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, 2008
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, 2008, 153,847,193 Common Shares of Canadian Pacific Railway Limited were issued and
outstanding. At December 31, 2008, 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.
PRIOR FILINGS MODIFIED AND SUPERSEDED
The Registrants Annual Report on Form 40-F for the year ended December 31, 2008, 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).
In addition, this Annual Report on Form 40-F is incorporated by reference into or as an
exhibit to, as applicable, the Registration Statement on Form F-9 No. 333-142347 (Canadian Pacific
Railway Company).
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 52 through 109 of the Registrants 2008 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 28 Reconciliation of Canadian
and United States generally accepted accounting principles on pages 100 through 109 of such 2008
Annual Report.
B. Managements Discussion and Analysis
For managements discussion and analysis, see pages 3 through 50 of the Registrants 2008
Annual Report incorporated by reference and included herein.
For the purposes of this Annual Report on Form 40-F, only pages 3 through 109 of the
Registrants 2008 Annual Report referred to above shall be deemed filed, and the balance of such
2008 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, 2008, 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, 2008, 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 52 of the
Registrants 2008 Annual Report, incorporated by reference and included herein.
2
The effectiveness of the Registrants internal control over financial reporting as of December
31, 2008 has been audited by PricewaterhouseCoopers LLP, the
Registrants' independent auditor, as stated in their report on page 53 of the Registrants 2008 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 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 December
2008. 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.
3
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 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
Richard C. Kelly
John P. Manley
Roger Phillips
Michael W. Wright
Each of the aforementioned directors 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.
4
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, have
accounting or related financial management expertise within the meaning of the NYSE Standards.
The boards have determined that all members of the Audit Committees are financially literate within
the definition contained in, and as required by, Multilateral Instrument 52-110 and the NYSE
Standards.
SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
Each Registrants board has determined that no director who serves on more than two public
company audit committees 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.
Krystyna T. Hoeg serves on two public company audit committees, in addition to the Audit
Committees of the two Registrants. The boards of the Registrants have determined that the service
of Ms. Hoeg on the audit committees of two 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, 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. |
PRINICIPAL ACCOUNTANT FEES AND SERVICES
Fees payable to the Registrants independent auditor, PricewaterhouseCoopers, LLP for the
years ended December 31, 2008, and December 31, 2007, totaled $3,195,200 and $3,433,980,
respectively, as detailed in the following table:
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Year ended December 31, 2008 |
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Year ended December 31, 2007 |
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Audit Fees |
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$ |
2,044,700 |
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$ |
2,391,600 |
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Audit-Related Fees |
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$ |
808,600 |
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$ |
619,780 |
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Tax Fees |
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$ |
341,900 |
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$ |
422,600 |
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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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$ |
3,195,200 |
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$ |
3,433,980 |
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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 2008 and 2007, 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.
6
OFF-BALANCE SHEET ARRANGEMENTS
A description of the Registrants off-balance sheet arrangements is set forth on page 34 of
the Registrants 2008 Annual Report incorporated by reference and included herein.
TABLE OF CONTRACTUAL COMMITMENTS
The table setting forth the Registrants contractual commitments is set forth on page 35 of
the Registrants 2008 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 Canadian Pacific Railway Companys Annual Report on Form 40-F for the fiscal year
ended December 31, 2007.
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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/s/ Karen L. Fleming
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Name: |
Karen L. Fleming |
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Title: |
Corporate Secretary |
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Date: |
March 5, 2009 |
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7
DOCUMENTS FILED AS PART OF THIS REPORT
1. |
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Annual Information Form of the Registrant for the year ended December 31, 2008. |
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2. |
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Annual Report of the Registrant for the year ended December 31, 2008, 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, 2008 and
for each of the three years then ended1. |
EXHIBITS
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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 3 through 109 of the Registrants 2008 Annual Report
referred to above shall be deemed filed, and the balance of such 2008 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. |
8
2008 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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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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4.5 QUARTERLY TRENDS |
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4.6 BUSINESS CATEGORIES |
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4.7 REVENUES |
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10 |
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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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14 |
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4.10 INTEGRATED OPERATING PLAN |
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14 |
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4.11 INFORMATION TECHNOLOGY |
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4.12 LABOUR PRODUCTIVITY AND EFFICIENCY |
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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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18 |
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SECTION 5: DIVIDENDS |
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5.1 DECLARED DIVIDENDS AND DIVIDEND POLICY |
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19 |
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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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21 |
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SECTION 7: MARKET FOR SECURITIES |
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7.1 STOCK EXCHANGE LISTINGS |
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23 |
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7.2 TRADING PRICE AND VOLUME |
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23 |
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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, BANKRUPTCIES, PENALTIES OR SANCTIONS |
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25 |
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8.3 SENIOR OFFICERS |
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26 |
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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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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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31 |
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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 23, 2009
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 |
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Non-Voting |
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Securities |
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Percentage of Voting |
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Beneficially Owned, |
|
|
|
|
Securities Held |
|
or over which |
|
|
Incorporated under |
|
Directly or |
|
Control or Direction |
Principal
Subsidiary(1) |
|
the Laws of |
|
Indirectly |
|
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 |
Dakota, Minnesota & Eastern Railroad
Corporation (4)
|
|
Delaware
|
|
100%
|
|
Not applicable |
Delaware and Hudson Railway Company,
Inc. (2)
|
|
Delaware
|
|
100%
|
|
Not applicable |
Mount Stephen Properties Inc.(5)
|
|
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) |
|
Indirect wholly owned subsidiary of the Soo Line Corporation. |
|
(5) |
|
Wholly owned subsidiary of Canadian Pacific Railway Company. |
Dakota, Minnesota & Eastern Railroad Corporation (DM&E) was acquired in October 2007 and is
indirectly wholly owned by Soo Line Corporation. The US Surface Transportation Board (STB)
approved the application to acquire control on September 30, 2008. The official effective date of
the final decision was October 30, 2008.
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.
The Company assumed control of DM&E on October 30, 2008 following approval of its acquisition of
DM&E by the STB. The addition of DM&E extended CPs reach and increased its rail network, added
new customers and expanded the service available to customers of both DM&E and CP. DM&E connects
with CP at Minneapolis, Winona (Minnesota) and Chicago, and connects and interchanges traffic with
all Class I railways. DM&E has approximately 1,000 employees, 2,500 miles of track, including 500
miles of trackage rights, and rolling stock that includes approximately 8,200 rail cars and 165
locomotives. DM&E serves eight states: Illinois, Minnesota, Iowa, Wisconsin, Missouri, South
Dakota, Wyoming and Nebraska. DM&Es freight revenues are derived principally from transporting
grain, industrial products, and coal. DM&E has the option, but not the obligation, to construct a
railway line into the Powder River Basin (PRB) located in Wyoming, the largest thermal coal
producing region in the United States. No decision will be made by the Company on whether to
construct a line of railway into the PRB until certain milestones have been met.
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.
During 2008, the Company filed its application with the Canadian Transportation Agency to initiate
the regulatory permitting process for construction of the rail corridor.
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 mid 2008, CP commenced a review of opportunities to accelerate the realization of benefits
achievable from operating plan efficiency improvements. Known as Execution Excellence for
Efficiency (or E3), this initiative is intended to identify opportunities to reduce costs and
improve product reliability. Train productivity, asset utilization, yard and terminal operations,
maintenance and product reliability have been the focus of this review.
In late 2008, the product design and yield teams were grouped together in the Strategy & Yield
department, with the objective of further enhancing margins. This combined group will provide
network capability in an effort to optimize demand, product offering, equipment and track
utilization. The development of this coordinated approach to yield and operations planning is a
key element of the larger Strategy & Yield mandate to coordinate CPs strategy, yield, product
design, interline, business development and network capacity functions.
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 128 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 15,500-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 10,800 miles of track. An additional 4,700 miles of track are owned jointly,
leased or operated under trackage rights. Of the total mileage operated, approximately 6,300 miles
are located in western Canada, 2,200 miles in eastern Canada, 5,800 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 three wholly owned subsidiaries: Soo Line
Railroad Company (Soo Line), a Class I railway operating in the US Midwest; the Delaware and
Hudson Railway Company, Inc. (D&H), which operates between eastern Canada and major US Northeast
markets, including New York City, New York; Philadelphia, Pennsylvania; and Washington, D.C., and
DM&E, which operates in the US Midwest.
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.
5
SECTION 4: DESCRIPTION OF THE BUSINESS
Over the past few years Class I railway initiatives have included:
|
|
|
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; |
|
|
|
CP-CN directional running operations in the B.C. Fraser Canyon; |
|
|
|
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.
4.4 Network and Right-of-Way
Our 15,500-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; New York City and Buffalo, New York; and Kansas City, Missouri.
Our network is composed of four primary corridors (Western, Southern, Central, and Eastern) and the
DM&E. These corridors with the DM&E are comprised of main lines, totalling approximately 4,700
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
Pacific CanAm Route, which connects Calgary and Medicine Hat, Alberta, with Union Pacific
Railroad Company (UP) at Kingsgate, B.C.
6
SECTION 4: DESCRIPTION OF THE BUSINESS
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, Calgary; Edmonton; Alberta; 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.
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
3.1).
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.
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. Connections are also made with the CN at a number of locations, including
Regina, Saskatoon, Winnipeg, Thunder Bay and Sudbury.
7
SECTION 4: DESCRIPTION OF THE BUSINESS
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, D.C.. 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 The Dakota, Minnesota & Eastern Railroad Corporation
Overview The DM&E is a Class II railroad with approximately 2,500 miles of track, including
approximately 500 miles of trackage rights, in the US midwest and primary customers in
agri-products and merchandise. DM&E has connections to and traffic interchanges with all seven
Class I railroads and is proximate to the PRB located in Wyoming, the largest thermal coal
producing region in the United States.
Products Primary traffic categories transported on the DM&E include industrial and consumer
products, grain, coal, fertilizers and forest products.
Feeder Lines The acquisition of the DM&E provides a strategic end-to-end network fit that will
extend CPs network reach and increase operational efficiency. The DM&E connects with the Southern
Corridor at Minneapolis, Winona, Minnesota and Chicago. The railway operates in eight states and
has direct access to Chicago, Minneapolis, Kansas City (Missouri), and to critical water ports.
Connections The DM&E has the ability to interchange with all of the seven Class I railroads
operating in the United States. The east portion of the line provides additional access to Chicago
where as the south portion of the rail extends to Kansas City. The DM&E is also located favourably
to the PRB.
8
SECTION 4: DESCRIPTION OF THE BUSINESS
Yards and Repair Facilities We support our rail operations of the DM&E with major rail yards and
locomotive repair shops in Mason City, Iowa; Nahant, Iowa; and Huron, South Dakota.
4.4.6 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.
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.
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 2008 compared with 2007:
|
|
|
|
|
|
|
|
|
Business
Category(1) |
|
2008 |
|
2007 |
|
Bulk |
|
|
43 |
% |
|
|
44 |
% |
Merchandise |
|
|
28 |
% |
|
|
27 |
% |
Intermodal |
|
|
29 |
% |
|
|
29 |
% |
|
(1) Figures include DM&E from October 30, 2008 to December 31, 2008.
9
SECTION 4: DESCRIPTION OF THE BUSINESS
4.7 Revenues
The following table summarizes our annual freight revenues since 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
Revenues |
|
|
|
|
|
Fiscal 2008 |
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
(in
$ millions, except for percentages) |
|
|
|
|
|
Growth |
|
|
|
|
|
|
Growth |
|
|
|
|
|
|
Fiscal |
|
|
Rate as |
|
|
Fiscal |
|
|
Rate as |
|
|
Fiscal |
|
|
|
2008(1) |
|
|
Compared |
|
|
2007 |
|
|
Compared |
|
|
2006 |
|
|
|
|
|
|
|
to Fiscal |
|
|
|
|
|
|
to Fiscal |
|
|
|
|
|
Business
Category |
|
|
|
|
|
2007 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
Bulk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
970 |
|
|
|
3.3 |
% |
|
|
939 |
|
|
|
3.8 |
% |
|
|
905 |
|
Coal |
|
|
607 |
|
|
|
5.9 |
% |
|
|
573 |
|
|
|
(3.1 |
)% |
|
|
592 |
|
Sulphur and fertilizers |
|
|
509 |
|
|
|
1.3 |
% |
|
|
502 |
|
|
|
14.3 |
% |
|
|
439 |
|
|
Total bulk |
|
|
2,086 |
|
|
|
3.6 |
% |
|
|
2,014 |
|
|
|
4.0 |
% |
|
|
1,936 |
|
|
Merchandise |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest products |
|
|
239 |
|
|
|
(13.2 |
)% |
|
|
276 |
|
|
|
(12.8 |
)% |
|
|
316 |
|
Industrial and consumer products |
|
|
766 |
|
|
|
22.0 |
% |
|
|
628 |
|
|
|
4.0 |
% |
|
|
604 |
|
Automotive |
|
|
324 |
|
|
|
1.4 |
% |
|
|
319 |
|
|
|
1.5 |
% |
|
|
314 |
|
|
Total merchandise |
|
|
1,329 |
|
|
|
8.7 |
% |
|
|
1,223 |
|
|
|
(0.9 |
)% |
|
|
1,234 |
|
|
Intermodal |
|
|
1,400 |
|
|
|
6.2 |
% |
|
|
1,318 |
|
|
|
4.9 |
% |
|
|
1,257 |
|
|
Total freight revenues |
|
|
4,815 |
|
|
|
5.7 |
% |
|
|
4,555 |
|
|
|
2.9 |
% |
|
|
4,427 |
|
|
(1) Revenues include DM&E from October 30, 2008 to December 31, 2008.
4.7.1 Bulk
Our bulk business represented approximately 43% of total freight revenues in 2008.
4.7.1.1 Grain
Our grain business accounted for approximately 20% of total freight revenues in 2008.
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 states of North Dakota, Minnesota, Iowa and South Dakota.
Western Canadian grain is shipped primarily west to the Port of Vancouver and east to the Port of
Thunder Bay for export. Grain is also shipped to the 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 21.5.1 of our 2008 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 13% of total freight revenues in 2008.
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.
10
SECTION 4: DESCRIPTION OF THE BUSINESS
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 10% of total freight revenues in 2008.
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 manufacturing of sulphuric acid, which 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.
4.7.2 Merchandise
Our merchandise business represented approximately 28% of total freight revenues in 2008.
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 5% of total freight revenues in 2008.
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 16% of total freight
revenues in 2008.
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
11
SECTION 4: DESCRIPTION OF THE BUSINESS
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 2008.
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 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 2008.
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 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, 2008, one customer comprised 11.3% of total revenues and 1.5% of total accounts
receivable. At December 31, 2007 and 2006, the same customer comprised 11.5% and 11.5% of total
revenues and 6.2% and 5.6% 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:
12
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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2008 |
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2007 |
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2006 |
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2005 |
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2004 |
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Consolidated Data Including DM&E(3) |
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Efficiency and other indicators |
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Gross ton-miles (GTM) (millions)(4) |
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239,619 |
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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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US gallons of locomotive fuel per 1,000 GTMs freight
and yard(5) |
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1.22 |
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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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Terminal dwell (hours)(6) |
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22.3 |
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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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Number of active employees end of period(7) |
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15,783 |
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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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Freight revenue per RTM (cents)(8) |
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3.87 |
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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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CP Data excluding DM&E |
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Efficiency and other indicators |
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Car miles per car day(9) |
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143.6 |
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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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Average train speed (miles per hour)(10) |
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24.0 |
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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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Safety indicators |
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FRA personal injuries per 200,000
employee-hours(11) |
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1.47 |
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2.09 |
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2.00 |
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2.38 |
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2.75 |
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FRA train accidents per million train-miles(12) |
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1.87 |
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2.05 |
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1.56 |
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2.26 |
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2.12 |
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DM&E Data only |
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FRA personal injuries per 200,000
employee-hours(3) |
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3.53 |
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FRA train accidents per million train-miles(12) |
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7.81 |
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(1) |
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Revenue ton-miles (RTM) (millions), GTMs per average active employee (thousands),
and GTMs 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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The 2008 figures include the results of DM&E from October 30, 2008 to December 31,
2008, except where noted. |
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(4) |
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GTMs 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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(5) |
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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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(6) |
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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 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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(7) |
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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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(8) |
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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. |
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(9) |
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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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(10) |
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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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(11) |
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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. |
13
SECTION 4: DESCRIPTION OF THE BUSINESS
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(12) |
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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$8,900 in damage. |
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; and freight
cars and other equipment. On an accrual basis, we invested approximately $2.7 billion in our core
assets from 2006 to 2008, with annual capital spending over this period averaging approximately 19%
of revenues. This included approximately $1.8 billion invested in track and facilities, $0.4
billion in locomotives, $0.2 billion in information technology and $0.4 billion in freight cars and
other equipment. Our cash outlay for locomotives over the same period, however, was $0.2 billion as
CP financed the 2008 tranche of acquisitions through a capital lease resulting in a net cash
investment of $2.6 billion or 18% of revenues.
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 732 AC
locomotives (excluding DM&E). While AC locomotives represent approximately 67% of our road-freight
locomotive fleet, they handle about 86% of our workload (excluding DM&E). 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 81 (51-Road, 30-Yard) 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 excluding DM&E)
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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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310 |
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2 |
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312 |
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6-10 |
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238 |
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238 |
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11-15 |
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184 |
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184 |
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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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292 |
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269 |
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229 |
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790 |
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Total |
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732 |
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359 |
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271 |
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229 |
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1,591 |
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4.9.2 Railcar Fleet
We own, lease or manage approximately 47,500 freight cars. Approximately 18,800 are owned by CP,
7,300 are hopper cars owned by Canadian federal and provincial government agencies, and 21,400 are
leased. Long-term leases on approximately 4,300 cars are scheduled to expire during 2009, and the
leases on approximately 6,300 additional cars are scheduled to expire before the end of 2013.
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.
The DM&E owns or leases approximately 6,300 freight cars. Approximately 600 are owned by DM&E, and
5,700 are leased. Long-term leases on approximately 1,300 cars are scheduled to expire during
2009, and the leases on approximately 2,000 additional cars are scheduled to expire before the end
of 2013.
4.10 Integrated Operating Plan (IOP)
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.
14
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 2008, 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.
The Execution Excellence for Efficiency (or E3) review that commenced in mid-2008 is an
initiative intended to accelerate benefits related to IOP efficiency, to reduce costs and to
improve reliability of CPs product. Train productivity, asset utilization, yard and terminal
operations, maintenance and product reliability have been the focus of this review.
In late 2008, the IOP and Yield teams were grouped together in the Strategy & Yield department.
This combined group will provide network capability in an effort to optimize demand, product
offering, equipment and track utilization.
4.11 Information Technology
As a 24-hours-a-day, seven-days-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.
The Shipment Suite of applications is the primary toolset used in the design, planning and
execution of our IOP. During 2008 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. The yard management tools facilitate better
planning, performance reporting, design and execution of yard activities. The resulting efficiency
gains translate into optimum capacity utilization of trains, better on time shipment performance
and reduced costs. For 2009, we plan to implement improved inventory reporting using wireless
technology and introduce the capability for customers to request cars and related services directly
over the Internet. Safety improvements in 2008 included the ability to better track trains
containing hazardous materials and an improved ability to monitor the hours of service put in by
train crews.
To improve the safety and reliability of our rolling stock we implemented a system that captures
data from wayside detectors and uses this data to project maintenance requirements. On-line
failures are reduced and maintenance costs are lowered through better scheduling. In the
Engineering area, we delivered a system to electronically schedule and capture data from the
inspection of track structures such as bridges and culverts. During 2009 we plan to expand this
system to cover all track components.
In the sales and marketing area we began a multi-year initiative to upgrade our e-business website
to provide improved capabilities and ease of use to our customers. The first rollout of these
capabilities is scheduled to begin in mid-2009. In the intermodal line of business we completed
implementation of the TRIEX system at all our terminals. TRIEX provides customer self-service
including proof of delivery, full shipment tracking, more sophisticated pricing options and
simplified billing processes.
Our
acquisition of the Dakota, Minnesota & Eastern Railroad
Corporation closed on October 30, 2008 and we
immediately began an expansion of CPs systems onto the DM&E property. By year end we had loaded
all employee information into our system and were ready to begin processing payrolls. All
financial data has been loaded into SAP and we began using the system in January
15
SECTION 4: DESCRIPTION OF THE BUSINESS
2009. Over the balance of 2009 we plan to expand the use of our train operations and shipment
management systems onto the DM&E.
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. We also extended a license agreement with SAP Canada for two more years, to
leverage use of its software to functions beyond managing assets and expenditures, such as revenue
management, supplier management and pricing.
During 2006, improvements were made to the Shipment Suite 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.
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. The targeted reductions for these initiatives were successfully achieved by 2006.
During 2008 we launched the Execution Excellence for Efficiency (E3) initiative and began
progressing its implementation during the fourth quarter it is designed to reduce operating
costs, and provide us with increased flexibility to react quickly to market changes.
Running trades productivity has been improved in 2006 through 2008 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 21.0 of our 2008 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, 2008 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 by 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.
16
SECTION 4: DESCRIPTION OF THE BUSINESS
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, for CP excluding DM&E data, was 1.47 in
2008 compared with 2.09 in 2007 and 2.00 in 2006. For DM&E this rate was 3.53 in 2008. The FRA
train accident rate in 2008, for CP excluding DM&E data, was 1.87 accidents per million
train-miles, compared with 2.05 and 1.56, respectively, in 2007 and 2006. For DM&E, this rate was
7.81 in 2008.
Our Health, Safety, Security and Environment Committee provides ongoing focus, leadership,
commitment and support for efforts to improve the safety of our operations as well as the safety
and health of our employees. The committee is comprised of all of the most senior representatives
from our different operations departments and is a key component of safety governance at CP. Our
Safety Framework governs the safety management process, which involves more than 1,000 employees in
planning and implementing safety-related activities. This management process, combined with
planning that encompasses all operational functions, ensures a continuous and consistent focus on
safety.
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 and again in 2008.
Our next CCPA and ACC Responsible Care verification is tentatively scheduled for June 2011.
4.16.2 Planning
We prepare an annual Corporate Environmental Plan and an Operations Environment Plan, which include
details of our environmental goals and targets as well as high-level strategies. These plans are
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 2018.
4.16.4 Environmental Contamination
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
17
SECTION 4: DESCRIPTION OF THE BUSINESS
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 $27.8 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, Sales and Marketing, Finance, Operations, Supply
Services, and Safety and Environmental Services departments, meets quarterly to review
environmental matters.
4.16.7 Expenditures
We spent $41 million in 2008 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.
18
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 |
|
$0.1875 |
|
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 |
$0.2475 |
|
June 27, 2008 |
|
July 28, 2008 |
$0.2475 |
|
September 26, 2008 |
|
October 27, 2008 |
$0.2475 |
|
December 24, 2008 |
|
January 26, 2009 |
$0.2475 |
|
March 27, 2009 |
|
April 27, 2009 |
|
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.
19
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, 2008,
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. |
20
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:
|
|
|
|
|
|
|
|
Long-Term |
|
|
Approved Rating |
|
Debt |
|
|
Organization |
|
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 and
Dominion Bond Rating Service, while the rating of Moodys Investors Service has a stable outlook.
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.
21
SECTION 6: CAPITAL STRUCTURE
The following table summarizes rating categories for respective rating agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominion |
|
|
|
|
Moodys |
|
|
|
Bond |
|
|
|
|
Investors |
|
Standard |
|
Rating |
|
|
|
|
Service |
|
& Poors |
|
Service |
|
|
|
|
|
|
|
|
|
Aaa
|
|
AAA
|
|
AAA
|
|
|
|
High Investment Grade |
|
|
|
|
|
|
|
Aa1
|
|
AA+
|
|
AA(high) |
|
|
Aa2
|
|
AA
|
|
AA |
|
|
Aa3
|
|
AA-
|
|
AA(low) |
|
|
|
|
|
|
|
|
|
A1
|
|
A+
|
|
A(high) |
|
|
A2
|
|
A
|
|
A |
|
|
A3
|
|
A-
|
|
A(low) |
|
|
|
|
|
|
|
|
|
|
Investment
Grade |
Baa1
|
|
BBB+
|
|
BBB(high)
|
|
Baa2
|
|
BBB
|
|
BBB |
|
|
Baa3
|
|
BBB-
|
|
BBB(low) |
|
|
|
|
|
|
|
|
|
Ba1
|
|
BB+
|
|
BB(high) |
|
|
|
Below Investment Grade |
Ba2
|
|
BB
|
|
BB |
|
|
Ba3
|
|
BB-
|
|
BB(low) |
|
|
|
|
|
|
|
|
|
B1
|
|
B+
|
|
B(high)
|
|
|
B2
|
|
B
|
|
B |
|
|
B3
|
|
B-
|
|
B(low) |
|
|
|
|
|
|
|
|
|
Caa
|
|
CCC
|
|
CCC |
|
|
|
|
|
|
|
|
|
Ca
|
|
CC
|
|
CC |
|
|
|
|
|
|
|
|
|
C
|
|
C
|
|
C |
|
|
|
|
|
|
|
22
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 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
High |
|
Low |
|
Closing |
|
Volume of |
Month |
|
Price per |
|
Price per |
|
Price per |
|
Price per |
|
Shares |
|
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Traded |
|
January |
|
|
64.24 |
|
|
|
69.10 |
|
|
|
57.30 |
|
|
|
67.04 |
|
|
|
16,198,128 |
|
February |
|
|
67.30 |
|
|
|
74.74 |
|
|
|
67.13 |
|
|
|
71.54 |
|
|
|
13,733,133 |
|
March |
|
|
71.54 |
|
|
|
72.10 |
|
|
|
62.39 |
|
|
|
66.00 |
|
|
|
15,823,326 |
|
April |
|
|
66.45 |
|
|
|
72.13 |
|
|
|
63.98 |
|
|
|
69.38 |
|
|
|
16,600,290 |
|
May |
|
|
69.17 |
|
|
|
75.00 |
|
|
|
69.05 |
|
|
|
72.58 |
|
|
|
16,782,877 |
|
June |
|
|
71.90 |
|
|
|
71.90 |
|
|
|
64.60 |
|
|
|
67.70 |
|
|
|
16,748,437 |
|
July |
|
|
65.50 |
|
|
|
68.75 |
|
|
|
60.50 |
|
|
|
64.30 |
|
|
|
16,287,700 |
|
August |
|
|
64.98 |
|
|
|
68.27 |
|
|
|
60.50 |
|
|
|
64.78 |
|
|
|
9,102,256 |
|
September |
|
|
65.00 |
|
|
|
67.80 |
|
|
|
53.80 |
|
|
|
57.07 |
|
|
|
16,919,026 |
|
October |
|
|
57.86 |
|
|
|
57.86 |
|
|
|
43.38 |
|
|
|
54.55 |
|
|
|
18,774,397 |
|
November |
|
|
54.84 |
|
|
|
57.41 |
|
|
|
34.24 |
|
|
|
40.70 |
|
|
|
15,023,450 |
|
December |
|
|
39.00 |
|
|
|
42.82 |
|
|
|
35.16 |
|
|
|
40.98 |
|
|
|
14,078,169 |
|
|
The following table provides the monthly trading information for our Common Shares on the New York
Stock Exchange during 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
High |
|
Low |
|
Closing |
|
Volume of |
Month |
|
Price per |
|
Price per |
|
Price per |
|
Price per |
|
Shares |
|
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Traded |
|
January |
|
|
64.95 |
|
|
|
69.26 |
|
|
|
55.39 |
|
|
|
66.57 |
|
|
|
5,470,200 |
|
February |
|
|
67.00 |
|
|
|
76.18 |
|
|
|
66.90 |
|
|
|
73.19 |
|
|
|
5,112,100 |
|
March |
|
|
72.90 |
|
|
|
72.96 |
|
|
|
60.82 |
|
|
|
64.29 |
|
|
|
5,728,000 |
|
April |
|
|
65.10 |
|
|
|
71.67 |
|
|
|
62.84 |
|
|
|
69.16 |
|
|
|
4,899,100 |
|
May |
|
|
68.23 |
|
|
|
76.14 |
|
|
|
68.09 |
|
|
|
73.16 |
|
|
|
4,630,400 |
|
June |
|
|
71.86 |
|
|
|
72.12 |
|
|
|
63.55 |
|
|
|
66.14 |
|
|
|
5,111,200 |
|
July |
|
|
65.42 |
|
|
|
68.33 |
|
|
|
59.62 |
|
|
|
62.81 |
|
|
|
11,084,078 |
|
August |
|
|
63.26 |
|
|
|
63.71 |
|
|
|
57.97 |
|
|
|
60.75 |
|
|
|
5,420,403 |
|
September |
|
|
61.18 |
|
|
|
63.08 |
|
|
|
51.75 |
|
|
|
53.86 |
|
|
|
10,446,979 |
|
October |
|
|
53.60 |
|
|
|
53.70 |
|
|
|
34.37 |
|
|
|
45.00 |
|
|
|
15,014,105 |
|
November |
|
|
45.44 |
|
|
|
49.52 |
|
|
|
26.64 |
|
|
|
32.20 |
|
|
|
12,614,948 |
|
December |
|
|
31.37 |
|
|
|
35.68 |
|
|
|
28.05 |
|
|
|
33.62 |
|
|
|
10,174,603 |
|
|
23
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) |
|
|
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)
|
|
2009 (2001) |
|
|
|
|
|
|
|
T.W. Faithfull (4)(5)
Oxford, Oxfordshire, England
|
|
Retired President and Chief Executive Officer
Shell Canada Limited (oil and gas company)
|
|
2009 (2003) |
|
|
|
|
|
|
|
F.J. Green (4)
Calgary, Alberta, Canada
|
|
President and Chief Executive Officer, Canadian
Pacific Railway Company and Canadian Pacific
Railway Limited
|
|
2009 (2006) |
|
|
|
|
|
|
|
K.T. Hoeg, C.A. (2)(6)
Toronto, Ontario, Canada
|
|
Former President and Chief Executive Officer of
Corby Distilleries Limited (spirits and wine)
|
|
2009 (2007) |
|
|
|
|
|
|
|
Richard C. Kelly (2)(4)
Minneapolis, Minnesota, U.S.A.
|
|
Chairman, President and Chief Executive Officer
Xcel Energy (a utility supplier of electric
power and natural gas)
|
|
2009 (2008) |
|
|
|
|
|
|
|
The Hon. J.P. Manley (2)(3)(6)
Ottawa, Ontario, Canada
|
|
Senior Counsel, McCarthy Tétrault LLP (law firm)
|
|
2009 (2006) |
|
|
|
|
|
|
|
L.J. Morgan (4)(5)
Bethesda, Maryland, U.S.A.
|
|
Partner, Covington & Burling LLP (law firm)
|
|
2009 (2006) |
|
|
|
|
|
|
|
M. Paquin (4)(5)
Montreal, Quebec, Canada
|
|
President and Chief Executive Officer, Logistec
Corporation (international cargo-handling
company)
|
|
2009 (2001) |
|
|
|
|
|
|
|
M.E.J. Phelps, O.C. (3)(5)(6)
West Vancouver, B.C., Canada
|
|
Chairman, Dornoch Capital Inc. (private
investment company)
|
|
2009 (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)
|
|
2009 (2001) |
|
|
|
|
|
|
|
H.T.
Richardson, C.M., O.M. (5)(6)
Winnipeg, Manitoba, Canada
|
|
President and Chief Executive Officer, James
Richardson & Sons, Limited (privately owned
corporation)
|
|
2009 (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)
|
|
2009 (2001) |
|
|
|
|
|
Notes: |
|
(1) |
|
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. K. T. Hoeg
was President and Chief Executive Officer of Corby Distilleries Limited from October 1996 to
February 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. |
24
SECTION 8: DIRECTORS AND OFFICERS
|
|
|
(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, Bankruptcies, Penalties or Sanctions
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.
Mr. Manley was a director of the Nortel Companies when the Nortel Companies applied for and was
granted creditor protection under the Companies Creditors Arrangement Act on January 14, 2009.
Mr. R. Kelly was President and Chief Executive Officer of NRG Energy, Inc. (NRG), a former
subsidiary of Xcel Energy Inc. from June 6, 2002 to May 14, 2003, and a director of NRG from June
2000 to May 14, 2003. In May 2003, NRG and certain of NRGs affiliates filed voluntary petitions
for reorganization under Chapter 11 of the US Bankruptcy Code to restructure their debt. NRG
emerged from bankruptcy on December 5, 2003.
25
SECTION 8: DIRECTORS AND OFFICERS
8.3 Senior Officers
As at February 17, 2009, 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 |
|
|
|
|
|
|
|
K. B.
McQuade
Mesquite, Nevada, U.S.A.
|
|
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 and Chief
Operating Officer, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Executive
Vice-President and Chief
Information Officer, Norfolk
Southern Railroad |
|
|
|
|
|
|
|
J. A.
OHagan
Calgary, Alberta, Canada
|
|
Senior
Vice-President,
Strategy and Yield
|
|
Senior Vice-President,
Strategy and Yield, Canadian
Pacific Railway Limited and
Canadian Pacific Railway
Company; 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 |
|
|
|
|
|
|
|
M. M.
Szel
Calgary, Alberta, Canada
|
|
Senior Vice-
President, Sales
and Marketing
|
|
Senior Vice-President, Sales
and Marketing 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;
Vice-President Strategy and
Law, Corporate Secretary,
Canadian Pacific Railway
Company |
|
|
|
|
|
|
|
B. M.
Winter
Calgary, Alberta, Canada
|
|
Senior Vice-
President,
Operations
|
|
Senior Vice-President,
Operations, 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 |
|
26
|
|
|
|
|
|
Name
and municipality of residence |
|
Position held |
|
Principal occupation within the |
|
|
|
|
|
preceding five years |
|
|
D. B.
Campbell
Calgary, Alberta, Canada
|
|
Vice-President,
Corporate Planning
|
|
Vice-President, Corporate
Planning, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company;
Vice-President Business
Planning and Development,
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,
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 |
|
|
|
|
|
|
|
R. A.
Shields
Calgary, Alberta, Canada
|
|
Vice-President,
Human Resources and
Industrial
Relations
|
|
Vice-President, Human
Resources and Industrial
Relations, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company |
|
|
|
|
|
|
|
K.
Fleming
Calgary, Alberta, Canada
|
|
Corporate
Secretary
|
|
Corporate Secretary, Canadian
Pacific Railway Limited and
Canadian Pacific Railway
Company; Associate Corporate
Secretary, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company; Legal
Counsel Labour & Employment
Coordinator, Canadian Pacific
Railway Company; Labour
Coordinator, Canadian Pacific
Railway Company |
|
|
|
|
|
|
|
G.A.
Feigel
Calgary, Alberta, Canada
|
|
Assistant Corporate
Secretary
|
|
Assistant Corporate Secretary,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited |
|
|
|
|
|
|
|
|
8.4 Shareholdings of Directors and Officers
As at December 31, 2008, the directors and senior officers, as a group, beneficially owned, either
directly or indirectly, or exercised control or direction over a total of 106,304 Common Shares of
CP, representing 0.07% of the outstanding Common Shares as of that date.
8.5 Announcements
In accordance with the Companys General By-Law, Mr. S.E. Bachand retired from the Board of
Directors on May 8, 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 no provision is required 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 23, 2009, in
respect of our consolidated financial statements, with accompanying notes as at December 31, 2008
and 2007 and for each of the years in the three year period ended December 31, 2008. They have
also prepared an audit report on the effectiveness of internal control over financial reporting, at
December 31, 2008. 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 Imperial Oil Limited, Sun Life Financial Inc.,
Shoppers Drug Mart Corporation, Cineplex Galaxy Income Fund, Ganong Bros. Limited and Samuel, Son &
Co., Limited. She is also on the Board of the Toronto East General Hospital and 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.
Richard C. Kelly - Mr. Kelly is Chairman of the Board, President and Chief Executive Officer of
Xcel Energy Inc., a utility supplier of electric power and natural gas service in eight Western and
Midwestern States. He has held that position since December 2005. From June to mid-December 2005
he served as President and Chief Executive Officer, and previous to that he served as Chief
Financial Officer. Mr. Kelly is Second Vice-Chairman of Edison Electric Institute, Chairman of the
Board of Trustees of the Science Museum of Minnesota and a Board member of the Capital City
Partnership, the Electric Power Research Institute, the Nuclear Energy Institute Regis University
and director on the Denver Metro Chamber of Commerce. Mr. Kelly earned both an M.B.A. and a
bachelors degree in accounting from Regis University.
John P. Manley - Mr. Manley is 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, CAE Inc. 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 Discovery District, 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 by the Prime Minister to Chair 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. 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.
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 Cliffs
Natural Resources. 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.
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 National Instrument 52-110.
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
31
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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 |
|
1. |
|
Purposes |
The purposes of the Audit, Finance and Risk Management Committee (the Committee) of the Board
of Directors of the Corporation are to fulfill applicable public company audit committee legal
obligations and to assist the Board of Directors in fulfilling its oversight responsibilities
in relation to the disclosure of financial statements and information derived from financial
statements, and in relation to risk management matters including:
|
|
|
the review of the annual and interim financial statements of the Corporation; |
|
|
|
the integrity and quality of the Corporations financial reporting and systems
of internal control, and risk management; |
|
|
|
the Corporations compliance with legal and regulatory requirements; |
|
|
|
the qualifications, independence, engagement, compensation and performance of
the Corporations external auditors; and |
|
|
|
the performance of the Corporations internal audit function; |
and to prepare, if required, an audit committee report for inclusion in the Corporations
annual management proxy circular, in accordance with applicable rules and regulations.
The Corporations external auditors shall report directly to the Committee.
2. |
|
Composition of Committee |
The members of the Committee of each of CPRL and CPRC shall be identical and shall be Directors
of CPRL and CPRC, respectively. The Committee shall consist of not less than three and not
more than six Directors, none of whom is either an officer or employee of the Corporation or
any of its subsidiaries. Members of the Committee shall meet applicable requirements and
guidelines for audit committee service, including requirements and guidelines with respect to
being independent and unrelated to the Corporation and to having accounting or related
financial management expertise and financial literacy, set forth in applicable securities laws
or the rules of any stock exchange on which the Corporations securities are listed for
trading. No director who serves on the audit committee of more than two public companies other
than the Corporation shall be eligible to serve as a member of the Committee, unless the Board
of Directors has determined that such simultaneous service would not impair the ability of such
member to effectively serve on the Committee. Determinations as to whether a particular
Director satisfies the requirements for membership on the Committee shall be affirmatively made
by the full Board.
3. |
|
Appointment of Committee Members |
Members of the Committee shall be appointed from time to time by the Board and shall hold
office at the pleasure of the Board. Where a vacancy occurs at any time in the membership of
the Committee, it may be filled by the Board. The Board shall fill a vacancy whenever
necessary to maintain a Committee membership of at least three Directors.
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.
32
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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.
