e40vf
UNITED STATES
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 |
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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, 2010
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
(Province or other jurisdiction of
incorporation or organization)
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4011
(Primary Standard Industrial
Classification Code Number)
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98-0355078
(Canadian Pacific Railway Limited)
98-0001377
(Canadian Pacific Railway Company)
(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)
CT 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 |
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: Debt Securities
For annual reports, indicate by check mark the information filed with this form:
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þ Annual information form
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þ 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, 2010, 169,175,058 Common Shares of Canadian Pacific Railway Limited (CPRL) were
issued and outstanding. At December 31, 2010, 347,170,009 Ordinary Shares of Canadian Pacific
Railway Company (CPRC) were issued and outstanding. All of the ordinary shares of CPRC are held
by CPRL.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 (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.
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (s.232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the Registrant was required to submit and post such files).
2
PRIOR FILINGS MODIFIED AND SUPERSEDED
The Registrants Annual Report on Form 40-F for the year ended December 31, 2010, at the time
of filing with the Securities and Exchange Commission (the 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. 333-159943 (Canadian Pacific
Railway Company), and the Registration Statement on Form F-10 No. 333-159945 (Canadian Pacific
Railway Limited).
ANNUAL INFORMATION FORM, CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS
AND MANAGEMENTS DISCUSSION AND ANALYSIS
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A. |
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Annual Information Form |
For the Annual Information Form of the Registrant for the year ended December 31, 2010 see
pages 1 through 42 of the Registrants 2010 Annual Information Form incorporated by reference and
included herein.
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B. |
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Audited Annual Financial Statements |
For consolidated audited financial statements (U.S. GAAP), including the report of the
auditors with respect thereto, see pages 49 through 108 of the Registrants 2010 Annual Report
incorporated by reference and included herein.
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Managements Discussion and Analysis |
For managements discussion and analysis, see pages 3 through 48 of the Registrants 2010
Annual Report incorporated by reference and included herein.
For the purposes of this Annual Report on Form 40-F, only pages 3 through 108 of the
Registrants 2010 Annual Report referred to above shall be deemed filed, and the balance of such
2010 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, 2010, 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) and 15d-15(e) under the Exchange Act). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and
procedures were effective as of December 31, 2010, to ensure that information required to be
disclosed by the Registrants in reports that they file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in the Commission
rules and forms and (ii) accumulated and communicated to the Registrants management, including
their Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
3
It should be noted that while the Registrants Chief Executive Officer and Chief Financial
Officer believe that the Registrants disclosure controls and procedures provide a reasonable level
of assurance that they are effective, they do not expect that the Registrants disclosure controls
and procedures or internal control over financial reporting will prevent all errors and fraud. A
control system, no matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
For managements report on internal control over financial reporting, see page 50 of the
Registrants 2010 Annual Report, incorporated by reference and included herein.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
The effectiveness of the Registrants internal control over financial reporting as of December
31, 2010 has been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their
report on pages 51 through 52 of the Registrants 2010 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 have materially affected, or are
reasonably likely to materially affect, the Registrants internal control over financial reporting.
NOTICES PURSUANT TO REGULATION BTR
None.
CODE OF ETHICS
A. The Registrants Code of Business Ethics specifically addresses, among other things, conflicts
of interest, protection and proper use of corporate assets and opportunities, confidentiality of
corporate information, fair dealing with third parties, compliance with laws, rules and regulations
and reporting of illegal or unethical behavior. The Code applies to all directors, officers and
employees, both unionized and non-unionized, of the Registrants and their subsidiaries in Canada,
the U.S. and elsewhere, and forms part of the terms and conditions of employment of all such
individuals. All Directors have signed acknowledgements that they have read, understood and agree
to comply with the Code. The Registrant conducts mandatory on-line ethics training for officers
and non-union employees. As part of the on-line ethics training, officers and non-union employees
are 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.
B. In addition, 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 Senior Vice-President
Finance and Comptroller. It is available on the Registrants web site at www.cpr.ca and in print
to any shareholder who requests it. All amendments to the code, and all waivers of the code with
respect to any of the officers covered by it, will be posted on the Registrants web site and
provided in print to any shareholder who requests them.
4
CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES
The Registrants amended their Corporate Governance Principles and Guidelines in December 2010
to include shareholders engagement, shareholder advisory votes on executive compensation, director
attendance at the Registrants annual meeting and performance reviews for the Chairman of the
Board. These principles and guidelines pertain to such matters as, but are not limited to:
director qualification standards and responsibilities; election of directors; discretionary term
limits for service as Board or Board Committee Chairs; access by directors to management and
independent advisors; director compensation; director retirement age; director orientation and
continuing education; management succession; and annual performance evaluations of the board,
including its committees and individual directors, and of the Chief Executive Officer. The
Corporate Governance Principles and Guidelines are available on the Registrants web site at
www.cpr.ca and in print to any shareholder who requests them.
COMMITTEE TERMS OF REFERENCE
The terms of reference of each of the following committees of the Registrants are available on
the Registrants web site at www.cpr.ca and in print to any shareholder who requests them: the
Audit, Finance and Risk Management Committee; the Corporate Governance and Nominating Committee;
the Management Resources and Compensation Committee; the Health, Safety, Security and Environment
Committee; and the Pension Committee.
DIRECTOR INDEPENDENCE
The boards of the Registrants have adopted standards for director independence: (a) prescribed
by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated thereunder and National
Instrument 52-110 for members of public company audit committees; and (b) set forth in the NYSE
Listed Company Manual (the NYSE Standards), the Canadian corporate governance standards set forth
in National Instrument 58-101 and National 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 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
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IDENTIFICATION OF AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
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
Linda J. Morgan
Roger Phillips
Michael W. Wright
Each of the aforementioned directors with the exception of Ms. Morgan 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 been determined by the boards of the Registrants to be independent within the
criteria referred to above under the subheading Director Independence, including the NYSE
Standards.
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, National 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.
No member of the Audit Committees of the Registrants serves on more than two public company
audit committees in addition to the Audit Committee of either Registrant.
6
PRINICIPAL ACCOUNTANT FEES AND SERVICES
Fees payable to the Registrants independent auditors, PricewaterhouseCoopers LLP for the
years ended December 31, 2010, and December 31, 2009, totaled $2,525,200 and $3,396,200,
respectively, as detailed in the following table:
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Year ended December 31, 2010 |
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Year ended December 31, 2009 |
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Audit Fees
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$1,795,600 |
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$2,176,800 |
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Audit-Related Fees
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$388,400 |
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$794,800 |
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Tax Fees
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$341,200 |
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$424,600 |
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All Other Fees
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$ |
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$ |
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TOTAL
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$2,525,200 |
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$3,396,200 |
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The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
Audit Fees
Audit fees were for professional services rendered for the audit of the Registrants annual
financial statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors report on the
effectiveness of internal control over 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; 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, US and International accounting standards,
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 2010 and 2009, there were
no services in this category.
7
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.
OFF-BALANCE SHEET ARRANGEMENTS
A description of the Registrants off-balance sheet arrangements is set forth on page 34 of
the Registrants 2010 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 34 of
the Registrants 2010 Annual Report incorporated by reference and included herein.
INTERACTIVE DATA FILE
The Registrants, within 30 days, will submit to the Commission in Exhibit 101 of an amendment
to this Form 40-F, and concurrently post on its corporate Web site, an Interactive Data File.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
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.
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B. |
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Consent to Service of Process |
Each Registrant has previously filed a Form F-X in connection with the class of securities to
which the obligation to file this report arises. Any change to the name or address of the agent
for service of process of either Registrant shall be communicated promptly to the Commission by an
amendment to the Form F-X referencing the file number of such Registrant.
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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 15, 2011 |
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9
EXHIBITS
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99.1 |
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Consent of PricewaterhouseCoopers LLP, Independent Auditors. |
99.2 |
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Certification by the Chief Executive Officer of the Registrants filed pursuant to Rule 13a-14(a) of the Exchange Act. |
99.3 |
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Certification by Chief Financial Officer of the Registrants filed pursuant to Rule 13a-14(a)
of the Exchange Act. |
99.4 |
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Certification by the Chief Executive Officer of the Registrants furnished pursuant to 18
U.S.C. Section 1350. |
99.5 |
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Certification by the Chief Financial Officer of the Registrants filed pursuant to 18 U.S.C.
Section 1350. |
101 |
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Interactive Data File* |
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* |
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To be filed by amendment. |
10
Annual Information Form 2010
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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SECTION 2: INTERCORPORATE RELATIONSHIPS |
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2.1 PRINCIPAL SUBSIDIARIES |
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SECTION 3: GENERAL DEVELOPMENTS 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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7 |
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4.5 QUARTERLY TRENDS |
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10 |
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4.6 BUSINESS CATEGORIES |
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10 |
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4.7 REVENUES |
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10 |
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4.8 RAILWAY PERFORMANCE |
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4.9 FRANCHISE INVESTMENT |
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4.10 INTEGRATED OPERATING PLAN (IOP) |
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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 AND 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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4.18 COMPETITIVE CONDITIONS |
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SECTION 5: DIVIDENDS |
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5.1 DECLARED DIVIDENDS AND DIVIDEND POLICY |
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20 |
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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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22 |
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SECTION 7: MARKET FOR SECURITIES |
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7.1 STOCK EXCHANGE LISTINGS |
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7.2 TRADING PRICE AND VOLUME |
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24 |
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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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8.3 SENIOR OFFICERS |
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8.4 SHAREHOLDINGS OF DIRECTORS AND OFFICERS |
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29 |
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SECTION 9: LEGAL PROCEEDINGS |
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30 |
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SECTION 10: TRANSFER AGENTS AND REGISTRARS |
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10.1 TRANSFER AGENT |
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31 |
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SECTION 11: INTERESTS OF EXPERTS |
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32 |
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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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33 |
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12.2 PRE-APPROVAL OF POLICIES AND PROCEDURES |
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12.3 AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE CHARTER |
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34 |
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12.4 AUDIT AND NON-AUDIT FEES AND SERVICES |
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39 |
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SECTION 13: FORWARD LOOKING INFORMATION |
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41 |
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SECTION 14: ADDITIONAL INFORMATION |
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14.1 ADDITIONAL COMPANY INFORMATION |
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All dollar amounts in this Annual Information Form (AIF) are in Canadian dollars, unless
otherwise noted.
March 2, 2011
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) pursuant to section 192 of the
CBCA 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.
Our registered, executive and head office is located at Suite 500, 401 9th Avenue S.W., Calgary,
Alberta T2P 4Z4.
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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, |
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Securities Held |
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or over which |
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Incorporated under |
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Directly or |
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Control or Direction |
Principal Subsidiary(1) |
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the Laws of |
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Indirectly |
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is Exercised |
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Canadian Pacific Railway Company |
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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 subject
to approval by the U.S. Surface Transportation Board (STB) and is an indirect wholly owned
subsidiary of the Soo Line Corporation. The 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 DEVELOPMENTS OF THE BUSINESS
3.1 Recent Developments
We continually seek to grow the value and scale of our core business through infrastructure-sharing
and joint-service programs with other railways, strategic capital investment programs, strategic
additions and operating plan strategies. Combined with the ongoing improvement of our locomotive
fleet, these strategies facilitate more predictable and fluid train operations between major
terminals. In line with our strategic vision, CP accomplished the following initiatives in 2010:
CP announced a ten-year agreement with Teck Resources Limited (Teck). The agreement reflects the
companies commitment to work together to achieve growth in the volume of coal shipped through a
range of economic and marketplace dynamics and provides flexibility critical for a long term
agreement.
We made significant progress re-organizing the Company to reduce the total number of management
layers. The new organizational structure is based on ensuring clear accountability and alignment
and will facilitate more efficient decision making consistent with delivering on our multi-year
service reliability, productivity and asset velocity objectives. The redesign has reduced the
number of operating regions, and the Operations side of the business is complete.
During 2010, CP took on new initiatives targeted at permanently reducing structural costs. This
included the consolidation of certain offices, as well as the consolidation of locomotive and
freight car repair facilities.
In addition, we took further actions to strengthen our balance sheet and create and enhance the
organizations financial flexibility. CP took advantage of low cost debt markets and used both
debt and funds from operations to pre-fund the main Canadian defined benefit pension plan. This
effectively puts our cash to work more quickly and reduces expected future pension contributions.
The actions taken have given the company significant flexibility in pension funding levels over the
next 3-5 years.
Finally, with the strengthening economy in 2010, CP enjoyed a 12.6% increase in volumes (as
measured by carloads) and delivered on the key objective of sustaining long train improvements
while managing a busier network. Our multi-year capital plan includes the intention to expand and
increase the number of sidings that can accommodate long trains to allowing further productivity
improvements. Our 2011 capital plan includes key improvements in productive IT and investment to
support growth.
2009
Highlights
In 2009, CP was focused on evaluating the structure of our business. We continued with cost
reduction strategies including Execution Excellence for Efficiency (or E3), which was the
beginning of our larger variable cost initiatives, our structural cost reduction initiative and the
application of lean management techniques to our core operation processes.
2009 was also a year where we focused on strengthening our balance sheet which included issuing
equity in the first quarter. As well, we made a cash tender for outstanding debt and issued new
debt to lengthen our maturity profile, smooth our repayment profile and strengthen near term
liquidity. CP focused on managing working capital, which included selling certain non-core assets.
In the fourth quarter of 2009, CP terminated a contract with a lessee in order to cease
through-train operations over the CP owned rail branch line between Smiths Falls and Sudbury,
Ontario. Improved train efficiencies allowed us to move this service over our main line rather
than using this bypass route. CP also made a voluntary prepayment to our defined benefit pension
plan to reduce the volatility of future pension funding requirements.
In the third quarter of 2009, the Company sold certain non-core assets. Several significant
properties were sold, including Windsor Station in Montreal, Quebec and land in Western Canada for
transit purposes. After the sale, CP will continue to occupy a portion of Windsor Station through
a lease for a 10-year period.
Also in 2009, the Company completed a sale of a portion of its investment in the Detroit River
Tunnel Partnership (DRTP) to its existing partner, reducing the Companys ownership from 50% to
16.5%. Effective April 1, 2009, the Company discontinued proportionate consolidation and is
accounting for its remaining investment in the DRTP under the equity method of accounting. Running
rights remain unchanged.
4
SECTION 3: GENERAL DEVELOPMENTS OF THE BUSINESS
2008
Highlights
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. Freight
revenues from DM&E 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 U.S. The
decision to construct a railway line into the PRB will be made by the Company based on economic
viability and supported by certain key conditions being met. In 2009 we integrated DM&E into most
of our major operating systems.
In mid 2008, CP commenced a review of opportunities to accelerate the realization of benefits
achievable from operating plan efficiency improvements. Known as 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.
5
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. From our inception 130 years ago, we have developed
into a fully integrated and technologically advanced Class I railway (a railroad earning a minimum
of US$378.8 million in revenues annually) providing rail and intermodal freight transportation
services over a 14,800-mile network serving the principal business centres of Canada, from Montreal
to Vancouver, British Columbia (B.C.), and the U.S. Midwest and Northeast regions.
We own approximately 10,700 miles of track. An additional 4,100 miles of track are owned jointly,
leased or operated under trackage rights. Of the total mileage operated, approximately 6,100 miles
are located in western Canada, 2,200 miles in eastern Canada, 5,400 miles in the U.S. Midwest and
1,100 miles in the U.S. Northeast. Our business is based on funnelling railway traffic from
feeder lines and connectors, including secondary and branch lines, onto our high-density mainline
railway network. We have extended our network reach by establishing alliances and connections with
other major Class 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 and the Port
Metro Vancouver in Vancouver, B.C., respectively.
Our network accesses the U.S. market directly through three wholly owned subsidiaries: Soo Line
Railroad Company (Soo Line), a Class I railway operating in the U.S. Midwest; DM&E, a wholly
owned subsidiary of the Soo Line, which operates in the U.S. Midwest; and the Delaware and Hudson
Railway Company, Inc. (D&H), which operates between eastern Canada and major U.S. Northeast
markets, including New York City, New York; Philadelphia, Pennsylvania; and Washington, D.C.
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. 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 and rail car fleets, these strategies enable us to achieve more
predictable and fluid train operations between major terminals.
6
SECTION 4: DESCRIPTION OF THE BUSINESS
Over the past few years, Class I railway initiatives have included:
|
|
|
co-operation initiatives with the Canadian National Railway Company (CN) in the Port
Metro Vancouver Terminal and B.C. Lower Mainland; |
|
|
|
working very closely with all the Class I and other carriers that serve Chicago,
Illinois under the Chicago Region Environmental and Transportation Efficiency (CREATE)
program. Class Is, Amtrak, Metra and switching carriers Indiana Harbor Belt Railroad
(IHB) and Belt Railway of Chicago (BRC) have partnered in CREATE to initiate operating
and structural changes that will improve operating efficiency and fluidity in and around
Chicago, creating the largest railroad hub in North America. |
|
|
|
CP working with the State Departments of Transportation of New York, Illinois, Wisconsin
and Minnesota to develop plans for improved track infrastructure to support intercity
passenger rail. Work on the improvements is expected to commence during the 2011
construction season and be complete by 2013. The improvements will improve the fluidity of
passenger and freight traffic on shared CP track. |
We also develop mutually beneficial arrangements with smaller railways, including shortline and
regional carriers.
4.4 Network and Right-of-Way
Our 14,800-mile network extends from the Port Metro Vancouver on Canadas Pacific Coast to the Port
of Montreal in eastern Canada, and to the U.S. industrial centres of Chicago; Detroit, Michigan;
Newark, New Jersey; Philadelphia; New York City and Buffalo, New York; Kansas City, Missouri; and
Minneapolis, Minnesota.
Our network is composed of four primary corridors: Western, Eastern, Central and the Northeast
U.S.
4.4.1 The Western Corridor: Vancouver-Thunder Bay
Overview The Western Corridor links Vancouver with Thunder Bay, Ontario, which is the western
Canadian terminus of our Eastern corridor. With service through Calgary, Alberta the Western
Corridor is an important part of our routes between Vancouver and the U.S. Midwest, and between
Vancouver and eastern Canada. The Western Corridor provides access to the Port of Thunder Bay,
Canadas primary Great Lakes bulk terminal.
Products The Western Corridor is our primary route for bulk and resource products traffic from
western Canada to the Port Metro 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 four 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 Metro Vancouver; the Calgary-
7
SECTION 4: DESCRIPTION OF THE BUSINESS
Edmonton-Scotford Route, which provides rail access to central Albertas Industrial Heartland in
addition to the petrochemical facilities in central Alberta; the Pacific CanAm Route, which
connects Calgary and Medicine Hat, Alberta, with Union Pacific Corporation (UP) at Kingsgate,
B.C.; and the North Route that provides rail service to customers from Winnipeg, Manitoba to
Calgary through Portage la Prairie, Saskatoon and Wetaskiwin. This line is an important collector
of Canadian grain and fertilizer, serving the potash mines located east and west of Saskatoon. In
addition, this line provides direct access to refining and upgrading facilities in Albertas
Industrial Heartland and at Lloydminster, Alberta.
Connections Our Western Corridor connects with UP at Kingsgate and with Burlington Northern
Santa Fe, LLC (BNSF) at Coutts, Alberta, and at New Westminster and Huntingdon in B.C. This
corridor also connects with CN at many locations including Thunder Bay, Winnipeg, Regina and
Saskatoon, Saskatchewan, Red Deer, Calgary, and Edmonton, Alberta; 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, Moose Jaw, Saskatchewan, Winnipeg and Thunder Bay. We also
have major intermodal terminals at Vancouver, Calgary, Edmonton, Regina and Winnipeg. We have
locomotive and rail car repair facilities at Golden, B.C., Vancouver, Calgary, Moose Jaw and
Winnipeg.
4.4.2 The Central Corridor: Moose Jaw-Chicago-Kansas City
Overview The Central Corridor connects with the Western Corridor at Moose Jaw. By running south
to Chicago and Kansas City through the twin cities of Minneapolis and St. Paul in Minnesota, and
Milwaukee, Wisconsin, we provide a direct, single-carrier route between western Canada and the U.S.
Midwest. The west end of the Central Corridor is proximate to the PRB located in Wyoming, the
largest thermal coal producing region in the U.S.
Products Primary traffic categories transported on the Central Corridor include
intermodal containers from the Port Metro Vancouver, fertilizers, chemicals, grain, coal,
automotive and other agricultural products.
Feeder Lines We have operating rights over the BNSF line between Minneapolis and the twin ports
of Duluth, Minnesota and Superior, Wisconsin. CP maintains its own yard facilities at the twin
ports that provide an outlet for grain from the U.S. Midwest to the grain terminals at these ports,
and a strategic entry point for large dimensional shipments that can be routed via CPs network to
locations such as Albertas Industrial Heartland to serve the needs of the oil sands and energy
industry. The DM&E route from Winona, Minnesota to Colony, Wyoming and Crawford, Nebraska provides
access to key agricultural and industrial commodities. The Iowa, Chicago and Eastern Railroad
(ICE) route from River Junction Minnesota and Sabula Junction, Iowa provides a key connection
between the twin cities and Kansas City.
Connections Our Central 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. At Kansas City we connect
with Kansas City Southern (KCS), BNSF and UP. Our Central Corridor also links to several
shortline railways that primarily serve grain and coal producing areas in the U.S.
Yards and Repair Facilities We support rail operations on the Central Corridor with main rail
yards in Chicago, Milwaukee, Wisconsin, St. Paul and Glenwood, Minnesota, Mason City, and Nahant,
Iowa; and Huron, South Dakota. We own 49% of the IHB 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. We share a yard with KCS in Kansas City.
8
SECTION 4: DESCRIPTION OF THE BUSINESS
4.4.3 The Eastern Corridor: Thunder Bay-Montreal and Detroit
Overview The Eastern Corridor extends from Thunder Bay through to its eastern terminus at
Montreal and from Toronto to Windsor, Ontario. Our Eastern Corridor provides shippers direct rail
service from Toronto and Montreal to Calgary and Vancouver via our Western Corridor and to the U.S.
via our Central Corridor. This is a key element of our transcontinental intermodal and other
services, as well as truck trailers moving in drive-on/drive-off Expressway service between
Montreal and Toronto. The corridor also supports our market position at the Port of Montreal by
providing one of the shortest rail routes for European cargo destined to the U.S. Midwest. The
Eastern Corridor consists of a route between Montreal and Windsor, which we own and maintain,
coupled with running rights between Windsor and Detroit, a trackage rights arrangement on Norfolk
Southern Corporation (NS) tracks between Detroit and Chicago and a long-term rail car haulage
contract with CSX Corporation (CSX) that links Detroit with our lines in Chicago.
Products Major traffic categories transported in the Eastern Corridor include forest and
industrial and consumer products, intermodal containers, automotive products and general
merchandise.
Feeder Lines A major feeder line that serves the steel industry at Hamilton, Ontario provides
connections to both our Northeast U.S. corridor and other U.S. carriers at Buffalo.
Connections The Eastern Corridor connects with a number of shortline railways including routes
from Montreal to Quebec City, Quebec and Montreal to St. John, New Brunswick. Connections are also
made with CN at a number of locations, including Sudbury, Toronto and Montreal and NS and CSX at
Detroit and Buffalo as well as CSX in Montreal.
Yards and Repair Facilities We support our rail operations in the Eastern Corridor with major
rail yards at Toronto and Montreal. 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 Montreal and Detroit. Terminals for our Expressway service are
located in Montreal and at Milton and Agincourt in the Greater Toronto area.
We have locomotive repair facilities at Montreal and Toronto and car repair facilities at Thunder
Bay, Toronto and Montreal.
4.4.4 The Northeast U.S. Corridor: Buffalo and Montreal to New York
Overview The Northeast U.S. Corridor provides an important link between the major population
centres of eastern Canada, the U.S. Midwest and the U.S. Northeast.
Products Major traffic categories transported in the Northeast U.S. Corridor include industrial
and consumer products.
Feeder Lines The Northeast U.S. 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; Philadelphia; and Newark, New Jersey. The line
between Guelph Junction, Ontario and Binghamton, New York, including haulage rights over NS lines,
links industrial southern Ontario with key U.S. connecting rail carriers at Buffalo and with the
Montreal-to-Sunbury line at Binghamton.
Connections We have major connections with NS at Harrisburg and Allentown in Pennsylvania, and
with CSX at Philadelphia. Shortline connections exist with multiple players throughout the
corridor.
Yards and Repair Facilities We support our Northeast U.S. Corridor with a major rail yards in
Binghamton. We have locomotive and car repair facilities in Montreal and Binghamton, in addition
to car repair facilities in Chicago and locomotive and car repair facilities in Toronto.
4.4.5 Right-of-Way
Our rail network is standard gauge, which is used by all major railways in Canada, the U.S. 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.
9
SECTION 4: DESCRIPTION OF THE BUSINESS
Where rail traffic is lighter, train movements are directed by written instructions
transmitted electronically and by radio from rail traffic controllers to train crews. In some
specific 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.
2010 was an extraordinary year with volatility and limited market transparency. Coupled with the
quarterly fluctuations in trends caused by the 2009 global recession, our results and volumes are
inconsistent with the sensitivity and trends provided above. Management believes that the changes
in economic conditions in 2009 affected the quarterly results in 2009 and 2010; the timing of a
return to the sensitivity and trends discussed will depend on the recovery of the economy and our
customers.
4.6 Business Categories
The following table compares the percentage of our total freight revenue derived from each of our
major business lines in 2010 compared with 2009:
|
|
|
|
|
|
|
|
|
Business Category |
|
2010 |
|
2009 |
|
Bulk |
|
|
43 |
% |
|
|
44 |
% |
Merchandise |
|
|
29 |
% |
|
|
28 |
% |
Intermodal |
|
|
28 |
% |
|
|
28 |
% |
|
4.7 Revenues
The following table summarizes our annual freight revenues since 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues |
|
|
|
|
|
Fiscal 2010 |
|
|
|
|
|
Fiscal 2009 |
|
|
(in $ millions, except for percentages) |
|
Fiscal |
|
Compared |
|
Fiscal |
|
Compared |
|
Fiscal |
|
|
2010 |
|
to Fiscal |
|
2009(1) |
|
to Fiscal |
|
2008(1) |
Business Category |
|
|
|
|
|
2009 |
|
|
|
|
|
2008(1) |
|
|
|
|
|
Bulk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
1,135.7 |
|
|
|
(0.1 |
)% |
|
|
1,137.1 |
|
|
|
16.4 |
% |
|
|
977.2 |
|
Coal |
|
|
490.8 |
|
|
|
10.6 |
% |
|
|
443.8 |
|
|
|
(27.4 |
)% |
|
|
611.4 |
|
Sulphur and fertilizers |
|
|
474.8 |
|
|
|
53.5 |
% |
|
|
309.3 |
|
|
|
(39.6 |
)% |
|
|
511.9 |
|
|
Total bulk |
|
|
2,101.3 |
|
|
|
11.2 |
% |
|
|
1,890.2 |
|
|
|
(10.0 |
)% |
|
|
2,100.5 |
|
|
Merchandise |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest products |
|
|
184.9 |
|
|
|
5.0 |
% |
|
|
176.1 |
|
|
|
(27.0 |
)% |
|
|
241.1 |
|
Industrial and consumer products |
|
|
902.8 |
|
|
|
14.8 |
% |
|
|
786.1 |
|
|
|
1.8 |
% |
|
|
772.0 |
|
Automotive |
|
|
316.4 |
|
|
|
38.0 |
% |
|
|
229.3 |
|
|
|
(29.6 |
)% |
|
|
325.6 |
|
|
Total merchandise |
|
|
1,404.1 |
|
|
|
17.8 |
% |
|
|
1,191.5 |
|
|
|
(11.0 |
)% |
|
|
1,338.7 |
|
|
Intermodal |
|
|
1,347.9 |
|
|
|
12.5 |
% |
|
|
1,198.1 |
|
|
|
(19.2 |
)% |
|
|
1,482.3 |
|
|
Total freight revenues |
|
|
4,853.3 |
|
|
|
13.4 |
% |
|
|
4,279.8 |
|
|
|
(13.0 |
)% |
|
|
4,921.5 |
|
|
|
|
|
(1) |
|
Restated on a U.S. GAAP basis. |
10
SECTION 4: DESCRIPTION OF THE BUSINESS
4.7.1 Bulk
Our bulk business represented approximately 43% of total freight revenues in 2010.
4.7.1.1 Grain
Our grain business accounted for approximately 23% of total freight revenues in 2010.
Grain transported by CP consists of both whole grains, such as wheat, corn, soybeans, and canola,
and processed products such as meals, oils, 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 Metro Vancouver and east to the Port
of Thunder Bay for export. Grain is also shipped to the U.S. and to eastern Canada for domestic
consumption. U.S.-originated export grain traffic is shipped to ports at Duluth and Superior. In
partnership with other railways, we also move grain to export terminals in the U.S. Pacific
Northwest and the Gulf of Mexico. Grain destined for domestic consumption moves east via Chicago
to the U.S. Northeast or is interchanged with other carriers to the U.S. Southeast, Pacific
Northwest and California markets.
Railway revenues 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 21.3.1 of our 2010 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 U.S. and on our website at www.cpr.ca.
4.7.1.2 Coal
Our coal business represented approximately 10% of total freight revenues in 2010.
We handle mostly metallurgical coal destined for export through the Port Metro Vancouver for use in
the steel-making process in the Pacific Rim, Europe and South America.
Our Canadian coal traffic originates mainly from Tecks mines in southeastern B.C. They are
considered to be among the most productive, highest-quality metallurgical coal mines in the world.
CP announced a ten-year agreement designed to achieve growth in the volume of coal shipped. We
move coal west from these mines to port terminals for export to world markets, and east for the
U.S. midwest markets and for consumption in steel-making mills along the Great Lakes.
In the U.S. through short haul movements, we move primarily thermal coal, which is interchanged to
us from other carriers, for use in power-generating plants. Our U.S. 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 2010.
Sulphur
Most sulphur is produced in Alberta as 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. 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 Metro 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
and Australia. In addition, we transport liquid sulphur from Scotford, Alberta, site of one of the
largest refineries in the Edmonton area, and from other origins to the southeastern and
northwestern U.S. for use in the fertilizer industry.
11
SECTION 4: DESCRIPTION OF THE BUSINESS
Fertilizers
Fertilizers traffic consists primarily of potash and chemical fertilizers. Our potash traffic
moves mainly from Saskatchewan to offshore markets through the ports of Metro Vancouver, Thunder
Bay and Portland, Oregon and to markets in the U.S. Chemical fertilizers are transported to
markets in Canada and the U.S. from key production areas in the Canadian prairies. Phosphate
fertilizer is also transported from U.S. and Canadian producers to markets in Canada and the
northern U.S.
We provide transportation services from major potash and nitrogen production facilities in western
Canada and have efficient routes to the major U.S. markets. We also have direct service to key
fertilizer distribution terminals, such as the barge facilities on the Mississippi River system at
Minneapolis-St. Paul, as well as access to Great Lakes vessels at Thunder Bay.
4.7.2 Merchandise
Our merchandise business represented approximately 29% of total freight revenues in 2010.
