016. Pension contributions for our registered pension
plans are not included due to the volatility in calculating them. Pension payments are discussed
further in Section 21.9. Future income tax liabilities may vary according to changes in tax rates,
tax regulations and the operating results of the Company. As the cash impact in any particular year
cannot be reasonably determined, all long-term future tax liabilities have been reflected in the
after 5 years category in this table. Future income taxes are further discussed in Section 23.4.
21.0 Future Trends and Commitments
21.1 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.
21.2 AGREEMENTS AND RECENT DEVELOPMENT
During the first half of 2007, we announced our intention to assemble a rail corridor to access the
Alberta Industrial Heartland northeast of Edmonton that serves the Alberta oil sands development.
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.
21.3 INTEGRATED OPERATING PLAN
Our IOP is the foundation for our scheduled railway operations, through which we strive to provide
quality service for customers and improve asset utilization to achieve high levels of efficiency.
The key principles upon which our IOP is built include moving freight cars across the network with
as few handlings as possible, creating balance in directional flow of trains in our corridors by
day of week, and minimizing the time that locomotives and freight cars are idle.
Under our IOP, trains are scheduled to run consistently at times agreed upon with our customers. To
accomplish this, we establish
a plan for each rail car that covers its entire trip from point of
origin to final destination. Cars with similar destinations are consolidated into blocks. This
reduces delays at intermediate locations by simplifying processes for employees, eliminating the
duplication of work and helping to ensure traffic moves fluidly through rail yards and terminals.
These measures improve transit times for shipments throughout our network and increase car
availability for customers. Our IOP also increases efficiency by more effectively scheduling
employee shifts, locomotive maintenance, track repair and material supply.
We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and the
IOP to operate longer and heavier trains. This has reduced associated expenses, simplified the
departure of shipments from points of origin and provided lower-cost capacity for growth.
We are committed to continuously improving scheduled railway operations as a means to achieve
additional efficiencies that will enable further growth without the need to incur significant
capital expenditures to accommodate the growth. During 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.
21.4 CANADIAN GOVERNMENT COVERED HOPPER CARS
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 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. The new operating agreement with CP became effective
July 1, 2007 and sets out the terms and operating conditions governing approximately 6,300 federal
covered hopper cars allocated to CP.
21.5 SALE OF LATTA SUBDIVISION
On May 26, 2006, the STB approved the sale of our Latta subdivision to Indiana Rail Road Co.
(INRD). The Latta subdivision, located in the State of Indiana, is a rail line between Fayette,
near Terre Haute, and Bedford. The sale also included rights of INRD to use certain track of CSX
Transportation between Chicago, Illinois, and Louisville, Kentucky. INRD assumed all rail
operations on the line beginning May 27, 2006. The sale of this
portion of our operations did not
materially impact our financial results. This sale was not segregated as a discontinued operation
on our financial statements because it did not generate its own identifiable cash flow. Total
annual carloads associated with this subdivision were approximately 54,000, of which approximately
40,000 were for coal traffic. The carloads affected were for relatively short distances on CP. CP
recognized an $18 million gain from the sale of our Latta subdivision.
21.6 STOCK PRICE
The market value of our Common Shares increased $2.82 per share on the Toronto Stock Exchange in
2007 (from $61.40 to $64.22). The market value of our Common Shares increased $12.69 per share on
the Toronto Stock Exchange in 2006 (from $48.71 to $61.40). These changes in share price caused
corresponding increases in the value of our outstanding SARs, DSUs, RSUs and PSUs in both years.
Effective the second quarter of 2006, we put in place a TRS (discussed in Section 17.7.1) to
mitigate gains and losses associated with the effect of our share price on the SARs, DSUs, RSUs and
PSUs. Excluding the impact of our TRS, the cost of our SARs, DSUs, RSUs and PSUs was $13.7 million
in 2007 based on the change in share price during 2007. This cost was $32.4 million in 2006 based
on the change in the share price during 2006.
21.7 ENVIRONMENTAL
In 2004, we recorded a $90.9 million charge for costs associated with investigation,
characterization, remediation and other applicable actions related to environmental contamination
at a CP-owned property in the US, which includes areas previously leased to third parties.
In 2005, we reached a binding settlement in relation to a lawsuit with a potentially responsible
party involving portions of past environmental contamination at the above-mentioned property in the
US. The lawsuit against this
other party has been dismissed and the party has accepted responsibility for designated portions of
the property and paid us a settlement sum in partial payment of the response costs we have
incurred.
As a result of the settlement, we were able to reverse accrued liabilities related to the property
and recognize a total reduction of $33.9 million to the special charges accrued in prior years.
Under applicable accounting rules, this reduction could not be recognized until the outcome of the
lawsuit or any binding settlement with the other responsible party became known.
We continue to be responsible for remediation work on portions of 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.
21.8 CERTAIN OTHER FINANCIAL COMMITMENTS
In addition to the financial commitments mentioned previously in Section 18.0 and Section 20.0, we
are party to certain other financial commitments set forth in the adjacent table and discussed
opposite.
CERTAIN OTHER FINANCIAL COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of commitment per period |
|
|
|
|
|
|
|
|
|
|
|
2009 & |
|
|
2011 & |
|
|
2013 & |
|
At December 31, 2007 (in millions) |
|
Total |
|
|
2008 |
|
|
2010 |
|
|
2012 |
|
|
beyond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
$ |
337.3 |
|
|
$ |
337.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital commitments |
|
|
504.2 |
|
|
|
278.7 |
|
|
|
68.2 |
|
|
|
47.3 |
|
|
|
110.0 |
|
Offset financial liability |
|
|
190.3 |
|
|
|
190.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
1,031.8 |
|
|
$ |
806.3 |
|
|
$ |
68.2 |
|
|
$ |
47.3 |
|
|
$ |
110.0 |
|
|
|
|
|
|
|
21.8.1
Letters of Credit
Letters of credit are obtained mainly to provide security to third parties as part of various
agreements, such as required by our workers compensation and pension fund requirements. We are
liable for these contract amounts in the case of non-performance under these agreements. As a
result, our available line of credit is adjusted for contractual amounts obtained through letters
of credit currently included within our revolving credit facility.
21.8.2
Capital Commitments
We remain committed to maintaining our current high level of plant quality and renewing our
franchise. As part of this commitment, we are obligated to make various capital purchases related
to track programs, locomotive acquisitions and overhauls, freight cars, and land. At December 31,
2007, we had multi-year capital commitments of $504.2 million in the form of signed contracts,
largely for locomotive overhaul agreements. Payments for these commitments are due in 2008 through
2016. These expenditures are expected to be financed by cash generated from operations or by
issuing new debt.
21.8.3
Offset Financial Liability
We entered into a bank loan to finance the acquisition of certain equipment. This loan is offset by
a financial asset with the same institution. At December 31, 2007, the loan had a balance of $195.4
million, offset
by a financial asset of $190.3 million. The remainder is included in Long-term
debt on our Consolidated Balance Sheet.
21.9 PENSION PLAN DEFICIT
The defined benefit pension plans deficit was $415.3 million as at December 31, 2007. A plan
surplus or deficit is calculated as the difference between an actuarially estimated future
obligation for pension payments and the fair market value of the assets available to pay this
liability. The pension obligation is discounted using a discount rate that is a blended interest
rate of high-quality corporate debt instruments. The discount rate is one of the factors that can
influence a plans deficit. Other factors include the actual return earned on the assets, and rates
used, based on managements best estimates, for future salary increases and inflation.
We estimate that every 1.0 percentage point increase (or decrease) in the discount rate can cause
our defined benefit pension plans deficit to decrease (or increase) by approximately $625 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 47 % and 53 % of the plans assets are invested in public 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 to the pension plans
that, as a minimum, meet pension legislative requirements.
We made contributions of $86.4 million to the defined benefit pension plans in 2007, compared with
$209.5 million in 2006.
The minimum 2008 contribution requirement for our main pension plan will be set out in an updated
actuarial valuation as at January 1, 2008 (to be finalized in June 2008). At this time, we expect
our pension contribution in 2008 to be similar to 2007. Future pension contributions will be highly
dependent on our actual experience with such variables as investment returns, interest rate
fluctuations and demographic changes, as well as on any changes in the regulatory environment.
21.10 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 in Section 23.1) totalled $61.0 million in 2007, compared with $96.3
million in 2006 and $69.0 million in 2005. Payments relating to all restructuring liabilities
amounted to $47.0 million, compared with $76.8 million in 2006 and $50.6 in 2005. Payments relating
to the labour liabilities were $46.8 million in 2007, compared with $71.8 million in 2006 and $50.5
million in 2005.
Cash payments for restructuring and environmental initiatives are estimated to be $61 million in
2008, $42 million in 2009, $35 million in 2010, and a total of $122 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 $41 million in 2008, $25 million in 2009, $21 million in 2010, and a total of
$53 million over the remaining years through 2025. These amounts include residual payments to
protected employees for previous restructuring plans that have been completed.
21.11 INDEMNIFICATIONS
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific
Railway Company Pension Trust Fund, we have undertaken to indemnify and save harmless the trustee,
to the extent not paid by the fund, from any and all taxes, claims,
liabilities, damages, costs and
expenses arising out of the performance of the trustees obligations under the agreement, except as
a result of misconduct by the trustee. The indemnity includes liabilities, costs or expenses
relating to any legal reporting or notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise with respect to the assets of the
pension plans that are not part of the fund. The indemnity survives the termination or expiry of
the agreement with respect to claims and liabilities arising prior to the termination or expiry. At
December 31, 2007, we had not recorded a liability associated with this indemnification, as we do
not expect to make any payments pertaining to it.
Pursuant to our by-laws, we indemnify all our current and former directors and officers. In
addition to the indemnity provided for in our by-laws, we also indemnify our directors and officers
pursuant to indemnity agreements. We carry a liability insurance policy for directors and officers,
subject to a maximum coverage limit and certain deductibles in cases where a director or officer is
reimbursed for any loss covered by the policy.
22.0 Business Risks and Enterprise Risk Management
In the normal course of our operations, we are exposed to various business risks and uncertainties
that can have an effect on our financial condition. While some financial exposures are reduced
through insurance and hedging programs we have in place, there are certain cases where the
financial risks are not fully insurable or are driven by external factors beyond our influence or
control.
As part of the preservation and delivery of value to our shareholders, we have developed an
integrated Enterprise Risk Management (ERM) framework to support consistent achievement of key
business objectives through daily pro-active management of risk. The objective of the
program is to
identify events that result from risks, thereby requiring active management. Each event identified
is assessed based on the potential severity and the ability of the risk to impact our financial
position and reputation, taking into account existing management control and likelihood. Risk
mitigation strategies are formulated to accept, treat, transfer, or eliminate the exposure to the
identified events.
The following is a discussion of key areas of business risks and uncertainties that we have
identified through our ERM framework and our mitigating strategies. The risk areas below are listed
in no particular order, as risks are evaluated on both severity and probability. Readers are
cautioned that the following is not an exhaustive list of all the risks we are exposed to, nor will
our mitigation strategies eliminate all risks listed.
22.1 COMPETITION
We face significant competition for freight transportation in Canada and the US, including
competition from other railways and trucking companies. We are subject to competition for freight
traffic from other Class I railways,
particularly Canadian National Railway Company (CN), Burlington Northern Santa Fe Railway, CSX
Corporation, Norfolk Southern Corporation and Union Pacific Corporation. Competition is based
mainly on price, quality of service and access to markets. Competition with the trucking industry
is generally based on freight rates, flexibility of service and transit time performance. The cost
structure and service of our competitors could impact our competition and have a materially adverse
impact on our business or operating results.
To mitigate competition risk, our strategies include:
□ |
|
creating long-term value for customers, shareholders and employees by profitably growing
within the reach of our rail franchise and through strategic additions to enhance access to
markets and quality of service; |
□ |
|
improving handling through IOP to reduce costs and enhance quality of service; and |
|
□ |
|
exercising a disciplined yield approach to competitive contract renewals and bids. |
22.2 LIQUIDITY
CP has long term debt ratings of Baa3, BBB, and BBB from Moodys, S&P, and DBRS respectively. The
ratings of Moodys and DBRS have a stable outlook. The S&P rating has a negative outlook.
CP has the following liquidity lines available:
□ |
|
a five year revolving credit facility of $945 million, with an accordion feature to $1,150
million, of which $408 million was available on December 31, 2007. The facility expires in
December 2012; |
|
□ |
|
an accounts receivable securitization program that provides up to $200 million in invested
amount. On December 31, 2007, $80 million in available capacity remained. The program expires
in September 2009; and |
|
□ |
|
an 18 month US$1.8 billion temporary credit facility to acquire the DM&E. On October 4,
2007, US$1.27 billion was drawn to close the transaction. The facility expires in April 2009. |
These facilities are arranged with a core group of highly rated international banks. They
incorporate pre-agreed pricing. The revolving credit facility and the temporary credit facility are
available on next day terms. The accounts receivable securitization program capacity is available
on five days notice.
CP plans to access both Canadian and US capital markets to secure long term financing for the
temporary credit facility. Market conditions allowing, CP will access debt capital markets in
various maturities periodically prior to the expiry of the temporary credit facility in order to
minimize risk and optimize pricing. It is CPs intention to manage its long term financing
structure to maintain
its investment grade rating. CP may decide to enter certain derivative
instruments to reduce interest rate and foreign exchange exposure in advance of these issuances.
Surplus cash is invested into a range of short dated money market instruments meeting or exceeding
the parameters of our investment policy.
22.3 ENVIRONMENTAL LAWS
AND REGULATIONS
Our operations and real estate assets are subject to extensive federal, provincial, state and local
environmental laws and regulations governing emissions to the air, discharges to waters and the
handling, storage, transportation and disposal of waste and other materials. If we are found to
have violated such laws or regulations it could materially affect our business or operating
results. In addition, in operating a railway, it is possible that releases of hazardous waste or
materials and derailments or other accidents may occur that could cause harm to human health or to
the environment. Costs of remediation, damages and changes in regulations could materially affect
our operating results and reputation.
We have implemented a comprehensive Environmental Management System, to facilitate the reduction of
environmental risk. An annual Corporate Environmental Plan states our environmental goals,
objectives, strategies and tactics.
Specific environmental programs are in place to address areas such as air emissions, wastewater,
management of vegetation, chemicals and waste, storage tanks and fuelling facilities. We also
undertake environmental impact assessments. There is continued focus on preventing spills and other
incidents that have a negative impact on the environment. There is an established Strategic
Emergency Response Contractor network and spill equipment kits
located across Canada and the US to ensure a
rapid and efficient response in the event of an
environmental incident. In addition, emergency preparedness and response plans are regularly
updated and tested.
We have developed an environmental audit program that comprehensively, systematically and regularly
assesses our facilities for compliance with legal requirements and our policies for conformance to
accepted industry standards. Included in this is a corrective action follow-up process and
semi-annual review by the Environmental and Safety Committee established by the Board of Directors.
We focus on key strategies, identifying tactics and actions to support commitments to the
community. Our strategies include:
□ |
|
protecting the environment; |
|
□ |
|
ensuring compliance with applicable environmental laws and regulations; |
|
□ |
|
promoting awareness and training; |
|
□ |
|
managing emergencies through preparedness; and |
|
□ |
|
encouraging involvement, consultation and dialogue with communities along our lines. |
22.4 REGULATORY AUTHORITIES
22.4.1
Regulatory Change
Our railway operations are subject to extensive federal laws, regulations and rules in both Canada
and the US which directly affect how we manage many aspects of our railway operation and business
activities. Our operations are primarily regulated by the Canadian Transport Agency (Agency) and
Transport Canada in Canada and the FRA and STB in the US. Various other federal regulators directly
and indirectly affect our operations in areas such as health, safety, security and environment and
other matters, all of which may affect our business or operating results.
The Canada Transportation Act (CTA) contains shipper rate and service remedies, including
final-offer arbitration, competitive
line rates, and compulsory inter-switching. These shipper
protections also extend to western Canadian grain transportation.
In Canada, Bill C-11, legislation amending the CTA, was passed and is now in effect as law. These
amendments include, but are not limited to, amendments concerning the grain revenue cap, commuter
and passenger access, and railway noise. The grain revenue cap is a cap imposed by Canadian federal
law on the amount of revenue we may earn for the transportation of certain grain from western
Canada to Vancouver for export or to Thunder Bay. The resulting grain revenue cap adjustment
calculation reflecting the change in the cost of maintaining grain hopper cars has been issued by
the Agency. The Agency has decided that the grain revenue cap should be adjusted down by $2.59 per
tonne retroactive to August 1, 2007. CP has announced its intention to appeal this decision. Noise
complaints have been filed with the Agency, and these noise complaints have been resolved through
mediation. There is no assurance as to the impact of these guidelines and any future complaints
filed on CP. Amendments concerning Final Offer Arbitration, agency review of the reasonableness of
ancillary services and other shipper issues have been introduced by the Canadian federal government
in Bill C-8. It is expected that Bill C-8 will become law in 2008. No assurance can be given as to
the effect on CP of the provisions of Bill C-11 or C-8 or as to the content, timing or effect on CP
of any anticipated additional legislation.
The FRA has jurisdiction over safety-related aspects of our railway operations in the US. State and
local regulatory agencies may also exercise limited jurisdiction over certain safety and
operational matters of local significance.
The commercial aspects of CPs railway operations in the US are subject to regulation by the STB.
The STB has published new rules
for the imposition of fuel surcharges and has 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 of new rules and any rules or regulation which might be forthcoming as a
result of current STB reviews.
To mitigate statutory and regulatory impacts, we are actively and extensively engaged throughout
the different levels of government and regulators, both directly and indirectly through industry
associations, including the Association of American Railroads (AAR) and the Railway Association
of Canada (RAC).
22.4.2
Security
We are subject to statutory and regulatory directives in the US that address security concerns.
Because CP plays a critical role in the North American transportation system, our rail lines,
facilities, and equipment, including rail cars carrying hazardous materials, could be direct
targets or indirect casualties of terrorist attacks. Future decisions by the US government on
security matters or decisions by the industry in response to security threats to the North American
rail network could have a materially adverse effect on our business or operating results. In
addition, insurance premiums for some or all of our current coverage could increase significantly,
or certain coverage may not be available to us in the future.
We strive to ensure our customers have unlimited access to North American markets by working
closely with Canadian and US regulators and other railways to facilitate the safe and secure
movement of goods between Canada and the US 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 US Customs and Border Protections (CBP) |
|
|
Customs-Trade Partnership Against Terrorism (C-TPAT) and Partners in Protection (PIP)
programs that seek to strengthen overall supply chain and border security; |
|
□ |
|
we are an approved carrier in Canada Border Services Agency (CBSA) programs to streamline
clearance at the border for imports from the US; |
|
□ |
|
we have implemented several regulatory security frameworks that focus on the provision of
advanced electronic cargo information and improved security technology at border crossings,
including the implementation of Vehicle and Cargo Inspection System (VACIS) at five of our
border crossings; |
|
□ |
|
we have also worked with the AAR to develop and put in place an extensive industry-wide
security plan to address terrorism and security-driven efforts seeking to restrict the
routings and operational handlings of certain hazardous materials; and |
|
□ |
|
we are working with the Transport Security Administration to reduce toxic inhalation risk
in high threat urban areas. |
22.5 LABOUR RELATIONS
Certain of our union agreements are currently under renegotiation. We cannot guarantee these
negotiations will be resolved in a timely manner or on favourable terms. Work stoppage may occur if
the negotiations are not resolved, which could materially impact business or operating results.
At December 31, 2007, approximately 79 % of our workforce was unionized and approximately 81 % of
our workforce was located in Canada. Unionized employees are represented by a total of 34
bargaining units. Agreements are in place with all of seven bargaining units that represent our
employees in Canada and 14 of 27 bargaining units that
represent employees in our US operations.
The following is a negotiations status summary:
22.5.1
Canada
□ |
|
On January 26, 2008, CP and the Canadian Auto Workers (CAW), representing employees who
maintain and repair locomotives and freight cars, reached a tentative three-year agreement
extending through to the end of 2010. This agreement was ratified on February 15, 2008. |
|
□ |
|
On December 5, 2007, CP and the Teamsters Canada Rail Conference (TCRC-RTE), which
represents employees who operate trains, reached a tentative five-year agreement extending
through to the end of 2011. This agreement was ratified on February 13, 2008. |
|
□ |
|
On July 18, 2007, a three-year agreement extending through to December 31, 2009 with the
Teamsters Canada Rail Conference (TCRC-MWED), which represents employees who maintain track
infrastructure and perform capital programs, was ratified. |
|
□ |
|
A five-year collective agreement with the International Brotherhood of Electrical Workers,
representing signal maintainers, extends to the end of 2009. |
|
□ |
|
A four-year collective agreement with the Canadian Pacific Police Association, representing
CP Police sergeants and constables, extends to the end of 2009. |
|
□ |
|
A three-year agreement with the Steelworkers Union, representing intermodal operation and
clerical employees extends to the end of 2009. |
|
□ |
|
A three-year collective agreements, with the Teamsters Canada Rail Conference, Rail Canada
Traffic Controllers, representing employees who control train traffic, extends to the end of
2008. |
22.5.2
US
We are party to collective agreements with 14 bargaining units of our Soo Line Railroad Company
(Soo Line) subsidiary and 13 bargaining units of our Delaware and Hudson Railway (D&H)
subsidiary. Most US Class I railroads negotiate labour agreements collectively on a national basis.
Soo Line and D&H have elected to negotiate independently of the national bargaining process.
With respect to Soo Line, negotiations are underway with four bargaining units representing track
maintainers, conductors, car repair employees, and sheet metal workers. Agreements with the
bargaining unit representing locomotive engineers, train dispatchers, yard supervisors, clerks,
machinists, boilermaker and blacksmiths, mechanical supervisors, electricians and signal repair
employees extends through 2009. A tentative agreement with the bargaining unit representing
mechanical labourers is subject to ratification.
D&H has agreements in place with five unions representing mechanical supervisors, mechanical
labourers, machinists, police and yard supervisors. Negotiations are underway with electricians,
track maintainers, conductors, locomotive engineers, clerks, signal repair employees and
engineering supervisors. A tentative agreement with the bargaining unit representing car repairers
is subject to ratification.
22.6 NETWORK CAPACITY
AND VOLUME
Our operating and hence financial position are subject to capacity constraints and fluctuations in
traffic volumes:
22.6.1
Capacity
Significant increases in rail traffic volumes have created capacity challenges for North American
railways. In particular, a rapid surge in exports and imports has created pressure on railway
systems to and from the Pacific Coast. In 2005, we completed a major expansion
of our track network
in western Canada between the prairies and the Port of Vancouver on the Pacific Coast. Any further
expansion will be tied to ongoing market conditions and the continuation of a stable regulatory
environment in Canada. We are also maximizing our freight handling capacity by acquiring new and
more powerful locomotives and replacing older freight cars with more efficient and higher-capacity
freight cars.
In January 2006, CP and CN entered into an agreement, which assists in the optimization of railway
infrastructure in the lower mainland of BC.
22.6.2
Volume
We have a substantial investment in fixed plant and equipment and, therefore, have a limited
ability to adjust production levels in response to significant and short-term declines in traffic
volumes, potentially resulting in a cyclical adverse impact on predicted future earnings levels.
However, we actively manage our processes and resources to control variable costs, increase
efficiency and mitigate the negative effects of declines in freight traffic.
We will continue our focus on quality revenue growth and cost management, as well as improved
utilization of our asset base.
22.7 FINANCIAL RISKS
22.7.1 Pension Funding
Status Volatility
Our main Canadian defined benefit pension plan can produce significant volatility in pension
funding requirements, given the pension funds $7.5 billion size, the differing drivers of the
pension asset and liability values, and Canadian statutory pension funding requirements. CP has
made several changes to the plans investment policy over the last several years to reduce this
volatility, without increasing the expected long-term costs of maintaining this plan. These
investment policy changes include: reducing the plans public equity markets exposure,
with the
funds redirected to less volatile Canadian commercial real estate and private market
infrastructure; increasing the duration
of the plans fixed income assets so as to better match the sensitivity of the plans liabilities
to interest rate movements; and hedging approximately 50 % of the plans foreign currency exposure.
22.7.2
Fuel Cost Volatility
Fuel expense constitutes a significant portion of CPs operating costs and can be influenced by a
number of factors such as geopolitical events, weather, or unplanned infrastructure failures.
Our mitigation strategy includes a fuel cost recovery program and from time to time derivative
instruments (specific instruments currently used are discussed further in Section 17.6). While
fluctuations in fuel cost are mitigated, the risk cannot be completely eliminated due to timing and
the volatility in the market.
22.7.3
Foreign Exchange Risk
Although we conduct our business primarily in Canada, a significant portion of our revenues,
expenses, assets and liabilities including debt are denominated in US dollars. Consequently, our
results are affected by fluctuations in the exchange rate between these currencies. The value of
the Canadian dollar is affected by a number of domestic and international factors, including,
without limitation, economic performance, Canadian, US and international monetary policies and US
debt levels. Changes in the exchange rate between the Canadian dollar and other currencies
(including the US dollar) make the goods transported by us more or less competitive in the world
marketplace and, in turn, positively or negatively affect our revenues and expenses. To manage this
exposure to fluctuations in exchange rates between Canadian and US dollars, we may sell or purchase
US dollar forwards at fixed rates in future periods. To the extent that exchange rates decline
below the rate fixed
by forward contracts (Canadian dollar strengthening relative to the US
dollar), we will not receive the full benefit of these contracts to purchase US dollars. If we sell
the US dollar forward, we will not receive the full benefit should the exchange rate increase
(Canadian dollar weakening relative to the US dollar) above the fixed rate of the forward contract.
Foreign exchange management is discussed further in Section 17.5.
22.7.4
Interest Rate Risk
In order to meet our capital structure requirements, we may enter into long-term debt agreements.
These debt agreements expose us to increased interest costs on future fixed debt instruments and
existing variable rate debt instruments should market rates increase. In addition, the present
value of our assets and liabilities will also vary with interest rate changes. To manage our
interest rate exposure, we may enter into forward rate agreements such as treasury rate locks or
bond forwards that lock in rates for a future date, thereby protecting ourselves against interest
rate increases. We may also enter into swap agreements whereby one party agrees to pay a fixed rate
of interest while the other party pays a floating rate. Contingent on the direction of interest
rates, we may incur higher costs depending on our contracted rate. Interest rate management is
discussed further in Section 17.4.