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. |
33
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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; |
|
|
(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; |
34
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
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 proforma or
adjusted information determined other than in accordance with generally accepted
accounting principles, and the disclosure by the Corporation of earnings guidance and
other financial information to the public including analysts and rating agencies, it being
understood that such discussions may, in the discretion of the Committee, be done
generally (i.e., by discussing the types of information to be disclosed and the type of
presentation to be made) and that the Committee need not discuss in advance each earnings
release or each instance in which the Corporation discloses earnings guidance or other
financial information; and be satisfied that adequate procedures are in place for the
review of such public disclosures and periodically assess the adequacy of those
procedures; |
|
|
Material Litigation, Tax Assessments, Etc. |
|
g) |
|
review with management, the external auditors and, if necessary, legal counsel all
legal and regulatory matters and litigation, claims or contingencies, including tax
assessments, that could have a material effect upon the financial position of the
Corporation, and the manner in which these matters may be, or have been, disclosed in the
financial statements; and obtain reports from management and review with the Corporations
chief legal officer, or appropriate delegates, the Corporations compliance with legal and
regulatory requirements; |
|
|
Oversight of External Auditors |
|
h) |
|
subject to applicable law relating to the appointment and removal of the external
auditors, be directly responsible for the appointment, retention, termination,
compensation and oversight of the external auditors; and be responsible for the resolution
of disagreements between management and the external auditors regarding financial
reporting; |
|
|
Rotation of External Auditors Audit Partners |
|
i) |
|
review and evaluate the lead audit partner of the external auditors and assure the
regular rotation of the lead audit partner and the audit partner responsible for reviewing
the audit and other audit partners, as required by applicable law; and consider whether
there should be a regular rotation of the external audit firm itself; |
|
|
External Auditors Internal Quality Control |
|
j) |
|
obtain and review, at least annually, and discuss with the external auditors a report
by the external auditors describing the external auditors internal quality-control
procedures, any material issues raised by the most recent internal quality-control review,
or peer review, of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, respecting one
or more independent audits carried out by the external auditors, and any steps taken to
deal with any such issues; |
|
|
External Auditors Independence |
|
k) |
|
review and discuss at least annually with the external auditors all relationships
that the external auditors and their affiliates have with the Corporation and its
affiliates in order to assess the external auditors independence, including, without
limitation: |
|
(i) |
|
obtaining and reviewing, at least annually, a formal written statement
from the external auditors delineating all relationships that in the external
auditors professional judgment may reasonably be thought to bear on the
independence of the external auditors with respect to the Corporation, |
|
|
(ii) |
|
discussing with the external auditors any disclosed relationships or
services that may affect the objectivity and independence of the external auditors,
and |
35
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(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; |
|
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
|
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; |
|
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. |
|
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, 2008, and December 31,
2007, totalled $3,195,200 and $3,433,980, respectively, as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2008 |
|
December 31, 2007 |
|
Audit Fees |
|
$ |
2,044,700 |
|
|
$ |
2,391,600 |
|
Audit-Related Fees |
|
$ |
808,600 |
|
|
$ |
619,780 |
|
Tax Fees |
|
$ |
341,900 |
|
|
$ |
422,600 |
|
All Other Fees |
|
$ |
|
|
|
$ |
|
|
|
TOTAL |
|
$ |
3,195,200 |
|
|
$ |
3,433,980 |
|
|
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 2008 and 2007, 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
|
|
|
1
|
|
Chief Executives Letter to Shareholders
|
2
|
|
Management Discussion and Analysis
|
51
|
|
Financial Statements
|
110
|
|
Shareholder Information
|
112
|
|
Directors and Committees
|
113
|
|
Senior Officers of the Company
|
CHIEF EXECUTIVE
OFFICERS LETTER TO SHAREHOLDERS
February 23,
2009
The world faced unprecedented economic volatility in 2008. At
Canadian Pacific, we felt the effects of a fluctuating Canadian
dollar, extreme movement in fuel prices, drastic changes in both
equity and credit markets and reduced traffic volumes as our
customers adjusted to changing trade levels. While these factors
are expected to pressure our business through 2009, I expect
that our sound business strategy will produce positive long-term
results and position us to take advantage of opportunities when
the global economy recovers.
In January 2009, CP announced an equity offering in which we
entered into an agreement with a syndicate of underwriters who
agreed to purchase 13.9 million common shares of CP. This
offering provides CP with gross proceeds of approximately
$510.8 million which may be used to reduce indebtedness,
contribute to funding of capital projects and for general
corporate purposes. This transaction strengthens our balance
sheet and provides us with increased financial flexibility in
todays uncertain economy.
I am confident that our efforts to preserve future growth
options, focus on cost management and strengthening our balance
sheet will help us weather the global economic storm and emerge
even stronger.
We completed the acquisition of the Dakota,
Minnesota & Eastern Railroad (DM&E) with the
approval from the U.S. Surface Transportation Board in
October of 2008. This strong regional railroad is delivering
results that exceed our original investment case. It has
expanded our capacity and extends our network reach and access
to key ports and rail interchanges.
We saw early signs of the softening economy in the first half of
2008 and we moved quickly to accelerate a number of efficiency
efforts throughout our organization. Our early actions are
already delivering sustainable savings and we will elevate our
focus on our fixed cost structure in 2009 to realize additional
efficiencies.
We have also acted to ensure future growth opportunities,
despite the changes in the economic landscape. We secured land
and permits in the Montreal and Edmonton areas for intermodal
growth. We also secured rights-of-way and permits in Woodstock,
Ontario to service Toyota, and in the Alberta Industrial
Heartland for access to future oil sands upgrader growth. The
completion of our western corridor expansion provides capacity
for many years of efficient growth and our co-production
agreements on critical lines running into Vancouver from
Kamloops were aligned and extended.
While we are operating more efficiently, we continue to make
safe operations our top priority. We made notable improvements
in the full-year safety statistics on our railway. Our employee
injury frequency was down 31% and train operation incidents
declined 10%. While these are excellent results, I am most proud
that 2008 was a fatality-free year. Throughout 2008, every CP
employee truly embraced our vision to be the safest, most fluid
railway in North America by making safety a top priority.
CP recognizes how important it is that we maintain our
partnerships with the more than 1,500 communities through which
we operate. 2008 marked a number of community investment
milestones. Our 10th anniversary Holiday Train visited over
125 communities in six provinces and seven states to raise food,
money and awareness for local food banks. Our ongoing
sponsorship of the Vancouver 2010 Winter Games will help move
Games equipment, sponsor materials and supplies to Vancouver
through our innovative logistics and transportation solutions.
We also partnered with the province of B.C. to celebrate its
150th anniversary with the CP Spirit of BC 150 Rail Tour,
which visited 33 communities and was headed by CPs 2816
Empress Steam locomotive.
Although investing in our employees and the communities through
which we operate must be balanced with aggressively capitalizing
on cost control opportunities, our values include being good
neighbours and we will continue to fulfill our community
responsibilities in these challenging economic times.
With continuing economic uncertainty through 2009, CP is firmly
focused on managing fixed and variable costs, ensuring we
continue to price for value, delivering consistent, quality
service to our customers and maximizing our strategic
flexibility. Maintaining our financial flexibility and focusing
on safe and efficient operations will position us well for the
future and the inevitable upturn in the economy.
Sincerely,
Fred J. Green
President and Chief Executive Officer
MANAGEMENTS
DISCUSSION AND ANALYSIS
February 23,
2009
TABLE OF
CONTENTS
|
|
|
|
|
|
|
1.0
|
|
Business Profile
|
|
|
3
|
|
|
|
|
|
|
|
|
2.0
|
|
Strategy
|
|
|
3
|
|
|
|
|
|
|
|
|
3.0
|
|
Additional Information
|
|
|
3
|
|
|
|
|
|
|
|
|
4.0
|
|
Financial Highlights
|
|
|
4
|
|
|
|
|
|
|
|
|
5.0
|
|
Operating Results
|
|
|
5
|
|
5.1
|
|
Income
|
|
|
5
|
|
5.2
|
|
Diluted Earnings per Share
|
|
|
5
|
|
5.3
|
|
Operating Ratio
|
|
|
6
|
|
5.4
|
|
Return on Capital Employed
|
|
|
6
|
|
5.5
|
|
Impact of Foreign Exchange on Earnings
|
|
|
6
|
|
|
|
|
|
|
|
|
6.0
|
|
Non-GAAP Earnings
|
|
|
8
|
|
|
|
|
|
|
|
|
7.0
|
|
Lines of Business
|
|
|
10
|
|
7.1
|
|
Volumes
|
|
|
10
|
|
7.2
|
|
Revenues
|
|
|
11
|
|
7.2.1
|
|
Freight Revenues
|
|
|
12
|
|
7.2.2
|
|
Other Revenues
|
|
|
14
|
|
7.2.3
|
|
Freight Revenue per Carload
|
|
|
14
|
|
|
|
|
|
|
|
|
8.0
|
|
Performance Indicators
|
|
|
15
|
|
8.1
|
|
Safety Indicators
|
|
|
15
|
|
8.2
|
|
Efficiency and Other Indicators
|
|
|
15
|
|
|
|
|
|
|
|
|
9.0
|
|
Operating Expenses, Before Other Specified Items
|
|
|
16
|
|
|
|
|
|
|
|
|
10.0
|
|
Other Income Statement Items
|
|
|
18
|
|
|
|
|
|
|
|
|
11.0
|
|
Quarterly Financial Data
|
|
|
21
|
|
|
|
|
|
|
|
|
12.0
|
|
Fourth-Quarter Summary
|
|
|
22
|
|
12.1
|
|
Breakout of DM&E from Q4 2008 Operating Results
|
|
|
22
|
|
12.2
|
|
Operating Results
|
|
|
22
|
|
12.3
|
|
Non-GAAP Earnings
|
|
|
23
|
|
12.4
|
|
Revenues
|
|
|
23
|
|
12.5
|
|
Operating Expenses
|
|
|
24
|
|
12.6
|
|
Other Income Statement Items
|
|
|
25
|
|
12.7
|
|
Liquidity and Capital Resources
|
|
|
25
|
|
|
|
|
|
|
|
|
13.0
|
|
Changes in Accounting Policy
|
|
|
25
|
|
13.1
|
|
2008 Accounting Changes
|
|
|
25
|
|
13.2
|
|
Future Accounting Changes
|
|
|
25
|
|
|
|
|
|
|
|
|
14.0
|
|
Liquidity and Capital Resources
|
|
|
26
|
|
14.1
|
|
Operating Activities
|
|
|
27
|
|
14.2
|
|
Investing Activities
|
|
|
27
|
|
14.3
|
|
Financing Activities
|
|
|
27
|
|
14.4
|
|
Free Cash
|
|
|
28
|
|
|
|
|
|
|
|
|
15.0
|
|
Balance Sheet
|
|
|
29
|
|
|
|
|
|
|
|
|
16.0
|
|
Financial Instruments
|
|
|
31
|
|
|
|
|
|
|
|
|
17.0
|
|
Off-Balance Sheet Arrangements
|
|
|
34
|
|
|
|
|
|
|
|
|
18.0
|
|
Acquisition
|
|
|
34
|
|
|
|
|
|
|
|
|
19.0
|
|
Contractual Commitments
|
|
|
35
|
|
|
|
|
|
|
|
|
20.0
|
|
Future Trends and Commitments
|
|
|
35
|
|
|
|
|
|
|
|
|
21.0
|
|
Business Risks and Enterprise Risk Management
|
|
|
38
|
|
21.1
|
|
Teck Coal Limited
|
|
|
39
|
|
21.2
|
|
Competition
|
|
|
39
|
|
21.3
|
|
Liquidity
|
|
|
39
|
|
21.4
|
|
Environmental Laws and Regulations
|
|
|
39
|
|
21.5
|
|
Regulatory Authorities
|
|
|
40
|
|
21.6
|
|
Labour Relations
|
|
|
41
|
|
21.7
|
|
Network Capacity and Volume
|
|
|
41
|
|
21.8
|
|
Financial Risks
|
|
|
42
|
|
21.9
|
|
General and Other Risks
|
|
|
42
|
|
|
|
|
|
|
|
|
22.0
|
|
Critical Accounting Estimates
|
|
|
43
|
|
|
|
|
|
|
|
|
23.0
|
|
Systems, Procedures and Controls
|
|
|
45
|
|
|
|
|
|
|
|
|
24.0
|
|
Forward-Looking Information
|
|
|
46
|
|
|
|
|
|
|
|
|
25.0
|
|
Glossary of Terms
|
|
|
49
|
|
This Managements Discussion and Analysis
(MD&A) supplements the Consolidated Financial
Statements and related notes for the year ended
December 31, 2008. 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 25.0 Glossary of Terms.
Unless otherwise indicated, all comparisons of results for the
fourth quarter of 2008 and 2007 are against the results for the
fourth quarter of 2007 and 2006, respectively. Unless otherwise
indicated, all comparisons of results for 2008 and 2007 are
against the results for 2007 and 2006, respectively.
1.0 Business
Profile
CPRL is a holding company whose direct and indirect subsidiaries
operate railways in North America. The Companys vision is
to become the safest and most fluid railway in North America.
The main operating subsidiary of the Company, Canadian Pacific
Railway Company (CPRC), was incorporated in 1881.
CPRC is one of Canadas oldest corporations and was North
Americas first transcontinental railway. From its
inception 128 years ago, CPRC has developed into a fully
integrated and technologically advanced Class I railway
providing rail and intermodal freight transportation services
over a 15,500 mile network serving the principal business
centres of Canada, from Montreal, Quebec, to Vancouver, British
Columbia, and the US Midwest and Northeast regions.
The Company owns approximately 10,800 miles of track. An
additional 4,700 miles of track are owned jointly, leased
or operated under trackage rights. Of the total mileage
operated, approximately 6,300 miles are located in western
Canada, 2,200 miles in eastern Canada, 5,800 miles in
the US Midwest and 1,200 miles in the US Northeast.
CPRLs business is based on funnelling railway traffic from
feeder lines and connectors, including secondary and branch
lines, onto its high-density mainline railway network. CPRL has
established alliances and connections with other major
Class I railways in North America, to provide competitive
services and access to markets across North America beyond its
own rail network. CPRL also provides service to markets in
Europe and the Pacific Rim through direct access to the Port of
Montreal, Quebec, and the Port of Vancouver, British Columbia,
respectively.
CPRLs network accesses the US market directly through
three wholly-owned subsidiaries: Soo Line Railroad Company
(Soo Line), a Class I railway operating in the
US Midwest; the Delaware and Hudson Railway Company
(D&H), which operates between eastern Canada
and major US Northeast markets, including New York City, New
York; Philadelphia, Pennsylvania; and Washington, DC; and
Dakota, Minnesota and Eastern Railroad Corporation
(DM&E, discussed further in Section 18.0
Acquisition), which operates in the US Midwest.
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 our customers,
shareholders and employees by profitably growing to expand
within the reach of our rail franchise and through strategic
additions. We seek to accomplish this objective through the
following three-part strategy:
|
|
o
|
generating quality revenue growth by realizing the benefits of
demand growth in our bulk, intermodal and merchandise business
lines with targeted infrastructure capacity investments linked
to global trade opportunities;
|
|
o
|
improving productivity by leveraging strategic marketing and
operating partnerships, executing a scheduled railway through
our Integrated Operating Plan (IOP) and driving more
value from existing assets and resources by improving
fluidity; and
|
|
o
|
continuing to develop a dedicated, professional and
knowledgeable workforce that is committed to safety and
sustainable financial performance through steady improvement in
profitability, increased free cash flow and a competitive return
on investment.
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions, except percentages and per-share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues(2)
|
|
$
|
4,931.6
|
|
|
$
|
4,707.6
|
|
|
$
|
4,583.2
|
|
Operating
income(1)(2)
|
|
|
1,057.4
|
|
|
|
1,164.2
|
|
|
|
1,128.6
|
|
Income, before FX on LTD and other specified
items(1)
|
|
|
631.5
|
|
|
|
672.8
|
|
|
|
627.5
|
|
Net income
|
|
|
619.0
|
|
|
|
946.2
|
|
|
|
796.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
4.03
|
|
|
|
6.14
|
|
|
|
5.06
|
|
Diluted earnings per share
|
|
|
3.98
|
|
|
|
6.08
|
|
|
|
5.02
|
|
Diluted earnings per share, before FX on LTD and other specified
items(1)
|
|
|
4.06
|
|
|
|
4.32
|
|
|
|
3.95
|
|
Dividends declared per share
|
|
|
0.9900
|
|
|
|
0.9000
|
|
|
|
0.7500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free
cash(1)
|
|
|
230.9
|
|
|
|
303.4
|
|
|
|
244.9
|
|
Total assets at December 31
|
|
|
15,469.8
|
|
|
|
13,365.0
|
|
|
|
11,415.9
|
|
Total long-term financial liabilities at December
31(3)(4)
|
|
|
4,844.5
|
|
|
|
4,267.1
|
|
|
|
2,956.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio, before other specified
items(1)
|
|
|
78.6
|
%
|
|
|
75.3
|
%
|
|
|
75.4
|
%
|
Return on capital
employed(1)
|
|
|
8.2
|
%
|
|
|
9.5
|
%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
Non-GAAP Earnings. A reconciliation of income and diluted
EPS, before FX on LTD and other specified items, to net income
and diluted EPS, as presented in the consolidated financial
statements is provided in Section 6.0
Non-GAAP Earnings. A reconciliation of free cash to GAAP
cash position is provided in Section 14.4 Free Cash.
(2) Revenues
and Operating Income include DM&E (discussed further in
Section 18.0 Acquisition) from October 30, 2008 to
December 31, 2008.
(3) Excludes
deferred taxes of the following amounts: $2,616.1 million,
$1,701.5 million and $1,781.2 million, and other
non-financial deferred liabilities of $706.5 million,
$593.7 million and $583.0 million for the years 2008,
2007 and 2006 respectively.
(4) Certain
figures, previously reported for 2007 and 2006, have been
reclassified to conform with the basis of presentation adopted
in the current year.
5.0 Operating
Results
5.1 INCOME
Operating income (discussed further in Section 6.0
Non-GAAP Earnings) in 2008 was $1,057.4 million, down
$106.8 million, or 9.2%, from $1,164.2 million in 2007.
The decrease was primarily due to:
|
|
o
|
the weakening economy in the second half of the year, which
resulted in lower volumes;
|
|
o
|
the Canadian Transportation Agency (Agency) decision
directing a downward adjustment of the railway maximum revenue
entitlement for movement of regulated grain under the Canadian
Transportation Act (CTA) which included a provision
for repayment of revenues relating to grain rates (discussed
further in Section 21.5.1 Regulatory Change);
|
|
o
|
increased purchased services and other expenses, due to higher
casualty related expenses despite an improved frequency rate,
primarily due to higher cost of derailments;
|
|
o
|
higher fuel expenses driven by higher West Texas Intermediate
(WTI) prices and widening refining margins, net of
fuel recoveries; and
|
|
o
|
higher costs associated with difficult operating conditions,
mainly driven by harsh weather conditions on our central and
eastern network.
|
This decrease was partially offset by:
|
|
o
|
improved freight rates;
|
|
o
|
the consolidation of DM&E results from October 30,
2008 to December 31, 2008; prior to October 30, 2008
results of DM&E were recorded on an equity basis; and
|
|
o
|
the favourable impact of the change in FX of approximately
$14 million.
|
Net income for the year ended December 31, 2008 was
$619.0 million, down $327.2 million, or 34.6%, from
$946.2 million in 2007. This decrease was primarily due to:
|
|
o
|
lower FX gains (net of tax) on US dollar-denominated long-term
debt (LTD);
|
|
o
|
income tax benefits recorded in 2007 due to legislation to
reduce corporate income tax rates;
|
|
o
|
lower operating income; and
|
|
o
|
impairment to the fair value of our investment in Canadian third
party asset-backed commercial paper (ABCP, discussed
further in Section 10.3 Loss in Fair Value of Canadian
Third Party Asset-backed Commercial Paper).
|
Higher interest expense was primarily due to the funding
required for our acquisition of DM&E (discussed further in
Section 14.3 Financing Activities). However, the after tax
cost of the interest was more than offset by earnings from our
investment in DM&E.
The decreases in net income were partially offset by a full year
of earnings from our investment in DM&E and by lower income
tax expenses driven by lower operating income and lower tax
rates.
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:
|
|
o
|
record shipments reflecting continued strong growth in bulk and
intermodal products;
|
|
o
|
higher revenues resulting from increased freight rates; and
|
|
o
|
lower compensation and benefits expenses.
|
These were partially offset by:
|
|
o
|
higher fuel prices driven by higher refining charges and WTI
prices, net of fuel recoveries;
|
|
o
|
higher costs reflecting record volumes in 2007;
|
|
o
|
the unfavourable impact of the change in FX of approximately
$34 million; and
|
|
o
|
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:
|
|
o
|
FX gains on US dollar-denominated LTD, reflecting a
strengthening in the Canadian dollar;
|
|
o
|
higher operating income; and
|
|
o
|
the recognition of equity earnings, starting in October 2007,
following our acquisition of DM&E (discussed further in
Section 18.0 Acquisition).
|
These increases were partially offset by the after-tax decrease
in estimated fair value of our investment in Canadian third
party ABCP (discussed further in Section 10.3 Loss in Fair
Value of Canadian Third Party Asset-backed Commercial Paper).
5.2 DILUTED
EARNINGS PER SHARE
Diluted EPS, which is defined in Section 25.0 Glossary of
Terms, was $3.98 in 2008, a decrease of $2.10, or 34.5%, from
2007. Diluted EPS, was $6.08 in 2007, an increase of $1.06, or
21.1%, from 2006. The decrease in 2008 reflected lower net
income mainly due to income tax benefits recorded in 2007 due to
legislation to reduce corporate income tax rates, lower FX gains
(net of tax) on US dollar-denominated LTD and lower operating
income. The increase in 2007 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 15.5 Share Capital).
Diluted EPS excluding FX gains and losses on long-term debt
(FX on LTD) and other specified items was $4.06 in
2008, a decrease of $0.26, or 6.0%, from 2007. Diluted EPS
excluding FX on LTD and other specified items was $4.32 in 2007,
an increase of $0.37, or 9.4%, from 2006. The decrease in 2008
was mainly due to lower
income before FX on LTD and other specified items, mainly caused
by lower operating income. The increase in 2007 was mainly due
to 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 Non-GAAP Earnings.
5.3 OPERATING
RATIO
Our operating ratio increased to 78.6% in 2008, compared with
75.3% in 2007 and 75.4% in 2006. The increase in 2008 was due to
the weakening economy in the second half of the year which
resulted in lower volumes (discussed further in Section 7.0
Lines of Business) and the net impact of fuel prices. 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.
5.4 RETURN
ON CAPITAL EMPLOYED
Return on capital employed (ROCE) at
December 31, 2008 was 8.2%, compared with 9.5% in 2007 and
10.2% in 2006. The decrease in 2008 was due to lower earnings
and higher average capital employed. The increase in average
capital employed reflects increased retained income and an
increase in US dollar-denominated debt due to higher foreign
exchange caused by a weakening Canadian dollar. The decrease in
2007 was primarily due to an increase in net debt resulting from
the financing obtained for the acquisition of DM&E
(discussed further in Section 18.0 Acquisition). The
decrease in 2007 was partially offset by an increase in
earnings. ROCE is discussed further in Section 6.0
Non-GAAP Earnings.
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.
The Canadian dollar strengthened against the US dollar by
approximately 3% in 2008 and by approximately 4% in 2007. The
average FX rate for converting US dollars to Canadian dollars
decreased to $1.05 in 2008 from $1.08 in 2007 and $1.13 in 2006.
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 2008 and 2007. 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 $2 million to $5 million. This change
occurs as more revenue than expenses are generated in US
dollars. Fluctuations in seasonal shipping patterns in
conjunction with rapid movements in foreign exchange rates has
caused our results to be inconsistent with our sensitivity
guidance for 2008. FX fluctuations increased operating income by
approximately $12 million in 2008 and decreased operating
income by approximately $34 million in 2007, 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.
EFFECT ON
EARNINGS DUE TO THE CHANGE IN FOREIGN EXCHANGE
|
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions, except foreign exchange rate)
|
|
2008(1)
vs. 2007
|
|
|
2007 vs. 2006
|
|
Average annual foreign exchange rates
|
|
|
$1.05 vs. $1.08
|
|
|
|
$1.08 vs. $1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenues
|
|
|
|
|
|
|
|
|
Grain
|
|
$
|
1
|
|
|
$
|
(24
|
)
|
Coal
|
|
|
|
|
|
|
(5
|
)
|
Sulphur and fertilizers
|
|
|
(4
|
)
|
|
|
(9
|
)
|
Forest products
|
|
|
(4
|
)
|
|
|
(10
|
)
|
Industrial and consumer products
|
|
|
(3
|
)
|
|
|
(20
|
)
|
Automotive
|
|
|
(2
|
)
|
|
|
(8
|
)
|
Intermodal
|
|
|
(5
|
)
|
|
|
(13
|
)
|
Other revenues
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Unfavourable effect
|
|
|
(17
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
9
|
|
|
|
13
|
|
Fuel
|
|
|
8
|
|
|
|
23
|
|
Materials
|
|
|
5
|
|
|
|
2
|
|
Equipment rents
|
|
|
4
|
|
|
|
7
|
|
Depreciation and amortization
|
|
|
1
|
|
|
|
3
|
|
Purchased services and other
|
|
|
2
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Favourable effect
|
|
|
29
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Favourable (Unfavourable) effect on operating
income(2)
|
|
|
12
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
Other charges
|
|
|
3
|
|
|
|
|
|
Net interest expense
|
|
|
|
|
|
|
7
|
|
Income tax expense, before FX on LTD and other specified
items(2)
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Favourable (Unfavourable) effect on income, before FX on LTD and
other specified
items(2)
|
|
$
|
17
|
|
|
$
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Figures
include DM&E from October 30, 2008 to
December 31, 2008.
(2) These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
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. In addition these non-GAAP
measures exclude other specified items (discussed further in
Section 6.2 Other Specified Items) that are not among our
normal ongoing revenues and operating expenses.
The adjoining table details a reconciliation of operating income
and income, before FX on LTD and other specified items, to net
income, as presented in the consolidated financial statements.
Free cash is calculated as cash provided by operating
activities, less cash used in investing activities and dividends
paid, adjusted for the acquisition of DM&E, and changes in
cash and cash equivalent balances resulting from foreign
exchange fluctuations, and excluding changes in the accounts
receivable securitization program, and the investment in ABCP.
The measure is used by management to provide information with
respect to investment and financing decisions and provides a
comparable measure for period to period changes. Free cash is
discussed further and is reconciled to the change in cash as
presented in the consolidated financial statements in
Section 14.4 Free Cash.
Earnings measures that exclude FX on LTD and other specified
items, operating income, adjusted diluted EPS, ROCE, net-debt to
net-debt-plus-equity ratio, interest-coverage 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. Operating income is calculated as revenues less
operating expenses and is a common measure of profitability used
by management. Income, before FX on LTD and other specified
items provides management with a measure of income that can help
in a period to period comparable assessment of long-term
profitability and also allows management and other external
users of our consolidated financial statements to compare our
profitability on a long-term basis with that of our peers. 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. It also provides management and external users of our
consolidated financial statements with a measure of
profitability on a period by period basis and in comparison to
our peers. Diluted EPS, before FX on LTD and other specified
items is also referred to as adjusted diluted EPS. 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 and interest-coverage
ratio (discussed further in Sections 14.3.1 Net-debt to
Net-debt-plus-equity Ratio and 14.3.2 Interest-Coverage Ratio)
represent two of many metrics used in assessing the
Companys capital structure and debt servicing
capabilities, and they do not have a comparable GAAP measure to
which they can be reconciled. These ratios both provide
indicators of our capital structure and debt servicing
capabilities, and how these have changed, period over period and
in comparison to our peers. They also are leading indicators of
our coverage position. Interest-coverage ratio reported
quarterly is measured on a twelve-month rolling basis.
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)
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
|
2008(1)
|
|
|
2007
|
|
Revenues
|
|
$
|
4,931.6
|
|
|
$
|
4,707.6
|
|
|
$
|
4,583.2
|
|
|
$
|
1,299.7
|
|
|
$
|
1,188.3
|
|
Operating expenses
|
|
|
3,874.2
|
|
|
|
3,543.4
|
|
|
|
3,454.6
|
|
|
|
994.8
|
|
|
|
882.8
|
|
Operating
income(2)
|
|
|
1,057.4
|
|
|
|
1,164.2
|
|
|
|
1,128.6
|
|
|
|
304.9
|
|
|
|
305.5
|
|
Other charges
|
|
|
22.7
|
|
|
|
29.6
|
|
|
|
27.8
|
|
|
|
8.3
|
|
|
|
8.5
|
|
Equity income in DM&E
|
|
|
51.3
|
|
|
|
12.3
|
|
|
|
|
|
|
|
10.4
|
|
|
|
12.3
|
|
Net interest expense
|
|
|
261.1
|
|
|
|
204.3
|
|
|
|
194.5
|
|
|
|
73.8
|
|
|
|
63.4
|
|
Income tax expense, before income tax on FX on LTD and other
specified
items(2)
|
|
|
193.4
|
|
|
|
269.8
|
|
|
|
278.8
|
|
|
|
54.9
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, before FX on LTD and other specified
items(2)
|
|
|
631.5
|
|
|
|
672.8
|
|
|
|
627.5
|
|
|
|
178.3
|
|
|
|
185.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (gains) losses on long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD losses (gains)
|
|
|
16.3
|
|
|
|
(169.8
|
)
|
|
|
0.1
|
|
|
|
3.9
|
|
|
|
(8.3
|
)
|
Income tax (benefit) expense on FX on LTD
|
|
|
(38.6
|
)
|
|
|
44.3
|
|
|
|
7.1
|
|
|
|
(26.2
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
FX on LTD, net of tax (gains) losses
|
|
|
(22.3
|
)
|
|
|
(125.5
|
)
|
|
|
7.2
|
|
|
|
(22.3
|
)
|
|
|
(11.4
|
)
|
Other specified items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss in fair value of ABCP
|
|
|
49.4
|
|
|
|
21.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax on loss in fair value of ABCP
|
|
|
(14.6
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss in fair value of ABCP, net of tax
|
|
|
34.8
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits due to tax rate reductions
|
|
|
|
|
|
|
(162.9
|
)
|
|
|
(176.0
|
)
|
|
|
|
|
|
|
(145.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
619.0
|
|
|
$
|
946.2
|
|
|
$
|
796.3
|
|
|
$
|
200.6
|
|
|
$
|
342.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, before FX on LTD and other specified
items(2)
|
|
$
|
4.06
|
|
|
$
|
4.32
|
|
|
$
|
3.95
|
|
|
$
|
1.15
|
|
|
$
|
1.20
|
|
Diluted EPS, related to FX on LTD, net of
tax(2)
|
|
|
0.14
|
|
|
|
0.81
|
|
|
|
(0.04
|
)
|
|
|
0.14
|
|
|
|
0.07
|
|
Diluted EPS, related to other specified items, net of
tax(2)
|
|
|
(0.22
|
)
|
|
|
0.95
|
|
|
|
1.11
|
|
|
|
|
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, as determined by GAAP
|
|
$
|
3.98
|
|
|
$
|
6.08
|
|
|
$
|
5.02
|
|
|
$
|
1.29
|
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in this section of the
MD&A.
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, 2008, for every $0.01 the
Canadian dollar weakens (or strengthens) 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 $0.4 million and $2.3 million on an
after-tax basis, net of hedging. A large portion of our US
dollar-denominated debt is designated as a hedge of our net
investment in US subsidiaries.
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:
|
|
o
|
FX losses on LTD of $16.3 million in 2008, as the Canadian
dollar exchange rate weakened to $1.2180 relative to the US
dollar;
|
|
o
|
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; and
|
|
o
|
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.
|
Income tax expense (or benefit) related to FX on LTD is
discussed further in Section 10.5 Income Taxes.
6.2 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 the first and third quarters of 2008, we recorded charges of
$15.0 million after tax ($21.3 million before tax) and
$19.8 million after tax ($28.1 million before tax)
respectively, to reflect the change in the estimated fair value
of ABCP (discussed further in Section 10.3 Loss in Fair
Value of Canadian Third Party Asset-backed Commercial Paper).
In 2007, there were three other specified items included in net
income, as follows:
|
|
o
|
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.
|
|
o
|
In the third quarter of 2007, we recorded a charge of
$15.0 million after tax ($21.5 million before tax) to
reflect the change in the estimated fair value of ABCP
(discussed further in Section 10.3 Loss in Fair Value of
Canadian Third Party Asset-backed Commercial Paper).
|
|
o
|
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 in net income, as
follows:
|
|
o |
In the second quarter of 2006, the governments of Canada and the
provinces of Alberta, Saskatchewan and Manitoba introduced
legislation to reduce corporate income tax rates over a period
of several years. We recorded a future income tax benefit of
$176.0 million to reflect the positive impact of these tax
rate reductions on transactions in prior years for which future
taxes will be paid.
|
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.
Volumes in 2008, as measured by total carloads, decreased by
53,200, or 2.0%, and RTMs decreased by 4,820 million, or
3.7%. In 2007, total carloads increased by 79,800, or 3.0%, and
RTMs increased by 6,478 million, or 5.3%.
The decrease in carloads and RTMs in 2008 was mainly due to:
|
|
o
|
sharply declining economic conditions in the second half of 2008;
|
|
o
|
continued weakness in forest products due to a slowdown in the
US housing market;
|
|
o
|
declining auto sales leading to reduced shipments; and
|
|
o
|
customer production issues resulting in potash and sulphur
reduced shipments.
|
This decrease was partially offset by the inclusion of DM&E
volumes from October 30, 2008 to December 31, 2008,
industrial product shipments driven by economic growth in
Western Canada and strong global demand for metallurgical coal
resulting in increased shipments through the western corridor
earlier in the year.
The increases in carloads and RTMs in 2007 were mainly due to:
|
|
o
|
strong intermodal growth due to strength in global markets and
continued offshore sourcing trends;
|
|
o
|
strong global demand for bulk products; and
|
|
o
|
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 20.5 Sale of Latta Subdivision), which reduced our
carloads by approximately 23,000.
VOLUMES
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
Carloads (in
thousands)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
|
382.4
|
|
|
|
385.0
|
|
|
|
382.8
|
|
Coal
|
|
|
281.0
|
|
|
|
269.1
|
|
|
|
281.7
|
|
Sulphur and fertilizers
|
|
|
191.3
|
|
|
|
209.8
|
|
|
|
178.3
|
|
Forest products
|
|
|
91.8
|
|
|
|
114.1
|
|
|
|
135.0
|
|
Industrial and consumer products
|
|
|
340.9
|
|
|
|
313.3
|
|
|
|
316.0
|
|
Automotive
|
|
|
141.3
|
|
|
|
168.5
|
|
|
|
165.3
|
|
Intermodal
|
|
|
1,216.0
|
|
|
|
1,238.1
|
|
|
|
1,159.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carloads
|
|
|
2,644.7
|
|
|
|
2,697.9
|
|
|
|
2,618.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
ton-miles
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
|
29,376
|
|
|
|
30,690
|
|
|
|
30,127
|
|
Coal
|
|
|
21,247
|
|
|
|
20,629
|
|
|
|
19,650
|
|
Sulphur and fertilizers
|
|
|
19,757
|
|
|
|
21,259
|
|
|
|
17,401
|
|
Forest products
|
|
|
5,677
|
|
|
|
7,559
|
|
|
|
8,841
|
|
Industrial and consumer products
|
|
|
18,296
|
|
|
|
16,987
|
|
|
|
16,844
|
|
Automotive
|
|
|
2,213
|
|
|
|
2,471
|
|
|
|
2,450
|
|
Intermodal
|
|
|
27,966
|
|
|
|
29,757
|
|
|
|
27,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
ton-miles
|
|
|
124,532
|
|
|
|
129,352
|
|
|
|
122,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) DM&E
carloads for October 30, 2008 to December 31, 2008 (in
thousands): Grain 12.0, Coal 7.3, Sulphur and fertilizers 0.7,
Forest products 0.9, Industrial and consumer products 13.6,
Automotive 0.0. Total DM&E carloads (in thousands) 34.5.
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.
For the year ended and as at December 31, 2008, one
customer comprised 11.3% of total revenues and 1.5% of total
accounts receivable. For the year ended and as at
December 31, 2007 and 2006, the same customer comprised
11.5% and 11.5% of total revenues and 6.2% and 5.6% of total
accounts receivable, respectively.
7.2.1 Freight
Revenues
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DM&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
CP excluding
|
|
|
Oct. 30,
|
|
|
Consolidated
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions)
|
|
DM&E
|
|
|
2008
|
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
Grain
|
|
$
|
950.4
|
|
|
$
|
19.6
|
|
|
$
|
970.0
|
|
|
$
|
938.9
|
|
|
$
|
904.6
|
|
Coal
|
|
|
603.4
|
|
|
|
4.1
|
|
|
|
607.5
|
|
|
|
573.6
|
|
|
|
592.0
|
|
Sulphur and fertilizers
|
|
|
507.0
|
|
|
|
1.6
|
|
|
|
508.6
|
|
|
|
502.0
|
|
|
|
439.3
|
|
Forest products
|
|
|
237.5
|
|
|
|
1.8
|
|
|
|
239.3
|
|
|
|
275.8
|
|
|
|
316.4
|
|
Industrial and consumer products
|
|
|
735.5
|
|
|
|
30.6
|
|
|
|
766.1
|
|
|
|
627.9
|
|
|
|
603.8
|
|
Automotive
|
|
|
323.2
|
|
|
|
0.3
|
|
|
|
323.5
|
|
|
|
319.0
|
|
|
|
314.4
|
|
Intermodal
|
|
|
1,399.8
|
|
|
|
|
|
|
|
1,399.8
|
|
|
|
1,318.0
|
|
|
|
1,256.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenues
|
|
|
4,756.8
|
|
|
|
58.0
|
|
|
|
4,814.8
|
|
|
|
4,555.2
|
|
|
|
4,427.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
116.3
|
|
|
|
0.5
|
|
|
|
116.8
|
|
|
|
152.4
|
|
|
|
155.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,873.1
|
|
|
$
|
58.5
|
|
|
$
|
4,931.6
|
|
|
$
|
4,707.6
|
|
|
$
|
4,583.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
Freight revenues are earned from transporting bulk, merchandise
and intermodal goods, and include fuel recoveries billed to our
customers. Freight revenues were $4,814.8 million in 2008,
an increase of $259.6 million, or 5.7%. Freight revenues
were $4,555.2 million for 2007, an increase of
$127.9 million, or 2.9%.
Freight revenues for 2008 increased mainly due to:
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008;
|
|
o
|
improvements in freight rates, which include our fuel recovery
program; and
|
|
o
|
overall volume growth in industrial and consumer products and
coal.
|
These increases were partially offset by:
|
|
o
|
the negative effect on volume of the economic downturn;
|
|
o
|
the Agency decision directing a downward adjustment of the
railway maximum revenue entitlement for movement of regulated
grain under the CTA which included a provision for repayment of
revenues relating to grain rates (discussed further in
Section 21.5.1 Regulatory Change);
|
|
o
|
weakness throughout the year in forest products; and
|
|
o
|
the unfavourable impact of the change in FX of approximately
$17 million.
|
Freight revenues for 2007 increased mainly due to continued
strong growth in bulk products and intermodal shipments along
with increases in freight rates. These increases were partially
offset by:
|
|
o
|
a decrease in coal freight rates;
|
|
o
|
continued weakness in forest products, mainly lumber and panel,
and certain industrial and consumer products; and
|
|
o
|
the unfavourable impact of the change in FX of approximately
$89 million.
|
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
2008 were $970.0 million, an increase of
$31.1 million, or 3.3%. Grain revenues in 2007 were
$938.9 million, an increase of $34.3 million, or 3.8%.
Grain revenues increased in 2008 primarily due to the inclusion
of DM&E revenues of $19.6 million, from
October 30, 2008 to December 31, 2008, and increased
freight rates.
This increase was partially offset by a provision for the Agency
decision directing a downward adjustment of the railway maximum
revenue entitlement for movement of regulated grain under the
CTA (discussed further in Section 21.5.1 Regulatory
Change). The increase was also offset by lower shipments due to
harvest delays in both the US and Canada for the 2007/2008 crop
year.
Grain revenues increased in 2007 primarily due to:
|
|
o
|
a large carryover from the first half of the 2006/2007 crop year
benefiting the first two quarters of 2007;
|
|
o
|
a strong export program as a result of strong commodity prices
and demand for North American grain; and
|
|
o
|
higher freight rates.
|
These increases were partially offset by the unfavourable 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.
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 2008 were
$607.5 million, an increase of $33.9 million, or 5.9%.
Coal revenues in 2007 were $573.6 million, a decrease of
$18.4 million, or 3.1%.
Coal revenues increased in 2008 primarily due to:
|
|
o
|
the strong global demand for metallurgical coal earlier in the
year;
|
|
o
|
improvements in freight rates; and
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008.
|
Coal revenues decreased in 2007 primarily due to:
|
|
o
|
decreased freight rates;
|
|
o
|
decrease in carloads due to the sale of the Latta subdivision in
the first half of 2006; and
|
|
o
|
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.
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 2008 were
$508.6 million, an increase of $6.6 million, or 1.3%.
Revenues in 2007 were $502.0 million, an increase of
$62.7 million, or 14.3%.
Sulphur and fertilizers revenues increased in 2008 primarily due
to improvements in freight rates and the inclusion of DM&E
revenues from October 30, 2008 to December 31, 2008.
This increase was partially offset by decreased supply of
sulphur and potash due to customer production issues and by the
unfavourable impact of FX of approximately $4 million for
2008.
The 2007 increase was primarily due to an increase in demand for
nutrients for bio fuels, partially offset by the unfavourable
impact of the change in FX of approximately $9 million.
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 2008 were $239.3 million, a
decrease of $36.5 million, or 13.2%. Revenues in 2007 were
$275.8 million, a decrease of $40.6 million, or 12.8%.
Forest products revenues declined in 2008 due to continued weak
market conditions and extended plant shut downs for certain
forest product customers which has led to reduced volumes. In
addition revenues declined by the unfavourable impact of FX of
approximately $4 million.