Merchandise products move in trains of mixed freight and in a variety of car types. 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 4% of total freight revenues in 2010.
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 19% of total freight
revenues in 2010.
Industrial and consumer products traffic include a wide array of commodities grouped under
chemicals, energy and plastics as well as mine, metals and aggregates.
Our industrial and consumer products traffic is widely dispersed throughout North America, with
large bases in Alberta, Ontario, Quebec and the U.S. Midwest. The location of mines, steel mills
and aggregate facilities adjacent to our rail lines provides for the convenient shipment of a
diverse group of industrial products for a wide range of customers. We transport products to
destinations throughout North America, including to and from ports. We also participate in the
movement of products from the U.S. to Canadian destinations, including chemicals originating in and
around the Gulf Coast and destined to points in eastern Canada.
4.7.2.3 Automotive
Our automotive business represented approximately 6% of total freight revenues in 2010.
Automotive traffic includes domestic, import and pre-owned vehicles as well as automotive parts.
We transport finished vehicles from U.S. and Canadian assembly plants to the Canadian marketplace,
and to other markets throughout North America via major interchanges at Detroit, Chicago and
Buffalo. We also move imported vehicles to retail markets in Canada and the U.S. Midwest. A
comprehensive network of automotive compounds is utilized to facilitate final delivery of vehicles
to dealers throughout Canada and in the U.S.
12
SECTION 4: DESCRIPTION OF THE BUSINESS
4.7.3 Intermodal
Our intermodal business accounted for approximately 28% of total freight revenues in 2010.
Domestic intermodal freight consists primarily of manufactured consumer products moving in
containers. International intermodal freight moves in marine containers to and from ports and
North American inland markets.
Domestic Intermodal
Our domestic intermodal business covers a broad spectrum of industries including food, retail,
less-than truckload shipping, trucking, forest products and various other consumer-related
products. Key service factors in domestic intermodal include consistent on-time delivery, the
ability to provide door-to-door service and the availability of value-added services. The majority
of our domestic intermodal business originates in Canada where we market our services directly to
retailers, providing complete door-to-door service and maintaining direct relationships with our
customers. In the U.S., our service is delivered mainly through wholesalers.
International Intermodal
Our international intermodal business consists primarily of containerized traffic moving between
the ports in Vancouver, Montreal, New York and Philadelphia and inland points across Canada and the
U.S.
We are a major carrier of containers moving via the ports in Montreal and Vancouver. Import traffic
from the Port Metro Vancouver is mainly long-haul business destined for eastern Canada and the U.S.
Midwest and Northeast. Our trans-Pacific service offers the shortest route between the Port Metro
Vancouver and Chicago. We work closely with the Port of Montreal, a major year-round East Coast
gateway to Europe, to serve markets primarily in Canada and the U.S. Midwest. Our U.S. Northeast
service connects eastern Canada with the ports of Philadelphia and New York, offering a competitive
alternative to trucks.
4.7.4 Other Business
We earn additional revenues from leasing certain assets, switching fees, other arrangements
including logistical services, contracts with passenger service operators, and investments in joint
rail operations.
4.7.5 Significant Customers
In 2010 and 2009, no one customer comprised more than 10% of total revenues and accounts
receivable. For the year ended December 31, 2008 one customer comprised 11.3% of total revenues
and 1.7% of total accounts receivable.
13
SECTION 4: DESCRIPTION OF THE BUSINESS
4.8 Railway Performance
We focus on safety, franchise investment, increasing network efficiency and improving asset
utilization, train operations productivity and labour productivity. The following table summarizes
the effect of these strategies based on industry-recognized performance indicators:
4.8.1 Performance Indicators
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Year Ended December 31 |
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Performance Indicators(1) |
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2010(2) |
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2009(2) |
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2008(2) |
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2007 |
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2006 |
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Efficiency and other indicators |
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Gross ton-miles (GTM) (millions)(3) |
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242,757 |
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209,475 |
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239,705 |
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246,322 |
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236,405 |
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Train miles (thousands) |
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39,576 |
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34,757 |
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41,420 |
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42,804 |
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42,310 |
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U.S. gallons of locomotive fuel per 1,000 GTMs freight and yard(4) |
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1.17 |
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1.19 |
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1.22 |
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1.21 |
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1.20 |
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Average number of active employees expense(5) |
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13,879 |
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13,619 |
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14,340 |
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14,172 |
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14,311 |
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Car miles per car day(6) |
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139.9 |
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N/A |
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N/A |
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N/A |
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N/A |
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Car miles per car day, excluding DM&E |
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151.5 |
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142.6 |
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143.6 |
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142.3 |
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137.3 |
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Average train speed (miles per hour)(7) |
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22.7 |
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N/A |
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N/A |
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N/A |
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N/A |
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Average train speed (miles per hour), excluding DM&E |
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23.8 |
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25.5 |
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24.0 |
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23.2 |
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24.8 |
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Average terminal dwell (hours)(8) |
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21.4 |
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21.9 |
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22.3 |
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22.2 |
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20.8 |
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Safety indicators |
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FRA personal injuries per 200,000 employee-hours(9)(11) |
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1.61 |
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1.92 |
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1.63 |
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2.09 |
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2.00 |
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FRA train accidents per million train-miles(10)(11) |
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1.63 |
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1.81 |
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2.53 |
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2.05 |
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1.56 |
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(1) |
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Certain prior period figures have been updated to reflect new information. |
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(2) |
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Consolidated data includes DM&E for 2010 and 2009. The 2008 figures include DM&E on
a fully consolidated basis for the period from October 30 through December 31, 2008. |
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(3) |
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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). An increase in GTMs indicates additional workload. |
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(4) |
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U.S. 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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(5) |
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The average number of actively employed workers during the period whose
compensation costs are included in Compensation and Benefits Expense on the Consolidated
Statement of Income. 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 or who have not worked a minimum
number of hours. This definition also excludes employees working on capital projects. |
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(6) |
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Car miles per car day is calculated by dividing total car-miles for a period by the
total number of active cars. Total car-miles include the distance travelled by every car on a
revenue-producing train and a train used in or around our yards. A car-day is assumed to
equal one active car. An active car is a revenue-producing car that is generating costs to CP
on an hourly or mileage basis. Excluded from this count are i) cars that are not on the track
or are being stored; ii) cars that are in need of repair; iii) cars that are used to carry
materials for track repair; iv) cars owned by customers that are on the customers tracks; and
v) cars that are idle and waiting to be reclaimed by CP. |
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(7) |
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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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(8) |
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Average 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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(9) |
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U.S. Federal Railroad Administration (FRA) personal injuries per 200,000
employee-hours measures the number of personal injuries, multiplied by 200,000 and divided by
total employee-hours. Personal injuries are defined as injuries that require employees to
lose time away from work, modify their normal duties or obtain medical treatment beyond minor
first aid. Employee-hours are the total hours worked, excluding vacation and sick time, by
all employees, excluding contractors. |
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(10) |
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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$9,200 in the U.S. or $10,600 in Canada
in damage. |
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(11) |
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Safety indicators for 2008 include DM&E for the whole year. |
14
SECTION 4: DESCRIPTION OF THE BUSINESS
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 (IT); and
freight cars and other equipment. On an accrual basis, we invested approximately $2.41 billion in
our core assets from 2008 to 2010, with annual capital spending over this period averaging
approximately 15% of revenues. This included approximately $1.81 billion invested in track and
roadway, $0.22 billion in rolling stock, $0.19 in other equipment, $0.14 billion in IT and $0.05
billion in buildings.
4.9.1 Locomotive Fleet
Our locomotive fleet includes 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 727 AC locomotives. While AC
locomotives represent approximately 61% of our road-freight locomotive fleet, they handle
approximately 83% of our workload. Our investment in AC locomotives has helped to improve service
reliability and generate cost savings in fuel, equipment rents and maintenance.
Following is a synopsis of our owned and leased locomotive fleet:
Number of Locomotives (owned and long-term leased)
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Road Freight |
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Road |
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Yard |
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Age in Years |
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AC |
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DC |
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Switcher |
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Switcher |
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Total |
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0-5 |
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200 |
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2 |
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202 |
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6-10 |
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205 |
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205 |
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11-15 |
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322 |
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322 |
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16-20 |
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Over 20 |
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472 |
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276 |
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226 |
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974 |
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Total |
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727 |
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472 |
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278 |
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226 |
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1,703 |
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4.9.2 Railcar Fleet
We own, lease or manage approximately 56,200 freight cars. Approximately 18,200 are owned by CP,
approximately 7,200 are hopper cars owned by Canadian federal and provincial government agencies
and approximately 13,100 are leased on a short-term basis and 17,700 are held under long-term
leases. Short-term leases on approximately 6,600 cars are scheduled to expire during 2011, and the
leases on approximately 4,800 additional cars are scheduled to expire before the end of 2015.
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 an operating agreement in 2007.
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.
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, track renewal and material supply.
We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and our
new Train Area Marshalling software tool (TrAM) to safely 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.
15
SECTION 4: DESCRIPTION OF THE BUSINESS
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 2010, execution of our IOP generated
productivity and efficiency improvements that reduced expenses in key areas, while improving
service reliability to support rate increases and grow market share. Areas of expense reduction
included labour, purchased services and equipment costs.
4.11 Information Technology
As a 24-hour-a-day, 7-day-a-week business, CP relies heavily on IT systems to schedule and manage
planning and operational components safely and efficiently. IT 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. Across the network, CPs suite of
operating systems manages the overall movement of customers shipments and provides railway
employees with reliable data on shipment performance, transit times, connections with other trains,
train and yard capacities, and locomotive requirements. Within the yards, individual shipments are
matched to freight car blocks, which in turn are matched to trains that are scheduled according to
CPs IOP.
Our forward focus is on modernization and simplification of our IT systems, standardizing on two
separate platforms: Shipment Suite for Rail Operations and SAP for Enterprise Resource Planning.
CPs significant IT initiatives are as follows:
MultiRail
Core to CPs success has been the innovative and industry-leading use of a product design software
tool called MultiRail. MultiRail is a fully-integrated application that allows CP to refine and
evaluate our operating plan strategy. It creates and communicates a balanced plan to accommodate
shippers needs, operational considerations and asset utilization. CP has modeled the IOP within
the MultiRail application using forward-looking traffic data. The full integration of the design
process with our operation control systems allows us to move from the planning phase into the
execution phase and to react quickly and efficiently to changing business conditions and
opportunities.
Transportation
Management Systems (TMS)
CPs TMS system is operating at all intermodal facilities. The system improves intermodal service
by providing customer self-service, proof of delivery and full shipment tracking. TMS also
provides more sophisticated pricing options and simplified billing processes.
Mycpr.ca
A multi-year program designed to revamp e-business applications is underway to provide customers
with an industry leading electronic commerce capability. The next phase will see the launch of a
new version of CPs customer website,
www.myCPR.ca. This new tool will allow customers to manage
all aspects of their shipments from initial price inquiries, car ordering, shipment tracking,
invoice viewing and payment.
Engineering
Excellence
CP is making significant technology investments in Engineering Excellence to ensure continued
network safety and reliability. The bridge inspection system allows employees to capture inspection
results electronically in the field, reducing the amount of time spent documenting inspection
results and increasing the quality of information gathered about the condition of each asset.
Engineering Excellence ensures timely maintenance, improved infrastructure renewal planning and
assured compliance to regulatory requirements.
Equipment
Health Management System (EHMS)
EHMS is a multi-year project that supports the railway industrys Advanced Technology Safety
Initiative to reduce stress on railway infrastructure. The system allows freight car equipment
owners to monitor and maintain their fleet proactively. Features include truck hunting detectors
and hot box detector information and alerts to our EHMS system.
16
SECTION 4: DESCRIPTION OF THE BUSINESS
4.12 Labour Productivity and Efficiency
CP believes employees contribute best when the organizational structure is lean and
accountabilities are clear. Companies only attain their full potential when they engage employees
intelligence and creativity in a structured manner that becomes part of the fabric of the company.
In the past few years CP has initiated a number of strategic initiatives to achieve these
conditions. In 2009, we commenced a holistic review of our organizational structure. We made
significant progress implementing changes in 2010, which are designed to ensure clear
accountability and alignment. The changes will facilitate more efficient decision making and have
lead to some reductions in the number of management positions.
Our investments in lean and continuous improvement principles are now beginning to provide a return
on our investment in increased productivity and reduced costs.
To reinforce the link between employee performance and organizational outcomes, CP also uses
performance based programs designed to allow eligible unionized and non-unionized employees to
share in the profits they help generate.
4.13 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. CPs Enterprise Risk Management (ERM)
program targets strategic risk areas to determine additional prevention or mitigation plans that
can be undertaken to either reduce risk or enable opportunities to be realized. The ERM process
instils discipline in the approach to managing risk at CP and has been a contributing factor in
providing focus on key areas. CP has managed to mitigate a number of strategic business risks
using this focused approach.
The risks and our enterprise risk management are discussed in more detail in Section 21.0 Business
Risks and Enterprise Risk Management of our 2010 MD&A, which is
available on SEDAR at www.sedar.com in
Canada, on EDGAR at www.sec.gov
in the U.S. and on our website
at www.cpr.ca.
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, 2010, 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 of 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.
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 U.S. Federal Railroad Administration
(FRA) reporting guidelines.
The FRA personal injury rate per 200,000 employee-hours for CP was 1.61 in 2010, a decrease
compared with 1.92 in 2009 and 1.63 in 2008. The FRA train accident rate for CP in 2010 was 1.63
accidents per million train-miles, compared with 1.81 in 2009 and 2.53 in 2008. CP strives to
continually improve its safety performance through ten key strategies and activities such as
training and technology. 2010 represents CPs second lowest personal injury rate and our third
lowest train accident rate.
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
17
SECTION 4: DESCRIPTION OF THE BUSINESS
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.
We are a partner in Responsible CareÒ, an initiative of the Chemistry Industry Association of
Canada and the American Chemistry Council (ACC) in the U.S., 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.
4.16.2 Planning
We prepare an annual Corporate Environmental Plan and an Operations Environmental 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 U.S. to ensure a rapid and efficient
response in the event of an environmental incident. In addition, we regularly update and test
emergency preparedness and response plans.
4.16.4 Environmental Contamination
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 anticipated costs. The
costs are expected to be incurred over a period of approximately 10 years. The states voluntary
investigation and remediation program will oversee the work to ensure it is completed in accordance
with applicable standards. We currently estimate the remaining liability associated with these
areas to be US$24.2 million.
4.16.5 Checking and Corrective Action
Our environmental audit comprehensively, systematically and regularly assesses our facilities for
compliance with legal and regulatory 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. Our audit program includes health and safety.
18
SECTION 4: DESCRIPTION OF THE BUSINESS
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 $34.4 million in 2010 for environmental management, including amounts spent on ongoing
operations, fuel conservation, 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 and contingent business interruption coverage, which would
apply in the event of catastrophic damage to our infrastructure and specified strategic assets in
the transportation network. 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.
4.18 Competitive Conditions
For a discussion of CPs competitive conditions in which we operate, please refer to Section 21.1
Competition included in our 2010 MD&A, which are incorporated by reference herein.
19
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:
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|
|
Dividend Amount |
|
Record Date |
|
Payment Date |
|
$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 |
$0.2475 |
|
June 26, 2009 |
|
July 27, 2009 |
$0.2475 |
|
September 25, 2009 |
|
October 26, 2009 |
$0.2475 |
|
December 31, 2009 |
|
January 25, 2010 |
$0.2475 |
|
March 26, 2010 |
|
April 26, 2010 |
$0.2700 |
|
June 25, 2010 |
|
July 26, 2010 |
$0.2700 |
|
September 24, 2010 |
|
October 25, 2010 |
$0.2700 |
|
December 31, 2010 |
|
January 31, 2011 |
$0.2700 |
|
March 25, 2011 |
|
April 25, 2011 |
|
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.
20
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, 2010,
no first or second 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. |
21
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 following information relating to the Companys credit ratings is provided as it relates to the
Companys financing costs, liquidity and operations. Specifically, credit ratings affect the
Companys ability to obtain short-term and long-term financing and /or the cost of such financing.
Additionally, the ability of the Company to engage in certain collateralized business activities
on a cost effective basis depends on the Companys credit ratings. A reduction in the current
rating on the Companys debt by its rating agencies, particularly a downgrade below investment
grade ratings, or a negative change in the Companys ratings outlook could adversely affect the
Companys cost of financing and/or its access to sources of liquidity and capital. In addition,
changes in credit ratings may affect the Companys ability to, and/or the associated costs of, (i)
entering into ordinary course derivative or hedging transactions and may require the Company to
post additional collateral under certain of its contracts, and (ii) entering into and maintaining
ordinary course contracts with customers and suppliers on acceptable terms and (iii) ability to
self-insure certain leased or financed rolling stock assets as per common industry practice.
The Companys debt securities are rated 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 Corporation
|
|
BBB |
|
|
|
Dominion Bond Rating Service
|
|
BBB |
|
|
|
|
|
22
SECTION 6: CAPITAL STRUCTURE
The Standard & Poors Corporation has a negative outlook, while the Moodys Investors Service
and Dominion Bond Rating Service have 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.
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 |
|
|
|
|
|
|
|
23
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 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
High |
|
Low |
|
Closing |
|
Volume of |
Month |
|
Price per |
|
Price per |
|
Price per |
|
Price per |
|
Shares |
|
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Traded |
|
January |
|
|
57.14 |
|
|
|
57.48 |
|
|
|
49.98 |
|
|
|
50.48 |
|
|
|
9,122,731 |
|
February |
|
|
50.51 |
|
|
|
52.36 |
|
|
|
49.58 |
|
|
|
50.79 |
|
|
|
9,466,384 |
|
March |
|
|
51.00 |
|
|
|
57.54 |
|
|
|
50.80 |
|
|
|
57.24 |
|
|
|
10,568,993 |
|
April |
|
|
57.01 |
|
|
|
61.66 |
|
|
|
55.55 |
|
|
|
59.88 |
|
|
|
9,487,200 |
|
May |
|
|
60.35 |
|
|
|
62.00 |
|
|
|
53.57 |
|
|
|
58.88 |
|
|
|
14,227,073 |
|
June |
|
|
57.77 |
|
|
|
62.90 |
|
|
|
56.03 |
|
|
|
57.06 |
|
|
|
15,469,194 |
|
July |
|
|
57.25 |
|
|
|
62.13 |
|
|
|
55.65 |
|
|
|
61.39 |
|
|
|
12,208,568 |
|
August |
|
|
61.76 |
|
|
|
63.15 |
|
|
|
58.19 |
|
|
|
62.81 |
|
|
|
10,558,343 |
|
September |
|
|
63.25 |
|
|
|
65.82 |
|
|
|
62.44 |
|
|
|
62.86 |
|
|
|
10,812,161 |
|
October |
|
|
63.01 |
|
|
|
67.50 |
|
|
|
61.60 |
|
|
|
66.48 |
|
|
|
9,812,600 |
|
November |
|
|
66.49 |
|
|
|
67.25 |
|
|
|
63.93 |
|
|
|
65.55 |
|
|
|
7,919,864 |
|
December |
|
|
66.00 |
|
|
|
66.68 |
|
|
|
64.10 |
|
|
|
64.62 |
|
|
|
7,441,455 |
|
|
The following table provides the monthly composite trading information for our Common Shares
on the New York Stock Exchange during 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
High |
|
Low |
|
Closing |
|
Volume of |
Month |
|
Price per |
|
Price per |
|
Price per |
|
Price per |
|
Shares |
|
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Share ($) |
|
Traded |
|
January |
|
|
54.76 |
|
|
|
55.74 |
|
|
|
46.77 |
|
|
|
47.00 |
|
|
|
11,418,147 |
|
February |
|
|
47.55 |
|
|
|
50.39 |
|
|
|
46.13 |
|
|
|
48.18 |
|
|
|
10,748,305 |
|
March |
|
|
48.71 |
|
|
|
56.65 |
|
|
|
48.29 |
|
|
|
56.24 |
|
|
|
9,753,036 |
|
April |
|
|
56.59 |
|
|
|
61.38 |
|
|
|
55.43 |
|
|
|
58.86 |
|
|
|
9,258,699 |
|
May |
|
|
59.55 |
|
|
|
60.78 |
|
|
|
49.98 |
|
|
|
55.03 |
|
|
|
17,260,850 |
|
June |
|
|
54.78 |
|
|
|
61.98 |
|
|
|
53.15 |
|
|
|
53.62 |
|
|
|
17,870,414 |
|
July |
|
|
53.81 |
|
|
|
60.42 |
|
|
|
52.15 |
|
|
|
59.87 |
|
|
|
12,998,927 |
|
August |
|
|
61.00 |
|
|
|
62.14 |
|
|
|
54.73 |
|
|
|
58.98 |
|
|
|
13,356,734 |
|
September |
|
|
59.89 |
|
|
|
63.47 |
|
|
|
59.89 |
|
|
|
60.93 |
|
|
|
13,237,176 |
|
October |
|
|
61.42 |
|
|
|
66.72 |
|
|
|
60.14 |
|
|
|
65.14 |
|
|
|
11,116,621 |
|
November |
|
|
65.45 |
|
|
|
67.03 |
|
|
|
62.62 |
|
|
|
63.99 |
|
|
|
8,600,049 |
|
December |
|
|
64.86 |
|
|
|
66.43 |
|
|
|
63.59 |
|
|
|
64.81 |
|
|
|
10,300,835 |
|
|
24
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
|
|
2011
(2001) |
|
|
|
|
|
T.W. Faithfull (3)(4)(5)
Oxford, Oxfordshire, England
|
|
Retired President and Chief Executive Officer
Shell Canada Limited (oil and gas company)
|
|
2011
(2003) |
|
|
|
|
|
F.J. Green (4)
Calgary, Alberta, Canada
|
|
President and Chief Executive Officer,
Canadian Pacific Railway Company and
Canadian Pacific
Railway Limited
|
|
2011
(2006) |
|
|
|
|
|
K.T. Hoeg, C.A. (2)(6)
Toronto, Ontario, Canada
|
|
Former President and Chief Executive Officer
of Corby Distilleries Limited (spirits and
wine)
|
|
2011
(2007) |
|
|
|
|
|
R. C. Kelly (2)(4)
Minneapolis, Minnesota, U.S.A.
|
|
Chairman and Chief Executive Officer
Xcel Energy Inc. (a utility supplier of
electric power and natural gas)
|
|
2011
(2008) |
|
|
|
|
|
The Hon. J.P. Manley (2)(3)(6)
Ottawa, Ontario, Canada
|
|
President and Chief Executive Officer,
Canadian Council of Chief Executives
(non-profit public policy,
consultation and advocacy organization)
|
|
2011
(2006) |
|
|
|
|
|
L.J. Morgan (2)(4)
Bethesda, Maryland, U.S.A.
|
|
Counsel, Covington & Burling LLP (law firm)
|
|
2011
(2006) |
|
|
|
|
|
M. Paquin (4)(5)
Montreal, Quebec, Canada
|
|
President and Chief Executive Officer,
Logistec Corporation (international
cargo-handling company)
|
|
2011
(2001) |
|
|
|
|
|
M.E.J. Phelps, O.C. (3)(5)(6)
West Vancouver, B.C., Canada
|
|
Chairman, Dornoch Capital Inc. (private
investment company)
|
|
2011
(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)
|
|
2011
(2001) |
|
|
|
|
|
D.W. Raisbeck (5)(6)
Sanibel, Florida, U.S.A
|
|
Retired Vice-Chairman, Cargill Inc.
(producer and marketer of agricultural,
financial and industrial products)
|
|
2011
(2009) |
|
|
|
|
|
H.T. Richardson, C.M., O.M. (5)(6)
Winnipeg, Manitoba, Canada
|
|
President and Chief Executive Officer, James
Richardson & Sons, Limited (privately owned
corporation)
|
|
2011
(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)
|
|
2011
(2001) |
|
Notes:
|
|
|
(1) |
|
J.E. Cleghorn was Chairman of the Board of SNC-Lavalin Group from May 2002 until May 2007.
F.J. Green was President and Chief Operating Officer, Canadian Pacific Railway Company and
Canadian Pacific Railway Limited from November 2005 until May 2006. K.T. Hoeg was President
and Chief Executive Officer of Corby Distilleries Limited from October 1996 to February 2007.
The Hon. J.P. Manley |
25
SECTION 8: DIRECTORS AND OFFICERS
|
|
|
|
|
was the counsel for McCarthy Tetrault from July 2004 until October 2009 and President-Elect of
the Canadian Counsel of Chief Executives from October to December 2009. R.C. Kelly was
President of Xcel Energy Inc. from June 2005 to September 2009. D.W. Raisbeck was Vice-Chairman
of Cargill Inc. from 1999 to 2009. |
|
(2) |
|
Member of the Audit, Finance and Risk Management Committee. |
|
(3) |
|
Member of the Corporate Governance and Nominating Committee. |
|
(4) |
|
Member of the Health, Safety, Security and Environment Committee. |
|
(5) |
|
Member of the Management Resources and Compensation Committee. |
|
(6) |
|
Member of the Pension Committee. |
8.2 Cease Trade Orders, 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 and J.P.
Manley, both former directors. 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 U.S. Bankruptcy Code to restructure their debt. NRG
emerged from bankruptcy on December 5, 2003.
26
SECTION 8: DIRECTORS AND OFFICERS
8.3 Senior Officers
As at March 2, 2011, the following were executive officers of CP:
|
|
|
|
|
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 Company and Canadian
Pacific Railway Limited;
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 |
|
|
|
|
|
E. L. Harris(1)
Spring Lake, Michigan, U.S.A.
|
|
Executive Vice-President and Chief
Operations Officer
|
|
Executive Vice-President and
Chief Operations Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Rail
Operations Consultant,
Independent Contractor; Senior
Advisor to the Board, Global
Infrastructure Partners;
Executive Vice-President
Operations, Canadian National
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 Corporation |
|
|
|
|
|
J. A. OHagan
Calgary, Alberta, Canada
|
|
Executive
Vice-President and
Chief Marketing
Officer
|
|
Executive Vice-President and
Chief Marketing Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Senior
Vice-President, Marketing and
Sales and Chief Marketing
Officer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Senior Vice-President,
Strategy and Yield, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Vice-President,
Strategy and External Affairs,
Canadian Pacific Railway
Company; Vice-President,
Strategy, Research and New
Market Development, Canadian
Pacific Railway Company |
|
|
|
|
|
R. H. Foot
Calgary, Alberta, Canada
|
|
Group Vice-President,
Sales
|
|
Group Vice-President, Sales,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President, Sales &
Marketing, Merchandise,
Canadian Pacific Railway
Company |
|
|
|
|
|
D. B. Campbell
Calgary, Alberta, Canada
|
|
Senior
Vice-President,
Strategy and
Financial Planning
|
|
Senior Vice-President Strategy
and Financial Planning,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President, Finance,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President, Corporate
Planning, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Vice-President Business
Planning and Development,
Canadian Pacific Railway
Company |
27
SECTION 8: DIRECTORS AND OFFICERS
|
|
|
|
|
Name and municipality of residence |
|
Position held |
|
Principal occupation within the |
|
|
|
|
preceding five years |
|
J. M. Franczak(1)
Calgary, Alberta, Canada
|
|
Senior Vice-President,
Operations
|
|
Senior Vice-President,
Operations, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited; Group
Vice-President, Operations,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President Operations,
Canadian Pacific Railway
Company; Vice-President,
Transportation, Canadian
Pacific Railway Company;
Assistant Vice-President,
Transportation, Canadian
Pacific Railway Company |
|
|
|
|
|
B. W. Grassby
Calgary, Alberta, Canada
|
|
Senior
Vice-President,
Finance and
Comptroller
|
|
Senior Vice-President Finance
and Comptroller, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Vice-President and
Comptroller, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Acting Chief Financial Officer
and Vice-President and
Comptroller, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Vice-President and
Comptroller, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited |
|
|
|
|
|
B. M. Winter
Calgary, Alberta, Canada
|
|
Senior Vice-President,
Engineering and
Mechanical
|
|
Senior Vice-President,
Engineering and Mechanical,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Senior
Vice-President, Operations,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President Operations,
Canadian Pacific Railway
Company; Vice-President,
Transportation and Field
Operations, Canadian Pacific
Railway Company |
|
|
|
|
|
M. G. Allison
Calgary, Alberta, Canada
|
|
Vice-President and
Treasurer
|
|
Vice-President and Treasurer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President and Treasurer,
Suncor Energy, Inc.;
Vice-President Process
Integration, Suncor Energy
Inc.; Vice-President Business
Services Natural Gas &
Renewable Energy, Suncor
Energy Inc. |
|
|
|
|
|
P. J. Edwards
Calgary, Alberta, Canada
|
|
Vice-President,
Human Resources and
Industrial
Relations
|
|
Vice-President Human Resources
and Industrial Relations,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited;
Vice-President Human
Resources, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Vice-President Human
Resources, Canadian National
Railway Company |
|
|
|
|
|
P. A. Guthrie, Q.C.
Municipal District of Rockyview,
Alberta, Canada
|
|
Vice-President, Law
and Risk Management
|
|
Vice-President, Law and Risk
Management, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Assistant Vice-President Legal
Services, Canadian Pacific
Railway Company |
|
|
|
|
|
K. L. Fleming
Calgary, Alberta, Canada
|
|
Corporate Secretary
|
|
Corporate Secretary, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Associate Corporate
Secretary, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited; Legal
Counsel Labour & Employment
Coordinator, Canadian Pacific
Railway Company |
|
Note:
|
|
|
(1) |
|
Effective April 1, 2011, Mr. Harris will be retiring and Mr. Franczak will be appointed
Executive Vice-President Operations. |
28
SECTION 8: DIRECTORS AND OFFICERS
8.4 Shareholdings of Directors and Officers
As at December 31, 2010, the directors and senior officers of CPRL owned or controlled a total of
112,016 shares representing approximately 0.07% of the outstanding shares at that date
(169,175,058).
29
SECTION 9: LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the normal course of business. There
are no significant legal proceedings currently in progress.
30
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 U.S.
Requests for information should be directed to:
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario Canada
M5J 2Y1
31
SECTION 11: INTERESTS OF EXPERTS
The Companys independent auditors are PricewaterhouseCoopers LLP, Chartered Accountants.
PricewaterhouseCoopers LLP has issued an independent auditors report dated February 24, 2011, in
respect of the Companys consolidated financial statements, as at December 31, 2010 and 2009 and
for each of the years in the three year period ended December 31, 2010. They have also prepared an
audit report on the effectiveness of internal control over financial reporting, at December 31,
2010. PricewaterhouseCoopers LLP has advised that they are independent with respect to CP within
the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of
Alberta and within the meaning of Public Company Accounting Oversight Board Rule 3520, Auditor
Independence.
32
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).
K. 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 currently a director of Imperial Oil Limited, Sun Life Financial Inc.,
Shoppers Drug Mart Corporation, Ganong Bros. Limited and Samuel, Son & Co., Limited. She is also
on the Board of the Toronto East General Hospital. 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.