22.8 GENERAL AND OTHER RISKS
There are factors and developments that are beyond the influence or control of the railway industry
generally and CP specifically which may have a material adverse effect on our business or operating
results. Our freight volumes and revenues are largely dependent upon the performance of the North
American and global economies, which remains uncertain, and other factors affecting the volumes and
patterns of international trade. We are also sensitive to factors including, but not limited to,
natural disasters, security threats, weather, insect populations,
commodity pricing, global supply
and demand, and supply chain efficiency, as well as developments affecting North Americas
agricultural, mining, forest products, consumer products, import/export and automotive sectors.
23.0 Critical
Accounting Estimates
To prepare financial statements that conform with Canadian GAAP, we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Using the most current information available,
we review our estimates on an ongoing basis, including those related to environmental liabilities,
pensions and other benefits, property, plant and equipment, future income taxes, and legal and
personal injury liabilities.
The development, selection and disclosure of these estimates, and this MD&A, have been reviewed by
the Board of Directors Audit, Finance and Risk Management Committee, which is comprised entirely
of independent directors.
23.1 ENVIRONMENTAL LIABILITIES
We estimate the probable costs to be incurred in the remediation of property contaminated by past
railway use. We screen and classify sites according to typical activities and scale of operations
conducted, and we develop remediation strategies for each property based on the nature and extent
of the contamination, as well as the location of the property and surrounding areas that may be
adversely affected by the presence of contaminants. We also consider available technologies,
treatment and disposal facilities and the acceptability of site-specific plans based on the local
regulatory environment. Site-specific plans range from containment
and risk management of the
contaminants through to the removal and treatment of the contaminants and affected soils and ground
water. The details of the estimates reflect the environmental liability at each property. We are
committed to fully meeting our regulatory and legal obligations with respect to environmental
matters.
Liabilities for environmental remediation may change from time to time as new information about
previously untested sites becomes known. The net liability may also vary as the courts decide legal
proceedings against outside parties responsible for contamination. These potential charges, which
cannot be quantified at this time, are not expected to be material to our financial position, but
may materially affect income in the period in which a charge is recognized. Material increases to
costs would be reflected as increases to Deferred liabilities on our Consolidated Balance Sheet
and to Special charges within operating expenses on our Statement of Consolidated Income.
At December 31, 2007, the accrual for environmental remediation on our Consolidated Balance Sheet
amounted to $104.0 million, of which the long-term portion amounting to $84.2 million was included
in Deferred liabilities and the short-term portion amounting to $19.8 million was included in
Accounts payable and accrued liabilities. Costs incurred under our environmental remediation
program are charged against the accrual. Total payments were $14.0 million in 2007 and $19.5
million in 2006. The US dollar-denominated portion of the liability was affected by the change in
FX, resulting in a decrease in environmental liabilities of $9.7 million in 2007 and $0.2 million
in 2006.
23.2 PENSIONS AND OTHER BENEFITS
We have defined benefit and defined contribution pension plans. Other benefits include
post-retirement medical and life insurance for pensioners, and some post-employment workers
compensation and
long-term disability benefits in Canada. Workers compensation benefits are
described in Section 23.5. Pension and post-retirement benefits liabilities are subject to various
external influences and uncertainties, as described in Section 21.9.
Pension costs are actuarially determined using the projected-benefit method prorated over the
credited service periods of employees. This method incorporates our best estimates of expected plan
investment performance, salary escalation and retirement ages of employees. The expected return on
fund assets is calculated using market-related asset values developed from a five-year average of
market values for the funds public equity securities (with each prior years market value adjusted
to the current date for assumed investment income during the intervening period) plus the market
value of the funds fixed income, real estate and infrastructure securities. The discount rate we
use to determine the benefit obligation is based on market interest rates on high-quality corporate
debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of 10
% of the greater of the benefit obligation and the market-related value of plan assets are
amortized over the expected average remaining service period of active employees expected to
receive benefits under the plan (approximately 11 years). Prior service costs arising from plan
amendments are amortized over the expected average remaining service period of active employees who
were expected to receive benefits under the plan at the date of amendment. A transitional asset and
obligation, which arose from implementing the CICA Accounting Standard Section 3461 Employee
Future Benefits effective January 1, 2000, are being amortized over the expected average remaining
service period of active employees who were expected to receive benefits under the plan at January
1, 2000 (approximately 13 years).
Other assets and deferred charges on our
December 31, 2007 Consolidated Balance Sheet included
prepaid pension costs of $1,103.1 million. This accrued benefit asset is increased mainly by
amounts contributed to the plans by the Company, partially offset by the amount of pension expense
for the year. Our Consolidated Balance Sheet also included $0.2 million in Accounts payable and
accrued liabilities and $0.8 million in Deferred liabilities for pension obligations.
The obligations with respect to post-retirement benefits, including health care and life insurance
for pensioners, and post-employment benefits, including some workers compensation and long-term
disability benefits in Canada, are actuarially determined and accrued using the projected-benefit
method prorated over the credited service periods of employees. Fluctuations in the post-retirement
benefit obligation are caused by changes in the discount rate used. A
1.0 percentage point increase (decrease) in the discount rate would decrease (increase) the
liability by approximately $50 million. We included post-retirement benefits accruals of $201.6
million in Deferred liabilities and post-retirement benefits accruals of $18.8 million in
Accounts payable and accrued liabilities on our December 31, 2007 Consolidated Balance Sheet.
Pension and post-retirement benefits expenses were included in Compensation and benefits on our
December 31, 2007 Statement of Consolidated Income. Combined pension and post-retirement benefits
expenses (excluding self-insured workers compensation and long-term disability benefits) were $98.2
million in 2007, compared with $122.1 million in 2006.
Pension expense consists of defined benefit pension expense plus defined contribution pension
expense (equal to contributions). Pension expense was $65.6 million in 2007, compared with $78.4
million in 2006. Defined benefit pension expense was $62.4 million in 2007, compared with $75.4
million in 2006. Defined contribution
pension expense was $3.2 million in 2007, compared with $3.0
million in 2006. Post-retirement benefits expense was $32.6 million in 2007, compared with $43.6
million in 2006.
23.3 PROPERTY, PLANT AND EQUIPMENT
We depreciate the cost of properties, net of salvage, on a straight-line basis over the estimated
useful life of the property group. We follow the group depreciation method under which a single
depreciation rate is applied to the total cost in a particular class of property, despite
differences in the service life or salvage value of individual properties within the same class.
Under the group depreciation method, retirements or disposals of properties in the normal course of
business are accounted for by charging the cost of the property less any net salvage to accumulated
depreciation.
Due to the capital intensive nature of the railway industry, depreciation represents a significant
part of our operating expenses. The estimated useful lives of properties have a direct impact on
the amount of depreciation expense charged and the amount of accumulated depreciation recorded as a
component of Net properties on our Consolidated Balance Sheet. At December 31, 2007, accumulated
depreciation was $5,103.9 million. Depreciation expense relating to properties amounted to $472.0
million in 2007, compared with $464.1 million in 2006.
We undertake regular depreciation studies to establish the estimated useful life of each property
group. The studies use statistical analysis and historical retirement records whenever feasible to
estimate service lives and salvage rates. In cases where there are new asset types or there is
insufficient retirement experience, the useful lives and salvage parameters are based on
engineering or other expert opinions in the field. Beginning in 2006 management performed the
depreciation studies with the
assistance of external consultants. Revisions to the estimated useful
lives and net salvage projections for properties constitute a change in accounting estimate and we
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 $3.0 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 $7.9 million in 2007 from the previous year primarily due to capital
additions to locomotives and track investment.
23.4 FUTURE INCOME TAXES
We account for future income taxes in accordance with the CICA Accounting Standard Section 3465
Income Taxes, which is based on the liability method. This method focuses on a companys balance
sheet and the temporary differences otherwise calculated from the comparison of book versus tax
values. It is assumed that such temporary differences will be settled in the future at
substantively enacted tax rates. This valuation process determines the future income tax assets and
liabilities at the balance sheet date.
In determining future income taxes, we make estimates and assumptions regarding future tax matters,
including estimating the timing of the realization and settlement of future income tax assets
(including the benefit of tax
losses) and liabilities. Future income taxes are calculated using the current substantively enacted
federal and provincial future income tax rates, which may differ in future periods.
In 2007, we reduced our future income tax liability by $162.9 million (2006 $176 million) due to
a reduction in income tax rates by the Government of Canada and certain provincial governments
(discussed in Section 11.4).
Following a review of impending transactions during third-quarter 2005, we concluded that our
remaining unrecognized capital loss carryforwards for tax would more than likely be utilized, and
we recorded a future tax asset for all previously unrecognized capital loss carryforwards. As a
result, any future capital gains recorded, including FX on LTD, will be taxable, where historically
they had resulted in no net tax expense.
As a result of this review, we made further reclassifications of income tax allocated to unrealized
FX on LTD (for non-GAAP reporting purposes, see Section 6.0). These reclassifications moved
previously recognized capital losses that have historically been allocated to unrealized FX on LTD
gains and included them in the calculation of income tax for other capital transactions, which are
included in income tax expense, before income tax on FX on LTD and other specified items (see
Section 6.0).
Future income tax expense totalling $38.7 million was included in income tax for 2007 and $75.3
million was included in income tax 2006. The change in future income tax expense for 2007 was
primarily due to tax rate changes implemented by the Canadian federal and provincial governments
(discussed further in Section 11.4). At December 31, 2007, future income tax
liabilities of
$1,701.5 million were recorded as a long-term liability and comprised largely of temporary
differences related to accounting for properties. Future income tax benefits of
$67.3 million realizable within one year were recorded as a current asset.
23.5 LEGAL AND PERSONAL INJURY LIABILITIES
We are involved in litigation in Canada and the US related to our business. Management is required
to establish estimates of potential liability arising from incidents, claims and pending
litigation, including personal injury claims and certain occupation-related and property damage
claims.
These estimates are determined on a case-by-case basis. They are based on an assessment of the
actual damages incurred, current legal advice with respect to the expected outcome of the legal
action, and actuarially determined assessments with respect to settlements in other similar cases.
We employ experienced claims adjusters who investigate and assess the validity of individual claims
made against us and estimate the damages incurred.
A provision for incidents, claims or litigation is recorded based on the facts and circumstances
known at the time. We accrue for likely claims when the facts of an incident become known and
investigation results provide a reasonable basis for estimating the liability. The lower end of the
range is accrued if the facts and circumstances permit only a range of reasonable estimates and no
single amount in that range is a better estimate than any other. Additionally, for administrative
expediency, we keep a general provision for lesser-value injury cases. Facts and circumstances
related to asserted claims can change, and a process is in place to monitor accruals for changes in
accounting estimates.
With respect to claims related to occupational health and safety in the provinces of Quebec,
Ontario, Manitoba and BC, estimates administered through the
Workers Compensation Board (WCB)
are actuarially determined. In the provinces of Saskatchewan and Alberta, we are assessed for an
annual WCB contribution. As a result, this amount is not subject to estimation by management.
Railway employees in the US are not covered by a workers compensation program, but are covered by
US federal law for railway employees. Although we manage in the US using a case-by-case
comprehensive approach, for accrual purposes, a combination of case-by-case analysis and
statistical analysis is utilized.
In 2005, we conducted a study to better measure the level of accruals for asbestos claims from
retired US employees, and to better calibrate the case-by-case accruals for other US employee
claims to recent safety and other experience trends. The result of the study was to increase our
liability accrual for such claims by $4.1 million with a corresponding charge to operating expense.
These studies are now being conducted on an annual basis. In 2006 and 2007, adjustment to the
liability was not significant.
Provisions for incidents, claims and litigation charged to income, which are included in Purchased
services and other on our Statement of Consolidated Income, amounted to $46.9 million in 2007 and
$41.1 million in 2006.
Accruals for incidents, claims and litigation, including WCB accruals, totalled $153.6 million, net
of insurance recoveries, at December 31, 2007. The total accrual included $102.1 million in
Deferred liabilities and
$78.5 million in Accounts payable and accrued liabilities, offset by $10.7 million in Other
assets and deferred charges and $16.3 million in Accounts receivable.
23.6 CANADIAN THIRD PARTY ASSET-BACKED COMMERCIAL PAPER
At December 31, 2007, ABCP has been valued at its estimated fair value (discussed further in
Section 11.2). ABCP, at its estimated
fair value of $122.1 million, was included in Investments.
The estimated
change in fair value of $21.5 million was recognized as a charge to income in Change
in fair value of Canadian third party asset-backed commercial paper in the third quarter of 2007.
Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and
timing of cash flows and the outcome of the restructuring process could give rise to a further
material change in the value of the Companys investment in ABCP which would impact the Companys
near term earnings.
24.0 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 US 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.
25.0 Forward-looking Information
This MD&A, especially but not limited to this section, contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (US) and other relevant
securities legislation 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, except as required by law, 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.
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 and liquidity of investments; various events
that could disrupt operations, including severe weather conditions; security threats and
governmental response to them; and technological changes.
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 Section 22.0 and elsewhere in this MD&A with the particular forward-looking
statement in question.
25.1 2007 FINANCIAL OUTLOOK
The following is the original 2007 guidance we provided in November of 2006:
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2007 financial outlook |
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Original guidance (2) |
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Date approved |
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Key assumptions underlying our original guidance |
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Total revenues
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Increase of 4 % 6 %
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Nov 15, 2006
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□ average crude oil prices of US$65 per barrel; |
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Total operating expenses
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Increase of 3 % 5 %
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Nov 15, 2006
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□ average FX rate of $1.10 per US dollar; and |
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Adjusted Diluted EPS (1)
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$4.30 $4.45
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Nov 15, 2006
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□ tax rate of 30 % 32 % |
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Capital expenditures
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$885 $895 million
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Nov 15, 2006 |
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Free Cash (1)
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In excess of $200 million
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Nov 15, 2006 |
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(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
measures are discussed further in Section 6.0.
(2) Certain portions of the guidance have subsequently been updated. The updates are
discussed further below.
We subsequently revised certain of our 2007 guidance. The following is the most updated 2007
guidance we provided:
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2007 financial outlook |
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Updated guidance |
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Date approved |
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Actual |
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Variance |
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Revised key assumptions |
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Total revenues
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Just below range of
increase of 4 % 6 %
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Oct 28, 2007
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2.7% |
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-130 basis points |
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□ average crude
oil prices of US$69
per barrel; |
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Total operating expenses
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Increase of 3 % 5 %
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Nov 15, 2006
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2.6% |
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- 40 basis points |
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□ average FX rate of $1.08 per US
dollar; and |
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Adjusted Diluted EPS (1)
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Lower end of or below
$4.30 $4.45
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Dec 11, 2007
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$4.32 |
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N/A |
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tax rate of 30
% 32% |
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Capital expenditures
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$885 $895 million
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Nov 15, 2006
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$902 million
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+ $7 million |
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Free Cash (1)
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In excess of $300 million
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Apr 17, 2007
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$303 million
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N/A |
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(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
measures are discussed further in Section 6.0.
25.1.1 2007 Guidance Updates
In April 2007, we revised our free cash to be in excess of $300 million, primarily due to an
approximate $50 million reduction in our estimated cash pension funding requirement.
In October 2007, the original key assumptions were revised to reflect market conditions. As such,
two revisions to guidance were made in our October 29, 2007 press release where the original target
of 4 % to 6 % growth in total revenues was revised
to just below the lower end of the range and adjusted diluted EPS was to be at the lower end of the original target range of $4.30 to $4.45.
In our December 12, 2007 press release, our adjusted diluted EPS was revised to the bottom of or
below the original target range of $4.30 to $4.45 primarily due to higher costs associated with
network disruptions, mainly driven by harsh weather conditions, and a large increase in fuel price
which was partially mitigated by our fuel recovery programs.
25.1.2 Variance from 2007 Guidance
Total revenue growth for 2007 was below our revised guidance primarily due to network disruptions,
mainly driven by harsh weather conditions, and the negative impact of the change in FX.
Total operating expenses for 2007 were below our guidance primarily due to lower compensation and
benefits expenses (further discussed in Section 9.1) and the positive impact of the change in FX.
Capital expenditures were above our guidance primarily due to the buyout of certain leased
locomotives under favourable terms.
25.2 2008 FINANCIAL OUTLOOK
The following is the original 2008 guidance we provided in October 2007:
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2008 financial outlook |
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Guidance |
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Date approved |
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Key 2008 assumptions |
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Total revenues
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Increase of 4 % 6 %
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Oct 29, 2007
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□ average crude oil prices of US$80 per barrel; |
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Total operating expenses
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Increase of 3 % 5 %
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Oct 29, 2007
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□ average FX rate of $1.00 per US dollar; |
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Adjusted diluted EPS (1)
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$4.70 $4.85
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Oct 29, 2007
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□ North American economic (GDP) growth of 2.5 %; and |
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Capital expenditures
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$885 $895 million
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Oct 29, 2007
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□ tax rate of 29 % 31 % |
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Free Cash (1)
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In excess of $250 million
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Oct 29, 2007 |
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(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
measures are discussed further in Section 6.0.
25.2.1 2008 Guidance Updates
We subsequently revised certain of our 2008 guidance. The following is the most updated 2008
guidance we provided:
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2008 financial outlook |
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Guidance |
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Date approved |
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Key 2008 assumptions |
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Total revenues
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Increase of 4% 6%
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Oct 29, 2007
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□ average crude oil prices of US$87 per barrel (2);
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Total operating expenses
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Increase of 3 % 5 %
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Oct 29, 2007
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□ average FX rate of $1.00 per US dollar; |
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Adjusted diluted EPS (1)
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$4.65 $4.80
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Feb 19, 2008
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□ North American economic (GDP) growth of 2.5 %; and |
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Capital expenditures
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$885 $895 million
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Oct 29, 2007
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□ tax rate of 29% 31%. |
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Free Cash (1)
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In excess of $250 million
|
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Oct 29, 2007 |
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(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
measures are discussed further in Section 6.0.
(2) This assumption had been revised in our January 29, 2008 press release.
In our February 20, 2008 press release, our adjusted diluted EPS was revised downward to the range
of $4.65 to $4.80. This was the result of the prospective application of the Canadian
Transportation Agencys adjustment to the grain revenue
entitlement under the CTA (discussed further in Section 22.4.1). The retroactive component of this adjustment could affect our adjusted
diluted EPS by an additional $0.08 per share.
The purpose of our guidance is to provide shareholders transparency with respect to
managements expectations of our operations and financial performance. Undue reliance should not be placed on
this guidance and other forward-looking information for other purposes.
26.0 Glossary of Terms
ABCP Canadian third party asset-backed commercial paper.
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
or 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 US subsidiary of CPRL.
DM&E Dakota, Minnesota & Eastern Railroad Corporation
EPS Earnings per share.
Fluidity Obtaining more value from our existing assets and resources.
Foreign
Exchange or FX The value of the Canadian dollar relative to the US dollar (exclusive of any
impact on market demand).
FRA US Federal Railroad Administration, a regulatory agency whose purpose is to promulgate and
enforce rail safety regulations; administer railroad assistance programs; conduct research and
development in support of improved railroad safety and national rail transportation policy; provide
for the rehabilitation of Northeast Corridor rail passenger service; and consolidate government
support of rail transportation activities.
FRA personal 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 or
gross ton-miles The movement of total train weight over a distance of one mile. Total train
weight is comprised of the weight of the freight cars, their contents and any inactive locomotives.
An increase in GTMs indicates additional workload.
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 US subsidiary of CPRL.
STB US Surface Transportation Board, a regulatory agency with jurisdiction over railway rate and
service issues and rail restructuring, including mergers and sales.
Terminal
dwell The average time a freight car resides at a specified terminal location. The timing
starts with a train arriving in the terminal, a customer releasing the car to us, or a car arriving
that is to be transferred to another railway. The timing ends when the train leaves, a customer
receives the car from us or the freight car is transferred to another railway. Freight cars are
excluded if: i) a train is moving through the terminal without stopping; ii) they are being stored
at the terminal; iii) they are in need of repair; or iv) they are used in track repairs.
US 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.
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
The information in this report is the responsibility of management. The consolidated financial
statements have been prepared by management in accordance with Canadian generally accepted
accounting principles and include some amounts based on managements best estimates and careful
judgment. The consolidated financial statements include the accounts of Canadian Pacific Railway
Limited, Canadian Pacific Railway Company and all of its subsidiaries (the Company). The
financial information of the Company included in the Companys Annual Report is consistent with
that in the consolidated financial statements. The consolidated financial statements have been
approved by the Board of Directors.
Our Board of Directors is responsible for reviewing and approving the consolidated financial
statements and for overseeing managements performance of its financial reporting responsibilities.
The Board of Directors carries out its responsibility for the consolidated financial statements
principally through its Audit, Finance and Risk Management Committee (the Audit
Committee),
consisting of six members, all of whom are outside directors. The Audit Committee reviews the
consolidated financial statements and Managements Discussion and Analysis with management and the
independent auditors prior to submission to the Board for approval. The Audit Committee meets
regularly with management, internal auditors, and the independent auditors to review accounting
policies, and financial reporting. The Audit Committee also reviews the recommendations of both the
independent and internal auditors for improvements to internal controls, as well as the actions of
management to implement such recommendations. The internal and independent auditors have full
access to the Audit Committee, with or without the presence of management.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. Because of its inherent limitations, internal
control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management has assessed the effectiveness of the Companys internal controls over financial
reporting in accordance with the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment,
management determined that the Company maintained effective internal control over financial
reporting as of December 31, 2007.
The effectiveness of the Companys internal control over financial reporting as of December 31,
2007 has been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their
report, which is included herein.
MICHAEL LAMBERT
Executive Vice-President
and Chief Financial Officer
February 19, 2008
FRED J. GREEN
Chief Executive Officer
INDEPENDENT AUDITORS REPORT
TO THE SHAREHOLDERS OF CANADIAN PACIFIC RAILWAY LIMITED
We have completed integrated audits of the consolidated financial statements and internal control
over financial reporting of Canadian Pacific Railway Limited as of December 31, 2007 and 2006 and
an audit of its 2005 consolidated financial statements. Our opinions, based on our audits, are
presented below.
CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Canadian Pacific Railway Limited as
at December 31, 2007 and December 31, 2006, and the related consolidated statements of income,
comprehensive income, changes in shareholders equity and cash flows for each of the years in the
three year period ended
December 31, 2007. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of the Companys financial statements as at December 31, 2007 and December
31, 2006 and for each of the years then ended in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight Board (United
States). We conducted our audit of the Companys financial statements for the year ended December
31, 2005 in accordance with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. A
financial statement audit also includes assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as at December 31, 2007 and December 31,
2006 and the results of its operations and its cash flows for each of the years in the three year
period ended December 31, 2007 in accordance with Canadian generally accepted accounting
principles.
INTERNAL CONTROL OVER FINANCIAL REPORTING
We have also audited Canadian Pacific Railway Limiteds internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Assessment of Internal Control over Financial Reporting.
Our
responsibility is to express an opinion on the effectiveness of the Companys internal control
over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition,
use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007 based on criteria established in Internal Control
Integrated Framework issued by the COSO.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
February 19, 2008
STATEMENT OF CONSOLIDATED INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions of Canadian dollars, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Freight (Note 23) |
|
$ |
4,555.2 |
|
|
$ |
4,427.3 |
|
|
$ |
4,266.3 |
|
Other |
|
|
152.4 |
|
|
|
155.9 |
|
|
|
125.3 |
|
|
|
|
|
|
|
4,707.6 |
|
|
|
4,583.2 |
|
|
|
4,391.6 |
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
1,284.2 |
|
|
|
1,327.6 |
|
|
|
1,322.1 |
|
Fuel |
|
|
746.8 |
|
|
|
650.5 |
|
|
|
588.0 |
|
Materials |
|
|
215.5 |
|
|
|
212.9 |
|
|
|
203.3 |
|
Equipment rents |
|
|
207.5 |
|
|
|
181.2 |
|
|
|
210.0 |
|
Depreciation and amortization |
|
|
472.0 |
|
|
|
464.1 |
|
|
|
445.1 |
|
Purchased services and other |
|
|
617.4 |
|
|
|
618.3 |
|
|
|
621.6 |
|
|
|
|
|
|
|
3,543.4 |
|
|
|
3,454.6 |
|
|
|
3,390.1 |
|
|
|
|
Operating income, before the following: |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
|
|
1,001.5 |
|
Special credit for environmental remediation (Note 18) |
|
|
|
|
|
|
|
|
|
|
(33.9 |
) |
Special charge for labour restructuring (Note 18) |
|
|
|
|
|
|
|
|
|
|
44.2 |
|
|
|
|
Operating income |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
|
|
991.2 |
|
Other income and charges (Note 4) |
|
|
17.3 |
|
|
|
27.8 |
|
|
|
18.1 |
|
Change in fair value of Canadian third party asset-backed commercial paper
(Note 11) |
|
|
21.5 |
|
|
|
|
|
|
|
|
|
Foreign exchange (gain) loss on long-term debt |
|
|
(169.8 |
) |
|
|
0.1 |
|
|
|
(44.7 |
) |
Net interest expense (Note 5) |
|
|
204.3 |
|
|
|
194.5 |
|
|
|
204.2 |
|
Income tax expense (Note 6) |
|
|
144.7 |
|
|
|
109.9 |
|
|
|
270.6 |
|
|
|
|
Net income |
|
$ |
946.2 |
|
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (Note 7) |
|
$ |
6.14 |
|
|
$ |
5.06 |
|
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (Note 7) |
|
$ |
6.08 |
|
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
946.2 |
|
|
$ |
796.3 |
|
|
$ |
543.0 |
|
Net change in foreign currency translation adjustments, net of
hedging activities |
|
|
(7.4 |
) |
|
|
(1.6 |
) |
|
|
(7.4 |
) |
Net change in losses on derivatives designated as cash flow hedges |
|
|
(36.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before income taxes |
|
|
(44.2 |
) |
|
|
(1.6 |
) |
|
|
(7.4 |
) |
Income tax recovery (expense) |
|
|
3.4 |
|
|
|
0.5 |
|
|
|
(2.1 |
) |
|
|
|
Other comprehensive loss (Note 9) |
|
|
(40.8 |
) |
|
|
(1.1 |
) |
|
|
(9.5 |
) |
|
|
|
Comprehensive income |
|
$ |
905.4 |
|
|
$ |
795.2 |
|
|
$ |
533.5 |
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
As at December 31 (in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
378.1 |
|
|
$ |
124.3 |
|
Accounts receivable and other current assets (Note 8) |
|
|
542.8 |
|
|
|
615.7 |
|
Materials and supplies |
|
|
179.5 |
|
|
|
158.6 |
|
Future income taxes (Note 6) |
|
|
67.3 |
|
|
|
106.3 |
|
|
|
|
|
|
|
1,167.7 |
|
|
|
1,004.9 |
|
Investments (Note 11) |
|
|
1,668.6 |
|
|
|
64.9 |
|
Net properties (Note 12) |
|
|
9,293.1 |
|
|
|
9,122.9 |
|
Other assets and deferred charges (Note 13) |
|
|
1,235.6 |
|
|
|
1,223.2 |
|
|
|
|
Total assets |
|
$ |
13,365.0 |
|
|
$ |
11,415.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Short-term borrowing |
|
$ |
229.7 |
|
|
$ |
|
|
Accounts payable and accrued liabilities |
|
|
980.8 |
|
|
|
1,002.6 |
|
Income and other taxes payable |
|
|
68.8 |
|
|
|
16.0 |
|
Dividends payable |
|
|
34.5 |
|
|
|
29.1 |
|
Long-term debt maturing within one year (Note 14) |
|
|
31.0 |
|
|
|
191.3 |
|
|
|
|
|
|
|
1,344.8 |
|
|
|
1,239.0 |
|
Deferred liabilities (Note 16) |
|
|
714.6 |
|
|
|
725.7 |
|
Long-term debt (Note 14) |
|
|
4,146.2 |
|
|
|
2,813.5 |
|
Future income taxes (Note 6) |
|
|
1,701.5 |
|
|
|
1,781.2 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
Share capital (Note 19) |
|
|
1,188.6 |
|
|
|
1,175.7 |
|
Contributed surplus (Note 19) |
|
|
42.4 |
|
|
|
32.3 |
|
Accumulated other comprehensive income (Note 9) |
|
|
39.6 |
|
|
|
66.4 |
|
Retained income |
|
|
4,187.3 |
|
|
|
3,582.1 |
|
|
|
|
|
|
|
5,457.9 |
|
|
|
4,856.5 |
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
13,365.0 |
|
|
$ |
11,415.9 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 22).
See Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
Approved on behalf of the Board:
|
|
J.E. Cleghorn, Director
|
|
R. Phillips, Director |
STATEMENT OF CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
946.2 |
|
|
$ |
796.3 |
|
|
$ |
543.0 |
|
Add (deduct) items not affecting cash |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
472.0 |
|
|
|
464.1 |
|
|
|
445.1 |
|
Future income taxes (Note 6) |
|
|
38.7 |
|
|
|
75.3 |
|
|
|
258.0 |
|
Change in fair value of Canadian third party asset-backed commercial paper (Note 11) |
|
|
21.5 |
|
|
|
|
|
|
|
|
|
Environmental remediation charge (Note 18) |
|
|
|
|
|
|
|
|
|
|
(30.9 |
) |
Restructuring and impairment charge (Note 18) |
|
|
|
|
|
|
|
|
|
|
44.2 |
|
Foreign exchange (gain) loss on long-term debt |
|
|
(169.8 |
) |
|
|
0.1 |
|
|
|
(44.7 |
) |
Amortization of deferred charges |
|
|
12.1 |
|
|
|
16.5 |
|
|
|
19.5 |
|
Restructuring and environmental payments (Note 18) |
|
|
(61.0 |
) |
|
|
(96.3 |
) |
|
|
(69.0 |
) |
Other operating activities, net |
|
|
4.6 |
|
|
|
(103.4 |
) |
|
|
(91.2 |
) |
Change in non-cash working capital balances related to operations (Note 10) |
|
|
50.3 |
|
|
|
(101.6 |
) |
|
|
(23.3 |
) |
|
|
|
Cash provided by operating activities |
|
|
1,314.6 |
|
|
|
1,051.0 |
|
|
|
1,050.7 |
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties (Note 12) |
|
|
(893.2 |
) |
|
|
(793.7 |
) |
|
|
(884.4 |
) |
Reduction in investments and other assets |
|
|
0.2 |
|
|
|
2.2 |
|
|
|
2.0 |
|
Net proceeds from disposal of transportation properties |
|
|
14.9 |
|
|
|
97.8 |
|
|
|
13.2 |
|
Acquisition of Dakota, Minnesota & Eastern Railroad Corporation (Note 11) |
|
|
(1,492.6 |
) |
|
|
|
|
|
|
|
|
Investment in Canadian third party asset-backed commercial paper (Note 11) |
|
|
(143.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(2,514.3 |
) |
|
|
(693.7 |
) |
|
|
(869.2 |
) |
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(133.1 |
) |
|
|
(112.4 |
) |
|
|
(89.5 |
) |
Issuance of CP Common Shares |
|
|
30.4 |
|
|
|
66.6 |
|
|
|
31.8 |
|
Purchase of CP Common Shares (Note 19) |
|
|
(231.1 |
) |
|
|
(286.4 |
) |
|
|
(80.6 |
) |
Increase in short-term borrowing |
|
|
229.7 |
|
|
|
|
|
|
|
|
|
Issuance of long-term debt (Note 14) |
|
|
1,745.3 |
|
|
|
2.8 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(187.7 |
) |
|
|
(25.4 |
) |
|
|
(274.4 |
) |
|
|
|
Cash provided by (used in) financing activities |
|
|
1,453.5 |
|
|
|
(354.8 |
) |
|
|
(412.7 |
) |
|
|
|
Cash position |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
253.8 |
|
|
|
2.5 |
|
|
|
(231.2 |
) |
Cash and cash equivalents at beginning of year |
|
|
124.3 |
|
|
|
121.8 |
|
|
|
353.0 |
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
378.1 |
|
|
$ |
124.3 |
|
|
$ |
121.8 |
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
1,175.7 |
|
|
$ |
1,141.5 |
|
Shares issued under stock option plans (Note 19) |
|
|
37.4 |
|
|
|
71.0 |
|
Shares purchased (Note 19) |
|
|
(24.5 |
) |
|
|
(36.8 |
) |
|
|
|
Balance, end of year |
|
|
1,188.6 |
|
|
|
1,175.7 |
|
|
|
|
Contributed surplus |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
32.3 |
|
|
|
245.1 |
|
Movement in stock-based compensation |
|
|
10.1 |
|
|
|
10.3 |
|
Shares purchased |
|
|
|
|
|
|
(223.1 |
) |
|
|
|
Balance, end of year |
|
|
42.4 |
|
|
|
32.3 |
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
66.4 |
|
|
|
67.5 |
|
Adjustment for change in accounting policy (Note 2) |
|
|
14.0 |
|
|
|
|
|
|
|
|
Adjusted balance, beginning of year |
|
|
80.4 |
|
|
|
67.5 |
|
Other comprehensive loss (Note 9) |
|
|
(40.8 |
) |
|
|
(1.1 |
) |
|
|
|
Balance, end of year |
|
|
39.6 |
|
|
|
66.4 |
|
|
|
|
Retained income |
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
3,582.1 |
|
|
|
2,930.0 |
|
Adjustment for change in accounting policy (Note 2) |
|
|
4.0 |
|
|
|
|
|
|
|
|
Adjusted balance, beginning of year |
|
|
3,586.1 |
|
|
|
2,930.0 |
|
Net income for the year |
|
|
946.2 |
|
|
|
796.3 |
|
Shares purchased (Note 19) |
|
|
(206.6 |
) |
|
|
(26.5 |
) |
Dividends |
|
|
(138.4 |
) |
|
|
(117.7 |
) |
|
|
|
Balance, end of year |
|
|
4,187.3 |
|
|
|
3,582.1 |
|
|
|
|
Total accumulated other comprehensive income and retained income |
|
|
4,226.9 |
|
|
|
3,648.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity, end of year |
|
$ |
5,457.9 |
|
|
$ |
4,856.5 |
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
1. Summary of significant accounting policies
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Canadian Pacific Railway Limited
(CPRL) and all of its subsidiaries, including variable-interest entities (VIE) for which CPRL
is the primary beneficiary and the proportionate share of the accounts of jointly controlled
enterprises (collectively referred to as CP or the Company), and have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP).
These consolidated financial statements are expressed in Canadian dollars, except where otherwise
indicated. The preparation of these financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of revenues and
expenses during the period, the reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the financial statements. Management regularly
reviews its estimates, including those related to restructuring and environmental liabilities,
pensions and other benefits, depreciable lives of properties, future income tax assets and
liabilities, as well as legal and personal injury liabilities based upon currently available
information. Actual results could differ from these estimates.
PRINCIPAL SUBSIDIARIES
The following list sets out CPRLs principal railway operating subsidiaries, including the
jurisdiction of incorporation and the percentage of voting securities owned directly or indirectly
by CPRL as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Incorporated under |
|
|
Percentage of voting securities |
Principal subsidiary |
|
the laws of |
|
|
held directly or indirectly by CPRL |
|
|
|
|
|
|
|
|
|
|
|
Canadian Pacific Railway Company |
|
Canada |
|
|
|
100 |
% |
Soo Line Railroad Company (Soo Line) |
|
Minnesota |
|
|
|
100 |
% |
Delaware and Hudson Railway Company, Inc. (D&H) |
|
Delaware |
|
|
|
100 |
% |
Mount Stephen Properties Inc. (MSP) |
|
Canada |
|
|
|
100 |
% |
|
|
Dakota, Minnesota and Eastern Railroad Corporation (DM&E) was acquired in October, 2007 and is
wholly owned. The purchase is subject to review and approval by the U.S. Surface Transportation
Board (STB), during which time the shares of DM&E have been placed in a voting trust.
REVENUE RECOGNITION
Railway freight revenues are recognized based on the percentage of completed service method. Other
revenue is recognized as service is performed or contractual obligations are met. Volume rebates
are accrued as a reduction of freight revenues based on estimated volumes and contract terms as
freight service is provided.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes marketable short-term investments that are readily convertible
to cash with original maturities of less than 3 months. Short-term investments are stated at fair
value, which approximates cost.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies, other than those held through
self-sustaining foreign subsidiaries, are translated into Canadian dollars at the year-end exchange
rate for monetary items and at the historical exchange rates for non-monetary items. Foreign
currency revenues and expenses are translated at the exchange rate in effect on the dates of the
related transactions. Foreign currency gains and losses, other than those arising from the
translation of the Companys net investment in self-sustaining foreign subsidiaries, are included
in income.
The accounts of the Companys self-sustaining foreign subsidiaries are translated into Canadian
dollars using the year-end exchange rate for assets and liabilities and the average exchange rates
during the year for revenues and expenses. Exchange gains and losses arising from translation of
these foreign subsidiaries accounts are included in other comprehensive loss. A portion of the
U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in
self-sustaining foreign subsidiaries. As a result, unrealized foreign exchange gains and losses on
a portion of the U.S. dollar-denominated long-term debt are offset against foreign exchange gains
and losses arising from translation of self-sustaining foreign subsidiaries accounts.
PENSIONS AND OTHER BENEFITS
Pension costs are actuarially determined using the projected-benefit method prorated over the
credited service periods of employees. This method incorporates managements best estimates of
expected plan investment performance, salary escalation and retirement ages of employees. The
expected return on fund assets is calculated using market-related asset values developed from a
five-year average of market values for the funds public equity securities (with each prior years
market value adjusted to the current date for assumed investment income during the intervening
period) plus the market value of the funds fixed income, real estate and infrastructure
securities. The discount rate used to determine the benefit obligation is based on market interest
rates on high-quality corporate debt instruments with matching cash flows. Unrecognized actuarial
gains and losses in excess of 10 % of the greater of the benefit obligation and the market-related
value of plan assets are amortized over the expected average remaining service period of active
employees expected to receive benefits under the plan (approximately 11 years). Prior service costs
arising from plan amendments are amortized over the expected average remaining service period of
active employees who were expected to receive benefits under the plan at the date of amendment.
Transitional assets and obligations, which arose from implementing the CICA Accounting Standard
Section 3461 Employee Future Benefits effective January 1, 2000, are being amortized over the
expected average remaining service period of active employees who were expected to receive benefits
under the plan at January 1, 2000 (approximately 13 years).
Benefits other than pensions, including health care, some workers compensation and long-term
disability benefits in Canada and life insurance, are actuarially determined and accrued on a basis
similar to pension costs.
MATERIALS AND SUPPLIES
Materials and supplies on hand are valued at the lower of average cost and replacement value.
NET PROPERTIES
Fixed asset additions and major renewals are recorded at cost, including direct costs, directly
attributable indirect costs and attributed carrying costs. The Company capitalizes development
costs for major new computer systems, including the related variable indirect costs. In addition,
CP capitalizes the cost of major overhauls and large refurbishments. When depreciable property is
retired or otherwise disposed of in the normal course of business, the book value, less net salvage
proceeds, is charged to accumulated depreciation. However, when removal costs exceed the salvage
value on assets and the Company had no legal obligation to remove, the net removal cost is charged
to income in the period in which the asset is removed and is not charged to accumulated
depreciation. When there is a legal obligation associated with the retirement of property, plant
and equipment, a liability is initially recognized at its fair value and a corresponding asset
retirement cost is added to the gross book value of the related asset and amortized to expense over
the estimated term to retirement. The Company reviews the carrying amounts of its properties
whenever changes in circumstances indicate that such carrying amounts may not be recoverable based
on future undiscounted cash flows. When such properties are determined to be impaired, recorded
asset values are revised to the fair value and an impairment loss is recognized.
Depreciation is calculated on the straight-line basis at rates based on the estimated service life,
taking into consideration the projected annual usage of depreciable property, except for rail and
other track material in the U.S., which is based directly on usage. Usage is based on volumes of
traffic.
Assets to be disposed of are included in Other assets and deferred charges on the Consolidated
Balance Sheet. They are reported at the lower of the carrying amount and fair value, less costs to
sell, and are no longer depreciated.
Equipment under capital lease is included in properties and depreciated over the period of expected
use.
Estimated service life used for principal categories of properties is as follows:
|
|
|
|
|
Assets |
|
Years |
|
|
|
|
|
|
|
|
Diesel locomotives |
|
|
28 to 35 |
|
|
Freight cars |
|
|
21 to 46 |
|
|
Ties |
|
|
35 to 41 |
|
|
Rails in first position |
|
|
27 to 29 |
|
in other than first position |
|
|
55 |
|
|
Computer system development costs |
|
|
5 to 15 |
|
|
|
DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS
Derivative financial and commodity instruments may be used from time to time by the Company to
manage its exposure to price risks relating to foreign currency exchange rates, stock-based
compensation, interest rates and fuel prices. 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 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 affect the following income
statement lines: Revenues, Compensation and benefits, Fuel, Other income and 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 loss. 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 a cash flow hedge relationship become ineffective,
previously unrealized gains and losses remain within Accumulated other comprehensive income
(AOCI) 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 AOCI until the related hedged item settles, at which time amounts recognized in
AOCI 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.
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.
The Company from time to time enters into foreign exchange forward contracts to hedge anticipated
sales in U.S. dollars, the related accounts receivable and future capital acquisitions. Foreign
exchange translation gains and losses on foreign currency-denominated derivative financial
instruments used to hedge anticipated U.S. dollar-denominated sales are recognized as an adjustment
of the revenues when the sale is recorded. Those used to hedge future capital acquisitions are
recognized as an adjustment of the property amount when the acquisition is recorded.
The Company also occasionally enters into foreign exchange forward contracts as part of its
short-term cash management strategy. These contracts are not designated as hedges due to their
short-term nature and are carried on the Consolidated Balance Sheet at fair value. Changes in fair
value are recognized in income in the period in which the change occurs.
The Company enters into interest rate swaps to manage the risk related to interest rate
fluctuations. These swap agreements require the periodic exchange of payments without the exchange
of the principal amount on which the payments are based. Interest expense on the debt is adjusted
to include the payments owing or receivable under the interest rate swaps.
The Company from time to time enters into bond forwards to fix interest rates for anticipated
issuances of debt. These agreements are accounted for as cash flow hedges.
The Company has a fuel-hedging program under which CP acquires future crude oil contracts for a
portion of its diesel fuel purchases to reduce the risk of price volatility affecting future cash
flows. In addition, foreign exchange forward contracts are used as part of the fuel-hedging program
to manage the foreign exchange variability component of CPs fuel price risk. The gains or losses
on the hedge contracts are applied against the corresponding fuel purchases in the period during
which the hedging contracts mature.
The Company enters into derivatives called Total Return Swaps (TRS) to mitigate fluctuations in
stock appreciation rights (SAR), deferred share units (DSU), performance share units (PSU)
and restricted share units (RSU). These are not designated as hedges and are recorded at market
value with the offsetting gain or loss reflected in Compensation and benefits.
RESTRUCTURING ACCRUAL AND ENVIRONMENTAL REMEDIATION
Restructuring liabilities are recorded at their present value. The discount related to liabilities
incurred in 2003 and subsequent years is amortized to Compensation and benefits and Purchased
services and other over the payment period. The discount related to liabilities incurred prior to
2003 is amortized to Other income and charges over the payment period. Environmental remediation
accruals cover site-specific remediation programs. Provisions for labour restructuring and
environmental remediation costs are recorded in Deferred liabilities, except for the current
portion, which is recorded in Accounts payable and accrued liabilities.
INCOME TAXES
The Company follows the liability method of accounting for income taxes. Future income tax assets
and liabilities are determined based on differences between the financial reporting and tax bases
of assets and liabilities using substantively enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The effect of a change in income tax rates on future
income tax assets and liabilities is recognized in income in the period during which the change
occurs.
EARNINGS PER SHARE
Basic earnings per share are calculated using the weighted average number of Common Shares
outstanding during the year. Diluted earnings per share are calculated using the Treasury Stock
Method for determining the dilutive effect of options.
STOCK-BASED COMPENSATION
CP follows the fair value based approach to accounting for stock-based compensation applying to
options issued for years beginning in 2003. Compensation expense and an increase in contributed
surplus are recognized for stock options over their vesting period based on their estimated fair
values on the date of grants, as determined using the Black-Scholes option-pricing model.
Forfeitures and cancellations of options are accounted for when they occur except for tandem
options where forfeitures are estimated on the grant date.
Any consideration paid by employees on exercise of stock options is credited to share capital when
the option is exercised and the recorded fair value of the option is removed from contributed
surplus and credited to share capital. Compensation expense is also recognized for SARs, DSUs, PSUs
and RSUs, using the intrinsic method, and employee share purchase plans, using the issue price, by
amortizing the cost over the vesting period or over the period from the grant date to the date
employees become eligible to retire when this is shorter than the vesting period, with the
liability for SARs, DSUs, PSUs and RSUs marked-to-market until exercised. Forfeitures and
cancellations of SARs, DSUs, PSUs and RSUs are accounted for when they occur. The SAR liability is
settled to Share capital when a SAR is cancelled due to the exercise of a tandem option.
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, Section 1530 Comprehensive
Income and Section 3251 Equity. 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 AOCI. Adoption of these standards was on a retrospective basis without restatement of
prior periods, except for the restatement of equity balances to reflect the reclassification of
Foreign currency translation adjustments to AOCI and Other Comprehensive Loss.
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 income of $4.0 million, and the recognition of AOCI 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 AOCI and Retained
income 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. AOCI 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 income 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 statements as a result of the refinement of
certain estimates used at the year end.
ACCOUNTING CHANGES
Effective from January 1, 2007, the CICA has amended Accounting Standard Section 1506 Accounting
Changes to prescribe the criteria for changing accounting policies and related accounting
treatment and disclosures of accounting changes. Changes in accounting policies are permitted when
required by a primary source of GAAP, for example when a new accounting section is first adopted,
or when the change in accounting policy results in more reliable and relevant financial information
being reflected in the financial statements.
The adoption of this amended accounting standard did not impact the financial statements of the
Company.
3. Future accounting changes
FINANCIAL INSTRUMENT AND CAPITAL DISCLOSURES
The CICA has issued the following accounting standards effective for fiscal years beginning on or
after January 1, 2008: Section 3862 Financial Instruments Disclosures, Section 3863 Financial
Instruments Presentation, and Section 1535 Capital Disclosures.
Section 3862 Financial Instruments Disclosures and Section 3863 Financial Instruments
Presentation replace Section 3861 Financial Instruments Disclosure and Presentation, revising
disclosures related to financial instruments, including hedging instruments, and carrying forward
unchanged presentation requirements.
Section 1535 Capital Disclosures will require the Company to provide disclosures about the
Companys capital and how it is managed.
The adoption of these new accounting standards will not impact the amounts reported in the
Companys financial statements as they primarily relate to disclosure.
INVENTORIES
Effective January 1, 2008, the CICA has issued accounting standard Section 3031 Inventories.
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 on CPs financial statements. Any adjustment
on the adoption of Section 3031 Inventories will be recognized in 2008 as an adjustment to
opening inventory and opening retained income.
GOODWILL AND INTANGIBLE ASSETS
In February 2008, the CICA has issued accounting standard Section 3064 Goodwill, and intangible
assets, replacing accounting standard Section 3062 Goodwill and other intangible assets and
accounting standard Section 3450 Research and development costs. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable
to financial statements relating to fiscal years beginning on or after October 1, 2008.
Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1,
2009. Section 3064 establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible assets by
profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards
included in the previous Section 3062. The Company is currently evaluating the impact of the
adoption of this new Section.
4. Other income and charges
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount on accruals recorded at present value |
|
$ |
8.1 |
|
|
$ |
10.0 |
|
|
$ |
15.4 |
|
Other exchange losses (gains) |
|
|
5.8 |
|
|
|
6.5 |
|
|
|
(2.2 |
) |
Loss on sale of accounts receivable (Note 8) |
|
|
5.8 |
|
|
|
5.0 |
|
|
|
3.5 |
|
Loss (gain) on non-hedging derivative instruments |
|
|
1.5 |
|
|
|
(1.2 |
) |
|
|
(6.6 |
) |
Equity income in Dakota, Minnesota & Eastern Railroad
Corporation, net of tax (Note 11) |
|
|
(12.3 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
8.4 |
|
|
|
7.5 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
Total other income and charges |
|
$ |
17.3 |
|
|
$ |
27.8 |
|
|
$ |
18.1 |
|
|
|
|
|
|
|
|
|
5. Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
219.6 |
|
|
$ |
200.5 |
|
|
$ |
211.8 |
|
Interest income |
|
|
(15.3 |
) |
|
|
(6.0 |
) |
|
|
(7.6 |
) |
|
|
|
|
|
|
|
|
Net interest expense |
|
$ |
204.3 |
|
|
$ |
194.5 |
|
|
$ |
204.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cash interest payments |
|
$ |
208.9 |
|
|
$ |
192.8 |
|
|
$ |
199.6 |
|
|
|
|
|
|
|
|
|
Interest expense includes interest on capital leases of $21.6 million for the year ended December
31, 2007 (2006 $24.2 million; 2005 $24.7 million).
6. Income taxes
The following is a summary of the major components of the Companys income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada (domestic) |
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
$ |
69.8 |
|
|
$ |
3.3 |
|
|
$ |
10.3 |
|
|
|
|
|
Future income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences |
|
|
163.8 |
|
|
|
194.7 |
|
|
|
213.9 |
|
Effect of tax rate decreases |
|
|
(162.9 |
) |
|
|
(176.0 |
) |
|
|
|
|
Recognition of previously unrecorded tax losses |
|
|
|
|
|
|
|
|
|
|
(17.2 |
) |
Effect of hedge of net investment in self-sustaining foreign subsidiaries |
|
|
(9.7 |
) |
|
|
0.6 |
|
|
|
(2.1 |
) |
Other |
|
|
(6.9 |
) |
|
|
(2.3 |
) |
|
|
(1.0 |
) |
|
|
|
|
Total future income tax expense |
|
|
(15.7 |
) |
|
|
17.0 |
|
|
|
193.6 |
|
|
|
|
|
Total income taxes (domestic) |
|
$ |
54.1 |
|
|
$ |
20.3 |
|
|
$ |
203.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (foreign) |
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
$ |
36.2 |
|
|
$ |
31.3 |
|
|
$ |
2.3 |
|
|
|
|
|
Future income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences |
|
|
64.7 |
|
|
|
62.5 |
|
|
|
64.4 |
|
Other |
|
|
(10.3 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
Total future income tax expense |
|
|
54.4 |
|
|
|
58.3 |
|
|
|
64.4 |
|
|
|
|
|
Total income taxes (foreign) |
|
$ |
90.6 |
|
|
$ |
89.6 |
|
|
$ |
66.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
$ |
106.0 |
|
|
$ |
34.6 |
|
|
$ |
12.6 |
|
Future income tax expense |
|
|
38.7 |
|
|
|
75.3 |
|
|
|
258.0 |
|
|
|
|
|
Total income taxes (domestic and foreign) |
|
$ |
144.7 |
|
|
$ |
109.9 |
|
|
$ |
270.6 |
|
|
|
|
|
|
|
|
|
The provision for future income taxes arises from temporary differences in the carrying values of
assets and liabilities for financial statement and income tax purposes and the effect of loss carry
forwards. The items comprising the future income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax assets |
|
|
|
|
|
|
|
|
Restructuring liability |
|
$ |
39.7 |
|
|
$ |
64.5 |
|
Amount related to tax losses carried forward |
|
|
53.9 |
|
|
|
83.6 |
|
Liabilities carrying value in excess of tax basis |
|
|
35.6 |
|
|
|
84.1 |
|
Future environmental remediation costs |
|
|
35.1 |
|
|
|
42.7 |
|
Other |
|
|
28.7 |
|
|
|
21.4 |
|
|
|
|
|
Total future income tax assets |
|
|
193.0 |
|
|
|
296.3 |
|
|
|
|
|
Future income tax liabilities |
|
|
|
|
|
|
|
|
Capital assets carrying value in excess of tax basis |
|
|
1,495.5 |
|
|
|
1,567.3 |
|
Other long-term assets carrying value in excess of tax basis |
|
|
300.0 |
|
|
|
338.0 |
|
Other |
|
|
33.7 |
|
|
|
65.9 |
|
|
|
|
|
Total future income tax liabilities |
|
|
1,827.2 |
|
|
|
1,971.2 |
|
|
|
|
|
Total net future income tax liabilities |
|
|
1,634.2 |
|
|
|
1,674.9 |
|
Current future income tax assets |
|
|
67.3 |
|
|
|
106.3 |
|
|
|
|
|
Long-term future income tax liabilities |
|
$ |
1,701.5 |
|
|
$ |
1,781.2 |
|
|
|
|
|
|
|
|
|
The Companys consolidated effective income tax rate differs from the expected statutory tax rates.