This decrease was partially offset by improvements in freight
rates.
Forest products revenues declined in 2007 primarily due to:
|
|
o
|
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;
|
|
o
|
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;
|
|
o
|
the impact of the strengthening of the Canadian dollar, which
has led to decreased market competitiveness for Canadian
producers; and
|
|
o
|
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.
7.2.1.5 Industrial
and Consumer Products
Industrial and consumer products include chemicals, plastics,
aggregates, steel, mine, ethanol and other energy-related
products (other than coal) shipped throughout North America.
Industrial and consumer products revenues in 2008 were
$766.1 million, an increase of $138.2 million, or
22.0%. Revenues in 2007 were $627.9 million, an increase of
$24.1 million, or 4.0%.
Industrial and consumer products revenues increased in 2008
primarily due to:
|
|
o
|
the inclusion of DM&E revenues, of $30.6 million, from
October 30, 2008 to December 31, 2008;
|
|
o
|
continued economic growth in the early part of 2008; and
|
|
o
|
improvements in freight rates.
|
The increase was partially offset by the unfavourable impact of
FX of $3 million.
The increase in 2007 was 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.
7.2.1.6 Automotive
Automotive consists primarily of the transportation of domestic,
import and pre-owned 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 2008
were $323.5 million, an increase of $4.5 million, or
1.4%. Revenues in 2007 were $319.0 million, an increase of
$4.6 million, or 1.5%.
The increase in 2008 was primarily due to improvements in
freight rates, partially offset by lower volumes due to soft
market conditions, particularly in the US, as well as the
unfavourable impact of the change in FX of approximately
$2 million.
Automotive revenues in 2007 were up, reflecting carload growth
as new domestics (such as Toyota and Honda) and import volumes
continued 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.
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 2008 were $1,399.8 million, an
increase of $81.8 million, or 6.2%. Revenues in 2007 were
$1,318.0 million, an increase of $61.2 million, or
4.9%.
The increase in intermodal revenues in 2008 was primarily due to
improvements in freight rates which were partially offset by the
unfavourable impact of the change in FX of approximately
$5 million.
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 unfavourable impact of the change in FX of
approximately $13 million for 2007.
7.2.2 Other
Revenues
Other revenues are generated from leasing certain assets,
switching fees, land sales, and business partnerships. Other
revenues in 2008 were $116.8 million, a decrease of
$35.6 million or 23.4%. Other revenues in 2007 were
$152.4 million, a decrease of $3.5 million, or 2.2%.
The decrease in Other revenues in 2008 was primarily due to
lower land sales.
The decrease in 2007 was primarily due to a gain of
approximately $18 million realized from the sale of our
Latta subdivision in second-quarter 2006 (discussed further in
Section 20.5 Sale of Latta Subdivision), partially offset
by an increase in land sales in 2007.
7.2.3 Freight
Revenue per Carload
Freight revenue per carload is the amount of freight revenue
earned for every carload moved, calculated by dividing the
freight revenue for a commodity by the number of carloads of the
commodity transported in the period.
In 2008, total freight revenue per carload improved by 7.9%.
This reflected improvements in freight rates and was partially
offset by the unfavourable impact of mix and the change in FX.
In 2007, total freight revenue per carload remained relatively
unchanged from 2006. This reflected 2.0% improvements in freight
rates and mix, which were offset by the negative impact of the
change in FX.
FREIGHT REVENUE
PER CARLOAD
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December
31 ($)
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
Freight revenue per carload
|
|
|
1,821
|
|
|
|
1,688
|
|
|
|
1,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
|
2,537
|
|
|
|
2,439
|
|
|
|
2,363
|
|
Coal
|
|
|
2,162
|
|
|
|
2,132
|
|
|
|
2,102
|
|
Sulphur and fertilizers
|
|
|
2,659
|
|
|
|
2,393
|
|
|
|
2,464
|
|
Forest products
|
|
|
2,607
|
|
|
|
2,417
|
|
|
|
2,344
|
|
Industrial and consumer products
|
|
|
2,247
|
|
|
|
2,004
|
|
|
|
1,911
|
|
Automotive
|
|
|
2,289
|
|
|
|
1,893
|
|
|
|
1,902
|
|
Intermodal
|
|
|
1,151
|
|
|
|
1,065
|
|
|
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
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 25.0 Glossary of Terms.
PERFORMANCE
INDICATORS(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Consolidated data including
DM&E(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency and other indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
ton-miles
(GTM) of freight (millions)
|
|
|
239,619
|
|
|
|
246,322
|
|
|
|
236,405
|
|
US gallons of locomotive fuel consumed per 1,000
GTMs freight and yard
|
|
|
1.22
|
|
|
|
1.21
|
|
|
|
1.20
|
|
Terminal dwell (hours)
|
|
|
22.3
|
|
|
|
22.2
|
|
|
|
20.8
|
|
Number of active employees end of period
|
|
|
15,783
|
|
|
|
15,382
|
|
|
|
15,327
|
|
Freight revenue per RTM (cents)
|
|
|
3.87
|
|
|
|
3.52
|
|
|
|
3.60
|
|
CP data excluding DM&E
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency and other indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
Car miles per car day
|
|
|
143.6
|
|
|
|
142.3
|
|
|
|
137.3
|
|
Average train speed (miles per hour)
|
|
|
24.0
|
|
|
|
23.2
|
|
|
|
24.8
|
|
Safety indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per
200,000 employee-hours
|
|
|
1.47
|
|
|
|
2.09
|
|
|
|
2.00
|
|
FRA train accidents per million
train-miles
|
|
|
1.87
|
|
|
|
2.05
|
|
|
|
1.56
|
|
DM&E data only
|
|
|
|
|
|
|
|
|
|
|
|
|
Safety indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per
200,000 employee-hours
|
|
|
3.53
|
|
|
|
|
|
|
|
|
|
FRA train accidents per million
train-miles
|
|
|
7.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Certain
comparative period figures have been updated to reflect new
information.
(2) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
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
for CP, excluding DM&E, was 1.47 in 2008, an improvement
from 2.09 in 2007 and 2.00 in 2006. This rate was 3.53 for the
DM&E in 2008.
The FRA train accident rate in 2008 was 1.87 accidents per
million
train-miles,
excluding DM&E, compared with 2.05 and 1.56, respectively,
in 2007 and 2006. This rate was 7.81 for the DM&E in 2008.
8.2 EFFICIENCY
AND OTHER INDICATORS
GTMs decreased 2.7% in 2008 to 239,619 million compared
with the same periods in 2007. The decrease in 2008 was mainly
due to a reduction in the volume of automotive, forest products,
intermodal and sulphur and fertilizers, partially offset by
growth in industrial and consumer products, and coal.
Fluctuations in GTMs normally drive fluctuations in certain
variable costs, such as fuel and train crew costs.
In 2007, GTMs increased 4.2% to approximately
246.3 billion. The increase in 2007 was mainly due to
increased potash, intermodal and coal traffic.
US gallons of locomotive fuel consumed per 1,000 GTMs in both
freight and yard activity increased 0.8% in 2008 and 2007. The
2008 increase was largely attributable to difficult winter
operating conditions. The increase was partially offset by
improved execution of our IOP and successful fuel-conservation
efforts.
The increase in 2007 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 0.5% in 2008. The increase in 2008 was
primarily due to significant flood events in the US Midwest and
subsequent recovery in the third quarter of 2008 and difficult
winter conditions in the first quarter of 2008. Terminal dwell
increased 6.7% in 2007. This increase was primarily due to
weather-related issues and concentrated track maintenance
programs following the end of the strike involving maintenance
of way employees in mid 2007.
The number of active employees at December 31, 2008
increased by 401 or 2.6%. This increase was primarily due to the
inclusion of the 1,068 active employees of the DM&E, from
October 30, 2008 to December 31, 2008. This increase
was partially offset by layoffs of employees (primarily train
crews) in response to lower traffic volumes. 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 strike involving
maintenance of way employees in mid 2007. Approximately 6% of
employees were assigned to capital projects at December 31,
2008, compared with approximately 7% at December 31, 2007.
Freight revenue per RTM improved by 9.9% in 2008. This increase
was the result of improvements in freight rates and mix, which
was offset by the unfavourable impact of the change in FX.
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.
Car miles per car day increased 0.9% in 2008 to 143.6 and
increased 3.6% in 2007. The increases in 2008 and 2007 were
primarily due to improved car ordering and tactical fleet
management and IOP improvements.
Average train speed improved by 3.4% in 2008. This improvement
was largely driven by continuous focus on the execution of our
IOP (discussed in Section 20.3 Integrated Operating Plan).
This improvement was also driven by a reduction of trains
operating on the network as a result of running longer trains
and reduced volumes.
Average train speed decreased 6.5% in 2007. Average train speed
in 2007 was negatively impacted by:
|
|
o
|
an increase in the number of bulk trains, which operate at
slower speeds and experienced more queuing for unloading in 2007;
|
|
o
|
network disruptions, which were primarily related to weather
events;
|
|
o
|
temporary power and crew shortages; and
|
|
o
|
concentrated track maintenance programs following the end of the
CP strike.
|
9.0 Operating
Expenses, Before Other Specified Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
DM&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CP
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding
|
|
|
Oct. 30,
|
|
|
Consolidated
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
For the year ended December 31 (in millions)
|
|
DM&E
|
|
|
2008
|
|
|
2008(1)
|
|
|
revenue
|
|
|
Expense
|
|
|
revenue
|
|
|
Expense
|
|
|
revenue
|
|
Compensation and benefits
|
|
$
|
1,293.3
|
|
|
$
|
12.2
|
|
|
$
|
1,305.5
|
|
|
|
26.5
|
|
|
$
|
1,284.2
|
|
|
|
27.3
|
|
|
$
|
1,327.6
|
|
|
|
29.0
|
|
Fuel
|
|
|
998.7
|
|
|
|
7.1
|
|
|
|
1,005.8
|
|
|
|
20.4
|
|
|
|
746.8
|
|
|
|
15.9
|
|
|
|
650.5
|
|
|
|
14.2
|
|
Materials
|
|
|
213.7
|
|
|
|
3.5
|
|
|
|
217.2
|
|
|
|
4.4
|
|
|
|
215.5
|
|
|
|
4.6
|
|
|
|
212.9
|
|
|
|
4.6
|
|
Equipment rents
|
|
|
181.7
|
|
|
|
0.5
|
|
|
|
182.2
|
|
|
|
3.7
|
|
|
|
207.5
|
|
|
|
4.4
|
|
|
|
181.2
|
|
|
|
4.0
|
|
Depreciation and amortization
|
|
|
483.5
|
|
|
|
7.8
|
|
|
|
491.3
|
|
|
|
10.0
|
|
|
|
472.0
|
|
|
|
10.0
|
|
|
|
464.1
|
|
|
|
10.1
|
|
Purchased services and other
|
|
|
662.8
|
|
|
|
9.4
|
|
|
|
672.2
|
|
|
|
13.6
|
|
|
|
617.4
|
|
|
|
13.1
|
|
|
|
618.3
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,833.7
|
|
|
$
|
40.5
|
|
|
$
|
3,874.2
|
|
|
|
78.6
|
|
|
$
|
3,543.4
|
|
|
|
75.3
|
|
|
$
|
3,454.6
|
|
|
|
75.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 consolidated figures include DM&E from
October 30, 2008 to December 31, 2008.
Operating expenses were $3,874.2 million in 2008, up
$330.8 million, or 9.3% from 2007. These expenses were
$3,543.4 million in 2007, up $88.8 million, or 2.6%
from 2006.
Operating expenses for 2008 increased primarily due to:
|
|
o
|
higher fuel prices driven by higher WTI prices;
|
|
o
|
higher weather related expenses as well as casualty related
expenses despite improved safety performance;
|
|
o
|
the consolidation of DM&E from October 30, 2008 to
December 31, 2008; and
|
|
o
|
increased wage rates.
|
These increases in operating expenses were partially offset by:
|
|
o
|
lower variable expenses due to reduced volumes;
|
|
o
|
the favourable impact of the change in FX of approximately
$29 million; and
|
|
o
|
lower incentive compensation.
|
Operating expenses in 2007 increased primarily due to:
|
|
o
|
higher fuel prices driven by higher refining charges and WTI
prices;
|
|
o
|
record volumes as measured by GTMs and RTMs in 2007, including
change in traffic mix largely driven by an increase in
intermodal trains;
|
|
o
|
increased equipment rent expense; and
|
|
o
|
higher costs associated with network disruptions, mainly driven
by harsh weather conditions.
|
These increases in operating expenses were partially offset by:
|
|
o
|
the favourable impact of the change in FX of approximately
$57 million;
|
|
o
|
a decrease in compensation and benefits expense; and
|
|
o
|
position reductions under restructuring initiatives.
|
9.1 COMPENSATION
AND BENEFITS
Compensation and benefits expense includes employee wages,
salaries and fringe benefits. Compensation and benefits expense
was $1,305.5 million in 2008, an increase of
$21.3 million. This expense was $1,284.2 million in
2007, a decrease of $43.4 million from 2006.
The increase in 2008 was primarily due to:
|
|
o
|
increased wage rates;
|
|
o
|
the inclusion of DM&E expenses from October 30, 2008
to December 31, 2008;
|
|
o
|
lower settlement gains in 2008 on the release of certain
post-retirement benefit liabilities due to the assumption of
these obligations by a US national multi-employer benefit plan;
and
|
|
o
|
the impact of reduced costs from restructuring initiatives in
the fourth quarter of 2007.
|
This increase was partially offset by:
|
|
o
|
lower employee incentive compensation partially offset by losses
on our total return swap (TRS) (discussed further in
Section 16.7.1 Total Return Swap);
|
|
o
|
lower pension expenses; and
|
|
o
|
the favourable impact of the change in FX of approximately
$9 million.
|
Compensation and benefits expense decreased in 2007 primarily
due to:
|
|
o
|
lower incentive and stock-based compensation;
|
|
o
|
lower pension expenses;
|
|
o
|
the favourable impact of the change in FX of approximately
$13 million; and
|
|
o
|
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.
|
This decrease was partially offset by increased labour expenses
due to higher volumes and the negative impact of inflation.
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
$1,005.8 million in 2008, an increase of
$259.0 million. This expense was $746.8 million in
2007, an increase of $96.3 million from 2006.
The increase in 2008 was primarily due to higher WTI prices.
This increase was partially offset by decreased volumes in 2008.
This increase was partially mitigated by the favourable impact
of the change in FX of approximately $8 million. Fuel price
increases were also mitigated by our fuel recovery program (the
benefits of which are reflected in freight revenues).
Fuel expense in 2007 increased primarily due to:
|
|
o
|
higher WTI prices and widening refining margins;
|
|
o
|
increased consumption driven by increased volumes;
|
|
o
|
a lower hedge position in 2007; and
|
|
o
|
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 increase was partially offset by the favourable impact of
the change in FX of approximately $23 million. Fuel price
increases were also mitigated by our fuel recovery program.
9.3 MATERIALS
Materials expense includes the cost of materials used for track,
locomotive, freight car, and building maintenance. Materials
expense was $217.2 million in 2008, an increase of
$1.7 million. This expense was $215.5 million in 2007,
an increase of $2.6 million from 2006.
The 2008 increase was mainly due to higher input costs including
highway vehicle fuel and the consolidation of DM&E from
October 30, 2008 to December 31, 2008.
This increase was partially offset by:
|
|
o
|
lower car repair and train servicing costs;
|
|
o
|
recoveries from third parties; and
|
|
o
|
the favourable impact of the change in FX of approximately
$5 million.
|
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.
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
$182.2 million in 2008, a decrease of $25.3 million.
This expense was $207.5 million in 2007, an increase of
$26.3 million from 2006.
The 2008 decrease was due to lower volumes, reduced leasing
costs on freight cars and locomotives, higher recoveries for CP
freight cars and locomotives as well as the favourable impact of
the change in FX of approximately $4 million in 2008. These
improvements were
partially offset by higher costs from network and supply chain
disruptions and traffic imbalances.
Equipment rents expense in 2007 increased mainly due to:
|
|
o
|
reductions in receipts for the use of our railcars from other
railways and customers;
|
|
o
|
higher equipment rental payments to other railways as a result
of network disruptions, mainly driven by harsh weather
conditions; and
|
|
o
|
higher locomotive leasing costs, primarily driven by increased
volume.
|
These increases were partially offset by the favourable impact
of the change in FX of approximately $7 million.
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 $491.3 million in
2008, an increase of $19.3 million. This expense was
$472.0 million in 2007, an increase of $7.9 million
from $464.1 million in 2006. The increase in 2008 was
primarily due to:
|
|
o
|
additions to capital assets, especially to track;
|
|
o
|
accelerated depreciation of software; and
|
|
o
|
the consolidation of DM&E from October 30, 2008 to
December 31, 2008 which includes amortization of fair
values determined under purchase accounting.
|
These increases were partially offset by asset retirements.
The increase in 2007 was 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 $672.2 million in 2008, an
increase of $54.8 million. This expense was
$617.4 million in 2007, a decrease of $0.9 million
from $618.3 million in 2006.
The increase in 2008 was mainly due to:
|
|
o
|
casualty related expenses due to higher cost of derailments
despite an improved safety performance;
|
|
o
|
increased bad debt expense;
|
|
o
|
the consolidation of DM&E from October 30, 2008 to
December 31, 2008; and
|
|
o
|
higher energy costs.
|
These increases were partially offset by the favourable impact
of the change in FX of approximately $2 million, and CP
strike-related expenses in the second quarter of 2007.
The decrease in purchased services and other expense in 2007 was
mainly due to the favourable impact of the change in FX of
approximately $9 million, which was mainly offset by an
increase in maintenance costs for locomotives.
10.0 Other
Income Statement Items
10.1 OTHER
CHARGES
Other charges consist of amortization of the discounted portion
of certain long-term accruals, gains and losses due to the
impact of the change in 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 charges
were $22.7 million in 2008, a decrease of $6.9 million
from 2007 and were $29.6 million in 2007, an increase of
$1.8 million from 2006.
The decrease in 2008 was the result of lower restructuring
accretion costs and fewer losses on the sale of accounts
receivable as a result of the termination of our accounts
receivable program in the second quarter of 2008 (discussed
further in Section 17.1 Sale of Accounts Receivable).
10.2 EQUITY
INCOME IN DAKOTA, MINNESOTA & EASTERN
RAILROAD
Equity income in DM&E, net of tax, was $51.3 million
in 2008, an increase of $39.0 million from
$12.3 million in 2007. The inclusion of equity earnings of
the DM&E began in the fourth quarter of 2007 and continued
until October 30, 2008, when DM&E was fully
consolidated upon approval of control by the US Surface
Transportation Board (STB) (discussed further in
Section 18.0 Acquisition).
10.3 LOSS IN
FAIR VALUE OF CANADIAN THIRD PARTY ASSET-BACKED COMMERCIAL
PAPER
At December 31, 2008 and 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 DBRS Limited
(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 nor have they traded in an
active market since. There are currently no market quotations
available. As a result, the Company has classified its ABCP as
held for trading 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 on an
agreement 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 retained legal and
financial advisors to oversee the proposed restructuring process.
On March 17, 2008, a court order was obtained which
commenced the process of restructuring the ABCP under the
protection of the
Companies Creditors Arrangement Act (CCAA). A
vote of the holders of the ABCP approving the restructuring
occurred on April 25, 2008, and on June 25, 2008 a
court order sanctioning the restructuring of the ABCP was made
pursuant to the CCAA.
On March 20, 2008, the pan-Canadian restructuring committee
issued an Information Statement containing details about the
proposed restructuring. Based on this and other public
information, including reports issued by Ernst & Young
Inc., the Court appointed Monitor, it is estimated that at
December 31, 2008, of the $143.6 million of ABCP in
which the Company has invested:
|
|
o
|
$12.5 million is represented by traditional securitized
assets and the Company will, on restructuring, receive
replacement Traditional Asset (TA) Tracking
long-term floating rate notes with expected repayments over
approximately seven and three-quarter years. As the underlying
assets are primarily comprised of cash and Canadian Lines of
Credit which are subject to an offer to repurchase at par value,
the Company has assumed that these notes will be repaid in full
significantly in advance of maturity;
|
|
o
|
$117.7 million is represented by a combination of leveraged
collateralized debt, synthetic assets and traditional
securitized assets and the Company will, on restructuring,
receive replacement senior Class
A-1 and
Class A-2
and subordinated Class B and Class C long-term
floating rate notes with expected repayments over approximately
eight years. The Company expects to receive replacement notes
with par values as follows:
|
|
|
|
|
o
|
Class A-1:
$59.6 million
|
|
|
o
|
Class A-2:
$46.2 million
|
|
|
o
|
Class B: $8.4 million
|
|
|
o
|
Class C: $3.5 million
|
The replacement senior notes are expected to obtain an A rating
while the replacement subordinated notes are likely to be
unrated; and
|
|
o |
$13.4 million is represented by assets that have an
exposure to US mortgages and sub-prime mortgages and assets that
are held in a satellite trust that will be terminated when the
restructuring is effective. On restructuring, the Company is
likely to receive Ineligible Asset (IA) Tracking
long-term floating rate notes with expected repayments over
approximately five years to eight years. In addition, the
Company will receive other tracking notes of approximately
$1.2 million which are expected to be paid down when the
restructuring is effective, with recoveries of 5.9% of
principal. Certain of these notes may be rated, although at this
time the pan-Canadian restructuring committee has provided no
indication of the rating these notes may receive. DBRS has
indicated that certain IA Tracking notes may be unrated.
|
The valuation technique used by the Company to estimate the fair
value of its investment in ABCP at December 31, 2008,
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 details
included in the Information Statement issued by the pan-Canadian
restructuring committee and subsequent Monitors Reports
and the risks 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
at December 31, 2008 and 2007 are:
|
|
|
2008
|
|
|
Probability weighted average interest rate
|
|
2.2%
|
Weighted average discount rate
|
|
9.1%
|
Expected repayments of long-term floating rate notes
|
|
five to eight years, other than certain tracking notes to be
paid down on restructuring
|
Credit losses
|
|
rated
notes(1):
nil to 25%
unrated
notes(2):
25% to 100%
|
|
|
|
|
|
|
(1) TA
Tracking,
Class A-1
and
Class A-2
senior notes and IA Tracking notes.
(2) Class B
and Class C subordinated notes and IA Tracking notes.
|
|
|
2007
|
|
|
Probability weighted average interest rate
|
|
4.6%
|
Weighted average discount rate
|
|
5.3%
|
Expected repayments of long-term floating rate notes
|
|
five to seven years
|
Credit losses
|
|
nil to 50%
|
|
|
|
|
|
|
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. Discount rates have
been estimated using Government of Canada benchmark rates plus
expected spreads for similarly rated instruments with similar
maturities and structure.
The expected repayments vary by different replacement long-term
floating rate notes as a result of the expected maturity of the
underlying assets.
One of the cash flow scenarios modelled is a liquidation
scenario whereby recovery of the Companys investment is
through the liquidation of the underlying assets of the ABCP
trusts. While the likelihood is remote, there remains a
possibility that a liquidation scenario may occur even with the
successful approval of the restructuring plan.
In addition, assumptions have also been made as to the amount of
restructuring costs that the Company will bear.
The probability weighted discounted cash flows resulted in an
estimated fair value of the Companys ABCP of
$72.7 million at December 31, 2008 (2007
$122.1 million), excluding $6.4 million of accrued
interest, which has been recognized separately in the balance
sheet. This represents a reduction in the estimated fair value
of $49.4 million from December 31, 2007 as a result of
the worsening credit markets and expected termination of certain
tracking notes. Charges to income of $49.4 million before
tax ($34.8 million after tax) were recorded in 2008
(2007 $21.5 million before tax,
$15.0 million after tax). These charges represent 34% of
the original value (2007 15%), bringing the total
write-down to an aggregate of approximately 49% of the original
value (2007 15%), or 47% of the original value plus
accrued interest. Sensitivity analysis is presented below for
key assumptions:
|
|
|
|
|
|
|
Change in fair value of
|
|
(in millions of Canadian dollars)
|
|
ABCP
|
|
Probability of successful restructuring:
|
|
|
|
|
1 percent increase
|
|
$
|
0.3
|
|
1 percent decrease
|
|
$
|
(0.3
|
)
|
Interest rate
|
|
|
|
|
50 basis point increase
|
|
$
|
3.0
|
|
50 basis point decrease
|
|
$
|
(3.0
|
)
|
Discount rate
|
|
|
|
|
50 basis point increase
|
|
$
|
(2.5
|
)
|
50 basis point decrease
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to the year end, on January 12, 2009, the Court
granted an order for the implementation of the restructuring
plan, for the ABCP, and the restructuring was completed on
January 21, 2009. As a result CP received the following
new, replacement ABCP notes with a total settlement value of
$142.8 million, as follows:
|
|
o
|
$12.4 million Master Asset Vehicle (MAV) 3 TA
Tracking notes;
|
|
o
|
$118.2 million MAV 2 notes with eligible assets:
|
|
|
|
|
o
|
Class A-1: $59.3 million
|
|
|
o
|
Class A-2: $45.9 million
|
|
|
o
|
Class B: $8.3 million
|
|
|
o
|
Class C: $3.5 million
|
|
|
o
|
Class 9: $0.6 million
|
|
|
o
|
Class 14: $0.6 million
|
|
|
o |
$12.2 million MAV 2 IA Tracking notes
|
The difference between the original cost of $143.6 million
and the settlement value of $142.8 million is expected to
be received as interest.
The estimated fair value of the new replacement notes received
on January 21, 2009 is materially unchanged from the
December 31, 2008 estimated fair value. These new
replacement notes will be classified as held for trading
financial assets and will be subject to mark-to-market
accounting in future periods. Changes in fair value will be
recorded in income as they arise.
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 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.
10.4 NET
INTEREST EXPENSE
Net interest expense includes interest on long-term debt and
capital leases, net of interest income. Net interest expense was
$261.1 million in 2008, an increase of $56.8 million.
The expense was $204.3 million in 2007, an increase of
$9.8 million from 2006.
The increase in 2008 was primarily due to:
|
|
o
|
financing being in place for a full 12 months to fund the
acquisition of DM&E (discussed further in Section 14.3
Financing Activities);
|
|
o
|
interest on new debt issued in May of 2008 (discussed further in
Section 14.3 Financing Activities) to replace the majority of
the bridge financing and permanently fund the acquisition of the
DM&E; and
|
|
o
|
the issuance of US$450 million Notes in May of 2007.
|
Net 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 14.3 Financing Activities). 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 favourable
impact from the change in FX on US dollar-denominated interest
expense.
10.5 INCOME
TAXES
Income tax expense was $140.2 million in 2008, a decrease
of $4.5 million from 2007. Income tax expense was
$144.7 million in 2007, an increase of $34.8 million
from 2006. The 2008 decrease was mainly due to lower earnings.
The decrease in 2008 was also due to a future income tax benefit
of $10.6 million recorded in the first quarter of 2008 and
a further income tax benefit of $5.1 million recorded in
the second quarter of 2008, resulting from tax rate changes
implemented by provincial governments.
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.
The effective income tax rate for 2008 was 18.5%, compared with
13.3% and 12.1% for 2007 and 2006. The normalized rates (income
tax rate based on income adjusted for FX on LTD, DM&E
equity income, and other specified items) for 2008, 2007 and
2006 were 25.0%, 29.0% and 30.8%, respectively. In addition, the
change in the normalized tax rate reflects tax planning
initiatives.
We expect a normalized 2009 income tax rate of between 28% and
30%. The 2009 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 (discussed further in
Section 21.0 Business Risks and Enterprise Risk Management
and Section 22.4 Future Income Taxes). We expect to have an
increase in our cash tax payments in future years.
As part of a consolidated financing strategy, CP structures its
US dollar-denominated long-term debt in different taxing
jurisdictions. As well, a portion of this debt is designated as
a net investment hedge against net investment in US
subsidiaries. As a result, the tax on foreign exchange gains and
losses on long-term debt in different taxing jurisdictions can
vary significantly.
11.0 Quarterly
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008(1)
|
|
|
2007
|
|
For the quarter ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
Total revenue
|
|
$
|
1,299.7
|
|
|
$
|
1,264.7
|
|
|
$
|
1,220.3
|
|
|
$
|
1,146.9
|
|
|
$
|
1,188.3
|
|
|
$
|
1,187.9
|
|
|
$
|
1,215.5
|
|
|
$
|
1,115.9
|
|
Operating
income(2)
|
|
|
304.9
|
|
|
|
303.2
|
|
|
|
251.1
|
|
|
|
198.2
|
|
|
|
305.5
|
|
|
|
321.7
|
|
|
|
307.7
|
|
|
|
229.3
|
|
Net income
|
|
|
200.6
|
|
|
|
172.7
|
|
|
|
154.9
|
|
|
|
90.8
|
|
|
|
342.3
|
|
|
|
218.6
|
|
|
|
256.7
|
|
|
|
128.6
|
|
Income, before FX on LTD and other specified
items(2)
|
|
|
178.3
|
|
|
|
186.4
|
|
|
|
150.4
|
|
|
|
116.4
|
|
|
|
185.1
|
|
|
|
190.3
|
|
|
|
174.8
|
|
|
|
122.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.30
|
|
|
$
|
1.12
|
|
|
$
|
1.01
|
|
|
$
|
0.59
|
|
|
$
|
2.23
|
|
|
$
|
1.43
|
|
|
$
|
1.66
|
|
|
$
|
0.83
|
|
Diluted earnings per share
|
|
|
1.29
|
|
|
|
1.11
|
|
|
|
1.00
|
|
|
|
0.59
|
|
|
|
2.21
|
|
|
|
1.41
|
|
|
|
1.64
|
|
|
|
0.82
|
|
Diluted earnings per share, before FX on LTD and other specified
items(2)
|
|
|
1.15
|
|
|
|
1.20
|
|
|
|
0.97
|
|
|
|
0.75
|
|
|
|
1.20
|
|
|
|
1.23
|
|
|
|
1.12
|
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings. A reconciliation of income and diluted
EPS, before FX on LTD and other specified items, to net income
and diluted EPS, as presented in the consolidated financial
statements is provided in Section 6.0
Non-GAAP Earnings.
11.1 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. The seasonality of volumes and
revenues may also be impacted by extraordinary declines being
experienced in manufacturing production and consumer spending in
North America and globally, including the potential adverse
impact of the current global credit crisis. Operating income
(discussed further in Section 6.0 Non-GAAP Earnings)
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.
12.0 Fourth-Quarter
Summary
12.1 BREAKOUT
OF DM&E FROM Q4 2008 OPERATING
RESULTS(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CP
|
|
|
DM&E
|
|
|
|
|
|
CP
|
|
|
|
|
|
|
excluding
|
|
|
as of
|
|
|
|
|
|
excluding
|
|
|
Q4 2008
|
|
|
|
DM&E
|
|
|
Oct. 30,
|
|
|
Consolidated
|
|
|
DM&E
|
|
|
increase
|
|
(in millions)
|
|
Q4 2008
|
|
|
2008
|
|
|
Q4 2008
|
|
|
Q4 2007
|
|
|
(decrease)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
$
|
287.5
|
|
|
$
|
19.6
|
|
|
$
|
307.1
|
|
|
$
|
257.5
|
|
|
$
|
49.6
|
|
Coal
|
|
|
135.4
|
|
|
|
4.1
|
|
|
|
139.5
|
|
|
|
131.2
|
|
|
|
8.3
|
|
Sulphur and fertilizers
|
|
|
115.9
|
|
|
|
1.6
|
|
|
|
117.5
|
|
|
|
121.2
|
|
|
|
(3.7
|
)
|
Forest products
|
|
|
55.4
|
|
|
|
1.8
|
|
|
|
57.2
|
|
|
|
61.5
|
|
|
|
(4.3
|
)
|
Industrial and consumer products
|
|
|
185.4
|
|
|
|
30.6
|
|
|
|
216.0
|
|
|
|
157.9
|
|
|
|
58.1
|
|
Automotive
|
|
|
81.3
|
|
|
|
0.3
|
|
|
|
81.6
|
|
|
|
77.0
|
|
|
|
4.6
|
|
Intermodal
|
|
|
338.9
|
|
|
|
|
|
|
|
338.9
|
|
|
|
336.3
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenues
|
|
|
1,199.8
|
|
|
|
58.0
|
|
|
|
1,257.8
|
|
|
|
1,142.6
|
|
|
|
115.2
|
|
Other revenues
|
|
|
41.4
|
|
|
|
0.5
|
|
|
|
41.9
|
|
|
|
45.7
|
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,241.2
|
|
|
|
58.5
|
|
|
|
1,299.7
|
|
|
|
1,188.3
|
|
|
|
111.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
337.2
|
|
|
|
12.2
|
|
|
|
349.4
|
|
|
|
308.4
|
|
|
|
41.0
|
|
Fuel
|
|
|
232.4
|
|
|
|
7.1
|
|
|
|
239.5
|
|
|
|
196.3
|
|
|
|
43.2
|
|
Materials
|
|
|
42.4
|
|
|
|
3.5
|
|
|
|
45.9
|
|
|
|
47.9
|
|
|
|
(2.0
|
)
|
Equipment rents
|
|
|
45.3
|
|
|
|
0.5
|
|
|
|
45.8
|
|
|
|
45.1
|
|
|
|
0.7
|
|
Depreciation and amortization
|
|
|
118.1
|
|
|
|
7.8
|
|
|
|
125.9
|
|
|
|
116.3
|
|
|
|
9.6
|
|
Purchased services and other
|
|
|
178.9
|
|
|
|
9.4
|
|
|
|
188.3
|
|
|
|
168.8
|
|
|
|
19.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
954.3
|
|
|
|
40.5
|
|
|
|
994.8
|
|
|
|
882.8
|
|
|
|
112.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income(2)
|
|
$
|
286.9
|
|
|
$
|
18.0
|
|
|
$
|
304.9
|
|
|
$
|
305.5
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings. A reconciliation of income and diluted
EPS, before FX on LTD and other specified items, to net income
and diluted EPS, as presented in the consolidated financial
statements is provided in Section 6.0
Non-GAAP Earnings.
12.2 OPERATING
RESULTS
Operating income (discussed further in Section 6.0
Non-GAAP Earnings) for the three-month period ended
December 31, 2008, was $304.9 million, a decrease of
$0.6 million from $305.5 million.
The decrease in operating income was primarily due to the
weakening economy which resulted in lower volumes, and a
provision which was accrued for the Agency decision directing a
downward adjustment of the railway maximum revenue entitlement
for movement of regulated grain under the CTA (discussed further
in Section 21.5.1 Regulatory Change).
This decrease was partially offset by:
|
|
o
|
improved freight rates;
|
|
o
|
the favourable impact of the change in FX of approximately
$36 million; and
|
|
o
|
the consolidation of DM&E results from October 30,
2008 to December 31, 2008.
|
We reported net income of $200.6 million in the fourth
quarter of 2008, a decrease of $141.7 million from
$342.3 million in 2007.
The decrease 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 Other Income Statement Items).
Diluted EPS was $1.29 in the fourth quarter of 2008, a decrease
of $0.92 from $2.21 in 2007. This was primarily due to lower net
income in the fourth quarter of 2008, mainly caused by the
future income tax benefit recorded in the fourth quarter of 2007.
In the fourth quarter of 2008, GTMs were approximately
57.5 billion, a decrease of 7.4%. RTMs were approximately
29,825 million, a
decrease of 8.3%. The decrease in GTMs and RTMs was primarily
due to:
|
|
o
|
the economic downturn;
|
|
o
|
lower intermodal volumes due to reduced demand for both domestic
and international shipments;
|
|
o
|
reduced shipments of potash, sulphur & fertilizers,
caused partially by customer production issues; and
|
|
o
|
decreased demand for lumber and panel products caused by a
continued slowdown in the US housing market.
|
This decrease was partially offset by the inclusion of DM&E
volumes from October 30, 2008 to December 31, 2008.
12.3 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 consolidated financial statements for
the fourth quarters of 2008 and 2007, is included in
Section 6.0 Non-GAAP Earnings.
Income, before FX on LTD and other specified items, was
$178.3 million in the fourth quarter of 2008, a decrease of
$6.8 million from $185.1 million. The decrease was
mainly driven by a decrease in operating income excluding the
DM&E and an increase in interest expense. These items were
partially offset by the increase in income from the
consolidation of the DM&E and lower foreign exchange losses.
12.4 REVENUES
Total revenues were $1,299.7 million in fourth-quarter
2008, an increase of $111.4 million from
$1,188.3 million. This increase was primarily driven by:
|
|
o
|
the favourable impact of the change in FX of approximately
$101 million;
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008; and
|
|
o
|
an improvement of freight rates.
|
This increase was partially offset by lower volumes due to
declining economic conditions.
12.4.1 Grain
Grain revenues in the fourth quarter of 2008 were
$307.1 million, an increase of $49.6 million from
$257.5 million. This increase was primarily driven by:
|
|
o
|
the favourable impact of the change in FX of approximately
$28 million;
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008; and
|
|
o
|
improved freight rates.
|
This increase was partially offset by a provision for the Agency
decision directing a downward adjustment of the railway maximum
revenue entitlement for movement of regulated grain under the
CTA (discussed further in Section 21.5.1 Regulatory
Change). These increases were also partially offset by lower US
grain shipments due to reduced export demand.
12.4.2 Coal
Coal revenues were $139.5 million in fourth-quarter 2008,
an increase of $8.3 million from $131.2 million. The
increase in revenues was primarily due to:
|
|
o
|
an improvement in freight rates;
|
|
o
|
the favourable impact of the change in FX of approximately
$5 million; and
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008.
|
This increase was partially offset by reduced volumes due to
outages at our largest customer and an overall reduced demand
for metallurgical coal.
12.4.3 Sulphur
and Fertilizers
Sulphur and fertilizers revenues were $117.5 million in the
fourth quarter of 2008, a decrease of $3.7 million from
$121.2 million. This decrease was mainly due to the impact
of the global credit crisis on demand, high retailer
inventories, and production issues at several of our customers.
This decrease was partially offset by:
|
|
o
|
the favourable impact of the change in FX of $10 million;
|
|
o
|
an improvement in freight rates; and
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008.
|
12.4.4 Forest
Products
Forest products revenues were $57.2 million in the fourth
quarter of 2008, a decrease of $4.3 million from
$61.5 million. This decrease was mainly due to soft demand
for lumber and panel products caused by a continued slowdown in
the US housing market which has lead to continued customer plant
curtailments and closures.
This decrease was partially offset by the favourable impact of
the change in FX of $9 million and an improvement in
freight rates.
12.4.5 Industrial
and Consumer Products
Industrial and consumer products revenues were
$216.0 million in the fourth quarter of 2008, an increase
of $58.1 million from $157.9 million. The increase was
primarily due to:
|
|
o
|
the inclusion of DM&E revenues from October 30, 2008
to December 31, 2008;
|
|
o
|
the favourable impact of the change in FX of approximately
$25 million; and
|
|
o
|
an improvement in freight rates.
|
This increase was partially offset by lower demand caused by
declining economic conditions in steel, construction, and
manufacturing industries.
12.4.6 Automotive
Automotive revenues were $81.6 million in fourth-quarter
2008, an increase of $4.6 million from $77.0 million.
This increase was primarily due to improvements in freight rates
and the favourable impact of the change in FX of approximately
$10 million.
This increase was partially offset by a decline in volumes as
vehicle sales have declined significantly in the US and Canada.
12.4.7 Intermodal
Intermodal revenues grew in the fourth quarter of 2008 to
$338.9 million, an increase of $2.6 million from
$336.3 million. These increases were primarily due to the
favourable impact of the change in FX of approximately
$13 million and improvements in freight rates. This
increase was partially offset by lower volumes due to reduced
demand for both domestic and international shipments.
12.4.8 Other
Revenues
Other revenues were $41.9 million in the fourth quarter of
2008, a decrease of $3.8 million from $45.7 million.
The decrease was primarily due to lower land sales.
12.5 OPERATING
EXPENSES
Operating expenses in the fourth quarter of 2008 were
$994.8 million, an increase of $112.0 million from
$882.8 million.
This increase was primarily due to the unfavourable impact of
the change in FX of approximately $66 million and the
inclusion of DM&E expenses from October 30, 2008 to
December 31, 2008.