R. C. Kelly - Mr. Kelly is Chairman 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 September 2009. From December 2005 to September 2009 he was Chairman of
the Board, President and Chief Executive Officer, 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 Chairman of Edison Electric Institute, 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.
The Hon. J. P. Manley - Mr. Manley is President and Chief Executive Officer of the Canadian
Council of Chief Executives. He has held that position since January 2010. From May 2004 to
December 2009 he was counsel at the law firm of McCarthy Tétrault LLP. He is a director of
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, 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 2006.
L. J. Morgan - Ms. Morgan is Of Counsel at Covington & Burling LLP, a U.S. based international law
firm. She joined the firm as a partner in September 2003 and retired from the partnership in
February 2010. During her tenure with the firm, she has chaired its transportation and government
affairs practices. She also serves on the Board of Visitors for the Georgetown University Law
Center and the Business Advisory Committee for Northwestern Universitys Transportation Center.
Ms. Morgan was previously Chairman of the U.S. Surface Transportation Board, and its predecessor
the Interstate Commerce Commission, from March 1995 to December 2002. Prior to joining the
Interstate Commerce Commission, Ms. Morgan served as General Counsel to the Senate Committee on
Commerce, Science and Transportation. Ms. Morgan was granted the honour of Recognition in Chambers
- USA, Best Lawyers in America, and SuperLawyers for outstanding legal counsel in the
transportation sector. She graduated from Vassar College with an A.B. and the Georgetown
University Law Center with a J.D., and is an alumna of the Program for Senior Managers in
Government at Harvard Universitys John F. Kennedy School of Government.
R. Phillips - 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 currently a director of 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.
M. W. Wright (Chair) - 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
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).
33
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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 Senior Vice-President, Finance and
Comptroller must submit to the Committee at least quarterly a report of all services performed or
to be performed by our independent auditors pursuant to the policy. Any additional audit or
non-audit services to be provided by our independent auditors either not included among the
pre-approved services or exceeding the budgeted amount for such pre-approved services by more than
10% must be individually pre-approved by the Committee or its Chairman, who must report all such
additional pre-approvals to the Committee at its next meeting following the granting thereof. Our
independent auditors annual audit services engagement terms and fees are subject to the specific
pre-approval of the Committee. In addition, prior to the granting of any pre-approval, the
Committee or its Chairman, as the case may be, must be satisfied that the performance of the
services in question will not compromise the independence of our independent auditors. Our Chief
Internal Auditor monitors compliance with this policy.
12.3 Audit, Finance and Risk Management Committee Charter
The term Corporation herein shall refer to each of Canadian Pacific Railway Limited (CPRL) and
Canadian Pacific Railway Company (CPRC), and the terms Board, Directors, Board of Directors
and Committee shall refer to the Board, Directors, Board of Directors, or Committee of CPRL or
CPRC, as applicable.
A. |
|
Committee and Procedures |
|
1. |
|
Purpose |
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.
34
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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.
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.
35
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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. |
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; |
36
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(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; |
|
d) |
|
following such review with management and the external auditors, recommend to the
Board of Directors whether to approve the audited annual financial statements of the
Corporation and the related Managements Discussion and Analysis, and report to the Board
on the review by the Committee of the information derived from the financial statements
contained in the Annual Information Form and Annual Report; |
|
|
Interim Financial Statements and MD&A |
|
e) |
|
review with management, the internal auditors and the external auditors the
Corporations interim financial statements and its interim Managements Discussion and
Analysis, and if thought fit, approve the interim financial statements and interim
Managements Discussion and Analysis and the public release thereof by management; |
|
|
Earnings Releases, Earnings Guidance |
|
f) |
|
review and discuss earnings press releases, including the use of pro forma or
adjusted information determined other than in accordance with generally accepted
accounting principles, and the disclosure by the Corporation of earnings guidance and
other financial information to the public including analysts and rating agencies, it being
understood that such discussions may, in the discretion of the Committee, be done
generally (i.e., by discussing the types of information to be disclosed and the type of
presentation to be made) and that the Committee need not discuss in advance each earnings
release or each instance in which the Corporation discloses earnings guidance or other
financial information; and be satisfied that adequate procedures are in place for the
review of such public disclosures and periodically assess the adequacy of those
procedures; |
|
|
Material Litigation, Tax Assessments, Etc. |
|
g) |
|
review with management, the external auditors and, if necessary, legal counsel all
legal and regulatory matters and litigation, claims or contingencies, including tax
assessments, that could have a material effect upon the financial position of the
Corporation, and the manner in which these matters may be, or have been, disclosed in the
financial statements; and obtain reports from management and review with the Corporations
chief legal officer, or appropriate delegates, the Corporations compliance with legal and
regulatory requirements; |
|
|
Oversight of External Auditors |
|
h) |
|
subject to applicable law relating to the appointment and removal of the external
auditors, be directly responsible for the appointment, retention, termination,
compensation and oversight of the external auditors; and be responsible for the resolution
of disagreements between management and the external auditors regarding financial
reporting; |
|
|
Rotation of External Auditors Audit Partners |
|
i) |
|
review and evaluate the lead audit partner of the external auditors and assure the
regular rotation of the lead audit partner and the audit partner responsible for reviewing
the audit and other audit partners, as required by applicable law; and consider whether
there should be a regular rotation of the external audit firm itself; |
|
|
External Auditors Internal Quality Control |
|
j) |
|
obtain and review, at least annually, and discuss with the external auditors a report
by the external auditors describing the external auditors internal quality-control
procedures, any material issues raised by the most recent internal quality-control review,
or peer review, of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, respecting one
or more independent audits carried out by the external auditors, and any steps taken to
deal with any such issues; |
37
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
|
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 |
|
|
(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; |
38
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
|
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; |
|
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, 2010, and December 31,
2009, totalled $2,525,200 and $3,396,200, respectively, as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2010 |
|
December 31, 2009 |
|
Audit Fees |
|
$ |
1,795,600 |
|
|
$ |
2,176,800 |
|
Audit-Related Fees |
|
|
388,400 |
|
|
|
794,800 |
|
Tax Fees |
|
|
341,200 |
|
|
|
424,600 |
|
All Other Fees |
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
2,525,200 |
|
|
$ |
3,396,200 |
|
|
The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below:
12.4.1 Audit Fees
Audit fees were for professional services rendered for the audit of CPs annual financial
statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors report on the
effectiveness of internal controls over 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
39
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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; 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 U.S. and Canadian accounting standards,
securities regulations, and/or laws.
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 value 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 2010 and 2009, there were
no services in this category.
40
SECTION
13: FORWARD-LOOKING INFORMATION
This AIF contains certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (U.S.) and other relevant securities legislation relating, but not
limited to expected improvements in operating efficiency and fluidity, the ability of information
technology to improve service and provide sophisticated billing options, the benefits of lean
process and continuous improvement principles, the cost of environmental remediation and
anticipated capital expenditures. Forward-looking information typically contains statements with
words such as anticipate, believe, expect, plan or similar words suggesting future
outcomes.
Readers are cautioned to not place undue reliance on forward-looking information because it is
possible that actual results will be different from our 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.
The forward-looking information in this document involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: the ability to implement
cost-cutting and efficiency initiatives, the effectiveness of new information technology and
estimates of future costs.
41
SECTION
14: ADDITIONAL INFORMATION
14.1 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 U.S. 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.
42
|
|
|
1
|
|
Chief Executive Officers Letter to Shareholders
|
2
|
|
Managements Discussion and Analysis
|
49
|
|
Financial Statements
|
109
|
|
Five-Year Summary
|
111
|
|
Shareholder Information
|
113
|
|
Directors and Committees
|
114
|
|
Senior Officers of the Company
|
CHIEF EXECUTIVE
OFFICERS LETTER TO SHAREHOLDERS
In last years letter, I said that I was confident that the
lessons learned during the challenges of 2009 would serve us
well in 2010 and beyond that by maintaining a firm
focus on managing fixed and variable costs and ensuring we
continue to price for value we would make the most of an
inevitable economic recovery. And that has been the case.
Some of the notable accomplishments of the past year:
|
|
o
|
Revenue ton miles were increased by 17% as a result of an
improving economy and CPs market development activities;
|
|
o
|
Adjusted diluted earnings per share increased by 54%;
|
|
o
|
CPs adjusted operating ratio was improved by
410 basis points;
|
|
o
|
The annual dividend rate was increased by 9%;
|
|
o
|
The balance sheet was further strengthened by reducing long-term
debt by approximately $250 million and making a
$650 million voluntary prepayment to the Canadian Defined
Benefit Pension Plan; and
|
|
o
|
CP and our largest customer, Teck Resources signed a historic
ten year services contract that aligns the two parties to
substantially grow volumes in the decade ahead.
|
These results were achieved in a year that brought its own
unique challenges.
The rate of economic recovery in 2010 exceeded the expectations
of most of our customers, which was obviously excellent news.
But the limited visibility into near term customer demands
placed on CP resources created a challenge of coordination
between CPs capacity and the capacities of the many North
American and global supply chains in which we participate. CP
responded well, however there were times when CP and the supply
chains did not perform optimally and this is an opportunity we
will address.
In 2011, CP will benefit from our 2010 resource actions on
people and equipment and expects to meet customer demand with a
level of service, and at a level of efficiency, necessary to
achieve its marketplace and financial objectives.
2010 was also a year in which CP continued to strengthen its
reputation as a responsible and active corporate citizen.
I am proud to say, that for the fifth consecutive year, Canadian
Pacific remained the industry leader in train safety
performance. The Company has now been the safest railway in
North America 11 out of the past 13 years a
testament to the dedication and diligence of our employees and
to the effectiveness of our underlying safety management process.
Canadian Pacific also prides itself on its active involvement in
the many communities in which it operates. In 2010, CP was the
official rail services supplier for the 2010 Vancouver Olympic
and Paralympic Winter Games and played an important role in
bringing the Olympic experience to the people of Canada.
CPs Holiday Train once again visited over 140 communities
throughout North America. Since its inception in 1999, the
Holiday Train has helped raise $5.6 million and collected
2.6 million pounds of food in support of community food
banks.
In 2010 CP celebrated the
125th
anniversary of the completion of the construction of the
transcontinental railway. In the same way CP has been at the
forefront of innovation throughout its long history, we used
this anniversary of the driving the last spike to
announce the companys commitment to Driving the
Digital Railway. This is a broad and comprehensive
initiative that will ensure CP remains a leader in innovation
and the application of technology to deliver a successful and
prosperous future for shareholders, employees, and customers.
Turning to 2011, CP enters the year with the balance sheet
strength and liquidity necessary to execute the elements of its
strategy without delay. This is best evidenced by a
$1 billion capital plan that is focused squarely on
providing capacity to grow with an improving economy, leveraging
the customer service and efficiency benefits of technology and
realizing the potential of market development initiatives
carefully nurtured over the past few years.
In 2011 there is much that can and must be done to continue our
steady march to achieving our stated financial goals. It is an
exciting time for this company and its employees. The
cornerstone of CPs success will be an unrelenting focus on
the safety of our operations and the quality of our service.
Sincerely,
Fred Green
President and Chief Executive Officer
CANADIAN
PACIFIC
MANAGEMENTS DISCUSSION AND ANALYSIS
For
the year ended December 31, 2010
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
|
|
|
5
|
|
5.4
|
|
Impact of Foreign Exchange on Earnings
|
|
|
6
|
|
|
|
|
|
|
|
|
6.0
|
|
Non-GAAP Earnings
|
|
|
6
|
|
|
|
|
|
|
|
|
7.0
|
|
Lines of Business
|
|
|
8
|
|
7.1
|
|
Volumes
|
|
|
8
|
|
7.2
|
|
Revenues
|
|
|
10
|
|
7.3
|
|
2010 to 2009 Comparatives
|
|
|
10
|
|
7.3.1
|
|
Freight Revenues
|
|
|
10
|
|
7.3.2
|
|
Other Revenues
|
|
|
12
|
|
7.3.3
|
|
Freight Revenue per Carload
|
|
|
12
|
|
7.3.4
|
|
Freight Revenue per Revenue
Ton-Mile
|
|
|
12
|
|
7.4
|
|
2009 to 2008 Comparatives
|
|
|
13
|
|
7.4.1
|
|
Freight Revenues
|
|
|
13
|
|
7.4.2
|
|
Other Revenues
|
|
|
14
|
|
7.4.3
|
|
Freight Revenue per Carload
|
|
|
14
|
|
7.4.4
|
|
Freight Revenue per Revenue
Ton-Mile
|
|
|
14
|
|
|
|
|
|
|
|
|
8.0
|
|
Performance Indicators
|
|
|
14
|
|
8.1
|
|
Efficiency and Other Indicators
|
|
|
15
|
|
8.2
|
|
Safety Indicators
|
|
|
15
|
|
|
|
|
|
|
|
|
9.0
|
|
Operating Expenses
|
|
|
16
|
|
9.1
|
|
2010 to 2009 Comparatives
|
|
|
16
|
|
9.2
|
|
2009 to 2008 Comparatives
|
|
|
18
|
|
|
|
|
|
|
|
|
10.0
|
|
Other Income Statement Items
|
|
|
19
|
|
|
|
|
|
|
|
|
11.0
|
|
Quarterly Financial Data
|
|
|
20
|
|
|
|
|
|
|
|
|
12.0
|
|
Fourth-Quarter Summary
|
|
|
21
|
|
12.1
|
|
Operating Results
|
|
|
22
|
|
12.2
|
|
Non-GAAP Earnings
|
|
|
22
|
|
12.3
|
|
Revenues
|
|
|
22
|
|
12.4
|
|
Operating Expenses
|
|
|
23
|
|
12.5
|
|
Other Income Statement Items
|
|
|
24
|
|
12.6
|
|
Income Taxes
|
|
|
25
|
|
12.7
|
|
Liquidity and Capital Resources
|
|
|
25
|
|
|
|
|
|
|
|
|
13.0
|
|
Changes in Accounting Policy
|
|
|
25
|
|
13.1
|
|
2010 Accounting Changes
|
|
|
25
|
|
13.2
|
|
New Accounting Pronouncements Issued and Not Yet Adopted
|
|
|
26
|
|
|
|
|
|
|
|
|
14.0
|
|
Liquidity and Capital Resources
|
|
|
26
|
|
14.1
|
|
Operating Activities
|
|
|
26
|
|
14.2
|
|
Investing Activities
|
|
|
27
|
|
14.3
|
|
Financing Activities
|
|
|
28
|
|
14.4
|
|
Free Cash
|
|
|
29
|
|
|
|
|
|
|
|
|
15.0
|
|
Balance Sheet
|
|
|
30
|
|
|
|
|
|
|
|
|
16.0
|
|
Financial Instruments
|
|
|
31
|
|
|
|
|
|
|
|
|
17.0
|
|
Off-Balance Sheet Arrangements
|
|
|
34
|
|
|
|
|
|
|
|
|
18.0
|
|
Acquisition
|
|
|
34
|
|
|
|
|
|
|
|
|
19.0
|
|
Contractual Commitments
|
|
|
34
|
|
|
|
|
|
|
|
|
20.0
|
|
Future Trends and Commitments
|
|
|
35
|
|
|
|
|
|
|
|
|
21.0
|
|
Business Risks and Enterprise Risk Management
|
|
|
36
|
|
21.1
|
|
Competition
|
|
|
36
|
|
21.2
|
|
Liquidity
|
|
|
36
|
|
21.3
|
|
Regulatory Authorities
|
|
|
37
|
|
21.4
|
|
Labour Relations
|
|
|
38
|
|
21.5
|
|
Environmental Laws and Regulations
|
|
|
39
|
|
21.6
|
|
Climate Change
|
|
|
39
|
|
21.7
|
|
Financial Risks
|
|
|
39
|
|
21.8
|
|
General and Other Risks
|
|
|
40
|
|
|
|
|
|
|
|
|
22.0
|
|
Critical Accounting Estimates
|
|
|
41
|
|
|
|
|
|
|
|
|
23.0
|
|
Systems, Procedures and Controls
|
|
|
45
|
|
|
|
|
|
|
|
|
24.0
|
|
Forward-Looking Information
|
|
|
45
|
|
|
|
|
|
|
|
|
25.0
|
|
Glossary of Terms
|
|
|
47
|
|
This Managements Discussion and Analysis
(MD&A) is provided in conjunction with the
Consolidated Financial Statements and related notes for the year
ended December 31, 2010 prepared in accordance with
accounting principles generally accepted in the United States
(U.S. GAAP). Except where otherwise indicated,
all financial information reflected herein is expressed in
Canadian dollars. All information has been prepared in
accordance with U.S. GAAP, except as described in
Section 6.0 Non-GAAP Earnings of this MD&A.
March 2,
2011
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 2010 are against the results for the fourth
quarter of 2009. Unless otherwise indicated, all comparisons of
results for 2010 and 2009 are against the results for 2009 and
2008, respectively.
1.0 Business
Profile
Canadian Pacific Railway Limited, through its subsidiaries,
operates a transcontinental railway in Canada and the United
States (U.S.) and provides logistics and supply
chain expertise. Through our subsidiaries, we provide rail and
intermodal transportation services over a network of
approximately 14,800 miles, serving the principal business
centres of Canada from Montreal, Quebec, to Vancouver, British
Columbia (B.C.), and the U.S. Northeast and
Midwest regions. Our railway feeds directly into the
U.S. heartland from the East and West coasts. Agreements
with other carriers extend our market reach east of Montreal in
Canada, throughout the U.S. and into Mexico. We transport
bulk commodities, merchandise freight and intermodal traffic.
Bulk commodities include grain, coal, sulphur and fertilizers.
Merchandise freight consists of finished vehicles and automotive
parts, as well as forest and industrial and consumer products.
Intermodal traffic consists largely of high-value,
time-sensitive retail goods in overseas containers that can be
transported by train, ship and truck, and in domestic containers
and trailers that can be moved by train and truck.
2.0
Strategy
Our vision is to become the safest and most fluid railway in
North America. Through the ingenuity of our people, it is our
objective to create long-term value for our customers,
shareholders and employees. 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.
|
In line with our strategic vision, CP accomplished the following
initiatives in 2010:
CP announced a ten-year agreement with Teck Resources Limited
(Teck). The agreement reflects the companies
commitment to work together to achieve growth in the volume of
coal shipped through a range of economic and marketplace
dynamics and provides flexibility critical for a long term
agreement.
We made significant progress re-organizing the Company to reduce
the total number of management layers. The new organizational
structure is based on ensuring clear accountability and
alignment and will facilitate more efficient decision making
consistent with delivering on our multi-year service
reliability, productivity and asset velocity objectives. The
redesign has reduced the number of operating regions, and the
Operations side of the reorganization is complete.
During 2010, CP took on new initiatives targeted at permanently
reducing structural costs. This included the consolidation of
certain offices, as well as the consolidation of locomotive and
freight car repair facilities.
In addition, we took further actions to strengthen the balance
sheet and create and enhance the organizations financial
flexibility. CP took advantage of low cost debt markets and
used both debt and funds from operations to pre-fund the main
Canadian defined benefit pension plan. This effectively puts our
cash to work more quickly and reduces expected future pension
contributions. The actions taken have given the Company
significant flexibility in pension funding levels over the next
3-5 years.
Finally, with the strengthening economy in 2010, CP enjoyed a
12.6% increase in volumes (as measured by carloads) and
delivered on the key objective of sustaining long train
improvements while managing a busier network. Our multi-year
capital plan includes the intention to expand and increase the
number of sidings that can accommodate long trains to allow
further productivity improvements. Our 2011 capital plan
includes key improvements in IT and investment to support growth
and productivity enhancements.
3.0 Additional
Information
Additional information, including our Consolidated Financial
Statements, Annual Information Form, press releases and other
required filing documents, is available on SEDAR at
www.sedar.com in Canada, on EDGAR at www.sec.gov in the
U.S. and on our website at www.cpr.ca. The aforementioned
documents are issued and made available in accordance with legal
requirements and are not incorporated by reference into this
MD&A.
4.0 Financial
Highlights
|
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|
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|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
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For the year ended December 31 (in millions, except
percentages and per-share data)
|
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|
|
|
|
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2008(2)
|
|
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DM&E(3)
|
|
|
Pro
forma(1)(4)(5)
|
|
Revenues
|
|
$
|
4,981.5
|
|
|
$
|
4,402.2
|
|
|
$
|
5,048.5
|
|
|
$
|
300.7
|
|
|
$
|
5,349.2
|
|
Adjusted operating
income(5)
|
|
|
1,116.1
|
|
|
|
805.5
|
|
|
|
1,039.0
|
|
|
|
86.2
|
|
|
|
1,125.2
|
|
Operating income
|
|
|
1,116.1
|
|
|
|
830.1
|
|
|
|
1,039.0
|
|
|
|
86.2
|
|
|
|
1,125.2
|
|
Income, before FX on LTD and other specified
items(5)
|
|
|
654.2
|
|
|
|
418.3
|
|
|
|
631.2
|
|
|
|
|
|
|
|
631.2
|
|
Net income
|
|
|
650.7
|
|
|
|
550.0
|
|
|
|
627.8
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|
|
|
|
|
|
|
627.8
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Basic earnings per share
|
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3.86
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|
|
|
3.31
|
|
|
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4.08
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|
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4.08
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|
Diluted earnings per share
|
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|
3.85
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|
3.30
|
|
|
|
4.04
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|
|
|
|
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|
4.04
|
|
Diluted earnings per share, before FX on LTD and other specified
items(5)
|
|
|
3.87
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|
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|
2.51
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|
|
|
4.06
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|
|
|
|
|
|
|
4.06
|
|
Dividends declared per share
|
|
|
1.0575
|
|
|
|
0.9900
|
|
|
|
0.9900
|
|
|
|
|
|
|
|
0.9900
|
|
|
|
|
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|
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Free
cash(5)(7)
|
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|
(325.2
|
)
|
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|
(90.7
|
)
|
|
|
150.7
|
|
|
|
|
|
|
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Total assets at December 31
|
|
|
13,675.9
|
|
|
|
14,154.8
|
|
|
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14,362.2
|
|
|
|
|
|
|
|
|
|
Total long-term financial liabilities at December
31(6)
|
|
|
4,169.8
|
|
|
|
4,302.2
|
|
|
|
5,126.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio
|
|
|
77.6
|
%
|
|
|
81.1
|
%
|
|
|
79.4
|
%
|
|
|
|
|
|
|
79.0
|
%
|
Adjusted operating
ratio(5)
|
|
|
77.6
|
%
|
|
|
81.7
|
%
|
|
|
79.4
|
%
|
|
|
|
|
|
|
79.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) Revenues
and Operating income include DM&E (discussed further in
Section 18.0 Acquisition) from October 30, 2008 to
December 31, 2008.
(3) DM&E
results for the period January 1, 2008 to October 29,
2008 which under GAAP was reported as one line in equity income
in DM&E.
(4) Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for the year ended
December 31, 2008.
(5) These
earnings measures have no standardized meanings prescribed by
U.S. 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.
(6) Excludes
deferred taxes of the following amounts: $1,944.8 million,
$1,818.7 million and $1,964.5 million, and other
non-financial long-term liabilities of $1,447.1 million,
$1,769.8 million and $1,688.2 million for the years
2010, 2009 and 2008 respectively.
(7) Includes
a $650 million voluntary prepayment to the Companys
main Canadian defined benefit pension plan in 2010 and a
$500 million voluntary prepayment in 2009 (discussed
further in Section 20.5 Pension Plan Deficit).
5.0 Operating
Results
5.1
INCOME
Operating income in 2010 was $1,116.1 million, up
$286.0 million, or 34.5%, from $830.1 million in 2009.
Adjusted operating income in 2010, excluding certain other
specified items (discussed further in Section 6.0
Non-GAAP Earnings and Section 6.2 Other Specified
Items) was also $1,116.1 million, an increase of
$310.6 million, or 38.6% from 2009 adjusted operating
income of $805.5 million.
Operating income in 2010 increased due to the stronger economy
(discussed further in Section 7.0 Lines of Business), along
with continued cost management activities (discussed further in
Section 9.0 Operating Expenses). The increase in 2010
operating income also reflected the 2009 loss of
$54.5 million which arose from the termination of a lease
with a shortline railway (discussed further in
Section 9.1.7.2 Loss on Termination of Lease with Shortline
Railway).
This increase in operating income was partially offset by the
2009 gain on sales of significant properties (discussed further
in Section 9.1.7.1 Gain on Sales of Significant Properties)
and the unfavourable impact of the change in foreign exchange
(FX, discussed further in Section 25.0 Glossary
of Terms).
Adjusted operating income increased primarily due to an increase
in overall freight volumes and associated revenues driven by the
continuing economic recovery along with the favourable impact of
cost management initiatives. The increase was partially offset
by an unfavourable impact of the change in FX.
Operating income in 2009 was $830.1 million, down
$208.9 million, or 20.1%, from $1,039.0 million in
2008. Operating income in 2009 was down $295.1 million, or
26.2%, from $1,125.2 million in 2008 on a pro forma basis.
Adjusted operating income in 2009, excluding certain other
specified items (discussed further in Section 6.0
Non-GAAP Earnings and Section 6.2 Other Specified
Items) was $805.5 million, a decrease of
$319.7 million, or 28.4% from 2008 on a pro forma adjusted
operating income basis of $1,125.2 million.
The decrease in 2009 operating income, compared to 2008 on a pro
forma basis, was primarily due to:
|
|
o
|
the global recession which resulted in lower traffic volumes;
|
|
o
|
reduced coal revenues as a result of regulatory rate proceedings
and reduced average length of haul on export coal; and
|
|
o
|
a loss on termination of a lease (discussed further in
Section 9.1.7.2 Loss on Termination of Lease with Shortline
Railway).
|
This decrease was partially offset by:
|
|
o
|
the gain on sales of significant properties (discussed further
in Section 9.1.7.1 Gain on Sales of Significant Properties);
|
|
o
|
the favourable impact of the change in FX;
|
|
o
|
a decline in overall compensation and benefits expense due to
lower volumes, however, the success of variable cost reductions
in response to lower volumes resulted in higher incentive
compensation and gainshare payments to employees;
|
|
o
|
the net effect of fuel price declines; and
|
|
o
|
lower purchased services and other expenses.
|
Net income for the year ended December 31, 2010 was
$650.7 million, an increase of $100.7 million, or
18.3%, from $550.0 million in 2009. The increase in 2010
was primarily due to higher operating income.
This increase was partially offset by:
|
|
o
|
the 2009 gain on sale of a partnership interest (discussed
further in Section 10.1 Gain on Sale of Partnership
Interest);
|
|
o
|
an increase in income tax expense; and
|
|
o
|
income tax recoveries in 2009 (discussed further in
Section 10.5 Income Taxes).
|
Net income for the year ended December 31, 2009 was
$550.0 million, a decrease of $77.8 million, or 12.4%,
from $627.8 million in 2008. The decrease in 2009 was
mainly due to lower operating income. The decrease was partially
offset by:
|
|
o
|
the gain on sale of a partnership interest (discussed further in
Section 10.1 Gain on Sale of Partnership Interest);
|
|
o
|
the absence of the 2008 loss in fair value of our investment in
Asset-backed Commercial Paper (ABCP); and
|
|
o
|
income tax recoveries in 2009 (discussed further in
Section 10.5 Income Taxes).
|
5.2 DILUTED
EARNINGS PER SHARE
Diluted earnings per share (EPS) was $3.85 in 2010,
an increase of $0.55, or 16.7% from 2009. Diluted EPS was $3.30
in 2009, a decrease of $0.74, or 18.3%, from $4.04 in 2008. The
increase in 2010 was mainly due to higher net income, offset
slightly by an increase in the number of common shares. The
decrease in 2009 was mainly due to lower net income and the
issuance of common shares in the first quarter of 2009.
Diluted EPS, before foreign exchange on long-term debt (FX
on LTD) and other specified items (discussed further in
Section 6.0 Non-GAAP Measures) was $3.87 in 2010, an
increase of $1.36 or 54.2%, from 2009. Diluted EPS before FX on
LTD and other specified items was $2.51 in 2009, a decrease of
$1.55, or 38.2%, from $4.06 in 2008. The increase in 2010 was
primarily due to higher adjusted operating income, partially
offset by an increase in income tax expense. The decrease in
2009 was mainly due to lower operating income. The issuance of
common shares in the first quarter further reduced 2009 diluted
EPS, before FX on LTD and other specified items.
5.3 OPERATING
RATIO
The operating ratio provides the percentage of revenues used to
operate the railway, and is calculated as operating expenses
divided by revenues. A lower percentage normally indicates
higher efficiency in the operation of the railway. Operating
ratio was 77.6% in 2010,
an improvement from 81.1% in 2009. Operating ratio increased to
81.1% in 2009 from 79.4% in 2008.
Excluding certain other specified items our adjusted operating
ratio (discussed further in Section 6.0
Non-GAAP Earnings and Section 6.2 Other Specified
Items) was 77.6% in 2010, compared with 81.7% in 2009. Adjusted
operating ratio increased to 81.7% in 2009 from 79.4% in 2008.
The adjusted operating ratio in 2010 improved 410 basis
points from 81.7% in 2009. The improvement was primarily due to
an increase in freight revenues (discussed further in
Section 7.0 Lines of Business) combined with continued cost
management initiatives (discussed further in Section 9.0
Operating Expenses).
The 2009 adjusted operating ratio of 81.7% increased by
270 basis points from 79.0% in 2008 on a pro forma basis.
The increase in 2009 was primarily due to lower volumes which
were partially mitigated by cost management initiatives that
reduced both variable and structural costs and lower fuel prices.
5.4 IMPACT OF
FOREIGN EXCHANGE ON EARNINGS
Fluctuations in FX affect our results because
U.S. dollar-denominated revenues and expenses are
translated into Canadian dollars. U.S. dollar-denominated
revenues and expenses increase when the Canadian dollar weakens
in relation to the U.S. dollar.
In 2010, the Canadian dollar strengthened against the
U.S. dollar on average by approximately 10.4% compared to
2009 and weakened by approximately 9.4% in 2009 compared with
2008. The average FX rate for converting U.S. dollars to
Canadian dollars decreased to $1.03 in 2010 from $1.15 in 2009
and increased to $1.15 in 2009 from $1.05 in 2008.
The FX fluctuations throughout 2010 impacted both the
year-over-year
and 2010 fourth-quarter to 2009 fourth-quarter comparisons. Our
revenues and expenses, long-term debt and U.S. investments
are subject to changes in the value of the Canadian dollar and
the timing of the settlement of certain transactions.
6.0
Non-GAAP Earnings
We present non-GAAP measures and cash flow information 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 measures exclude
FX on LTD, which can be volatile and short term, and other
specified items that are not among our normal ongoing revenues
and operating expenses.
These non-GAAP measures have no standardized meaning and are not
defined by GAAP and, therefore, are unlikely to be comparable to
similar measures presented by other companies. Income, before FX
on LTD and other specified items, or adjusted earnings, provides
management with a measure of income that can help in a
multi-period 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. Diluted EPS, before FX on LTD and
other specified items is also referred to as adjusted diluted
EPS.