Expected income tax expense at statutory rates is reconciled to income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at Canadian enacted statutory tax rates |
|
$ |
333.6 |
|
|
$ |
298.6 |
|
|
$ |
291.8 |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Large corporations tax |
|
|
|
|
|
|
(5.6 |
) |
|
|
8.3 |
|
Gains and equity income not subject to tax |
|
|
(62.5 |
) |
|
|
(22.0 |
) |
|
|
(22.0 |
) |
Foreign tax rate differentials |
|
|
33.8 |
|
|
|
6.6 |
|
|
|
2.7 |
|
Effect of tax rate decreases |
|
|
(162.9 |
) |
|
|
(176.0 |
) |
|
|
|
|
Recognition of previously unrecorded tax losses |
|
|
|
|
|
|
|
|
|
|
(17.2 |
) |
Other |
|
|
2.7 |
|
|
|
8.3 |
|
|
|
7.0 |
|
|
|
|
|
Income tax expense |
|
$ |
144.7 |
|
|
$ |
109.9 |
|
|
$ |
270.6 |
|
|
|
|
|
|
|
|
|
The Company
has no unbenefited capital losses at December 31, 2007 and 2006.
In 2007, legislation was enacted to reduce Canadian federal corporate income tax rates over a
period of several years. As a result of these changes, the Company recorded a $162.9 million
benefit in future tax liability and income tax expense related to the revaluation of its future
income tax balances as at December 31, 2006.
In 2006, federal and provincial legislation was substantively enacted to reduce Canadian corporate
income tax rates over a period of several years. As a result of these changes, the Company recorded
a $176.0 million reduction in
future tax liability and income tax expense related to the revaluation of its future income tax
balances as at December 31, 2005.
Cash taxes paid in the year ended December 31, 2007, was $6.7 million (2006 $50.9 million; 2005
$7.6 million).
7. Earnings per share
At December 31, 2007, the number of shares outstanding was 153.3 million (2006 155.5 million).
Basic earnings per share have been calculated using net income for the year divided by the weighted
average number of CPRL shares outstanding during the year.
Diluted earnings per share have been calculated using the Treasury Stock Method, which gives effect
to the dilutive value of outstanding options. After the spin-off of CP from Canadian Pacific
Limited (CPL) in October 2001, CPL stock options held by CPL employees were exchanged for CP
replacement options. At December 31, 2007, there were 0.2 million replacement options outstanding
(2006 0.2 million; 2005 0.4 million). Since the spin-off, CPRL has issued new stock options
to CP employees. At December 31, 2007, there were 4.3 million new options outstanding (2006 4.3
million; 2005 5.5 million). These new option totals at December 31, 2007 exclude 2.4 million
options (2006 2.3 million; 2005 2.0 million) for which there are tandem SARs outstanding (see
Note 21), as these are not included in the dilution calculation.
The number of shares used in the earnings per share calculations is reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
154.0 |
|
|
|
157.3 |
|
|
|
158.4 |
|
Dilutive effect of stock options |
|
|
1.6 |
|
|
|
1.5 |
|
|
|
1.7 |
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
155.6 |
|
|
|
158.8 |
|
|
|
160.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in dollars) |
|
|
2007 |
|
|
|
2006 |
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
6.14 |
|
|
$ |
5.06 |
|
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
6.08 |
|
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
|
|
|
|
|
|
|
In 2007, 3,183 options (2006 379,908; 2005 1,000) were excluded from the computation of
diluted earnings per share because their effects were not dilutive.
8. Accounts receivable
The Company maintains an adequate allowance for doubtful accounts based on expected collectibility
of accounts receivable. Credit losses are based on specific identification of uncollectible
accounts and the application of historical percentages by aging category. At December 31, 2007,
allowances of $18.4 million (2006 $19.2 million) were recorded in Accounts receivable. During
2007, provisions of $2.7 million of accounts receivable (2006 $6.5 million) were recorded within
Purchased services and other.
The Company renewed its accounts receivable securitization program for a term of five years to
September 2009. Under the terms of the renewal, the Company sold an undivided co-ownership interest
in $120.0 million of eligible freight receivables to an unrelated trust. The trust is a
multi-seller trust and CP is not the primary beneficiary. The Company may increase the sale amount
up to a program limit of $200.0 million. At December 31, 2007, the outstanding undivided
co-ownership interest held by the trust under the accounts receivable securitization program was
$120.0 million (2006 $120.0 million).
The undivided co-ownership interest is sold on a fully serviced basis and the Company receives no
fee for ongoing servicing responsibilities. The average servicing period is approximately one
month. A servicing asset of $0.1 million and a liability of $0.1 million have been recorded, as the
benefit the Company derives from servicing the receivables approximates the value of the activity.
Receivables funded under the securitization program may not include delinquent, defaulted or
written-off receivables, nor receivables that do not meet certain obligor-specific criteria,
including concentrations in excess of prescribed limits.
The Company provides a credit enhancement amount to absorb credit losses. The trust has no recourse
to the co-ownership interest in receivables retained by the Company, other than in respect of the
credit enhancement amount. This amount is recognized by the Company as a retained interest and
included in accounts receivable. At December 31, 2007, the fair value of the retained interest was
18.7 % of the receivables sold or $22.5 million (2006 19.1 % or $22.9 million). The fair value
approximated carrying value as a result of the short collection cycle and negligible credit losses.
The Company cannot enter into an agreement with a third party with respect to its retained
interest.
The securitization program is subject to standard reporting and credit-rating requirements for CP.
The reporting includes provision of a monthly portfolio report that the pool of eligible
receivables satisfies pre-established criteria that are reviewed and approved by Dominion Bond
Rating Service and are standard for agreements of this nature. Failure to comply with these
provisions would trigger termination of the program.
In 2007, the Company recognized a loss of $5.8 million (2006 $5.0 million; 2005 $3.5 million)
on the securitization program. The loss is included in Other income and charges on the Statement
of Consolidated Income.
The table below summarizes certain cash flows related to the transfer of receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from collections reinvested |
|
$ |
1,478.9 |
|
|
$ |
1,475.7 |
|
|
$ |
1,480.6 |
|
|
|
|
|
|
|
9. Other comprehensive loss and accumulated other comprehensive income
Components of other comprehensive loss and the related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
|
|
|
|
|
Before tax |
|
|
(expense) |
|
|
Net of tax |
|
(in millions of Canadian dollars) |
|
amount |
|
|
recovery |
|
|
amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
71.0 |
|
|
$ |
(9.7 |
) |
|
$ |
61.3 |
|
Unrealized foreign exchange loss on translation of the net investment in U.S.
subsidiaries |
|
|
(78.4 |
) |
|
|
|
|
|
|
(78.4 |
) |
Realized gain on cash flow hedges settled in the period |
|
|
(12.8 |
) |
|
|
4.8 |
|
|
|
(8.0 |
) |
Increase in unrealized holding losses on cash flow hedges |
|
|
(26.2 |
) |
|
|
9.1 |
|
|
|
(17.1 |
) |
Realized loss on cash flow hedges settled in prior periods |
|
|
2.2 |
|
|
|
(0.8 |
) |
|
|
1.4 |
|
|
Other comprehensive loss |
|
$ |
(44.2 |
) |
|
$ |
3.4 |
|
|
$ |
(40.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange loss on translation of U.S. dollar-denominated
long-term debt designated as a hedge of the net investment in U.S. subsidiaries |
|
$ |
(3.7 |
) |
|
$ |
0.5 |
|
|
$ |
(3.2 |
) |
Unrealized foreign exchange gain on translation of the net investment in U.S.
subsidiaries |
|
|
2.1 |
|
|
|
|
|
|
|
2.1 |
|
|
Other comprehensive loss |
|
$ |
(1.6 |
) |
|
$ |
0.5 |
|
|
$ |
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
11.7 |
|
|
$ |
(2.1 |
) |
|
$ |
9.6 |
|
Unrealized foreign exchange loss on translation of the net investment in U.S.
subsidiaries |
|
|
(19.1 |
) |
|
|
|
|
|
|
(19.1 |
) |
|
Other comprehensive loss |
|
$ |
(7.4 |
) |
|
$ |
(2.1 |
) |
|
$ |
(9.5 |
) |
|
|
Changes in the balances of each classification within AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment |
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for change in |
|
|
opening |
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
accounting |
|
|
balance |
|
|
|
|
|
|
Closing |
|
|
|
balance |
|
|
policy |
|
|
Jan. 1 |
|
|
Period |
|
|
balance |
|
(in millions of Canadian dollars) |
|
Jan. 1 |
|
|
(Note 2) |
|
|
(Note 2) |
|
|
change |
|
|
Dec. 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 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 |
|
|
$ |
61.3 |
|
|
$ |
296.6 |
|
Foreign exchange on net investment in U.S. subsidiaries |
|
|
(168.5 |
) |
|
|
|
|
|
|
(168.5 |
) |
|
|
(78.4 |
) |
|
|
(246.9 |
) |
Increase (decrease) in unrealized effective gains
(losses) on cash flow hedges |
|
|
|
|
|
|
18.9 |
|
|
|
18.9 |
|
|
|
(25.1 |
) |
|
|
(6.2 |
) |
Deferred loss on settled hedge instruments |
|
|
|
|
|
|
(5.3 |
) |
|
|
(5.3 |
) |
|
|
1.4 |
|
|
|
(3.9 |
) |
|
Accumulated other comprehensive income |
|
$ |
66.4 |
|
|
$ |
14.0 |
|
|
$ |
80.4 |
|
|
$ |
(40.8 |
) |
|
$ |
39.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange on U.S. dollar debt designated as a
hedge of the net investment in U.S. subsidiaries |
|
$ |
238.1 |
|
|
|
|
|
|
|
|
|
|
$ |
(3.2 |
) |
|
$ |
234.9 |
|
Foreign exchange on net investment in U.S. subsidiaries |
|
|
(170.6 |
) |
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
(168.5 |
) |
|
Accumulated other comprehensive income |
|
$ |
67.5 |
|
|
|
|
|
|
|
|
|
|
$ |
(1.1 |
) |
|
$ |
66.4 |
|
|
|
During the next twelve months, the Company expects $10.9 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.
10. Change in non-cash working capital balances related to operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Use) source of cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
$ |
70.6 |
|
|
$ |
(101.0 |
) |
|
$ |
(61.8 |
) |
Materials and supplies |
|
|
(28.7 |
) |
|
|
(15.8 |
) |
|
|
(14.6 |
) |
Accounts payable and accrued liabilities |
|
|
(45.5 |
) |
|
|
(0.4 |
) |
|
|
39.1 |
|
Income and other taxes payable |
|
|
53.9 |
|
|
|
15.6 |
|
|
|
14.0 |
|
|
|
|
Change in non-cash working capital |
|
$ |
50.3 |
|
|
$ |
(101.6 |
) |
|
$ |
(23.3 |
) |
|
|
|
|
|
|
11. Investments
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail investments accounted for on an equity basis |
|
$ |
1,528.6 |
|
|
$ |
37.9 |
|
Other investments |
|
|
140.0 |
|
|
|
27.0 |
|
|
|
|
Total investments |
|
$ |
1,668.6 |
|
|
$ |
64.9 |
|
|
|
|
|
|
|
DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION (DM&E)
Effective October 4, 2007, the Company acquired all of the issued and outstanding shares of Dakota,
Minnesota & Eastern Railroad Corporation and its subsidiaries (DM&E), a Class II railroad with
approximately 2,500 miles of track in the U.S. Midwest, for a purchase price of approximately
US$1.5 billion, including acquisition costs.
The transaction is subject to review and approval by the United States Surface Transportation Board
(STB), pending which the shares of DM&E have been placed into an independent voting trust. The
voting trust is required by U.S. law so the Company does not exercise control over DM&E prior to
approval of the transaction by the STB. The Company is currently accounting for the purchase by the
equity method until such time as the acquisition has been approved by the STB; upon final approval
the acquisition will be accounted for using the purchase method of accounting. This final approval
is not expected to be received until late 2008. As such the accompanying consolidated financial
statements include the equity investment and equity earnings of DM&E for the period October 4 to
December 31, 2007. The equity income from the Companys investment in DM&E, which is recorded net
of tax, was $12.3 million in 2007, and is recorded in Other income and charges on the Statement
of Consolidated Income.
The purchase price included a $1.473 billion cash payment at the closing and future contingent
payments of up to approximately US$1.05 billion, which may become payable upon achievement of
certain milestones and transaction costs of $20 million incurred to December 31, 2007. The Company
drew down US$1.27 billion from an eighteen-month credit agreement entered into in October 2007
specifically to fund the acquisition of DM&E. Future contingent payments of US$350 million would
become due when construction starts of the Powder River Basin expansion project prior to December
31, 2025. Further future contingent payments of up to approximately US$700 million would become due
upon the movement of specified volumes over the Powder River Basin extension prior to December 31,
2025. The contingent payments would be accounted for as an increase in the purchase price.
Intangible assets acquired are subject to amortization. Neither the amortization of intangible
assets nor goodwill are deductible for tax purposes.
The following table reflects the purchase price allocation, based on the fair value of DM&Es
assets, owned and leased, and liabilities acquired at acquisition, which is subject to final
valuations, the impact of which is not expected to have a material effect on the result of
operations.
|
|
|
|
|
October 4, 2007 (in millions of Canadian dollars) |
|
2007 |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
91 |
|
Railroad properties |
|
|
1,935 |
|
Intangible assets |
|
|
50 |
|
Goodwill |
|
|
163 |
|
Other assets |
|
|
2 |
|
|
|
Total assets acquired |
|
|
2,241 |
|
|
|
Current liabilities |
|
|
104 |
|
Future income taxes |
|
|
576 |
|
Debt and other liabilities |
|
|
68 |
|
|
|
Total liabilities assumed |
|
|
748 |
|
|
|
Investment in net assets of DM&E |
|
$ |
1,493 |
|
|
|
ASSET-BACKED COMMERCIAL PAPER (ABCP)
At December 31, 2007, the Company held Canadian third party asset-backed commercial paper (ABCP)
issued by a number of trusts with an original cost of $143.6 million. At the dates the Company
acquired these investments they were rated R1 (High) by Dominion Bond Rating Service (DBRS), the
highest credit rating issued for commercial paper, and backed by R1 (High) rated assets and
liquidity agreements. These investments matured during the third quarter of 2007 but, as a result
of liquidity issues in the ABCP market, did not settle on maturity. As a result, the Company has
classified its ABCP as long-term assets within Investments after initially classifying them as Cash
and cash equivalents.
On August 16, 2007, an announcement was made by a group representing banks, asset providers and
major investors that they had agreed in principle to a long-term proposal and interim agreement to
convert the ABCP into long-term floating rate notes maturing no earlier than the scheduled maturity
of the underlying assets. On September 6, 2007, a pan-Canadian restructuring committee consisting
of major investors was formed. The committee was created to propose a solution to the liquidity
problem affecting the ABCP market and has retained legal and financial advisors to oversee the
proposed restructuring process.
The ABCP in which the Company has invested has not traded in an active market since mid-August 2007
and there are currently no market quotations available. The ABCP in which the Company has invested
continues to be rated R1 (High, Under Review with Developing Implications) by DBRS.
A Standstill Agreement is in place that commits investors not to take any action that would
precipitate an event of default. It is expected that the restructuring of the ABCP will occur in
April 2008 if approval by investors is obtained to do so. This approval will be requested on a
trust by trust basis most likely during April 2008.
On December 23, 2007, the pan-Canadian restructuring committee provided certain details about the
expected restructuring. Based on this and other public information it is estimated that, of the
$143.6 million of ABCP in which the Company has invested:
□ |
|
$12.5 million is represented by traditional securitized assets and the Company will, on
restructuring, receive replacement long-term floating rate notes that are expected to receive
a AAA credit rating; |
|
□ |
|
$119.0 million is represented by a combination of leveraged collaterized debt, synthetic
assets and traditional securitized assets and the Company will, on restructuring, receive
replacement senior and subordinated long-term floating rate notes. The senior notes are
expected to obtain a AAA rating while the subordinated notes are likely to be unrated; and |
|
□ |
|
$12.1 million is represented by assets that have an exposure to U.S. sub-prime mortgages.
On restructuring, the Company is likely to receive long-term floating rate notes that may be
rated, although at this time the pan-Canadian restructuring committee has provided no
indication of the likely rating these notes may receive. |
The valuation technique used by the Company to estimate the fair value of its investment in ABCP at
December 31, 2007, incorporates probability weighted discounted cash flows considering the best
available public information regarding market conditions and other factors that a market
participant would consider for such investments. The assumptions used in determining the estimated
fair value reflect the public statements made by the pan-Canadian restructuring committee that it
expects the ABCP will be converted into various long-term floating rate notes, as discussed above,
with maturities matching the maturities of the underlying assets and bearing market interest rates
commensurate with the nature of the underlying assets and their associated cash flows and the
credit rating and risk associated with the long-term floating rate notes.
The interest rates and maturities of the various long-term floating rate notes, discount rates and
credit losses modelled are:
|
|
|
|
|
|
|
Probability weighted average interest rate |
|
|
4.6% |
Weighted average discount rate |
|
|
5.3% |
Maturity of long-term floating rate notes |
|
five to seven years |
Credit losses |
|
nil to 25 % on a going concern basis 5 % to 50 % on a liquidation basis |
|
|
Interest rates and credit losses vary by each of the different replacement long-term floating rate
notes that are expected to be issued as each has different credit ratings and risks. Interest rates
and credit losses also vary by the different probable cash flow scenarios that have been modelled.
Discount rates vary dependent upon the credit rating of the replacement long-term floating rate
notes.
Maturities vary by different replacement long-term floating rate notes as a result of the expected
maturity of the underlying assets.
One of the probable cash flow scenarios modelled is a liquidation scenario whereby, if the
restructuring is not successfully completed, recovery of the Companys investment is through the
liquidation of the underlying assets of the ABCP trusts.
In addition, assumptions have also been made as to the amount of restructuring costs that the
Company will bear.
Based on additional information that became publicly available during the fourth quarter of 2007,
the probability weighted cash flows resulted in an estimated fair value of the Companys investment
in ABCP of $122.1 million at December 31, 2007. This was unchanged from the estimated fair value at
September 30, 2007. The reduction in the fair value of $21.5 million compared to the original cost
of the ABCP was recorded as a charge to income in the third quarter of 2007 with no further charges
required in the fourth quarter of 2007.
In view of the continuing uncertainties regarding the value of the assets which underlie the ABCP,
the amount and timing of cash flows and the outcome of the restructuring process could give rise to
a further material change in the value of the Companys investment in ABCP and could impact the
Companys near term earnings.
OTHER INVESTMENTS
Effective January 1, 2005 , CPs 50 % investment in the Detroit River Tunnel Partnership (DRTP)
has been accounted for on a proportionate consolidation basis. Summarized financial information for
the Companys interest in the DRTP is as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
0.8 |
|
|
$ |
0.9 |
|
Long-term assets |
|
|
51.0 |
|
|
|
48.0 |
|
Current liabilities |
|
|
2.5 |
|
|
|
2.1 |
|
Long-term liabilities |
|
|
0.5 |
|
|
|
0.5 |
|
Revenues |
|
|
12.9 |
|
|
|
12.8 |
|
Expenses |
|
|
2.4 |
|
|
|
1.7 |
|
Net income |
|
|
10.5 |
|
|
|
11.1 |
|
Cash provided by operating activities |
|
|
9.4 |
|
|
|
8.9 |
|
Cash used in investing activities |
|
|
1.9 |
|
|
|
1.4 |
|
Cash used in financing activities |
|
|
7.7 |
|
|
|
7.3 |
|
|
|
|
|
|
|
Income before tax from CPs investment in the DRTP was $10.5 million in 2007 (2006 $11.1
million; 2005 $8.2 million). The equity income (loss) from the Companys investment in the CNCP
Niagara-Windsor Partnership was $0.2 million in 2007 (2006 ($0.6) million; 2005 ($0.6)
million). CPs investment in the Indiana Harbor Belt Railroad Company generated equity income of
$4.1 million in 2007 (2006 $3.6 million; 2005 $3.0 million). Equity income (loss) is recorded
in Other revenues on the Statement of Consolidated Income.
12. Net properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
(in millions of Canadian dollars) |
|
Cost |
|
|
depreciation |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway |
|
$ |
8,828.0 |
|
|
$ |
2,852.1 |
|
|
$ |
5,975.9 |
|
Buildings |
|
|
342.4 |
|
|
|
136.0 |
|
|
|
206.4 |
|
Rolling stock |
|
|
3,593.7 |
|
|
|
1,485.4 |
|
|
|
2,108.3 |
|
Other |
|
|
1,632.9 |
|
|
|
630.4 |
|
|
|
1,002.5 |
|
|
Total net properties |
|
$ |
14,397.0 |
|
|
$ |
5,103.9 |
|
|
$ |
9,293.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway |
|
$ |
8,615.1 |
|
|
$ |
2,770.5 |
|
|
$ |
5,844.6 |
|
Buildings |
|
|
344.8 |
|
|
|
154.1 |
|
|
|
190.7 |
|
Rolling stock |
|
|
3,548.3 |
|
|
|
1,450.9 |
|
|
|
2,097.4 |
|
Other |
|
|
1,625.6 |
|
|
|
635.4 |
|
|
|
990.2 |
|
|
Total net properties |
|
$ |
14,133.8 |
|
|
$ |
5,010.9 |
|
|
$ |
9,122.9 |
|
|
|
At December 31, 2007, software development costs of $612.5 million (2006 $609.8 million) and
accumulated depreciation of $239.1 million (2006 $239.8 million) were included in the category
Other. Additions during 2007 were $48.8 million (2006 $37.6 million; 2005 $39.6 million)
and depreciation expense was $50.5 million (2006 $53.2 million; 2005 $52.3 million).
At December 31, 2007, net properties included $503.4 million (2006 $522.5 million) of assets
held under capital lease at cost and related accumulated depreciation of $127.5 million (2006
$112.4 million).
During 2007, capital assets were acquired under the Companys capital program at an aggregate cost
of $908.5 million (2006 $818.6 million; 2005 $906.0 million), $12.1 million of which were
acquired by means of capital leases (2006 $21.6 million; 2005 $0.6 million), and $4.6 million
of which were acquired by means of a non-monetary transaction. Cash payments related to capital
purchases were $893.2 million in 2007 (2006 $793.7 million; 2005 $884.4 million). At December
31, 2007, $2.1 million (2006 $3.5 million; 2005 $9.4 million) remained in accounts payable
related to the above purchases.
13. Other assets and deferred charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension costs |
|
$ |
1,104.1 |
|
|
$ |
1,081.2 |
|
Other (1) |
|
|
131.5 |
|
|
|
142.0 |
|
|
|
|
Total other assets and deferred charges |
|
$ |
1,235.6 |
|
|
$ |
1,223.2 |
|
|
|
|
|
|
|
(1) At December 31, 2007, the category Other included assets held for sale that
had a carrying value of $17.0 million (2006 $1.0 million) that were reclassified from Net
properties.
14. Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
Currency in which payable |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.250 % Notes due 2011 |
|
US$ |
|
$ |
398.8 |
|
|
$ |
466.2 |
|
7.125 % Debentures due 2031 |
|
US$ |
|
|
341.4 |
|
|
|
407.9 |
|
9.450 % Debentures due 2021 |
|
US$ |
|
|
244.4 |
|
|
|
291.4 |
|
5.750 % Debentures due 2033 |
|
US$ |
|
|
235.5 |
|
|
|
291.4 |
|
4.90 % Medium Term Notes due 2010 |
|
CDN$ |
|
|
349.8 |
|
|
|
350.0 |
|
5.95 % 30 year Notes |
|
US$ |
|
|
432.1 |
|
|
|
|
|
5.41 % Senior Secured Notes due 2024 |
|
US$ |
|
|
130.4 |
|
|
|
160.3 |
|
6.91 % Secured Equipment Notes due 2008 2024 |
|
CDN$ |
|
|
212.9 |
|
|
|
223.2 |
|
7.49 % Equipment Trust Certificates due 2008 2021 |
|
US$ |
|
|
111.2 |
|
|
|
134.9 |
|
Secured Equipment Loan due 2007 |
|
US$ |
|
|
|
|
|
|
141.6 |
|
Secured Equipment Loan due 2008 2015 |
|
CDN$ |
|
|
144.2 |
|
|
|
149.6 |
|
Obligations under capital leases due 2008 2022
(5.20 % 6.99 %) |
|
US$ |
|
|
263.5 |
|
|
|
317.0 |
|
Obligations under capital leases due 2008 2031
(5.64 % 5.65 %) |
|
CDN$ |
|
|
13.5 |
|
|
|
21.9 |
|
Bridge financing due 2009 |
|
US$ |
|
|
1,256.3 |
|
|
|
|
|
Bank loan payable on demand due 2010 (5.883 %) |
|
CDN$ |
|
|
5.1 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
4,139.1 |
|
|
|
2,960.1 |
|
Perpetual 4 % Consolidated Debenture Stock |
|
US$ |
|
|
30.3 |
|
|
|
35.7 |
|
Perpetual 4 % Consolidated Debenture Stock |
|
GB£ |
|
|
7.8 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
4,177.2 |
|
|
|
3,004.8 |
|
Less: Long-term debt maturing within one year |
|
|
|
|
|
|
31.0 |
|
|
|
191.3 |
|
|
|
|
|
|
|
|
|
|
$ |
4,146.2 |
|
|
$ |
2,813.5 |
|
|
|
|
|
|
|
At December 31, 2007, the gross amount of long-term debt denominated in U.S. dollars was US$3,513.8
million (2006 US$1,927.5 million).