12.5.1 Compensation
and Benefits
Compensation and benefits expense in fourth-quarter 2008 was
$349.4 million, an increase of $41.0 million from
$308.4 million. The increase was primarily driven by:
|
|
o
|
the inclusion of DM&E expenses from October 30, 2008
to December 31, 2008;
|
|
o
|
the unfavourable impact of the change in FX of approximately
$12 million of 2008;
|
|
o
|
the impact of reduced costs from restructuring initiatives in
the fourth quarter of 2007;
|
|
o
|
wage and benefit increases; and
|
|
o
|
higher stock-based compensation expense due to losses on our TRS
(discussed further in Section 16.7.1 Total Return Swap).
|
The increase was partially offset by lower train starts which
resulted in reduced number of train crews and by reduced pension
expense.
12.5.2 Fuel
Fuel expense was $239.5 million in fourth-quarter 2008, an
increase of $43.2 million from $196.3 million in 2007.
The increase was primarily driven by:
|
|
o
|
the unfavourable impact in the change in FX of approximately
$31 million;
|
|
o
|
losses realized on our fuel hedging program; and
|
|
o
|
the inclusion of DM&E expenses from October 30, 2008
to December 31, 2008.
|
The increase was partially offset by lower train starts. Fuel
price increases were also mitigated by our fuel recovery program
(the benefits of which are reflected in freight revenues).
12.5.3 Materials
Materials expense was $45.9 million in the fourth quarter
of 2008, a decrease of $2.0 million from
$47.9 million. The decrease was primarily due to recoveries
from third parties and the lower cost of materials used for
freight car repairs and train servicing, primarily driven by
reductions in wheel consumption and material prices. This was
partially offset by the inclusion of DM&E expenses from
October 30, 2008 to December 31, 2008 and the
unfavourable impact of the change in FX of approximately
$3 million.
12.5.4 Equipment
Rents
Equipment rents expense was $45.8 million in the fourth
quarter of 2008, an increase of $0.7 million from
$45.1 million. The increase was primarily due to the
unfavourable impact of the change in FX of approximately
$8 million, increased car hire payments due to network
disruptions and traffic imbalances. This increase was partially
offset by:
|
|
o
|
lower volumes;
|
|
o
|
fewer leased locomotives on the property; and
|
|
o
|
reduced lease rates on intermodal equipment.
|
12.5.5 Depreciation
and Amortization
Depreciation and amortization expense was $125.9 million in
fourth-quarter 2008, an increase of $9.6 million from
$116.3 million, largely due to the inclusion of DM&E
expenses from October 30, 2008 to December 31, 2008
which includes amortized fair values determined under purchase
accounting and the unfavourable impact of the change in FX of
approximately $3 million. This increase was partially
offset by the favourable impact of depreciation rate revisions.
12.5.6 Purchased
Services and Other
Purchased services and other expense was $188.3 million in
fourth-quarter 2008, an increase of $19.5 million from
$168.8 million. The increase was mainly due to:
|
|
o
|
the unfavourable impact of the change in FX of approximately
$10 million;
|
|
o
|
the inclusion of DM&E expenses from October 30, 2008
to December 31, 2008;
|
|
o
|
increased allowance for doubtful accounts reflecting uncertain
economic conditions; and
|
|
o
|
higher casualty related expenses.
|
These increases were partially offset by:
|
|
o
|
the recognition of anticipated future environmental costs at
certain identified sites across our network in the fourth
quarter of 2007;
|
|
o
|
the recognition of third party recoveries; and
|
|
o
|
lower travel and consulting costs.
|
12.6 OTHER
INCOME STATEMENT ITEMS
In the fourth quarter of 2008 there was a loss due to FX on LTD
of $3.9 million, as the Canadian dollar weakened to $1.2180
from $1.0642 at September 30, 2008. In the fourth-quarter
2007, there was a gain due to FX on LTD of $8.3 million as
a result of a strengthening of the Canadian dollar against the
US dollar.
Other charges was an expense of $8.3 million in the fourth
quarter of 2008, a decrease of $0.2 million from a
$8.5 million expense in fourth-quarter 2007.
Equity income in DM&E was $10.4 million in the fourth
quarter of 2008, a decrease of $1.9 million from
$12.3 million in 2007.
Net interest expense was $73.8 million in fourth-quarter
2008, an increase of $10.4 million from $63.4 million
in the same period of 2007. This increase was primarily due to
the unfavourable impact from the change in FX on US
dollar-denominated interest expense of approximately
$11 million and lower interest revenue due to lower rates
and deposits. This increase was partially offset by increased
capitalization of interest expense incurred for long-term
capital projects.
12.7 LIQUIDITY
AND CAPITAL RESOURCES
For the three months ended December 31, 2008, we held
$117.6 million in cash and cash equivalents, which was an
increase of $19.7 million compared with the three months
ended September 30, 2008. For the three months ended
December 31, 2007, we held $378.1 million in cash and
cash equivalents, which was an increase of $38.9 million
compared with the three months ended September 30, 2007.
The lower increase in cash and cash equivalents during the
fourth quarter of 2008 was primarily due to increased cash used
in financing activities as a result of the repayment of
short-term borrowing and long-term debt (discussed further in
Section 14.3 Financing Activities), partially offset by
proceeds from the sale and refinancing of equipment and
increased cash from operations.
13.0 Changes
in Accounting Policy
13.1 2008
ACCOUNTING CHANGES
13.1.1 Financial
Instruments and Capital Disclosures
The CICA issued the following accounting standards effective for
fiscal periods beginning in 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 revise disclosure
requirements related to financial instruments, including hedging
instruments.
Section 1535 Capital Disclosures requires the
Company to provide disclosures about the Companys capital
and how it is managed.
These new accounting standards have not impacted the amounts
reported in the Companys financial statements; however,
they have resulted in expanded note disclosure (see Note 16
and Note 23).
13.1.2 Inventories
The CICA issued accounting standard Section 3031
Inventories which became effective January 1,
2008. 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 standard requires
the reversal of previously recorded write downs to realizable
value when there is clear evidence that net realizable value has
increased. The adoption of Section 3031
Inventories did not impact the Companys
financial statements.
13.2 FUTURE
ACCOUNTING CHANGES
13.2.1 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.
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. 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. The provisions of
Section 3064 will be adopted retrospectively, with
restatement of prior periods. As a result of this adoption, the
Company will record certain expenditures related to a
pre-operating period as expenses, rather than recording them as
assets in Other assets and deferred charges and
Net properties. The adoption of Section 3064
will result in a reduction to opening retained income of
$6.0 million at January 1, 2006, an increase to
Purchased services and other expense of
$6.6 million in 2008 (2007 $0.8 million,
2006 $1.3 million) and a decrease to
Income tax expense of $2.6 million in 2008
(2007 $0.3 million, 2006
$0.5 million).
13.2.2 Credit
risk and the fair value of financial assets and financial
liabilities
On January 20, 2009, the Emerging Issues Committee
(EIC) issued a new abstract EIC 173 Credit
risk and the fair value of financial assets and financial
liabilities. This abstract concludes that an entitys
own credit risk and the credit risk of the counterparty should
be taken into account when determining the fair value of
financial assets and financial liabilities, including derivative
instruments.
This abstract is to apply to all financial assets and
liabilities measured at fair value in interim and annual
financial statements for periods ending on or after
January 20, 2009. The Company is currently evaluating the
impact of the adoption of this new abstract.
13.2.3 Business
Combinations, consolidated financial statements and
non-controlling interests
In January 2009, CICA has issued three new standards.
Business combinations, Section 1582
This section which replaces the former Section 1581
Business combinations and provides the Canadian
equivalent to International Financial Reporting Standard IFRS 3
Business Combinations (January 2008). The new
standard requires the acquiring entity in a business combination
to recognize most of the assets acquired and liabilities assumed
in the transaction at fair value including contingent assets and
liabilities; and recognize and measure the goodwill acquired in
the business combination or a gain from a bargain purchase.
Acquisition-related costs are also to be expensed.
Consolidated financial statements, Section 1601 and
Non-controlling
interests, Section 1602
These two sections replace Section 1600 Consolidated
financial statements. Section 1601 Consolidated
financial statements carries forward guidance from
Section 1600 Consolidated financial statements
with the exception of non-controlling interests which are
addressed in a separate section. Section 1602
Non-controlling interests is equivalent to the
corresponding provisions of International Financial Reporting
Standard IAS 27 Consolidated and Separate Financial
Statement (January 2008). This standard requires the
Company to report non-controlling interests within equity,
separately from the equity of the owners of the parent, and
transactions between an entity and non-controlling interests as
equity transactions.
All three standards are effective January 1, 2011, at which
time Canadian public companies will have adopted IFRS. As such,
adoption of these standards by the Company is not expected
unless they are early adopted. Early adoption is permitted,
however, the early adoption of one of the three standards would
require adoption of the other two standards. At this point the
Company does not intend to early adopt. The Company is currently
evaluating the impact of the adoption of these new standards.
13.2.4 International
Financial Reporting Standards (IFRS)
On February 13, 2008, the Accounting Standards Board
(AcSB) of the Canadian Institute of Chartered
Accountants announced that Canadian publicly accountable
enterprises are required to adopt International Financial
Reporting Standards (IFRS), as issued by the
International Accounting Standards Board (IASB),
effective January 1, 2011. In June 2008, the Canadian
Securities Administrators (CSA) proposed that
Canadian public companies which are also Securities and Exchange
Commission (SEC) registrants, such as CP, could
retain the option to prepare their financial statements under US
GAAP instead of IFRS. In November 2008, the SEC published for
comment a proposed roadmap that could result in US issuers being
required to adopt IFRS using a phased in approach based on
market capitalization, starting in 2014.
IFRS may require increased financial statement disclosure as
compared to Canadian GAAP. Although IFRS uses a conceptual
framework similar to Canadian GAAP, differences in accounting
policies will need to be addressed by the Company. The Company
is currently considering the impact a conversion to IFRS or US
GAAP would have on its financial statements.
We commenced our IFRS conversion project in 2008 and we have
established a formal project governance structure. This
structure includes a steering committee consisting of senior
levels of management from finance, information technology and
investor relations, among others. There has been, and will
continue to be, regular reporting to senior executive management
and to the Audit, Finance and Risk Management Committee of our
Board of Directors. We have also engaged an external expert
advisor.
Our project consists of four phases: diagnostic; planning;
design and development; and implementation. We have completed
the diagnostic phase which involved a high level review of the
major differences between current Canadian GAAP, US GAAP and
IFRS.
We have also completed the planning for our project retaining
flexibility within our plans to be able to adapt to unexpected
developments. We are now in the design and development phase of
our project. We are assessing IFRS accounting policy options and
making appropriate recommendations. Cross-functional work teams
are also developing the accounting system change requirements
that will be implemented. These work teams will also identify
and implement appropriate controls for manual processes and
accounting systems that will change as a result of the adoption
of IFRS.
We are closely monitoring regulatory developments made by the
CSA and the SEC and developments in accounting made by the AcSB
and the IASB that may affect the timing, nature or disclosure of
our adoption of IFRS. Assessment of these developments will
determine whether CP adopts IFRS or US GAAP, as the basis of its
public financial reporting from 2011.
14.0 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 19.0 Contractual Commitments and
Section 20.8 Certain Other Financial Commitments. We are
not aware of any trends or expected fluctuations in our
liquidity that would create any deficiencies. Liquidity risk is
discussed in Section 21.3 Liquidity. The following
discussion of operating, investing and financing activities
describes our indicators of liquidity and capital resources.
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the US, up to
13,900,000 CP common shares at a price of $36.75. The offering
closed on February 11, 2009 at which time CP issued
13,900,000 common shares, including 1,300,000 common shares
issued under the provisions of an over-allotment option
available to the underwriters of the common share offering, for
gross proceeds of approximately
$511 million (proceeds net of fees and issue costs are
approximately $490 million) (discussed further in
Section 20.1.1 Prospectus offering subsequent to year-end).
14.1 OPERATING
ACTIVITIES
Cash provided by operating activities was $1,079.1 million
in 2008, a decrease of $254.4 million from 2007. Cash
provided by operating activities was $1,333.5 million in
2007, an increase of $284.3 million from 2006.
The decrease in 2008 was primarily due to the impact to working
capital from the termination of our accounts receivable
securitization program, lower earnings, higher income tax
payments, and increased pension contributions.
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. 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.
14.2 INVESTING
ACTIVITIES
Cash used in investing activities was $856.1 million in
2008, a decrease of $1,658.2 million from 2007. 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 lower in 2008, primarily due to the
acquisition of DM&E in 2007 as well as the reclassification
of ABCP in 2007.
Cash used in investing activities was higher in 2007 primarily
due to the acquisition of DM&E, increased capital
expenditures, and the reclassification of ABCP in the third
quarter of 2007 (discussed further in this section and
Section 10.3 Loss in Fair Value of Canadian Third Party
Asset-backed Commercial Paper).
Additions to properties (capital investment) in 2009
are expected to be in the range of $800 million to
$820 million which is a reduction of approximately
$200 million when compared with the combined CP and
DM&E cash capital investment for the full year in 2008.
This outlook assumes an average currency exchange rate of $1.25
per US dollar. While there will be modest reductions in programs
for the maintenance and upgrade of rail, ballast, crossties and
other basic right-of-way infrastructure components, CP will be
temporarily reducing investments in information technology and
it will also postpone planned increases of capacity through
upgraded track and signalling systems. Compared to 2008, CP is
also reducing investments in modifications and upgrades to the
freight car fleet.
We intend to finance capital expenditures with cash from
operations but may partially finance these expenditures with new
debt and equity. 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.
14.3 FINANCING
ACTIVITIES
Cash used in financing activities was $511.5 million as
compared to cash provided by financing activities of
$1,453.5 million in 2007. The increase in cash used in
financing activities in 2008 of $1,965.0 million was mainly
due to an increase in repayment of long-term debt, as well as a
net decrease in issuance of long-term debt as compared to 2007.
The increase in 2007 was primarily due to:
|
|
o
|
the US$1.27 billion bridge financing to fund the
acquisition of DM&E (discussed further in this section);
|
|
o
|
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
|
|
o
|
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.
CP filed a US$1.5 billion base shelf prospectus in May 2007
and a CAD$1.5 billion Medium Term Note 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 15.5 Share Capital), 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 18.0 Acquisition). 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 fund the acquisition of DM&E.
In May 2008, CP issued the following debt to replace the bridge
financing for the acquisition of DM&E:
|
|
o
|
US$400 million of 5.75% five-year Notes;
|
|
o
|
US$300 million of 6.50%
10-year
Notes; and
|
|
o
|
CAD$375 million of 6.25%
10-year
Medium Term Notes.
|
During 2008, the entire draw-down from the bridge financing
credit agreement was repaid using the proceeds from the
issuances of debt noted above and free cash which was generated
throughout the year.
At December 31, 2008, CP had available as sources of
financing, unused credit facilities of up to $459 million.
14.3.1 Net-debt
to Net-debt-plus-equity Ratio
At December 31, 2008, our net-debt to net-debt-plus-equity
ratio (discussed further in Section 6.0
Non-GAAP Earnings) increased to 44.3%, compared with 42.5%
and 37.2% at December 31, 2007 and 2006, respectively. The
increase in 2008 was primarily due to the impact of the weaker
Canadian dollar on US dollar-denominated
debt at December 31, 2008, compared with December 31,
2007. This was partially offset by an increase in equity driven
by earnings and the repayment of long-term debt.
The increase in 2007 was primarily due to:
|
|
o
|
the bridge financing obtained for the acquisition of DM&E;
|
|
o
|
an increase in short-term borrowing of $229.7 million; and
|
|
o
|
the investment in ABCP (discussed further in Section 10.3
Loss in Fair Value of Canadian Third Party Asset-backed
Commercial Paper).
|
These increases were partially offset by an increase in equity
driven by earnings and the impact of the strengthening of the
Canadian dollar.
14.3.2 Interest-Coverage
Ratio
At December 31, 2008, our
interest-coverage
ratio (discussed further in Section 6.0
Non-GAAP Earnings) decreased to 4.2, compared with 5.6 for
the same period in 2007. This decrease was primarily due to a
higher interest expense as a result of an increase in debt to
fund the acquisition of DM&E (discussed further in
Section 14.3 Financing Activities).
The Company believes that the interest-coverage ratio remains
within reasonable limits, in light of the relative size of the
Company and its capital management objectives.
Interest-coverage ratio is a non-GAAP measure that is
calculated, on a twelve-month rolling basis, as revenues less
operating expenses, less other charges, plus equity income in
DM&E, divided by interest expense. The ratio excludes
changes in the estimated fair value of the Companys
investment in ABCP as these are not in the normal course of
business.
14.3.3 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. The S&P and DBRS ratings have a
negative outlook, while the rating of Moodys has a stable
outlook.
14.4 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, adjusted for the acquisition of
DM&E, and changes in cash and cash equivalent balances
resulting from foreign exchange fluctuations, and excluding
changes in the accounts receivable securitization program
(discussed further in Section 17.1 Sale of Accounts
Receivable), and the investment in ABCP. Free cash is adjusted
for the DM&E acquisition and the investment in ABCP, as
these are not indicative of normal day-to-day investments in the
Companys asset base. The securitization of accounts
receivable is a financing-type transaction, which is excluded to
clarify the nature of the use of free cash.
We generated free cash of $230.9 million in 2008 compared
with $303.4 million in 2007 and $244.9 million in
2006. The decrease in free cash in 2008 was primarily due to a
decrease in cash generated by operating activities (as discussed
in Section 14.1 Operating Activities), partially offset by
the favourable effect of foreign currency fluctuations on US
dollar-denominated debt.
The increase in 2007, compared with 2006, was largely due to the
increase in cash generated by operating activities (as discussed
in Section 14.1 Operating Activities), partially offset by
increased capital spending, lower proceeds from disposal of
transportation properties and a higher dividend payment.
CALCULATION OF
FREE CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
(reconciliation of free cash to GAAP cash position)
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions)
|
|
2008(7)
|
|
|
2007(6)
|
|
|
2006(6)
|
|
Cash provided by operating
activities(1)
|
|
$
|
1,079.1
|
|
|
$
|
1,333.5
|
|
|
$
|
1,049.2
|
|
Cash used in investing activities
|
|
|
(856.1
|
)
|
|
|
(2,514.3
|
)
|
|
|
(693.7
|
)
|
Add back reclassification of
ABCP(2)
|
|
|
|
|
|
|
143.6
|
|
|
|
|
|
Dividends paid
|
|
|
(148.7
|
)
|
|
|
(133.1
|
)
|
|
|
(112.4
|
)
|
Add back acquisition of
DM&E(3)
|
|
|
8.6
|
|
|
|
1,492.6
|
|
|
|
|
|
Termination of accounts receivable securitization
program(4)
|
|
|
120.0
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on
cash(6)
|
|
|
28.0
|
|
|
|
(18.9
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free
cash(5)
|
|
|
230.9
|
|
|
|
303.4
|
|
|
|
244.9
|
|
Cash provided by (used in) financing activities, excluding
dividend payment
|
|
|
(362.8
|
)
|
|
|
1,586.6
|
|
|
|
(242.4
|
)
|
Reclassification of
ABCP(2)
|
|
|
|
|
|
|
(143.6
|
)
|
|
|
|
|
Acquisition of
DM&E(3)
|
|
|
(8.6
|
)
|
|
|
(1,492.6
|
)
|
|
|
|
|
Accounts receivable securitization
program(4)
|
|
|
(120.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash, as shown on the Statement of
Consolidated Cash Flows
|
|
|
(260.5
|
)
|
|
|
253.8
|
|
|
|
2.5
|
|
Net cash and cash equivalents at beginning of year
|
|
|
378.1
|
|
|
|
124.3
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents at end of year
|
|
$
|
117.6
|
|
|
$
|
378.1
|
|
|
$
|
124.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Cash
provided by operating activities includes $120.0 relating to the
termination of the accounts receivable securitization program.
This amount is subsequently added back to arrive at free cash.
(2) The
reclassification of ABCP is discussed further in
Section 10.3 Change in Fair Value of Canadian Third Party
Asset-backed Commercial Paper.
(3) The
acquisition of DM&E is discussed further in
Section 18.0 Acquisition.
(4) The
termination of accounts receivable securitization program is
discussed further in Section 17.1 Sale of Accounts
Receivable.
(5) Free
cash has no standardized meaning 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 Non-GAAP Earnings.
(6) Certain
figures, previously reported for 2007 and 2006, have been
reclassified to conform with the basis of presentation adopted
in the current year.
(7) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
15.0 Balance
Sheet
15.1 ASSETS
Assets totalled $15,469.8 million at December 31,
2008, compared with $13,365.0 million at December 31,
2007 and $11,415.9 million at December 31, 2006.
The increase in assets in 2008 reflects the consolidation of the
DM&E assets. Previously, the DM&E assets, net of
liabilities, were recorded as investments.
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 18.0 Acquisition).
15.2 TOTAL
LIABILITIES
Our combined short-term and long-term liabilities were
$9,476.4 million at December 31, 2008, compared with
$7,907.1 million at December 31, 2007 and
$6,559.4 million at December 31, 2006.
This increase in total liabilities in 2008 was mainly due to:
|
|
o
|
an increase in long-term debt, driven by the impact of foreign
exchange;
|
|
o
|
an increase in future income taxes (discussed further in
Section 22.4 Future Income Taxes); and
|
|
o
|
an increase in deferred liabilities mainly due to the increases
in cost of the TRS (discussed further in Section 16.7.1
Total Return Swap) and the consolidation of DM&Es
liabilities.
|
These increases were partially offset by the net effect of the
repayment of bridge financing which was replaced by the issuance
of long-term notes.
The increase in total liabilities in 2007 was due mainly to:
|
|
o
|
an increase in short-term borrowing;
|
|
o
|
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
|
|
|
o |
bridge financing to fund the acquisition of DM&E (discussed
further in Section 14.3 Financing Activities).
|
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.
15.3 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
Accumulated other comprehensive income (AOCI).
Amounts previously reported as Foreign currency
translation adjustment were reclassified to AOCI
retroactively. Unrealized gains and losses on hedges net of
related future income taxes were transferred to AOCI
prospectively.
15.4 EQUITY
At December 31, 2008, our Consolidated Balance Sheet
reflected $5,993.4 million in equity, compared with an
equity balance of $5,457.9 million at December 31,
2007 and $4,856.5 million at December 31, 2006. This
increase in equity was primarily due to growth in retained
income driven by net income, growth in AOCI and the issuance of
Common Shares for stock options exercised, partially offset by
dividends.
15.5 SHARE
CAPITAL
CP 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 February 23, 2009,
167,981,468 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, 2009,
7.6 million options were outstanding under our MSOIP and
Directors Stock Option Plan, and 2.4 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 allowed CP to purchase up to 15,250,010 of its common
shares during the
12-month
period ending March 27, 2008. This represented
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 further shares were repurchased in anticipation
of the acquisition of the DM&E.
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. During 2007 a total of 3,209,790 shares were
repurchased at an average share price of $71.99. There were no
shares repurchased during 2008. As of December 31, 2008,
the program had not been reinstated and has now expired. On
February 3, 2009, CP filed a final prospectus offering for
sale to the public, primarily in Canada and the US, up to
13,900,000 CP common shares at a price of $36.75. The offering
closed on February 11, 2009 at which time CP issued
13,900,000 common shares, including 1,300,000 common shares
issued under the provisions of an over-allotment option
available to the underwriters of the common share offering, for
gross proceeds of approximately $511 million (proceeds net
of fees and issue costs are approximately $490 million)
(discussed further in Section 20.1.1 Prospectus offering
subsequent to year-end).
15.6 DIVIDENDS
Dividends declared by the Board of Directors in the last three
years are as follows:
|
|
|
|
|
|
|
|
|
Dividend Amount
|
|
Record Date
|
|
|
Payment Date
|
|
$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
|
|
$0.2475
|
|
|
June 27, 2008
|
|
|
|
July 28, 2008
|
|
$0.2475
|
|
|
September 26, 2008
|
|
|
|
October 27, 2008
|
|
$0.2475
|
|
|
December 24, 2008
|
|
|
|
January 26, 2009
|
|
$0.2475
|
|
|
March 27, 2009
|
|
|
|
April 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.0 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.
16.1 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:
16.1.1 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.
16.1.2 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.
Deferred liabilities Contractual amounts
payable over a period greater than one year are valued at an
amount equal to the discounted future cash flow using a discount
rate that reflects market prices to settle liabilities with
similar terms and maturities.
Long-term debt The carrying amount of
long-term debt is at amortized cost based on an initial fair
value as determined at the time using the quoted market prices
for the same or similar debt instruments.
16.1.3 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.
16.1.4 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 10.3 Loss in Fair Value of Canadian Third Party
Asset-backed Commercial Paper) 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.
16.1.5 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
$4,729.8 million and a fair value of approximately
$4,198.9 million at December 31, 2008.
16.2 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 charges, Foreign exchange (gains) losses
on long-term debt and Net 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 consolidated financial statements.
Prior to January 1, 2007, if a derivative was not an
effective hedge, its book value was adjusted to its market value
each quarter and the associated gains or losses were included in
Other charges on our Statement of Consolidated
Income.
Our policy with respect to using derivative financial
instruments is to selectively reduce volatility associated with
fluctuations in interest rates, 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.
16.3 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.
16.4 INTEREST
RATE MANAGEMENT
16.4.1 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 decreased Net
interest expense on our Statement of Consolidated Income
by $3.1 million in 2008 (2007 increased by
$1.1 million). At December 31, 2008, an unrealized
gain, derived from the fair value of the swaps, of
$20.9 million was reflected in Accounts receivable
and other current assets and Other assets and
deferred charges with the offset reflected in
Long-term debt on our Consolidated Balance Sheet
(2007 $5.5 million). The fair value was
calculated utilizing swap, currency and basis-spread curves from
Bloomberg. These swaps are fully effective.
16.4.2 Interest
and Treasury Rate Locks
During 2007, the Company entered into derivative agreements,
which were designated as cash flow hedges, that established the
benchmark rate on $350.0 million of 30 year debt that
was expected to be issued (new debt issued in 2008 is discussed
further in 14.3 Financing Activities). These hedges were
de-designated on May 13, 2008 when it was no longer
probable that the Company would issue 30 year debt. On
May 23, 2008, the fair value of these instruments was a
loss of $30.9 million at the time of the issuance of the
debt and the settlement of the derivative instrument. A gain of
$1.3 million from the date of de-designation to the date of
settlement of the derivative instrument was recorded in net
income. Prior to de-designation, losses of $1.1 million due
to some ineffectiveness were recognized and recorded in net
income during 2008. Effective hedge losses of $28.7 million
were deferred in accumulated other comprehensive income and will
be amortized in earnings over 30 years as an adjustment to
interest expense.
At December 31, 2008, net unamortized gains for previously
settled interest and treasury rate locks of $1.2 million
was reflected in
AOCI on the Consolidated Balance Sheet
(2007 losses of $2.0 million). 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 Other comprehensive
income on the Statement of Consolidated Income of
$3.3 million in 2008 (2007 $3.2 million).
16.5 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.
16.5.1 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, 2008 nor at December 31,
2007. Freight revenues on our Statement of
Consolidated Income did not include any gain or loss on forward
contracts for 2008 or 2007 as no forward hedges settled,
compared with realized gains of $3.9 million in 2006.
16.5.2 Currency
Forward on Long-term Debt
In June 2007, the Company entered into a foreign exchange
forward contract to fix the exchange rate on US$400 million
6.250% Notes due 2011. This derivative guarantees the
amount of Canadian dollars that the Company will repay when its
US$400 million 6.25% Note matures in October 2011.
During the year ended December 31, 2008, the Company
recorded a gain on this derivative of $73.0 million, to
Foreign exchange (gain) loss on long-term debt. The
unrealized gain on the forward of $57.3 million
(December 31, 2007 unrealized loss of
$15.7 million) was included in Other assets and
deferred charges. The fair value was calculated by using
the forward curve from Bloomberg and discounting the future cash
flow using the applicable bond yield.
16.6 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.
16.6.1 Crude
Oil Swaps
From time to time, CP may enter into crude oil or diesel 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 or diesel, 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 in 2009.
At December 31, 2008, the fair value of our crude swaps was
$3.2 million resulting in the recognition of an unrealized
gain in Accounts receivable and other current assets
with the offset, net of tax, reflected in AOCI on
our Consolidated Balance Sheet. During 2008, the change in fair
value of $18.2 million, before tax, resulted in a decrease
to Other comprehensive income on our Consolidated
Statement of Comprehensive Income.
At December 31, 2008, the fair value of our diesel swaps
was $4.5 million resulting in the recognition of an
unrealized loss in Accounts payable and accrued
liabilities with the offset, net of tax, reflected in
AOCI on our Consolidated Balance Sheet. During 2008,
the change in fair value of $4.4 million, before tax,
resulted in a decrease to Other comprehensive income
on our Consolidated Statement of Comprehensive Income.
At December 31, 2008, the fair value of the forward
purchases of US dollars was $0.1 million. This unrealized
loss was recognized in Accounts payable and accrued
liabilities with the offset, net of tax, reflected in
AOCI on our Consolidated Balance Sheet. During 2008,
the change in fair value of $3.5 million, before tax,
resulted in an increase to Other comprehensive
income on our Consolidated Statement of Comprehensive
Income.
In 2008, Fuel expense was reduced by
$4.3 million (2007 $16.5 million) as
a result of $6.1 million in realized gains
(2007 $19.1 million) arising from settled
swaps, partially offset by $1.8 million in realized losses
(2007 $2.6 million) arising from the settled FX
forward contracts. Included in the $6.1 million realized
gains on commodity swaps in 2008 were $9.7 million in
realized losses (2007 realized gains
$1.7 million) 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, 2008 we had fuel hedges for
approximately 11% of our first quarter 2009 estimated fuel
purchases and 2% to 3% for the balance of 2009. 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.
16.7 STOCK-BASED
COMPENSATION EXPENSE MANAGEMENT
16.7.1 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), deferred share units (DSU),
restricted share units (RSU) and performance share
units (PSU) (discussed further in Section 20.6
Stock Price). The value of the TRS derivative is linked to the
market value of our stock. Unrealized gains and losses on the
TRS partially offset the costs and benefits recognized in 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
$64.1 million in 2008 (2007 $2.6 million).
At December 31, 2008, the unrealized loss of
$67.9 million on the TRS was included in Deferred
liabilities on our Consolidated Balance Sheet
(2007 $3.8 million). This reflects the decline
in the market value of our common shares of $23.24 per share on
the Toronto Stock Exchange in 2008 (from $64.22 at
December 31, 2007 to $40.98 at December 31, 2008).
17.0 Off-Balance
Sheet Arrangements
17.1 SALE OF
ACCOUNTS RECEIVABLE
During the second quarter of 2008, our accounts receivable
securitization program was terminated and settled. At
December 31, 2008, the outstanding undivided co-ownership
interest held by an unrelated trust under our accounts
receivable securitization program was $nil million (2007 and
2006 $120.0 million). Losses of
$2.7 million on the securitization program in 2008 (2007
losses of $5.8 million; 2006
$5.0 million) were included in Other charges on
our Statement of Consolidated Income.
Proceeds from collections reinvested in the accounts receivable
securitization program were $595.4 million for year ended
December 31, 2008, compared with $1,478.9 million for
2007. We have complied with all termination tests during the
program.
17.2 GUARANTEES
At December 31, 2008, we have certain residual value
guarantees on certain leased equipment of $194.6 million,
compared with $321.7 million at December 31, 2007. As
at December 31, 2008, residual value guarantees for the
DM&E of $12.7 million have been consolidated into the
$194.6 million, compared with $11.0 million for 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 25 to the 2008 consolidated financial
statements). These accruals do not include any amounts for
residual value guarantees.
18.0 Acquisition
18.1 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 1,068 employees,
2,500 miles of track, including approximately
500 miles of trackage rights and rolling stock that
includes approximately 8,200 rail cars and 165 locomotives, in
the US Midwest and primary customers in agri-products and
merchandise. DM&E connects with CP at Minneapolis, Chicago
and Winona (Minnesota) and connects with and interchanges with
all Class I railroads. DM&E serves eight states:
Illinois, Minnesota, Iowa, Wisconsin, Missouri, South Dakota,
Wyoming and Nebraska. DM&Es freight revenues are
derived principally from transporting grain, industrial products
and coal. DM&E has the option, but not the obligation, to
construct a railway line into the Powder River Basin
(PRB) located in Wyoming, the largest thermal coal
producing region in the US. No decision will be made by the
Corporation on whether to construct a line of railway into the
PRB until certain milestones have been met.
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 approximately
US$1.05 billion, plus certain interest and inflationary
adjustments 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
associated traffic volume targets. Any contingent payments that
may become payable would be recorded as an increase in the
purchase price. The acquisition has been financed with cash on
hand and debt (discussed further in Section 14.3 Financing
Activities).
The purchase was subject to review and approval by the STB,
during which time the shares of DM&E were placed in a
voting trust. The STB approved the application to acquire
control on September 30, 2008 effective October 30,
2008. Prior to October 30, 2008, CPs investment in
the DM&E had not been accounted for by CP on a consolidated
basis and instead the investment in the DM&E was accounted
for as an equity investment. As of October 30, 2008,
DM&E is accounted for on a consolidated basis. Equity
income for the three months ended December 31, 2008 of
$10.4 million, and $51.3 million for the year ended
December 31, 2008 have been included in Equity income
in Dakota, Minnesota & Eastern Railroad
Corporation. Equity income for the three months and year
ended December 31, 2007 of $12.3 million has been
included in Equity income in Dakota, Minnesota &
Eastern Railroad Corporation.
The final purchase price allocation of the DM&E is
disclosed in Note 11 of the 2008 consolidated financial
statements.
19.0 Contractual
Commitments
The accompanying table indicates our known obligations and
commitments to make future payments for contracts, such as debt
and capital lease and commercial arrangements.
CONTRACTUAL
COMMITMENTS AT DECEMBER 31,
2008(3)
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1 3
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3 5
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After
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Payments due by period (in millions)
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Total
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< 1 year
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years
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years
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5 years
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Long-term debt
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$
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4,347.3
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$
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28.3
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$
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892.7
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|
$
|
566.1
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|
|
$
|
2,860.2
|
|
|
|
|
|
Capital lease obligations
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|
|
419.2
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|
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15.7
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|
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45.8
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26.0
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|
|
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331.7
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Operating lease
obligations(1)
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1,072.9
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172.0
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265.0
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204.9
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|
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431.0
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Supplier purchase obligations
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1,216.0
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171.7
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223.4
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211.8
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609.1
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Other long-term liabilities reflected
on our Consolidated Balance
Sheet(2)
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3,799.8
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113.0
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288.5
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|
|
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197.5
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|
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3,200.8
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Total contractual obligations
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$
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10,855.2
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$
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500.7
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$
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1,715.4
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$
|
1,206.3
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$
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7,432.8
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(1) Residual
value guarantees on certain leased equipment with a maximum
exposure of $194.6 million (discussed in Section 17.2)
are not included in the minimum payments shown above, as
management believes 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 2009 to 2017. Pension
contributions for our registered pension plans are not included
due to the volatility in calculating them. Pension payments are
discussed further in Section 20.9 Pension Plan Deficit.
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 22.4 Future Income Taxes.
(3) These
figures include contractual commitments of the DM&E.
20.0 Future
Trends and Commitments
20.1 AGREEMENTS
AND RECENT DEVELOPMENTS
20.1.1 Prospectus
offering subsequent to year-end
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the US, up to
13,900,000 CP common shares at a price of $36.75. The offering
closed on February 11, 2009 at which time CP issued
13,900,000 common shares, including 1,300,000 common shares
issued under the provisions of an over-allotment option
available to the underwriters of the common share offering, for
gross proceeds of approximately $511 million (proceeds net
of fees and issue costs are approximately $490 million).
The proceeds of the common share issue may be used by CP to
reduce indebtedness, contribute to funding capital projects and
for general corporate purposes as the need may arise and as
management may consider appropriate at the time.
This issuance of additional CP common shares represents an
approximate nine percent dilution to shareholders value.
20.1.2 Recent
developments
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. The Company has filed its application with
the Agency, to initiate the regulatory permitting process for
construction of the rail corridor to proceed.
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.
20.2 CHANGE
IN EXECUTIVE OFFICERS
Effective August 7, 2008, Richard C. Kelly was appointed to
the Board of Directors. He replaced Stephen E. Bachand, who
retired from the Board of Directors, effective May 9, 2008.
Effective September 4, 2008, Executive Vice President and
Chief Financial Officer, Mike Lambert, left the company.
On September 4, 2008, Kathryn McQuade, Executive Vice
President and Chief Operating Officer was appointed Executive
Vice President and Chief Financial Officer. Ms. McQuade has
assumed responsibility for all functions currently reporting to
the CFO: comptroller, treasury, investor relations, internal
audit, and corporate planning. She has also retained
responsibility for the DM&E, as well as business
information services and strategic sourcing group.
20.3 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 2008,
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.
The Execution Excellence for Efficiency
(E3) review that commenced in mid-2008 is an
initiative to accelerate benefits related to IOP efficiency, to
drive out costs and to improve reliability of CPs product.
Train productivity, asset utilization, yard and terminal
operations, maintenance and product reliability have been the
focus of this review.
In late 2008, the IOP and Yield teams were grouped together in
the Strategy & Yield department. This
combined group will provide network capability that optimizes
demand, product offering, equipment and track utilization.
20.4 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 fleet consists of cars
which CP has operating agreements with the federal and various
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.
20.5 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 consolidated
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.
20.6 STOCK
PRICE
The market value of our Common Shares decreased $23.24 per share
on the Toronto Stock Exchange in 2008 (from $64.22 on
December 31, 2007 to $40.98 on December 31, 2008). The
market value of our Common Shares increased $2.82 per share on
the Toronto Stock Exchange in 2007 (from $61.40 on
December 31, 2006 to $64.22 on December 31, 2007).
These changes in share price caused corresponding decreases and
increases, respectively, 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 to
mitigate gains and losses associated with the effect of our
share price on the SARs, DSUs, RSUs and PSUs. These are
derivative instruments that provide price appreciation and
dividends, in return for a charge by the counterparty. The swaps
minimize volatility to compensation expense by providing a gain
to substantially offset increased compensation expense as the
share price increases and a loss to offset reduced compensation
expense when the share price falls. If stock-based compensation
share units fall out of the money after entering the program,
the loss associated with the swaps would no longer be offset by
any compensation expense reductions.
Excluding the impact of our TRS, the expense recovery of our
SARs, DSUs, RSUs and PSUs was $41.2 million in 2008 based
on the change in share price, compared with a cost of
$13.7 million in 2007 based on the change in share price
during 2007. Including the impact of our TRS, the cost of our
SARs, DSUs, RSUs and PSUs was $22.9 million in 2008
compared with $16.4 million in 2007.
20.7 ENVIRONMENTAL
We continue to be responsible for remediation work on portions
of a property in the State of Minnesota and continue to retain
liability accruals for remaining future expected costs. The
costs are expected to be incurred over approximately
10 years. The states voluntary investigation and
remediation program will oversee the work to ensure it is
completed in accordance with applicable standards.
20.8 CERTAIN
OTHER FINANCIAL COMMITMENTS
In addition to the financial commitments mentioned previously in
Section 17.0 Off-balance Sheet Arrangements and
Section 19.0 Contractual Commitments, we are party to
certain other financial commitments set forth in the adjacent
table and discussed below.
CERTAIN OTHER
FINANCIAL COMMITMENTS AT DECEMBER 31,
2008(1)
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Amount of commitment per period
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2010 &
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2012 &
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2014 &
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(in millions)
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Total
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2009
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2011
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2013
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beyond
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Letters of credit
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$
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336.6
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$
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336.6
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$
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$
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$
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Capital commitments
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775.0
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223.2
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76.4
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71.4
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404.0
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Offset financial liability
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201.8
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201.8
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Total commitments
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$
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1,313.4
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$
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761.6
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$
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76.4
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$
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71.4
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$
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404.0
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(1) These
figures include other financial commitments of DM&E.
20.8.1 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.
20.8.2 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, 2008, we
had multi-year capital commitments of $775.0 million in the
form of signed contracts, largely for locomotive overhaul
agreements. Payments for these commitments are due in 2009
through 2017. These expenditures are expected to be financed by
cash generated from operations or by issuing new debt.
20.8.3 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, 2008, the loan had a
balance of $207.3 million, offset by a financial asset of
$201.8 million. The remainder is included in
Long-term debt on our Consolidated Balance Sheet.