Adjusted operating income is calculated as operating income less
other specified operating expenses. This provides a measure of
the profitability of the railway on an ongoing basis as it
excludes other specified items. Adjusted operating expenses is
calculated as operating expenses less other specified operating
expenses that do not typify normal business activities. There
were no such adjustments for the three months and year ended
December 31, 2010. In the three months ended
December 31, 2009 the loss on termination of a lease with a
shortline railway of $54.5 million was excluded from
operating expenses. In the year ended December 31, 2009 the
gain on sales of significant properties of $79.1 million
and the loss on termination of a lease with a shortline railway
of $54.5 million were excluded from operating expenses.
Adjusted operating ratio is calculated as adjusted operating
expenses divided by revenues. This provides the percentage of
revenues used to operate the railway on an ongoing basis as it
excludes certain other specified items.
Our results for fourth-quarter and full year 2009 are compared
to fourth-quarter and full year 2008 on a pro forma basis. Pro
forma is a non-GAAP measure which redistributes the DM&E
operating results originally reported on an equity basis of
accounting to a
line-by-line
consolidation of revenues and expenses. Doing so provides a
comparable measure for period to period changes until DM&E
results are fully consolidated with CPs operations for
comparable periods.
The following table details a reconciliation of 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 changes in cash and cash equivalent balances
resulting from FX fluctuations and excludes the acquisition
of DM&E and changes in the accounts receivable
securitization program. The measure is used by management to
provide information with respect to the relationship between
cash provided by operating activities and investment decisions
and provides a comparable measure for period to period changes.
Free cash is discussed further and is reconciled to the change
in cash and cash equivalents as presented in the financial
statements in Section 14.4 Free Cash.
Interest coverage ratio is a metric used in assessing the
Companys debt servicing capabilities, but does not have a
comparable GAAP measure to which it can be reconciled. This
ratio provides an indicator of our debt servicing capabilities,
and how these have changed, period over period and in comparison
to our peers. Interest coverage ratio includes adjusted earnings
before interest and taxes (adjusted EBIT) which can
also be calculated as adjusted operating income less other
income and charges, before FX on LTD and other specified items.
The ratio reported quarterly is measured on a twelve month
rolling basis. Interest coverage ratio is discussed further in
Section 14.3.2 Interest Coverage Ratio.
RECONCILIATION OF
NON-GAAP MEASURES TO GAAP MEASURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
For the year ended December 31
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008(2)
|
|
|
2010
|
|
|
2009(1)
|
|
(in millions, except diluted EPS)
|
|
|
|
|
|
|
|
2008(1)
|
|
|
DM&E(3)
|
|
|
Pro
forma(3)(4)
|
|
|
|
|
|
|
|
Adjusted operating
income(4)(5)
|
|
$
|
1,116.1
|
|
|
$
|
805.5
|
|
|
$
|
1,039.0
|
|
|
$
|
86.2
|
|
|
$
|
1,125.2
|
|
|
$
|
297.7
|
|
|
$
|
222.0
|
|
|
|
Equity income in DM&E
|
|
|
|
|
|
|
|
|
|
|
50.9
|
|
|
|
(50.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and charges, before FX on LTD and other specified
items(4)
|
|
|
(6.3
|
)
|
|
|
22.3
|
|
|
|
17.1
|
|
|
|
(0.4
|
)
|
|
|
16.7
|
|
|
|
(5.3
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
Adjusted
EBIT(4)
|
|
|
1,122.4
|
|
|
|
783.2
|
|
|
|
1,072.8
|
|
|
|
35.7
|
|
|
|
1,108.5
|
|
|
|
303.0
|
|
|
|
221.4
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
257.3
|
|
|
|
267.6
|
|
|
|
239.6
|
|
|
|
1.9
|
|
|
|
241.5
|
|
|
|
65.2
|
|
|
|
68.4
|
|
Income tax expense, before income tax on FX on LTD and other
specified
items(4)
|
|
|
210.9
|
|
|
|
97.3
|
|
|
|
202.0
|
|
|
|
33.8
|
|
|
|
235.8
|
|
|
|
47.7
|
|
|
|
27.4
|
|
|
|
Income, before FX gain (loss) on LTD and other specified
items(4)
|
|
|
654.2
|
|
|
|
418.3
|
|
|
|
631.2
|
|
|
|
|
|
|
|
631.2
|
|
|
|
190.1
|
|
|
|
125.6
|
|
|
|
Foreign exchange gain (loss) on long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD gain (loss)
|
|
|
2.3
|
|
|
|
3.6
|
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
(5.8
|
)
|
|
|
(0.9
|
)
|
|
|
7.6
|
|
Income tax (expense) recovery on FX on LTD
|
|
|
(8.2
|
)
|
|
|
(31.3
|
)
|
|
|
37.2
|
|
|
|
|
|
|
|
37.2
|
|
|
|
(3.6
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
FX on LTD, net of tax (loss) gain
|
|
|
(5.9
|
)
|
|
|
(27.7
|
)
|
|
|
31.4
|
|
|
|
|
|
|
|
31.4
|
|
|
|
(4.5
|
)
|
|
|
2.5
|
|
Other specified items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on termination of lease with shortline railway
|
|
|
|
|
|
|
(54.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54.5
|
)
|
Income tax recovery
|
|
|
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.9
|
|
|
|
|
|
|
|
Loss on termination of lease with shortline railway, net of tax
|
|
|
|
|
|
|
(37.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37.6
|
)
|
Gain on sale of partnership interest
|
|
|
|
|
|
|
81.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
(12.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of partnership interest, net of tax
|
|
|
|
|
|
|
68.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of significant properties
|
|
|
|
|
|
|
79.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of significant properties, net of tax
|
|
|
|
|
|
|
68.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of long-term floating rate notes/ ABCP
|
|
|
3.4
|
|
|
|
6.3
|
|
|
|
(49.4
|
)
|
|
|
|
|
|
|
(49.4
|
)
|
|
|
0.3
|
|
|
|
|
|
Income tax (expense) recovery
|
|
|
(1.0
|
)
|
|
|
(1.8
|
)
|
|
|
14.6
|
|
|
|
|
|
|
|
14.6
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of long-term floating rate notes/ ABCP, net
of tax
|
|
|
2.4
|
|
|
|
4.5
|
|
|
|
(34.8
|
)
|
|
|
|
|
|
|
(34.8
|
)
|
|
|
0.2
|
|
|
|
|
|
Income tax benefits due to rate reduction and settlement related
to prior year
|
|
|
|
|
|
|
55.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.7
|
|
|
|
Net income
|
|
$
|
650.7
|
|
|
$
|
550.0
|
|
|
$
|
627.8
|
|
|
$
|
|
|
|
$
|
627.8
|
|
|
$
|
185.8
|
|
|
$
|
146.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
3.85
|
|
|
$
|
3.30
|
|
|
$
|
4.04
|
|
|
$
|
|
|
|
$
|
4.04
|
|
|
$
|
1.09
|
|
|
$
|
0.87
|
|
Diluted EPS, related to FX on LTD, net of
tax(4)
|
|
|
0.03
|
|
|
|
0.17
|
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
(0.20
|
)
|
|
|
0.03
|
|
|
|
(0.02
|
)
|
Diluted EPS, related to other specified items, net of
tax(4)
|
|
|
(0.01
|
)
|
|
|
(0.96
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
0.22
|
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, before FX on LTD and other specified
items(4)
|
|
$
|
3.87
|
|
|
$
|
2.51
|
|
|
$
|
4.06
|
|
|
$
|
|
|
|
$
|
4.06
|
|
|
$
|
1.12
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) DM&E
results for the period January 1, 2008 to October 29,
2008 which under GAAP was reported as one line in equity income
in DM&E.
(3) Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for 2008.
(4) These
earnings measures have no standardized meanings prescribed by
U.S. 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.
(5) Adjusted
operating income is calculated as revenues less adjusted
operating expenses. Adjusted operating expenses are discussed
further in Section 9.0 Operating expenses.
6.1 FOREIGN
EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT
FX on LTD arises mainly as a result of translating
U.S. 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 U.S. 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. The majority of our
U.S. dollar-denominated debt is designated as a hedge of
our net investments in U.S. 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 gain on LTD of $2.3 million in 2010, as the Canadian
dollar strengthened to $0.9946 at December 31, 2010,
relative to the U.S. dollar;
|
|
o
|
FX gain on LTD of $3.6 million in 2009, as the Canadian
dollar strengthened to $1.0510 at December 31, 2009,
relative to the U.S. dollar;
|
|
o
|
FX loss on LTD of $5.8 million in 2008, as the Canadian
dollar exchange rate weakened to $1.2180 at December 31,
2008 relative to the U.S. dollar; and
|
|
o
|
income tax recovery (expense) 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, gains and losses on non-routine
sales of assets, unusual income tax adjustments, restructuring
and asset impairment charges, and other items that do not typify
normal business activities.
In 2010 we recorded net realized gains on the settlement of
long-term floating rate notes and unrealized gains from the
change in the estimated fair value of long-term floating rate
notes totalling $3.4 million ($2.4 million after tax),
of which $0.3 million ($0.2 million after tax) were
recorded in the fourth quarter.
In 2009, there were five other specified items included in net
income as follows:
|
|
o
|
in the fourth quarter of 2009, we recorded a loss of
$54.5 million ($37.6 million after tax) on the
termination of a lease with a shortline railway (discussed
further in Section 9.1.7.2 Loss on Termination of Lease with
Shortline Railway).
|
|
o
|
in the fourth quarter of 2009, the Company recorded a tax
benefit of $55.7 million due to a rate reduction and a
settlement related to a prior year income tax matter.
|
|
o
|
in the third quarter of 2009, we recorded gains of
$79.1 million ($68.1 million after tax) on the sale of
Windsor Station, in Montreal and a land sale in western Canada
(discussed further in Section 9.1.7.1 Gain on Sales of
Significant Properties).
|
|
o
|
in the second quarter of 2009, we recorded a gain of
$81.2 million ($68.7 million after tax) on the sale of
a partnership interest in the Detroit River Tunnel Partnership
(DRTP) (discussed further in Section 10.1 Gain
on Sale of Partnership Interest).
|
|
o
|
in the second and third quarters of 2009, the Company recorded
realized gains from the settlement of and unrealized gains from
the change in estimated fair value of long-term floating rate
notes totalling $6.3 million ($4.5 million after tax),
(discussed further in Section 22.6 Long-term Floating Rate
Notes).
|
In the first and third quarters of 2008, we recorded charges
totalling $49.4 million ($34.8 million after tax) to
reflect the change in the estimated fair value of ABCP
(discussed further in Section 22.6 Long-term Floating Rate
Notes).
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
For the year ended December 31
|
|
|
|
|
|
|
|
As
reported(1)
|
|
|
Pro
forma(2)
|
|
Carloads (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
|
466.4
|
|
|
|
469.5
|
|
|
|
382.4
|
|
|
|
460.4
|
|
Coal
|
|
|
341.1
|
|
|
|
305.1
|
|
|
|
281.0
|
|
|
|
317.7
|
|
Sulphur and fertilizers
|
|
|
177.2
|
|
|
|
108.8
|
|
|
|
191.3
|
|
|
|
195.4
|
|
Forest products
|
|
|
71.6
|
|
|
|
66.8
|
|
|
|
91.8
|
|
|
|
97.6
|
|
Industrial and consumer products
|
|
|
396.9
|
|
|
|
345.9
|
|
|
|
340.9
|
|
|
|
425.5
|
|
Automotive
|
|
|
137.3
|
|
|
|
103.7
|
|
|
|
141.3
|
|
|
|
142.0
|
|
Intermodal
|
|
|
1,070.1
|
|
|
|
962.9
|
|
|
|
1,216.0
|
|
|
|
1,216.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carloads
|
|
|
2,660.6
|
|
|
|
2,362.7
|
|
|
|
2,644.7
|
|
|
|
2,854.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
ton-miles
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
|
34,556
|
|
|
|
34,838
|
|
|
|
29,376
|
|
|
|
32,019
|
|
Coal
|
|
|
19,021
|
|
|
|
16,997
|
|
|
|
21,247
|
|
|
|
21,600
|
|
Sulphur and fertilizers
|
|
|
17,687
|
|
|
|
9,362
|
|
|
|
19,757
|
|
|
|
19,956
|
|
Forest products
|
|
|
5,238
|
|
|
|
4,470
|
|
|
|
5,677
|
|
|
|
5,927
|
|
Industrial and consumer products
|
|
|
21,996
|
|
|
|
17,653
|
|
|
|
18,296
|
|
|
|
21,364
|
|
Automotive
|
|
|
2,067
|
|
|
|
1,607
|
|
|
|
2,213
|
|
|
|
2,221
|
|
Intermodal
|
|
|
25,863
|
|
|
|
23,425
|
|
|
|
27,966
|
|
|
|
27,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
ton-miles
|
|
|
126,428
|
|
|
|
108,352
|
|
|
|
124,532
|
|
|
|
131,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) Pro
forma basis includes DM&E results for the full year ended
December 31, 2008.
Volumes in 2010, as measured by total carloads, increased by
approximately 297,900, or 12.6%, and revenue
ton-miles
(RTM) increased by 18,076 million, or 16.7%,
compared with 2009.
These increases in carloads and RTMs in 2010 were a result of
higher demand driven by an improved economy, a rebound in coal
and fertilizer volumes, and inventory replenishment by our
customers benefiting the majority of our lines of business in
the year.
Volumes in 2009, as measured by total carloads, decreased by
approximately 491,900, or 17.2%, and RTMs decreased by
22,701 million, or 17.3%, compared with pro forma 2008.
These decreases in carloads and RTMs in 2009 were driven by the
global recession which resulted in soft market conditions and
reduced customer demand lowering shipments in all but the grain
line of business which benefited from a larger than normal crop.
Coal volumes measured by carloads did not decline as much as
RTMs due to decreased average length of haul.
7.2 REVENUES
Our revenues are primarily derived from transporting freight.
Other revenues are generated mainly from leasing of certain
assets, switching fees and passenger revenue.
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions)
|
|
|
|
|
|
|
|
reported(1)
|
|
|
DM&E(2)
|
|
|
Pro
forma(3)(4)
|
|
Grain
|
|
$
|
1,135.7
|
|
|
$
|
1,137.1
|
|
|
$
|
977.2
|
|
|
$
|
102.3
|
|
|
$
|
1,079.5
|
|
Coal
|
|
|
490.8
|
|
|
|
443.8
|
|
|
|
611.4
|
|
|
|
15.8
|
|
|
|
627.2
|
|
Sulphur and fertilizers
|
|
|
474.8
|
|
|
|
309.3
|
|
|
|
511.9
|
|
|
|
10.5
|
|
|
|
522.4
|
|
Forest products
|
|
|
184.9
|
|
|
|
176.1
|
|
|
|
241.1
|
|
|
|
9.9
|
|
|
|
251.0
|
|
Industrial and consumer products
|
|
|
902.8
|
|
|
|
786.1
|
|
|
|
772.0
|
|
|
|
156.3
|
|
|
|
928.3
|
|
Automotive
|
|
|
316.4
|
|
|
|
229.3
|
|
|
|
325.6
|
|
|
|
4.0
|
|
|
|
329.6
|
|
Intermodal
|
|
|
1,347.9
|
|
|
|
1,198.1
|
|
|
|
1,482.3
|
|
|
|
|
|
|
|
1,482.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenues
|
|
|
4,853.3
|
|
|
|
4,279.8
|
|
|
|
4,921.5
|
|
|
|
298.8
|
|
|
|
5,220.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues
|
|
|
128.2
|
|
|
|
122.4
|
|
|
|
127.0
|
|
|
|
1.9
|
|
|
|
128.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,981.5
|
|
|
$
|
4,402.2
|
|
|
$
|
5,048.5
|
|
|
$
|
300.7
|
|
|
$
|
5,349.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) DM&E
figures are for the period January 1, 2008 to
October 29, 2008.
(3) Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
(4) These
earnings measures have no standardized meanings prescribed by
U.S. 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.
In 2010 and 2009, no one customer comprised more than 10% of
total revenues and accounts receivable. For the year ended
December 31, 2008, one customer comprised 11.0% of total
revenues and 1.7% of total trade accounts receivable.
7.3 2010 TO
2009 COMPARATIVES
7.3.1 Freight
Revenues
Freight revenues are earned from transporting bulk, merchandise
and intermodal goods, and include fuel recoveries billed to our
customers. Freight revenues were $4,853.3 million in 2010,
an increase of $573.5 million, or 13.4% compared to
$4,279.8 million in 2009.
The increase in 2010 was driven primarily by:
|
|
o
|
higher traffic volumes due to an improved economy;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates on average for all lines of business.
|
These improvements were partially offset by the unfavourable
impact of the change in FX.
7.3.1.1 Fuel
Cost Recovery Program
A change in fuel prices may adversely impact the Companys
expenses and revenues. As such, CP primarily employs a fuel cost
recovery program utilizing a 15 day average fuel index
price designed to respond to fluctuations in fuel prices and
help mitigate the financial impact of fuel price volatility.
7.3.1.2 Grain
Grain transported by CP consists of both whole grains, such as
wheat, corn, soybeans, and canola, and processed products such
as meals, oils, and flour. Canadian grain products are primarily
transported to ports for export and to Canadian and
U.S. markets for domestic consumption. U.S. grain
products are shipped from the Midwestern U.S. to other
points in the Midwest, the Pacific Northwest and North-eastern
U.S. Grain revenues in 2010 were $1,135.7 million, a
decrease of $1.4 million, or 0.1% compared to
$1,137.1 million in 2009.
Grain revenues decreased slightly in 2010 primarily due to lower
Canadian grain shipments driven by lower overall production for
the 2009/2010 crop year compared to an above average 2008/2009
crop year, and the unfavourable impact of the change in FX.
This decrease was partially offset by increased
U.S. originated shipments, higher fuel surcharge revenues
due to the change in fuel prices, and increased freight rates.
7.3.1.3 Coal
Our Canadian coal business consists primarily of metallurgical
coal transported from southeastern B.C. to the ports of
Vancouver, B.C. and Thunder Bay, Ontario, and to the
U.S. Midwest. Our U.S. coal
business consists primarily of the transportation of thermal
coal and petroleum coke within the U.S. Midwest. Coal
revenues in 2010 were $490.8 million, an increase of
$47.0 million, or 10.6% from $443.8 million in 2009.
Coal revenues increased in 2010 primarily due to:
|
|
o
|
an increase in demand for metallurgical coal to Asia;
|
|
o
|
increased freight rates for U.S. originated
traffic; and
|
|
o
|
higher fuel surcharge revenues due to the change in fuel price.
|
This increase was partially offset by reduced average length of
haul, and the unfavourable impact of the change in FX.
7.3.1.4 Sulphur
and Fertilizers
Sulphur and fertilizers include potash, chemical fertilizers and
sulphur shipped mainly from western Canada to the ports of
Vancouver, B.C., and Portland, Oregon, and to other Canadian and
U.S. destinations. Sulphur and fertilizers revenues in 2010
were $474.8 million, an increase of $165.5 million, or
53.5% from $309.3 million in 2009.
Sulphur and fertilizers revenues increased in 2010 primarily due
to:
|
|
o
|
higher export potash shipments as a result of the return of
international buyers to the market;
|
|
o
|
higher domestic potash shipments due to increased overall demand
and rising commodity prices such as grain, in the second half of
the year;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
7.3.1.5 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 product revenues in 2010 were $184.9 million, an
increase of $8.8 million, or 5.0% from $176.1 million
in 2009.
Forest product revenues increased in 2010 primarily due to:
|
|
o
|
higher overall shipments of lumber, panel and pulp and paper
products due to the re-opening of a mill on our lines in 2010;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates and extended length of haul.
|
The increase was partially offset by the unfavourable impact of
the change in FX.
7.3.1.6 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 2010 were
$902.8 million, an increase of $116.7 million, or
14.8% from $786.1 million in 2009.
Industrial and consumer products revenues increased in 2010
primarily due to:
|
|
o
|
increased shipments of steel, clay and aggregates driven by the
improvement in the North American economy;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
7.3.1.7 Automotive
Automotive consists primarily of three core finished-vehicle
traffic segments: import vehicles, Canadian-produced vehicles
and
U.S.-produced
vehicles. These segments move through Port Metro Vancouver to
eastern Canadian markets; to the U.S. from Ontario
production facilities; and to Canadian markets, respectively.
Automotive revenues in 2010 were $316.4 million, an
increase of $87.1 million, or 38.0% from
$229.3 million in 2009.
The increase in 2010 was primarily due to:
|
|
o
|
increased overall auto production and higher North American auto
sales;
|
|
o
|
the absence of a series of unusual plant shutdowns and
curtailments of production caused by the restructuring of
U.S. automakers in 2009;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
7.3.1.8 Intermodal
CPs intermodal portfolio consists of domestic and
international services. Our domestic business consists primarily
of the movement of manufactured consumer products in containers
within North America. The international business handles
the movement of marine containers to and from ports and into
North American inland markets. Intermodal revenues in 2010 were
$1,347.9 million, an increase of $149.8 million, or
12.5% from $1,198.1 million in 2009.
The increase in 2010 was primarily due to:
|
|
o
|
increased domestic container shipments due to increased domestic
sales in the cross border and retail sectors offset by reduced
volumes in short-haul lanes;
|
|
o
|
higher overall import/export volumes through the Port Metro
Vancouver;
|
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX and overall lower imports through the Eastern
ports by CP served shipping lines.
7.3.2 Other
Revenues
Other revenues are generated from leasing certain assets,
switching fees, other arrangements including logistical
services, and contracts with passenger service operators. Other
revenues in 2010 were $128.2 million, an increase of
$5.8 million, or 4.7% from $122.4 million in 2009.
The increase was primarily due to increased revenues from
leasing and switching, partially offset by lower passenger
revenues and the unfavourable impact of the change in FX.
7.3.3 Freight
Revenue per Carload
FREIGHT REVENUE
PER CARLOAD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
For the year ended December 31
|
|
2010
|
|
|
2009
|
|
|
As
reported(1)
|
|
|
Pro
forma(2)(3)
|
|
Grain
|
|
$
|
2,435
|
|
|
$
|
2,422
|
|
|
$
|
2,555
|
|
|
$
|
2,345
|
|
Coal
|
|
|
1,439
|
|
|
|
1,455
|
|
|
|
2,176
|
|
|
|
1,974
|
|
Sulphur and fertilizers
|
|
|
2,679
|
|
|
|
2,843
|
|
|
|
2,676
|
|
|
|
2,673
|
|
Forest products
|
|
|
2,582
|
|
|
|
2,636
|
|
|
|
2,626
|
|
|
|
2,572
|
|
Industrial and consumer products
|
|
|
2,275
|
|
|
|
2,273
|
|
|
|
2,265
|
|
|
|
2,182
|
|
Automotive
|
|
|
2,304
|
|
|
|
2,211
|
|
|
|
2,304
|
|
|
|
2,321
|
|
Intermodal
|
|
|
1,260
|
|
|
|
1,244
|
|
|
|
1,219
|
|
|
|
1,219
|
|
Total freight revenue per carload
|
|
$
|
1,824
|
|
|
$
|
1,811
|
|
|
$
|
1,861
|
|
|
$
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
(3) These
earnings measures have no standardized meanings prescribed by
U.S. 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.
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.
Total freight revenue per carload in 2010 increased by 0.7% due
to the increase in fuel surcharge revenues and increased freight
rates. This increase was partially offset by the unfavourable
impact of the change in FX.
7.3.4 Freight
Revenue per Revenue
Ton-Mile
FREIGHT REVENUE
PER REVENUE
TON-MILE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
For the year ended December 31
(cents)
|
|
2010
|
|
|
2009
|
|
|
As
reported(1)
|
|
|
Pro
forma(2)(3)
|
|
Grain
|
|
|
3.29
|
|
|
|
3.26
|
|
|
|
3.33
|
|
|
|
3.37
|
|
Coal
|
|
|
2.58
|
|
|
|
2.61
|
|
|
|
2.88
|
|
|
|
2.90
|
|
Sulphur and fertilizers
|
|
|
2.68
|
|
|
|
3.30
|
|
|
|
2.59
|
|
|
|
2.62
|
|
Forest products
|
|
|
3.53
|
|
|
|
3.94
|
|
|
|
4.25
|
|
|
|
4.23
|
|
Industrial and consumer products
|
|
|
4.10
|
|
|
|
4.45
|
|
|
|
4.22
|
|
|
|
4.35
|
|
Automotive
|
|
|
15.31
|
|
|
|
14.27
|
|
|
|
14.71
|
|
|
|
14.84
|
|
Intermodal
|
|
|
5.21
|
|
|
|
5.11
|
|
|
|
5.30
|
|
|
|
5.30
|
|
Total freight revenue per revenue
ton-mile
|
|
|
3.84
|
|
|
|
3.95
|
|
|
|
3.95
|
|
|
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2) Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
(3) These
earnings measures have no standardized meanings prescribed by
U.S. 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.
Freight revenue per RTM is the amount of freight revenue earned
for every RTM moved, calculated by dividing the freight revenue
for a commodity by the number of RTMs of the commodity
transported in the period.
Freight revenue per RTM in 2010 decreased by 2.8% due to the
unfavourable impact of the change in FX and a significant
increase in shipments of potash and metallurgical coal, which
generate lower freight revenue per RTM. This decrease was
partially offset by increased fuel surcharge revenues and
increased freight rates.
7.4 2009 TO
2008 COMPARATIVES
Revenue variances below (Sections 7.4.1.1 to 7.4.4) compare
2009 to 2008 figures. DM&E revenues are included on a pro
forma basis.
7.4.1 Freight
Revenues
Freight revenues are earned from transporting bulk, merchandise
and intermodal goods, and include fuel recoveries billed to our
customers. Freight revenues were $4,279.8 million in 2009,
a decrease of $641.7 million, or 13.0%, from
$4,921.5 million in 2008.
Freight revenue including DM&E revenues on a pro forma
basis decreased by $940.5 million, or 18.0% from
$5,220.3 million in 2008.
The decrease in 2009 was driven primarily by:
|
|
o
|
lower traffic volumes due to the global recession;
|
|
o
|
a decline in freight revenues due to fuel price changes; and
|
|
o
|
decreased rates and reduced average length of haul on export
coal as a result of regulatory rate proceedings.
|
The decrease was partially offset by the favourable impact of
the change in FX on U.S. dollar-denominated revenues and
net increases in freight rates for business other than coal.
7.4.1.1 Grain
Grain revenues in 2009 were $1,137.1 million an increase of
$57.6 million, or 5.3% compared to 2008 pro forma of
$1,079.5 million.
Grain revenues increased in 2009 primarily due to:
|
|
o
|
an increase in Canadian grain export shipments driven by strong
demand and an above average 2008/2009 crop year;
|
|
o
|
the favourable impact of the change in FX; and
|
|
o
|
a net increase in freight rates for U.S. and commercial
grain.
|
The increase was partially offset by lower fuel surcharge
revenues due to the change in fuel price and a negative rate
decision in regulated grain.
7.4.1.2 Coal
Coal revenues in 2009 were $443.8 million, a decrease of
$183.4 million, or 29.2% from pro forma 2008 of
$627.2 million.
Coal revenues decreased in 2009 primarily due to:
|
|
o
|
reduced coal shipments as a result of reduced market demand for
metallurgical coal for the first three quarters of the year;
|
|
o
|
decreased rates as a result of regulatory rate proceedings and
reduced average length of haul on export coal which reduced coal
revenues by approximately $63 million; and
|
|
o
|
lower fuel surcharge revenues due to the change in fuel price.
|
This decrease was partially offset by new short haul
U.S. coal traffic, the favourable impact of the change in
FX and increased export coal volumes in the fourth quarter
driven by offshore steel demand.
7.4.1.3 Sulphur
and Fertilizers
Sulphur and fertilizers revenues in 2009 were
$309.3 million, a decrease of $213.1 million, or 40.8%
from pro forma 2008 of $522.4 million.
Sulphur and fertilizers revenues decreased in 2009 primarily due
to:
|
|
o
|
lower export potash shipments as a result of ongoing price
negotiations between producers and major buyers;
|
|
o
|
lower domestic potash shipments as farmers deferred
purchases; and
|
|
o
|
lower fuel surcharge revenues due to the change in fuel price.
|
The decrease was partially offset by the favourable impact of
the change in FX and a net increase in freight rates.
7.4.1.4 Forest
Products
Forest product revenues in 2009 were $176.1 million, a
decrease of $74.9 million, or 29.8% from pro forma 2008 of
$251.0 million.
Forest product revenues decreased in 2009 primarily due to soft
market demand for lumber, panel and pulp and paper products due
to the global recession resulting in mill shutdowns and
production curtailments as well as lower fuel surcharge revenues
due to the change in fuel price.
The decrease was partially offset by the favourable impact of
the change in FX and a net increase in freight rates.
7.4.1.5 Industrial
and Consumer Products
Industrial and consumer products revenues in 2009 were
$786.1 million, a decrease of $142.2 million, or 15.3%
from pro forma 2008 of $928.3 million.
Industrial and consumer products revenues decreased in 2009
primarily due to reduced overall volumes primarily from our
steel, building products, chemical and plastics customers due to
the global recession and lower fuel surcharge revenues due to
the change in fuel price.
This decrease was partially offset by:
|
|
o
|
the favourable impact of the change in FX;
|
|
o
|
increased volumes in ethanol and other energy related products;
|
|
|
o
|
increased demurrage, a charge for the utilization of railroad
assets beyond the standard times provided for loading or
unloading; and
|
|
o
|
a net increase in freight rates.
|
7.4.1.6 Automotive
Automotive revenues in 2009 were $229.3 million, a decrease
of $100.3 million, or 30.4% from pro forma 2008 of
$329.6 million.
The decrease in 2009 was primarily due to a significant
reduction of auto sales in the first three quarters of the year
resulting in plant shutdowns and lower shipments of finished
vehicles, and lower fuel surcharge revenues resulting from the
change in fuel price. This decrease was partially offset by a
net increase in freight rates, the favourable impact of the
change in FX and increased volumes in the fourth quarter due to
increased North American vehicle sales.
7.4.1.7 Intermodal
Intermodal revenues in 2009 were $1,198.1 million, a
decrease of $284.2 million, or 19.2% from pro forma 2008 of
$1,482.3 million.
The decrease in 2009 was primarily due to the global recession
which reduced import and export volumes as well as domestic
intermodal container shipments and lower fuel surcharge revenues
resulting from the change in fuel price. The decrease was
partially offset by a net increase in freight rates and the
favourable impact of the change in FX.
7.4.2 Other
Revenues
Other revenues in 2009 were $122.4 million, a decrease of
$6.5 million, or 5.0% from pro forma 2008 of
$128.9 million. The decrease in 2009 was mainly due to
lower switching fees.
7.4.3 Freight
Revenue per Carload
Total freight revenue per carload in 2009 decreased by 1.0%
compared with pro forma 2008 due to lower fuel price recoveries
and negative rate decisions in coal and regulated grain. This
decrease was partially offset by favourable changes in FX and
higher net freight rates.