Interest on each of the following instruments is paid semi-annually: 6.250 % Notes and 7.125 %
Debentures on April 15 and October 15; 9.450 % Debentures on February 1 and August 1; 5.750 %
Debentures on March 15 and September 15; and 4.90 % Medium Term Notes on June 15 and December 15 of
each year. All of these Notes and Debentures are unsecured but carry a negative pledge.
The 5.41 % Senior Secured Notes due 2024 are secured by specific locomotive units with a carrying
value at December 31, 2007, of $185.2 million. Equal blended semi-annual payments of principal and
interest are made on March 3 and September 3 of each year, up to and including September 3, 2023.
Final payment of the remaining interest and principal will be made on March 3, 2024.
The 6.91 % Secured Equipment Notes are full recourse obligations of the Company secured by a first
charge on specific locomotive units with a carrying value at December 31, 2007 of $187.3 million.
The Company made semi-annual payments of interest in the amount of $8.1 million on April 1 and
October 1 of each year, up to and including October 1, 2004. Commencing April 1, 2005, and
continuing on April 1 and October 1 of each year, the Company pays equal blended semi-annual
payments of principal and interest of $10.9 million. Final payment of principal and interest is due
October 1, 2024.
The 7.49 % Equipment Trust Certificates are secured by specific locomotive units with a carrying
value at December 31, 2007, of $120.8 million. Semi-annual interest payments of US$4.4 million were
made on January 15 and July 15 of each year, up to and including January 15, 2005. Beginning on
July 15, 2005, and continuing on January 15 and July 15 of each year, the Company makes semi-annual
payments that vary in amount and are interest-only payments or blended principal and interest
payments. Final payment of the principal is due January 15, 2021.
The Secured Equipment Loan due 2008-2015 is secured by specific locomotive units with a carrying
value of $154.2 million at December 31, 2007. The floating interest rate is calculated based on a
six-month average Canadian Dollar Offered Rate (calculated based on an average of Bankers
Acceptance rates) plus 53 basis points (2007 4.91 %; 2006 3.89 %). The Company makes blended
payments of principal and interest semi-annually on February 1 and August 1 of each year.
The bank loan payable on demand matures in 2010 and carries an interest rate of 5.883 %. The amount
of the loan at December 31, 2007, was $195.4 million (2006 $184.2 million). The Company has
offset against this loan a financial asset of $190.3 million (2006 $179.5 million) with the same
financial institution.
The Consolidated Debenture Stock, created by an Act of Parliament of 1889, constitutes a first
charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property
and effects of the Company, with certain exceptions.
During 2007, the Company issued US$450 million of 5.95 % 30 year notes for net proceeds of
CDN$485.1 million. The notes are unsecured, but carry a negative pledge. Interest is paid
semi-annually in arrears on May 15 and November 15 of each year.
In October 2007, the Company obtained bridge financing in the amount of US$1.27 billion for net
proceeds of CDN$1.26 billion. The bridge financing is repayable in 2009 and is unsecured. The
interest rate is floating and is calculated based on London Interbank Offered Rate (LIBOR) plus a
spread (2007 5.53 %).
The Secured Equipment Loan due 2007 was secured by specific units of rolling stock. The interest
rate was floating and was calculated based on a blend of one-month and three-month average LIBOR
plus a spread (2007 7.43 %; 2006 5.57 %). The Company made blended payments of principal and
interest quarterly on February 20, May 20, August 20 and November 20 of each year. The final
interest and principal payment occurred on February 20, 2007.
Annual maturities and sinking fund requirements, excluding those pertaining to capital leases, for
each of the five years following 2007 are (in millions): 2008 $252.4; 2009 $1,277.5; 2010
$373.3; 2011 $424.6; 2012 $35.2.
At December 31, 2007, capital lease obligations included in long-term debt were as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
Year |
|
|
Capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
$ |
27.8 |
|
|
|
|
2009 |
|
|
|
28.9 |
|
|
|
|
2010 |
|
|
|
41.5 |
|
|
|
|
2011 |
|
|
|
22.2 |
|
|
|
|
2012 |
|
|
|
24.5 |
|
|
|
Thereafter |
|
|
|
302.4 |
|
|
Total minimum lease payments |
|
|
|
|
|
|
447.3 |
|
Less: Imputed interest |
|
|
|
|
|
|
(170.3 |
) |
|
Present value of minimum lease payments |
|
|
|
|
|
|
277.0 |
|
Less: Current portion |
|
|
|
|
|
|
(8.3 |
) |
|
Long-term portion of capital lease obligations |
|
|
|
|
|
$ |
268.7 |
|
|
|
The carrying value of the assets securing the capital lease obligations was $375.8 million at
December 31, 2007.
15. Financial instruments
FOREIGN EXCHANGE FORWARD CONTRACTS
During 2007, the company entered into a currency forward to fix the exchange rate on US$400 million
6.250 % Notes due 2011. At December 31, 2007, the unrealized loss on this currency forward was
$15.7 million which has been recorded to Foreign exchange on long-term debt.
COMMODITY CONTRACTS
Exposure to fluctuations in fuel prices has been partially managed by selling or purchasing crude
oil swaps. At December 31, 2007, the Company had entered into futures contracts, which are
accounted for as cash flow hedges, to purchase approximately 396,000 barrels (2006 1,116,000
barrels) over the 2008-2009 period at average annual prices ranging from US$30.59 to US$38.19 per
barrel (2006 US$32.24 to US$41.59 over the 2007-2009 period). At December 31, 2007, the
unrealized gain on crude oil futures was CDN$21.4 million (2006 CDN$31.7 million). The Company
from time to time uses foreign exchange forward contracts to manage the risk caused by foreign
exchange variability on fuel purchases and commodity hedges. The Company enters into purchase
contracts of U.S. dollars because the Canadian dollar cost of fuel increases if the U.S. dollar
appreciates relative to the Canadian dollar. Gains and losses on the crude oil swaps, coupled with
foreign exchange forward contracts, offset increases and decreases in the cash cost of fuel. At
December 31, 2007, the Company had entered into foreign exchange forward contracts totaling US$14.2
million over the 2008-2009 period at exchange rates ranging from 1.2276 to 1.3008 (2006 US$45.8
million over the 2007-2009 period at exchange rates ranging from 1.1759 to 1.3008), which are
accounted for as cash flow hedges. At December 31, 2007, the unrealized loss on these forward
contracts was CDN$3.5 million (2006 CDN$3.1 million).
INTEREST RATE CONTRACTS
At December 31, 2007, the Company had outstanding interest rate swap agreements, classified as a
fair value hedge, for a nominal amount of US$200 million (2006 US$200.0 million). The swap
agreements converted a portion of the Companys fixed-interest-rate liability into a variable-rate
liability for the 6.250 % Notes. At December 31, 2007, the unrealized gains on these interest rate
swap agreements was CDN$5.5 million (2006 CDN$2.8 million).
The following table discloses the terms of the swap agreements at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Expiration |
|
|
October 15, 2011 |
|
Notional amount of principal (in CDN$ millions) |
|
|
$ 198.3 |
|
Fixed receiving rate |
|
|
6.250 |
% |
Variable paying rate |
|
|
6.655 |
% |
|
|
Based on U.S. three-month LIBOR.
During 2007, the Company entered into agreements that established the benchmark rate on CDN$350.0
million of long-term debt, which is expected to be issued in 2008. The fair value of this
instrument, which is accounted for as a cash flow hedge, was a loss of CDN$30.6 million at December
31, 2007. During the year, losses of CDN$2.3 million were recognised and recorded in Net income
and unrealized losses of CDN$28.3 million were recorded in Other comprehensive loss.
In 2004 , the Company entered into agreements that established the borrowing rate on US$200.0
million of long-term debt, which was expected to be issued in the first half of 2005. Unrealized
gains on this arrangement, which was accounted for as a cash flow hedge, were CDN$1.8 million at
December 31, 2004. In the first quarter of 2005, the hedge was terminated as the Company decided
not to issue the debt and the $5.8-million gain on settlement was recorded in Other income and
charges.
CREDIT RISK MANAGEMENT
Counterparties to financial instruments expose the Company to credit losses in the event of
non-performance. However, the Company does not anticipate non-performance that would materially
impact the Companys financial statements because dealings have been with counterparties of high
credit quality and adequate provisions have been made. In addition, the Company believes there are
no significant concentrations of credit risk (1).
INTEREST RATE EXPOSURE AND FAIR VALUES
The Companys exposure to interest rate risk along with the total carrying amounts and fair values
of its financial instruments are summarized in the following tables (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate maturing in |
|
|
|
|
|
|
|
2007 |
|
At floating |
|
|
|
|
|
|
2009 |
|
|
2013 |
|
|
Total carrying |
|
|
|
|
(in millions of Canadian dollars) |
|
interest rates |
|
|
2008 |
|
|
to 2012 |
|
|
and after |
|
|
value |
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
378.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
378.1 |
|
|
$ |
378.1 |
|
Crude oil swaps, unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.4 |
|
|
|
21.4 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
229.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229.7 |
|
|
|
229.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.250 % Notes |
|
|
|
|
|
|
|
|
|
|
396.5 |
|
|
|
|
|
|
|
396.5 |
|
|
|
413.8 |
|
7.125 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347.0 |
|
|
|
347.0 |
|
|
|
374.0 |
|
9.450 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247.8 |
|
|
|
247.8 |
|
|
|
300.5 |
|
5.750 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247.8 |
|
|
|
247.8 |
|
|
|
226.2 |
|
5.950 % 30-year notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446.1 |
|
|
|
446.1 |
|
|
|
403.8 |
|
4.90 % Medium Term Notes |
|
|
|
|
|
|
|
|
|
|
350.0 |
|
|
|
|
|
|
|
350.0 |
|
|
|
351.9 |
|
5.41 % Senior Secured Notes |
|
|
|
|
|
|
2.8 |
|
|
|
13.7 |
|
|
|
95.6 |
|
|
|
112.1 |
|
|
|
123.6 |
|
6.91 % Secured Equipment Notes |
|
|
|
|
|
|
7.0 |
|
|
|
33.3 |
|
|
|
176.3 |
|
|
|
216.6 |
|
|
|
244.6 |
|
7.49 % Equipment Trust Certificates |
|
|
|
|
|
|
4.4 |
|
|
|
42.6 |
|
|
|
98.2 |
|
|
|
145.2 |
|
|
|
124.4 |
|
Secured Equipment Loan |
|
|
133.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133.1 |
|
|
|
145.2 |
|
4 % Consolidated Debenture Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.1 |
|
|
|
38.1 |
|
|
|
33.8 |
|
Obligations under capital leases |
|
|
|
|
|
|
8.3 |
|
|
|
46.7 |
|
|
|
222.0 |
|
|
|
277.0 |
|
|
|
296.8 |
|
Bridge financing |
|
|
1,259.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,259.0 |
|
|
|
1,259.0 |
|
Bank loan payable on demand |
|
|
|
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
5.1 |
|
|
|
5.0 |
|
Transaction costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.2 |
) |
|
|
|
|
|
Total long-term debt |
|
|
1,392.1 |
|
|
|
27.6 |
|
|
|
882.8 |
|
|
|
1,918.9 |
|
|
|
4,177.2 |
|
|
|
4,302.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
on fuel, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
Interest rate swaps, unrealized loss |
|
|
198.3 |
|
|
|
|
|
|
|
(198.3 |
) |
|
|
|
|
|
|
5.5 |
|
|
|
5.5 |
|
Total return swap, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8 |
|
|
|
3.8 |
|
Interest rate forward, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.6 |
|
|
|
30.6 |
|
Currency forward, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.7 |
|
|
|
15.7 |
|
|
|
(1)
The discussion provided relating to credit risk management and interest rate
exposure and fair values and the information in the table above does not consider risks related to
the Companys investment in ABCP which is discussed in more detail in Note 11.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate maturing in |
|
|
|
|
|
|
|
2006 |
|
At floating |
|
|
|
|
|
|
2008 |
|
|
2012 |
|
|
Total carrying |
|
|
|
|
(in millions of Canadian dollars) |
|
interest rates |
|
|
2007 |
|
|
to 2011 |
|
|
and after |
|
|
value |
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
124.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
124.3 |
|
|
$ |
124.3 |
|
Crude oil swaps, unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.7 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.250 % Notes |
|
|
|
|
|
|
|
|
|
|
466.2 |
|
|
|
|
|
|
|
466.2 |
|
|
|
487.0 |
|
7.125 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407.9 |
|
|
|
407.9 |
|
|
|
484.3 |
|
9.450 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291.4 |
|
|
|
291.4 |
|
|
|
381.7 |
|
5.750 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291.4 |
|
|
|
291.4 |
|
|
|
300.6 |
|
4.90 % Medium Term Notes |
|
|
|
|
|
|
|
|
|
|
350.0 |
|
|
|
|
|
|
|
350.0 |
|
|
|
355.3 |
|
5.41 % Senior Secured Notes |
|
|
|
|
|
|
3.8 |
|
|
|
17.5 |
|
|
|
139.0 |
|
|
|
160.3 |
|
|
|
157.8 |
|
6.91 % Secured Equipment Notes |
|
|
|
|
|
|
6.6 |
|
|
|
31.1 |
|
|
|
185.5 |
|
|
|
223.2 |
|
|
|
259.0 |
|
7.49 % Equipment Trust Certificates |
|
|
|
|
|
|
3.1 |
|
|
|
14.8 |
|
|
|
117.0 |
|
|
|
134.9 |
|
|
|
155.7 |
|
Secured Equipment Loan |
|
|
141.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141.6 |
|
|
|
141.6 |
|
Secured Equipment Loan |
|
|
149.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149.6 |
|
|
|
149.6 |
|
4 % Consolidated Debenture Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.7 |
|
|
|
44.7 |
|
|
|
37.4 |
|
Obligations under capital leases |
|
|
|
|
|
|
27.0 |
|
|
|
50.4 |
|
|
|
261.5 |
|
|
|
338.9 |
|
|
|
358.2 |
|
Bank loan payable on demand |
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
4.7 |
|
|
|
4.7 |
|
|
Total long-term debt |
|
|
291.2 |
|
|
|
45.2 |
|
|
|
930.0 |
|
|
|
1,738.4 |
|
|
|
3,004.8 |
|
|
|
3,272.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amounts |
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
on fuel, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Interest rate swaps, unrealized loss |
|
|
233.1 |
|
|
|
|
|
|
|
(233.1 |
) |
|
|
|
|
|
|
|
|
|
|
2.8 |
|
Total return swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
The Company has determined the estimated fair values of its financial instruments based on
appropriate valuation methodologies. However, considerable judgment is necessary to develop these
estimates. Accordingly, the estimates presented herein are not necessarily indicative of what the
Company could realize in a current market exchange. The use of different assumptions or
methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
□ |
|
Short-term financial assets and liabilities are valued at their carrying amounts as
presented on the Consolidated Balance Sheet, which are reasonable estimates of fair value due
to the relatively short period to maturity of these instruments. |
|
□ |
|
The fair value of publicly traded long-term debt is determined based on market prices at
December 31, 2007 and 2006. The fair value of other long-term debt is estimated based on rates
currently available to the Company for long-term borrowings, with terms and conditions similar
to those borrowings in place at the applicable Consolidated Balance Sheet date. |
|
□ |
|
The fair value of derivative instruments is calculated based on market prices or rates at
December 31, 2007 and 2006, which generally reflects the estimated amount the Company would
receive or pay to terminate the contracts at the applicable Consolidated Balance Sheet date. |
STOCK-BASED COMPENSATION EXPENSE MANAGEMENT
The Company entered into a TRS, effective in May 2006, in order to reduce the volatility and total
cost to the Company over time of four types of stock-based compensation: SARs, DSUs, RSUs and PSUs.
The value of the TRS derivative is linked to the market value of our stock and is intended to
mitigate the impact on expenses of share value movements on SARs, DSUs, RSUs and PSUs.
Compensation and benefits expense increased by $2.6
million (2006 $1.2 million) for the year ended December 31, 2007 due to unrealized losses for
these swaps. These losses substantially offset the benefits recognized in these stock-based
compensation programs due to fluctuations in share price during the period the TRS was in place.
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 as there are no quoted prices in an active
market for these investments. The Companys equity investments recorded on an equity basis have a
carrying value equal to cost plus the Companys share of the investees net income, less any
dividends received. 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.
Investments ABCP is carried at fair value, which has been determined using valuation techniques
that incorporate probability weighted discounted future cash flows reflecting market conditions and
other factors that a market participant would consider (see Note 11).
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 $4,177.2 million and a fair
value of approximately $4,302.6 million at December 31, 2007.
16. Deferred liabilities
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for restructuring and environmental remediation (Note 18) |
|
$ |
234.0 |
|
|
$ |
309.0 |
|
Deferred workers compensation and personal injury accruals |
|
|
161.4 |
|
|
|
162.5 |
|
Accrued employee benefits |
|
|
222.0 |
|
|
|
208.4 |
|
Asset retirement obligations (Note 17) |
|
|
29.1 |
|
|
|
30.9 |
|
Deferred revenue on rights-of-way license agreements |
|
|
48.0 |
|
|
|
45.8 |
|
Deferred income credits |
|
|
32.0 |
|
|
|
27.3 |
|
Stock-based compensation liabilities |
|
|
75.0 |
|
|
|
76.6 |
|
Financial instruments |
|
|
13.7 |
|
|
|
|
|
Other |
|
|
92.1 |
|
|
|
54.1 |
|
|
|
|
|
|
|
907.3 |
|
|
|
914.6 |
|
Less: Amount payable/realizable within one year |
|
|
192.7 |
|
|
|
188.9 |
|
|
|
|
Total deferred liabilities |
|
$ |
714.6 |
|
|
$ |
725.7 |
|
|
|
|
|
|
|
Deferred revenue on rights-of-way license agreements is being amortized to income on a
straight-line basis over the related lease terms.
17. Asset retirement obligations
The Company has two liabilities related to asset retirement obligations (ARO) recorded in
Deferred liabilities. These liabilities are discounted at 6.25 %. The accretion expense related
to these AROs in 2007 was $1.9 million (2006 $2.0 million; 2005 $2.1 million), offset by
payments made of $0.7 million and a reduction of $0.8 million due to a sale of a related asset
(2006 payments of $0.7 million and a reduction of $3.4 million due to a sale of a related asset;
2005 payments of $0.6 million and a reduction of $1.0 million due to the sale of the related
asset), and revisions to the estimated cash flows of $2.2 million thereby decreasing the ARO
liability to $29.1 million at December 31, 2007 (2006 $30.9 million; 2005 $32.9 million).
Accretion expense is included in Depreciation and amortization on the Statement of Consolidated
Income.
Upon the ultimate retirement of grain-dependent branch lines, the Company has to pay a fee, levied
under the Canada Transportation Act, of $30,000 per mile of abandoned track. The undiscounted
amount of the liability was $50.4 million at December 31, 2007 (2006 $51.9 million), which, when
present valued, was $27.7 million at December 31, 2007 (2006 $29.6 million). The payments are
expected to be made in the 2008-2044 period.
The Company also has a liability on a joint facility that will have to be settled upon retirement
based on a proportion of use during the life of the asset. The estimate of the obligation at
December 31, 2007, was $16.0 million (2006 $15.3 million), which, when present valued, was $1.4
million at December 31, 2007 (2006 $1.3 million). For purposes of estimating this liability, the
payment related to the retirement of the joint facility is anticipated to be in 37 years.
18. Restructuring accrual and environmental remediation
At December 31, 2007, the provision for restructuring and environmental remediation was $234.0
million (2006 $309.0 million). The restructuring provision was primarily for 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 for
various sites, as well as a special charge taken in 2004 related to a specific property.
Set out below is a reconciliation of CPs liabilities associated with its restructuring and
environmental remediation programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Closing |
|
|
|
balance |
|
|
Accrued |
|
|
|
|
|
|
Amortization |
|
|
exchange |
|
|
balance |
|
(in millions of Canadian dollars) |
|
Jan. 1 |
|
|
(reduced |
) |
|
Payments |
|
|
of discount |
(1) |
|
impact |
|
|
Dec. 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations and severances |
|
$ |
187.4 |
|
|
$ |
(12.8 |
) |
|
$ |
(46.8 |
) |
|
$ |
6.1 |
|
|
$ |
(4.7 |
) |
|
$ |
129.2 |
|
Other non-labour liabilities for exit plans |
|
|
1.4 |
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
0.8 |
|
|
Total restructuring liability |
|
|
188.8 |
|
|
|
(13.0 |
) |
|
|
(47.0 |
) |
|
|
6.1 |
|
|
|
(4.9 |
) |
|
|
130.0 |
|
|
Environmental remediation program |
|
|
120.2 |
|
|
|
7.5 |
|
|
|
(14.0 |
) |
|
|
|
|
|
|
(9.7 |
) |
|
|
104.0 |
|
|
Total restructuring and environmental
remediation liability |
|
$ |
309.0 |
|
|
$ |
(5.5 |
) |
|
$ |
(61.0 |
) |
|
$ |
6.1 |
|
|
$ |
(14.6 |
) |
|
$ |
234.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations and severances |
|
$ |
263.6 |
|
|
$ |
(14.1 |
) |
|
$ |
(71.8 |
) |
|
$ |
9.8 |
|
|
$ |
(0.1 |
) |
|
$ |
187.4 |
|
Other non-labour liabilities for exit plans |
|
|
5.8 |
|
|
|
0.7 |
|
|
|
(5.0 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
1.4 |
|
|
Total restructuring liability |
|
|
269.4 |
|
|
|
(13.4 |
) |
|
|
(76.8 |
) |
|
|
9.9 |
|
|
|
(0.3 |
) |
|
|
188.8 |
|
|
Environmental remediation program |
|
|
129.4 |
|
|
|
10.5 |
|
|
|
(19.5 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
120.2 |
|
|
Total restructuring and environmental
remediation liability |
|
$ |
398.8 |
|
|
$ |
(2.9 |
) |
|
$ |
(96.3 |
) |
|
$ |
9.9 |
|
|
$ |
(0.5 |
) |
|
$ |
309.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations and severances |
|
$ |
269.7 |
|
|
$ |
33.6 |
|
|
$ |
(50.5 |
) |
|
$ |
12.0 |
|
|
$ |
(1.2 |
) |
|
$ |
263.6 |
|
Other non-labour liabilities for exit plans |
|
|
6.1 |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
5.8 |
|
|
Total restructuring liability |
|
|
275.8 |
|
|
|
33.5 |
|
|
|
(50.6 |
) |
|
|
12.1 |
|
|
|
(1.4 |
) |
|
|
269.4 |
|
|
Environmental remediation program |
|
|
172.9 |
|
|
|
(22.4 |
) |
|
|
(18.4 |
) |
|
|
|
|
|
|
(2.7 |
) |
|
|
129.4 |
|
|
Total restructuring and environmental
remediation liability |
|
$ |
448.7 |
|
|
$ |
11.1 |
|
|
$ |
(69.0 |
) |
|
$ |
12.1 |
|
|
$ |
(4.1 |
) |
|
$ |
398.8 |
|
|
|
(1) Amortization of discount is charged to income as Compensation and benefits
(2007 $3.3 million; 2006 $5.1 million; 2005 $0.7 million), Purchased services and other
(2007 nil; 2006 nil; 2005 $2.3 million) and Other income and charges (2007 $2.8
million; 2006 $4.8 million; 2005 $9.2 million), as applicable.
New accruals and adjustments to previous accruals were a net reduction of $5.5 million in 2007,
compared with net reduction of $2.9 million in 2006 and a net increase of $11.1 million in 2005.
In 2007, CP recorded a net reduction in the restructuring liability included in Deferred
liabilities, of $13.0 million, mainly due to experience gains on termination costs for previously
accrued labour initiatives. This reduction was partially offset by an increase in the environmental
remediation liability, also included in Deferred liabilities, of $7.5 million. This net reduction
was recorded in Compensation and benefits and Purchased services and other.
In 2006, CP recorded a net reduction in the restructuring liability included in Deferred
liabilities, of $13.4 million, mainly due to experience gains on termination costs for previously
accrued labour initiatives. This reduction was partially offset by an increase in the environmental
remediation liability, also included in Deferred liabilities, of $10.5 million. This net
reduction was recorded in Compensation and benefits and Purchased services and other.
In 2005, CP established new restructuring initiatives to reduce labour costs, primarily in
management and administrative areas, which were completed in 2006. These initiatives required
recording a special charge of $44.2 million for labour restructuring, which included $43.1 million
for labour restructuring liabilities and $1.1 million for accelerated recognition of stock-based
compensation (included elsewhere in Deferred liabilities and in Contributed surplus). This
charge was partially offset by a net reduction of $9.6 million (included in Compensation and
benefits and Purchased services and other), largely due to experience gains on previously
accrued amounts and minor new initiatives. The adjustment to the environmental remediation program
was largely due to a binding settlement reached during the third quarter of 2005 with a potentially
responsible party, resulting in a reduction of $33.9 million to the special charge recorded in
2004, including a $30.3-million reduction in the environmental liability. The $30.3-million
reduction was partially offset by $7.9 million of other adjustments, due largely to monitoring and
technical support costs related to multi-year sites.
In the fourth quarter of 2004, CP recorded a special charge of $90.9 million for investigation,
characterization, remediation and other applicable actions related to environmental contamination
at a CP-owned property in the U.S., which includes areas previously leased to third parties. CP is
participating in the State of Minnesotas voluntary investigation and clean-up program at the east
side of the property. The property is the subject of ongoing fieldwork being undertaken in
conjunction with the appropriate state authorities to determine the extent and magnitude of the
contamination and the appropriate remediation plan. In 2005, CP filed with the State of Minnesota a
response action plan for the east side of the property.