20.9 PENSION
PLAN DEFICIT
The accounting for our pension plans and determination of
required pension contributions reflect a number of factors, some
of which include stock market performance, real estate
investment returns, interest rate fluctuations, labour inflation
and demographic changes. Over the duration of the plan these
factors can fluctuate significantly. To facilitate the
management of short-term fluctuations, accounting principles,
and to some extent contribution requirements, allow for yearly
averages of pension fund assets used in determining pension fund
returns. These accounting methods and contribution requirements
recognize the long term nature of the plan and allow for
short-term changes to be accounted for and paid over a period of
time as opposed to being recognized immediately.
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 $425 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 $60 million. Adverse experience
with respect to these factors could eventually increase funding
and pension expense significantly, while favourable experience
with respect to these factors could eventually decrease funding
and pension expense significantly.
The plans investment policies provide for between 45% and
51% of the plans assets to be 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, at a minimum, meet pension legislative
requirements.
We made contributions of $95.4 million to the defined
benefit pension plans in 2008, compared with $86.4 in 2007.
We currently expect our 2009 contribution requirement to be
based on an actuarial valuation as at January 1, 2009 for
our main Canadian defined benefit plan in which the asset value
used for the calculation of the plans statutory solvency
position will be a market-related value developed from a
three-year average of market values for the funds public
equity securities (plus the market value of the funds
fixed income, real estate and infrastructure securities).
This averaging method will mitigate the impact of adverse 2008
stock market returns on the determination of our 2009 and 2010
pension contributions. An additional factor to be considered is
whether the Canadian federal government implements solvency
funding relief measures as announced in its November 27,
2008 Economic and Fiscal Statement. The announced measures would
allow statutory solvency deficits to be funded over
10 years, rather than the current 5 years, provided
that either prescribed member consent requirements are met, or
the difference between 5 and 10 year funding is secured by
letters of credit. CP estimates that the market value of its
main Canadian defined benefit pension plans assets will
have fallen from approximately $7.5 billion as of
January 1, 2008 to approximately $6.1 billion as at
January 1, 2009 against solvency liabilities of
approximately $7.6 billion.
We currently expect our aggregate 2009 pension contributions to
be in the range of $150 million to $160 million if the
Canadian federal government implements the solvency funding
relief measures, or in the range of $185 million to
$195 million if it does not. Our required pension
contributions for 2010 will depend on both pension fund
investment performance during 2009 and on long Canada bond
yields at December 31, 2009. If the pension funds
investments in public equities, real estate, and infrastructure
achieve, in aggregate, a 10% return in 2009 and long Canada bond
yields at December 31, 2009 are 4.0% (versus the 3.45%
yield at December 31, 2008), we estimate our aggregate 2010
pension contributions to be in the range of $295 million to
$315 million if the Canadian federal government implements
the solvency funding relief measures, or in the range of
$325 million to $345 million if it does not. If the
pension funds investments in public equities, real estate,
and infrastructure achieve, in aggregate, a 10% return in 2009
while long Canada bond yields at December 31, 2009 are
3.5%, the 2010 contribution estimates would increase by
approximately $30 million. Alternatively, if the pension
funds investments in public equities, real estate, and
infrastructure achieve, in aggregate, a 5% return in 2009 and
long Canada bond yields at December 31, 2009 are 4.0%, the
2010 contribution estimates would increase by approximately
$40 million.
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.
20.10 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 22.1 Environmental Liabilities)
totalled $53.3 million in 2008, compared with
$61.0 million in 2007 and $96.3 million in 2006.
Payments relating to all restructuring liabilities amounted to
$40.7 million, compared with $47.0 million in 2007 and
$76.8 in 2006. Payments relating to the labour liabilities were
$40.3 million in 2008, compared with $46.8 million in
2007 and $71.8 million in 2006.
Cash payments for restructuring and environmental initiatives
are estimated to be $52 million in 2009, $40 million
in 2010, $37 million in 2011 and a total of
$141 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
$30 million in 2009, $20 million in 2010,
$17 million in 2011 and a total of $52 million over
the remaining years through 2025. These amounts include residual
payments to protected employees for previous restructuring plans
that have been completed.
20.11 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,
2008, 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.
21.0 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.
21.1 TECK
COAL LIMITED
CPs contract with Teck Coal Limited (Teck),
CPs largest customer, for the transportation of coal,
expires March 31, 2009. CP is currently in negotiations for
a new contract. The outcome of these negotiations cannot be
predicted, including, but not limited to, price, volumes of coal
to be transported, and term of the contract. In the event that
CP is not able to enter into a new contract with Teck, or is not
able to enter a transportation arrangement on terms similar to
or more favourable than the current contract, or is faced with
significantly decreased future coal shipping volumes from
Tecks operations due to contract terms, Tecks
recently announced production curtailment for 2009 or otherwise,
this could have a material adverse impact on CPs business,
financial condition, results of operations and cash flows.
21.2 COMPETITION
We face significant competition for freight transportation in
Canada and the US, including competition from other railways and
trucking companies. 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:
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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;
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improving handling through IOP to reduce costs and enhance
quality of service; and
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exercising a disciplined yield approach to competitive contract
renewals and bids.
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21.3 LIQUIDITY
CP has long-term debt ratings of Baa3, BBB, and BBB from
Moodys, S&P, and DBRS respectively. The S&P and
DBRS ratings have a negative outlook, while the Moodys
rating has a stable outlook.
CP has a four year revolving credit facility of
$945 million, with an accordion feature to
$1,150 million, of which $459 million was available on
December 31, 2008. This facility is arranged with a core
group of 15 highly rated international banks and incorporates
pre-agreed pricing. Multi-year arrangements with the banks
extend through the 2011 and 2012 timeframe. The revolving credit
facility is available on next day terms. In addition, CP also
has available from a financial institution a credit facility of
approximately $143 million that can be drawn in early 2009
once certain conditions have been met.
It is CPs intention to manage its long-term financing
structure to maintain its investment grade rating.
Surplus cash is invested into a range of short dated money
market instruments meeting or exceeding the parameters of our
investment policy.
21.4 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 fueling 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 Health, Safety, Security
and Environment 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:
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protecting the environment;
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ensuring compliance with applicable environmental laws and
regulations;
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promoting awareness and training;
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managing emergencies through preparedness; and
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encouraging involvement, consultation and dialogue with
communities along our lines.
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21.5 REGULATORY
AUTHORITIES
21.5.1 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 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 CTA contains shipper rate and service remedies, including
final-offer arbitration, competitive line rates and compulsory
inter-switching.
In Canada, legislation amending the CTA was passed in 2008 and
is now in effect as law in Bill C-11 and Bill C-8. These
amendments include, but are not limited to, amendments
concerning the grain revenue cap, commuter and passenger access,
final offer arbitration, charges for ancillary services 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. During the quarter ended
March 31, 2008, the Agency announced a decision directing a
downward adjustment (the Downward Adjustment) of the
railway maximum revenue entitlement for movement of regulated
grain under the CTA, for the period from August 1, 2007 to
July 31, 2008. The Company appealed the decision to the
Federal Court of Appeal. In late November 2008, the Federal
Court of Appeal released its ruling dismissing the appeal. The
Company has sought leave to appeal this decision to the Supreme
Court of Canada. As a result of the Downward Adjustment to the
maximum revenue entitlement, the Company exceeded its revenue
entitlement in the
2007-2008
crop year by approximately $33.8 million and repaid this
amount plus a 15% penalty of approximately $5.1 million on
January 29, 2009. If the Companys appeal to the
Supreme Court of Canada is successful in whole or in part, some
or all of this amount may be repaid to the Company.
Noise complaints have been filed with the Agency, with some
noise complaints resolved through mediation and others remaining
unresolved. 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. In the
United States, the Railway Safety Improvement Act became law on
October 16, 2008. Among other things, this law requires the
introduction of positive train control by 2015; limits the
number of hours freight rail crews can work each month; and
provides for the development of programs that include methods to
manage and reduce crew fatigue. Although it is too early to
assess the possible impact of this legislation on the Company,
the requirements imposed by this legislation could have an
adverse impact on the Companys financial condition and
results of operations.
The commercial aspects of CPs railway operations in the US
are subject to regulation by the STB. The STB is an economic
regulatory agency that Congress charged with the fundamental
missions of resolving railroad rate and service disputes and
reviewing proposed railroad mergers. The STB serves as both an
adjudicatory and a regulatory body. The agency has jurisdiction
over railroad rate and service issues and rail restructuring
transactions (mergers, line sales, line construction, and line
abandonment). The STB has passed rules relating to simplified
standards for railway rate cases to address concerns raised by
small and medium sized shippers that the previous rules resulted
in costly and lengthy proceedings. The STBs rulemaking has
been appealed but the rules are currently in effect. It is too
soon to assess the possible impact on CP of such new rules.
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).
21.5.2 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. Current proposed regulations by
the Department of Transportation and the Department of Homeland
Security include speed restrictions, chain of custody and
security measures which could cause service degradation and
higher costs for the transportation of hazardous materials,
especially toxic inhalation materials. 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. While CP will continue to work closely with Canadian
and US government agencies, future decisions by these agencies
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.
As we strive to ensure our customers have unlimited access to
North American markets, we have taken the following steps to
provide enhanced security and reduce the risks associated with
the cross-border transportation of goods:
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to strengthen the overall supply chain and border security, we
are a certified carrier in voluntary customs programs, such as
the Customs-Trade Partnership Against Terrorism and Partners in
Protection;
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to streamline clearances at the border, 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
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Vehicle and Cargo Inspection System at five of our border
crossings;
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to strengthen railway security in North America, we signed a
revised voluntary Memorandum of Understanding with Transport
Canada and 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;
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to reduce toxic inhalation risk in high threat urban areas, we
are working with the Transportation Security Administration; and
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to comply with new US regulations, we will be completing annual
route assessments to select and use the route posing the least
overall safety and security risk, as well as implementing
procedures to maintain positive chain of custody for rail
security sensitive materials.
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21.6 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, 2008, approximately 78% of our workforce
was unionized and approximately 73% of our workforce was located
in Canada. Unionized employees are represented by a total of 36
bargaining units. Agreements are in place with six of seven
bargaining units that represent our employees in Canada and 16
of 29 bargaining units that represent employees in our US
operations. The following is a negotiations status summary:
21.6.1 Canada
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On January 20, 2009 CP and the Teamsters Canada Rail
Conference, Rail Canada Traffic Controllers, representing
employees who control train traffic, reached a tentative
three-year agreement extending through the end of 2011.
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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.
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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 the end of 2011. This agreement was ratified
on February 13, 2008.
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A three-year collective agreement with the Teamsters Canada Rail
Conference (TCRC-MWED), which represents employees
who maintain track infrastructure and perform capital programs,
extends to the end of 2009.
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A five-year collective agreement with the International
Brotherhood of Electrical Workers, representing signal
maintainers, extends to the end of 2009.
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A four-year collective agreement with the Canadian Pacific
Police Association, representing CP Police sergeants and
constables, extends to the end of 2009.
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A three-year agreement with the Steelworkers Union, representing
intermodal operation and clerical employees extends to the end
of 2009.
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21.6.2 US
We are party to collective agreements with 14 bargaining units
of our Soo Line subsidiary, 13 bargaining units of our D&H
subsidiary, and two bargaining units of our DM&E subsidiary.
With respect to Soo Line, negotiations are underway with one
bargaining unit representing track maintainers. Existing
agreements extend through 2009 with the 13 bargaining units
representing train service employees, car repair employees,
locomotive engineers, train dispatchers, yard supervisors,
clerks, machinists, boilermakers and blacksmiths, signal
maintainers, electricians, sheet metal workers, mechanical
labourers, and mechanical supervisors.
D&H has agreements extending though 2009 in place with two
unions that represent locomotive engineers and train service
employees. Negotiations continue with the track maintainers, car
repair employees, electricians, clerks, signal employees, and
engineering supervisors. Agreements for yard supervisors,
mechanical labourers, machinists, and police officers open for
negotiations as of January 1, 2009.
With respect to DM&E, only locomotive engineers and train
service employees are represented. DM&E has an agreement
covering engineers and conductors that extends through 2013. The
agreement on the Iowa, Chicago & Eastern Railroad
Corporation (IC&E) portion of the railroad
covering train and engine service employees opened for
renegotiation in July, 2008, and are continuing. There is also a
representation dispute for train and engine service employees on
IC&E which is being handled by the National Mediation Board.
21.7 NETWORK
CAPACITY AND VOLUME
Our operating and hence financial position are subject to
capacity constraints and fluctuations in traffic volumes.
21.7.1 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. Since 2005, we
completed several major expansion projects 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, replacing older freight cars with more efficient
and higher-capacity freight cars, and making improvements to our
train designs.
In addition in January 2006, CP and CN entered into an
agreement, which assists in the optimization of railway
infrastructure in the lower mainland of BC. This co-production
agreement, like the CP-CN
directional running operations in the BC Fraser Canyon,
increases production on the infrastructure of both railways.
21.7.2 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.
21.8 FINANCIAL
RISKS
21.8.1 Pension
Funding Status Volatility
Our main Canadian defined benefit pension plan accounts for 97%
of CPs pension obligation and can produce significant
volatility in pension funding requirements, given the pension
funds size, the differing drivers of the pension, asset
and liability values, and Canadian statutory pension funding
requirements. Despite the fact that CP has made several changes
to the plans investment policy over the last several years
to reduce this volatility, including the reduction of the
plans public equity markets exposure, the recent and rapid
declines in the value of public equity securities, reduction in
the long term Government of Canada bond yields and other
economic changes have resulted in a significant pension funding
shortfall and may require CP to significantly increase the
amounts of pension contributions in 2009, 2010 and beyond.
21.8.2 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 16.6 Fuel Price Management). The fuel cost recovery
program reflects changes in fuel costs, which are included in
freight rates. Freight rates will increase when fuel prices rise
and will decrease when fuel costs decrease. While fluctuations
in fuel cost are mitigated, the risk cannot be completely
eliminated due to timing and the volatility in the market.
21.8.3 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 16.5.
21.8.4 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 16.4.
21.9 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. CPs bulk
traffic is dominated by grain, metallurgical coal, fertilizers
and sulphur. Factors outside of CPs control which affect
bulk traffic include: (i) with respect to grain volumes,
domestic production-related factors such as weather conditions,
acreage plantings, yields and insect populations, (ii) with
respect to coal volumes, global steel production,
(iii) with respect to fertilizer volumes, grain and other
crop markets, with both production levels and prices relevant,
and (iv) with respect to sulphur volumes, industrial
production and fertilizer production, both in North America and
abroad. The merchandise commodities transported by the Company
include those relating to the forestry, energy, industrial,
automotive and other consumer spending sectors. Factors outside
of CPs control which affect this portion of CPs
business include the general state of the North American
economy, with North American industrial production, business
investment and consumer spending the general sources of economic
demand. Housing, auto production and energy development are also
specific sectors of importance. Factors outside of CPs
control which affect the Companys intermodal traffic
volumes include North American consumer spending and a
technological shift toward containerization
in the transportation industry that has expanded the range of
goods moving by this means.
Fuel prices also remain uncertain, as they are influenced by
many factors, including, without limitation, worldwide oil
demand, international politics, severe weather, refinery
capacity, labour and political instability in major
oil-producing countries and the ability of these countries to
comply with
agreed-upon
production quotas.
Adverse changes to any of the factors outside of CPs
control which affect CPs bulk traffic, the merchandise
commodities transported by CP or CPs intermodal traffic
volumes or adverse changes to fuel prices could have a material
adverse effect on CPs business, financial condition,
results of operations and cash flows.
We are also sensitive to factors including, but not limited to,
natural disasters, security threats, commodity pricing, global
supply and demand, and supply chain efficiency. Other business
risks include: potential increase in maintenance and operational
costs, uncertainties of litigation, risks and liabilities
arising from derailments and technological changes.
22.0 Critical
Accounting Estimates
To prepare consolidated 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 consolidated 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.
22.1 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, 2008, the accrual for environmental
remediation on our Consolidated Balance Sheet amounted to
$151.1 million (2007 $104.0 million), of
which the long-term portion amounting to $130.2 million
(2007 $84.2 million) was included in
Deferred liabilities and the short-term portion
amounting to $20.9 million (2007
$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 $12.6 million in 2008 and
$14.0 million in 2007. The US dollar-denominated portion of
the liability was affected by the change in FX, resulting in an
increase in environmental liabilities of $12.1 million in
2008 and a decrease of $9.7 million in 2007. In the fourth
quarter of 2008, the accrual for environmental remediation
increased by $43.5 million as a result of the purchase of
the DM&E.
22.2 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 22.5 Legal and Personal Injury Liabilities. Pension
and post-retirement benefits liabilities are subject to various
external influences and uncertainties, as described in
Section 20.9 Pension Plan Deficit.
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, subject to the market-related
asset value not being greater than 120% of the market value nor
being less than 80% of the market value. 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
10 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, 2008 Consolidated Balance Sheet included
prepaid pension costs of $1,160.2 million. This accrued
benefit asset is increased mainly by amounts contributed to the
plans by the Company, partially offset by the amount of pension
expense for the year. Our Consolidated Balance Sheet also
included $0.3 million in Accounts payable and accrued
liabilities and $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 can
result from changes in the discount rate used. A
1.0 percentage point increase (decrease) in the discount
rate would decrease (increase) the liability by approximately
$40 million. We included post-retirement benefits accruals
of $227.0 million in Deferred liabilities and
post-retirement benefits accruals of $19.5 million in
Accounts payable and accrued liabilities on our
December 31, 2008 Consolidated Balance Sheet.
Pension and post-retirement benefits expenses were included in
Compensation and benefits on our December 31,
2008 Statement of Consolidated Income. Combined pension and
post-retirement benefits expenses (excluding self-insured
workers compensation and long-term disability benefits) were
$82.7 million in 2008, compared with $98.2 million in
2007.
Pension expense consists of defined benefit pension expense plus
defined contribution pension expense (equal to contributions).
Pension expense was $44.9 million in 2008, compared with
$65.6 million in 2007. Defined benefit pension expense was
$41.8 million in 2008, compared with $62.4 million in
2007. Defined contribution pension expense was $3.1 million
in 2008, compared with $3.2 million in 2007.
Post-retirement benefits expense was $37.8 million in 2008,
compared with $32.6 million in 2007.
22.3 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, 2008, accumulated depreciation was
$5,509.8 million. Depreciation expense relating to
properties amounted to $491.3 million in 2008, compared
with $472.0 million in 2007.
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 $19.3 million in 2008 from
the previous year primarily due to:
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additions to capital assets, especially to track;
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accelerated depreciation of software; and
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the consolidation of DM&E from October 30, 2008 to
December 31, 2008, which includes amortization of fair
values determined under purchase accounting.
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This increase was partially offset by asset retirements.
22.4 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 2008, we reduced our future income tax liability by
$15.7 million (2007 $162.9 million) due to
a reduction in income tax rates by the Government of Canada and
certain provincial governments (discussed in Section 10.5
Income Taxes).
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, discussed further in Section 6.0
Non-GAAP Earnings). 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 (discussed further in
Section 6.0 Non-GAAP Earnings).
Future income tax expense totalling $160.6 million was
included in income tax for 2008 and $38.7 million was
included in income tax 2007. The change in future tax expense
for 2008 was primarily due to a reduction in the impact of tax
rate changes recognized in prior years. 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 10.5 Income
Taxes). At December 31, 2008, future income tax liabilities
of $2,616.1 million were recorded as a long-term liability
and comprised largely of temporary differences related to
accounting for properties. Future income tax benefits of
$76.5 million realizable within one year were recorded as a
current asset.
22.5 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.
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
$79.7 million in 2008 and $46.9 million in 2007.
Accruals for incidents, claims and litigation, including WCB
accruals, totalled $164.9 million, net of insurance
recoveries, at December 31, 2008. The total accrual
included $104.4 million in Deferred liabilities
and $79.9 million in Accounts payable and accrued
liabilities, offset by $10.9 million in Other
assets and deferred charges and $8.5 million in
Accounts receivable.
22.6 CANADIAN
THIRD PARTY ASSET-BACKED COMMERCIAL PAPER
At December 31, 2008, ABCP at its estimated fair value of
$72.7 million, excluding $6.4 million of accrued
interest, which has been recognized separately in the balance
sheet (discussed further in Section 10.3 Loss in Fair Value
of Canadian Third Party Asset-backed Commercial Paper), was
included in Investments. During 2008 the change in
the estimated fair value of $49.4 million was recognized as
a charge to income in Loss in fair value of Canadian third
party asset-backed commercial paper. During 2007 the
change in the estimated fair value of $21.5 million was
recorded as a charge to income to the same account.
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 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.
23.0 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.
24.0 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, intend, may,
should, 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 including the potential adverse impact of
the current global credit crisis; the Companys ability to
successfully renew its shipping contract with its largest
customer; effect of changes in market conditions and discount
rates on the financial position of pension plans and levels of
required pension fund contributions; reduction for demand in
metallurgical coal and resulting curtailment of coal extraction
operations; 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; transportation of
dangerous goods; timing of completion of capital and maintenance
projects; currency and interest rate fluctuations; successful
integration of DM&E (discussed further in Section 18.0
Acquisition) into the Companys current operations; 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 21.0 Business Risk and
Enterprise Risk Management and elsewhere in this MD&A with
the particular forward-looking statement in question.
24.1 2008
FINANCIAL OUTLOOK
The following is the original 2008 guidance we provided in
October of 2007:
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2008 Financial Outlook
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Guidance
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Date
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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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o 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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o 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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o 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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o 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 Non-GAAP Earnings.
24.1.1 2008
Q1 Guidance Updates
We subsequently revised certain of our 2008 guidance in April of
2008 as follows:
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2008 Financial Outlook
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Guidance
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Date
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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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Apr 21, 2008
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o average
crude oil prices of US $98 per
barrel(2);
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Total operating expenses
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Increase of 6% 8%
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Apr 21, 2008
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o average
all-in fuel cost of US $3.35 per US
gallon(3);
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Adjusted Diluted
EPS(1)
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$4.40 $4.60
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Apr 21, 2008
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o average
FX rate of $1.00 per US dollar;
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Capital expenditures
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$885 $895 million
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Apr 21, 2008
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o US
GDP growth of
1.2%(4);
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Free
Cash(1)
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Approximately $200 million
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Apr 21, 2008
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o Canadian
GDP growth of
1.6%(4);
and
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o Tax
rate of 27%
29%(5).
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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 Non-GAAP Earnings.
(2) This
assumption had been revised to US $87 per barrel in our
January 29, 2008 press release, and revised to US $98 per
barrel in our April 22, 2008 press release.
(3) This
additional assumption was in our April 22, 2008 press
release.
(4) The
North American GDP growth assumption had been revised in April
of 2008 to reflect current economic conditions.
(5) This
assumption had been revised in our April 22, 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
Agencys adjustment to the grain revenue entitlement under
the CTA (discussed further in Section 21.5.1 Regulatory
Change).
In our April 22, 2008 press release, our guidance was
updated as follows:
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adjusted diluted EPS was revised to the range of $4.40 to $4.60;
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total operating expenses was expected to increase by six to
eight percent; and
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free cash was expected to be approximately $200 million.
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Our 2008 guidance was revised in April of 2008 to reflect:
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the harsh weather conditions in the first quarter of 2008;
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continued increase in fuel price; and
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continued economic uncertainty.
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24.1.2 2008
Q2 Guidance Updates
We further revised certain of our 2008 guidance in July of 2008
as follows:
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2008 Financial Outlook
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Guidance
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Date
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Key 2008 Assumptions
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Total revenues
|
|
Increase of 6% 8%
|
|
July 21, 2008
|
|
o average
crude oil prices of US $121 per
barrel(2);
|
Total operating expenses
|
|
Increase of 11% 13%
|
|
July 21, 2008
|
|
o average
all-in fuel cost of US $3.80 to $3.90 per US
gallon(2);
|
Adjusted Diluted
EPS(1)
|
|
$4.00 $4.20
|
|
July 21, 2008
|
|
o average
FX rate of $1.00 per US dollar;
|
Capital expenditures
|
|
$885 $895 million
|
|
July 21, 2008
|
|
o US
GDP growth of
1.6%(2);
|
Free
Cash(1)
|
|
Approximately $150 million
|
|
July 21, 2008
|
|
o Canadian
GDP growth of
1.2%(2);
and
|
|
|
|
|
|
|
o Tax
rate of 26%
27%(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 measures are
discussed further in Section 6.0 Non-GAAP Earnings.
(2) These
assumptions have been revised subsequent to our April 22,
2008 press release.
The Company strives to mitigate the impact of any changes in WTI
and crack margins through fuel recovery programs. However, these
programs do not completely offset the changes in expense caused
by changes in WTI and crack margins.
The approximate net annual impact on EPS of changes in WTI and
crack margin given our current portfolio of freight contracts is
as follows:
|
|
o
|
a change in WTI of US$2 per barrel impacts EPS by $0.01; and
|
|
o
|
a change in crack margins of US$1 per barrel impacts EPS by
$0.02.
|
These sensitivities do not consider the impact of the lagged
implementation of changes resulting in fuel surcharges from the
timing of actual expenses incurred. This lag is due to
regulatory notice requirements for rail price adjustments.
Our 2008 guidance was revised in July of 2008 to reflect the
continued increase in fuel price and the ongoing economic
uncertainty.
24.1.3 2008
Q3 Guidance Updates
We further revised certain of our 2008 guidance in October of
2008 as follows. The following is the most updated 2008 guidance
we provided:
|
|
|
|
|
|
|
2008 Financial Outlook
|
|
Guidance
|
|
Date
|
|
Key 2008 Assumptions
|
Total revenues
|
|
Increase of 4% 6%
|
|
October 27, 2008
|
|
o average
crude oil prices of US $105 per barrel;
|
Total operating expenses
|
|
Increase of 8% 10%
|
|
October 27, 2008
|
|
o average
all-in fuel cost of US $3.40 to $3.50 per US gallon;
|
Adjusted Diluted
EPS(1)
|
|
$4.00 $4.20
|
|
October 27, 2008
|
|
o average
FX rate of $1.04 per US dollar;
|
Capital expenditures
|
|
$885 $895 million
|
|
October 27, 2008
|
|
o US
GDP growth of 1.5%;
|
Free
Cash(1)
|
|
Approximately $150 million
|
|
October 27, 2008
|
|
o Canadian
GDP growth of 0.6%; and
|
|
|
|
|
|
|
o Tax
rate of 26% 27%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Non-GAAP Earnings.
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.
24.1.4 Variance
from 2008 Guidance
Free cash flow of $231 million (discussed further in
Section 6.0 Non-GAAP Earnings) was above our revised
guidance primarily due to the favourable effect of foreign
currency fluctuations on US dollar-denominated cash and on
equipment purchased earlier in the year and refinanced during
the fourth quarter of 2008.
Cash capital on CP (excluding DM&E) ended the year at
$878 million, slightly below guidance. On an accrued basis
the capital program (exclusive of DM&E) was
$959 million due to the decision to finance locomotives
through a capital lease.
24.2 2009
FINANCIAL OUTLOOK
Limited guidance has been given for 2009 due to economic
uncertainty. Guidance was given for Capital expenditures ranging
from $800-$820 million on November 13, 2008. The 2009
outlook assumes an average foreign exchange rate of $1.25 per US
dollar (US$0.80) as of January 27, 2009. Undue reliance
should not be placed on this guidance and other forward-looking
information for other purposes.
25.0 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.
Casualty expenses Includes costs associated with personal
injuries, freight and property damages, and environmental
mishaps.
CICA Canadian Institute of Chartered Accountants.
CP, the Company CPRL, CPRL and its subsidiaries, CPRL and
one or more of its subsidiaries, or one or more of CPRLs
subsidiaries.
CPRL Canadian Pacific Railway Limited.
D&H Delaware and Hudson Railway Company, Inc., a
wholly owned indirect US subsidiary of CPRL.
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. This measure
is also referred to as adjusted diluted EPS.
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$8,900 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 income Calculated as revenues less operating
expenses and is a common measure of profitability used by
management.
Operating ratio The ratio of total operating expenses to
total revenues. A lower percentage normally indicates higher
efficiency.
Return on capital employed or ROCE Earnings before
after-tax interest expense for the current quarter and the
previous three quarters 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.
CONSOLIDATED
FINANCIAL STATEMENTS
December 31,
2008
Except where otherwise indicated, all financial information
reflected herein is expressed in Canadian dollars
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 (GAAP) 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 independent directors. The Audit
Committee reviews the consolidated financial statements 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 ha ve
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, 2008.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2008 has been
audited by PricewaterhouseCoopers LLP, independent auditors, as
stated in their report, which is included herein.
|
|
|
|
|
|
KATHRYN B. MCQUADE Executive Vice-President and Chief Financial Officer
February 23, 2009
|
|
FRED J. GREEN
Chief Executive Officer
|
INDEPENDENT
AUDITORS REPORT
TO THE
SHAREHOLDERS OF
CANADIAN PACIFIC RAILWAY LIMITED
We have completed integrated audits of Canadian Pacific Railway
Limiteds 2008, 2007 and 2006 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2008. 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, 2008
and 2007, and the related statement of consolidated income,
comprehensive income, changes in shareholders equity and
cash flows for each of the years in the three year period ended
December 31, 2008. 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, 2008 and 2007 and for each of
the years in the three year period ended December 31, 2008
in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting
Oversight Board (United States). 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, 2008 and 2007
and the results of its operations and its cash flows for each of
the years in the three year period ended December 31, 2008
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, 2008, 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 Report on 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 audits provide a reasonable basis for our
opinion.
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
Canadian 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, 2008 based on criteria established in
Internal Control Integrated Framework issued by
the COSO.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
February 23, 2009
STATEMENT OF
CONSOLIDATED INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in
millions of Canadian dollars, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight (Note 26)
|
|
$
|
4,814.8
|
|
|
$
|
4,555.2
|
|
|
$
|
4,427.3
|
|
Other
|
|
|
116.8
|
|
|
|
152.4
|
|
|
|
155.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,931.6
|
|
|
|
4,707.6
|
|
|
|
4,583.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,305.5
|
|
|
|
1,284.2
|
|
|
|
1,327.6
|
|
Fuel
|
|
|
1,005.8
|
|
|
|
746.8
|
|
|
|
650.5
|
|
Materials
|
|
|
217.2
|
|
|
|
215.5
|
|
|
|
212.9
|
|
Equipment rents
|
|
|
182.2
|
|
|
|
207.5
|
|
|
|
181.2
|
|
Depreciation and amortization
|
|
|
491.3
|
|
|
|
472.0
|
|
|
|
464.1
|
|
Purchased services and other
|
|
|
672.2
|
|
|
|
617.4
|
|
|
|
618.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,874.2
|
|
|
|
3,543.4
|
|
|
|
3,454.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating expenses
|
|
|
1,057.4
|
|
|
|
1,164.2
|
|
|
|
1,128.6
|
|
Equity income in Dakota, Minnesota & Eastern Railroad
Corporation (Note 11)
|
|
|
51.3
|
|
|
|
12.3
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other charges (Note 4)
|
|
|
22.7
|
|
|
|
29.6
|
|
|
|
27.8
|
|
Loss in fair value of Canadian third party asset-backed
commercial paper (Note 11)
|
|
|
49.4
|
|
|
|
21.5
|
|
|
|
|
|
Foreign exchange loss (gain) on long-term debt
|
|
|
16.3
|
|
|
|
(169.8
|
)
|
|
|
0.1
|
|
Net interest expense (Note 5)
|
|
|
261.1
|
|
|
|
204.3
|
|
|
|
194.5
|
|
Income tax expense (Note 6)
|
|
|
140.2
|
|
|
|
144.7
|
|
|
|
109.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
619.0
|
|
|
$
|
946.2
|
|
|
$
|
796.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (Note 7)
|
|
$
|
4.03
|
|
|
$
|
6.14
|
|
|
$
|
5.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (Note 7)
|
|
$
|
3.98
|
|
|
$
|
6.08
|
|
|
$
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain of the comparative figures have been reclassified in
order to be consistent with the 2008 presentation.
See Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in
millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
619.0
|
|
|
$
|
946.2
|
|
|
$
|
796.3
|
|
Net gain (loss) in foreign currency translation adjustments, net
of hedging activities
|
|
|
10.0
|
|
|
|
(7.4
|
)
|
|
|
(1.6
|
)
|
Realized gain and increased losses on derivatives designated as
cash flow hedges
|
|
|
(16.1
|
)
|
|
|
(36.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before income taxes
|
|
|
(6.1
|
)
|
|
|
(44.2
|
)
|
|
|
(1.6
|
)
|
Income tax recovery
|
|
|
44.8
|
|
|
|
3.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) (Note 9)
|
|
|
38.7
|
|
|
|
(40.8
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
657.7
|
|
|
$
|
905.4
|
|
|
$
|
795.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CONSOLIDATED
BALANCE SHEET
|
|
|
|
|
|
|
|
|
As at December 31 (in millions
of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
117.6
|
|
|
$
|
378.1
|
|
Accounts receivable and other current assets (Note 8)
|
|
|
713.1
|
|
|
|
542.8
|
|
Materials and supplies
|
|
|
215.8
|
|
|
|
179.5
|
|
Future income taxes (Note 6)
|
|
|
76.5
|
|
|
|
67.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,123.0
|
|
|
|
1,167.7
|
|
Investments (Note 11)
|
|
|
151.1
|
|
|
|
1,668.6
|
|
Net properties (Note 12)
|
|
|
12,576.9
|
|
|
|
9,293.1
|
|
Assets held for sale
|
|
|
39.6
|
|
|
|
17.0
|
|
Goodwill and intangible assets (Note 13)
|
|
|
237.2
|
|
|
|
|
|
Other assets and deferred charges (Note 14)
|
|
|
1,342.0
|
|
|
|
1,218.6
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,469.8
|
|
|
$
|
13,365.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowing
|
|
$
|
150.1
|
|
|
$
|
229.7
|
|
Accounts payable and accrued liabilities
|
|
|
1,034.9
|
|
|
|
980.8
|
|
Income and other taxes payable
|
|
|
42.2
|
|
|
|
68.8
|
|
Dividends payable
|
|
|
38.1
|
|
|
|
34.5
|
|
Long-term debt maturing within one year (Note 15)
|
|
|
44.0
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,309.3
|
|
|
|
1,344.8
|
|
Deferred liabilities (Note 17)
|
|
|
865.2
|
|
|
|
714.6
|
|
Long-term debt (Note 15)
|
|
|
4,685.8
|
|
|
|
4,146.2
|
|
Future income taxes (Note 6)
|
|
|
2,616.1
|
|
|
|
1,701.5
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Share capital (Note 20)
|
|
|
1,220.8
|
|
|
|
1,188.6
|
|
Contributed surplus (Note 20)
|
|
|
40.2
|
|
|
|
42.4
|
|
Accumulated other comprehensive income (Note 9)
|
|
|
78.3
|
|
|
|
39.6
|
|
Retained income
|
|
|
4,654.1
|
|
|
|
4,187.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,993.4
|
|
|
|
5,457.9
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
15,469.8
|
|
|
$
|
13,365.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 24).
Certain of the comparative figures have been reclassified in
order to be consistent with the 2008 presentation.
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
619.0
|
|
|
$
|
946.2
|
|
|
$
|
796.3
|
|
Add (deduct) items not affecting cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
491.3
|
|
|
|
472.0
|
|
|
|
464.1
|
|
Future income taxes (Note 6)
|
|
|
160.6
|
|
|
|
38.7
|
|
|
|
75.3
|
|
Loss in fair value of Canadian third party asset-backed
commercial paper (Note 11)
|
|
|
49.4
|
|
|
|
21.5
|
|
|
|
|
|
Foreign exchange loss (gain) on long-term debt
|
|
|
16.3
|
|
|
|
(169.8
|
)
|
|
|
0.1
|
|
Amortization of deferred charges and accretion
|
|
|
10.1
|
|
|
|
12.1
|
|
|
|
16.5
|
|
Equity income, net of cash received
|
|
|
(46.6
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
Restructuring and environmental payments (Note 19)
|
|
|
(53.4
|
)
|
|
|
(61.0
|
)
|
|
|
(96.3
|
)
|
Other operating activities, net
|
|
|
(35.4
|
)
|
|
|
33.6
|
|
|
|
(105.2
|
)
|
Change in non-cash working capital balances related to
operations (Note 10)
|
|
|
(132.2
|
)
|
|
|
50.3
|
|
|
|
(101.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
1,079.1
|
|
|
|
1,333.5
|
|
|
|
1,049.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties (Note 12)
|
|
|
(892.3
|
)
|
|
|
(893.2
|
)
|
|
|
(793.7
|
)
|
Additions to investments and other assets
|
|
|
(222.5
|
)
|
|
|
(19.2
|
)
|
|
|
(137.1
|
)
|
Reductions in investments and other assets
|
|
|
257.6
|
|
|
|
19.4
|
|
|
|
139.3
|
|
Net proceeds from disposal of transportation properties
|
|
|
9.7
|
|
|
|
14.9
|
|
|
|
97.8
|
|
Additions to investment in Dakota, Minnesota & Eastern
Railroad Corporation (Note 11)
|
|
|
(8.6
|
)
|
|
|
(1,492.6
|
)
|
|
|
|
|
Investment in Canadian third party asset-backed commercial paper
(Note 11)
|
|
|
|
|
|
|
(143.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(856.1
|
)
|
|
|
(2,514.3
|
)
|
|
|
(693.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(148.7
|
)
|
|
|
(133.1
|
)
|
|
|
(112.4
|
)
|
Issuance of CP Common Shares
|
|
|
19.7
|
|
|
|
30.4
|
|
|
|
66.6
|
|
Purchase of CP Common Shares (Note 20)
|
|
|
|
|
|
|
(231.1
|
)
|
|
|
(286.4
|
)
|
(Decrease) increase in short-term borrowing
|
|
|
(79.6
|
)
|
|
|
229.7
|
|
|
|
|
|
Issuance of long-term debt (Note 15)
|
|
|
1,068.7
|
|
|
|
1,745.3
|
|
|
|
2.8
|
|
Repayment of long-term debt
|
|
|
(1,340.7
|
)
|
|
|
(187.7
|
)
|
|
|
(25.4
|
)
|
Settlement of treasury rate lock
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(511.5
|
)
|
|
|
1,453.5
|
|
|
|
(354.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency fluctuations on U.S.
dollar-denominated cash and cash equivalents
|
|
|
28.0
|
|
|
|
(18.9
|
)
|
|
|
1.8
|
|
Cash position
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(260.5
|
)
|
|
|
253.8
|
|
|
|
2.5
|
|
Cash and cash equivalents at beginning of year
|
|
|
378.1
|
|
|
|
124.3
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
117.6
|
|
|
$
|
378.1
|
|
|
$
|
124.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain of the comparative figures have been reclassified in
order to be consistent with the 2008 presentation.
See Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in
millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Share capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
1,188.6
|
|
|
$
|
1,175.7
|
|
|
$
|
1,141.5
|
|
Shares issued under stock option plans (Note 20)
|
|
|
32.2
|
|
|
|
37.4
|
|
|
|
71.0
|
|
Shares purchased (Note 20)
|
|
|
|
|
|
|
(24.5
|
)
|
|
|
(36.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,220.8
|
|
|
|
1,188.6
|
|
|
|
1,175.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed surplus
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
42.4
|
|
|
|
32.3
|
|
|
|
245.1
|
|
Stock compensation expense
|
|
|
7.8
|
|
|
|
10.1
|
|
|
|
11.4
|
|
Stock compensation related to shares issued under stock option
plans
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
(1.1
|
)
|
Shares purchased
|
|
|
|
|
|
|
|
|
|
|
(223.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
40.2
|
|
|
|
42.4
|
|
|
|
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
39.6
|
|
|
|
66.4
|
|
|
|
67.5
|
|
Adjustment for change in accounting policy
|
|
|
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance, beginning of year
|
|
|
39.6
|
|
|
|
80.4
|
|
|
|
67.5
|
|
Other comprehensive income (loss) (Note 9)
|
|
|
38.7
|
|
|
|
(40.8
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
78.3
|
|
|
|
39.6
|
|
|
|
66.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained income
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
4,187.3
|
|
|
|
3,582.1
|
|
|
|
2,930.0
|
|
Adjustment for change in accounting policy
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance, beginning of year
|
|
|
4,187.3
|
|
|
|
3,586.1
|
|
|
|
2,930.0
|
|
Net income for the year
|
|
|
619.0
|
|
|
|
946.2
|
|
|
|
796.3
|
|
Shares purchased (Note 20)
|
|
|
|
|
|
|
(206.6
|
)
|
|
|
(26.5
|
)
|
Dividends
|
|
|
(152.2
|
)
|
|
|
(138.4
|
)
|
|
|
(117.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
4,654.1
|
|
|
|
4,187.3
|
|
|
|
3,582.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income and retained
income
|
|
|
4,732.4
|
|
|
|
4,226.9
|
|
|
|
3,648.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity, end of year
|
|
$
|
5,993.4
|
|
|
$
|
5,457.9
|
|
|
$
|
4,856.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2008
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 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). The Companys
investments in which it has significant influence are accounted
for using the equity method and all other investments are
accounted for using the cost method.