7.4.4 Freight
Revenue per Revenue
Ton-Mile
Freight revenue per RTM in 2009 decreased by 0.8% compared with
pro forma 2008 due to lower fuel price recoveries and negative
rate decisions in coal and regulated grain. This decrease was
partially offset by favourable changes in FX and higher net
freight rates.
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
|
|
2010
|
|
|
2009
|
|
|
2008 Pro
forma(2)
|
|
Efficiency and other indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
ton-miles
(GTM) of freight (millions)
|
|
|
242,757
|
|
|
|
209,475
|
|
|
|
250,991
|
|
Train miles (thousands)
|
|
|
39,576
|
|
|
|
34,757
|
|
|
|
43,243
|
|
U.S. gallons of locomotive fuel consumed per 1,000
GTMs freight and yard
|
|
|
1.17
|
|
|
|
1.19
|
|
|
|
1.22
|
|
Average number of active employees expense
|
|
|
13,879
|
|
|
|
13,619
|
|
|
|
15,107
|
|
Car miles per car day
|
|
|
139.9
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Car miles per car day, excluding DM&E
|
|
|
151.5
|
|
|
|
142.6
|
|
|
|
143.6
|
|
Average train speed (miles per hour)
|
|
|
22.7
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Average train speed (miles per hour), excluding DM&E
|
|
|
23.8
|
|
|
|
25.5
|
|
|
|
24.0
|
|
Average terminal dwell
(hours)(3)
|
|
|
21.4
|
|
|
|
21.9
|
|
|
|
22.3
|
|
Safety indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per
200,000 employee-hours
|
|
|
1.61
|
|
|
|
1.92
|
|
|
|
1.63
|
|
FRA train accidents per million
train-miles
|
|
|
1.63
|
|
|
|
1.81
|
|
|
|
2.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Certain
comparative period figures have been updated to reflect new
information.
(2) Pro
forma basis includes DM&E results for the full year ended
December 31, 2008, except U.S. gallons of locomotive fuel
consumed per 1,000 GTMs freight and yard in 2008,
car miles per car day, average train speed and average terminal
dwell.
(3) Figures
are excluding DM&E for 2009 and 2008.
8.1 EFFICIENCY
AND OTHER INDICATORS
2010 performance indicators variances for GTMs, train
miles, average number of active expense employees and
U.S. gallons of locomotive fuel consumed are compared to
2009. 2009 performance indicator variances are compared to 2008
on a pro forma basis for the above mentioned metrics.
GTMs for 2010 were 242,757 million which increased by 15.9%
compared with 209,475 million in the same period in 2009.
The increase in 2010 was mainly due to an increase in traffic
across all lines of business, other than grain which was
relatively flat
year-over-year.
GTMs for 2009 were 209,475 million which decreased by 16.5%
compared with 250,991 million in the same period in 2008 on
a pro forma basis. The decrease in 2009 was mainly due to the
global recession which led to a decrease in traffic for all
lines of business except for grain. Fluctuations in GTMs
normally drive fluctuations in certain variable costs, such as
fuel and train crew costs.
Train miles increased by 13.9% in 2010 compared to 2009. The
increase in 2010 was driven by increased traffic volumes and
offset, in part, by managements strategy of consolidating
and running longer, heavier trains. Train miles decreased by
19.6% in 2009 compared to pro forma 2008. The decrease in 2009
was driven by managements strategy of consolidating and
running longer, heavier trains and was further impacted by
reduced volumes. As a result, overall train miles were decreased.
U.S. gallons of locomotive fuel consumed per 1,000 GTMs in
both freight and yard activity decreased by 1.7% in 2010
compared to 2009. The decrease in fuel consumption was due
primarily to new fuel saving technology introduced on 200
locomotives and continued focus on fuel conservation programs
including idle reduction and train handling practices.
U.S. gallons of locomotive fuel consumed per 1,000 GTMs
decreased 2.5% in 2009 compared with 2008. The decrease in 2009
was primarily due to an on-going fuel conservation programs
which included the introduction of new fuel saving technology,
operation of longer trains and use of a higher proportion of
fuel efficient locomotives.
The average number of active expense employees for 2010
increased by 260, or 1.9%, compared with 2009. The increase in
2010 was driven by higher traffic volumes resulting from a
stronger economy. The average number of active expense employees
for 2009 decreased by 1,488, or 9.8%, compared with 2008 on a
pro forma basis. This decrease in 2009 was primarily due to
temporary employee layoffs and position reductions made in
response to the decline in traffic volumes that accompanied the
global recession.
Car miles per car day, including DM&E, were 139.9 in 2010.
Excluding DM&E, car miles per car day were 151.5, an
increase of 6.2% from 142.6 in 2009. The increase in 2010 was
mainly due to various initiatives in the design and execution of
our operations plan focused on improving asset velocity.
Excluding DM&E, car miles per car day decreased by 0.7% in
2009 to 142.6 compared to 143.6 in 2008. The decrease in 2009
was mainly due to lower volumes.
Average train speed, including DM&E, was 22.7 miles
per hour in 2010. Excluding DM&E, average train speed was
23.8 miles per hour, a decrease of 6.7% from
25.5 miles per hour in 2009. The decrease in 2010 was
mainly due to increased volumes, traffic mix, and supply chain
pipeline issues. Excluding DM&E, average train speed
improved by 6.3% in 2009. The improvement in 2009 occurred due
to improved network fluidity as a result of a combination of
lower volumes and the execution of our long train strategy for
fewer train starts.
Average terminal dwell, the average time a freight car resides
in a terminal, improved 2.3% in 2010 to 21.4 hours from
21.9 hours in 2009. The improvement was the result of
various initiatives in the design and execution of our operating
plan to improve asset velocity and continued focus on the
storage of surplus cars. Average terminal dwell, improved 1.8%
in 2009 when compared to 2008. The improvement in 2009 reflected
lower volumes and the aggressive storage of surplus cars which
reduced the number of active cars online and therefore, the
average time freight cars spent in terminals.
8.2 SAFETY
INDICATORS
Safety is a key priority for our management and Board of
Directors. Our two main safety indicators personal
injuries and train accidents follow strict
U.S. Federal Railroad Administration (FRA)
reporting guidelines.
The FRA personal injury rate per
200,000 employee-hours
for CP was 1.61 in 2010, a decrease from 1.92 in 2009 and 1.63
in 2008 on a pro forma basis. The FRA train accident rate for CP
in 2010 was 1.63 accidents per million
train-miles,
compared with 1.81 in 2009 and 2.53 in 2008 on a pro forma
basis. CP strives to continually improve its safety performance
through key strategies and activities such as training and
technology. 2010 represents CPs second lowest personal
injury rate and our third lowest train accident rate.
9.0 Operating
Expenses
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009(2)
|
|
|
2008(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
2009 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 to
|
|
|
|
|
|
2008 pro
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
forma(1)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
Pro
|
|
|
|
|
For the year ended December 31 (in millions)
|
|
Expense
|
|
|
Fav/(unfav)
|
|
|
Expense
|
|
|
Fav/(unfav)
|
|
|
Expense
|
|
|
DM&E(3)
|
|
|
forma(1)(4)
|
|
|
|
|
Compensation and benefits
|
|
$
|
1,431.0
|
|
|
|
(9.5
|
)
|
|
$
|
1,306.6
|
|
|
|
3.4
|
|
|
$
|
1,289.8
|
|
|
$
|
63.0
|
|
|
$
|
1,352.8
|
|
|
|
|
|
Fuel
|
|
|
728.1
|
|
|
|
(25.5
|
)
|
|
|
580.3
|
|
|
|
45.1
|
|
|
|
1,005.9
|
|
|
|
51.5
|
|
|
|
1,057.4
|
|
|
|
|
|
Materials
|
|
|
214.2
|
|
|
|
1.6
|
|
|
|
217.6
|
|
|
|
20.2
|
|
|
|
257.8
|
|
|
|
14.9
|
|
|
|
272.7
|
|
|
|
|
|
Equipment rents
|
|
|
206.0
|
|
|
|
8.8
|
|
|
|
226.0
|
|
|
|
2.4
|
|
|
|
218.5
|
|
|
|
13.0
|
|
|
|
231.5
|
|
|
|
|
|
Depreciation and amortization
|
|
|
489.6
|
|
|
|
(1.3
|
)
|
|
|
483.2
|
|
|
|
(4.1
|
)
|
|
|
428.2
|
|
|
|
35.9
|
|
|
|
464.1
|
|
|
|
|
|
Purchased services and other
|
|
|
796.5
|
|
|
|
(1.7
|
)
|
|
|
783.0
|
|
|
|
7.4
|
|
|
|
809.3
|
|
|
|
36.2
|
|
|
|
845.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
expenses(1)
|
|
$
|
3,865.4
|
|
|
|
(7.5
|
)
|
|
$
|
3,596.7
|
|
|
|
14.9
|
|
|
$
|
4,009.5
|
|
|
$
|
214.5
|
|
|
$
|
4,224.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on termination of lease with shortline railway
|
|
|
|
|
|
|
100.0
|
|
|
|
54.5
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of significant properties
|
|
|
|
|
|
|
(100.0
|
)
|
|
|
(79.1
|
)
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
3,865.4
|
|
|
|
(8.2
|
)
|
|
$
|
3,572.1
|
|
|
|
15.4
|
|
|
$
|
4,009.5
|
|
|
$
|
214.5
|
|
|
$
|
4,224.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
(1) These
earnings measures have no standardized meanings as prescribed by
U.S. 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.
(2) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(3) Includes
DM&E operating expenses for the period January 1, 2008
to October 29, 2008.
(4) Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for full year 2008.
Operating expenses were $3,865.4 million in 2010, an
increase of $293.3 million, or 8.2% from
$3,572.1 million in 2009. Operating expenses in 2009
decreased by $651.9 million, or 15.4% from 2008 on a pro
forma basis.
Adjusted operating expenses were $3,865.4 million in 2010,
an increase of $268.7 million, or 7.5%, from
$3,596.7 million in 2009. Adjusted operating expenses
decreased by $627.3 million, or 14.9% in 2009, from 2008 on
a pro forma basis.
Adjusted operating expenses for 2010 compared to 2009 were
higher primarily due to increased volumes, resulting in higher
labour costs and increased fuel consumption, and higher fuel
prices. The increase in adjusted operating expenses was
partially offset by lower equipment rents due to reduced freight
car and intermodal equipment leasing costs, the use of customer
provided rail cars and the favourable impact of the change in FX.
The increase in operating expenses in 2010 was the result of the
2009 gain on sales of significant properties and increased
volumes, resulting in higher labour costs and increased fuel
consumption, and higher fuel prices. The increase was partially
offset by lower equipment rents due to reduced freight car and
intermodal equipment leasing costs, the use of customer provided
rail cars, the favourable impact of the change in FX and the
2009 loss on termination of a lease with a shortline railway.
Adjusted operating expenses for 2009 compared to 2008 on a pro
forma basis were lower primarily due to:
|
|
o
|
decreased volumes;
|
|
o
|
cost management initiatives to align and size resources
accordingly;
|
|
o
|
lower fuel prices;
|
|
o
|
lower costs from train accidents; and
|
|
o
|
fewer locomotive overhauls.
|
The decrease in adjusted operating expenses was partially offset
by the unfavourable impact of the change in FX.
The decrease in operating expenses in 2009 compared to 2008 on a
pro forma basis was a result of the reasons noted above and the
gain on sales of significant properties, partially offset by the
loss on termination of a lease with a shortline railway and the
unfavourable impact of the change in FX.
9.1 2010 TO 2009
COMPARATIVES
9.1.1
Compensation and Benefits
Compensation and benefits expense includes employee wages,
salaries and fringe benefits. Compensation and benefits expense
was $1,431.0 million in 2010, an increase of
$124.4 million, or 9.5%, from $1,306.6 million in 2009.
The increase in 2010 was primarily due to higher:
|
|
o
|
labour expenses driven by higher traffic volumes;
|
|
o
|
employee incentive compensation expenses driven by improved
corporate performance;
|
|
o
|
wage and benefit inflation;
|
|
o
|
pension expense; and
|
|
o
|
restructuring charges in 2010 associated with the implementation
of our structural cost initiatives.
|
The increase was partially offset by the favourable impact of
the change in FX.
9.1.2
Fuel
Fuel expense consists of fuel used by locomotives and includes
provincial, state and federal fuel taxes and the impact of our
hedging program. Fuel expense was $728.1 million in 2010,
an increase of $147.8 million, or 25.5%, from
$580.3 million in 2009.
The increase in 2010 was primarily due to higher fuel prices and
increased consumption as a result of higher traffic volumes
partially offset by the favourable impact of the change in FX as
well as improved efficiencies from ongoing fuel-conservation
programs and the operation of longer trains.
9.1.3
Materials
Materials expense includes the cost of material used for track,
locomotive, freight car, and building maintenance. Materials
expense was $214.2 million in 2010, a decrease of
$3.4 million or 1.6%, from $217.6 million in 2009.
The decrease in 2010 was mainly due to the favourable impact of
the change in FX and increased proceeds received from the
scrapping of freight car material. This decrease was partially
offset by higher locomotive material repair and servicing costs
primarily due to the return from storage of locomotives to move
higher volumes and improve fluidity.
9.1.4 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
$206.0 million in 2010, a decrease of $20.0 million or
8.8% from $226.0 million in 2009.
The decrease in 2010 was mainly due to reduced freight car and
intermodal equipment leasing costs resulting from the benefits
of fleet reductions that occurred in 2009 and the favourable
impact of the change in FX. This was partially offset by higher
car hire payments made to other railways as we made greater use
of foreign freight cars on our lines to meet traffic demands and
higher locomotive leasing costs due to higher volumes.
9.1.5
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 $489.6 million in
2010, an increase of $6.4 million, or 1.3%, from
$483.2 million in 2009. The increase in 2010 was primarily
due to more depreciable assets, partially offset by the
favourable impact of the change in FX.
9.1.6 Purchased
Services and Other
Purchased services and other expenses encompasses a wide range
of costs, including expenses for joint facilities, personal
injuries and damage, environmental remediation, property and
other taxes, contractor and consulting fees, insurance, gains on
land sales and equity earnings. Purchased services and other
expense was $796.5 million in 2010, an increase of
$13.5 million, or 1.7% from $783.0 million in 2009.
The increase in 2010 was mainly due to:
|
|
o
|
higher volume-related expenses;
|
|
o
|
higher information technology project planning costs due to an
increase in activity in preparation for 2011 projects;
|
|
o
|
lower gains on land sales which are recorded as reductions to
operating expenses;
|
|
o
|
higher property and other taxes;
|
|
o
|
higher relocation costs related to CPs structural cost
initiatives;
|
|
o
|
increased consulting costs; and
|
|
o
|
increased maintenance costs performed by third parties.
|
The increase was partially offset by the favourable impact of
the change in FX and the absence of a 2009 charge to
workers compensation benefit.
PURCHASED
SERVICES AND OTHER
|
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions)
|
|
2010
|
|
|
2009(1)
|
|
Support and facilities
|
|
$
|
341.7
|
|
|
$
|
319.1
|
|
Track and operations
|
|
|
228.9
|
|
|
|
242.0
|
|
Intermodal
|
|
|
140.5
|
|
|
|
136.2
|
|
Equipment
|
|
|
82.9
|
|
|
|
100.4
|
|
Other
|
|
|
30.4
|
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
824.4
|
|
|
|
822.4
|
|
Land
sales(2)
|
|
|
(27.9
|
)
|
|
|
(39.4
|
)
|
|
|
|
|
|
|
|
|
|
Total purchased services and other
|
|
$
|
796.5
|
|
|
$
|
783.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) Land
sales does not include specified operating expenses which are
discussed further in Section 9.1.7 Specified Operating
Expenses.
9.1.7 Specified
Operating Expenses
There were no specified operating expense items in 2010.
9.1.7.1 Gain on
Sales of Significant Properties
During the third quarter of 2009, the Company completed two
significant real estate sales, resulting in gains of
$79.1 million ($68.1 million after tax).
The Company sold Windsor Station in Montreal, for proceeds of
$80.0 million, including the assumption of a mortgage of
approximately $16 million due in 2011. CP will continue to
occupy a portion of Windsor Station through a lease for a
10 year period after the sale. As a result, part of the
transaction is considered to be a sale-leaseback and
consequently a gain of $19.5 million related to this part
of the transaction has been deferred and is being amortized over
the remainder of the lease term.
The Company sold land in western Canada for transit purposes for
proceeds of $43.0 million.
9.1.7.2 Loss on
Termination of Lease with Shortline Railway
During the fourth quarter of 2009, the Company made a payment of
approximately $73 million to terminate a contract with a
lessee in order to cease through-train operations over the CP
owned rail branchline between Smiths Falls, Ontario and Sudbury,
Ontario including a settlement of a $20.6 million existing
liability. The contract with the lessee provided for the
operation of a minimum number of CP freight trains over the
leased branchline. The loss on the transaction recognized in the
fourth quarter was $54.5 million ($37.6 million after
tax).
9.2 2009 TO 2008
COMPARATIVES
Expense variances below (Sections 9.2.1 to 9.2.6) compare
2009 to 2008 pro forma figures.
9.2.1
Compensation and Benefits
Compensation and benefits expense was $1,306.6 million in
2009, a decrease of $46.2 million, or 3.4%, from
$1,352.8 million on a pro forma basis.
The decrease in 2009 was primarily due to:
|
|
o
|
reductions in labour expenses achieved through temporary layoffs
and employment reductions in response to reduced volumes;
|
|
o
|
lower training and recertification costs associated with fewer
active employees;
|
|
o
|
lower pension and other post-retirement benefit expense caused
by a higher discount rate and a settlement of a post-retirement
benefit liability with a U.S. national multi-employer
benefit plan; and
|
|
o
|
savings from reduced overtime hours worked as a result of cost
management initiatives.
|
The decrease was partially offset by:
|
|
o
|
increased employee incentive compensation associated with a more
normal bonus accrual in 2009 and increased gainshare payments to
union employees;
|
|
o
|
increased labour expenses due to wage rate increases; and
|
|
o
|
the unfavourable impact of changes in FX for 2009.
|
9.2.2
Fuel
Fuel expense was $580.3 million in 2009, a decrease of
$477.1 million, or 45.1%, from $1,057.4 million in
2008 on a pro forma basis.
The decrease in 2009 was primarily due to lower fuel prices and
decreased consumption as a result of lower traffic volumes and
improved efficiencies from ongoing fuel-conservation programs,
operation of longer trains and the use of a higher proportion of
fuel efficient locomotives. The decrease was partially offset by
the unfavourable impact of the change in FX.
9.2.3
Materials
Materials expense was $217.6 million in 2009, a decrease of
$55.1 million, or 20.2%, from $272.7 million on a pro
forma basis.
The decrease in 2009 was mainly due to lower locomotive overhaul
costs, lower freight car and locomotive maintenance as reduced
volumes resulted in a higher number of stored freight cars and
locomotives and reduced vehicle and other fuel costs. This
decrease was partially offset by the unfavourable impact of the
change in FX.
9.2.4 Equipment
Rents
Equipment rents expense was $226.0 million in 2009, a
decrease of $5.5 million, or 2.4%, from $231.5 million
on a pro forma basis.
The 2009 decrease was due to lower volumes which resulted in a
reduction in active cars online. This was achieved through the
turn back of leased equipment which reduced freight car leasing
costs, combined with a reduction in car hire payments as a
result of fewer foreign cars online. The decrease was partially
offset by the unfavourable impact of the change in FX and lower
car hire receipts due to lower numbers of CP cars operating on
other railways.
9.2.5
Depreciation and Amortization
Depreciation and amortization expense was $483.2 million in
2009, an increase of $19.1 million, or 4.1%, from
$464.1 million in 2008 on a pro forma basis.
The increase in 2009 was primarily due to unfavourable FX and
higher depreciable assets partially offset by favourable
depreciation rate changes, mainly in information systems and
locomotives, and retirements of properties.
9.2.6 Purchased
Services and Other
Purchased services and other expense was $783.0 million in
2009, a decrease of $62.5 million, or 7.4%, from
$845.5 million on a pro forma basis.
The decrease in 2009 was due to:
|
|
o
|
lower costs from train accidents and personal injuries;
|
|
o
|
higher gains on land sales recorded as a reduction to operating
expenses;
|
|
o
|
reduced locomotive maintenance and intermodal handling
reflecting lower volumes;
|
|
o
|
lower intermodal trucking costs;
|
|
o
|
lower bad debt expense;
|
|
o
|
reduced business travel expenses, realized through cost
management initiatives; and
|
|
o
|
lower utility costs.
|
The decrease was partially offset by increased workers
compensation benefit accruals reflecting actuarial studies and
the unfavourable impact of the change in FX.
10.0 Other Income
Statement Items
10.1 GAIN ON SALE
OF PARTNERSHIP INTEREST
During the second quarter of 2009, the Company completed the
sale of a portion of its investment in the DRTP to its existing
partner, reducing the Companys ownership from 50% to
16.5%. The sale was agreed to on March 31, 2009 but was
subject to regulatory approval, which was received during the
second quarter. The proceeds received in the second quarter from
the transaction were approximately $110 million. Additional
proceeds of approximately $22 million are contingent on
achieving certain future freight volumes through the tunnel, and
have not been recognized. The gain on this transaction was
$81.2 million ($68.7 million after tax).
10.2 OTHER INCOME
AND CHARGES
Other income and charges consists of gains and losses from the
change in FX on LTD and working capital, various costs related
to financing, gains and losses associated with changes in the
fair value of non-hedging derivative instruments and other
non-operating expenditures. For the year ending
December 31, 2010, other income and charges were a
favourable credit to income of $12.0 million as the Company
recognized gains from FX on LTD and FX gains on the
Companys working capital position due to the weakening of
the U.S. dollar. FX on LTD is discussed further in
Section 6.1 Foreign Exchange Gains and Losses on Long-Term
Debt. Other income and charges was an expense of
$12.4 million in 2009, a decrease of $59.9 million or
82.8%, compared to $72.3 million in 2008.
The decrease in 2009 was the result of realized and unrealized
gains on long-term floating rate notes in 2009 versus losses in
2008 associated with ABCP and the gain in 2009 versus the loss
in 2008 on FX on LTD (discussed further in Section 6.1
Foreign Exchange Gains and Losses on Long-Term Debt). The
decrease was partially offset by the net loss recognized upon
the repurchase of debt, discussed below.
During the second quarter of 2009, the Company issued
US$350 million 7.25%
10-year
Notes for net proceeds of $408.2 million. The proceeds from
this offering contributed to the repurchase of debt with a net
carrying amount of $555.3 million, net of deferred costs of
$1.4 million, pursuant to a tender offer for a total cost
of $571.9 million. Upon repurchase of the debt a net loss
of $16.6 million was recognized in Other income and
charges.
10.3 EQUITY
INCOME IN DAKOTA, MINNESOTA & EASTERN RAILROAD
CORPORATION
Following Surface Transportation Board (STB)
approval on October 30, 2008, earnings of the DM&E are
fully consolidated with CP. As a result, earnings of DM&E
in 2010 and 2009 are consolidated on a line by line basis. Prior
to October 30, 2008 earnings of DM&E were reported as
equity income in DM&E totalling $50.9 million in 2008.
10.4 NET INTEREST
EXPENSE
Net interest expense includes interest on long-term debt and
capital leases, net of interest income of $10.8 million
(2009 $18.3 million). Net interest expense was
$257.3 million in 2010, a decrease of $10.3 million,
or 3.8%. Net interest expense was $267.6 million in 2009,
an increase of $26.1 million, or 10.8%, from 2008 on a pro
forma basis. On a reported basis net interest expense was
$239.6 million in 2008.
The decrease in 2010 was primarily due to:
|
|
o
|
the favourable impact of the change in FX on
U.S. dollar-denominated interest expense;
|
|
o
|
the repayment of debt during the second quarter of 2010
(discussed further in Section 14.3 Financing
Activities); and
|
|
o
|
the repurchase of debt securities during the second quarter of
2009.
|
The decrease was partly offset by interest on new debt issuances
(discussed further in Section 14.3 Financing Activities)
and lower interest income resulting from the collection of an
interest bearing receivable during the second quarter of 2010.
The increase in 2009 was primarily due to:
|
|
o
|
a lower amount of interest capitalized on qualifying projects;
|
|
o
|
the unfavourable impact from the change in FX on
U.S. dollar-denominated
interest expense;
|
|
o
|
interest on new debt issuances (discussed further in
Section 14.3 Financing Activities); and
|
|
o
|
lower interest income due to lower rates on deposits.
|
The increase was partly offset by:
|
|
o
|
the repurchase of debt as part of the tender offer of debt
securities;
|
|
o
|
lower draws on the credit facility;
|
|
o
|
reduced rates on variable debt; and
|
|
o
|
repayment of the remaining DM&E bridge financing in
December 2008 (discussed further in Section 14.3 Financing
Activities).
|
10.5 INCOME
TAXES
Income tax expense was $220.1 million in 2010, an increase
of $138.8 million, from $81.3 million in 2009. Income
tax expense was $81.3 million in 2009, a decrease of
$68.9 million, from 2008. The increase in 2010 was
primarily due to higher earnings. The decrease in tax expense in
2009 was due to lower earnings and deferred tax benefits related
to provincial rate reductions and the resolution of a prior year
income tax matter in 2009.
The effective income tax rate for 2010 was 25.3%, compared with
12.9% and 19.3% for 2009 and 2008 respectively. The normalized
rates (income tax rate based on income adjusted for FX on LTD,
and other specified items) for 2010, 2009 and 2008 were 24.4%,
18.9% and 27.2%, respectively. The changes in the normalized tax
rates were primarily due to lower Canadian federal and
provincial corporate income tax rates, tax planning initiatives,
and a weak business environment in 2009.
We expect a normalized 2011 income tax rate of between 24% and
26%. The 2011 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 Deferred 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
U.S. dollar-denominated long-term debt in different tax
jurisdictions. As well, a portion of this debt is designated as
a net investment hedge against net investment in
U.S. subsidiaries. As a result, the tax on foreign exchange
gains and losses on long-term debt in different tax
jurisdictions can vary significantly.
11.0 Quarterly
Financial Data
QUARTERLY
FINANCIAL DATA AS REPORTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
For the quarter ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
Dec. 31
|
|
|
Sept. 30
|
|
|
Jun. 30(1)
|
|
|
Mar. 31(1)
|
|
|
Dec. 31(1)
|
|
|
Sept. 30(1)
|
|
|
Jun. 30(1)
|
|
|
Mar. 31(1)
|
|
Total revenue
|
|
$
|
1,294.3
|
|
|
$
|
1,286.2
|
|
|
$
|
1,234.2
|
|
|
$
|
1,166.8
|
|
|
$
|
1,143.2
|
|
|
$
|
1,118.1
|
|
|
$
|
1,031.3
|
|
|
$
|
1,109.6
|
|
Operating income
|
|
|
297.7
|
|
|
|
337.7
|
|
|
|
274.1
|
|
|
|
206.6
|
|
|
|
167.5
|
|
|
|
342.9
|
|
|
|
184.9
|
|
|
|
134.8
|
|
Adjusted operating
income(2)
|
|
|
297.7
|
|
|
|
337.7
|
|
|
|
274.1
|
|
|
|
206.6
|
|
|
|
222.0
|
|
|
|
263.8
|
|
|
|
184.9
|
|
|
|
134.8
|
|
Net income
|
|
|
185.8
|
|
|
|
197.3
|
|
|
|
166.6
|
|
|
|
101.0
|
|
|
|
146.2
|
|
|
|
209.3
|
|
|
|
135.5
|
|
|
|
59.0
|
|
Income, before FX on LTD and other specified
items(2)
|
|
|
190.1
|
|
|
|
204.7
|
|
|
|
156.2
|
|
|
|
103.2
|
|
|
|
125.6
|
|
|
|
160.9
|
|
|
|
79.3
|
|
|
|
52.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.10
|
|
|
$
|
1.17
|
|
|
$
|
0.99
|
|
|
$
|
0.60
|
|
|
$
|
0.87
|
|
|
$
|
1.25
|
|
|
$
|
0.81
|
|
|
$
|
0.37
|
|
Diluted earnings per share
|
|
|
1.09
|
|
|
|
1.17
|
|
|
|
0.98
|
|
|
|
0.60
|
|
|
|
0.87
|
|
|
|
1.24
|
|
|
|
0.80
|
|
|
|
0.37
|
|
Diluted earnings per share, before FX on LTD and other specified
items(2)
|
|
|
1.12
|
|
|
|
1.21
|
|
|
|
0.92
|
|
|
|
0.61
|
|
|
|
0.74
|
|
|
|
0.95
|
|
|
|
0.47
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) These
earnings measures have no standardized meanings prescribed by
U.S. 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, adjusted
operating income and diluted EPS, before FX on LTD and other
specified items, to net income and diluted EPS, as presented in
the financial statements is provided in Section 6.0
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. 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.
2010 was an extraordinary year with volatility and limited
market transparency. Coupled with the quarterly fluctuations in
trends caused by the 2009 global recession, our results and
volumes are inconsistent with the sensitivity and trends
provided above. Management believes that the changes in economic
conditions in 2009 affected the quarterly results in 2009 and
2010; the timing of a return to the sensitivity and trends
discussed will depend on the recovery of the economy and our
customers.
12.0
Fourth-Quarter Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 2010
|
|
|
|
|
|
|
|
|
|
to Q4 2009
|
|
|
|
|
|
|
|
|
|
%
|
|
(in millions)
|
|
2010
|
|
|
2009(1)
|
|
|
fav/(unfav)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
$
|
299.8
|
|
|
$
|
293.6
|
|
|
|
2.1
|
|
Coal
|
|
|
125.2
|
|
|
|
112.3
|
|
|
|
11.5
|
|
Sulphur and fertilizers
|
|
|
132.0
|
|
|
|
85.1
|
|
|
|
55.1
|
|
Forest products
|
|
|
50.2
|
|
|
|
42.8
|
|
|
|
17.3
|
|
Industrial and consumer products
|
|
|
240.0
|
|
|
|
205.2
|
|
|
|
17.0
|
|
Automotive
|
|
|
75.3
|
|
|
|
67.9
|
|
|
|
10.9
|
|
Intermodal
|
|
|
339.6
|
|
|
|
308.9
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freight revenues
|
|
|
1,262.1
|
|
|
|
1,115.8
|
|
|
|
13.1
|
|
Other revenues
|
|
|
32.2
|
|
|
|
27.4
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,294.3
|
|
|
|
1,143.2
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
362.3
|
|
|
|
316.7
|
|
|
|
(14.4
|
)
|
Fuel
|
|
|
202.4
|
|
|
|
157.6
|
|
|
|
(28.4
|
)
|
Materials
|
|
|
56.0
|
|
|
|
42.1
|
|
|
|
(33.0
|
)
|
Equipment rents
|
|
|
48.5
|
|
|
|
53.0
|
|
|
|
8.5
|
|
Depreciation and amortization
|
|
|
121.2
|
|
|
|
122.2
|
|
|
|
0.8
|
|
Purchased services and other
|
|
|
206.2
|
|
|
|
229.6
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
expenses(2)
|
|
|
996.6
|
|
|
|
921.2
|
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on termination of lease with shortline railway
|
|
|
|
|
|
|
54.5
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
996.6
|
|
|
|
975.7
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
income(2)
|
|
$
|
297.7
|
|
|
$
|
222.0
|
|
|
|
34.1
|
|
Operating income
|
|
$
|
297.7
|
|
|
$
|
167.5
|
|
|
|
77.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) These
earnings measures have no standardized meanings as prescribed by
U.S. 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.