In the third quarter of 2005, a binding settlement was reached relating to a lawsuit with a
potentially responsible party in relation to portions of past environmental contamination at the
above-mentioned CP-owned property. As a result, the lawsuit against this party was dismissed. CP
reduced accrued liabilities related to this property and recognized in 2005 a total reduction of
$33.9 million to the special charge for environmental remediation recorded in 2004.
In the fourth quarter of 2005, CP recorded a special charge of $44.2 million for a labour
restructuring initiative. The job reductions, mostly in management and administrative positions,
were completed in 2006.
19. Shareholders equity
AUTHORIZED AND ISSUED SHARE CAPITAL
The Companys Articles of Incorporation authorize for issuance an unlimited number of Common Shares
and an unlimited number of First Preferred Shares and Second Preferred Shares. At December 31,
2007, no Preferred Shares had been issued.
An analysis of Common Share balances is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
(in millions) |
|
Number |
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital, January 1 |
|
|
155.5 |
|
|
|
158.2 |
|
Shares issued under stock option plans |
|
|
1.0 |
|
|
|
2.3 |
|
Shares repurchased |
|
|
(3.2 |
) |
|
|
(5.0 |
) |
|
|
|
Share capital, December 31 |
|
|
153.3 |
|
|
|
155.5 |
|
|
|
|
|
|
|
The change in the Share capital balance includes $5.1 million (2006 $3.3 million) related to the
cancellation of the SARs liability on exercise of tandem stock options, and $0.7 million (2006
$1.1 million) of stock-based compensation transferred from Contributed surplus.
The balance remaining in contributed surplus of $42.4 million relates to stock-based compensation
recognized to date on unexercised options and will be attributed to share capital as options are
exercised.
In May 2005, the Company completed the necessary filings for a normal course issuer bid to
purchase, for cancellation, up to 2.5 million of its outstanding Common Shares, representing 1.6 %
of the approximately 159.0 million Common Shares outstanding just prior to the filing date. In
March 2006, the normal course issuer bid was amended to increase the number of Common Shares
eligible to be purchased to 3.3 million. Share repurchases were made during the 12-month period
beginning June 6, 2005, and ending June 5, 2006. In June 2006, the Company completed the
acquisition of Common Shares under 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, 2.7 million shares were purchased at an average
price per share of $73.64.
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 income. 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.
The table below summarizes the allocation of the cost of shares repurchased between share capital,
contributed surplus and retained income.
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital |
|
$ |
24.5 |
|
|
$ |
36.8 |
|
Contributed surplus |
|
|
|
|
|
|
223.1 |
|
Retained income |
|
|
206.6 |
|
|
|
26.5 |
|
|
|
|
CP Common Shares repurchased |
|
$ |
231.1 |
|
|
$ |
286.4 |
|
|
|
|
|
|
|
20. Pensions and other benefits
The Company has both defined benefit (DB) and defined contribution (DC) pension plans.
The DB plans provide for pensions based principally on years of service and compensation rates near
retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer
contributions to the DB plans, which are actuarially determined, are made on the basis of being not
less than the minimum amounts required by federal pension supervisory authorities.
Other benefits include post-retirement health and life insurance for pensioners, and
post-employment long-term disability and workers compensation benefits, which are based on
Company-specific claims.
At December 31, the elements of defined benefit cost for DB pension plans and other benefits
recognized in the year included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
|
Other benefits |
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current service cost (benefits
earned
by employees in the year) |
|
$ |
97.6 |
|
|
$ |
101.9 |
|
|
$ |
75.7 |
|
|
$ |
16.8 |
|
|
$ |
15.1 |
|
|
$ |
13.8 |
|
Interest cost on benefit obligation |
|
|
420.0 |
|
|
|
400.0 |
|
|
|
405.0 |
|
|
|
26.7 |
|
|
|
26.6 |
|
|
|
27.3 |
|
Actual return on fund assets |
|
|
(275.9 |
) |
|
|
(927.4 |
) |
|
|
(849.8 |
) |
|
|
(1.2 |
) |
|
|
(0.6 |
) |
|
|
(0.7 |
) |
Actuarial (gain) loss |
|
|
(1.4 |
) |
|
|
35.2 |
|
|
|
693.7 |
(1) |
|
|
(1.1 |
) |
|
|
(2.9 |
) |
|
|
29.8 |
|
Plan amendments |
|
|
22.5 |
|
|
|
1.3 |
|
|
|
56.5 |
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(6.7 |
) |
Settlement gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.7 |
)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Elements of employee future benefit
cost, before adjustments to
recognize the long-term nature
of employee future benefit costs |
|
|
262.8 |
|
|
|
(389.0 |
) |
|
|
381.1 |
|
|
|
30.5 |
|
|
|
37.0 |
|
|
|
63.5 |
|
Adjustments to recognize the
long-term nature of employee
future benefit costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transitional
(asset) obligation |
|
|
(16.2 |
) |
|
|
(16.2 |
) |
|
|
(16.2 |
) |
|
|
12.4 |
|
|
|
12.4 |
|
|
|
12.7 |
|
Difference between expected return
and actual return on fund assets |
|
|
(278.3 |
) |
|
|
401.2 |
|
|
|
351.2 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Difference between actuarial
loss (gain) recognized and
actual actuarial loss (gain)
on benefit obligation |
|
|
99.9 |
|
|
|
64.9 |
|
|
|
(638.1 |
) |
|
|
6.8 |
|
|
|
9.1 |
|
|
|
(25.6 |
) |
Difference between amortization
of prior service costs and actual
plan amendments |
|
|
(5.8 |
) |
|
|
14.5 |
|
|
|
(41.3 |
) |
|
|
(0.2 |
) |
|
|
1.0 |
|
|
|
6.7 |
|
|
|
|
|
|
Net benefit cost |
|
$ |
62.4 |
|
|
$ |
75.4 |
|
|
$ |
36.7 |
|
|
$ |
50.1 |
|
|
$ |
59.5 |
|
|
$ |
57.3 |
|
|
|
|
|
|
|
|
|
|
|
(1) Actuarial loss for 2005 was largely a result of a decrease in the discount
rate.
(2) Settlement gain from certain post-retirement benefit obligations being assumed by a
U.S. national multi-employer benefit plan.
Information about the Companys DB pension plans and other benefits, in aggregate, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
|
Other benefits |
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1 |
|
$ |
7,892.7 |
|
|
$ |
7,732.2 |
|
|
$ |
509.5 |
|
|
$ |
498.9 |
|
Current service cost |
|
|
97.6 |
|
|
|
101.9 |
|
|
|
16.8 |
|
|
|
15.1 |
|
Interest cost |
|
|
420.0 |
|
|
|
400.0 |
|
|
|
26.7 |
|
|
|
26.6 |
|
Employee contributions |
|
|
53.4 |
|
|
|
53.9 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Benefits paid |
|
|
(436.9 |
) |
|
|
(432.1 |
) |
|
|
(35.7 |
) |
|
|
(33.2 |
) |
Foreign currency changes |
|
|
(22.1 |
) |
|
|
0.3 |
|
|
|
(9.3 |
) |
|
|
0.3 |
|
Actuarial loss (gain) |
|
|
(1.4 |
) |
|
|
35.2 |
|
|
|
(1.1 |
) |
|
|
(2.9 |
) |
Plan amendments and other |
|
|
22.5 |
|
|
|
1.3 |
|
|
|
|
|
|
|
4.5 |
|
Release due to settlement |
|
|
|
|
|
|
|
|
|
|
(15.4 |
) |
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31 |
|
$ |
8,025.8 |
|
|
$ |
7,892.7 |
|
|
$ |
491.7 |
|
|
$ |
509.5 |
|
|
|
|
|
|
Change in fund assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at January 1 |
|
$ |
7,649.2 |
|
|
$ |
6,890.1 |
|
|
$ |
11.9 |
|
|
$ |
11.9 |
|
Actual return on fund assets |
|
|
275.9 |
|
|
|
927.4 |
|
|
|
1.2 |
|
|
|
0.6 |
|
Employer contributions |
|
|
86.4 |
|
|
|
209.5 |
|
|
|
34.9 |
|
|
|
32.4 |
|
Employee contributions |
|
|
53.4 |
|
|
|
53.9 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Benefits paid |
|
|
(436.9 |
) |
|
|
(432.1 |
) |
|
|
(35.7 |
) |
|
|
(33.2 |
) |
Foreign currency changes |
|
|
(17.5 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at December 31 |
|
$ |
7,610.5 |
|
|
$ |
7,649.2 |
|
|
$ |
12.5 |
|
|
$ |
11.9 |
|
|
|
|
|
|
Funded status plan deficit |
|
$ |
(415.3 |
) |
|
$ |
(243.5 |
) |
|
$ |
(479.2 |
) |
|
$ |
(497.6 |
) |
Unamortized prior service cost |
|
|
132.6 |
|
|
|
126.9 |
|
|
|
(0.7 |
) |
|
|
(1.0 |
) |
Unamortized net transitional (asset) obligation |
|
|
(80.3 |
) |
|
|
(96.5 |
) |
|
|
61.7 |
|
|
|
74.1 |
|
Unamortized experience losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred investment losses due to use of market-related value to
determine net benefit cost |
|
|
(181.2 |
) |
|
|
(568.9 |
) |
|
|
|
|
|
|
|
|
Unamortized net actuarial loss |
|
|
1,647.3 |
(1) |
|
|
1,861.7 |
(1) |
|
|
101.9 |
|
|
|
118.9 |
|
|
|
|
|
|
Accrued benefit asset (liability) on the Consolidated Balance Sheet |
|
$ |
1,103.1 |
|
|
$ |
1,079.7 |
|
|
$ |
(316.3 |
) |
|
$ |
(305.6 |
) |
|
|
|
|
|
|
|
|
|
|
(1) The amount by which these losses exceed the 10 % corridor (representing 10 %
of the benefit obligation) was equal to $844.7 million at December 31, 2007 (2006 $1,072.4
million). Any such excess is amortized, commencing in the following year, over the expected average
remaining service period of active employees expected to receive benefits under the plan (December
31, 2007 11 years; December 31, 2006 11 years). In 2007, $98.5 million was amortized and
included in the net benefit cost (2006 $100.1 million).
The accrued benefit asset (liability) is included on the Companys Consolidated Balance Sheet as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
|
Other benefits |
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets and deferred charges |
|
$ |
1,104.1 |
|
|
$ |
1,081.2 |
|
|
$ |
|
|
|
$ |
|
|
Accounts payable and accrued liabilities |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(38.3 |
) |
|
|
(21.5 |
) |
Other long-term liabilities |
|
|
(0.8 |
) |
|
|
(1.2 |
) |
|
|
(278.0 |
) |
|
|
(284.1 |
) |
|
|
|
|
|
Accrued benefit asset (liability) on the Consolidated Balance Sheet |
|
$ |
1,103.1 |
|
|
$ |
1,079.7 |
|
|
$ |
(316.3 |
) |
|
$ |
(305.6 |
) |
|
|
|
|
|
|
|
|
|
|
The measurement date used to determine the plan assets and the accrued benefit obligation is
December 31 (November 30 for U.S. pension plans). The most recent actuarial valuations for pension
funding purposes were performed as at January 1, 2007. The next actuarial valuations for pension
funding purposes will be performed as at January 1, 2008.
Included in the benefit obligation and fair value of fund assets at year end were the following
amounts in respect of plans where the benefit obligation exceeded the fund assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
|
Other benefits |
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation |
|
$ |
(8,025.8 |
) |
|
$ |
(7,892.7 |
) |
|
$ |
(491.7 |
) |
|
$ |
(509.5 |
) |
Fair value of fund assets |
|
|
7,610.5 |
|
|
|
7,649.2 |
|
|
|
12.5 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
$ |
(415.3 |
) |
|
$ |
(243.5 |
) |
|
$ |
(479.2 |
) |
|
$ |
(497.6 |
) |
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions used were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
(percentages) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.60 |
|
|
|
5.40 |
|
|
|
5.25 |
|
Projected future salary increases |
|
|
3.00 |
|
|
|
3.00 |
|
|
|
3.00 |
|
Health care cost trend rate |
|
|
9.50 |
(1) |
|
|
10.00 |
(1) |
|
|
10.00 |
(1) |
Benefit cost for year ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.40 |
|
|
|
5.25 |
|
|
|
6.00 |
|
Expected rate of return on fund assets |
|
|
8.00 |
|
|
|
8.00 |
|
|
|
8.00 |
|
Projected future salary increases |
|
|
3.00 |
|
|
|
3.00 |
|
|
|
3.00 |
|
Health care cost trend rate |
|
|
10.00 |
(1) |
|
|
10.00 |
(1) |
|
|
8.50 |
(2) |
|
|
|
|
|
|
(1) The health care cost trend rate is projected to decrease by 0.5 % per year
from a 10.0 % rate in 2006 and 2007 to approximately 5.0 % per year in 2017.
(2) For this prior period, the health care cost trend rate was projected to decrease by
0.5 % per year to approximately 4.5 % per year in 2012.
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in the assumed health care cost trend rate would
have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One percentage |
|
|
One percentage |
|
Favourable (unfavourable) (in millions of Canadian dollars) |
|
point increase |
|
|
point decrease |
|
|
|
|
|
|
|
|
|
|
|
|
Effect on the total of service and interest costs |
|
$ |
(1.2 |
) |
|
$ |
1.1 |
|
Effect on post-retirement benefit obligation |
|
$ |
(14.8 |
) |
|
$ |
14.0 |
|
|
|
PLAN ASSETS
The Companys pension plan asset allocation, and the current weighted average permissible range for
each major asset class, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of plan |
|
|
|
|
|
|
|
assets at December 31 |
|
Asset allocation (percentage) |
|
Current permissible range |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
47 53 |
|
|
|
49.4 |
|
|
|
56.3 |
|
Debt securities |
|
|
37 43 |
|
|
|
41.6 |
|
|
|
38.1 |
|
Real estate and infrastructure |
|
|
8 12 |
|
|
|
9.0 |
|
|
|
5.6 |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment strategy is to achieve a long-term (five- to ten-year period) real rate of
return of 5.5 %, net of all fees and expenses. The Companys best estimate of long-term inflation
of 2.5 % yields a long-term nominal target of 8.0 %, net of all fees and expenses. In identifying
the asset allocation ranges, consideration was given to the long-term nature of the underlying plan
liabilities, the solvency and going-concern financial position of the plan, long-term return
expectations and the risks associated with key asset classes as well as the relationships of their
returns with each other, inflation and interest rates. When advantageous and with due
consideration, derivative instruments may be utilized, provided the total value of the underlying
asset represented by financial derivatives, excluding currency forwards, is limited to 20 % of the
market value of the fund.
At December 31, 2007, fund assets consisted primarily of listed stocks and bonds, including 54,440
of the Companys Common Shares (2006 132,600) at a market value of $3.5 million (2006 $8.1
million) and 6.91 % Secured Equipment Notes issued by the Company at a par value of $3.9 million
(2006 $4.1 million) and at a market value of $4.3 million (2006 $4.7 million).
CASH FLOWS
In 2007, the Company contributed $82.9 million to its registered pension plans (2006 $202.0
million), including $3.2 million to the defined contribution plan (2006 $3.1 million). In
addition, the Company made payments directly to employees, their beneficiaries or estates or to
third-party benefit administrators of $40.7 million (2006 $42.0 million) with respect to
supplemental pension plan benefits and other benefits.
DEFINED CONTRIBUTION PLAN
Canadian non-unionized employees have the option to participate in the DC plan. The DC plan
provides a pension based on total employee and employer contributions plus investment income earned
on those contributions. Employee contributions are based on a percentage of salary. The Company
matches employee contributions to a maximum percentage each year. In 2007, the net cost of this
plan, which generally equals the employers required contribution, was $3.2 million (2006 $3.0
million; 2005 $3.1 million).
POST-EMPLOYMENT RESTRUCTURING BENEFITS
The Company accrues post-employment labour liabilities as part of its restructuring accruals (see
Note 18) that are discounted at rates of 5.25 % and 6.75 %. The labour portion of the Companys
accrued restructuring liability was as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in liability: |
|
|
|
|
|
|
|
|
Restructuring labour liability at January 1 |
|
$ |
160.8 |
|
|
$ |
224.8 |
|
Plan adjustment |
|
|
(12.8 |
) |
|
|
(14.1 |
) |
Interest cost |
|
|
8.9 |
|
|
|
12.0 |
|
Benefits paid |
|
|
(36.8 |
) |
|
|
(61.8 |
) |
Foreign currency changes |
|
|
(4.7 |
) |
|
|
(0.1 |
) |
|
|
|
Restructuring labour liability at December 31 |
|
|
115.4 |
|
|
|
160.8 |
|
|
|
|
Unfunded restructuring labour amount |
|
|
(115.4 |
) |
|
|
(160.8 |
) |
Unamortized net transitional amount |
|
|
(13.8 |
) |
|
|
(26.6 |
) |
|
|
|
Accrued restructuring labour liability on the Consolidated Balance Sheet |
|
$ |
(129.2 |
) |
|
$ |
(187.4 |
) |
|
|
|
|
|
|
21. Stock-based compensation
At December 31, 2007, the Company had several stock-based compensation plans, including a stock
option plan, tandem SARs, a DSU plan, a RSU plan, a PSU plan and an employee stock savings plan.
These plans resulted in a compensation cost in 2007 of $33.7 million (2006 $52.1 million; 2005
$38.7 million).
REPLACEMENT OPTIONS AND SARS
Due to the reorganization of Canadian Pacific Limited (CPL) and the spin-off of its subsidiary
companies in October 2001, all CPL employees who held CPL options at the date of the spin-off
received in exchange for their CPL options fully-vested replacement options and SARs in the
spun-off companies, according to the reorganization ratio used for Common Shares. The exercise
price of the CPL options and SARs was allocated among the replacement options and SARs of each of
the spun-off companies, based on a formula using the weighted average trading price of the spun-off
companies for their first 10 days of trading.
By agreement between CP and its former affiliates, the difference between the strike price and the
exercise price of SARs of the former affiliates held by CP employees is recognized as an expense by
CP. The difference between the strike price and the exercise price of CP SARs held by employees of
the former affiliates is recovered from the former affiliates.
SARs are attached to 50 % of the options and there is a one-to-one cancellation ratio between those
options and SARs.
STOCK OPTION PLANS AND SARS
Under the Companys stock option plans, options are granted to eligible employees to purchase
Common Shares of the Company at a price equal to the market value of the shares at the grant date.
CP follows the fair value-based approach to accounting for stock-based compensation for options
issued for years beginning in 2003. Compensation expense is recognized for stock options over the
shorter of the vesting period or employee service period based on their estimated fair values on
the dates of grant, as determined by the Black-Scholes option-pricing model. Options granted
between January 1 and December 31, 2002, are not recorded at fair value and, as such, no
compensation expense has been recorded for these options.
Pursuant to the employee plan, options may be exercised upon vesting, which is between 24 and 36
months after the grant date, and will expire after 10 years (regular options).
Some options vest after 48 months, unless certain performance targets are achieved, in which case
vesting is accelerated and will expire five years after the grant date (performance-accelerated
options). Some options will only vest when certain performance targets are achieved and will
expire, if the performance targets are not achieved within a specific time frame, and will expire
five years and three months after the grant date (performance-contingent options).
At December 31, 2007, there were 3,602,761 (2006 669,864; 2005 1,836,254) Common Shares
available for the granting of future options under the stock option plans, out of the 15,578,642
(2006 11,500,000; 2005 11,500,000) Common Shares currently authorized.
With the granting of regular options, employees are simultaneously granted SARs equivalent to
one-half the number of regular options granted. A SAR entitles the holder to receive payment of an
amount equal to the excess of the market value of a Common Share at the exercise date of the SAR
over the related option exercise price. On an ongoing basis, a liability for SARs is accrued on the
incremental change in the market value of the underlying stock and amortized to income over the
vesting period. SARs may be exercised no earlier than two years and no later than 10 years after
the grant date.
Where an option granted is a tandem award, the holder can choose to exercise an option or a SAR of
equal intrinsic value.
In 2007, the expense for stock options was $10.7 million (2006 $11.1 million; 2005 $9.8
million) and for SARs was $8.7 million (2006 $26.1 million; 2005 $16.8 million).
The following is a summary of the Companys fixed stock option plan as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
average |
|
|
Number of |
|
|
average |
|
|
|
options |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1 |
|
|
6,807,644 |
|
|
$ |
38.50 |
|
|
|
7,971,917 |
|
|
$ |
32.07 |
|
New options granted |
|
|
1,304,500 |
|
|
|
62.60 |
|
|
|
1,467,900 |
|
|
|
57.80 |
|
Exercised |
|
|
(972,281 |
) |
|
|
31.99 |
|
|
|
(2,330,664 |
) |
|
|
28.59 |
|
Forfeited/cancelled |
|
|
(158,755 |
) |
|
|
35.76 |
|
|
|
(301,509 |
) |
|
|
39.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
|
|
6,981,108 |
|
|
$ |
43.97 |
|
|
|
6,807,644 |
|
|
$ |
38.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31 |
|
|
4,035,008 |
|
|
$ |
34.12 |
|
|
|
2,918,294 |
|
|
$ |
29.64 |
|
|
|
|
|
|
|
At December 31, 2007, the details of the stock options outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
years to |
|
|
average |
|
|
Number |
|
|
average |
|
Range of exercise prices |
|
options |
|
|
expiration |
|
|
exercise price |
|
|
of options |
|
|
exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$14.07 $18.96 |
|
|
184,225 |
|
|
|
2 |
|
|
$ |
14.49 |
|
|
|
184,225 |
|
|
$ |
14.49 |
|
$27.62 $36.64 |
|
|
2,812,483 |
|
|
|
4 |
|
|
|
31.31 |
|
|
|
2,812,483 |
|
|
|
31.31 |
|
$42.05 $74.89 |
|
|
3,984,400 |
|
|
|
7 |
|
|
|
54.21 |
|
|
|
1,038,300 |
|
|
|
45.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,981,108 |
|
|
|
6 |
|
|
$ |
43.97 |
|
|
|
4,035,008 |
|
|
$ |
34.12 |
|
|
|
DEFERRED SHARE UNIT PLAN AND OTHER
The Company established the DSU plan as a means to compensate and assist in attaining share
ownership targets set for certain key employees and Directors. A DSU entitles the holder to
receive, upon redemption, a cash payment equivalent to the market value of a Common Share at the
redemption date. DSUs vest over various periods of up to 36 months and are only redeemable for a
specified period after employment is terminated.
Key employees may choose to receive DSUs in lieu of cash payments for certain incentive programs.
In addition, when acquiring Common Shares to meet share ownership targets, key employees may be
granted a matching number of DSUs up to 33 % of the shares and DSUs acquired during the first six
months after becoming eligible under the plan and, thereafter, up to 25 %. Key employees have five
years to meet their ownership targets.
An expense to income for DSUs is recognized over the vesting period for both the initial
subscription price and the change in value between reporting periods. At December 31, 2007, there
were 284,968 (2006 335,177; 2005 295,224) DSUs outstanding. In 2007, 46,050 (2006 65,781;
2005 47,891) DSUs were granted. In 2007, 96,259 (2006 26,137; 2005 44,167) DSUs were
redeemed. In 2007, the expense for DSUs was $4.1 million (2006 $6.8 million; 2005 $4.1
million).
The Company issued 16,921 RSUs in 2007. The RSUs are subject to time vesting. They will vest on May
31, 2010, and will be cashed out based on the average closing price for the 10 days prior to May
31, 2010. An expense to income for RSUs is recognized over the vesting period. The Company issued
30,000 RSUs in 2005. These RSUs were forfeited in 2006 prior to vesting. An expense to income for
RSUs was being recognized over the vesting period and was recovered upon cancellation. In 2007, the
expense was $0.2 million (2006 expense recovery of $0.6 million; 2005 $0.6 million).
The Company issued 23,855 PSUs in 2007. The PSUs are contingent upon achieving certain performance
targets, and would not become payable until 2010. The actual value of the PSUs will be based on the
average closing price for the 10 days prior to the entitlement date. An expense to income for PSUs
is recognized over the vesting period. In 2007, the expense was $0.7 million (2006 nil; 2005
nil).
Under the fair value method, the fair value of options at the grant date was $11.3 million for
options issued in 2007 (2006 $12.4 million; 2005 $10.1 million). The weighted average fair
value assumptions were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Expected option life (years) |
|
|
4.00 |
|
|
|
4.50 |
|
|
|
4.50 |
|
Risk-free interest rate |
|
|
3.90 |
% |
|
|
4.07 |
% |
|
|
3.49 |
% |
Expected stock price volatility |
|
|
22 |
% |
|
|
22 |
% |
|
|
24 |
% |
Expected annual dividends per share |
|
$ |
0.90 |
|
|
$ |
0.75 |
|
|
$ |
0.53 |
|
Weighted average fair value of options granted during the year |
|
$ |
12.97 |
|
|
$ |
12.99 |
|
|
$ |
9.66 |
|
|
|
|
|
|
|
EMPLOYEE SHARE PURCHASE PLAN
The Company has an employee share purchase plan whereby both employee and Company contributions are
used to purchase shares on the open market for employees. The Companys contributions are expensed
over the one-year vesting period. Under the plan, the Company matches $1 for every $3 contributed
by employees up to a maximum employee contribution of 6 % of annual salary.
At December 31, 2007, there were 12,181 participants (2006 11,682; 2005 8,989) in the plan.
The total number of shares purchased in 2007 on behalf of participants, including the Company
contribution, was 745,374 (2006 657,530; 2005 795,728). In 2007, the Companys contributions
totalled $10.4 million (2006 $10.0 million; 2005 $8.8 million) and the related expense was
$8.9 million (2006 $8.6 million; 2005 $7.4 million).
22. Commitments and contingencies
In the normal course of its operations, the Company becomes involved in various legal actions,
including claims relating to injuries and damage to property. The Company maintains provisions it
considers to be adequate for such actions. While the final outcome with respect to actions
outstanding or pending at December 31, 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.
At December 31, 2007, the Company had committed to total future capital expenditures amounting to
$504.2 million for the years 2008-2016.
At December 31, 2007, the Company had a committed unused line of credit of $408.0 million available
for short-term financing, effective until December 2012. The interest rate for this credit facility
varies based on bank prime, Bankers Acceptances or LIBOR. At December 31, 2007, the Company also
had a committed unused credit facility of US$530.0 million available for short-term financing
requirements related to the acquisition of DM&E and related capital programs. The interest rate for
this facility varies based on LIBOR.