USE OF
ESTIMATES
The preparation of these financial statements in conformity with
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 investments, restructuring
and environmental liabilities, pensions and other benefits,
depreciable lives of properties and intangible assets, 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, 2008.
|
|
|
|
|
|
|
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%
|
Dakota, Minnesota & Eastern Railroad Corporation
(DM&E)
|
|
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 was subject to review and approval by
the U.S. Surface Transportation Board (STB),
during which time the shares of DM&E were placed in a
voting trust. The STB approved the purchase on October 30,
2008, at which time the Company assumed control of DM&E.
REVENUE
RECOGNITION
Railway freight revenues are recognized based on the percentage
of completed service method. The allocation of revenue between
reporting periods is based on the relative transit time in each
reporting period with expense recognized as incurred. 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 highly-liquid short-term
investments that are readily convertible to cash with original
maturities of less than 3 months. Short-term investments
are stated at cost, which approximates fair value.
FOREIGN CURRENCY
TRANSLATION
These consolidated financial statements are expressed in
Canadian dollars, except where otherwise indicated.
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 income (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, subject to the market-related
asset value not being greater than 120% of the market value nor
being less than 80% of the market value. 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
10 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 (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 net realizable value.
NET
PROPERTIES
Fixed asset additions and major renewals are recorded at cost,
including direct costs, directly attributable indirect costs and
carrying costs, less accumulated depreciation. 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.
The Company follows group depreciation which groups assets which
are similar in nature and have similar economic lives. The
property groups are depreciated based on their expected economic
lives determined by studies of historical retirements of
properties in the group and engineering estimates.
The Company constructs much of its new and replacement
properties. The Company divides maintenance expenditures between
additions to properties and operating expenses based on the
nature of the work and capitalizes expenditures that increase
economic value or extends the life of the properties affected
and exceed minimum physical and financial thresholds.
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.
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
|
|
Rolling stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel locomotives
|
|
|
28 to 55
|
|
|
|
|
|
|
|
|
|
|
|
Freight cars
|
|
|
21 to 46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ties
|
|
|
34 to 41
|
|
|
|
|
|
|
|
|
|
|
|
Rails in first position
|
|
|
25 to 29
|
|
in
other than first position
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer system development costs
|
|
|
5 to 15
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS HELD FOR
SALE
Assets to be disposed of are reported at the lower of the
carrying amount and fair value, less costs to sell, and are no
longer depreciated.
GOODWILL
Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets upon acquisition of a
business. Goodwill is assigned to the reporting units that are
expected to benefit from the business acquisition.
The carrying value of goodwill, which is not amortized, is
assessed for impairment annually in the fourth quarter of each
year, or more frequently as economic events dictate. The fair
value of the reporting unit is compared to its carrying value,
including goodwill. If the fair value of the reporting unit is
less than its carrying value goodwill is impaired. The
impairment charge that would be recognized is the excess of the
carrying value of the goodwill over the fair value of the
goodwill. The fair value of goodwill would be determined in the
same manner as in a business combination.
INTANGIBLE
ASSETS
Intangible assets with finite lives are amortized using the
straight-line method based on the estimated useful lives of the
respective assets. The option to expand the track network has an
amortization period of 100 years. Favourable leases,
customer relationships and interline contracts have amortization
periods ranging from 4 to 20 years. When there is a change
in the estimated useful life of an intangible asset with a
finite life, amortization is adjusted prospectively.
Intangible assets subject to amortization are impaired and
written down if the carrying amount is not recoverable and
exceeds their fair value.
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. Gains and losses arising from
derivative instruments affect the following income statement
lines: Revenues, Compensation and
benefits, Fuel, Other charges,
Foreign exchange (gain) loss on long-term debt and
Net interest expense.
For fair value hedges, the periodic change in value is
recognized in income, on the same line as the changes in values
of the hedged items are also recorded. For a cash flow hedge,
the change in value of the effective portion is recognized in
Other comprehensive income (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 until the hedged item is settled and,
prospectively, future changes in value of the derivative are
recognized in income. The change in value of the effective
portion of a cash flow hedge remains in Accumulated other
comprehensive income until the related hedged item
settles, at which time amounts recognized in Accumulated
other comprehensive income are reclassified to the same
income or balance sheet account that records the hedged item.
Prior to January 1, 2007, the periodic change in the fair
value of an effective hedging instrument prior to settlement was
not recognized in the financial statements.
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 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 combines transaction costs and premiums or discounts
directly attributable to the issuance of long-term debt with the
fair value of the debt and amortizes these amounts to earnings
using the effective interest method.
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 charges over the
payment period. Environmental remediation accruals, recorded on
an undiscounted basis, 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. 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 AND CAPITAL DISCLOSURES
The CICA issued the following accounting standards effective for
fiscal periods beginning in 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 revise disclosure
requirements related to financial instruments, including hedging
instruments.
Section 1535 Capital Disclosures requires the
Company to provide disclosures about the Companys capital
and how it is managed.
These new accounting standards have not impacted the amounts
reported in the Companys financial statements; however,
they have resulted in expanded note disclosure (see Note 16
and Note 23).
INVENTORIES
The CICA issued accounting standard Section 3031
Inventories which became effective January 1,
2008. 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 standard requires
the reversal of previously recorded write downs to realizable
value when there is clear evidence that net realizable value has
increased. The adoption of Section 3031
Inventories did not impact the Companys
financial statements.
3. Future
accounting changes
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.
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. 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. The provisions of
Section 3064 will be adopted retrospectively, with
restatement of prior periods. As a result of this adoption, the
Company will record certain expenditures related to a
pre-operating period as expenses, rather than recording them as
assets in Other assets and deferred charges and
Net properties. The adoption of Section 3064
will result in a reduction to opening retained income of
$6.0 million at January 1, 2006, an increase to
Purchased services and other expense of
$6.6 million in 2008 (2007 $0.8 million,
2006 $1.3 million) and a decrease to
Income tax expense of $2.6 million in 2008
(2007 $0.3 million, 2006
$0.5 million).
CREDIT RISK AND
THE FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL
LIABILITIES
On January 20, 2009 the Emerging Issues Committee
(EIC) issued a new abstract EIC 173 Credit
risk and the fair value of financial assets and financial
liabilities. This abstract concludes that an entitys
own credit risk and the credit risk of the counterparty should
be taken into account when determining the fair value of
financial assets and financial liabilities, including derivative
instruments.
This abstract is to apply to all financial assets and
liabilities measured at fair value in interim and annual
financial statements for periods ending on or after
January 20, 2009. The Company is currently evaluating the
impact of the adoption of this new abstract.
BUSINESS
COMBINATIONS, CONSOLIDATED FINANCIAL STATEMENTS AND
NON-CONTROLLING INTERESTS
In January 2009, the CICA issued three new standards:
Business
combinations, Section 1582
This section which replaces the former Section 1581
Business combinations and provides the Canadian
equivalent to International Financial Reporting Standard IFRS 3
Business Combinations (January 2008). The new
standard requires the acquiring entity in a business combination
to recognize most of the assets acquired and liabilities assumed
in the transaction at fair value including contingent assets and
liabilities; and recognize and measure the goodwill acquired in
the business combination or a gain from a bargain purchase.
Acquisition-related costs are also to be expensed.
Consolidated
financial statements, Section 1601 and Non-controlling
interests, Section 1602
These two sections replace Section 1600 Consolidated
financial statements. Section 1601 Consolidated
financial statements carries forward guidance from
Section 1600 Consolidated financial statements
with the exception of non-controlling interests which are
addressed in a separate section. Section 1602
Non-controlling interests is equivalent to the
corresponding provisions of International Financial Reporting
Standard IAS 27 Consolidated and Separate Financial
Statement (January 2008). This standard requires the
Company to report non-controlling interests within equity,
separately from the equity of the owners of the parent, and
transactions between an entity and non-controlling interests as
equity transactions.
All three standards are effective January 1, 2011, at which
time Canadian public companies will have adopted IFRS. As such,
adoption of these standards by the Company is not expected
unless they are early adopted. Early adoption is permitted,
however, the early adoption of one of the three standards would
require adoption of the other two standards. At this point the
Company does not intend to early adopt. The Company is currently
evaluating the impact of the adoption of these new standards.
INTERNATIONAL
FINANCIAL REPORTING STANDARDS (IFRS)
On February 13, 2008, the Canadian Accounting Standards
Board (AcSB) confirmed that publicly accountable
enterprises will be required to adopt IFRS in place of Canadian
GAAP for interim and annual reporting purposes for fiscal years
beginning on or after January 1, 2011, unless, as permitted
by Canadian securities regulations, CP were to adopt
U.S. GAAP on or before this date. At this time the impact
on the Companys future financial position and results of
operations is not reasonably determinable or estimable. CP is
currently developing appropriate accounting policies under IFRS
and assessing the impact that these policy changes will have in
comparison to U.S. GAAP. This assessment will determine
whether CP adopts IFRS or U.S. GAAP from 2011.
4. Other
charges
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Amortization of discount on accruals recorded at present value
|
|
$
|
6.4
|
|
|
$
|
8.1
|
|
|
$
|
10.0
|
|
Other exchange losses
|
|
|
6.1
|
|
|
|
5.8
|
|
|
|
6.5
|
|
Loss on sale of accounts receivable (Note 8)
|
|
|
2.7
|
|
|
|
5.8
|
|
|
|
5.0
|
|
(Gain) loss on non-hedging derivative instruments
|
|
|
(0.7
|
)
|
|
|
1.5
|
|
|
|
(1.2
|
)
|
Other
|
|
|
8.2
|
|
|
|
8.4
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other charges
|
|
$
|
22.7
|
|
|
$
|
29.6
|
|
|
$
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Net
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest expense
|
|
$
|
270.4
|
|
|
$
|
219.6
|
|
|
$
|
200.5
|
|
Interest income
|
|
|
(9.3
|
)
|
|
|
(15.3
|
)
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
261.1
|
|
|
$
|
204.3
|
|
|
$
|
194.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cash interest payments
|
|
$
|
269.6
|
|
|
$
|
208.9
|
|
|
$
|
192.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense includes interest on capital leases of
$20.9 million for the year ended December 31, 2008
(2007 $21.6 million; 2006
$24.2 million).
6. Income
taxes
The following is a summary of the major components of the
Companys income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Canada (domestic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense
|
|
$
|
14.0
|
|
|
$
|
69.8
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences
|
|
|
17.5
|
|
|
|
163.8
|
|
|
|
194.7
|
|
Effect of tax rate decreases
|
|
|
(15.7
|
)
|
|
|
(162.9
|
)
|
|
|
(176.0
|
)
|
Effect of hedge of net investment in self-sustaining foreign
subsidiaries
|
|
|
40.2
|
|
|
|
(9.7
|
)
|
|
|
0.5
|
|
Other
|
|
|
|
|
|
|
(6.9
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future income tax expense (recovery)
|
|
|
42.0
|
|
|
|
(15.7
|
)
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes (domestic)
|
|
$
|
56.0
|
|
|
$
|
54.1
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (foreign)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense (recovery)
|
|
$
|
(34.4
|
)
|
|
$
|
36.2
|
|
|
$
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax expense
Origination and reversal of temporary differences
|
|
|
132.7
|
|
|
|
64.7
|
|
|
|
62.5
|
|
Other
|
|
|
(14.1
|
)
|
|
|
(10.3
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future income tax expense
|
|
|
118.6
|
|
|
|
54.4
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes (foreign)
|
|
$
|
84.2
|
|
|
$
|
90.6
|
|
|
$
|
89.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense (recovery)
|
|
$
|
(20.4
|
)
|
|
$
|
106.0
|
|
|
$
|
34.6
|
|
Future income tax expense
|
|
|
160.6
|
|
|
|
38.7
|
|
|
|
75.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes (domestic and foreign)
|
|
$
|
140.2
|
|
|
$
|
144.7
|
|
|
$
|
109.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2008
|
|
|
2007
|
|
Future income tax assets
|
|
|
|
|
|
|
|
|
Restructuring liability
|
|
$
|
29.1
|
|
|
$
|
39.7
|
|
Amount related to tax losses carried forward
|
|
|
92.3
|
|
|
|
53.9
|
|
Liabilities carrying value in excess of tax basis
|
|
|
124.2
|
|
|
|
35.6
|
|
Future environmental remediation costs
|
|
|
53.9
|
|
|
|
35.1
|
|
Other
|
|
|
88.3
|
|
|
|
28.7
|
|
|
|
|
|
|
|
|
|
|
Total future income tax assets
|
|
|
387.8
|
|
|
|
193.0
|
|
|
|
|
|
|
|
|
|
|
Future income tax liabilities
|
|
|
|
|
|
|
|
|
Capital assets carrying value in excess of tax basis
|
|
|
2,557.5
|
|
|
|
1,493.5
|
|
Other long-term assets carrying value in excess of tax basis
|
|
|
333.1
|
|
|
|
300.0
|
|
Other
|
|
|
36.8
|
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
Total future income tax liabilities
|
|
|
2,927.4
|
|
|
|
1,827.2
|
|
|
|
|
|
|
|
|
|
|
Total net future income tax liabilities
|
|
|
2,539.6
|
|
|
|
1,634.2
|
|
Current future income tax assets
|
|
|
76.5
|
|
|
|
67.3
|
|
|
|
|
|
|
|
|
|
|
Long-term future income tax liabilities
|
|
$
|
2,616.1
|
|
|
$
|
1,701.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected income tax expense at Canadian enacted statutory tax
rates
|
|
$
|
239.4
|
|
|
$
|
333.6
|
|
|
$
|
298.6
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Large corporations tax
|
|
|
|
|
|
|
|
|
|
|
(5.6
|
)
|
Gains and equity income not subject to tax
|
|
|
(61.6
|
)
|
|
|
(62.5
|
)
|
|
|
(22.0
|
)
|
Foreign tax rate differentials
|
|
|
(0.2
|
)
|
|
|
33.8
|
|
|
|
6.6
|
|
Effect of tax rate decreases
|
|
|
(15.7
|
)
|
|
|
(162.9
|
)
|
|
|
(176.0
|
)
|
Other
|
|
|
(21.7
|
)
|
|
|
2.7
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
140.2
|
|
|
$
|
144.7
|
|
|
$
|
109.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no un-benefited capital losses at
December 31, 2008 and 2007.
In 2008, legislation was substantively enacted to reduce
provincial income tax rates. As a result of these changes, the
Company recorded a $15.7 million benefit in future tax
liability and income tax expense, related to the revaluation of
its future income tax balances as at December 31, 2007.
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, 2008, was
$59.0 million (2007 $6.7 million;
2006 $50.9 million).
7. Earnings
per share
At December 31, 2008, the number of shares outstanding was
153.8 million (2007 153.3 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 assumes that any proceeds received
from the exercise of in-the-money options would be used to
purchase Common Shares at the average market price for the
period. For purposes of this calculation, at December 31,
2008, there were 1.5 million dilutive options outstanding
(2007 4.5 million; 2006
4.5 million). These option totals at December 31, 2008
exclude 1.0 million options (2007
2.4 million; 2006 2.3 million) for which
there are tandem SARs outstanding (see Note 22), 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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Weighted average shares outstanding
|
|
|
153.7
|
|
|
|
154.0
|
|
|
|
157.3
|
|
Dilutive effect of weighted average number of stock options
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
155.5
|
|
|
|
155.6
|
|
|
|
158.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in dollars)
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.03
|
|
|
$
|
6.14
|
|
|
$
|
5.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
3.98
|
|
|
$
|
6.08
|
|
|
$
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the weighted-average number of options excluded from
the computation of diluted earnings per share because their
effect was not dilutive was 1,344,669 (2007 3,183;
2006 379,908).
8. Accounts
receivable and other current assets
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Freight
|
|
$
|
464.1
|
|
|
$
|
336.2
|
|
Non-freight
|
|
|
215.1
|
|
|
|
182.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
679.2
|
|
|
|
518.6
|
|
Allowance for doubtful accounts
|
|
|
(31.8
|
)
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
647.4
|
|
|
|
500.2
|
|
Other current assets
|
|
|
65.7
|
|
|
|
42.6
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets
|
|
$
|
713.1
|
|
|
$
|
542.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company maintains an allowance for doubtful accounts based
on expected collectibility of accounts receivable. Credit losses
are based on specific identification of uncollectible accounts,
the application of historical percentages by aging category and
an assessment of the current economic environment. At
December 31, 2008, allowances of $31.8 million
(2007 $18.4 million) were recorded in
Accounts receivable. During 2008, provisions of
$14.4 million of accounts receivable (2007
$2.7 million) were recorded within Purchased services
and other.
During the second quarter of 2008, the Companys accounts
receivable securitization program was terminated and settled. As
a result, the Companys Accounts receivable and other
current assets increased by $120.0 million and in the
Statement of Consolidated Cash Flows the Change in non-cash
working capital balances related to operations reflects an
outflow of $120.0 million.
The Company had previously 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
was a multi-seller trust and CP was not the primary beneficiary.
At December 31, 2008, the outstanding undivided
co-ownership interest held by the trust under the accounts
receivable securitization program was $nil (2007
$120.0 million, 2006 $120.0 million).
The undivided co-ownership interest was sold on a fully serviced
basis and the Company received no fee for ongoing servicing
responsibilities. The average servicing period was approximately
one month. A servicing asset of $0.1 million and a
liability of $0.1 million were previously recorded but are
no longer required to be maintained and were settled as part of
the termination. The benefit the Company derived from servicing
the receivables approximated the value of the activity.
Receivables funded under the securitization program could not
include delinquent, defaulted or written-off receivables, nor
receivables that did not meet certain obligor-specific criteria,
including concentrations in excess of prescribed limits.
The Company had provided a credit enhancement amount to absorb
credit losses. The trust had no recourse to the co-ownership
interest in receivables retained by the Company, other than in
respect of the credit enhancement amount. This amount was
previously recognized by the Company as a retained interest and
included in accounts receivable. At December 31, 2008, the
fair value of the retained interest was nil% of the receivables
sold or $nil (2007 18.7% or $22.5 million). The
fair value approximated carrying value as a result of the short
collection cycle and negligible credit losses. The Company could
not enter into an agreement with a third party with respect to
its retained interest.
The securitization program was subject to standard reporting and
credit-rating requirements for the Company. The reporting
included provision of a monthly portfolio report that the pool
of eligible receivables satisfies pre-established criteria that
were 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 2008, the Company recognized a loss of $2.7 million
(2007 $5.8 million; 2005
$5.0 million) on the securitization program. The loss is
included in Other charges on the Statement of
Consolidated Income.
The table below summarizes certain cash flows related to the
transfer of receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Proceeds from collections reinvested
|
|
$
|
595.4
|
|
|
$
|
1,478.9
|
|
|
$
|
1,475.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Other
comprehensive income (loss) and accumulated other comprehensive
income
Components of other comprehensive income (loss) and the related
tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
|
|
|
|
|
Before
|
|
|
(expense)
|
|
|
Net of tax
|
|
(in millions of Canadian dollars)
|
|
tax amount
|
|
|
recovery
|
|
|
amount
|
|
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(297.5
|
)
|
|
$
|
40.2
|
|
|
$
|
(257.3
|
)
|
Unrealized foreign exchange gain on translation of the net
investment in U.S. subsidiaries
|
|
|
307.5
|
|
|
|
|
|
|
|
307.5
|
|
Realized gain on cash flow hedges settled in the period
|
|
|
(14.2
|
)
|
|
|
4.2
|
|
|
|
(10.0
|
)
|
Increase in unrealized holding losses on cash flow hedges
|
|
|
(5.1
|
)
|
|
|
1.4
|
|
|
|
(3.7
|
)
|
Realized loss on cash flow hedges settled in prior periods
|
|
|
3.2
|
|
|
|
(1.0
|
)
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
$
|
(6.1
|
)
|
|
$
|
44.8
|
|
|
$
|
38.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the balances of each classification within AOCI are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
|
|
|
|
|
|
Closing
|
|
|
|
Balance,
|
|
|
|
|
|
Balance,
|
|
|
|
January 1,
|
|
|
Period
|
|
|
December 31,
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
change
|
|
|
2008
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss) on U.S. dollar debt designated as a
hedge
of the net investment in U.S. subsidiaries
|
|
$
|
296.6
|
|
|
$
|
(257.3
|
)
|
|
$
|
39.3
|
|
Foreign exchange (loss) gain on net investment in U.S.
subsidiaries
|
|
|
(246.9
|
)
|
|
|
307.5
|
|
|
|
60.6
|
|
Decrease in unrealized effective losses on cash flow hedges
|
|
|
(6.2
|
)
|
|
|
5.2
|
|
|
|
(1.0
|
)
|
Increase in deferred loss on settled hedge instruments
|
|
|
(3.9
|
)
|
|
|
(16.7
|
)
|
|
|
(20.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
39.6
|
|
|
$
|
38.7
|
|
|
$
|
78.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
|
|
|
Opening
|
|
|
|
|
|
|
|
|
|
Opening
|
|
|
for change in
|
|
|
Balance,
|
|
|
|
|
|
Closing
|
|
|
|
Balance,
|
|
|
accounting
|
|
|
January 1,
|
|
|
|
|
|
Balance,
|
|
|
|
January 1,
|
|
|
policy
|
|
|
2007
|
|
|
Period
|
|
|
December 31,
|
|
(in millions of Canadian dollars)
|
|
2007
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
|
change
|
|
|
2007
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain 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 loss on net investment in U.S. subsidiaries
|
|
|
(168.5
|
)
|
|
|
|
|
|
|
(168.5
|
)
|
|
|
(78.4
|
)
|
|
|
(246.9
|
)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the next twelve months, the Company expects
$4.9 million of unrealized holding losses 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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Use) source of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets
|
|
$
|
(69.1
|
)
|
|
$
|
70.6
|
|
|
$
|
(101.0
|
)
|
Materials and supplies
|
|
|
(23.4
|
)
|
|
|
(28.7
|
)
|
|
|
(15.8
|
)
|
Accounts payable and accrued liabilities
|
|
|
(6.2
|
)
|
|
|
(45.5
|
)
|
|
|
(0.4
|
)
|
Income and other taxes payable
|
|
|
(33.5
|
)
|
|
|
53.9
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in non-cash working capital
|
|
$
|
(132.2
|
)
|
|
$
|
50.3
|
|
|
$
|
(101.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Investments
|
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Investment in Dakota, Minnesota & Eastern Railroad
Corporation accounted for on an equity basis
|
|
$
|
|
|
|
$
|
1,493.0
|
|
Other rail investments accounted for on an equity basis
|
|
|
48.4
|
|
|
|
35.6
|
|
Asset backed commercial paper
|
|
|
72.7
|
|
|
|
122.1
|
|
Other investments
|
|
|
30.0
|
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
151.1
|
|
|
$
|
1,668.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAKOTA,
MINNESOTA & EASTERN RAILROAD CORPORATION
(DM&E)
Dakota, Minnesota and Eastern Railroad Corporation
(DM&E) was acquired on October 4, 2007 and
is wholly owned by the Company. The purchase was subject to
review and approval by the U.S. Surface Transportation
Board (STB), during which time the shares of
DM&E were placed in a voting trust. The STB approved the
purchase effective on October 30, 2008, at which time the
Company assumed control of the DM&E.
The Company accounted for its investment in DM&E using the
equity method until the acquisition was approved by the STB and
the Company assumed control. Equity income in DM&E for the
period of October 4, 2007 to December 31, 2007 of
$12.3 million and equity income in 2008 earned prior to STB
approval effective October 30, 2008 of $51.3 million,
are recorded in Equity income in Dakota, Minnesota and
Eastern Railroad Corporation on the Statement of
Consolidated Income. Subsequent to October 30, 2008 the
results of DM&E are consolidated on a
line-by-line
basis.
The DM&E was purchased for $1.5 billion resulting in
goodwill of $180 million (US$147 million) as at
December 31, 2008. Future contingent payments of up to
approximately US$1.05 billion plus certain interest and
inflationary adjustments may become payable up to
December 31, 2025 upon achievement of certain milestones.
Future contingent payments of US$350 million would become
due if construction of the Powder River Basin expansion project
starts 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.
Intangible assets recognized as part of the purchase price
allocation have amortization periods for the various categories
of intangible assets that range from 4 to 100 years. Net of
amortization of $2.0 million recognized since the date of
acquisition, intangible assets total $57.6 million as at
December 31, 2008. Goodwill and intangible assets are
included on the Consolidated Balance Sheet as at
December 31, 2008 in Goodwill and intangible
assets.
The following table reflects the final purchase price
allocation, based on the fair value of DM&Es assets,
owned and leased, and liabilities acquired at acquisition.
|
|
|
|
|
October 4, 2007 (in millions
of Canadian dollars)
|
|
|
|
Current assets
|
|
$
|
92
|
|
Railroad properties
|
|
|
1,932
|
|
Intangible assets
|
|
|
50
|
|
Goodwill
|
|
|
147
|
|
Other assets
|
|
|
2
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,223
|
|
|
|
|
|
|
Current liabilities
|
|
|
98
|
|
Future income taxes
|
|
|
559
|
|
Debt and other liabilities
|
|
|
70
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
727
|
|
|
|
|
|
|
Investment in net assets of DM&E
|
|
$
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
CANADIAN THIRD
PARTY ASSET-BACKED COMMERCIAL PAPER (ABCP)
At December 31, 2008 and 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 DBRS Limited
(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, nor have they traded in an
active market since. There are currently no market quotations
available. As a result, the Company has classified its ABCP as
held for trading 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 on an
agreement 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 retained legal and
financial advisors to oversee the proposed restructuring process.
On March 17, 2008, a court order was obtained which
commenced the process of restructuring the ABCP under the
protection of the Companies Creditors Arrangement Act
(CCAA). A vote of the holders of the ABCP approving
the restructuring occurred on April 25, 2008, and on
June 25, 2008 a court order sanctioning the restructuring
of the ABCP was made pursuant to the CCAA.
On March 20, 2008, the pan-Canadian restructuring committee
issued an Information Statement containing details about the
proposed restructuring. Based on this and other public
information, including reports issued by Ernst & Young
Inc., the Court appointed Monitor, it is estimated that at
December 31, 2008, of the $143.6 million of ABCP in
which the Company has invested:
|
|
o
|
$12.5 million is represented by traditional securitized
assets and the Company will, on restructuring, receive
replacement Traditional Asset (TA) Tracking
long-term floating rate notes with expected repayments over
approximately seven and three-quarter years. As the underlying
assets are primarily comprised of cash and Canadian Lines of
Credit which are subject to an offer to repurchase at par value,
the Company has assumed that these notes will be repaid in full
significantly in advance of maturity;
|
|
o
|
$117.7 million is represented by a combination of leveraged
collateralized debt, synthetic assets and traditional
securitized assets and the Company will, on restructuring,
receive replacement senior
Class A-1
and
Class A-2
and subordinated Class B and Class C long-term
floating rate notes with expected repayments over approximately
eight years. The Company expects to receive replacement notes
with par values as follows:
|
|
|
|
|
o
|
Class A-1:
$59.6 million
|
|
|
o
|
Class A-2:
$46.2 million
|
|
|
o
|
Class B: $8.4 million
|
|
|
o
|
Class C: $3.5 million
|
The replacement senior notes are expected to obtain an A rating
while the replacement subordinated notes are likely to be
unrated; and
|
|
o |
$13.4 million is represented by assets that have an
exposure to U.S. mortgages and sub-prime mortgages and assets
that are held in a satellite trust that will be terminated when
the restructuring is effective. On restructuring, the Company is
likely to receive Ineligible Asset (IA) Tracking
long-term floating rate notes with expected repayments over
approximately five years to eight years. In addition, the
Company will receive other tracking notes of approximately
$1.2 million which are expected to be paid down when the
restructuring is effective, with recoveries of 5.9% of
principal. Certain of these notes may be rated, although at this
time the pan-Canadian restructuring committee has provided no
indication of the rating these notes may receive. DBRS has
indicated that certain IA Tracking notes may be unrated.
|
The valuation technique used by the Company to estimate the fair
value of its investment in ABCP at December 31, 2008,
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 details
included in the Information Statement issued by the pan-Canadian
restructuring committee and subsequent Monitors Reports
and the risks 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
at December 31, 2008 and 2007 are:
|
|
|
2008
|
|
|
Probability weighted average interest rate
|
|
2.2%
|
Weighted average discount rate
|
|
9.1%
|
Expected repayments of long-term floating rate notes
|
|
five to eight years, other than certain tracking notes to be
paid down on restructuring
|
Credit losses
|
|
rated
notes(1):
nil to 25%
|
|
|
unrated
notes(2):
25% to 100%
|
|
|
|
|
|
|
(1) TA
Tracking,
Class A-1
and
Class A-2
senior notes and IA Tracking notes.
(2) Class B
and Class C subordinated notes and IA Tracking notes.
|
|
|
2007
|
|
|
Probability weighted average interest rate
|
|
4.6%
|
Weighted average discount rate
|
|
5.3%
|
Expected repayments of long-term floating rate notes
|
|
five to seven years
|
Credit losses
|
|
nil to 50%
|
|
|
|
|
|
|
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. Discount rates have
been estimated using Government of Canada benchmark rates plus
expected spreads for similarly rated instruments with similar
maturities and structure.
The expected repayments vary by different replacement long-term
floating rate notes as a result of the expected maturity of the
underlying assets.
One of the cash flow scenarios modelled is a liquidation
scenario whereby recovery of the Companys investment is
through the liquidation of the underlying assets of the ABCP
trusts. While the likelihood is remote, there remains a
possibility that a liquidation scenario may occur even with the
successful approval of the restructuring plan.
In addition, assumptions have also been made as to the amount of
restructuring costs that the Company will bear.
The probability weighted discounted cash flows resulted in an
estimated fair value of the Companys ABCP of
$72.7 million at December 31, 2008
(2007 $122.1 million), excluding
$6.4 million of accrued interest, which has been recognized
separately in the balance sheet. This represents a reduction in
the estimated fair value of $49.4 million from
December 31, 2007 as a result of the worsening credit
markets and expected termination of certain tracking notes.
Charges to income of $49.4 million before tax
($34.8 million after tax) were recorded in 2008
(2007 $21.5 million before tax,
$15.0 million after tax). These charges represent 34% of
the original value (2007 15%), bringing the
total
write-down to an aggregate of approximately 49% of the original
value (2007 15%), or 47% of the original value
plus accrued interest. Sensitivity analysis is presented below
for key assumptions:
|
|
|
|
|
|
|
Change in fair value of
|
|
(in millions of Canadian dollars)
|
|
ABCP
|
|
Probability of successful restructuring:
|
|
|
|
|
1 percent increase
|
|
$
|
0.3
|
|
1 percent decrease
|
|
$
|
(0.3
|
)
|
Interest rate
|
|
|
|
|
50 basis point increase
|
|
$
|
3.0
|
|
50 basis point decrease
|
|
$
|
(3.0
|
)
|
Discount rate
|
|
|
|
|
50 basis point increase
|
|
$
|
(2.5
|
)
|
50 basis point decrease
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to the year end, on January 12, 2009, the Court
granted an order for the implementation of the restructuring
plan, for the ABCP, and the restructuring was completed on
January 21, 2009. As a result, CP received the following
new, replacement ABCP notes with a total settlement value of
$142.8 million, as follows:
|
|
o
|
$12.4 million Master Asset Vehicle (MAV) 3 TA
Tracking notes;
|
|
o
|
$118.2 million MAV 2 notes with eligible assets:
|
|
|
|
|
o
|
Class A-1:
$59.3 million
|
|
|
o
|
Class A-2:
$45.9 million
|
|
|
o
|
Class B: $8.3 million
|
|
|
o
|
Class C: $3.5 million
|
|
|
o
|
Class 9: $0.6 million
|
|
|
o
|
Class 14: $0.6 million
|
|
|
o |
$12.2 million MAV 2 IA Tracking notes
|
The difference between the original cost of $143.6 million
and the settlement value of $142.8 million is expected to
be received as interest. The estimated fair value of the new
replacement notes received on January 21, 2009 is
materially unchanged from the December 31, 2008 estimated
fair value. These new replacement notes will be classified as
held for trading financial assets and will be subject to
mark-to-market accounting in future periods. Changes in fair
value will be recorded in income as they arise.
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 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.
OTHER
INVESTMENTS
The Company accounts for its 50% investment in the Detroit River
Tunnel Partnership (DRTP) on a proportionate
consolidation basis. Summarized financial information for the
Companys interest in the DRTP is as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Current assets
|
|
$
|
2.4
|
|
|
$
|
0.8
|
|
Long-term assets
|
|
|
50.8
|
|
|
|
51.0
|
|
Current liabilities
|
|
|
2.4
|
|
|
|
2.5
|
|
Long-term liabilities
|
|
|
0.5
|
|
|
|
0.5
|
|
Revenues
|
|
|
10.3
|
|
|
|
12.9
|
|
Expenses
|
|
|
0.9
|
|
|
|
2.4
|
|
Income before tax
|
|
|
9.4
|
|
|
|
10.5
|
|
Cash provided by operating activities
|
|
|
8.4
|
|
|
|
9.4
|
|
Cash used in investing activities
|
|
|
0.9
|
|
|
|
1.9
|
|
Cash used in financing activities
|
|
|
7.4
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax from CPs investment in the DRTP was
$9.4 million in 2008
(2007 $10.5 million;
2006 $11.1 million). The equity loss from
the Companys investment in the CNCP Niagara-Windsor
Partnership was $0.6 million in 2008
(2007 income of $0.2 million;
2006 loss of $0.6 million). CPs
investment in the Indiana Harbor Belt Railroad Company generated
equity income of $5.6 million in 2008
(2007 $4.1 million;
2006 $3.6 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
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway
|
|
$
|
11,862.9
|
|
|
$
|
3,195.0
|
|
|
$
|
8,667.9
|
|
|
|
|
|
Buildings
|
|
|
366.5
|
|
|
|
126.8
|
|
|
|
239.7
|
|
|
|
|
|
Rolling stock
|
|
|
3,829.4
|
|
|
|
1,480.4
|
|
|
|
2,349.0
|
|
|
|
|
|
Other
|
|
|
2,027.9
|
|
|
|
707.6
|
|
|
|
1,320.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net properties
|
|
$
|
18,086.7
|
|
|
$
|
5,509.8
|
|
|
$
|
12,576.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, software development costs of $609.9
million (2007 $612.5 million) and
accumulated depreciation of $240.0 million
(2007 $239.1 million) were included in the
category Other. Additions during 2008 were
$55.6 million (2007 $48.8 million;
2006 $37.6 million) and depreciation
expense was $44.5 million
(2007 $50.5 million;
2006 $53.2 million).
At December 31, 2008, net properties included
$609.9 million (2007 $503.4 million) of
assets held under capital lease at cost and related accumulated
depreciation of $153.9 million
(2007 $127.5 million).
During 2008, capital assets were acquired under the
Companys capital program at an aggregate cost of
$981.7 million (2007 $908.5 million;
2006 $818.6 million), $79.5 million
of which were acquired by means of capital leases
(2007 $12.1 million;
2006 $21.6 million). Cash payments related
to capital purchases were $892.3 million in 2008
(2007 $893.2 million;
2006 $793.7 million). At December 31,
2008, $12.0 million
(2007 $2.1 million;
2006 $3.5 million) remained in accounts
payable related to the above purchases.
Effective October 30, 2008, the Companys consolidated
property accounts include those of its subsidiary DM&E
(see Note 11).
13. Goodwill
and intangible assets
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Goodwill
|
|
|
Intangible assets
|
|
Balance at beginning of the year
|
|
$
|
|
|
|
$
|
|
|
Additions (Note 11)
|
|
|
147.1
|
|
|
|
50.0
|
|
Amortization
|
|
|
|
|
|
|
(2.0
|
)
|
Foreign exchange impact
|
|
|
32.5
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
179.6
|
|
|
$
|
57.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets includes an option to expand the track
network, favourable leases, customer relationships and interline
contracts acquired in a business acquisition.
14. Other
assets and deferred charges
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Prepaid pension costs
|
|
$
|
1,160.2
|
|
|
$
|
1,104.1
|
|
Other
|
|
|
181.8
|
|
|
|
114.5
|
|
|
|
|
|
|
|
|
|
|
Total other assets and deferred charges
|
|
$
|
1,342.0
|
|
|
$
|
1,218.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Long-term
debt
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Currency in which payable
|
|
2008
|
|
|
2007
|
|
6.250% Notes due 2011
|
|
US$
|
|
$
|
505.7
|
|
|
$
|
398.8
|
|
7.125% Debentures due 2031
|
|
US$
|
|
|
420.8
|
|
|
|
341.4
|
|
9.450% Debentures due 2021
|
|
US$
|
|
|
301.2
|
|
|
|
244.4
|
|
5.750% Debentures due 2033
|
|
US$
|
|
|
292.4
|
|
|
|
235.5
|
|
4.90% Medium Term Notes due 2010
|
|
CDN$
|
|
|
349.9
|
|
|
|
349.8
|
|
5.95% Notes due 2037
|
|
US$
|
|
|
534.3
|
|
|
|
432.1
|
|
5.75% Notes due 2013
|
|
US$
|
|
|
483.3
|
|
|
|
|
|
6.50% Notes due 2018
|
|
US$
|
|
|
362.0
|
|
|
|
|
|
6.25% Medium Term Notes due 2018
|
|
CDN$
|
|
|
370.7
|
|
|
|
|
|
5.41% Senior Secured Notes due 2024
|
|
US$
|
|
|
156.7
|
|
|
|
130.4
|
|
6.91% Secured Equipment Notes due 2009 2024
|
|
CDN$
|
|
|
205.9
|
|
|
|
212.9
|
|
7.49% Equipment Trust Certificates due
2009 2021
|
|
US$
|
|
|
133.3
|
|
|
|
111.2
|
|
Secured Equipment Loan due 2009 2015
|
|
CDN$
|
|
|
139.3
|
|
|
|
144.2
|
|
Other Long Term Loans due 2009 2015
(4.00% 5.65%)
|
|
US$
|
|
|
5.4
|
|
|
|
|
|
Obligations under capital leases due 2009 2022
(5.20% 9.38%)
|
|
US$
|
|
|
406.4
|
|
|
|
263.5
|
|
Obligations under capital leases due 2009 2031
(5.64% 5.65%)
|
|
CDN$
|
|
|
12.8
|
|
|
|
13.5
|
|
Bridge financing due 2009
|
|
US$
|
|
|
|
|
|
|
1,256.3
|
|
Bank loan payable on demand due 2010 (5.883%)
|
|
CDN$
|
|
|
5.4
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,685.5
|
|
|
|
4,139.1
|
|
Perpetual 4% Consolidated Debenture Stock
|
|
US$
|
|
|
37.2
|
|
|
|
30.3
|
|
Perpetual 4% Consolidated Debenture Stock
|
|
GB£
|
|
|
7.1
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,729.8
|
|
|
|
4,177.2
|
|
Less: Long-term debt maturing within one year
|
|
|
|
|
44.0
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,685.8
|
|
|
$
|
4,146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the gross amount of long-term debt
denominated in U.S. dollars was US$3,009.8 million
(2007 US$3,513.8 million).
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 interest rate is floating and is
calculated based on London Interbank Offered Rate
(LIBOR) plus a spread (2008 3.75%;
2007 5.53%). The final interest and principal
payments occurred on December 30, 2008.
During the second quarter of 2008, the Company issued
US$400 million 5.75%
5-year
Notes, US$300 million 6.50%
10-year
Notes and CDN$375 million 6.25%
10-year
Medium Term Notes. Net proceeds from these offerings were
CDN$1,068.7 million. The notes are unsecured, but carry a
negative pledge. The proceeds from these offerings were used to
partially repay the bridge financing. Interest on each of these
notes is paid semi-annually: 5.75% Notes and
6.50% Notes on May 15 and November 15; and 6.25% Medium
Term Notes on June 1 and December 1 of each year.