12.1 OPERATING
RESULTS
Operating income for the three months ended December 31,
2010 was $297.7 million, an increase of
$130.2 million, or 77.7% from $167.5 million in 2009.
Adjusted operating income (discussed further in Section 6.0
Non-GAAP Earnings) for the three-month period ended
December 31, 2010, was $297.7 million, an increase of
$75.7 million, or 34.1%, from $222.0 million for the
same period in 2009. The increase is due to a stronger economy,
as demonstrated by a 13.9% increase in RTMs, driving an increase
in associated revenues (discussed further in Section 7.0
Lines of Business), along with the continued cost management
activities (discussed further in Section 9.0 Operating
Expenses).
Operating income for the three-month period ending
December 31, 2010 increased due to the stronger economy,
continued cost management activities and the absence of the 2009
loss on termination of lease with a shortline railway (discussed
further in Section 9.1.7.2 Loss on Termination of Lease
with Shortline Railway).
Net income was $185.8 million in the fourth quarter of
2010, an increase of $39.6 million, or 27.1%, from
$146.2 million in the fourth quarter of 2009.
The increase in net income was mainly due to higher operating
income driven by higher volumes and the absence of the 2009 loss
on termination of a lease (discussed further in
Section 9.1.7.2 Loss on Termination of Lease with Shortline
Railway). This increase was partially offset by 2009 income tax
recoveries.
Diluted EPS was $1.09 in the fourth quarter of 2010, an increase
of $0.22 from $0.87 in 2009. This was primarily due to higher
net income.
In the fourth quarter of 2010, GTMs were approximately
62,498 million, an increase of 13.2%, from
55,198 million in 2009. RTMs were approximately
32,883 million, an increase of 13.9%, from
28,874 million in 2009. The increase in GTMs and RTMs was
primarily due to the continuing economic recovery.
12.2 NON-GAAP EARNINGS
A discussion of non-GAAP earnings and a reconciliation of
adjusted operating income, adjusted EBIT and income before FX on
LTD and other specified items, to net income as presented in the
consolidated financial statements for the fourth quarters of
2010 and 2009, are included in Section 6.0
Non-GAAP Earnings.
Income, before FX on LTD and other specified items, was
$190.1 million in the fourth quarter of 2010, an increase
of $64.5 million from $125.6 million in 2009. The
increase was mainly driven by higher operating income, partially
offset by the unfavourable impact of the change in FX. Income,
before FX on LTD and other specified items, was
$125.6 million in the fourth quarter of 2009, a decrease of
$41.1 million from $166.7 million, on a pro forma
basis (discussed further in Section 6.0
Non-GAAP Earnings). The decrease was mainly driven by lower
operating income. This was partially offset by lower interest
expense (discussed further in Section 12.5 Other Income
Statement Items) and income tax expense before FX on LTD.
12.3 REVENUES
Total revenues were $1,294.3 million in fourth-quarter
2010, an increase of $151.1 million or 13.2% from
$1,143.2 million as reported in the same period of 2009.
This increase was primarily driven by:
|
|
o
|
higher overall volumes in all lines of business other than grain;
|
|
o
|
higher fuel surcharge revenues resulting from the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
12.3.1
Grain
Grain revenues in the fourth quarter of 2010 were
$299.8 million, an increase of $6.2 million or 2.1%
from $293.6 million in 2009.
This increase was primarily driven by:
|
|
o
|
higher volumes of U.S. originated shipments due to the
larger and better quality crop;
|
|
o
|
increased freight rates; and
|
|
o
|
higher fuel surcharge revenues due to the change in fuel price.
|
This increase was partially offset by lower Canadian grain
shipments and the unfavourable impact of the change in FX.
12.3.2
Coal
Coal revenues were $125.2 million in fourth-quarter of
2010, an increase of $12.9 million or 11.5% from
$112.3 million in 2009.
This increase was primarily driven by:
|
|
o
|
higher export coal shipments due to an increase in demand for
metallurgical coal to Asia;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
12.3.3 Sulphur
and Fertilizers
Sulphur and fertilizers revenues were $132.0 million in the
fourth quarter of 2010, an increase of $46.9 million or
55.1% from $85.1 million in 2009.
The increase was primarily due to:
|
|
o |
higher export potash shipments as a result of the return of
international buyers to the market;
|
|
|
o
|
higher domestic potash shipments due to increased overall demand
in the second half of the year;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
12.3.4 Forest
Products
Forest products revenues were $50.2 million in the fourth
quarter of 2010, an increase of $7.4 million or 17.3% from
$42.8 million in 2009.
The increase was due to:
|
|
o
|
higher overall shipments of lumber, panel and pulp and paper
products due to the re-opening of a mill on our lines in 2010;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
12.3.5 Industrial
and Consumer Products
Industrial and consumer products revenues were
$240.0 million in the fourth quarter of 2010, an increase
of $34.8 million or 17.0% from $205.2 million in 2009.
This increase was primarily due to:
|
|
o
|
increased shipments of steel, plastics, aggregates and ethanol
driven by the improvement in the North American economy;
|
|
o
|
higher fuel surcharge revenues due to the change in fuel
price; and
|
|
o
|
increased freight rates and extended length of haul.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
12.3.6
Automotive
Automotive revenues were $75.3 million in fourth-quarter
2010, an increase of $7.4 million or 10.9% from
$67.9 million in 2009.
This increase was driven by:
|
|
o
|
increased auto production and higher North American auto sales;
|
|
o
|
increased freight rates; and
|
|
o
|
the absence of a series of unusual plant shutdowns and
curtailments of production caused by the restructuring of
U.S. automakers in 2009.
|
This increase was partially offset by the unfavourable impact of
the change in FX.
12.3.7
Intermodal
Intermodal revenues increased in the fourth quarter of 2010 to
$339.6 million, an increase of $30.7 million or 9.9%
from $308.9 million in 2009.
This increase was driven by:
|
|
o
|
increased domestic container shipments due to increased domestic
sales in the cross border and retail sectors offset by reduced
volumes in short-haul lanes;
|
|
o
|
increased freight rates; and
|
|
o
|
higher fuel surcharge revenues due to the change in fuel price.
|
These increases were partially offset by the unfavourable impact
of the change in FX.
12.3.8 Other
Revenues
Other revenues were $32.2 million in the fourth quarter of
2010, an increase of $4.8 million or 17.5% from
$27.4 million in 2009. The increase was primarily due to
increased revenues from leasing and switching which was higher
due to increased volumes, partially offset by lower passenger
revenues and the unfavourable impact of the change in FX.
12.4 OPERATING
EXPENSES
Operating expenses in the fourth quarter of 2010 were
$996.6 million, an increase of $20.9 million or 2.1%
from $975.7 million in 2009. Adjusted operating expenses in
the fourth quarter of 2010 were $996.6 million, an increase
of $75.4 million or 8.2% from $921.2 million in 2009.
These increases were primarily due to the increased traffic
volumes, partially offset by the favourable change in FX in the
fourth quarter of 2010. The increase in operating expenses was
also partially offset by the absence of the 2009 loss on
termination of a lease with a shortline railway (discussed
further in Section 9.1.7.2 Loss on Termination of Lease
with Shortline Railway).
12.4.1
Compensation and Benefits
Compensation and benefits expense in fourth-quarter 2010 was
$362.3 million, an increase of $45.6 million or 14.4%
from $316.7 million in 2009.
This increase was primarily driven by:
|
|
o
|
a greater number of employees in response to higher volumes;
|
|
o
|
increased employee incentive compensation expenses driven by
improved corporate performance;
|
|
o
|
higher wage and benefit inflation;
|
|
o
|
restructuring charges in 2010 associated with the implementation
of our structural cost initiatives; and
|
|
o
|
higher training costs associated with additional employees hired
to handle increased volumes.
|
12.4.2
Fuel
Fuel expense was $202.4 million in fourth-quarter 2010, an
increase of $44.8 million or 28.4% from $157.6 million
in 2009. The increase was primarily due to higher fuel prices
and increased consumption as a result of higher traffic volumes
partially offset by the favourable impact of the change in FX.
12.4.3
Materials
Materials expense was $56.0 million in the fourth quarter
of 2010, an increase of $13.9 million or 33.0% from
$42.1 million in the fourth quarter of 2009. This increase
was primarily due to the number of freight car wheels replaced
as traffic volumes increased. In addition, as locomotives were
returned to service to accommodate the increase in volumes, we
incurred higher repair and service costs. The increase was
partially offset by the favourable impact of the change in FX.
12.4.4 Equipment
Rents
Equipment rents expense was $48.5 million in the fourth
quarter of 2010, a decrease of $4.5 million or 8.5% from
$53.0 million. The decrease was mainly due to increased car
hire receipts related to more CP-owned cars operating on other
railways and the favourable impact of the change in FX.
12.4.5
Depreciation and Amortization
Depreciation and amortization expense was $121.2 million in
fourth-quarter 2010, a decrease of $1.0 million or 0.8%
from $122.2 million in 2009, largely due to adoption of
updated depreciation rates for 2010 and the favourable impact of
the change in FX, offset by higher depreciable assets.
12.4.6 Purchased
Services and Other
Purchased services and other expense was $206.2 million in
fourth-quarter
2010, a decrease of $23.4 million, or 10.2% from
$229.6 million.
This decrease was primarily due to:
|
|
o
|
the favourable impact of the absence of the 2009 charge to
workers compensation benefit;
|
|
o
|
a higher level of gains on land sales in the fourth quarter of
2010 compared to the same period of 2009;
|
|
o
|
lower locomotive overhaul costs performed by third
parties; and
|
|
o
|
the favourable impact of the change in FX.
|
This decrease was partially offset by:
|
|
o
|
increased traffic volumes;
|
|
o
|
higher information technology project planning costs due to an
increase in activity in preparation for 2011 projects; and
|
|
o
|
higher relocation costs related to CPs structural cost
initiatives.
|
PURCHASED
SERVICES AND OTHER
|
|
|
|
|
|
|
|
|
For the three months ended
December 31 (in millions)
|
|
2010
|
|
|
2009(1)
|
|
Support and facilities
|
|
$
|
89.1
|
|
|
$
|
85.0
|
|
Track and operations
|
|
|
65.9
|
|
|
|
84.5
|
|
Intermodal
|
|
|
38.1
|
|
|
|
33.5
|
|
Equipment
|
|
|
23.5
|
|
|
|
29.3
|
|
Other
|
|
|
11.5
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228.1
|
|
|
|
241.2
|
|
Land
sales(2)
|
|
|
(21.9
|
)
|
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
|
Total purchased services and other
|
|
$
|
206.2
|
|
|
$
|
229.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) Land
sales do not include specified operating expenses which are
discussed further in Section 9.1.7 Specified Operating
Expenses.
12.5 OTHER INCOME
STATEMENT ITEMS
In the fourth quarter of 2010 there was a loss due to FX on LTD
of $0.9 million, as the Canadian dollar strengthened to
$0.99 from $1.03 at September 30, 2010.
Other income and charges were a favourable credit to income of
$4.7 million in the fourth quarter of 2010, compared with a
credit to income of $7.0 million in the fourth quarter of
2009.
Net interest expense was $65.2 million in the fourth
quarter of 2010, a decrease of $3.2 million from
$68.4 million in 2009. The decrease was largely due to the
repayment of debt during the second quarter of 2010 (discussed
further in Section 14.3 Financing Activities) and from a
higher level of capitalization of interest for the increased
number of long-term capital projects in 2010. The decrease was
offset in part by interest on new debt issuances (discussed
further in Section 14.3 Financing Activities).
12.6 INCOME
TAXES
Income tax expense was $51.4 million in the fourth quarter
of 2010, based on income before income tax expense of
$237.2 million. In the fourth quarter of 2009 the Company
had a recovery of income taxes of $40.1 million, based on
income before income tax expense of $106.1 million. Income
taxes in 2009 reflected benefits resulting from a tax rate
change implemented by the government of Ontario, as well as tax
recoveries related to the termination of a lease with a
shortline railway and the settlement of a prior year income tax
matter.
The effective income tax rate for fourth-quarter 2010 was 21.7%.
The normalized rate (income tax rate based on income adjusted
for FX on LTD, and other specified items) for the fourth quarter
of 2010 was 20.1%. The effective income tax rate for
fourth-quarter 2009 was a recovery at 37.8%, which reflected the
provincial rate reduction benefit as well as tax recoveries
related to the termination of a lease with a shortline railway
and the settlement of a prior year income tax matter. The
normalized rate (income tax rate based on income adjusted for FX
on LTD, and other specified items noted above) for the fourth
quarter of 2009 was 17.9%.
12.7 LIQUIDITY
AND CAPITAL RESOURCES
During the fourth quarter of 2010, the Company generated cash
and cash equivalents of $92.8 million compared with
$63.2 million generated in the same period of 2009.
The increase in cash and cash equivalents during the fourth
quarter of 2010 compared to 2009 was primarily due to higher
pension payments in 2009 which included a $500 million
voluntary prepayment to the Canadian defined benefit pension
plans (discussed further in Section 20.5 Pension Plan
Deficit) and higher net income. This increase was largely offset
by higher cash provided by financing activities in 2009 which
included the issuance of $400 million 6.45%
30-year
Notes and US$64.7 million of 5.57% Senior Secured
Notes and increased additions to properties in 2010.
13.0 Changes in
Accounting Policy
13.1 2010
ACCOUNTING CHANGES
13.1.1 Rail
Grinding
During the second quarter of 2010, the Company changed its
accounting policy for the treatment of rail grinding costs. In
prior periods, CP had capitalized such costs and depreciated
them over the expected economic life of the rail grinding. The
Company concluded that, although the accounting treatment was
within acceptable accounting standards, it is preferable to
expense the costs as incurred, given the subjectivity in
determining the expected economic life and the associated
depreciation methodology. The accounting policy change has been
accounted for on a retrospective basis. The effects of the
adjustment to January 1, 2010 resulted in an adjustment to
decrease net properties by $89.0 million, deferred income
taxes by $26.3 million, and shareholders equity by
$62.7 million. As a result of the change the following
increases (decreases) to financial statement line items occurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
ended December 31
|
|
|
For the year ended December 31
|
|
(in millions of Canadian dollars, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Changes to Consolidated Statement of Income and Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(4.3
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
(15.7
|
)
|
|
$
|
(14.0
|
)
|
|
$
|
(8.9
|
)
|
Compensation and benefits
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
2.3
|
|
|
|
2.8
|
|
|
|
2.7
|
|
Fuel
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Materials
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
1.8
|
|
|
|
1.7
|
|
Purchased services and other
|
|
|
4.5
|
|
|
|
5.2
|
|
|
|
13.8
|
|
|
|
15.9
|
|
|
|
15.4
|
|
|
|
Total operating expenses
|
|
|
1.3
|
|
|
|
3.5
|
|
|
|
1.2
|
|
|
|
6.6
|
|
|
|
11.0
|
|
Income tax expense
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
(0.7
|
)
|
|
|
(1.2
|
)
|
|
|
(3.2
|
)
|
|
|
Net income
|
|
$
|
(0.8
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
(7.8
|
)
|
|
|
Basic earnings per share
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Diluted earnings per share
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Other comprehensive income (loss)
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
2.4
|
|
|
|
(2.8
|
)
|
|
|
Comprehensive income (loss)
|
|
$
|
(0.2
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
0.4
|
|
|
$
|
(3.0
|
)
|
|
$
|
(10.6
|
)
|
|
|
Changes to Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities (decrease)
|
|
$
|
(5.6
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(16.9
|
)
|
|
$
|
(20.6
|
)
|
|
$
|
(19.9
|
)
|
Cash used in investing activities (decrease)
|
|
$
|
(5.6
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(16.9
|
)
|
|
$
|
(20.6
|
)
|
|
$
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at
|
|
|
As at
|
|
|
As at
|
|
|
As at
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
January 1
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Changes to Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net properties
|
|
$
|
(88.6
|
)
|
|
$
|
(89.0
|
)
|
|
$
|
(86.2
|
)
|
|
$
|
(70.6
|
)
|
Deferred income tax liability
|
|
|
(26.3
|
)
|
|
|
(26.3
|
)
|
|
|
(26.5
|
)
|
|
|
(21.5
|
)
|
Accumulated other comprehensive loss (income)
|
|
|
2.5
|
|
|
|
1.6
|
|
|
|
(0.8
|
)
|
|
|
2.0
|
|
Retained earnings
|
|
|
(64.8
|
)
|
|
|
(64.3
|
)
|
|
|
(58.9
|
)
|
|
|
(51.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.1.2 U.S.
GAAP/International Financial Reporting Standards
(IFRS)
Effective the first quarter of 2010, CP commenced reporting its
financial results using U.S. GAAP, which is consistent with
the current reporting of all other North American Class I
railways. As a result, CP will not be adopting IFRS in 2011.
13.1.3
Consolidations
In June 2009, the Financial Accounting Standards Board
(FASB) issued Amendments to Consolidation of
Variable Interest Entities. The guidance retains the scope of
the previous guidance and removes the exemption of entities
previously considered qualifying special purpose entities. In
addition, it replaces the previous quantitative approach with a
qualitative analysis approach for determining whether the
enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity.
The guidance is further amended to require ongoing reassessments
of whether an enterprise is the primary beneficiary of a
variable interest entity and requires enhanced disclosures about
an enterprises involvement in a variable interest entity.
The guidance is applicable to all variable interest entities
that existed at January 1, 2010, the date of adoption, or
are created thereafter.
The Company has variable interests in variable interest
entities; however, the adoption of the new guidance did not
change the previous assessment that the Company is not the
primary beneficiary and as such does not consolidate the
variable interest entities. Additional note disclosure regarding
the nature of the Companys variable interests and where
judgment was required to assess the primary beneficiary of these
variable interest entities has been provided in the
Companys Notes to Consolidated Financial Statements.
13.1.4 Accounting
for Transfers of Financial Assets
The FASB has released additional guidance with respect to the
accounting and disclosure of transfers of financial assets such
as securitized accounts receivable. Although the Company
currently does not have an accounts receivable securitization
program, the guidance, which includes revisions to the
derecognition criteria in a transfer and the treatment of
qualifying special purpose entities, would be applicable to any
future securitization. The new guidance is effective for the
Company from January 1, 2010. The adoption of this guidance
had no impact to the Companys financial statements.
13.1.5 Fair Value
Measurement and Disclosure
In January 2010, the FASB amended the disclosure requirements
related to fair value measurements. The update provides for new
disclosures regarding transfers in and out of Level 1 and
Level 2 financial asset and liability categories and
expanded disclosures in the Level 3 reconciliation. The
update also provides clarification that the level of
disaggregation should be at the class level and that disclosures
about inputs and valuation techniques are required for both
recurring and non recurring fair value measurements that fall in
either Level 2 or Level 3. New disclosures and
clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15,
2009, except for the expanded disclosures in the Level 3
reconciliation, which are effective for fiscal years beginning
after December 15, 2010. The Company has adopted this
guidance resulting in expanded note disclosure in the
Companys Notes to Consolidated Financial Statements.
13.2 NEW
ACCOUNTING PRONOUNCEMENTS ISSUED AND NOT YET ADOPTED
13.2.1 Future
Accounting Changes
There have been no new accounting pronouncements issued that are
expected to have a significant impact to the Companys
financial statements.
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 20.4 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 21.2 Liquidity. The following
discussion of operating, investing and financing activities
describes our indicators of liquidity and capital resources.
14.1 OPERATING
ACTIVITIES
Cash provided by operating activities was $502.1 million in
2010, an increase of $51.2 million from $450.9 million
in 2009. Cash provided by operating activities in 2009 decreased
by $492.0 million from $942.9 million in 2008.
The increase in 2010 was primarily due to higher net income and
a lower cash cost related to the unwind of the Total Return Swap
(TRS), (discussed further in Section 16.7.1
Total Return Swap).
This increase was offset in part by:
|
|
o
|
a $650 million voluntary prepayment to the Companys
main Canadian defined benefit pension plan in 2010, compared to
a $500 million voluntary prepayment in 2009 (discussed
further in Section 20.5 Pension Plan Deficit). In addition,
in 2010 the Company made scheduled contributions of
approximately $100 million towards the main Canadian
defined benefit pension plans deficit. The Company did not
make a similar payment in 2009;
|
|
o
|
the unfavourable impact of the change in working capital
balances in 2010; and
|
|
o
|
cash tax payments in 2010 compared to tax recoveries in 2009.
|
The decrease in 2009 was primarily due to:
|
|
o
|
a $500 million voluntary prepayment to the Canadian defined
benefit pension plans (discussed further in Section 20.5
Pension Plan Deficit);
|
|
o
|
lower net income; and
|
|
o
|
the partial unwind of the TRS (discussed further in
Section 16.7.1 Total Return Swap).
|
This decrease was offset in part by:
|
|
o
|
the termination of our $120.0 million accounts receivable
securitization program in 2008 (discussed further in
Section 17.1 Sale of Accounts Receivable);
|
|
o
|
the favourable improvement in working capital balances; and
|
|
o
|
cash tax recoveries in 2009 compared to payments in 2008.
|
14.2 INVESTING
ACTIVITIES
Cash used in investing activities was $635.6 million in
2010, an increase of $276.9 million from 2009. Cash used in
investing activities was $358.7 million in 2009, a decrease
of $441.4 million from $800.1 million in 2008.
The overall investing activities increase in 2010 was largely
due to the 2009 proceeds from the sale of significant properties
and other assets and including the sale of a partnership
interest in the second quarter of 2009.
The decrease in 2009 was largely due to proceeds on the sales of
a partnership interest and significant properties (discussed
further in Section 10.1 Gain on Sale of Partnership
Interest and Section 9.1.7.1 Gain on Sales of Significant
Properties) and lower additions to properties in 2009 and 2008.
Additions to properties (capital programs) in 2011
are expected to be in the range of $950 million to
$1.05 billion. Planned capital programs include
approximately $680 million for basic track infrastructure
renewal, $100 million for volume growth and productivity
initiatives, $100 million for strategic network
enhancements, $80 million to strengthen and upgrade
information technology systems to enhance shipment visibility
and information needs, and $40 million to address capital
regulated by governments, principally train control.
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL PROGRAMS
|
|
|
|
|
|
|
|
|
|
(in millions, except for miles and crossties)
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)
|
|
Additions to
properties(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway
|
|
$
|
589.2
|
|
|
$
|
509.9
|
|
|
$
|
663.2
|
|
Buildings
|
|
|
19.0
|
|
|
|
12.0
|
|
|
|
14.9
|
|
Rolling stock
|
|
|
26.4
|
|
|
|
79.8
|
|
|
|
107.8
|
|
Information systems
|
|
|
53.7
|
|
|
|
41.3
|
|
|
|
46.4
|
|
Other
|
|
|
55.1
|
|
|
|
60.3
|
|
|
|
73.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued
|
|
|
743.4
|
|
|
|
703.3
|
|
|
|
905.3
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired through capital leases
|
|
|
1.1
|
|
|
|
0.8
|
|
|
|
79.5
|
|
Other non-cash transactions
|
|
|
16.2
|
|
|
|
(1.0
|
)
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash invested in additions to properties (as per Consolidated
Statement of Cash Flows)
|
|
$
|
726.1
|
|
|
$
|
703.5
|
|
|
$
|
815.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track installation capital
programs(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Track miles of rail laid (miles)
|
|
|
416
|
|
|
|
395
|
|
|
|
408
|
|
Track miles of rail capacity expansion (miles)
|
|
|
3
|
|
|
|
1
|
|
|
|
31
|
|
Crossties installed (thousands)
|
|
|
872
|
|
|
|
870
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(2) The
figures include the results of the DM&E on a fully
consolidated basis for the periods after October 30, 2008.
(3) The
2008 figures exclude DM&E data.
Of the total additions to properties noted in the table above,
costs of approximately $588 million as at December 31,
2010 (2009 $606 million) for the renewal of the
railway, including track and roadway, buildings and rolling
stock, have been capitalized. Costs of approximately
$790 million during the year ended December 31, 2010
(2009 $782 million) related to normal repairs
and maintenance of the railroad have been expensed and presented
within operating expenses for the year. Repairs and maintenance
does not have a standardized definition and, therefore is
unlikely to be comparable to similar measures of other companies
and definitions applied by regulators.
We intend to finance capital expenditures with available cash
from operations but may partially finance these expenditures
with new debt, capital leases and temporary draws on our credit
facility and equity. Our decisions on funding equipment
acquisitions will be influenced by such factors as the need to
keep our capital structure within debt covenants and maintain
financial ratios that enable CP to manage its long-term
financing structure to maintain its investment grade rating, 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 $167.8 million in
2010 as compared to cash provided by financing activities of
$489.4 million in 2009 and cash used in financing
activities in 2008 of $431.2 million.
Cash used in financing activities in 2010 was mainly for the
repayment of $350 million 4.9%
seven-year
Medium Term Notes; $225.7 million bank loan, including
$71.7 million in interest; which was offset in part by the
collection of a related $219.8 million receivable,
including $69.8 million in interest, from a financial
institution; and the payment of dividends. These uses of cash
were also partly offset by the issuance of US$350 million
4.45%
12.5-year
Notes for net proceeds of CDN$355.2 million.
Cash provided by financing activities in 2009 was mainly due to
the issuance of:
|
|
o
|
common shares under a final prospectus offering for net cash
proceeds of approximately $489 million;
|
|
o
|
US$350 million 7.25%
10-year
Notes for net proceeds of approximately $409 million;
|
|
o
|
$400 million 6.45%
30-year
Notes for net proceeds of $397.8 million; and
|
|
o
|
US$64.7 million 5.57% Senior Secured Notes for net
proceeds of $66.7 million.
|
These proceeds were partially offset by the tendering of debt
for a total cost of $571.9 million and the repayment of
short-term borrowings and the payments of dividends.
Cash used in financing activities in 2008 was mainly due to the
repayment of the bridge financing originally used to finance the
acquisition of DM&E, dividends paid and the reduction in
short-term borrowings. These uses were largely offset by the
following debt issuances to permanently finance the acquisition
of DM&E and replace the bridge financing:
|
|
o
|
US$400 million 5.75% five-year Notes;
|
|
o
|
US$300 million 6.50%
10-year
Notes; and
|
|
o
|
$375 million 6.25%
10-year
Medium Term Notes.
|
In addition, $79.5 million of assets held for sale were
refinanced under capital leases during the year.
The Company has available, as sources of financing, unused
credit facilities of up to $705 million.
14.3.1 Debt to
Total Capitalization
At December 31, 2010, our debt to total capitalization
decreased to 47.2%, compared with 50.5% at December 31,
2009 and 54.5% at December 31, 2008.
The decrease in 2010 was primarily due to:
|
|
o
|
repayment of long-term debt;
|
|
o
|
an increase in equity driven by earnings; and
|
|
o
|
the impact of the stronger Canadian dollar on
U.S. dollar-denominated debt at December 31, 2010,
compared with December 31, 2009.
|
This was partially offset by the issuance of long-term debt and
an increase in the accumulated loss of the pension plan which
decreased equity.
The decrease in 2009 was primarily due to:
|
|
o
|
the proceeds raised from CPs equity issue;
|
|
o
|
the tendering of debt;
|
|
o
|
an increase in equity driven by earnings;
|
|
o
|
the impact of the stronger Canadian dollar on
U.S. dollar-denominated debt at December 31, 2009,
compared with December 31, 2008; and
|
|
o
|
the repayment of short-term borrowings.
|
This was partially offset by the issuance of long-term debt and
an increase in the accumulated loss of the pension plan which
decreased equity.
Debt to total capitalization is the sum of long-term debt,
long-term debt maturing within one year and short-term
borrowing, divided by debt plus total shareholders equity
as presented on our Consolidated Balance Sheet.
14.3.2 Interest
Coverage Ratio
At December 31, 2010, our interest coverage ratio
(discussed further in Section 6.0 Non-GAAP Earnings)
was 4.4, compared with 2.9 for the same period in 2009 and 4.5
in the same period of 2008.
The increase in 2010 was primarily due to a
year-over-year
improvement in adjusted EBIT (discussed further in
Section 6.0 Non-GAAP Earnings).
The decrease in 2009 was primarily due to a
year-over-year
reduction in adjusted EBIT (discussed further in
Section 6.0 Non-GAAP Earnings).
Interest coverage ratio is measured, on a rolling twelve month
basis, as adjusted EBIT divided by net interest expense. This
ratio excludes changes in the estimated fair value of the
Companys investment in long-term floating rate notes/ABCP,
the gains on sales of partnership interest and significant
properties and the loss on termination of a lease with a
shortline railway as these are not in the normal course of
business and FX gains and losses on long-term debt, which can be
volatile and short term. The interest coverage ratio and
adjusted EBIT are non-GAAP measures.
14.4 FREE
CASH
Free cash is a non-GAAP measure that management considers to be
an indicator of liquidity. The measure is used by management to
provide information with respect to the relationship between
cash provided by operating activities and investment decisions
and a comparable measure for period to period changes. Free cash
is calculated as cash provided by operating activities, less
cash used in investing activities and dividends paid, adjusted
for changes in cash and cash equivalent balances resulting from
FX fluctuations and excludes the acquisition of DM&E and
changes in the accounts receivable securitization program. Free
cash is adjusted for the DM&E acquisition as it is not
indicative of normal
day-to-day
investments in the Companys asset base. The securitization
of accounts receivable is a financing-type transaction, which is
excluded to clarify the nature of the use of free cash.
CALCULATION OF
FREE
CASH(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
(reconciliation of free cash to GAAP cash position)
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
(in millions)
|
|
2010
|
|
|
2009(2)
|
|
|
2008(1)(2)
|
|
Cash provided by operating activities
|
|
$
|
502.1
|
|
|
$
|
450.9
|
|
|
$
|
942.9
|
|
Cash used in investing activities
|
|
|
(635.6
|
)
|
|
|
(358.7
|
)
|
|
|
(800.1
|
)
|
Dividends paid
|
|
|
(174.5
|
)
|
|
|
(162.9
|
)
|
|
|
(148.7
|
)
|
Add back investment in
DM&E(3)
|
|
|
|
|
|
|
|
|
|
|
8.6
|
|
Termination of accounts receivable securitization
program(4)
|
|
|
|
|
|
|
|
|
|
|
120.0
|
|
Foreign exchange effect on cash and cash equivalents
|
|
|
(17.2
|
)
|
|
|
(20.0
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free
cash(5)
|
|
|
(325.2
|
)
|
|
|
(90.7
|
)
|
|
|
150.7
|
|
Cash provided by (used in) financing activities, excluding
dividend payment
|
|
|
6.7
|
|
|
|
652.3
|
|
|
|
(282.5
|
)
|
Investment in
DM&E(3)
|
|
|
|
|
|
|
|
|
|
|
(8.6
|
)
|
Accounts receivable securitization
program(4)
|
|
|
|
|
|
|
|
|
|
|
(120.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash, as shown on the Consolidated
Statement of Cash Flows
|
|
|
(318.5
|
)
|
|
|
561.6
|
|
|
|
(260.4
|
)
|
Net cash and cash equivalents at beginning of year
|
|
|
679.1
|
|
|
|
117.5
|
|
|
|
377.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents at end of year
|
|
$
|
360.6
|
|
|
$
|
679.1
|
|
|
$
|
117.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
2008 figures include DM&E consolidated from
October 30, 2008 to December 31, 2008.