Minimum payments under operating leases were estimated at $614.9 million in aggregate, with annual
payments in each of the five years following 2007 of (in millions): 2008 $120.3; 2009 $86.8;
2010 $68.9; 2011 $60.9; 2012 $58.0.
GUARANTEES
In the normal course of operating the railway, the Company enters into contractual arrangements
that involve providing certain guarantees, which extend over the term of the contracts. These
guarantees include, but are not limited to:
□ |
|
residual value guarantees on operating lease commitments of $321.7 million at December 31,
2007; |
|
□ |
|
guarantees to pay other parties in the event of the occurrence of specified events,
including damage to equipment, in relation to assets used in the operation of the railway
through operating leases, rental agreements, easements, trackage and interline agreements; |
|
□ |
|
indemnifications of certain tax-related payments incurred by lessors and lenders; and |
|
□ |
|
certain amounts related to the Companys investment in the DM&E. These include minimum
lease payments of $46.2 million, residual value guarantees of $11.0 million, and a line of
credit of US$10 million (see Note 11). |
The maximum amount that could be payable under these guarantees, excluding residual value
guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or
a portion of amounts paid under guarantees to other parties in the event of the occurrence of
specified events could be recoverable from other parties or through insurance. The Company has
accrued for all guarantees that it expects to pay. At December 31, 2007, these accruals amounted to
$7.0 million (2006 $6.2 million).
INDEMNIFICATIONS
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific
Railway Company Pension Trust Fund, we have undertaken to indemnify and save harmless the trustee,
to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs and
expenses arising out of the performance of the trustees obligations under the agreement, except as
a result of misconduct by the trustee. The indemnity includes liabilities, costs or expenses
relating to any legal reporting or notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise with respect to the assets of the
pension plans that are not part of the fund. The indemnity survives the termination or expiry of
the agreement with respect to claims and liabilities arising prior to the termination or expiry. At
December 31, 2007, we had not recorded a liability associated with this indemnification, as we do
not expect to make any payments pertaining to it.
Pursuant to our by-laws, we indemnify all our current and former directors and officers. In
addition to the indemnity provided for in our by-laws, we also indemnify our directors and officers
pursuant to indemnity agreements. We carry a liability insurance policy for directors and officers,
subject to a maximum coverage limit and certain deductibles in cases where a director or officer is
reimbursed for any loss covered by the policy.
23. Segmented information
OPERATING SEGMENT
The Company operates in only one operating segment: rail transportation. Operating results by
geographic areas, railway corridors or other lower level components or units of operation are not
reviewed by the Companys chief operating decision maker to make decisions about the allocation of
resources to, or the assessment of performance of, such geographic areas, corridors, components or
units of operation.
At December 31, 2007, one customer comprised 11.5 % (2006 11.5 %, 2005 14.5 %) of CPs total
revenues. At December 31, 2007, accounts receivable from this customer represented 6.2 % (2006
5.6 %) of CPs Accounts receivable and other current assets.
During 2005, the Company prospectively recorded a $23.4-million adjustment to increase revenues in
2005 related to services provided in 2004. The adjustment reflected a change in estimate primarily
as a result of a contract settlement with a customer.
GEOGRAPHIC INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
Canada |
|
|
United States |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,716.4 |
|
|
$ |
991.2 |
|
|
$ |
4,707.6 |
|
Net properties |
|
$ |
7,745.1 |
|
|
$ |
1,548.0 |
|
|
$ |
9,293.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,575.1 |
|
|
$ |
1,008.1 |
|
|
$ |
4,583.2 |
|
Net properties |
|
$ |
7,539.3 |
|
|
$ |
1,583.6 |
|
|
$ |
9,122.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,404.1 |
|
|
$ |
987.5 |
|
|
$ |
4,391.6 |
|
|
|
The Companys accounts have been adjusted to reflect an accounting basis that is more comparable
with that employed by other Class 1 railways in North America. CPs principal subsidiaries present
unconsolidated financial statements in accordance with generally accepted accounting practices for
railways as prescribed in the regulations of the Canadian Transportation Agency and the Surface
Transportation Board in the United States.
The condensed income statement and balance sheet information, which follows, includes the Canadian
operations prepared in accordance with the Uniform Classification of Accounts issued by the
Canadian Transportation Agency. The changes required to consolidate the Companys operations are
identified as consolidating entries.
CONSOLIDATING INFORMATION 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
(in millions of Canadian dollars) |
|
Canada |
|
|
United States |
|
|
countries |
|
|
entries |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,715.9 |
|
|
$ |
991.2 |
|
|
$ |
|
|
|
$ |
0.5 |
|
|
$ |
4,707.6 |
|
Operating expenses |
|
|
2,949.9 |
|
|
|
688.6 |
|
|
|
0.1 |
|
|
|
(95.2 |
) |
|
|
3,543.4 |
|
|
Operating income (loss) |
|
|
766.0 |
|
|
|
302.6 |
|
|
|
(0.1 |
) |
|
|
95.7 |
|
|
|
1,164.2 |
|
Interest and other income and charges |
|
|
230.7 |
|
|
|
43.8 |
|
|
|
(30.9 |
) |
|
|
(0.5 |
) |
|
|
243.1 |
|
Foreign exchange (gain) loss on long-term debt |
|
|
(255.6 |
) |
|
|
|
|
|
|
84.4 |
|
|
|
1.4 |
|
|
|
(169.8 |
) |
Income taxes |
|
|
99.8 |
|
|
|
89.5 |
|
|
|
0.7 |
|
|
|
(45.3 |
) |
|
|
144.7 |
|
|
Net income (loss) |
|
$ |
691.1 |
|
|
$ |
169.3 |
|
|
$ |
(54.3 |
) |
|
$ |
140.1 |
|
|
$ |
946.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
1,014.1 |
|
|
$ |
358.0 |
|
|
$ |
(89.8 |
) |
|
$ |
(114.6 |
) |
|
$ |
1,167.7 |
|
Net properties |
|
|
5,925.7 |
|
|
|
1,487.5 |
|
|
|
|
|
|
|
1,879.9 |
|
|
|
9,293.1 |
|
Other long-term assets |
|
|
2,766.7 |
|
|
|
1,559.8 |
|
|
|
515.1 |
|
|
|
(1,937.4 |
) |
|
|
2,904.2 |
|
|
Total assets |
|
$ |
9,706.5 |
|
|
$ |
3,405.3 |
|
|
$ |
425.3 |
|
|
$ |
(172.1 |
) |
|
$ |
13,365.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
1,158.7 |
|
|
$ |
232.1 |
|
|
$ |
0.3 |
|
|
$ |
(46.3 |
) |
|
$ |
1,344.8 |
|
Long-term liabilities |
|
|
5,648.9 |
|
|
|
1,809.0 |
|
|
|
|
|
|
|
(895.6 |
) |
|
|
6,562.3 |
|
Shareholders equity |
|
|
2,898.9 |
|
|
|
1,364.2 |
|
|
|
425.0 |
|
|
|
769.8 |
|
|
|
5,457.9 |
|
|
Total liabilities and shareholders equity |
|
$ |
9,706.5 |
|
|
$ |
3,405.3 |
|
|
$ |
425.3 |
|
|
$ |
(172.1 |
) |
|
$ |
13,365.0 |
|
|
|
CONSOLIDATING INFORMATION 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
(in millions of Canadian dollars) |
|
Canada |
|
|
United States |
|
|
countries |
|
|
entries |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,571.2 |
|
|
$ |
1,008.1 |
|
|
$ |
|
|
|
$ |
3.9 |
|
|
$ |
4,583.2 |
|
Operating expenses |
|
|
2,833.9 |
|
|
|
736.5 |
|
|
|
|
|
|
|
(115.8 |
) |
|
|
3,454.6 |
|
|
Operating income |
|
|
737.3 |
|
|
|
271.6 |
|
|
|
|
|
|
|
119.7 |
|
|
|
1,128.6 |
|
Interest and other income and charges |
|
|
196.5 |
|
|
|
42.0 |
|
|
|
(25.2 |
) |
|
|
9.0 |
|
|
|
222.3 |
|
Foreign exchange (gain) loss on long-term debt |
|
|
1.2 |
|
|
|
|
|
|
|
(1.3 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
Income taxes |
|
|
69.6 |
|
|
|
86.7 |
|
|
|
0.5 |
|
|
|
(46.9 |
) |
|
|
109.9 |
|
|
Net income |
|
$ |
470.0 |
|
|
$ |
142.9 |
|
|
$ |
26.0 |
|
|
$ |
157.4 |
|
|
$ |
796.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
813.5 |
|
|
$ |
293.2 |
|
|
$ |
18.1 |
|
|
$ |
(119.9 |
) |
|
$ |
1,004.9 |
|
Net properties |
|
|
5,673.0 |
|
|
|
1,569.3 |
|
|
|
|
|
|
|
1,880.6 |
|
|
|
9,122.9 |
|
Other long-term assets |
|
|
1,241.7 |
|
|
|
67.9 |
|
|
|
414.4 |
|
|
|
(435.9 |
) |
|
|
1,288.1 |
|
|
Total assets |
|
$ |
7,728.2 |
|
|
$ |
1,930.4 |
|
|
$ |
432.5 |
|
|
$ |
1,324.8 |
|
|
$ |
11,415.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
924.3 |
|
|
$ |
227.7 |
|
|
$ |
0.2 |
|
|
$ |
86.8 |
|
|
$ |
1,239.0 |
|
Long-term liabilities |
|
|
4,299.0 |
|
|
|
1,076.2 |
|
|
|
|
|
|
|
(54.8 |
) |
|
|
5,320.4 |
|
Shareholders equity |
|
|
2,504.9 |
|
|
|
626.5 |
|
|
|
432.3 |
|
|
|
1,292.8 |
|
|
|
4,856.5 |
|
|
Total liabilities and shareholders equity |
|
$ |
7,728.2 |
|
|
$ |
1,930.4 |
|
|
$ |
432.5 |
|
|
$ |
1,324.8 |
|
|
$ |
11,415.9 |
|
|
|
CONSOLIDATING INFORMATION 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
(in millions of Canadian dollars) |
|
Canada |
|
|
United States |
|
|
countries |
|
|
entries |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,397.9 |
|
|
$ |
987.5 |
|
|
$ |
|
|
|
$ |
6.2 |
|
|
$ |
4,391.6 |
|
Operating expenses |
|
|
2,731.1 |
|
|
|
779.0 |
|
|
|
|
|
|
|
(109.7 |
) |
|
|
3,400.4 |
|
|
Operating income |
|
|
666.8 |
|
|
|
208.5 |
|
|
|
|
|
|
|
115.9 |
|
|
|
991.2 |
|
Interest and other income and charges |
|
|
194.9 |
|
|
|
42.6 |
|
|
|
(22.1 |
) |
|
|
6.9 |
|
|
|
222.3 |
|
Foreign exchange (gain) loss on long-term debt |
|
|
(53.8 |
) |
|
|
|
|
|
|
13.7 |
|
|
|
(4.6 |
) |
|
|
(44.7 |
) |
Income taxes |
|
|
165.8 |
|
|
|
65.0 |
|
|
|
0.7 |
|
|
|
39.1 |
|
|
|
270.6 |
|
|
Net income |
|
$ |
359.9 |
|
|
$ |
100.9 |
|
|
$ |
7.7 |
|
|
$ |
74.5 |
|
|
$ |
543.0 |
|
|
|
24. Reconciliation of Canadian and United States generally accepted accounting principles
The consolidated financial statements of the Company have been prepared in accordance with GAAP in
Canada. The material differences between Canadian and U.S. GAAP relating to measurement and
recognition are explained below, along with their effect on the Companys Statement of Consolidated
Income and Consolidated Balance Sheet. Certain additional disclosures required under U.S. GAAP have
not been provided, as permitted by the United States Securities and Exchange Commission.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
Effective January 1, 2007, the Company adopted the following CICA accounting standards Section 3855
Financial Instruments, Recognition and Measurement, Section 3861 Financial Instruments,
Presentation and Disclosure, Section 3865 Hedging, Section 1530 Comprehensive Income and
Section 3251 Equity on a retrospective basis without restatement of prior periods, with the
exception that Foreign currency translation adjustments was reclassified to AOCI and Other
comprehensive income, which largely harmonized the measurement and recognition rules for
derivative instruments and hedging with U.S. GAAP. Transaction costs have been added to the fair
value of the Long-term debt under Canadian GAAP whereas under U.S. GAAP such costs are recorded
separately with Other assets and deferred charges.
Prior to January 1, 2007, the Company followed the CICA Accounting Guideline No. 13 Hedging
Relationships (AcG 13), which harmonized the documentation standards for financial instruments
and hedging with U.S. GAAP, as required by Financial Accounting Standards Board (FASB) Statement
No. 133 Accounting for Derivative Instruments and Hedging Activities (FASB 133). Under both
Canadian and U.S. GAAP, gains or losses were included in the income statement when the hedged
transaction occurs. However, under U.S. GAAP, the ineffective portion of a hedging derivative was
immediately recognized in income and the effective portion of changes in the fair value of
derivatives that was designated and qualified as cash flow hedges were recorded as a component of
AOCI. Changes in the fair value of derivatives that were designated and qualified as fair value
hedges were recorded in income along with adjustments to the hedged item. Under Canadian GAAP,
derivative instruments that qualified as hedges were not recorded on the balance sheet. Under U.S.
GAAP, all derivative instruments were recognized on the balance sheet at fair value. Canadian GAAP
required that gains and losses on derivatives meeting hedge accounting requirements be deferred and
recognized when the hedged transaction occurs.
PENSIONS AND POST-RETIREMENT BENEFITS
The CICA Section 3461 Employee Future Benefits permits amortization of net actuarial gains and
losses only if the unamortized portion of these gains and losses exceeds 10 % of the greater of the
benefit obligation and the market-related value of the plan assets the (corridor). This
harmonized the Canadian GAAP treatment with FASB Statement No. 87 Employers Accounting for
Pensions (FASB 87) and FASB Statement No. 106 Employers Accounting for Post-retirement
Benefits Other Than Pensions (FASB 106).
Prior to January 1, 2000, all actuarial gains and losses were amortized under Canadian GAAP. Upon
transition to the CICA Section 3461 effective January 1, 2000, all unamortized gains and losses,
including prior service costs, were accumulated into a net transitional asset, which is being
amortized to income over approximately 13 years. This created a difference with U.S. GAAP in 2007,
2006 and 2005, under which prior service costs continued to be amortized over the expected average
remaining service period and all other net gains accumulated prior to January
1, 2000, fell within the corridor. In 2007, 2006 and 2005, the difference was reduced due to
amortization of losses outside the corridor for Canadian GAAP (see Note 20).
FASB Statement No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 123R (FASB 158) requires that the
over or under funded status of defined benefit pension and other post-retirement plans be
recognized on the balance sheet. FASB 158 became effective for years ending after December 15,
2006. The over or under funded status is measured as the difference between the fair value of the
plan assets and the benefit obligation, being the projected benefit obligation for pension plans
and the accumulated benefit obligation for other post-retirement plans. In addition, any previously
unrecognized actuarial gains and losses and prior service costs and credits that arise during the
period will be recognized as a component of other comprehensive loss, net of tax. Under Canadian
GAAP, the over or under funded status of defined benefit plans are not recognized on the balance
sheet, nor does Canadian GAAP currently require the recognition of other comprehensive loss related
to defined benefit pension and other post-retirement plans.
Adoption of FASB 158 on a prospective basis at December 31, 2006 resulted in a reduction in Other
assets and deferred charges of $881.9 million, an increase in Deferred liabilities of $345.3
million, a reduction in AOCI of $838.8 million and an increase in deferred income tax assets of
$388.4 million. The adoption of FASB 158 was reflected as an adjustment to closing AOCI at
December 31, 2006. In addition, the Minimum pension liability of $43.6 million and an intangible
asset of $3.9 million at December 31, 2006, with an associated $25.7 million (after tax) balance in
AOCI, was reclassified to Unfunded status of defined benefit pension and post-retirement plans.
Prior periods have not been restated.
Prior to the adoption of FASB 158 in 2006, and in accordance with FASB 87, an additional minimum
pension liability was required for unfunded plans. The additional minimum pension liability
represented the excess of the unfunded accumulated benefit obligation over previously recorded
pension cost liabilities and was also charged directly to shareholders equity, net of related
deferred income taxes.
Under Canadian GAAP, there is no requirement to set up an unfunded pension liability based on an
annual funded position test.
POST-EMPLOYMENT BENEFITS
Post-employment benefits are covered by the CICA recommendations for accounting for employee future
benefits. Consistent with accounting for post-retirement benefits, the policy permits amortization
of actuarial gains and losses only if they fall outside of the corridor. Under FASB Statement No.
112 Employers Accounting for Post-employment Benefits (FASB 112), such gains and losses on
post employment benefits that do not vest or accumulate are included immediately in income.
TERMINATION AND SEVERANCE BENEFITS
Termination and severance benefits are covered by the CICA Section 3461 and the CICA Emerging
Issues Committee Abstract 134 Accounting for Severance and Termination Benefits (EIC 134). Upon
transition to the CICA Section 3461 effective January 1, 2000, a net transitional asset was created
and is being amortized to income over approximately 13 years. Under U.S. GAAP, the expected
benefits were not accrued and are expensed when paid.
STOCK-BASED COMPENSATION
FASB issued a revision to Statement No. 123 Share-based Payment (FASB 123R) which was effective
for CP from January 1, 2006. FASB 123R requires the use of an option-pricing model to fair value,
at the grant date, share-based awards issued to employees, including stock options, SARs and DSUs.
SARs and DSUs are subsequently re-measured at fair value at each reporting period. Under Canadian
GAAP, liability awards, such as SARs and DSUs, are accounted for using the intrinsic method. FASB
123R also requires that CP account for forfeitures on an estimated basis. Under Canadian GAAP, CP
has elected to account for forfeitures on an actual basis as they occur. CP adopted FASB 123R on
January 1, 2006 without restatement of prior periods using the modified prospective approach. In
addition, on adoption of FASB 123R, CP has recognized compensation cost attributable to stock-based
awards over the period from the grant date to the date the employee becomes eligible to retire when
this is shorter than the vesting period (the non-substantive vesting period approach).
Previously CP recognized the compensation cost over the vesting period (the nominal vesting period
approach). Canadian GAAP has similar provisions for the recognition of the compensation cost
attributable to stock-based awards over the shorter of the period from grant date to vesting or
eligibility for retirement. However, Canadian GAAP introduced these provisions with effect for the
year ended December 31, 2006 and the Company adopted them with retroactive restatement of prior
periods.
As a result of the adoption of FASB 123R, CP recorded a charge against income in 2006 of $3.0
million ($2.0 million net of tax) as a cumulative effect of the change in accounting principle and
2006 Compensation and benefit expense was decreased by $1.5 million ($0.9 million net of tax).
There was no impact to cash flow amounts as a result of the adoption of FASB 123R.
Under FASB Interpretation No. 44 Accounting for Certain Transactions Involving Stock Compensation
(FIN 44), compensation expense must be recorded if the intrinsic value of stock options is not
exactly the same immediately before and after an equity restructuring. As a result of the CPL
corporate reorganization in 2001, CPL underwent an equity restructuring, which resulted in
replacement options in CPRL stock having a different intrinsic value after the restructuring than
prior to it. Canadian GAAP did not require the revaluation of these options. The Company adopted on
a prospective basis effective January 2003 the CICA Section 3870 Stock-based Compensation and
Other Stock-based Payments, which requires companies to account for stock options at their fair
value. Concurrently, the Company elected to adopt the fair value option under FASB Statement No.
123 Accounting for Stock-based Compensation (FASB 123).
INTERNAL USE SOFTWARE
Under the American Institute of Certified Public Accountants Statement of Position No. 98-1
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP
98-1), certain costs, including preliminary project phase costs, are to be expensed as incurred.
These costs are capitalized under Canadian GAAP.
CAPITALIZATION OF INTEREST
The Company expenses interest related to capital projects undertaken during the year unless
specific debt is attributed to a capital program. FASB Statement No. 34 Capitalization of Interest
Cost (FASB 34) requires interest costs to be capitalized for all capital programs. Differences
in GAAP result in additional capitalization of interest under U.S. GAAP and subsequent related
depreciation.
COMPREHENSIVE INCOME
Under U.S. GAAP, all derivative instruments are recognized on the balance sheet as either an asset
or a liability measured at fair value. Changes in the fair value of derivatives are either
recognized in earnings or in other comprehensive loss depending on whether specific hedge criteria
are met. On January 1, 2007, the Company adopted the equivalent Canadian standard for comprehensive
income on a prospective basis, which is largely harmonized with FASB Statement No. 130 Reporting
Comprehensive Income (FASB 130).
FASB 130 requires disclosure of the change in equity from transactions and other events related to
non-owner sources during the period. In 2007 and the comparative periods presented, other
comprehensive loss arose from foreign currency translation on the net investment in self-sustaining
foreign subsidiaries, foreign currency translation related to long-term debt designated as a hedge
of the net investment in self-sustaining foreign subsidiaries, unfunded pension liability (minimum
pension liability in 2005) and changes in the fair value of derivative instruments. In 2006, the
Company made an adjustment to reduce deferred income tax liability and reduce deferred income tax
expense included in Other comprehensive loss by $54.6 million for amounts accumulated in Other
comprehensive loss prior to 2003.
JOINT VENTURE
The CICA Section 3055 Interest in Joint Ventures requires the proportionate consolidation method
to be applied to the recognition of interests in joint ventures in consolidated financial
statements. The Company has a joint-venture interest in the DRTP. FASB Accounting Principles Board
Opinion No. 18 The Equity Method of Accounting for Investments in Common Stock (APB 18)
requires the equity method of accounting to be applied to interests in joint ventures. This has no
effect on net income as it represents a classification difference within the income statement and
balance sheet. Equity income from DRTP in 2007 was $10.5 million (2006 $11.2 million, 2005
$8.2 million).
OFFSETTING CONTRACTS
FASB Financial Interpretation No. 39 Offsetting of Amounts Relating to Certain Contracts (FIN
39) does not allow netting of assets and liabilities among three parties. In 2003, the Company and
one of its subsidiaries entered into a contract with a financial institution. Under Canadian GAAP,
offsetting amounts with the same party and with a legal right to offset are netted against each
other.
START-UP COSTS
Under EIC 27 Revenues and Expenditures during the Pre-operating Period, costs incurred for
projects under development may be deferred until the projects are substantially complete. Upon
completion, these costs are amortized based on the expected period and pattern of benefit of the
expenditures. Under U.S. GAAP, these costs are to be expensed as incurred.
UNCERTAINTY IN TAX POSITIONS
In July 2006, FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Tax
Positions (FIN 48) introducing recognition and measurement criteria for income tax positions. An
income tax position is a position taken in a filed tax return or a position that will be taken in a
future tax return which has been reflected in the recognition and measurement of income or deferred
tax assets or liabilities. Under the provisions of FIN 48 a tax position must be evaluated using a
more likely than not recognition threshold based on the technical merits of the position and can
only be recognized if it is more likely than not that this position will be sustainable on audit.
If the position does not meet this threshold, no amount may be accrued. Additionally, the
recognized tax position will be measured at the largest amount that is greater than 50 % likely to
be realized on settlement. FIN 48 is effective for the Company commencing on January 1, 2007. The
adoption of FIN 48 had no impact on the financial statements of the Company.
CAPITAL LEASES
Under FASB Statement No. 13 Accounting for Leases (FASB 13), which prescribes certain
recognition criteria for a capital lease, certain leases, which the Company has recorded as capital
leases under Canadian GAAP, do not meet the criteria for capital leases and are recorded as
operating leases.
STATEMENT OF CASH FLOWS
There are no material differences in the Statement of Consolidated Cash Flows under U.S. GAAP.
FUTURE ACCOUNTING CHANGES
Measurement date of defined benefit pension
FASB 158 also requires, effective in 2008, that pension and other post-retirement benefit plans be
measured as of the balance sheet date. The Companys Canadian plans are already measured as of the
balance sheet date, however, the U.S. pension plans currently have a November 30 measurement date.
FASB 158 provides two approaches to transition to a fiscal year-end measurement date, both of which
are applied prospectively. Under the first approach, the plan assets are measured on November 30,
2007, and then re-measured on January 1, 2008. Under the alternative approach, the plan assets are
measured on November 30, 2007 and the next re-measurement is not until December 31, 2008. CP plans
has elected to adopt this change in measurement date using the latter approach. The impact of
adopting a plan measurement date at the balance sheet date for the Companys U.S. plans is not
anticipated to be material in 2008.
Fair value measurement
In September 2006, FASB issued FASB No. 157 Fair Value Measurement (FASB 157). This Statement
provides guidance for using fair values to measure assets and liabilities. Under the standard, the
definition of fair value focuses on the price that would be received to sell the asset or paid to
transfer the liability (an exit price), not the price that would be paid to acquire the asset or
received to assume the liability (an entry price). FASB 157 clarifies that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy
with the highest priority being quoted prices in active markets and the lowest priority being
company specific unobservable data. FASB 157 is effective January 1, 2008. The potential impact of
adoption on the Companys financial statements is not anticipated to be material.
Fair value option for financial assets and financial liabilities
In February 2007, FASB issued FASB No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities (FASB 159). This standard permits an entity to irrevocably elect fair
value on a contract by contract basis as the initial and subsequent measurement attribute for many
financial instruments and certain other items. An entity electing the fair value option would be
required to recognize changes in fair value in earnings. FASB 159 is effective January 1, 2008. At
this time the Company has not elected to account for any instruments at fair value under the fair
value option of FASB 159.
Business combinations
In December 2007, FASB issued FASB Statement No. 141 (revised 2007) Business Combinations (FASB
141(revised)) which replaces FASB Statement No. 141 Business Combinations. The new standard
requires the acquiring entity in a business combination to recognize all the assets acquired and
liabilities assumed in the transaction; and recognize and measure the goodwill acquired in the
business combination or a gain from a bargain purchase. FASB 141 (revised) will be applied
prospectively to business combinations for which the acquisition date is on or after January 1,
2009. The adoption of this accounting standard will not impact the current financial statements of
the Company.