Interest on each of the following instruments is paid
semi-annually: 5.95% Notes on May 15 and November 15;
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 collateralized
by specific locomotive units with a carrying value at
December 31, 2008, of $179.1 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 collateralized by a first charge on specific
locomotive units with a carrying value at December 31, 2008
of $179.4 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 collateralized
by specific locomotive units with a carrying value at
December 31, 2008, of $143.5 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
2009-2015 is
collateralized by specific locomotive units with a carrying
value of $148.0 million at December 31, 2008. 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 (2008 4.28%;
2007 4.91%). 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, 2008, was $207.2 million
(2007 $195.4 million). The Company has
offset against this loan a financial asset of
$201.8 million (2007 $190.3 million)
with the same financial institution.
The Consolidated Debenture Stock, authorized 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.
Annual maturities and sinking fund requirements, excluding those
pertaining to capital leases, for each of the five years
following 2008 are (in millions): 2009 $28.3;
2010 $375.3; 2011 $517.4;
2012 $37.4; 2013 $528.7.
At December 31, 2008, capital lease obligations included in
long-term debt were as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Year
|
|
|
Capital leases
|
|
Minimum lease payments in:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$
|
45.8
|
|
|
|
|
2010
|
|
|
|
61.9
|
|
|
|
|
2011
|
|
|
|
37.0
|
|
|
|
|
2012
|
|
|
|
38.3
|
|
|
|
|
2013
|
|
|
|
36.3
|
|
|
|
|
Thereafter
|
|
|
|
442.1
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
|
|
|
|
661.4
|
|
Less: Imputed interest
|
|
|
|
|
|
|
(242.2
|
)
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
|
|
|
|
419.2
|
|
Less: Current portion
|
|
|
|
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
|
|
|
|
$
|
403.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of the assets collateralizing the capital
lease obligations was $454.3 million at December 31,
2008.
16. Financial
instruments
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 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 as
determined at the time using discounted cash flow analysis and
observable market based inputs.
Financial
liabilities
Accounts payable and accrued liabilities and short-term
borrowings The carrying amounts approximate
fair value because of the short maturity of these instruments.
Deferred liabilities Contractual amounts
payable over a period greater than one year are valued at an
amount equal to the discounted future cash flow using a discount
rate that reflects market prices to settle liabilities with
similar terms and maturities.
Long-term debt The carrying amount of long-term
debt is at amortized cost based on an initial fair value as
determined at the time using the quoted market prices for the
same or similar debt instruments.
Available for
sale
Investments Certain equity investments, which
do not represent control or significant influence and which are
accounted for on a cost basis, have a carrying value that equals
cost as fair value cannot be reliably established. There are no
quoted prices in an active market for these investments.
Held for
trading
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 similar
instruments. Changes in fair values of such derivatives are
recognized in net income as they arise.
Cash and cash equivalents The carrying amounts
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).
The table below reconciles carrying value positions of the
Companys financial instruments with Consolidated Balance
Sheet categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Carrying Value of
|
|
|
Carrying Value of
|
|
|
|
|
|
Carrying Value of
|
|
|
Carrying Value of
|
|
|
|
|
|
|
Financial Assets /
|
|
|
Other Assets /
|
|
|
Balance Sheet
|
|
|
Financial Assets /
|
|
|
Other Assets /
|
|
|
Balance Sheet
|
|
(in millions of Canadian dollars)
|
|
Liabilities
|
|
|
Liabilities
|
|
|
Amount
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
Amount
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
117.6
|
|
|
$
|
|
|
|
$
|
117.6
|
|
|
$
|
378.1
|
|
|
$
|
|
|
|
$
|
378.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets Accounts
receivable
|
|
|
638.7
|
|
|
|
|
|
|
|
|
|
|
|
483.0
|
|
|
|
|
|
|
|
|
|
Current portion of crude oil swaps
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
Current portion of interest rate swaps
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
649.1
|
|
|
|
64.0
|
|
|
|
713.1
|
|
|
|
495.9
|
|
|
|
46.9
|
|
|
|
542.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments at cost
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Long-term receivables at amortized cost
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
ABCP
|
|
|
72.7
|
|
|
|
|
|
|
|
|
|
|
|
122.1
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
49.3
|
|
|
|
|
|
|
|
|
|
|
|
1,527.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101.8
|
|
|
|
49.3
|
|
|
|
151.1
|
|
|
|
140.9
|
|
|
|
1,527.7
|
|
|
|
1,668.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets and deferred charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of crude oil swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
Long-term portion of currency forward
|
|
|
57.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of interest rate swaps
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
1,271.0
|
|
|
|
|
|
|
|
|
|
|
|
1,210.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.0
|
|
|
|
1,271.0
|
|
|
|
1,342.0
|
|
|
|
8.5
|
|
|
|
1,210.1
|
|
|
|
1,218.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
150.1
|
|
|
$
|
|
|
|
$
|
150.1
|
|
|
$
|
229.7
|
|
|
$
|
|
|
|
$
|
229.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities Accounts payable and
accrued liabilities
|
|
|
899.0
|
|
|
|
|
|
|
|
|
|
|
|
759.1
|
|
|
|
|
|
|
|
|
|
Current portion of foreign exchange contracts on fuel
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
Current portion of diesel swaps
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of treasury rate lock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
Current portion of interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
131.3
|
|
|
|
|
|
|
|
|
|
|
|
190.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903.6
|
|
|
|
131.3
|
|
|
|
1,034.9
|
|
|
|
790.8
|
|
|
|
190.0
|
|
|
|
980.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt maturing within one year
|
|
|
44.0
|
|
|
|
|
|
|
|
44.0
|
|
|
|
31.0
|
|
|
|
|
|
|
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of foreign exchange contracts on fuel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Long-term portion of currency forward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
Long-term portion of interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
Total return swap
|
|
|
67.9
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
Other deferred liabilities
|
|
|
90.8
|
|
|
|
|
|
|
|
|
|
|
|
104.4
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
706.5
|
|
|
|
|
|
|
|
|
|
|
|
593.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158.7
|
|
|
|
706.5
|
|
|
|
865.2
|
|
|
|
120.9
|
|
|
|
593.7
|
|
|
|
714.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
4,685.8
|
|
|
|
|
|
|
|
4,685.8
|
|
|
|
4,146.2
|
|
|
|
|
|
|
|
4,146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $4,729.8 million at
December 31, 2008 (December 31, 2007
$4,177.2 million) and a fair value of approximately
$4,198.9 million at December 31, 2008
(December 31, 2007 $4,302.6 million). The
fair value of publicly traded long-term debt is determined based
on market prices at December 31, 2008 and December 31,
2007, respectively. 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.
Financial risk
management
In the normal course of operations, the Company is exposed to
various market risks such as foreign exchange risk, interest
rate risk, commodity price risk, other price risk, as well as
credit risk and liquidity risk. To manage these risks, the
Company utilizes a Financial Risk Management (FRM) framework.
The FRM goals and strategy are outlined below:
FRM objectives:
|
|
o
|
Maintaining sound financial condition as an ongoing entity;
|
|
o
|
Optimizing earnings per share and cash flow;
|
|
o
|
Financing operations of the group of CP companies at the optimal
cost of capital; and
|
|
o
|
Ensuring liquidity to all Canadian and U.S. operations.
|
In order to satisfy the objectives above, the Company has
adopted the following strategies:
|
|
o
|
Prepare multi-year planning and budget documents at prevailing
market rates to ensure clear, corporate alignment to performance
management and achievement of targets;
|
|
o
|
Measure the extent of operating risk within the business;
|
|
o
|
Identify the magnitude of the impact of market risk factors on
the overall risk of the business and take advantage of natural
risk reductions that arise from these relationships; and
|
|
o
|
Utilize financial instruments, including derivatives, to manage
the remaining residual risk to levels that fall within the risk
tolerance of the Company.
|
The Board of Directors has delegated FRM oversight to the Audit,
Finance and Financial Risk Management Committee (Audit
Committee). The Audit Committee reviews with management
FRM policies and processes to be implemented across the Company,
as well as the effectiveness and efficiency of such policies and
processes.
The policy objective with respect to the utilization of
derivative financial instruments is to selectively mitigate the
impact of fluctuations in foreign exchange (FX)
rates, interest rates, fuel price, and share price. The use of
any derivative instruments is carried out in accordance with
approved trading limits and authorized counterparties as
specified in the policy
and/or
mandate. It is not the Companys intent to use financial
derivatives or commodity instruments for trading or speculative
purposes.
Risk
factors
The following is a discussion of market, credit and liquidity
risks and related mitigation strategies that have been
identified through the FRM framework. This is not an exhaustive
list of all risks, nor will the mitigation strategies eliminate
all risks listed. Risks related to the Companys investment
in ABCP are discussed in more detail in Note 11.
Foreign
exchange risk
This risk refers to the fluctuation of financial commitments,
assets, liabilities, income or cash flows due to changes in FX
rates. The Company conducts business transactions and owns
assets in both Canada and the United States; as a result,
revenues and expenses are incurred in both Canadian dollars and
U.S. dollars. The Companys income is exposed to FX
risk largely in the following ways:
|
|
o
|
Translation of U.S. dollar-denominated revenues and
expenses into Canadian dollars When the Canadian
dollar changes relative to the U.S. dollar, income reported
in Canadian dollars will change. The impact of a strengthening
Canadian dollar on U.S. dollar revenues and expenses will
reduce net income because the Company has more U.S. dollar
revenues than expenses. This impact is excluded from the
sensitivity in the table below; and
|
|
o
|
Translation of U.S. dollar-denominated debt and other
monetary items A strengthening Canadian dollar will
reduce the Companys U.S. dollar denominated debt in
Canadian dollar terms and generate a FX gain on long-term debt,
which is recorded in income. The Company calculates FX on
long-term debt using the difference in FX rates at the beginning
and at the end of each reporting period. Other U.S. dollar
denominated monetary items will also be impacted by changes in
FX rates.
|
FOREIGN EXCHANGE
MANAGEMENT
In terms of net income, excluding FX on long-term debt,
mitigation of U.S. dollar FX exposure is provided primarily
through offsets created by revenues and expenses incurred in the
same currency. Where appropriate, the Company negotiates with
U.S. customers and suppliers to reduce the net exposure.
The Company may from time to time reduce residual exposure by
hedging revenues through FX forward contracts. The Company had
no revenue forward sales of U.S. dollars outstanding at
December 31, 2008.
The FX gains and losses on long-term debt are mainly unrealized
and can only be realized when U.S. dollar denominated
long-term debt matures or is settled. The Company also has
long-term FX exposure on its investment in U.S. affiliates.
A portion of the Companys U.S. dollar denominated
long-term debt has been designated as a hedge of the net
investment in self-sustaining foreign subsidiaries. This
designation has the effect of mitigating volatility on net
income by offsetting long-term FX gains and losses on long-term
debt. In addition, for long-term debt denominated in
U.S. dollars in Canada, the Company may enter into FX
forward contracts to hedge debt that is denominated in
U.S. dollars.
Occasionally the Company will enter into short-term FX forward
contracts as part of its cash management strategy.
The table below depicts the annual impact to net income and
other comprehensive income of long-term debt, including FX
forward contracts on long-term debt, had the exchange rate
increased or decreased by one cent. The impact on other
U.S. dollar denominated monetary items is not considered to
be material.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
Impact to Other
|
|
|
|
Impact to
|
|
|
comprehensive
|
|
(in millions of Canadian dollars)
|
|
Net income
|
|
|
income
|
|
1 cent strengthening in Canadian dollar
|
|
$
|
(2.3
|
)
|
|
$
|
(2.1
|
)
|
1 cent weakening in Canadian dollar
|
|
|
2.3
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: All variables excluding FX are held constant. Net income
would be decreased by $12.0 million and other comprehensive
income would be increased by $12.0 million if the net
investment hedge was not included in the above table.
FOREIGN EXCHANGE
FORWARD CONTRACTS
In June 2007, the Company entered into a FX forward contract to
fix the exchange rate on US$400 million 6.250% Notes
due 2011. This derivative guarantees the amount of Canadian
dollars that the Company will repay when its US$400 million
6.250% Notes mature in October 2011. During the year ended
December 31, 2008, the Company recorded a gain on this
derivative of $73.0 million (year ended December 31,
2007 loss of $15.7 million), in Foreign
exchange (gain) loss on long-term debt. At
December 31, 2008, the unrealized gain on the forward was
$57.3 million (December 31, 2007
unrealized loss of $15.7 million).
Interest rate
risk
This refers to the risk that the fair value or income and future
cash flows of a financial instrument will vary as a result of
changes in market interest rates.
In order to manage funding needs or capital structure goals, the
Company enters into debt or capital lease agreements that are
subject to either fixed market interest rates set at the time of
issue or floating rates determined by on-going market
conditions. Debt subject to variable interest rates exposes the
Company to variability in interest expense, while debt subject
to fixed interest rates exposes the Company to variability in
the fair value of the debt.
The table below depicts the exposure to floating and fixed
interest rates for all financial assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
At floating
|
|
|
At fixed
|
|
(in millions of Canadian dollars)
|
|
interest rates
|
|
|
interest rates
|
|
Financial assets
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
117.6
|
|
|
$
|
|
|
ABCP
|
|
|
72.7
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
150.1
|
|
|
|
|
|
Long-term
debt(1)
|
|
|
384.4
|
|
|
|
4,345.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes impact of interest rate
swaps.
|
INTEREST RATE
MANAGEMENT
To manage interest rate exposure, the Company accesses diverse
sources of financing and manages borrowings in line with a
targeted range of capital structure, debt ratings, liquidity
needs, maturity schedule, and currency and interest rate
profiles. In anticipation of future debt issuance, the Company
may enter into forward rate agreements such as treasury rate
locks, bond forwards or forward starting swaps to substantially
lock in all or a portion of the effective future interest
expense. The Company may also enter into swap agreements to
manage the mix of fixed and floating rate debt.
The table below depicts the annual impact to net income had
interest rates increased or decreased by 50 basis points.
Typically, as rates increase, net income decreases.
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31, 2008
|
|
|
|
Impact to
|
|
(in millions of Canadian dollars)
|
|
Net income
|
|
50 basis point increase in rates
|
|
$
|
(1.2
|
)
|
50 basis point decrease in rates
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
Note: All variables excluding interest rates are held constant.
At December 31, 2008, the Company had outstanding interest
rate swap agreements, classified as fair value hedges, for a
notional amount of US$200 million or CDN$243.6 million
(2007 US$200.0 or CDN$198.3 million). The swap
agreements convert a portion of the Companys
fixed-interest-rate liability into a variable-rate liability for
the 6.250% Notes. During the year ended December 31,
2008, the Company recorded a gain of $3.1 million (year
ended December 31, 2007 loss of
$1.1 million) to Net interest expense. At
December 31, 2008, the unrealized gain, derived from the
fair value of the swaps, was $20.9 million
(December 31, 2007 $5.5 million).
The following table discloses the terms of the swap agreements
at December 31, 2008:
|
|
|
Expiration
|
|
October 15, 2011
|
Notional amount of principal (in millions of Canadian dollars)
|
|
$243.6
|
Fixed receiving rate
|
|
6.250%
|
Variable paying rate year ended December 31,
2008
|
|
4.859%
|
|
|
|
|
|
|
Based on U.S. three-month LIBOR.
During 2007, the Company entered into derivative agreements,
which were designated as cash flow hedges, that established the
benchmark rate on $350.0 million of 30 year debt that
was expected to be issued. These hedges were de-designated on
May 13, 2008 when it was no longer probable that the
Company would issue 30 year debt. On May 23, 2008, the
fair value of these instruments was a loss of $30.9 million
at the time of the issuance of the debt and the settlement of
the derivative instrument. A gain of $1.3 million from the
date of de-designation to the date of settlement of the
derivative instrument was recorded in net income. Prior to
de-designation, losses of $1.1 million due to some
ineffectiveness were recognized and recorded in net income
during 2008. Effective hedge losses of $28.7 million were
deferred in Accumulated other comprehensive income and will be
amortized in earnings over 30 years as an adjustment to
interest expense.
Stock-based
compensation risk
This risk refers to the probability of increased compensation
expense due to the increase in the Companys share price.
The Companys compensation expense is subject to volatility
due to the movement of CPs share price and its impact on
the value of certain management and director stock-based
compensation programs. These programs, as described in the
management proxy circular, include deferred share units,
restricted share units, performance share units and share
appreciation rights. As the share price appreciates, these
instruments are marked to market increasing compensation expense.
STOCK-BASED
COMPENSATION EXPENSE MANAGEMENT
To minimize the volatility to compensation expense created by
changes in share price, the Company entered into Total Return
Swap arrangements (TRS) through April 2010 to reduce
the volatility and total cost to the Company over time of the
four types of stock-based compensation programs noted above.
These are derivative instruments that provide price appreciation
and dividends, in return for a charge by the counterparty. The
swaps minimize volatility to compensation expense by providing a
gain to substantially offset increased compensation expense as
the share price increases and a loss to offset reduced
compensation expense when the share price falls. If stock-based
compensation share units fall out of the money after entering
the program, the loss associated with the swaps would no longer
be offset by any compensation expense reductions.
The table below depicts the annual impact to net income as a
result of the TRS had the share price increased or decreased $1
from the closing share price on December 31, 2008 of $40.98.
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31, 2008
|
|
|
|
Impact to
|
|
(in millions of Canadian dollars)
|
|
Net income
|
|
$1 increase in share price
|
|
$
|
1.8
|
|
$1 decrease in share price
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Note: All variables excluding share price are held constant.
During the year ended December 31, 2008, Compensation and
benefits expense increased by $64.1 million (year ended
December 31, 2007 $2.6 million) due to
unrealized losses for these swaps. At December 31, 2008,
the unrealized loss on these swaps was $67.9 million
(December 31, 2007 $3.8 million).
Commodity
risk
The Company is exposed to commodity risk related to purchases of
diesel fuel and the potential reduction in net income due to
increases in the price of diesel. Because fuel expense
constitutes a large portion of the Companys operating
costs, volatility in diesel fuel prices can have a significant
impact on the Companys income. Items affecting volatility
in diesel prices include, but are not limited to, fluctuations
in world markets for crude oil and distillate fuels, which can
be affected by supply disruptions and geopolitical events.
FUEL PRICE
MANAGEMENT
The impact of variable fuel expense is mitigated substantially
through fuel recovery programs which apportion incremental
changes in fuel prices to shippers through price indices,
tariffs, and by contract, within agreed upon guidelines. While
these programs provide effective and meaningful coverage,
residual exposure remains as the fuel expense risk cannot be
completely recovered from shippers due to timing and volatility
in the market. The Company continually monitors residual
exposure, and where appropriate, may enter into derivative
instruments.
Derivative instruments used by the Company to manage fuel
expense risk may include, but are not limited to, swaps and
options for crude oil and diesel. In addition, the Company may
combine FX forward contracts with fuel derivatives to
effectively hedge the risk associated with FX variability on
fuel purchases and commodity hedges.
The table below depicts the annual impact to net income
(excluding recoveries through pricing mechanisms) and other
comprehensive income (OCI) as a result of the
Companys crude forward contracts had the price of West
Texas Intermediate (WTI) changed by $1 from the
closing price on December 31, 2008 of US$44.60 per barrel:
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31, 2008
|
|
|
|
Impact to Other
|
|
(in millions of Canadian dollars)
|
|
comprehensive income
|
|
$1 increase in price per barrel
|
|
$
|
0.3
|
|
$1 decrease in price per barrel
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Note: All variables excluding WTI per barrel are held constant.
At December 31, 2008, the Company had crude forward
contracts, which are accounted for as cash flow hedges, to
purchase approximately 180,000 barrels during 2009 at
average quarterly prices of US$38.19 per barrel. This represents
approximately 2% - 3% of estimated fuel purchases in 2009. At
December 31, 2008, the unrealized gain on these forward
contracts was $3.2 million (December 31,
2007 $21.4 million).
At December 31, 2008, the Company had diesel forward
contracts, which are accounted for as cash flow hedges, to
purchase approximately 150,000 barrels during the first
quarter of 2009 at an average quarterly price of US$87.15 per
barrel. This represents approximately 9% of estimated fuel
purchases during the first quarter of 2009. At December 31,
2008, the unrealized losses on these forward contracts was
$4.5 million (December 31, 2007 $nil).
At December 31, 2008, the Company had FX forward contracts
(in conjunction with the crude purchases above), which are
accounted for as cash flow hedges, totalling US$6.3 million
for settlement during 2009 at exchange rates ranging from 1.2276
to 1.2306. At December 31, 2008, the unrealized loss on
these forward contracts was $0.1 million (December 31,
2007 $3.5 million).
For the year ended December 31, 2008, the Company realized
gains on commodity swaps of $6.1 million (2007
$19.1 million), consisting of $15.8 million of gains
realized from OCI on swaps designated as hedges, and losses of
$9.7 million on swaps not designated as hedges
(2007 realized gains $1.7 million). The Company
also realized losses of $1.8 million on settled FX forward
contracts (2007 $2.6 million). The net impact
of these settled derivatives was to reduce Fuel
expense by $4.3 million (2007
$16.5 million).
Credit
risk
Credit risk refers to the possibility that a customer or
counterparty will fail to fulfil its obligations under a
contract and as a result create a financial loss for the
Company. The Companys credit risk regarding its investment
in ABCP are discussed in more detail in Note 11.
CREDIT RISK
MANAGEMENT
The railway industry serves predominantly financially
established customers and as a result the Company has
experienced limited financial losses with respect to credit
risk. The credit worthiness of customers is assessed using
credit scores supplied by a third party, and through direct
monitoring of their financial well-being on a continual basis.
As a result of the deteriorated economic environment, the
allowance for doubtful accounts has been increased to
$31.8 million from $18.4 million at December 31,
2007. The Company establishes guidelines for customer
credit limits and should thresholds in these areas be reached,
appropriate precautions are taken to improve collectibility.
Pursuant to their respective terms, accounts receivable, net of
allowances, are aged as follows at December 31, 2008:
|
|
|
|
|
(in millions of Canadian dollars)
|
|
|
|
Up to date
|
|
$
|
394.8
|
|
Under 30 days past due
|
|
|
163.0
|
|
30-60 days
past due
|
|
|
33.7
|
|
61-90 days
past due
|
|
|
17.5
|
|
Over 91 days past due
|
|
|
29.7
|
|
|
|
|
|
|
|
|
$
|
638.7
|
|
|
|
|
|
|
|
|
|
|
|
Counterparties to financial instruments expose the Company to
credit losses in the event of non-performance. Counterparties
for derivative and cash transactions are limited to high credit
quality financial institutions, which are monitored on an
ongoing basis. Counterparty credit assessments are based on the
financial health of the institutions and their credit ratings
from external agencies. With the exception of ABCP, the Company
does not anticipate non-performance that would materially impact
the Companys financial statements.
With the exception of ABCP, the Company believes there are no
significant concentrations of credit risk. The maximum exposure
to credit risk includes the Companys financial asset
values reported in the table which reconciles the carrying value
positions of the Companys financial instruments with
Consolidated Balance Sheet categories, and an indeterminable
maximum under guarantees as discussed in Note 25.
Liquidity
risk
The Company monitors and manages its liquidity risk to ensure
access to sufficient funds to meet operational and investing
requirements.
LIQUIDITY RISK
MANAGEMENT
The Company has long-term debt ratings of Baa3, BBB, and BBB
from Moodys Investors Service, Inc.
(Moodys), Standard and Poors Corporation
(S&P), and DBRS respectively. The S&P and
DBRS ratings have a negative outlook, while the rating of
Moodys has a stable outlook. The Company intends to manage
its capital structure and liquidity at levels that sustain an
investment grade rating.
The Company has a four year revolving credit facility of
$945 million, with an accordion feature to
$1.15 billion, of which $336 million is committed for
letters of credit, $150 million was drawn and
$459 million was available on December 31, 2008. This
facility is arranged with a core group of highly rated
international financial institutions and incorporates pre-agreed
pricing. The revolving credit facility is available on next day
terms.
Surplus cash is invested in a range of short dated money market
instruments meeting or exceeding the parameters of the
Companys investment policy.
The table below reflects the contractual maturity of the
Companys undiscounted cash flows for its financial
liabilities and derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2008
|
|
(in millions of Canadian dollars)
|
|
2009
|
|
|
2010 2012
|
|
|
2013+
|
|
|
Total
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
150.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150.1
|
|
Accounts payable and accrued liabilities
|
|
|
899.0
|
|
|
|
73.6
|
|
|
|
17.2
|
|
|
|
989.8
|
|
Total return swap
|
|
|
|
|
|
|
67.9
|
|
|
|
|
|
|
|
67.9
|
|
Diesel swaps
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
Foreign exchange contracts on fuel
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Long-term
debt(1)
|
|
|
74.1
|
|
|
|
1,067.3
|
|
|
|
3,867.3
|
|
|
|
5,008.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes principal on long-term
debt and undiscounted payments on capital leases.
|
17. Deferred
liabilities
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Provision for restructuring and environmental remediation
(Note 19)
|
|
$
|
251.2
|
|
|
$
|
234.0
|
|
Deferred workers compensation and personal injury accruals
|
|
|
159.8
|
|
|
|
161.4
|
|
Accrued employee benefits
|
|
|
248.0
|
|
|
|
222.0
|
|
Total return swap (Note 16)
|
|
|
67.9
|
|
|
|
3.8
|
|
Deferred revenue on rights-of-way license agreements
|
|
|
51.3
|
|
|
|
48.0
|
|
Deferred income credits
|
|
|
39.0
|
|
|
|
32.0
|
|
Asset retirement obligations (Note 18)
|
|
|
31.9
|
|
|
|
29.1
|
|
Deferred gain on sale leaseback
|
|
|
26.7
|
|
|
|
|
|
Long term payable
|
|
|
20.6
|
|
|
|
20.6
|
|
Stock-based compensation liabilities
|
|
|
23.2
|
|
|
|
71.3
|
|
Financial instruments
|
|
|
|
|
|
|
13.7
|
|
Other
|
|
|
92.2
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011.8
|
|
|
|
907.3
|
|
Less: Amount payable/realizable within one year
|
|
|
146.6
|
|
|
|
192.7
|
|
|
|
|
|
|
|
|
|
|
Total deferred liabilities
|
|
$
|
865.2
|
|
|
$
|
714.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue on rights-of-way license agreements is being
amortized to income on a straight-line basis over the related
lease term.
18. 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%.
Accretion expense is included in Depreciation and
amortization on the Statement of Consolidated Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance, beginning of year
|
|
$
|
29.1
|
|
|
$
|
30.9
|
|
|
$
|
32.9
|
|
Liabilities incurred
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
2.0
|
|
Liabilities settled payments
|
|
|
(2.2
|
)
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
Liabilities settled sale of related asset
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(3.4
|
)
|
Revision to estimated cash flows
|
|
|
(0.6
|
)
|
|
|
(2.2
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
31.9
|
|
|
$
|
29.1
|
|
|
$
|
30.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $48.2 million
at December 31, 2008 (2007 $50.4 million),
which, when present valued, was $26.6 million at
December 31, 2008 (2007 $27.7 million).
The payments are expected to be made in the 2009
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, 2008, was $16.7 million (2007
$16.0 million), which, when present valued, was
$1.6 million at December 31, 2008 (2007
$1.4 million). For purposes of estimating this liability,
the payment related to the retirement of the joint facility is
anticipated to be made in 36 years.
During the year, the Company incurred liabilities in relation to
the acquisition of DM&E. These liabilities relate to an
obligation to dispose of certain removed railroad ties at the
end of their useful lives and to restencil certain railcars
returned to the lessor at the end of the lease term.
19. Restructuring
accrual and environmental remediation
At December 31, 2008, the provision for restructuring and
environmental remediation was $251.2 million
(2007 $234.0 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, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations and severances
|
|
$
|
129.2
|
|
|
$
|
1.9
|
|
|
$
|
(40.3
|
)
|
|
$
|
4.3
|
|
|
$
|
4.5
|
|
|
$
|
99.6
|
|
Other non-labour liabilities for exit plans
|
|
|
0.8
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring liability
|
|
|
130.0
|
|
|
|
1.9
|
|
|
|
(40.7
|
)
|
|
|
4.3
|
|
|
|
4.6
|
|
|
|
100.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental remediation program
|
|
|
104.0
|
|
|
|
47.6
|
|
|
|
(12.6
|
)
|
|
|
|
|
|
|
12.1
|
|
|
|
151.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and environmental remediation liability
|
|
$
|
234.0
|
|
|
$
|
49.5
|
|
|
$
|
(53.3
|
)
|
|
$
|
4.3
|
|
|
$
|
16.7
|
|
|
$
|
251.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amortization
of discount is charged to income as Compensation and
benefits (2008 $2.5 million;
2007 $3.3 million; 2006
$5.1 million), and Other charges
(2008 $1.8 million; 2007
$2.8 million; 2006 $4.8 million), as
applicable.
New accruals and adjustments to previous accruals were a net
increase of $49.5 million in 2008, compared with net
reduction of $5.5 million in 2007 and a net reduction of
$2.9 million in 2006.
In 2008, CP recorded a net increase in the restructuring
liability included in Deferred liabilities of
$49.5 million, mainly due to the consolidation of the fair
value of DM&Es environmental remediation program of
$47.6 and a labour restructuring accrual of $1.9 million.
DM&Es environmental remediation program was accrued
based on costs that are probable and estimable following the
Companys environmental management strategies to remediate
specific sites across the DM&E property. This net increase
was primarily recorded in the
purchase price allocation for the DM&E, with other
adjustments recorded to Compensation and benefits
and Purchased services and other expense.
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.
20. 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, 2008, no Preferred Shares had been issued.
An analysis of Common Share balances is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
(in millions)
|
|
Number
|
|
|
Number
|
|
Share capital, January 1
|
|
|
153.3
|
|
|
|
155.5
|
|
Shares issued under stock option plans
|
|
|
0.5
|
|
|
|
1.0
|
|
Shares repurchased
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
Share capital, December 31
|
|
|
153.8
|
|
|
|
153.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the Share capital balance includes
$2.6 million (2007 $5.1 million) related
to the cancellation of the SARs liability on exercise of tandem
stock options, and $10.0 million (2007
$0.7 million) of stock-based compensation transferred from
Contributed surplus.
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. As of
December 31, 2008, the 2007 NCIB had expired.
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.
21. 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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current service cost (benefits earned by employees in the year)
|
|
$
|
97.6
|
|
|
$
|
97.6
|
|
|
$
|
101.9
|
|
|
$
|
16.1
|
|
|
$
|
16.8
|
|
|
$
|
15.1
|
|
Interest cost on benefit obligation
|
|
|
445.8
|
|
|
|
420.0
|
|
|
|
400.0
|
|
|
|
27.0
|
|
|
|
26.7
|
|
|
|
26.6
|
|
Actual loss (return) on fund assets
|
|
|
1,210.4
|
|
|
|
(275.9
|
)
|
|
|
(927.4
|
)
|
|
|
(0.3
|
)
|
|
|
(1.2
|
)
|
|
|
(0.6
|
)
|
Actuarial (gain) loss
|
|
|
(1,176.9
|
)(1)
|
|
|
(1.4
|
)
|
|
|
35.2
|
|
|
|
(63.4
|
)(1)
|
|
|
(1.1
|
)
|
|
|
(2.9
|
)
|
Plan amendments
|
|
|
42.0
|
|
|
|
22.5
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
Settlement gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.8
|
)(2)
|
|
|
(10.7
|
)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elements of employee future benefit cost, before adjustments to
recognize the long-term nature of employee future benefit costs
|
|
|
618.9
|
|
|
|
262.8
|
|
|
|
(389.0
|
)
|
|
|
(25.4
|
)
|
|
|
30.5
|
|
|
|
37.0
|
|
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
|
|
|
|
12.4
|
|
Difference between expected return and actual return on fund
assets
|
|
|
(1,794.3
|
)
|
|
|
(278.3
|
)
|
|
|
401.2
|
|
|
|
(0.4
|
)
|
|
|
0.6
|
|
|
|
|
|
Difference between actuarial loss/gain recognized and actual
actuarial loss/gain on benefit obligation
|
|
|
1,254.9
|
|
|
|
99.9
|
|
|
|
64.9
|
|
|
|
68.3
|
|
|
|
6.8
|
|
|
|
9.1
|
|
Difference between amortization of prior service costs and
actual plan amendments
|
|
|
(21.5
|
)
|
|
|
(5.8
|
)
|
|
|
14.5
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
41.8
|
|
|
$
|
62.4
|
|
|
$
|
75.4
|
|
|
$
|
54.8
|
|
|
$
|
50.1
|
|
|
$
|
59.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Actuarial
gain for 2008 was largely the result of an increase in the
discount rate.
(2) Settlement
gains 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)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
8,025.8
|
|
|
$
|
7,892.7
|
|
|
$
|
491.7
|
|
|
$
|
509.5
|
|
Current service cost
|
|
|
97.6
|
|
|
|
97.6
|
|
|
|
16.1
|
|
|
|
16.8
|
|
Interest cost
|
|
|
445.8
|
|
|
|
420.0
|
|
|
|
27.0
|
|
|
|
26.7
|
|
Employee contributions
|
|
|
57.1
|
|
|
|
53.4
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Benefits paid
|
|
|
(452.8
|
)
|
|
|
(436.9
|
)
|
|
|
(35.2
|
)
|
|
|
(35.7
|
)
|
Foreign currency changes
|
|
|
29.7
|
|
|
|
(22.1
|
)
|
|
|
8.6
|
|
|
|
(9.3
|
)
|
Actuarial gain
|
|
|
(1,176.9
|
)
|
|
|
(1.4
|
)
|
|
|
(63.4
|
)
|
|
|
(1.1
|
)
|
Plan amendments and other
|
|
|
42.0
|
|
|
|
22.5
|
|
|
|
|
|
|
|
|
|
Release due to settlement
|
|
|
|
|
|
|
|
|
|
|
(7.0
|
)
|
|
|
(15.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
$
|
7,068.3
|
|
|
$
|
8,025.8
|
|
|
$
|
438.0
|
|
|
$
|
491.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fund assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at January 1
|
|
$
|
7,610.5
|
|
|
$
|
7,649.2
|
|
|
$
|
12.5
|
|
|
$
|
11.9
|
|
Actual (loss) return on fund assets
|
|
|
(1,210.4
|
)
|
|
|
275.9
|
|
|
|
0.3
|
|
|
|
1.2
|
|
Employer contributions
|
|
|
95.4
|
|
|
|
86.4
|
|
|
|
34.2
|
|
|
|
34.9
|
|
Employee contributions
|
|
|
57.1
|
|
|
|
53.4
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Benefits paid
|
|
|
(452.8
|
)
|
|
|
(436.9
|
)
|
|
|
(35.2
|
)
|
|
|
(35.7
|
)
|
Foreign currency changes
|
|
|
18.7
|
|
|
|
(17.5
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at December 31
|
|
$
|
6,118.5
|
|
|
$
|
7,610.5
|
|
|
$
|
12.1
|
|
|
$
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status plan deficit
|
|
$
|
(949.8
|
)
|
|
$
|
(415.3
|
)
|
|
$
|
(425.9
|
)
|
|
$
|
(479.2
|
)
|
Unamortized prior service cost
|
|
|
154.2
|
|
|
|
132.6
|
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
Unamortized net transitional (asset) obligation
|
|
|
(64.1
|
)
|
|
|
(80.3
|
)
|
|
|
49.3
|
|
|
|
61.7
|
|
Unamortized experience losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred investment losses due to use of market-related
value to determine net benefit cost
|
|
|
1,204.0
|
|
|
|
(181.2
|
)
|
|
|
|
|
|
|
|
|
Unamortized net actuarial loss
|
|
|
814.8
|
(1)
|
|
|
1,647.3
|
(1)
|
|
|
33.8
|
|
|
|
101.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit asset (liability) on the Consolidated Balance
Sheet
|
|
$
|
1,159.1
|
|
|
$
|
1,103.1
|
|
|
$
|
(343.5
|
)
|
|
$
|
(316.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
aggregate amount by which each plans unamortized net
actuarial loss exceeds the plans 10% corridor (10% of the
greater of the benefit obligation and the market-related asset
value) was equal to $68.7 million at December 31, 2008
(2007 $844.7 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,
2008 10 years; December 31,
2007 11 years). In 2008, $78.0 million was
amortized and included in the net benefit cost (2007
$98.5 million).
The accrued benefit asset (liability) is included on the
Companys Consolidated Balance Sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
Other benefits
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Other assets and deferred charges
|
|
$
|
1,160.2
|
|
|
$
|
1,104.1
|
|
|
$
|
|
|
|
$
|
|
|
Accounts payable and accrued liabilities
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
(39.1
|
)
|
|
|
(38.3
|
)
|
Deferred liabilities
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
|
(304.4
|
)
|
|
|
(278.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit asset (liability) on the Consolidated Balance
Sheet
|
|
$
|
1,159.1
|
|
|
$
|
1,103.1
|
|
|
$
|
(343.5
|
)
|
|
$
|
(316.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The measurement date used to determine the plan assets and the
accrued benefit obligation is December 31 (2007
December 31, except November 30 for U.S. pension
plans). The most recent actuarial valuations for pension funding
purposes were performed as at January 1, 2008. The Company
is entitled to rely on the January 1, 2008 actuarial
valuation of its main Canadian pension plan until a new
valuation as at January 1, 2011 is filed with the
regulator, the regulator directs the Company to file at an
earlier date, or the Company files at an earlier date at its
discretion.
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)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Benefit obligation
|
|
$
|
(7,068.3
|
)
|
|
$
|
(8,025.8
|
)
|
|
$
|
(438.0
|
)
|
|
$
|
(491.7
|
)
|
Fair value of fund assets
|
|
|
6,118.5
|
|
|
|
7,610.5
|
|
|
|
12.1
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(949.8
|
)
|
|
$
|
(415.3
|
)
|
|
$
|
(425.9
|
)
|
|
$
|
(479.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions used were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
(percentages)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Benefit obligation at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
7.00
|
|
|
|
5.60
|
|
|
|
5.40
|
|
Projected future salary increases
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
Health care cost trend rate
|
|
|
9.00
|
(1)
|
|
|
9.50
|
(1)
|
|
|
10.00
|
(1)
|
Benefit cost for year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.60
|
|
|
|
5.40
|
|
|
|
5.25
|
|
Expected rate of return on fund assets
|
|
|
8.00
|
|
|
|
8.00
|
|
|
|
8.00
|
|
Projected future salary increases
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
Health care cost trend rate
|
|
|
9.50
|
(1)
|
|
|
10.00
|
(1)
|
|
|
10.00
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
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
|
)
|
|
$
|
1.2
|
|
Effect on post-retirement benefit obligation
|
|
$
|
(14.3
|
)
|
|
$
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLAN
ASSETS
The Companys pension plan asset allocation, and the
current weighted average policy range for each major asset
class, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of plan
|
|
|
|
|
|
|
assets at December 31
|
|
Asset allocation (percentage)
|
|
Current policy range
|
|
|
2008
|
|
|
2007
|
|
Equity securities
|
|
|
45 51
|
|
|
|
41.6
|
|
|
|
49.4
|
|
Debt securities
|
|
|
37 43
|
|
|
|
45.2
|
|
|
|
41.6
|
|
Real estate and infrastructure
|
|
|
8 16
|
|
|
|
13.2
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The December 31, 2008 percentages for the equity and
debt portfolios have moved outside their respective policy range
due to the deterioration in the equity markets during the fourth
quarter of 2008. The Company will rebalance these portfolios in
accordance with the Companys asset class rebalancing
policy.
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% yielded a long-term nominal target
of 8.0%, net of all fees and expenses. In 2009 the expected real
rate of return will be lowered to 5.25%, to yield an expected
nominal target of 7.75%. 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 returns on key asset classes 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, 2008, fund assets consisted primarily of
listed stocks and bonds, including 63,800 of the Companys
Common Shares (2007 54,440) at a market value of
$2.6 million (2007 $3.5 million) and
6.91% Secured Equipment Notes issued by the Company at a par
value of $3.8 million (2007 $3.9 million)
and at a market value of $4.1 million (2007
$4.3 million).
CASH
FLOWS
In 2008, the Company contributed $90.0 million to its
registered pension plans (2007 $82.9 million),
including $3.1 million to the defined contribution plan
(2007 $3.2 million). In addition, the Company
made payments directly to employees, their beneficiaries or
estates or to third-party benefit administrators of
$41.9 million (2007 $40.7 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 2008, the
net cost of this plan, which generally equals the
employers required contribution, was $3.1 million
(2007 $3.2 million; 2006
$3.0 million).