(2) Restated
for the Companys change in accounting policy in relation
to the accounting for rail grinding (discussed further in
Section 13.1.1 Rail Grinding).
(3) The
acquisition of DM&E in 2007 (discussed further in
Section 18.0 Acquisition).
(4) The
termination of accounts receivable securitization program
(discussed further in Section 17.1 Sale of Accounts Receivable).
(5) Free
cash has no standardized meaning prescribed by U.S. GAAP and,
therefore, is unlikely to be comparable to similar measures of
other companies. Free cash is discussed further in
Section 6.0 Non-GAAP Earnings.
There was negative free cash of $325.2 million in 2010,
compared with negative free cash of $90.7 million in 2009
and positive free cash of $150.7 million in 2008.
The decrease in 2010 was primarily due to:
|
|
o
|
a $650 million voluntary prepayment to the Companys
main Canadian defined benefit pension plan in 2010, compared to
a $500 million voluntary prepayment in 2009 (discussed
further in Section 20.5 Pension Plan Deficit). In addition,
in 2010 the Company made scheduled contributions of
approximately $100 million towards the main Canadian
defined benefit pension plans deficit. The Company did not
make a similar payment in 2009;
|
|
o
|
proceeds on the sales of a partnership interest and significant
properties in 2009;
|
|
o
|
the unfavourable impact in working capital balances in
2010; and
|
|
o
|
cash tax payments in 2010 compared to tax recoveries in 2009.
|
This decrease was offset in part by higher net income in 2010.
The decrease in 2009 was primarily due to:
|
|
o
|
a $500 million voluntary prepayment to the Companys
main Canadian defined benefit pension plans (discussed further
in Section 20.5 Pension Plan Deficit);
|
|
o
|
lower net income; and
|
|
o
|
the unfavourable impact in FX fluctuations on
U.S. dollar-denominated cash.
|
This decrease was offset in part by:
|
|
o
|
acquisition of assets held for sale in 2008;
|
|
o
|
proceeds on the sales of a partnership interest and significant
properties;
|
|
o
|
lower capital additions; and
|
|
o
|
the favourable improvement in working capital balances and cash
tax recoveries in 2009 compared to payments in 2008.
|
15.0 Balance
Sheet
15.1 ASSETS
Assets totalled $13,675.9 million at December 31,
2010, compared with $14,154.8 million at December 31,
2009 and $14,362.2 million at December 31, 2008. The
decrease in assets was mainly due to the reduction in cash
balances (discussed further in Section 14.0 Liquidity and
Capital Resources), the negative impact of a weaker
U.S. dollar and a reduction in accounts receivable
balances. The reduction in accounts receivable primarily
reflected the collection, during 2010, of a $219.8 million
receivable from a financial institution.
This decrease was partially offset by the increase in deferred
tax assets reflecting tax loss carry forwards that are expected
to be realized in 2011.
The decrease in assets in 2009 was mainly due to the negative
impact of a weaker U.S. dollar and a reduction in working
capital accounts. This decrease was partially offset by the
increase in cash and cash equivalents in 2009 which was mainly
due to cash provided by the monetization of various assets and
investments (discussed further in Section 9.1.7.1 Gain on
Sales of Significant Properties and Section 10.1 Gain on
Sale of Partnership Interest), proceeds from the issuance of
common shares and certain debt issuances. Adequate cash balances
allowed CP to increase funding to the Companys defined
benefit pension plan (discussed further in Section 20.5
Pension Plan Deficit).
15.2 TOTAL
LIABILITIES
Our combined short-term and long-term liabilities were
$8,851.2 million at December 31, 2010 compared with
$9,496.7 million at December 31, 2009 and
$10,087.1 million at December 31, 2008. The decrease
in total liabilities in 2010 reflected the favourable impact on
U.S. dollar-denominated liabilities of the strengthening of
the Canadian dollar, the reduction in long-term debt (discussed
further in Section 14.3 Financing Activities) and a
reduction in pension liabilities as a result of our voluntary
$650 million prepayment to the Companys main Canadian
defined benefit pension plan. This decrease was partially offset
by the unfavourable impact on pension and other benefit
liabilities of a reduction in discount rates at
December 31, 2010 and increases in deferred tax liabilities
reflecting the presentation of tax loss carry forwards as
current assets.
The decrease in total liabilities in 2009 reflected the
strengthening of the Canadian dollar and its favourable impact
on U.S. dollar-denominated liabilities, as well as lower
business activities as a result of the global recession which
reduced accounts payable.
15.3 EQUITY
At December 31, 2010, our Consolidated Balance Sheet
reflected $4,824.7 million in equity, compared with an
equity balance of $4,658.1 million at December 31,
2009 and $4,275.1 million at December 31, 2008. The
increase in equity in 2010 was primarily due to net income, in
excess of dividends, partially offset by an increase in
accumulated other comprehensive loss (AOCL) driven
by increases in pension liabilities arising from a reduction in
discount rates.
The increase in equity in 2009 was primarily due to the issuance
of 13.9 million common shares in February 2009 and net
income, in excess of dividends. This increase was partially
offset by an increase in AOCL as a result of the annual
valuation of our pension and other benefit plans.
15.4 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 March 2, 2011,
169,354,708 Common Shares and no Preferred Shares were issued
and outstanding.
In addition, CP has 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 March 2, 2011, 8.0
million options were outstanding under our MSOIP and
Directors Stock Option Plan, and 0.4 million Common Shares
have been reserved for issuance of future options.
15.5 DIVIDENDS
Dividends declared by the Board of Directors in the last three
years are as follows:
|
|
|
|
|
|
|
|
|
Dividend Amount
|
|
Record Date
|
|
|
Payment Date
|
|
$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
|
|
$0.2475
|
|
|
June 26, 2009
|
|
|
|
July 27, 2009
|
|
$0.2475
|
|
|
September 25, 2009
|
|
|
|
October 26, 2009
|
|
$0.2475
|
|
|
December 31, 2009
|
|
|
|
January 25, 2010
|
|
$0.2475
|
|
|
March 26, 2010
|
|
|
|
April 26, 2010
|
|
$0.2700
|
|
|
June 25, 2010
|
|
|
|
July 26, 2010
|
|
$0.2700
|
|
|
September 24, 2010
|
|
|
|
October 25, 2010
|
|
$0.2700
|
|
|
December 31, 2010
|
|
|
|
January 31, 2011
|
|
$0.2700
|
|
|
March 25, 2011
|
|
|
|
April 25, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.0 Financial
Instruments
16.1 FAIR
VALUE OF FINANCIAL INSTRUMENTS
The Company categorizes its financial assets and liabilities
measured at fair value into one of three different levels
depending on the observability of the inputs employed in the
measurement.
|
|
o
|
Level 1: Unadjusted quoted prices for identical assets and
liabilities in active markets that are accessible at the
measurement date.
|
|
o
|
Level 2: Directly or indirectly observable inputs other
than quoted prices included within Level 1 or quoted prices
for similar assets and liabilities. Derivative instruments in
this category are valued using models or other industry standard
valuation techniques derived from observable market data.
|
|
o
|
Level 3: Valuations based on inputs which are less
observable, unavailable or where the observable data does not
support a significant portion of the instruments fair
value. Generally, Level 3 valuations are longer dated
transactions, occur in less active markets, occur at locations
where pricing information is not available, or have no binding
broker quote to support Level 2 classifications.
|
When possible, the estimated fair value is based on quoted
market prices, and, if not available, estimates from third party
brokers. For non exchange traded derivatives classified in
Level 2, the Company uses standard valuation techniques to
calculate fair value. These methods include discounted mark to
market for forwards, futures and swaps. Primary inputs to these
techniques include observable market prices (interest, FX and
commodity) and volatility, depending on the type of derivative
and nature of the underlying risk. The Company uses inputs and
data used by willing market participants when valuing
derivatives and considers its own credit default swap spread as
well as those of its counterparties in its determination of fair
value. Wherever possible the Company uses observable inputs. All
derivatives are classified as Level 2. A detailed analysis
of the techniques used to value the Companys long-term
floating rate notes, which are classified as Level 3, are
discussed further in Section 22.6 Long-term Floating Rate
Notes.
16.1.1 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 $4,314.9 million at
December 31, 2010 (December 31, 2009
$4,743.5 million) and a fair value of approximately
$4,773.0 million at December 31, 2010
(December 31, 2009 $5,029.4 million). The
fair value of publicly traded long-term debt is determined based
on market prices at December 31, 2010 and December 31,
2009, respectively.
16.2 DERIVATIVE
FINANCIAL INSTRUMENTS
Our policy with respect to using derivative financial
instruments is to selectively reduce volatility associated with
fluctuations in interest rates, FX rates, the price of fuel and
stock-based compensation expense. Where derivatives are
designated as hedging instruments, 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
Consolidated 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
The Company is exposed to interest rate risk, which is the risk
that the fair value or 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 debt.
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, designated as
cash flow hedges, 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 Company does not currently hold any
derivative financial instruments to manage its interest rate
risk.
16.4.1 Interest
Rate Swaps
During 2010, the Company entered into interest rate swaps, which
are accounted for as fair value hedges, for a notional amount of
US$101.4 million. The swap agreements converted the
Companys outstanding fixed interest rate liability into a
variable rate liability for its 5.75% Notes due in May
2013. Subsequently in 2010, these swap agreements were unwound
for a gain of $2.9 million of which $0.6 million was
recognized in the year as a reduction to Net interest
expense. The gain was deferred as a fair value adjustment
to the underlying debt that was hedged and will be amortized to
Net interest expense until the time the
5.75% Notes are repaid. At December 31, 2010 and
December 31, 2009, the Company had no outstanding interest
rate swaps.
During 2009, CP unwound its outstanding
fixed-to-floating
interest rate swap, which converted a portion of its
US$400 million 6.250% Notes to floating-rate debt, for
a gain of $16.8 million. The gain was deferred as a fair
value adjustment to the underlying debt that was hedged and will
be amortized to Net interest expense until such time
the 6.250% Notes are repaid. Subsequently in 2009, CP
repurchased a portion of the underlying debt as part of a tender
offer and recognized $6.5 million of the deferred gain in
Other income and charges offsetting part of the
recognized loss on repurchase of debt.
The impact of the above noted settled interest rate swaps
reduced Net interest expense in 2010 by
$3.5 million (2009 $5.5 million).
16.4.2 Treasury
Rate Locks
At December 31, 2010, the Company had net unamortized
losses related to interest rate locks, which are accounted for
as cash flow hedges, settled in previous years totalling
$22.1 million (December 31, 2009
$23.9 million). This amount is composed of various
unamortized gains and losses related to specific debts which are
reflected in Accumulated other comprehensive loss
and are amortized to Net interest expense in the
period that interest on the related debt is charged. The
amortization of these gains and losses resulted in an increase
in Net interest expense and Other
comprehensive income of $1.8 million in 2010
(2009 $3.5 million).
16.5 FOREIGN
EXCHANGE MANAGEMENT
The Company is exposed to fluctuations 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 U.S., as a result, revenues and
expenses are incurred in both Canadian and U.S. dollars. We
enter into FX risk management transactions primarily to manage
fluctuations in the exchange rate between Canadian and
U.S. currencies. In terms of income, excluding FX on LTD,
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
customers and suppliers to reduce the net exposure.
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.
The majority of the Companys U.S. dollar-denominated
long-term debt has been designated as a hedge of the net
investment in 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,
the Company may enter into FX forward contracts to lock-in the
amount of Canadian dollars it has to pay on its
U.S. denominated debt maturities.
Occasionally the Company will enter into short-term FX forward
contracts as part of its cash management strategy.
16.5.1 Foreign
Exchange Forward Contracts on Long-term Debt
In 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 guaranteed the amount of Canadian dollars
that the Company will repay when its US$400 million
6.250% Notes mature in October 2011. This derivative was
not designated as a hedge and changes in fair value were
recognized in net income in the period in which the change
occurred. During 2009, CP unwound and settled
US$330 million of the US$400 million currency forward
for total proceeds of $34.1 million. During 2010, CP
unwound the remaining
US$70 million for total proceeds of $0.2 million.
During 2010, no gain or loss was reported on this derivative.
During 2009, a net loss of $23.0 million, inclusive of both
realized and unrealized losses, was recorded to Other
income and charges.
During 2010, the Company entered into FX forward contracts to
fix the exchange rate on US$50.0 million of its
5.75% Notes due in May 2013 and US$75.0 million of its
6.50% Notes due in May 2018. These derivatives, which are
accounted for as cash flow hedges, guarantee the amount of
Canadian dollars that the Company will repay when these Notes
mature. During 2010, the Company recorded an unrealized FX loss
on long-term debt of $0.5 million in Other income and
charges and $1.1 million in Other comprehensive
loss in relation to these derivatives. At
December 31, 2010, the unrealized loss derived from these
FX forwards was $1.6 million which was included in
Other long-term liabilities with the offset, net of
tax, reflected in Accumulated other comprehensive
loss and Retained earnings on our Consolidated
Balance Sheet.
16.6 FUEL
PRICE MANAGEMENT
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. Fuel expense constitutes a
large portion of the Companys operating costs and
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.
The impact of variable fuel expense is mitigated substantially
through fuel cost 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, diesel and crack spreads. 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.
16.6.1 Energy
Futures
At December 31, 2010, the Company had diesel futures
contracts, which are accounted for as cash flow hedges, to
purchase 14.2 million U.S. gallons during the period
January 2011 to December 2011 at an average price of US$2.29 per
U.S. gallon. This represents approximately 5% of estimated
fuel purchases for this period. At December 31, 2010, the
unrealized gain on these futures contracts was $4.1 million
(December 31, 2009 $2.5 million) and was
reflected in Other current assets with the offset,
net of tax, reflected in Accumulated other comprehensive
loss on the Consolidated Balance Sheet.
The impact of settled commodity swaps decreased Fuel
expense in 2010 by $2.5 million as a result of realized
gains on diesel swaps. The net impact of settled swaps increased
Fuel expense in 2009 by $1.2 million due to a
combination of realized losses of $0.8 million arising from
settled commodity swaps and $0.4 million arising from
settled FX forward contracts. Included in the $0.8 million
realized losses on commodity swaps in 2009 were
$0.2 million in realized gains from settled derivatives
that were not designated as hedges.
16.7 STOCK-BASED
COMPENSATION EXPENSE MANAGEMENT
16.7.1 Total
Return Swap
The Company is exposed to stock-based compensation risk, which
is 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 tandem share appreciation
rights (TSARs), deferred share units
(DSUs), restricted share units (RSUs),
and performance share units (PSUs). These
instruments create increased compensation expense when market
prices of CP shares increases.
The Company entered into a TRS in May 2006 to reduce the
volatility to the Company, over time, of three types of
stock-based compensation programs: TSARs, DSUs and RSUs. The TRS
is a derivative that provides price appreciation and dividends,
in return for a charge by the counterparty. The swaps were
intended to minimize volatility to Compensation and
benefits 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 swap would no longer be offset by any
compensation expense reductions, which would reduce the
effectiveness of the swap. Over time it is CPs intention
to reduce the size of the TRS program and has unwound portions
of the program in 2010 and 2009.
Compensation and benefits expense on the
Companys Consolidated Statement of Income included a net
gain on these swaps of $12.0 million in 2010 which was
inclusive of both realized and unrealized gains
(2009 $18.6 million). During 2009, in order to
improve the effectiveness of the TRS in mitigating the
volatility of stock-based compensation programs, CP unwound and
settled a portion of the program for a total cost of
$31.1 million. This cost had previously been recognized in
Compensation and benefits expense. During 2010, the
Company unwound and settled a further portion of the program for
a total cost of $0.2 million. At December 31, 2010,
the unrealized loss on the remaining TRS of $6.0 million
(December 31, 2009 $18.2 million) was
included in Accounts payable and accrued liabilities
on our Consolidated Balance Sheet.
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. Losses on the
securitization program of $2.7 million in 2008 were
included in Other income and charges on our
Consolidated Statement of Income. Proceeds from collections
reinvested in the accounts receivable securitization program
were $595.4 million for the year ended 2008.
17.2 GUARANTEES
At December 31, 2010, the Company had residual value
guarantees on operating lease commitments of
$162.5 million. The maximum amount that could be payable
under these and all of the Companys other guarantees
cannot be reasonably estimated due to the nature of certain of
the guarantees. All or a portion of amounts paid under certain
guarantees could be recoverable from other parties or through
insurance. The Company has accrued for all guarantees that it
expects to pay. As at December 31, 2010, these accruals
amounted to $5.4 million (December 31,
2009 $9.3 million).
18.0 Acquisition
18.1 DAKOTA,
MINNESOTA & EASTERN RAILROAD CORPORATION
Effective October 4, 2007, the Company acquired all of the
issued and outstanding shares of DM&E, a Class II
railroad operating in the U.S. Midwest, for a purchase
price of approximately US$1.5 billion. 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 U.S. No
decision will be made by the Corporation on whether to construct
a railway line into the PRB until certain milestones have been
met. Future contingent payments of up to approximately
US$1.1 billion, plus certain interest and inflationary
adjustments may become payable up to December 31, 2025 upon
the achievement of certain milestones towards the completion of
a track expansion into the PRB and the achievement of certain
associated traffic volume targets. Any contingent payments that
may become payable would be recorded as an increase in the
purchase price.
The purchase was subject to review and approval by the STB,
during which time the shares of DM&E were placed in a
voting trust. The STB approved the application to acquire
control effective October 30, 2008. Prior to
October 30, 2008, CPs investment in the DM&E had
not been accounted for by CP on a consolidated basis and instead
the investment in the DM&E was accounted for as an equity
investment and reported as Equity income in Dakota,
Minnesota & Eastern Railroad Corporation on the
Consolidated Statement of Income.
19.0 Contractual
Commitments
The accompanying table indicates our obligations and commitments
to make future payments for contracts, such as debt, capital
lease and commercial arrangements.
CONTRACTUAL
COMMITMENTS
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Payments due by period (in millions)
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Total
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2011
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2012 & 2013
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2014 & 2015
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2016 & beyond
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|
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Long-term debt
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$
|
4,033.0
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|
|
$
|
273.2
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|
|
$
|
179.4
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|
|
$
|
160.7
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|
|
$
|
3,419.7
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|
|
|
|
|
Capital lease obligations
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|
|
289.8
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|
|
|
8.5
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|
|
|
17.5
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|
|
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133.3
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|
|
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130.5
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|
|
|
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Operating lease
obligation(1)
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|
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782.1
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|
|
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133.3
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|
|
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226.4
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|
|
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145.6
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|
|
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276.8
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|
|
|
|
|
Supplier purchased obligations
|
|
|
1,541.1
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|
|
|
206.8
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|
|
|
261.1
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|
|
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297.4
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|
|
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775.8
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|
|
|
|
|
Other long-term liabilities reflected
on our Consolidated Balance
Sheet(2)
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|
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762.8
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|
|
|
93.5
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|
|
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155.7
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|
|
|
137.6
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|
|
|
376.0
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|
|
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Total contractual obligations
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$
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7,408.8
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|
|
$
|
715.3
|
|
|
$
|
840.1
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|
|
$
|
874.6
|
|
|
$
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4,978.8
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(1) Residual
value guarantees on certain leased equipment with a maximum
exposure of $162.5 million (discussed further in
Section 17.2 Guarantees) 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, deferred income tax
liabilities and certain other long-term liabilities. Projected
payments for post-retirement benefits, workers
compensation benefits and long-term disability benefits include
the anticipated payments for years 2010 to 2019. Pension
contributions for our registered pension plans are not included
due to the volatility in calculating them. Pension payments are
discussed further in Section 20.5 Pension Plan Deficit.
Deferred 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 deferred tax liabilities
have been reflected in the 2016 & beyond
category in this table. Deferred income taxes are further
discussed in Section 22.4 Deferred Income Taxes.
20.0 Future
Trends and Commitments
20.1 AGREEMENTS
AND RECENT DEVELOPMENTS
20.1.1 Teck
Coal Limited
On October 6, 2010, CP reached a ten-year agreement with
Teck our largest customer, for the transportation of
metallurgical coal from their five CP-served mines in southeast
British Columbia to Vancouver area ports for export. Contract
terms are confidential. The contract commences April 1,
2011.
The agreement reflects the companies commitment to work
together to achieve growth in the volume of coal shipped through
a range of economic and marketplace dynamics and provides for
flexibility over the long term. The agreement provides for
investments by CP that enhance coal handling capacity to provide
for Tecks volume growth.
20.1.2 Change
in Executive Officer
On April 6, 2010 Edmond (Ed) Harris was appointed to the
position of Executive Vice-President and Chief Operations
Officer of Canadian Pacific. Mr. Harris reports to the
President and Chief Executive Officer, Fred Green. His
responsibilities include all aspects of railway operations,
safety, customer service, engineering and mechanical services in
both Canada and the U.S.
Effective April 1, 2011, Mr. Harris will be retiring
and Mr. Michael Franczak will be appointed Executive
Vice-President Operations. Mr. Franczak will report to the
President and Chief Executive Officer, Fred Green, and will
assume responsibility for operations activity across Canadian
Pacifics North American network.
20.2 STOCK
PRICE
The market value of our Common Shares measured at
December 31, 2010 increased by $7.83 per share on the
Toronto Stock Exchange in 2010 (from $56.79 on December 31,
2009 to $64.62 on December 31, 2010). The market value of
our Common Shares increased by $15.81 per share in 2009 (from
$40.98 on December 31, 2008 to $56.79 on December 31,
2009).
20.3 ENVIRONMENTAL
Cash payments related to our environmental remediation program
(described in Section 22.1 Environmental Liabilities)
totalled $13.2 million in 2010, compared with
$18.2 million in 2009 and $12.6 million in 2008. Cash
payments for environmental initiatives are estimated to be
approximately $16 million in 2011, $16 million in
2012, $12 million in 2013 and a total of approximately
$63 million over the remaining years through 2020, which
will be paid in decreasing amounts. All payments will be funded
from general operations.
We continue to be responsible for remediation work on portions
of a property in the State of Minnesota and continue to retain
liability accruals for remaining future expected costs. The
costs are expected to be incurred over approximately
10 years. The states voluntary investigation and
remediation program will oversee the work to ensure it is
completed in accordance with applicable standards.
20.4 CERTAIN
OTHER FINANCIAL COMMITMENTS
In addition to the financial commitments mentioned previously in
Section 17.0 Off-Balance Sheet Arrangements and
Section 19.0 Contractual Commitments, we are party to
certain other financial commitments discussed below.
CERTAIN OTHER
FINANCIAL COMMITMENTS AT DECEMBER 31, 2010
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Amount of commitment per period
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2012 &
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2014 &
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2016 &
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(in millions)
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Total
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2011
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2013
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|
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2015
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beyond
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Letters of credit
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$
|
358.1
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|
|
$
|
357.3
|
|
|
$
|
0.8
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
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Capital commitments
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|
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236.8
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|
|
|
216.0
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|
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19.9
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|
|
0.1
|
|
|
|
0.8
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|
|
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|
|
|
|
|
|
|
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|
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Total commitments
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$
|
594.9
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|
|
$
|
573.3
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|
|
$
|
20.7
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|
$
|
0.1
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|
|
$
|
0.8
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20.4.1 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 contractual 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.
20.4.2 Capital
Commitments
We remain committed to maintaining our current high level of
plant quality and renewing our franchise. As part of this
commitment, we have entered contracts with suppliers to make
various capital purchases related to track programs. Payments
for these commitments are due in 2011 through 2028. These
expenditures are expected to be financed by cash generated from
operations or by issuing new debt.
20.5 PENSION
PLAN DEFICIT
We estimate that every 1.0 percentage point increase (or
decrease) in the discount rate attributable to changes in long
Government of Canada bond yields can cause our defined benefit
pension plans deficit to decrease (or increase) by
approximately $600 million, reflecting the changes to both
the pension obligations and the value of the pension funds
debt securities. Similarly, for every 1.0 percentage point
the actual return on assets varies above (or below) the
estimated return for the year, the deficit would decrease (or
increase) by approximately $85 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 $837.2 million to the defined
benefit pension plans in 2010, compared with $595.2 million
in 2009. Our 2010 contributions included a voluntary prepayment
in September 2010 of $650 million to our main Canadian
defined benefit pension plan. Our 2009 contributions included
voluntary prepayments in December 2009 of $500 million to
our main Canadian plan and $7.4 million to our
U.S. plans. We have significant flexibility with respect to
the rate at which we apply these voluntary prepayments to reduce
future years pension contribution requirements, which
allows us to manage the volatility of future pension funding
requirements.
We estimate our aggregate pension contributions to be in the
range of $100 million to $125 million in 2011, and in
the range of $125 million to $175 million in each of
the subsequent four years. These estimates reflect our current
intentions with respect to the rate at which we will apply the
December 2009 and September 2010 voluntary prepayments against
contribution requirements in 2011 and the subsequent four years.
Future pension contributions will be highly dependent on our
actual experience with such variables as investment returns,
interest rate fluctuations and demographic changes, on the rate
at which the December 2009 and September 2010 voluntary
prepayments are applied against pension contribution
requirements, and on any changes in the regulatory environment.
20.6 RESTRUCTURING
Cash payments related to severance under all restructuring
initiatives totalled $20.3 million in 2010, compared with
$27.0 million in 2009 and $40.7 million in 2008. Cash
payments for restructuring initiatives are estimated to be
approximately $28 million in 2011, $14 million in
2012, $11 million in 2013, and a total of approximately
$27 million over the remaining years through 2025. These
amounts include residual payments to protected employees for
previous restructuring plans that have been completed.
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 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 impact and likelihood, taking account of financial,
environmental, reputational impacts, and existing management
control. Risk mitigation strategies are formulated to accept,
treat, transfer, or eliminate the exposure to the identified
events. 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 COMPETITION
We face significant competition for freight transportation in
Canada and the U.S., including competition from other railways
and trucking and barge 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
competitiveness and have a materially adverse impact on our
business or operating results.
To mitigate competition risk, our strategies include:
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o
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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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o
|
renewing and maintaining infrastructure to enable safe and fluid
operations;
|
|
o
|
improving handling through IOP to reduce costs and enhance
quality and reliability of service; and
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o
|
exercising a disciplined yield approach to competitive contract
renewals and bids.
|
21.2 LIQUIDITY
CP has in place a revolving credit facility of
$945 million, with an accordion feature to
$1,150 million, of which $358 million was committed
for letters of credit and $587 million was available on
December 31, 2010. This facility is arranged with a core
group of 15 highly rated international financial institutions
and incorporates pre-agreed pricing. Arrangements with 14 of the
15 financial institutions extend through November 2012, with one
institution extending through November 2011. In addition, CP
also has available from a financial institution a credit
facility of $118 million, of which $118 million of
this facility was available on December 31, 2010 and is
available through the end of 2011. Both facilities are available
on next day terms and are subject to a minimum debt to total
capitalization ratio. Should our senior unsecured debt not be
rated at least investment grade by Moodys and S&P, we
will be further required to maintain a minimum fixed charge
coverage ratio. At December 31, 2010, the Company satisfied
the thresholds stipulated in both financial covenants.
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.
21.3 REGULATORY
AUTHORITIES
21.3.1 Regulatory
Change
Our railway operations are subject to extensive federal laws,
regulations and rules in both Canada and the U.S. which
directly affect how we manage many aspects of our railway
operation and business activities. Our operations are primarily
regulated by the Canadian Transportation Agency (the
Agency) and Transport Canada in Canada and the FRA and the
STB in the U.S. Various other federal regulators directly
and indirectly affect our operations in areas such as health,
safety, security and environmental and other matters.
The Canada Transportation Act (CTA) provides shipper
rate and service remedies, including Final Offer Arbitration
(FOA), competitive line rates and compulsory
inter-switching in Canada. The CTA regulates the grain revenue
cap, commuter and passenger access, FOA, and charges for
ancillary services and railway noise. No assurance can be given
to the content, timing or effect on CP of any anticipated
additional legislation or future legislative action.
For the grain crop year beginning August 1, 2010 the Agency
announced a 7% increase in the Volume-Related Composite Price
Index (VRCPI), a cost inflator used in calculating
the grain maximum revenue entitlement for CP and Canadian
National Railway. Grain revenues are impacted by several factors
including volumes and VRCPI, additional factors are discussed in
Section 21.8 General and Other Risks.
Transport Canada regulates safety-related aspects of our railway
operations in Canada. On June 4, 2010, Bill C-33 was
introduced in the House of Commons. The Bill is an Act to amend
the Railway Safety Act and to make consequential amendments to
the Canada Transportation Act. Bill C-33 is currently moving
through the Parliamentary process and could become law in 2011.
No assurance can be given as to the effect on CP of the proposed
amendments contained in Bill C-33.
On August 12, 2008 the Minister of Transport,
Infrastructure and Communities announced the Terms of Reference
for the Rail Freight Service Review (RFSR). The
review is focused on understanding the nature and extent of
problems and best practices within the logistics chain, with a
focus on railway performance in Canada. The interim RFSR report
was issued on October 8, 2010. CP has provided submissions
to the panel based on the results contained in the interim
report. The final report is expected to be released in early
2011.
The FRA regulates safety-related aspects of our railway
operations in the U.S. State and local regulatory agencies
may also exercise limited jurisdiction over certain safety and
operational matters of local significance. The Railway Safety
Improvement Act requires, among other things the introduction of
Positive Train Control by the end of 2015 (discussed further in
Section 21.3.3 Positive Train Control); limits freight rail
crews duty time; and requires development of a crew
fatigue management plan. The requirements imposed by this
legislation could have an adverse impact on the Companys
financial condition and results of operations.
The STB regulates commercial aspects of CPs railway
operations in the U.S. The STB is an economic regulatory
agency that Congress charged with the fundamental mandate of
resolving railroad rate and service disputes and reviewing
proposed railroad mergers. The STB serves as both an
adjudicatory and a regulatory body.
The STB revised rules relating to railway rate cases to address,
among other things, concerns raised by small and medium sized
shippers that the previous rules resulted in costly and lengthy
proceedings. Few cases have been filed, and no case has been
filed against the Company, under the new rules. It is too soon
to assess the possible impact on CP of such new rules.
The STB has scheduled a hearing to review existing exemptions
from railroad-transportation regulations for certain
commodities, boxcar and intermodal freight and a hearing on rail
competition. The industry and CP will participate.
The Chairman and Ranking Republican on the Senate Commerce
Committee reintroduced the Surface Transportation Board
Reauthorization Act which was the subject of discussions with
shippers and the rail industry during the last Congress.