Non-controlling interests in consolidated financial statements
In December 2007, FASB issued FASB Statement No. 160 Non-controlling Interests in Consolidated
Financial Statements (FASB 160) which requires the Company to report non-controlling interests
in subsidiaries as equity in the consolidated financial statements; and all transactions between an
entity and non-controlling interests as equity transactions. FASB 160 is effective for the Company
commencing on January 1, 2009 and its adoption is unlikely to impact the financial statements of
the Company at that time.
COMPARATIVE INCOME STATEMENT
Consolidated net income and Other comprehensive loss is reconciled from Canadian to U.S. GAAP in
the following manner:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Canadian GAAP |
|
$ |
946.2 |
|
|
$ |
796.3 |
|
|
$ |
543.0 |
|
Increased (decreased) by: |
|
|
|
|
|
|
|
|
|
|
|
|
Pension costs |
|
|
5.8 |
|
|
|
5.1 |
|
|
|
7.7 |
|
Post-retirement benefits costs |
|
|
9.4 |
|
|
|
9.1 |
|
|
|
9.2 |
|
Post-employment benefits costs |
|
|
7.2 |
|
|
|
6.7 |
|
|
|
(4.0 |
) |
Termination and severance benefits |
|
|
(8.8 |
) |
|
|
(8.2 |
) |
|
|
(9.4 |
) |
Internal use software additions |
|
|
(12.0 |
) |
|
|
(9.2 |
) |
|
|
(9.8 |
) |
Internal use software depreciation |
|
|
8.0 |
|
|
|
7.1 |
|
|
|
6.1 |
|
Stock-based compensation |
|
|
(1.7 |
) |
|
|
(3.0 |
) |
|
|
(3.4 |
) |
Loss on ineffective portion of hedges |
|
|
(0.4 |
) |
|
|
(0.9 |
) |
|
|
(6.6 |
) |
Capitalized interest additions |
|
|
14.0 |
|
|
|
4.1 |
|
|
|
4.4 |
|
Capitalized interest depreciation |
|
|
(4.5 |
) |
|
|
(3.9 |
) |
|
|
(3.9 |
) |
Start-up costs |
|
|
(0.8 |
) |
|
|
(10.8 |
) |
|
|
|
|
Fair value of financial instruments |
|
|
|
|
|
|
(2.3 |
) |
|
|
|
|
Future/deferred income tax expense related to net income |
|
|
(40.7 |
) |
|
|
(19.0 |
) |
|
|
1.7 |
|
|
|
|
|
Income before cumulative catch-up adjustment |
|
|
921.7 |
|
|
|
771.1 |
|
|
|
535.0 |
|
|
|
|
|
Cumulative catch-up adjustment on adoption of FASB 123R, net of tax |
|
|
|
|
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income U.S. GAAP |
|
$ |
921.7 |
|
|
$ |
769.1 |
|
|
$ |
535.0 |
|
Other comprehensive loss Canadian GAAP |
|
|
(40.8 |
) |
|
|
(1.1 |
) |
|
|
(9.5 |
) |
Increased (decreased) by: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain on designated net investment hedge |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
4.8 |
|
Unfunded pension and post-retirement liability adjustment |
|
|
(186.6 |
) |
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
783.3 |
|
|
|
(254.3 |
) |
Change in fair value of derivative instruments |
|
|
|
|
|
|
16.6 |
|
|
|
86.5 |
|
Gain on derivative instruments realized in net income |
|
|
|
|
|
|
(42.5 |
) |
|
|
(55.9 |
) |
Future (deferred) income tax recovery (expense) related to other
comprehensive loss |
|
|
35.7 |
|
|
|
(210.7 |
) |
|
|
76.6 |
|
|
|
|
|
Other comprehensive (loss) income U.S. GAAP |
|
$ |
(191.3 |
) |
|
$ |
546.2 |
|
|
$ |
(151.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share U.S. GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share before cumulative catch-up
adjustment on adoption of FASB 123R, net of tax |
|
$ |
5.98 |
|
|
$ |
4.90 |
|
|
$ |
3.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share after cumulative catch-up
adjustment on adoption of FASB 123R, net of tax |
|
$ |
5.98 |
|
|
$ |
4.89 |
|
|
$ |
3.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative catch-up
adjustment on adoption of FASB 123R, net of tax |
|
$ |
5.92 |
|
|
$ |
4.86 |
|
|
$ |
3.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share after cumulative catch-up
adjustment on adoption of FASB 123R, net of tax |
|
$ |
5.92 |
|
|
$ |
4.84 |
|
|
$ |
3.34 |
|
|
|
|
|
|
|
|
|
A summary of comprehensive income resulting from Canadian and U.S. GAAP differences is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Canadian GAAP |
|
$ |
905.4 |
|
|
$ |
795.2 |
|
|
$ |
533.5 |
|
U.S. GAAP |
|
$ |
730.4 |
|
|
$ |
1,315.3 |
|
|
$ |
383.2 |
|
|
|
|
|
|
|
|
|
A summary of operating income resulting from Canadian and U.S. GAAP differences is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
Canadian GAAP |
|
$ |
1,164.2 |
|
|
$ |
1,128.6 |
|
|
$ |
991.2 |
|
U.S. GAAP |
|
$ |
1,166.5 |
|
|
$ |
1,122.3 |
|
|
$ |
981.5 |
|
|
|
|
|
|
|
|
|
The differences between U.S. and Canadian GAAP operating income are itemized in the comparative net
income reconciliation, excluding the effect of future income taxes.
CONSOLIDATED BALANCE SHEET
Had the Consolidated Balance Sheet been prepared under U.S. GAAP, the differences would have been
as follows (higher/(lower)):
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
$ |
(0.2 |
) |
|
$ |
(0.4 |
) |
Accounts receivable and other current assets |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
|
1.4 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
Long-term assets |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
|
48.9 |
|
|
|
87.8 |
|
Capital commitments and mortgages |
|
|
|
|
|
|
(2.3 |
) |
Start-up costs |
|
|
(11.6 |
) |
|
|
(10.8 |
) |
Properties |
|
|
|
|
|
|
|
|
Capitalized interest |
|
|
160.0 |
|
|
|
150.4 |
|
Internal use software |
|
|
(55.2 |
) |
|
|
(51.2 |
) |
Investment in joint ventures |
|
|
(36.1 |
) |
|
|
(71.5 |
) |
Capital leases |
|
|
(10.4 |
) |
|
|
|
|
Other assets and deferred charges |
|
|
|
|
|
|
|
|
Pension |
|
|
(1,103.1 |
) |
|
|
(1,079.7 |
) |
Long-term receivable (FIN 39) |
|
|
190.3 |
|
|
|
179.5 |
|
Derivative instruments |
|
|
|
|
|
|
31.7 |
|
Transaction costs on long-term debt |
|
|
36.0 |
|
|
|
|
|
Investment in joint ventures |
|
|
(14.8 |
) |
|
|
(22.2 |
) |
|
|
|
Total assets |
|
$ |
(794.8 |
) |
|
$ |
(786.8 |
) |
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEET (CONTINUED)
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
$ |
(0.4 |
) |
|
$ |
(1.3 |
) |
Income and other taxes payable |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Long-term debt maturing within one year |
|
|
|
|
|
|
|
|
Capital leases |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
|
|
|
Deferred liabilities |
|
|
|
|
|
|
|
|
Termination and severance benefits |
|
|
(10.2 |
) |
|
|
(19.0 |
) |
Post-employment benefit liability |
|
|
5.2 |
|
|
|
16.4 |
|
Under funded status of defined benefit pension and other post-retirement plans |
|
|
573.0 |
|
|
|
421.0 |
|
Derivative instruments |
|
|
|
|
|
|
4.8 |
|
Investment in joint ventures |
|
|
(0.5 |
) |
|
|
(2.7 |
) |
Stock-based compensation |
|
|
0.2 |
|
|
|
(0.6 |
) |
Long-term debt |
|
|
|
|
|
|
|
|
Marked-to-market hedged portion of debt |
|
|
|
|
|
|
(2.8 |
) |
Bank loan (FIN 39) |
|
|
190.3 |
|
|
|
179.5 |
|
Capital leases |
|
|
(9.7 |
) |
|
|
|
|
Transaction costs on long-term debt |
|
|
36.0 |
|
|
|
|
|
Future/deferred income tax liability |
|
|
(441.2 |
) |
|
|
(437.2 |
) |
|
|
|
Total liabilities |
|
|
341.9 |
|
|
|
157.9 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Share capital |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
20.9 |
|
|
|
16.9 |
|
Contributed surplus |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5.2 |
|
|
|
8.3 |
|
Retained income |
|
|
(156.8 |
) |
|
|
(128.4 |
) |
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
(2.1 |
) |
Funding status of defined benefit pension and other post-retirement plans |
|
|
(1,010.2 |
) |
|
|
(858.8 |
) |
Derivative instruments (FASB 133) |
|
|
4.2 |
|
|
|
19.4 |
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
(794.8 |
) |
|
$ |
(786.8 |
) |
|
|
|
|
|
|
FIVE-YEAR SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2007 |
|
|
2006 |
|
|
2005(1) |
|
|
2004(1) |
|
|
2003(1) |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
$ |
938.9 |
|
|
$ |
904.6 |
|
|
$ |
754.5 |
|
|
$ |
668.2 |
|
|
$ |
644.4 |
|
Coal |
|
|
573.6 |
|
|
|
592.0 |
|
|
|
728.8 |
|
|
|
530.3 |
|
|
|
444.0 |
|
Sulphur and fertilizers |
|
|
502.0 |
|
|
|
439.3 |
|
|
|
447.1 |
|
|
|
460.0 |
|
|
|
417.4 |
|
Forest products |
|
|
275.8 |
|
|
|
316.4 |
|
|
|
333.9 |
|
|
|
322.0 |
|
|
|
328.8 |
|
Industrial and consumer products (3) |
|
|
627.9 |
|
|
|
603.8 |
|
|
|
542.9 |
|
|
|
481.4 |
|
|
|
459.9 |
|
Intermodal (3) |
|
|
1,318.0 |
|
|
|
1,256.8 |
|
|
|
1,161.1 |
|
|
|
1,034.7 |
|
|
|
926.4 |
|
Automotive |
|
|
319.0 |
|
|
|
314.4 |
|
|
|
298.0 |
|
|
|
288.5 |
|
|
|
304.2 |
|
|
|
|
|
|
|
4,555.2 |
|
|
|
4,427.3 |
|
|
|
4,266.3 |
|
|
|
3,785.1 |
|
|
|
3,525.1 |
|
Other (3) (4) (6) |
|
|
152.4 |
|
|
|
155.9 |
|
|
|
125.3 |
|
|
|
117.8 |
|
|
|
135.6 |
|
|
|
|
Total revenues (4) (6) |
|
|
4,707.6 |
|
|
|
4,583.2 |
|
|
|
4,391.6 |
|
|
|
3,902.9 |
|
|
|
3,660.7 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
1,284.2 |
|
|
|
1,327.6 |
|
|
|
1,322.1 |
|
|
|
1,261.5 |
|
|
|
1,166.4 |
|
Fuel |
|
|
746.8 |
|
|
|
650.5 |
|
|
|
588.0 |
|
|
|
440.0 |
|
|
|
393.6 |
|
Materials |
|
|
215.5 |
|
|
|
212.9 |
|
|
|
203.3 |
|
|
|
178.5 |
|
|
|
179.2 |
|
Equipment rents |
|
|
207.5 |
|
|
|
181.2 |
|
|
|
210.0 |
|
|
|
218.5 |
|
|
|
238.5 |
|
Depreciation |
|
|
472.0 |
|
|
|
464.1 |
|
|
|
445.1 |
|
|
|
407.1 |
|
|
|
372.3 |
|
Purchased services and other |
|
|
617.4 |
|
|
|
618.3 |
|
|
|
621.6 |
|
|
|
610.7 |
|
|
|
583.6 |
|
|
|
|
Total operating expenses, before other specified
items (4) (6) |
|
|
3,543.4 |
|
|
|
3,454.6 |
|
|
|
3,390.1 |
|
|
|
3,116.3 |
|
|
|
2,933.6 |
|
|
|
|
Operating income, before other specified items (4) (6) |
|
|
1,164.2 |
|
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
786.6 |
|
|
|
727.1 |
|
Other income and charges, before foreign exchange gains and losses on
long-term debt and other specified items (4) (5) (6) |
|
|
17.3 |
|
|
|
27.8 |
|
|
|
18.1 |
|
|
|
36.1 |
|
|
|
33.5 |
|
Interest expense |
|
|
204.3 |
|
|
|
194.5 |
|
|
|
204.2 |
|
|
|
218.6 |
|
|
|
218.7 |
|
Income tax expense, before foreign exchange gains and losses on
long-term debt and income tax on other specified items (4) (5)
(6) |
|
|
269.8 |
|
|
|
278.8 |
|
|
|
250.8 |
|
|
|
172.4 |
|
|
|
147.0 |
|
|
|
|
Income, before foreign exchange gains and losses
on long-term debt and other specified items (4) (5) (6) |
|
|
672.8 |
|
|
|
627.5 |
|
|
|
528.4 |
|
|
|
359.5 |
|
|
|
327.9 |
|
|
|
|
Foreign exchange gain (loss) on long-term debt (net of income tax)
(5) |
|
|
125.5 |
|
|
|
(7.2 |
) |
|
|
22.3 |
|
|
|
94.4 |
|
|
|
224.4 |
|
Other specified items (net of income tax) (4) |
|
|
147.9 |
|
|
|
176.0 |
|
|
|
(7.7 |
) |
|
|
(42.8 |
) |
|
|
(153.2 |
) |
|
|
|
Net income |
|
$ |
946.2 |
|
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
|
$ |
399.1 |
|
|
|
|
|
|
|
(1) Certain comparative period figures have been restated for retroactive application of
a new accounting pronouncement on stock-based compensation for employees eligible to retire before
vesting date.
(2) Restated. Effective January 1, 2004, CP adopted retroactively with restatement the
Canadian Institute of Chartered Accountants new accounting standard for asset retirement
obligations.
(3) In 2005, CP reclassified from Other revenue certain intermodal-related revenue
items consisting of container storage revenue and terminal service fees as part of the intermodal
line of business. Also, items relating to food and consumer products have been reclassed from the
intermodal group to the renamed Industrial and Consumer Products group.
(4) Before other specified items as follows: For 2007, a $162.9 million income tax
benefit was recorded due to Federal income tax rate reductions which was offset by a $21.5 million
change in estimated fair value of Canadian third party asset-backed commercial paper ($15.0 million
after tax); for 2006, a $176.0-million income tax benefit was recorded due to Federal and
Provincial income tax rate reductions; for 2005, a $33.9-million ($20.6 million after tax)
reduction to environmental remediation and a $44.2-million ($28.3 million after tax) special charge
for labour restructuring; for 2004, a $19.0-million ($12.4 million after tax) reduction of a labour
restructuring liability and a $90.9-million ($55.2 million after tax) special charge for
environmental remediation; for 2003, a $215.1-million ($141.4 million after tax) special charge for
labour restructuring and asset impairment, a $28.9-million ($18.4 million after tax) for a loss on
transfer of assets to an outsourcing firm, a $59.3-million favourable adjustment related to the
revaluation of future income taxes, and an unfavourable impact of $52.7 million for an increase in
future income taxes resulting from the repeal of previously legislated income tax reductions.
(5) Before foreign exchange gain (loss) on long-term debt as follows: For 2007, a $169.8
million ($125.5 million after tax) foreign exchange gain on long-term debt; for 2006, a
$0.1-million ($7.2 million after tax) foreign exchange loss on long-term debt; for 2005, a
$44.7-million ($22.3 million after tax) foreign exchange gain on long-term debt; for 2004, a
$94.4-million ($94.4 million after tax) foreign exchange gain on long-term debt; for 2003, a
$209.5-million ($224.4 million after tax) foreign exchange gain on long-term debt.
(6) These are earnings measures that are not in accordance with GAAP and may not be
comparable to similar measures of other companies. CPs results, before foreign exchange gains and
losses on long-term debt and other specified items as defined in this summary, are presented to
provide the reader with information that is readily comparable to prior years results. By
excluding foreign exchange gains and losses on long-term debt, the impact of volatile short-term
exchange rate fluctuations, which can only be realized when long-term debt matures or is settled,
is largely eliminated. By also excluding other specified items, the results better reflect ongoing
operations at CP.
SHAREHOLDER INFORMATION
COMMON SHARE MARKET PRICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Toronto Stock Exchange (Canadian dollars) |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
66.33 |
|
|
|
60.06 |
|
|
|
60.85 |
|
|
|
45.55 |
|
Second Quarter |
|
|
78.48 |
|
|
|
63.75 |
|
|
|
65.17 |
|
|
|
52.55 |
|
Third Quarter |
|
|
91.00 |
|
|
|
67.37 |
|
|
|
57.97 |
|
|
|
51.05 |
|
Fourth Quarter |
|
|
73.00 |
|
|
|
59.48 |
|
|
|
65.29 |
|
|
|
54.95 |
|
|
|
|
Year |
|
|
91.00 |
|
|
|
59.48 |
|
|
|
65.29 |
|
|
|
45.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Stock Exchange (U.S. dollars) |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
56.61 |
|
|
|
51.23 |
|
|
|
53.00 |
|
|
|
39.10 |
|
Second Quarter |
|
|
73.95 |
|
|
|
55.36 |
|
|
|
57.73 |
|
|
|
47.10 |
|
Third Quarter |
|
|
87.23 |
|
|
|
62.66 |
|
|
|
52.17 |
|
|
|
44.85 |
|
Fourth Quarter |
|
|
74.38 |
|
|
|
60.31 |
|
|
|
57.32 |
|
|
|
48.75 |
|
|
|
|
Year |
|
|
87.23 |
|
|
|
51.23 |
|
|
|
57.73 |
|
|
|
39.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of registered shareholders at year end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,152 |
|
Market prices at year end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toronto Stock Exchange |
|
|
|
|
|
|
|
|
|
|
|
|
|
CDN$ |
64.22 |
|
New York Stock Exchange |
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
64.64 |
|
|
|
SHAREHOLDER ADMINISTRATION
Common Shares
Computershare Investor Services Inc., with transfer facilities in Montreal, Toronto, Calgary and
Vancouver, serves as transfer agent and registrar for the Common Shares in Canada. Computershare
Trust Company NA, Denver, Colorado, serves as co-transfer agent and co-registrar for the Common
Shares in the United States.
For information concerning dividends, lost share certificates, estate transfers or for change in
share registration or address, please contact the transfer agent and registrar by telephone at
1-877-427-7245 toll free North America or International (514) 982-7555, visit their website at
www.computershare.com; or write to:
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario Canada M5J 2Y1
4 % CONSOLIDATED DEBENTURE STOCK
Inquiries with respect to Canadian Pacific Railway Companys 4 % Consolidated Debenture Stock
should be directed as follows:
For stock denominated in U.S. currency The Bank of New York Mellon at (212) 815-2719
or by e-mail at lesley.daley@bnymellon.com
and;
For stock denominated in pounds Sterling BNY Trust Company of Canada at (416) 933-8504
or by e-mail at marcia.redway@bnymellon.com.
MARKET FOR SECURITIES
The Common Shares of Canadian Pacific Railway Limited are listed on the Toronto and New York stock
exchanges. The Debenture Stock of Canadian Pacific Railway Company is listed on the London, England
Stock Exchange (sterling) and on the New York Stock Exchange (U.S. currency).
TRADING SYMBOL
Common Shares CP
DUPLICATE ANNUAL REPORTS
While every effort is made to avoid duplication, some Canadian Pacific Railway Limited registered
shareholders may receive multiple copies of shareholder information mailings such as this Annual
Report. Registered shareholders who wish to consolidate any duplicate accounts which are registered
in the same name are requested to write to Computershare Investor Services Inc.
DIRECT DEPOSIT OF DIVIDENDS
Registered shareholders are offered the option of having their Canadian and U.S. dollar dividends
directly deposited into their personal bank accounts in Canada and the United States on the
dividend payment dates. Shareholders may obtain a direct deposit enrolment form from Computershare
Investor Services Inc.
CORPORATE GOVERNANCE
Canadian Pacifics Board of Directors and its management are committed to a high standard of
corporate governance. They believe effective corporate governance calls for the establishment of
processes and structures that contribute to the sound direction and management of the Corporations
business, with a view to enhancing shareholder value.
A detailed description of CPs approach to corporate governance is contained in its Management
Proxy Circular issued in connection with the 2008 Annual and Special Meeting of Shareholders.
GOVERNANCE STANDARDS
Any significant differences between the Corporations corporate governance practices and those set
forth in the corporate governance listing standards (Listing Standards) of the New York Stock
Exchange (NYSE) are set forth on Canadian Pacific Railway Limiteds website www.cpr.ca under
Governance.
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION
The certifications (the 302 Certifications) of the Chief Executive Officer and the Executive
Vice-President and Chief Financial Officer of each of Canadian Pacific Railway Limited and Canadian
Pacific Railway Company required by Section 302 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated by the Securities and Exchange Commission (SEC) thereunder, have been filed with the
SEC as an exhibit to the Annual Report of Canadian Pacific Railway Limited and Canadian Pacific
Railway Company on Form 40-F. The 302 Certifications have also been filed in fulfillment of the
requirements of Multilateral Instrument 52-109.
DIRECTORS & COMMITTEES
Stephen E. Bachand (2) (4) * (5)
Retired President and Chief Executive Officer
Canadian Tire Corporation, Limited
Ponte Vedra Beach, Florida
John E. Cleghorn, O.C., F.C.A. (2) *
Chairman
Canadian Pacific Railway Limited
Toronto, Ontario
Tim W. Faithfull (3) (4)
Retired President and Chief Executive Officer
Shell Canada Limited
Oxford, Oxfordshire, England
Frederic J. Green (3)
President and Chief Executive Officer
Canadian Pacific Railway Limited
Calgary, Alberta
Krystyna T. Hoeg, C.A. (1) (3)
Former President and Chief Executive Officer
Corby Distilleries Limited
Toronto, Ontario
The Honourable John P. Manley (1) (5)
Senior Counsel
McCarthy Tétrault LLP
Ottawa, Ontario
Linda J. Morgan (3) (4)
Partner
Covington & Burling LLP
Bethesda, Maryland
Madeleine Paquin (1) (4)
President and Chief Executive Officer
Logistec Corporation
Montreal, Quebec
Michael E.J. Phelps, O.C. (2) (4) (5) *
Chairman
Dornoch Capital Inc.
West Vancouver, British Columbia
Roger Phillips, O.C., S.O.M., F.Inst.P. (1) * (2) (5)
Retired President and Chief Executive Officer
IPSCO Inc.
Regina, Saskatchewan
Hartley T. Richardson (1) (5)
President and Chief Executive Officer
James Richardson & Sons, Limited
Winnipeg, Manitoba
Michael W. Wright (1) (2) (3) *
Retired Chairman of the Board
and Chief Executive Officer
SUPERVALU INC.
Longboat Key, Florida
(1)
Audit, Finance and Risk
Management Committee
(2) Corporate Governance
and Nominating Committee
(3) Health, Safety, Security
and Environment Committee
(4) Management Resources
and Compensation Committee
(5) Pension Committee
* denotes chairman of the committee
SENIOR OFFICERS OF THE COMPANY
John E. Cleghorn, O.C., F.C.A.
Chairman of the Board
Toronto, Ontario
Frederic J. Green (1)
President and Chief Executive Officer
Calgary, Alberta
Michael R. Lambert (1)
Executive Vice-President
and Chief Financial Officer
Calgary, Alberta
Kathryn B. McQuade (1)
Executive Vice-President
and Chief Operating Officer
Mesquite, Nevada
Marcella M. Szel (1)
Senior Vice-President, Marketing and Sales
Calgary, Alberta
Brock M. Winter (1)
Senior Vice-President, Operations
Calgary, Alberta
Allen H. Borak
Vice-President, Business Information
and Technology Services
Calgary, Alberta
Donald B. Campbell (1)
Vice-President, Corporate Planning
Calgary, Alberta
Brian W. Grassby
Vice-President and Comptroller
Calgary, Alberta
Paul A. Guthrie, Q.C. (1)
Vice-President, Law
Municipal District of Rocky View, Alberta
Jonathan Legg
Vice-President, Strategic Initiatives
Calgary, Alberta
Jane A. OHagan (1)
Vice-President, Strategy and External Affairs
Calgary, Alberta
Tracy A. Robinson
Vice-President and Treasurer
Calgary, Alberta
R. Andrew Shields (1)
Vice-President, Human Resources and
Industrial Relations
Calgary, Alberta
Donald F. Barnhardt
Corporate Secretary
Calgary, Alberta
Karen Fleming
Associate Corporate Secretary
Calgary, Alberta
(1)
Executive Committee of
Canadian Pacific Railway Company
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2008 ANNUAL
AND SPECIAL MEETING
The Annual and Special Meeting of Shareholders will be held on Friday, May 9, 2008, at The Fairmont
Winnipeg located at 2 Lombard Place, Winnipeg, Manitoba, at 9:00 a.m., Central Time.
SHAREHOLDER SERVICES
Shareholders having inquiries or wishing to obtain copies of the Corporations Annual Information
Form may contact Shareholder Services at 1-866-861-4289 or (403) 319-7538, or by e-mail at
shareholder@cpr.ca, or by writing to: Shareholder Services, Office of the Corporate Secretary,
Canadian Pacific, Suite 920, Gulf Canada Square, 401- 9th Avenue S.W., Calgary, Alberta, Canada T2P
4Z4
INVESTOR RELATIONS
Financial information is available under the Investor Section on CPs Web site at www.cpr.ca.
COMMUNICATIONS
AND PUBLIC AFFAIRS
Contact Communications and Public Affairs, Canadian Pacific, Suite 500, Gulf Canada Square, 401 -
9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
Si vous désirez vous procurer la version française du présent rapport, veuillez vous adresser au :
Services aux actionnaires, Bureau du secrétaire général, Canadien Pacifique, Suite 920, Gulf Canada
Square, 401 - 9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4