POST-EMPLOYMENT
RESTRUCTURING BENEFITS
The Company accrues post-employment labour liabilities as part
of its restructuring accruals (see Note 19) that are
discounted at rates of 6.30% and 6.75%. The labour portion of
the Companys accrued restructuring liability was as
follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Change in liability:
|
|
|
|
|
|
|
|
|
Restructuring labour liability at January 1
|
|
$
|
115.4
|
|
|
$
|
160.8
|
|
Plan adjustment
|
|
|
1.9
|
|
|
|
(12.8
|
)
|
Interest cost
|
|
|
6.6
|
|
|
|
8.9
|
|
Benefits paid
|
|
|
(30.3
|
)
|
|
|
(36.8
|
)
|
Foreign currency changes
|
|
|
4.5
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
Restructuring labour liability at December 31
|
|
|
98.1
|
|
|
|
115.4
|
|
|
|
|
|
|
|
|
|
|
Unfunded restructuring labour amount
|
|
|
(98.1
|
)
|
|
|
(115.4
|
)
|
Unamortized net transitional amount
|
|
|
(1.5
|
)
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
Accrued restructuring labour liability on the Consolidated
Balance Sheet
|
|
$
|
(99.6
|
)
|
|
$
|
(129.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22. Stock-based
compensation
At December 31, 2008, 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 recovery of compensation cost in
2008 of $23.7 million (2007 expense of
$33.7 million; 2006 expense of
$52.1 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.
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). In case of retirement, options and SARs granted
after August 2006 will expire the earlier of 5 years after
the retirement date and their normal expiry date.
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, 2008, there were 2,334,861
(2007 3,602,761; 2006 669,864) Common
Shares available for the granting of future options under the
stock option plans, out of the 15,578,642 (2007
15,578,642; 2006 11,500,000) Common Shares currently
authorized.
With the granting of regular options, employees may be
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 2008, the expense for stock options was $7.4 million
(2007 $10.7 million; 2006
$11.1 million) and for SARs was a recovery of
$35.3 million (2007 expense of
$8.7 million; 2006 expense of
$26.1 million).
At December 31, 2008, there were 2,730,622
(2007 2,446,897; 2006 2,293,352) SARs
outstanding.
The following is a summary of the Companys fixed stock
option plan as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
average
|
|
|
|
Number of
|
|
|
average
|
|
|
|
|
options
|
|
|
exercise price
|
|
|
|
options
|
|
|
exercise price
|
|
Outstanding, January 1
|
|
|
|
6,981,108
|
|
|
$
|
43.97
|
|
|
|
|
6,807,644
|
|
|
$
|
38.50
|
|
New options granted
|
|
|
|
1,376,600
|
|
|
|
71.30
|
|
|
|
|
1,304,500
|
|
|
|
62.60
|
|
Exercised
|
|
|
|
(577,865
|
)
|
|
|
34.04
|
|
|
|
|
(972,281
|
)
|
|
|
31.99
|
|
Forfeited
|
|
|
|
(108,700
|
)
|
|
|
51.49
|
|
|
|
|
(158,755
|
)
|
|
|
35.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31
|
|
|
|
7,671,143
|
|
|
$
|
49.52
|
|
|
|
|
6,981,108
|
|
|
$
|
43.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31
|
|
|
|
4,558,043
|
|
|
$
|
38.48
|
|
|
|
|
4,035,008
|
|
|
$
|
34.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the details of the stock options
outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
years to
|
|
|
average
|
|
|
Number of
|
|
|
average
|
|
Range of exercise prices
|
|
options
|
|
|
expiration
|
|
|
exercise price
|
|
|
options
|
|
|
exercise price
|
|
$14.07 $18.06
|
|
|
169,750
|
|
|
|
1
|
|
|
$
|
14.52
|
|
|
|
169,750
|
|
|
$
|
14.52
|
|
$27.62 $40.47
|
|
|
2,345,898
|
|
|
|
4
|
|
|
|
31.28
|
|
|
|
2,335,898
|
|
|
|
31.24
|
|
$42.05 $62.56
|
|
|
3,777,895
|
|
|
|
5
|
|
|
|
54.42
|
|
|
|
2,041,295
|
|
|
|
48.63
|
|
$63.45 $74.89
|
|
|
1,377,600
|
|
|
|
7
|
|
|
|
71.44
|
|
|
|
11,100
|
|
|
|
63.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,671,143
|
|
|
|
5
|
|
|
$
|
49.52
|
|
|
|
4,558,043
|
|
|
$
|
38.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008,
there were 292,982 (2007 284,968; 2006
335,177) DSUs outstanding. In 2008, 48,464 (2007
46,050; 2006 65,781) DSUs were granted. In 2008,
40,450 (2007 96,259; 2006 26,137) DSUs
were redeemed. In 2008, the expense recovery for DSUs was
$5.4 million (2007 expense of
$4.1 million; 2006 expense of
$6.8 million).
The Company issued 276 RSUs in 2008 (2007 16,921).
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. In 2008, the expense was $0.2 million
(2007 $0.2 million; 2006 expense
recovery of $0.6 million).
The Company issued 390 PSUs in 2008 (2007 23,855).
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 for
PSUs is recognized over the vesting period. In 2008, the expense
recovery was $0.7 million (2007
expense of $0.7 million;
2006 $nil).
Under the fair value method, the fair value of options at the
grant date was $14.2 million for options issued in 2008
(2007 $11.3 million; 2006
$12.4 million). The weighted average fair value assumptions
were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected option life (years)
|
|
|
4.39
|
|
|
|
4.00
|
|
|
|
4.50
|
|
Risk-free interest rate
|
|
|
3.53
|
%
|
|
|
3.90
|
%
|
|
|
4.07
|
%
|
Expected stock price volatility
|
|
|
23
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
Expected annual dividends per share
|
|
$
|
0.99
|
|
|
$
|
0.90
|
|
|
$
|
0.75
|
|
Weighted average fair value of options granted during the year
|
|
$
|
15.07
|
|
|
$
|
12.97
|
|
|
$
|
12.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, there were 12,923 participants
(2007 12,181; 2006 11,682) in the plan.
The total number of shares purchased in 2008 on behalf of
participants, including the Company contribution, was 969,921
(2007 745,374; 2006 657,530). In 2008,
the Companys contributions totalled $11.6 million
(2007 $10.4 million; 2006
$10.0 million) and the related expense was
$9.8 million (2007 $8.9 million;
2006 $8.6 million).
23. Capital
disclosures
The Companys objectives when managing its capital are:
|
|
o
|
to maintain a flexible capital structure which optimizes the
cost of capital at acceptable risk while providing an
appropriate return to its shareholders;
|
|
o
|
to manage capital in a manner which balances the interests of
equity and debt holders;
|
|
o
|
to manage capital in a manner that will maintain compliance with
its financial covenants;
|
|
o
|
to manage its long-term financing structure to maintain its
investment grade rating; and
|
|
o
|
to maintain a strong capital base so as to maintain investor,
creditor and market confidence and to sustain future development
of the business.
|
The Company defines its capital as follows:
|
|
o
|
shareholders equity;
|
|
o
|
long-term debt, including the current portion thereof; and
|
|
o
|
short-term borrowing.
|
The Company manages its capital structure and makes adjustments
to it in accordance with the aforementioned objectives, as well
as in light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain
or adjust its capital structure, the Company may adjust the
amount of dividends paid to shareholders, purchase shares for
cancellation pursuant to normal course issuer bids, issue new
shares, issue new debt,
and/or issue
new debt to replace existing debt with different characteristics.
The Company monitors capital using a number of key financial
metrics, including:
|
|
o
|
net-debt to net-debt-plus-equity ratio; and
|
|
o
|
interest-coverage ratio: earnings before interest and taxes
(EBIT) to interest expense.
|
Both of these metrics have no standardized meanings prescribed
by GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies.
The calculations for the aforementioned key financial metrics
are as follows:
Net-debt to
net-debt-plus-equity ratio
Net debt, which is a non-GAAP measure, is the sum of long-term
debt, long-term debt maturing within one year and short-term
borrowing, less cash and cash equivalents. This sum is divided
by total net debt plus total shareholders equity as
presented on our Consolidated Balance Sheet.
Interest-coverage
ratio
EBIT, which is a non-GAAP measure that is calculated, on a
twelve month rolling basis, as revenues less operating expenses,
less other charges, plus equity income in DM&E, divided by
interest expense. The ratio excludes changes in the estimated
fair value of the Companys investment in ABCP as these are
not in the normal course of business.
The following table illustrates the financial metrics and their
corresponding guidelines currently in place:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
(in millions of Canadian dollars)
|
|
Guidelines
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Long-term debt
|
|
|
|
|
|
$
|
4,685.8
|
|
|
$
|
4,146.2
|
|
|
$
|
2,813.5
|
|
Long-term debt maturing within one year
|
|
|
|
|
|
|
44.0
|
|
|
|
31.0
|
|
|
|
191.3
|
|
Short-term borrowing
|
|
|
|
|
|
|
150.1
|
|
|
|
229.7
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
(117.6
|
)
|
|
|
(378.1
|
)
|
|
|
(124.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Debt(1)
|
|
|
|
|
|
$
|
4,762.3
|
|
|
$
|
4,028.8
|
|
|
$
|
2,880.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
$
|
5,993.4
|
|
|
$
|
5,457.9
|
|
|
$
|
4,856.5
|
|
Net debt
|
|
|
|
|
|
|
4,762.3
|
|
|
|
4,028.8
|
|
|
|
2,880.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Debt plus
Equity(1)
|
|
|
|
|
|
$
|
10,755.7
|
|
|
$
|
9,486.7
|
|
|
$
|
7,737.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating
expenses(2)
|
|
|
|
|
|
$
|
1,057.4
|
|
|
$
|
1,164.2
|
|
|
$
|
1,128.6
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
charges(2)
|
|
|
|
|
|
|
(22.7
|
)
|
|
|
(29.6
|
)
|
|
|
(27.8
|
)
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income in
DM&E(2)
|
|
|
|
|
|
|
51.3
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT(1)(2)
|
|
|
|
|
|
$
|
1,086.0
|
|
|
$
|
1,146.9
|
|
|
$
|
1,100.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net debt
|
|
|
|
|
|
$
|
4,762.3
|
|
|
$
|
4,028.8
|
|
|
$
|
2,880.5
|
|
Net debt plus equity
|
|
|
|
|
|
$
|
10,755.7
|
|
|
$
|
9,486.7
|
|
|
$
|
7,737.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-debt to Net-debt-plus-equity
Ratio(1)
|
|
|
No more than 50.0
|
%
|
|
|
44.3
|
%
|
|
|
42.5
|
%
|
|
|
37.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
|
|
|
$
|
1,086.0
|
|
|
$
|
1,146.9
|
|
|
$
|
1,100.8
|
|
Interest expense
|
|
|
|
|
|
$
|
261.1
|
|
|
$
|
204.3
|
|
|
$
|
194.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Coverage
Ratio(1)(2)
|
|
|
No less than 4.0
|
|
|
|
4.2
|
|
|
|
5.6
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
These earnings measures have no standardized meanings prescribed
by GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies.
|
(2) The
balance is calculated on a rolling twelve month basis.
The Companys financial objectives and strategy as
described above have remained substantially unchanged over the
last two fiscal years. The objectives are reviewed on an annual
basis and financial metrics and their guidelines are monitored
on a quarterly basis. The interest-coverage ratio has decreased
during 2008 due to a reduction in year over year earnings and an
increase in interest expense associated with the debt assumed in
the acquisition of the DM&E. The Company believes that both
the interest-coverage and net-debt to net-debt-plus-equity
ratios remain within reasonable limits, in light of the relative
size of the Company and its capital management objectives.
The Company is also subject to a financial covenant of funded
debt to total capitalization in the revolver loan agreement.
Performance to this financial covenant is well within limits.
The Company remains in compliance with all financial covenants.
24. Commitments
and contingencies
In the normal course of its operations, the Company becomes
involved in various legal actions, including claims relating to
injuries and damage to property. The Company maintains
provisions it considers to be adequate for such actions. While
the final outcome with respect to actions outstanding or pending
at December 31, 2008, 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, 2008, the Company had committed to total
future capital expenditures amounting to $775.0 million for
the years 20092028.
At December 31, 2008, the Company had a committed unused
line of credit of $459 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.
Minimum payments under operating leases were estimated at
$1,072.8 million in aggregate, with annual payments in each
of the five years following 2008 of (in millions):
2009 $172.0; 2010 $142.6;
2011 $122.4; 2012 $110.2;
2013 $94.7.
25. Guarantees
In the normal course of operating the railway, the Company
enters into contractual arrangements that involve providing
certain guarantees, which extend over the term of the contracts.
These guarantees include, but are not limited to:
|
|
o
|
residual value guarantees on operating lease commitments of
$194.6 million at December 31, 2008;
|
|
o
|
guarantees to pay other parties in the event of the occurrence
of specified events, including damage to equipment, in relation
to assets used in the operation of the railway through operating
leases, rental agreements, easements, trackage and interline
agreements; and
|
|
o
|
indemnifications of certain tax-related payments incurred by
lessors and lenders.
|
The maximum amount that could be payable under these guarantees,
excluding residual value guarantees, cannot be reasonably
estimated due to the nature of certain of these guarantees. All
or a portion of amounts paid under guarantees to other parties
in the event of the occurrence of specified events could be
recoverable from other parties or through insurance. The Company
has accrued for all guarantees that it expects to pay. At
December 31, 2008, these accruals amounted to
$9.6 million (2007 $7.0 million).
INDEMNIFICATIONS
Pursuant to a trust and custodial services agreement with the
trustee of the Canadian Pacific Railway Company Pension
Trust Fund, the Company has undertaken to indemnify and
save harmless the trustee, to the extent not paid by the fund,
from any and all taxes, claims, liabilities, damages, costs and
expenses arising out of the performance of the trustees
obligations under the agreement, except as a result of
misconduct by the trustee. The indemnity includes liabilities,
costs or expenses relating to any legal reporting or
notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise
with respect to the assets of the pension plans that are not
part of the fund. The indemnity survives the termination or
expiry of the agreement with respect to claims and liabilities
arising prior to the termination or expiry. At December 31,
2008, the Company had not recorded a liability associated with
this indemnification, as it does not expect to make any payments
pertaining to it.
Pursuant to the Companys by-laws, the Company indemnifies
all current and former directors and officers. In addition to
the indemnity provided for in the by-laws, the Company also
indemnifies its directors and officers pursuant to indemnity
agreements. The Company carries 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.
26. 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, 2008, one customer comprised 11.3%
(2007 11.5%, 2006 11.5%) of CPs
total revenues. At December 31, 2008, accounts receivable
from this customer represented 1.5% (2007 6.2%) of
CPs Accounts receivable and other current
assets.
GEOGRAPHIC
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Canada
|
|
|
United States
|
|
|
Total
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,814.6
|
|
|
$
|
1,117.0
|
|
|
$
|
4,931.6
|
|
|
|
Net properties
|
|
$
|
8,124.6
|
|
|
$
|
4,452.3
|
|
|
$
|
12,576.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Canada
|
|
|
United States
|
|
|
countries
|
|
|
entries
|
|
|
Total
|
|
|
|
Revenues
|
|
$
|
3,820.1
|
|
|
$
|
1,117.0
|
|
|
$
|
|
|
|
$
|
(5.5
|
)
|
|
$
|
4,931.6
|
|
|
|
Operating expenses
|
|
|
3,214.2
|
|
|
|
784.7
|
|
|
|
(0.1
|
)
|
|
|
(124.6
|
)
|
|
|
3,874.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating expenses
|
|
|
605.9
|
|
|
|
332.3
|
|
|
|
0.1
|
|
|
|
119.1
|
|
|
|
1,057.4
|
|
|
|
Equity income in DM&E, net interest expense, other charges
and loss in fair value of ABCP
|
|
|
325.6
|
|
|
|
36.0
|
|
|
|
(74.7
|
)
|
|
|
(5.0
|
)
|
|
|
281.9
|
|
|
|
Foreign exchange (gain) loss on long-term debt
|
|
|
285.4
|
|
|
|
|
|
|
|
(269.2
|
)
|
|
|
0.1
|
|
|
|
16.3
|
|
|
|
Income taxes
|
|
|
38.4
|
|
|
|
83.5
|
|
|
|
1.1
|
|
|
|
17.2
|
|
|
|
140.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(43.5
|
)
|
|
$
|
212.8
|
|
|
$
|
342.9
|
|
|
$
|
106.8
|
|
|
$
|
619.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
894.1
|
|
|
$
|
664.5
|
|
|
$
|
15.2
|
|
|
$
|
(450.8
|
)
|
|
$
|
1,123.0
|
|
|
|
Net properties
|
|
|
6,189.1
|
|
|
|
4,391.1
|
|
|
|
|
|
|
|
1,996.7
|
|
|
|
12,576.9
|
|
|
|
Other long-term assets
|
|
|
2,828.7
|
|
|
|
342.6
|
|
|
|
1,564.6
|
|
|
|
(2,966.0
|
)
|
|
|
1,769.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,911.9
|
|
|
$
|
5,398.2
|
|
|
$
|
1,579.8
|
|
|
$
|
(1,420.1
|
)
|
|
$
|
15,469.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,074.7
|
|
|
$
|
260.5
|
|
|
$
|
1.2
|
|
|
$
|
(27.1
|
)
|
|
$
|
1,309.3
|
|
|
|
Long-term liabilities
|
|
|
6,182.3
|
|
|
|
3,203.0
|
|
|
|
0.3
|
|
|
|
(1,218.5
|
)
|
|
|
8,167.1
|
|
|
|
Shareholders equity
|
|
|
2,654.9
|
|
|
|
1,934.7
|
|
|
|
1,578.3
|
|
|
|
(174.5
|
)
|
|
|
5,993.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,911.9
|
|
|
$
|
5,398.2
|
|
|
$
|
1,579.8
|
|
|
$
|
(1,420.1
|
)
|
|
$
|
15,469.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating expenses
|
|
|
766.0
|
|
|
|
302.6
|
|
|
|
(0.1
|
)
|
|
|
95.7
|
|
|
|
1,164.2
|
|
Equity income in DM&E, net interest expense, other charges
and loss in fair value of ABCP
|
|
|
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
|
|
$
|
691.1
|
|
|
$
|
169.3
|
|
|
$
|
(54.3
|
)
|
|
$
|
140.1
|
|
|
$
|
946.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,014.1
|
|
|
$
|
358.0
|
|
|
$
|
20.8
|
|
|
$
|
(225.2
|
)
|
|
$
|
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
|
|
|
$
|
535.9
|
|
|
$
|
(282.7
|
)
|
|
$
|
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
|
|
|
|
535.6
|
|
|
|
659.2
|
|
|
|
5,457.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,706.5
|
|
|
$
|
3,405.3
|
|
|
$
|
535.9
|
|
|
$
|
(282.7
|
)
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating expenses
|
|
|
737.3
|
|
|
|
271.6
|
|
|
|
|
|
|
|
119.7
|
|
|
|
1,128.6
|
|
Net interest expense and other 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27. Subsequent
event
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the U.S., up to
13,900,000 CP common shares at a price of $36.75. The offering
closed on February 11, 2009 at which time CP issued
13,900,000 common shares, including 1,300,000 common shares
issued under the provisions of an over-allotment option
available to the underwriters of the common share offering, for
gross proceeds of approximately $511 million (proceeds net
of fees and issue costs are approximately $490 million).
28. 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.
(a) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING:
The measurement and recognition rules for derivative instruments
and hedging under Canadian GAAP, as described in 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, are largely harmonized with U.S. GAAP,
as stated in Financial Accounting Standards Board
(FASB) Statement No. 133 Accounting for
Derivative Instruments and Hedging Activities (FASB
133). However, under Canadian GAAP, only the ineffective
portion of a net investment hedge that represents an over hedge
is recognized in income, whereas under U.S. GAAP, any
ineffective portion is recognized in income immediately. As
well, 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.
(b) PENSIONS AND POST-RETIREMENT BENEFITS:
On December 31, 2006, CP adopted FASB Statement
No. 158 Employers Accounting for Defined
Benefit Pension and other Postretirement Plans (FASB
158). Under U.S. GAAP, the Company is required to
recognize the over or under funded status of defined benefit
pension and other post-retirement plans on the balance sheet.
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 obligation for pension plans and
the accumulated benefit obligation for other post-retirement
plans. In addition, any previously unrecognized actuarial gains
and losses and prior service costs and credits that arise during
the period will be recognized as a component of other
comprehensive income (OCI), net of tax. No similar
requirement currently exists under Canadian GAAP.
FASB 158 requires 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 had a
November 30 measurement date. Under the provisions of FASB 158
the U.S. pension plan assets were measured on
November 30, 2007, and then re-measured on
December 31, 2008. The impact of adopting this change in
the plan measurement date at the balance sheet date for the
Companys U.S. plans was $0.4 million and was
recorded as an adjustment to U.S. GAAP retained earnings,
whereas for Canadian GAAP this amount was expensed.
(c) 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.
(d) 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.
(e) STOCK-BASED COMPENSATION:
U.S. GAAP requires the use of an option-pricing model to
fair value, at the grant date, share-based awards issued to
employees, including stock options, stock appreciation rights
(SARs) and deferred share units (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.
U.S. GAAP also requires that CP accounts for forfeitures on
an estimated basis. Under Canadian GAAP, CP has elected to
account for forfeitures on an actual basis as they occur.
In addition, on adoption of FASB Statement No. 123 Revised
2004 Share Based Payment (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.
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 Canadian Pacific Limited (CPL)
corporate reorganization in 2001, CPL underwent an equity
restructuring, which resulted in replacement options in CP 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 also account for stock
options at their fair value under FASB Statement No. 123
Accounting for Stock-based Compensation (FASB
123).
(f) 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.
(g) 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.
(h) 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 income
depending on whether specific hedge criteria are met.
FASB Statement No. 130 Reporting Comprehensive
Income requires disclosure of the change in equity from
transactions and other events related to non-owner sources
during the period. In 2008 and the comparative period presented,
the differences in other comprehensive income under
U.S. GAAP arose from foreign currency translation related
to long-term debt designated as a hedge of the net investment in
foreign subsidiaries and unfunded pension liability.
(i) JOINT VENTURE:
The CICA Section 3055 Interest in Joint
Ventures requires the proportionate consolidation method
to be applied to the recognition of interests in joint ventures
in consolidated financial statements. The Company has a
joint-venture interest in the Detroit River Tunnel Partnership
(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 Statement of
Consolidated Income and Consolidated Balance Sheet. Equity
income from DRTP in 2008 was $9.4 million (2007
$10.5 million; 2006 $11.1 million).
(j) 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.
(k) 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 expensed as incurred.
(l) CAPITAL LEASES:
Under FASB Statement No. 13 Accounting for
Leases, 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. These
relate to equipment leases, previously recorded as operating
leases under Canadian and U.S. GAAP, which were renewed
within the last 25 percent of the equipments useful
life. Under U.S. GAAP, these continue to be operating
leases.
(m) STATEMENT OF CASH FLOWS:
There are no material differences in the Statement of
Consolidated Cash Flows under U.S. GAAP.
(n) TRANSACTION COSTS ON LONG-TERM DEBT:
U.S. GAAP recognizes the transaction costs related to the
issuance of long-term debt as deferred charges whereas under
Canadian GAAP, these costs are added to the initial fair value
of the long-term debt.
FUTURE ACCOUNTING
CHANGES
FASB Statement
No. 141 (revised 2007) 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.
FSP 157-2
Nonfinancial Assets and Nonfinancial Liabilities
In February 2008, FASB issued FASB Staff Position on Statement
No. 157 Effective Date of FASB Statement
No. 157
(FSP 157-2).
FSP 157-2
delays the effective date of FASB Statement No. 157 for
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed on a recurring basis, to fiscal
years beginning after November 15, 2008. Our significant
nonfinancial assets and liabilities that could be impacted by
this deferral include assets and liabilities initially measured
at fair value in a business combination and goodwill tested
annually for impairment. The adoption of
FSP 157-2
is not expected to have a significant impact on the financial
position and the results of operations of the Company.
FASB Statement
No. 160 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 is unlikely to impact the
financial statements of the Company at that time.
FASB Statement
No. 161 Disclosures about Derivative
Instruments and Hedging Activities
In March 2008, FASB issued FASB Statement No. 161
Disclosures about Derivative Instruments and Hedging
Activities. The standard requires enhanced disclosures
about an entitys derivative and hedging activities.
Entities are required to provide enhanced disclosures about
(i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items
are accounted for, and (iii) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. The standard increases
convergence with International Financial Reporting Standards, as
it relates to disclosures of derivative instruments. The Company
is currently reviewing the guidance, which is effective for
fiscal years beginning after November 15, 2008, however, as
this guidance relates to disclosures it is not expected to
impact its consolidated financial statements.
FASB Statement
No. 162 The Hierarchy of Generally Accepted
Accounting Principles
In May 2008, FASB issued FASB Statement No. 162 The
Hierarchy of Generally Accepted Accounting Principles
(FASB 162). This standard identifies the sources of
accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity
with U.S. GAAP. FASB does not expect that this standard
will result in a change in current practice. FASB 162 will
become effective 60 days following the SECs approval
of the Public Company Accounting Oversight Board amendments to
AU Section 411 The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
The Company is currently reviewing the guidance to determine the
potential impact, if any, on its consolidated financial
statements.
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net income Canadian GAAP
|
|
$
|
619.0
|
|
|
$
|
946.2
|
|
|
$
|
796.3
|
|
Increased (decreased) by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension costs
|
|
|
3.2
|
|
|
|
5.8
|
|
|
|
5.1
|
|
Post-retirement benefits costs
|
|
|
9.6
|
|
|
|
9.4
|
|
|
|
9.1
|
|
Post-employment benefits costs
|
|
|
11.0
|
|
|
|
7.2
|
|
|
|
6.7
|
|
Termination and severance benefits
|
|
|
(8.7
|
)
|
|
|
(8.8
|
)
|
|
|
(8.2
|
)
|
Internal use software additions
|
|
|
(18.1
|
)
|
|
|
(12.0
|
)
|
|
|
(9.2
|
)
|
Internal use software depreciation
|
|
|
9.2
|
|
|
|
8.0
|
|
|
|
7.1
|
|
Stock-based compensation
|
|
|
6.9
|
|
|
|
(1.7
|
)
|
|
|
(3.0
|
)
|
Loss on ineffective portion of hedges
|
|
|
10.5
|
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
Capitalized interest additions
|
|
|
21.0
|
|
|
|
14.0
|
|
|
|
4.1
|
|
Capitalized interest depreciation
|
|
|
(5.3
|
)
|
|
|
(4.5
|
)
|
|
|
(3.9
|
)
|
Start-up
costs
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
|
(10.8
|
)
|
Fair value of financial instruments
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
Capital lease equipment rents
|
|
|
(1.3
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
Capital lease depreciation
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
|
|
Capital lease interest
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
|
|
Future/deferred income tax expense related to above differences
|
|
|
(17.9
|
)
|
|
|
(40.7
|
)
|
|
|
(19.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative
catch-up
adjustment
|
|
|
639.7
|
|
|
|
921.7
|
|
|
|
771.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
catch-up
adjustment on adoption of FASB 123R, net of tax
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income U.S. GAAP
|
|
$
|
639.7
|
|
|
$
|
921.7
|
|
|
$
|
769.1
|
|
Other comprehensive income (loss) Canadian
GAAP
|
|
|
38.7
|
|
|
|
(40.8
|
)
|
|
|
(1.1
|
)
|
Increased (decreased) by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange (loss) gain on designated net
investment hedge
|
|
|
(10.5
|
)
|
|
|
0.4
|
|
|
|
0.6
|
|
Unfunded pension and post-retirement liability adjustment
|
|
|
(533.4
|
)
|
|
|
(186.6
|
)
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
783.3
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
16.6
|
|
Gain on derivative instruments realized in net income
|
|
|
|
|
|
|
|
|
|
|
(42.5
|
)
|
Future/deferred income tax recovery (expense) related to other
comprehensive loss
|
|
|
145.4
|
|
|
|
35.7
|
|
|
|
(210.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income U.S. GAAP
|
|
$
|
(359.8
|
)
|
|
$
|
(191.3
|
)
|
|
$
|
546.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share before cumulative
catch-up
adjustment on adoption of FASB 123R, net of tax
|
|
$
|
4.16
|
|
|
$
|
5.98
|
|
|
$
|
4.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share after cumulative
catch-up
adjustment on adoption of FASB 123R, net of tax
|
|
$
|
4.16
|
|
|
$
|
5.98
|
|
|
$
|
4.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative catch-up
adjustment on adoption of FASB 123R, net of tax
|
|
$
|
4.11
|
|
|
$
|
5.92
|
|
|
$
|
4.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share after cumulative
catch-up
adjustment on adoption of FASB 123R, net of tax
|
|
$
|
4.11
|
|
|
$
|
5.92
|
|
|
$
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of comprehensive income resulting from Canadian and
U.S. GAAP differences is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian GAAP
|
|
$
|
657.7
|
|
|
$
|
905.4
|
|
|
$
|
795.2
|
|
U.S. GAAP
|
|
$
|
279.9
|
|
|
$
|
730.4
|
|
|
$
|
1,315.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of Revenues less operating expenses resulting from
Canadian and U.S. GAAP differences is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues less operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian GAAP
|
|
$
|
1,057.4
|
|
|
$
|
1,164.2
|
|
|
$
|
1,128.6
|
|
U.S. GAAP
|
|
$
|
1,053.8
|
|
|
$
|
1,166.5
|
|
|
$
|
1,122.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between U.S. and Canadian
GAAP Revenues less operating expenses 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)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
Accounts receivable and other current assets
Investment in joint ventures
|
|
|
|
|
|
|
1.4
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
|
51.2
|
|
|
|
48.9
|
|
Start-up
costs
|
|
|
(12.4
|
)
|
|
|
(11.6
|
)
|
Properties
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
|
175.7
|
|
|
|
160.0
|
|
Internal use software
|
|
|
(64.1
|
)
|
|
|
(55.2
|
)
|
Investment in joint ventures
|
|
|
(36.0
|
)
|
|
|
(36.1
|
)
|
Capital leases
|
|
|
(9.6
|
)
|
|
|
(10.4
|
)
|
Other assets and deferred charges
|
|
|
|
|
|
|
|
|
Pension
|
|
|
(1,160.2
|
)
|
|
|
(1,103.1
|
)
|
Long-term receivable (FIN 39)
|
|
|
201.8
|
|
|
|
190.3
|
|
Transaction costs on long-term debt
|
|
|
43.9
|
|
|
|
36.0
|
|
Investment in joint ventures
|
|
|
(15.7
|
)
|
|
|
(14.8
|
)
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
(825.5
|
)
|
|
$
|
(794.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET
(CONTINUED)
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
$
|
(0.3
|
)
|
|
$
|
(0.4
|
)
|
Income and other taxes payable
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
|
|
|
|
|
(0.1
|
)
|
Long-term debt maturing within one year
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
(0.8
|
)
|
|
|
(0.7
|
)
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Deferred liabilities
|
|
|
|
|
|
|
|
|
Termination and severance benefits
|
|
|
(1.5
|
)
|
|
|
(10.2
|
)
|
Post-employment benefit liability
|
|
|
|
|
|
|
5.2
|
|
Under funded status of defined benefit pension and other
post-retirement plans
|
|
|
1,031.1
|
|
|
|
573.0
|
|
Investment in joint ventures
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
Stock-based compensation
|
|
|
(2.5
|
)
|
|
|
0.2
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Bank loan (FIN 39)
|
|
|
201.8
|
|
|
|
190.3
|
|
Capital leases
|
|
|
(8.9
|
)
|
|
|
(9.7
|
)
|
Transaction costs on long-term debt
|
|
|
43.9
|
|
|
|
36.0
|
|
Future/deferred income tax liability
|
|
|
(568.7
|
)
|
|
|
(441.2
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
693.6
|
|
|
|
341.9
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
21.5
|
|
|
|
20.9
|
|
Contributed surplus
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
0.4
|
|
|
|
5.2
|
|
Retained income
|
|
|
(136.5
|
)
|
|
|
(156.8
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
Funding status of defined benefit pension and other
post-retirement plans
|
|
|
(1,399.6
|
)
|
|
|
(1,010.2
|
)
|
Unrealized foreign exchange (gain) loss on designated net
investment hedge
|
|
|
(4.9
|
)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
(825.5
|
)
|
|
$
|
(794.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIVE-YEAR
SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004(1)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
$
|
970.0
|
|
|
$
|
938.9
|
|
|
$
|
904.6
|
|
|
$
|
754.5
|
|
|
$
|
668.2
|
|
Coal
|
|
|
607.5
|
|
|
|
573.6
|
|
|
|
592.0
|
|
|
|
728.8
|
|
|
|
530.3
|
|
Sulphur and fertilizers
|
|
|
508.6
|
|
|
|
502.0
|
|
|
|
439.3
|
|
|
|
447.1
|
|
|
|
460.0
|
|
Forest products
|
|
|
239.3
|
|
|
|
275.8
|
|
|
|
316.4
|
|
|
|
333.9
|
|
|
|
322.0
|
|
Industrial and consumer
products(2)
|
|
|
766.1
|
|
|
|
627.9
|
|
|
|
603.8
|
|
|
|
542.9
|
|
|
|
481.4
|
|
Intermodal(2)
|
|
|
1,399.8
|
|
|
|
1,318.0
|
|
|
|
1,256.8
|
|
|
|
1,161.1
|
|
|
|
1,034.7
|
|
Automotive
|
|
|
323.5
|
|
|
|
319.0
|
|
|
|
314.4
|
|
|
|
298.0
|
|
|
|
288.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,814.8
|
|
|
|
4,555.2
|
|
|
|
4,427.3
|
|
|
|
4,266.3
|
|
|
|
3,785.1
|
|
Other(2)(3)(5)
|
|
|
116.8
|
|
|
|
152.4
|
|
|
|
155.9
|
|
|
|
125.3
|
|
|
|
117.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues(3)(5)
|
|
|
4,931.6
|
|
|
|
4,707.6
|
|
|
|
4,583.2
|
|
|
|
4,391.6
|
|
|
|
3,902.9
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,305.5
|
|
|
|
1,284.2
|
|
|
|
1,327.6
|
|
|
|
1,322.1
|
|
|
|
1,261.5
|
|
Fuel
|
|
|
1,005.8
|
|
|
|
746.8
|
|
|
|
650.5
|
|
|
|
588.0
|
|
|
|
440.0
|
|
Materials
|
|
|
217.2
|
|
|
|
215.5
|
|
|
|
212.9
|
|
|
|
203.3
|
|
|
|
178.5
|
|
Equipment rents
|
|
|
182.2
|
|
|
|
207.5
|
|
|
|
181.2
|
|
|
|
210.0
|
|
|
|
218.5
|
|
Depreciation
|
|
|
491.3
|
|
|
|
472.0
|
|
|
|
464.1
|
|
|
|
445.1
|
|
|
|
407.1
|
|
Purchased services and other
|
|
|
672.2
|
|
|
|
617.4
|
|
|
|
618.3
|
|
|
|
621.6
|
|
|
|
610.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses, before other specified
items(3)(5)
|
|
|
3,874.2
|
|
|
|
3,543.4
|
|
|
|
3,454.6
|
|
|
|
3,390.1
|
|
|
|
3,116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income, before other specified
items(3)(5)
|
|
|
1,057.4
|
|
|
|
1,164.2
|
|
|
|
1,128.6
|
|
|
|
1,001.5
|
|
|
|
786.6
|
|
Equity income (net of tax) in Dakota, Minnesota &
Eastern Railroad Corporation (DM&E)
|
|
|
51.3
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other charges, before foreign exchange gains and losses on
long-term debt and other specified
items(3)(4)(5)
|
|
|
22.7
|
|
|
|
29.6
|
|
|
|
27.8
|
|
|
|
18.1
|
|
|
|
36.1
|
|
Net interest expense
|
|
|
261.1
|
|
|
|
204.3
|
|
|
|
194.5
|
|
|
|
204.2
|
|
|
|
218.6
|
|
Income tax expense, before foreign exchange gains and losses on
long-term debt and income tax on other specified
items(3)(4)(5)
|
|
|
193.4
|
|
|
|
269.8
|
|
|
|
278.8
|
|
|
|
250.8
|
|
|
|
172.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, before foreign exchange gains and losses on long-term
debt and other specified
items(3)(4)(5)
|
|
|
631.5
|
|
|
|
672.8
|
|
|
|
627.5
|
|
|
|
528.4
|
|
|
|
359.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss) on long-term debt (net of income
tax)(4)
|
|
|
22.3
|
|
|
|
125.5
|
|
|
|
(7.2
|
)
|
|
|
22.3
|
|
|
|
94.4
|
|
Other specified items (net of income
tax)(3)
|
|
|
(34.8
|
)
|
|
|
147.9
|
|
|
|
176.0
|
|
|
|
(7.7
|
)
|
|
|
(42.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
619.0
|
|
|
$
|
946.2
|
|
|
$
|
796.3
|
|
|
$
|
543.0
|
|
|
$
|
411.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) 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.
(3) Before
other specified items as follows: For 2008, a $49.4 million
loss in fair value of Canadian third party asset-backed
commercial paper ($34.8 million after tax); 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 loss in 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.
(4) Before
foreign exchange gain (loss) on long-term debt as follows: For
2008, a $16.3 million ($22.3 million gain after tax)
foreign exchange loss on long-term debt; 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.
(5) 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Toronto Stock
Exchange (Canadian
dollars)
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
|
74.74
|
|
|
|
57.30
|
|
|
|
66.33
|
|
|
|
60.06
|
|
Second Quarter
|
|
|
75.00
|
|
|
|
63.98
|
|
|
|
78.48
|
|
|
|
63.75
|
|
Third Quarter
|
|
|
68.75
|
|
|
|
53.80
|
|
|
|
91.00
|
|
|
|
67.37
|
|
Fourth Quarter
|
|
|
57.86
|
|
|
|
34.24
|
|
|
|
73.00
|
|
|
|
59.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
75.00
|
|
|
|
34.24
|
|
|
|
91.00
|
|
|
|
59.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Stock Exchange (U.S. dollars)
|
|
|
High
|
|
|
|
Low
|
|
|
|
High
|
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
76.18
|
|
|
|
55.39
|
|
|
|
56.61
|
|
|
|
51.23
|
|
Second Quarter
|
|
|
76.14
|
|
|
|
62.84
|
|
|
|
73.95
|
|
|
|
55.36
|
|
Third Quarter
|
|
|
68.33
|
|
|
|
51.75
|
|
|
|
87.23
|
|
|
|
62.66
|
|
Fourth Quarter
|
|
|
53.70
|
|
|
|
26.64
|
|
|
|
74.38
|
|
|
|
60.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
76.18
|
|
|
|
26.64
|
|
|
|
87.23
|
|
|
|
51.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of registered shareholders at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,721
|
|
Market prices at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toronto Stock Exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDN$
|
40.98
|
|
New York Stock Exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
33.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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/cp ; 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 2009 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 National Instrument
52-109.
2009 ANNUAL AND
SPECIAL MEETING
The Annual and Special Meeting of Shareholders will be held on
Friday, May 22, 2009, at The Fairmont Waterfront Hotel
located at 900 Canada Place Way, Vancouver, British Columbia, at
9:00 a.m. Pacific 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
DIRECTORS &
COMMITTEES
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)(5)
Former President and Chief
Executive Officer
Corby Distilleries Limited
Toronto, Ontario
Richard C.
Kelly(1)(3)
Chairman, President and Chief
Executive Officer
Xcel Energy, Inc.
Minneapolis, Minnesota
The Honourable John P.
Manley(1)(2)(5)*
Senior Counsel
McCarthy Tétrault LLP
Ottawa, Ontario
Linda J.
Morgan(3)(4)
Partner
Covington & Burling LLP
Bethesda, Maryland
Madeleine
Paquin(3)(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, C.M.,
O.M.(4)(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
Kathryn B.
McQuade(1)
Executive Vice-President and Chief
Financial Officer
Mesquite, Nevada
Jane A.
OHagan(1)
Senior Vice-President, Strategy
and Yield
Calgary, Alberta
Marcella M.
Szel(1)
Senior Vice-President, Sales and
Marketing
Calgary, Alberta
Brock M.
Winter(1)
Senior Vice-President, Operations
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
Tracy A. Robinson
Vice-President and Treasurer
Calgary, Alberta
R. Andrew
Shields(1)
Vice-President, Human Resources
and Industrial
Relations Calgary, Alberta
Karen Fleming
Corporate Secretary
Calgary, Alberta
(1) Executive
Committee of Canadian Pacific Railway Company
(BOWNE LOGO)
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