It is too soon to know whether the hearings or the reintroduced
Surface Transportation Board Reauthorization Act will result in
further proceedings and regulatory changes.
The railroad industry in the U.S., shippers and representatives
of the Senate Commerce Committee met to discuss possible changes
to the legislation which governs the STBs mandate. The
Senate Commerce Committee produced a draft Bill. To date, the
House of Representatives has not produced a related Bill. It is
too soon to determine if any Bill at all will be enacted, or if
in the event any such Bill is enacted, whether it would have a
material impact on the Companys financial condition and
results of operations.
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).
21.3.2 Security
We are subject to statutory and regulatory directives in Canada
and the U.S. that address security concerns. 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. Regulations by the
Department of Transportation and the Department of Homeland
Security in the U.S. 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. New
legislative changes in Canada to the Transportation of Dangerous
Goods Act are expected to add new security regulatory
requirements. 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 U.S. 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 security 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 the 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 U.S. regulations for rail security
sensitive materials, we have implemented procedures to maintain
positive chain of custody and are performing annual route
assessments to select and use the route posing the least overall
safety and security risk.
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21.3.3 Positive
Train Control
In the U.S., the Rail Safety Improvement Act requires
Class I railroads to implement by December 31, 2015,
interoperable Positive Train Control (PTC) on main
track in the U.S. that has passenger rail traffic or toxic
inhalant hazard commodity traffic. The legislation defines PTC
as a system designed to prevent
train-to-train
collisions, over-speed derailments, incursions into established
work zone limits, and the movement of a train through a switch
left in the wrong position. The FRA has issued rules and
regulations for the implementation of PTC, and CP filed its PTC
Implementation Plans in April 2010, which outlined the
Companys solution for interoperability as well as its
consideration of relative risk in the deployment plan. The
Company is participating in industry and government working
groups to evaluate the scope of effort that will be required to
comply with these regulatory requirements, and to further the
development of an industry standard interoperable solution that
can be supplied in time to complete deployment. At this time CP
estimates the cost to implement PTC as required for railway
operations in the U.S. to be up to US$250 million. As at
December 31, 2010, total expenditures related to PTC are
approximately $14 million.
21.4 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, 2010, approximately 79% of our workforce
was unionized and approximately 75% of our workforce was located
in Canada. Unionized employees are represented by a total of 39
bargaining units. Agreements are in place with six of seven
bargaining units that represent our employees in Canada and 15
of 32 bargaining units that represent employees in our
U.S. operations.
21.4.1 Canada
We are party to collective agreements with seven bargaining
units in our Canadian operations. Currently, collective
agreements are in effect with six of the seven bargaining units.
On February 5, 2011, CP and the CAW announced that a
tentative contract settlement was reached; the Memorandum of
Settlement was sent to the union membership for ratification.
The agreement was ratified by the CAW membership on
February 24, 2011. The renewal collective agreement is four
years in duration, extending to the end of 2014. Of the six
agreements that are in place, two expire at the end of 2011
(Teamsters Canada Rail Conference (TCRC)
representing running trades employees and the TCRC-Rail Canada
Traffic Controllers representing rail traffic controllers). The
four agreements that expire at the end of 2012 are Canadian
Pacific Police Association, United Steelworkers representing
clerical workers, TCRC-Maintenance of Way Employees Division
representing track maintenance employees and the International
Brotherhood of Electrical Workers representing signals employees.
21.4.2
U.S.
We are party to collective agreements with fourteen bargaining
units of our Soo Line subsidiary, thirteen bargaining units of
our D&H subsidiary, and two bargaining units of our
DM&E subsidiary, and have commenced first contract
negotiations with a bargaining unit certified to represent
DM&E signal and communications workers, a bargaining unit
to represent track maintainers and a bargaining unit to
represent mechanics.
Soo Line agreements with all fourteen 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, track maintainers, and mechanical supervisors opened
for negotiation in January 2010. Soo Line has joined with the
other U.S. Class I railroads in national bargaining
for this upcoming round of negotiations.
D&H has settled contracts for the last round of
negotiations with all thirteen bargaining units, including
locomotive engineers, train service employees, car repair
employees, signal maintainers, yardmasters, electricians,
machinists, mechanical labourers, track maintainers, clerks,
police, engineering supervisors and mechanical supervisors. For
the 2010 round of negotiations, D&H and its unions
have committed to stand by the outcome of wage, benefits, and
rules negotiations at the national table.
DM&E currently has an agreement in place with two
bargaining units that extend to the end of 2013 and cover all
DM&E engineers and conductors. Negotiations on the first
contract to cover signal and communications workers, track
maintainers and mechanics continue in the first quarter of 2011.
21.5 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 materials during 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.
CPs annual Corporate and Operations Environmental Plans
state our current environmental goals, objectives and strategies.
Specific environmental programs are in place to address areas
such as air emissions, wastewater, management of vegetation,
chemicals and waste, storage tanks and fuelling facilities. We
also undertake environmental impact assessments. There is
continued focus on preventing spills and other incidents that
have a negative impact on the environment. There is an
established Strategic Emergency Response Contractor network and
spill equipment kits located across Canada and the U.S. 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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21.6 CLIMATE
CHANGE
In both Canada and the U.S. the federal governments have
not designated railway transportation as a large final emitter
with respect to greenhouse gas (GHG) emissions. The
railway transportation industry is currently not regulated with
respect to GHG emissions, nor do we operate under a regulated
cap of GHG emissions. Growing support for climate change
legislation is likely to result in changes to the regulatory
framework in Canada and the U.S. However, the timing and
specific nature of those changes are difficult to predict.
Specific instruments such as carbon taxes, and technical and
fuel standards have the ability to significantly affect the
Companys capital and operating costs. Restrictions, caps
and/or taxes
on the emissions of GHG could also affect the markets for, or
the volume of, the goods the Company transports.
The fuel efficiency of railways creates a significant advantage
over trucking, which currently handles a majority of the market
share of ground transportation. Although trains are already
three times more fuel efficient than trucks on a per
ton-mile
basis, we continue to adopt new technologies to minimize our
fuel consumption and GHG emissions.
Potential physical risks associated with climate change include
damage to railway infrastructure due to extreme weather effects,
(i.e. increased flooding, winter storms). Improvements to
infrastructure design and planning are used to mitigate the
potential risks posed by weather events. The Company maintains
flood plans, winter operating plans, an avalanche risk
management program and geotechnical monitoring of slope
stability.
21.7 FINANCIAL
RISKS
21.7.1 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 many factors that drive the pension
plans funded status, and Canadian statutory pension
funding requirements. Over the last several years, CP has made
several changes to the plans investment policy to reduce
this volatility, including the reduction of the plans
public equity markets exposure. In addition, CP has made
voluntary prepayments to our main Canadian defined benefit
pension plan of $650 million in September 2010 and
$500 million in December 2009 which will reduce pension
funding volatility, since we have significant flexibility with
respect to the rate at which we apply these voluntary
prepayments to reduce future years pension funding
requirements.
21.7.2 Fuel
Cost Volatility
Fuel expense constitutes a significant portion of CPs
operating costs and can be influenced by a number of factors,
including, without limitation, worldwide oil demand,
international politics, weather, refinery capacity, unplanned
infrastructure failures, labour and political instability and
the ability of certain countries to comply with
agreed-upon
production quotas.
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.
To address the residual portion of our fuel costs not mitigated
by our fuel recovery programs, CP has a systematic hedge program
with the goal to have hedged at any point in time 5-7% of
CPs next 12 months fuel consumption. Using this
approach up to 12% of the previous twelve month periods
unmitigated fuel consumption will have been hedged.
21.7.3 Foreign
Exchange Risk
Although we conduct our business primarily in Canada, a
significant portion of our revenues, expenses, assets and
liabilities including debt are denominated in U.S. 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, U.S. and international monetary
policies and U.S. debt levels. Changes in the exchange rate
between the Canadian dollar and other currencies (including the
U.S. dollar) make the goods transported by us more or less
competitive in the world marketplace and, in turn, positively or
negatively affect our revenues and expenses. To manage this
exposure to fluctuations in exchange rates between Canadian and
U.S. dollars, we may sell or purchase U.S. dollar
forwards at fixed rates in future periods. Foreign exchange
management is discussed further in Section 16.5 Foreign
Exchange Management.
21.7.4 Interest
Rate Risk
In order to meet our capital structure requirements, we may
enter into long-term debt agreements. These debt agreements
expose us to increased interest costs on future fixed debt
instruments and existing variable rate debt instruments should
market rates increase. In addition, the present value of our
assets and liabilities will also vary with interest rate
changes. To manage our interest rate exposure, we may enter into
forward rate agreements such as treasury rate locks or bond
forwards that lock in rates for a future date, thereby
protecting ourselves against interest rate increases. We may
also enter into swap agreements whereby one party agrees to pay
a fixed rate of interest while the other party pays a floating
rate. Contingent on the direction of interest rates, we may
incur higher costs depending on our contracted rate. Interest
rate management is discussed further in Section 16.4
Interest Rate Management
21.8 GENERAL
AND OTHER RISKS
21.8.1
Transportation of Hazardous Materials
Railways, including CP, are legally required to transport
hazardous materials as part of their common carrier obligations
regardless of risk or potential exposure of loss. A train
accident involving hazardous materials, including toxic
inhalation hazard commodities such as chlorine and anhydrous
ammonia could result in catastrophic losses from personal injury
and property damage, which could have a material adverse effect
on CPs operations, financial condition and liquidity.
21.8.2 Supply
Chain Disruptions
The North American transportation system is integrated.
CPs operations and service may be negatively impacted by
service disruptions of other transportation links such as ports,
handling facilities, customer facilities and other railroads. A
prolonged service disruption at one of these entities could have
a material adverse effect on CPs operations, financial
condition and liquidity.
21.8.3 Reliance
on Technology and Technological Improvements
Information technology is critical to all aspects of our
business. While we have business continuity and disaster
recovery plans in place, a significant disruption or failure of
one or more of our information technology or communications
systems could result in service interruptions or other failures
and deficiencies which could have a material adverse effect on
our results of operations, financial condition and liquidity.
21.8.4 Qualified
Personnel
Changes in employee demographics, training requirements, and the
availability of qualified personnel, particularly locomotive
engineers and train-persons, could negatively impact the
Companys ability to meet demand for rail service. We have
workforce planning tools and programs in place and are
undertaking technological improvements to assist with manual
tasks. Unpredictable increases in the demand for rail services
may increase the risk of having insufficient numbers of trained
personnel, which could have a material adverse effect on our
results of operations and financial condition.
21.8.5 Severe
Weather
We are exposed to severe weather conditions including floods,
avalanches, mudslides, extreme temperatures and significant
precipitation that may cause business interruptions that can
adversely affect our entire rail network and result in increased
costs, increased liabilities, and decreased revenue, which could
have a material adverse effect on CPs operations and
financial condition.
21.8.6 Supplier
Concentration
Due to the complexity and specialized nature of rail equipment
and infrastructure, there can be a limited number of suppliers
of this equipment and material available. Should these
specialized suppliers cease production or experience capacity or
supply shortages, this concentration of suppliers could result
in CP experiencing cost increases or difficulty in obtaining
rail equipment and materials. While CP manages this risk by
sourcing key products and services from multiple suppliers
whenever possible, widespread business failures of suppliers
could have a material adverse effect on CPs operations and
financial position.
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, gas production levels
in southern Alberta, 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
being 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.
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
U.S. 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 reported
periods. 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, deferred income taxes, legal and
personal injury liabilities, long-term floating rate notes and
goodwill and intangible assets.
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 cost 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 Other long-term
liabilities on our Consolidated Balance Sheet and to
Purchased Services and Other within operating
expenses on our Consolidated Statement of Income.
At December 31, 2010, the accrual for environmental
remediation on our Consolidated Balance Sheet amounted to
$107.4 million (2009 $121.3 million), of
which the long-term portion amounting to $91.0 million
(2009 $106.5 million) was included in
Other long-term liabilities and the short-term
portion amounting to $16.4 million (2009
$14.8 million) was included in Accounts payable and
accrued liabilities. Total payments were
$13.2 million in 2010 and $18.2 million in 2009. The
U.S. dollar-denominated portion of the liability was
affected by the change in FX, resulting in a decrease in
environmental liabilities of $4.5 million in 2010 and
$14.3 million in 2009.
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 and long-term disability 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 20.5 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 collectively bargained amendments to
pension plan benefit provisions are amortized over the term of
the applicable union agreement. Prior service costs arising from
all other sources are amortized over the expected average
remaining service period of active employees who were expected
to receive benefits under the plan at the date of amendment.
The obligations with respect to post-retirement benefits,
including health care and life insurance, are actuarially
determined and are accrued using the projected-benefit method
prorated over the credited service periods of employees. The
obligations with respect to post-employment benefits, including
some workers compensation and long-term disability
benefits in Canada, are the actuarial present value of benefits
payable to employees on disability.
We included pension benefit liabilities of $673.4 million
in Pension and other benefit liabilities on our
December 31, 2010 Consolidated Balance Sheet. We also
included post-retirement benefits accruals of
$343.6 million in Pension and other benefit
liabilities and post-retirement benefits accruals of
$23.0 million in Accounts payable and accrued
liabilities on our December 31, 2010 Consolidated
Balance Sheet. Accruals for self-insured workers compensation
and long-term disability benefit plans are discussed in
Section 22.5 Legal and Personal Injury Liabilities.
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
$45 million.
Net periodic benefit costs for pensions and post-retirement
benefits were included in Compensation and benefits
on our December 31, 2010 Statement of Consolidated Income.
Combined net periodic benefit costs for pensions and
post-retirement benefits (excluding self-insured workers
compensation and long-term disability benefits) were
$68.8 million in 2010, compared with $45.6 million in
2009.
Net periodic benefit costs for pensions were $39.7 million
in 2010, compared with $24.8 million in 2009. The portion
of this related to defined benefit pensions was
$36.3 million in 2010, compared with $22.1 million in
2009, and the portion related to defined contribution pensions
(equal to contributions) was $3.4 million for 2010,
compared with $2.7 million for 2009. We estimate net
periodic benefit costs for pensions in 2011 to equal
approximately $50 million. Net periodic benefit costs for
post-retirement benefits were $29.1 million in 2010,
compared with $20.8 million in 2009. Net periodic benefit
costs for post-retirement benefits in 2011 are not expected to
differ materially from the 2010 costs.
22.3 PROPERTY,
PLANT AND EQUIPMENT
CP performs depreciation studies of each property group
approximately every two years to update depreciation rates. The
depreciation studies are based on statistical analysis of
historical retirements of properties in the group and
incorporate engineering estimates of changes in current
operations and of technological advances. 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. The estimates of
economic lives are uncertain and can vary due to technological
changes or in the rate of wear. Additionally, the depreciation
rates are updated to reflect the change in residual values of
the assets in the 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. For the sale
or retirement of larger groups of depreciable assets that are
unusual and were not included in our depreciation studies, CP
records a gain or loss for the difference between net proceeds
and net book value of the assets sold or retired.
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 recorded as a component of
Net properties on our Consolidated Balance Sheet. At
December 31, 2010, accumulated depreciation was
$5,623.3 million.
Revisions to the estimated useful lives and net salvage
projections for properties constitute a change in accounting
estimate and we address these prospectively by amending
depreciation rates. It is anticipated that there will be changes
in the estimates of weighted average useful lives and net
salvage for each property group as assets are acquired, used and
retired. Substantial changes in either the useful lives of
properties or the salvage assumptions could result in
significant changes to depreciation expense. For example, if the
estimated average life of road locomotives, our largest asset
group, increased (or decreased) by 5%, annual depreciation
expense would decrease (or increase) by approximately
$3 million.
We review the carrying amounts of our properties when
circumstances indicate that such carrying amounts may not be
recoverable based on future undiscounted cash flows. When such
properties are determined to be impaired, recorded asset values
are revised to their fair values and an impairment loss is
recognized.
22.4 DEFERRED
INCOME TAXES
We account for deferred income taxes 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 deferred income tax
assets and liabilities at the balance sheet date.
In determining deferred income taxes, we make estimates and
assumptions regarding deferred tax matters, including estimating
the timing of the realization and settlement of deferred income
tax
assets (including the benefit of tax losses) and liabilities.
Deferred income taxes are calculated using enacted federal,
provincial, and state future income tax rates, which may differ
in future periods.
Deferred income tax expense totalling $211.2 million was
included in income tax for 2010 and $133.0 million was
included in income tax in 2009. The change in deferred income
tax in 2010 was primarily due to higher taxable income and the
utilization of tax assets to reduce income taxes in 2009. The
change in deferred tax expense for 2009 was due to lower taxable
income and the impact of tax rate changes recognized in prior
years. At December 31, 2010, deferred income tax
liabilities of $1,944.8 million (2009
$1,818.7 million) were recorded as a long-term liability
and comprised largely of temporary differences related to
accounting for properties. Deferred income tax benefits of
$222.3 million realizable within one year were recorded as
a current asset compared to $128.1 million at
December 31, 2009.
22.5 LEGAL
AND PERSONAL INJURY LIABILITIES
We are involved in litigation in Canada and the
U.S. related to our business. Management is required to
establish estimates of the 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 and current legal advice 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 B.C., claims
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 U.S. are not covered by a
workers compensation program, but are covered by
U.S. federal law for railway employees. Although we manage
in the U.S. using a
case-by-case
comprehensive approach, for accrual purposes, a combination of
case-by-case
analysis and statistical analysis is utilized.
Provisions for incidents, claims and litigation charged to
income, which are included in Purchased services and
other on our Consolidated Statement of Income, amounted to
$50.4 million in 2010 (2009 $54.5 million;
2008 $79.7 million).
Accruals for incidents, claims and litigation, including WCB
accruals, totaled $160.8 million, net of insurance
recoveries, at December 31, 2010 and $177.4 million at
December 31, 2009. At December 31, 2010 and 2009
respectively, the total accrual included $98.7 million and
$98.9 million in Pension and other benefit
liabilities, $12.9 million and $19.4 million in
Other long-term liabilities and $52.1 million
and $75.1 million in Accounts payable and accrued
liabilities, offset by $0.8 million and
$0.8 million in Other assets and
$2.1 million and $15.2 million in Accounts
receivable, net.
22.6 LONG-TERM
FLOATING RATE NOTES
At December 31, 2010 and December 31, 2009, the
Company held long-term floating rate notes with a total
settlement value of $117.0 million and $129.1 million,
respectively, and carrying values of $69.5 million and
$69.3 million, respectively. The carrying values, being the
estimated fair values, are reported in Investments.
During the year ended December 31, 2010, the Company
received $0.1 million in partial redemption of certain of
the notes held (2009 $12.5 million). In
addition, in 2010, notes with a settlement value of
$12.0 million were used to settle a $9.0 million
credit facility with a major Canadian bank. The notes had an
estimated fair value of $7.6 million. At December 31,
2010, the Company held long-term floating rate notes with
settlement value, as follows:
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$116.8 million Master Asset Vehicle (MAV) 2
notes with eligible assets; and
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$0.2 million MAV 3 Class 9 Traditional Asset
(TA) Tracking notes.
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At December 31, 2009, the Company held long-term floating
rate notes with settlement value, as follows:
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$116.8 million MAV 2 notes with eligible assets;
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$12.1 million MAV 2 Ineligible Assets (IA)
Tracking notes with ineligible assets; and
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$0.2 million MAV 3 Class 9 TA Tracking notes.
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During the year ended December 31, 2010, Dominion Bond
Rating Service (DBRS) upgraded the rating of the MAV
2
Class A-1
notes from A Under Review with Positive Implications to A
(high). The MAV 2
Class A-2
notes have received a BBB (low) rating from DBRS, unchanged from
2009.
In January 2009, under a Canadian Court granted order, a
restructuring of ABCP was completed. As a result, CP received
new replacement long-term floating rate notes with a total
settlement value of $142.8 million.
The valuation technique used by the Company to estimate the fair
value of its investment in long-term floating rate notes at
December 31, 2010 and December 31, 2009 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 above noted redemption of notes, accretion and
other minor changes in assumptions have resulted in gains of
$9.3 million in the year ended December 31, 2010
(2009 $9.2 million; 2008 losses of
$49.4 million). The interest rates and maturities of the
various long-term floating rate notes, discount rates and credit
losses modelled at December 31, 2010 and December 31,
2009, respectively, are:
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December 31, 2010
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December 31, 2009
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Probability weighted average coupon interest rate
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0.8
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%
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Nil
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Weighted average discount rate
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7.1
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%
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7.9
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%
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Expected repayments of long-term floating rate notes
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Approximately 6 years
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31/2
to 19 years
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Credit losses
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MAV 2 eligible asset notes: 1% to 100
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%
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MAV 2 eligible asset notes: nil to 100
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%
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MAV 2 IA Tracking notes: N/A
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MAV 2 IA Tracking notes: 25
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%
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MAV 3 Class 9 TA Tracking notes: 1
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%
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MAV 3 Class 9 TA Tracking notes: Nil
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The probability weighted discounted cash flows resulted in an
estimated fair value of the Companys long-term floating
rate notes of $69.5 million at December 31, 2010
(2009 $69.3 million). The change in the
original cost and estimated fair value of the Companys
long-term floating rate notes is as follows (representing a
roll-forward of assets measured at fair value using Level 3
inputs):
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(in millions of Canadian dollars)
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Original cost
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Estimated fair value
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As at January 1, 2009
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$
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143.6
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$
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72.7
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Change due to restructuring, January 21, 2009
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(0.8
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)
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Redemption of notes
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(13.7
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(8.0
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)
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Accretion
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2.9
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Change in market assumptions
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1.7
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As at December 31, 2009
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129.1
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69.3
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Redemption of notes
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(12.1
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)
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(7.7
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)
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Accretion
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5.9
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Change in market assumptions
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2.0
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As at December 31, 2010
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$
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117.0
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$
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69.5
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Accretion and gains and losses from the redemption of notes and
changes in market assumptions are reported in Other income
and charges.
Sensitivity analysis is presented below for key assumptions at
December 31, 2010:
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Change in fair value of long-term
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(in millions of Canadian dollars)
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floating rate notes
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Coupon interest
rate(1)
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50 basis point increase
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$
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Nil
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50 basis point decrease
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$
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Nil
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Discount rate
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50 basis point increase
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$
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(1.9
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)
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50 basis point decrease
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$
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2.0
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(1) Sensitivity
is after reflecting anticipated credit losses.
Continuing uncertainties regarding the value of the assets which
underlie the long-term floating rate notes and the amount and
timing of cash flows could give rise to a further material
change in the value of the Companys investment in
long-term floating rate notes which could impact the
Companys near-term earnings.
22.7 GOODWILL
AND INTANGIBLE ASSETS
As part of the acquisition of DM&E in 2007, CP recognized
goodwill of US$147 million on the allocation of the
purchase price, determined as the excess of the purchase price
over the fair value of the net assets acquired. Since the
acquisition, the operations of DM&E have been integrated
with CPs operations in the U.S., as a result the related
goodwill is now allocated to CPs U.S. reporting unit.
Goodwill is tested for impairment at least once per year as at
October 1st. The goodwill impairment test determines if the
fair value of the reporting unit continues to exceed its net
book value, or whether an impairment is required. The fair value
of the reporting unit is affected by projections of its
profitability including estimates of revenue growth which are
inherently uncertain. The annual test for impairment, performed
with the assistance of outside consultants, determined that the
fair value of CPs U.S. reporting unit exceeded the
carrying value by approximately 40% (2009 10%) and
that no impairment would be required in 2010.
The impairment test was performed primarily using an income
approach based on discounted cash flows. Discount rates of 8.50%
to 9.0% (2009 8.75% to 9.0%) were used, based on the
weighted average cost of capital. A change in discount rates of
0.25% would change the valuation by 5 to 6%. The valuation used
revenue growth projections ranging from 4.3 to 7.1%
(2009 4.5 to 6.9%) annually. A change in the long
term growth rate of 0.25% would change the valuation by 2 to 3%.
These sensitivities indicate that a prolonged recession or
increased borrowing rates could result in an impairment to the
carrying value of goodwill in future periods. A secondary
approach used in the valuation was a market approach which
included a comparison of implied earnings multiples of CP
U.S. to trading earnings multiples of comparable companies,
adjusted for the inherent minority discount. The derived value
of CP U.S. using the income approach fell within the range
of the observable trading multiples. The income approach was
chosen over the market approach as it takes into consideration
the particular characteristics attributable to CP U.S.
The carrying value of CPs goodwill changes from period to
period due to changes in the exchange rate. As at
December 31, 2010 goodwill was $146.6 million
(2009 $154.9 million).
Intangible assets of $43.2 million (2009
$47.4 million), acquired in the acquisition of DM&E,
includes the amortized costs of an option to expand the track
network, favourable leases, customer relationships and interline
contracts. Intangible assets with determinable lives are
amortized on a straight-line basis over their estimated useful
lives. Intangible assets with indefinite lives are not amortized
but are assessed for impairment on an annual basis, or more
often if the events or circumstances warrant. If the carrying
value of the indefinite-lived intangible asset exceeds its fair
value, an impairment charge would be recognized immediately.
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 U.S. Securities Exchange Act of 1934 (as amended)) to
ensure that material information relating to the Company is made
known to them. The Chief Executive Officer and Chief Financial
Officer have a process to evaluate these disclosure controls and
are satisfied that they are effective for ensuring that such
material information is made known to them.
24.0 Forward-Looking
Information
This MD&A, especially but not limited to Section 24,
contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995
(US) and other relevant securities legislation relating but
not limited to our operations, anticipated financial
performance, business prospects and strategies. Forward-looking
information typically contains statements with words such as
anticipate, believe, expect,
plan or similar words suggesting future outcomes.
Readers are cautioned not to place undue reliance on
forward-looking information because it is possible that we will
not achieve predictions, forecasts, projections and other forms
of forward-looking information. In addition, except as required
by law, we undertake no obligation to update publicly or
otherwise revise any forward-looking information, whether as a
result of new information, future events or otherwise.
By its nature, our forward-looking information involves numerous
assumptions, inherent risks and uncertainties, including but not
limited to the following factors: changes in business
strategies; general North American and global economic and
business conditions; the availability and price of energy
commodities; the effects of competition and pricing pressures;
industry capacity; shifts in market demands; changes in laws and
regulations, including regulation of rates; changes in taxes and
tax rates; potential increases in maintenance and operating
costs; uncertainties of litigation; labour disputes; risks and
liabilities arising from derailments; timing of completion of
capital and maintenance projects; currency and interest rate
fluctuations; effects of changes in market conditions on the
financial position of pension plans and liquidity of
investments; various events that could disrupt operations,
including severe weather conditions; security threats and
governmental response to them; and technological changes.
There are more specific factors that could cause actual results
to differ materially 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 Risks and Enterprise Risk Management and elsewhere in
this MD&A.
24.1 2010
FINANCIAL ASSUMPTIONS
CP provided the following financial assumptions for 2010:
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capital expenditures were estimated to range from
$680 million to $730 million;
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we expected our tax rate to be in the 25% to 27% range; and
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2010 pension contributions were estimated to be between
$150 million and $200 million.
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24.1.1
First-Quarter 2010 Guidance Updates
CP updated its financial assumptions as follows: The assumptions
were unchanged from information previously reported and
discussed above. However, CP expected its 2010 defined benefit
pension expense to increase by $15 million from 2009
expenses.
24.1.2
Second-Quarter 2010 Guidance Updates
CP revised expectations, announcing an update to the expected
capital program in 2010 that was to be in the range of
$750 million to $800 million. The 2010 pension
contributions for the defined benefit pension plans were changed
to an estimate of between $185 million and
$195 million. On June 29, 2010 CP announced the
reopening of its southern mainline after severe flooding that
caused an 11 day outage. The impact of flooding reduced
second quarter earnings per share by approximately 12 cents.
24.1.3
Third-Quarter 2010 Guidance Updates
On September 20, 2010 CP announced a voluntary prepayment
to its Canadian defined benefit pension plan of
$650 million. Excluding this voluntary prepayment CP
continued to estimate its contributions to the defined benefit
pension plans to be between $185 million and
$195 million for 2010. Including the voluntary prepayment
CP
estimated the contributions to the defined benefit pension plans
to be between $835 million and $845 million for 2010.
There were no other changes to our previously stated assumptions.
24.1.4 Variance
from 2010 Guidance
CPs capital expenditures for 2010 came in at
$726.1 million, (discussed further in Section 14.2
Investing Activities). The tax rate for 2010 was 25.3%, in line
with the guidance provided (discussed further in
Section 10.5 Income Taxes). Our 2010 pension contributions
to the Canadian defined benefit pension plan was
$837.2 million in 2010, including the $650 million
voluntary prepayment noted above.
24.2 2011
FINANCIAL ASSUMPTIONS
Capital expenditures are currently estimated to range from
$950 million to $1.05 billion. CP expects its tax rate
to be in the 24% to 26% range. The 2011 pension contributions
are currently estimated to be between $100 million and
$125 million (discussed further in Section 20.5
Pension Plan Deficit). Undue reliance should not be placed on
these assumptions and other forward-looking information.
25.0 Glossary of
Terms
Average active employees
expense The average number of actively employed
workers during the period whose compensation costs are included
in Compensation and Benefits Expense on the Consolidated
Statement of Income. 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 or
who have not worked a minimum number of hours. This definition
also excludes employees working on capital projects.
Average 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.
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-day. 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.
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 U.S. subsidiary of CPRL.
DM&E Dakota, Minnesota & Eastern
Railroad Corporation.
Fluidity Obtaining more value from our existing
assets and resources.
FRA U.S. Federal Railroad Administration, a
regulatory agency whose purpose is to promulgate and enforce
rail safety regulations; administer railroad assistance
programs; conduct research and development in support of
improved railroad safety and national rail transportation
policy; provide for the rehabilitation of Northeast Corridor
rail passenger service; and consolidate government support of
rail transportation activities.
FRA personal 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$9,200 in the U.S. or $10,600 in Canada
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 or Foreign Exchange The value of
the Canadian dollar relative to the U.S. dollar (exclusive of
any impact on market demand).
FX on LTD Foreign exchange gains and losses on
long-term debt.
GAAP Accounting principles generally accepted
in the United States.
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.
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.
RTMs or revenue
ton-miles The
movement of one revenue-producing ton of freight over a distance
of one mile.
Soo Line Soo Line Railroad Company, a wholly
owned indirect U.S. subsidiary of CPRL.
STB U.S. Surface Transportation Board, a
regulatory agency with jurisdiction over railway rate and
service issues and rail restructuring, including mergers and
sales.
U.S. gallons of locomotive fuel consumed per 1,000
GTMs The total fuel consumed in freight and yard
operations for every 1,000 GTMs traveled. This is calculated by
dividing the total amount of fuel issued to our locomotives,
excluding commuter and non-freight activities, by the total
freight-related GTMs. The result indicates how efficiently we
are using fuel.
WCB Workers Compensation Board, a mutual
insurance corporation providing workplace liability and
disability insurance in Canada.
CANADIAN PACIFIC
RAILWAY LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2010
Accounting Principles Generally Accepted
In the United States
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 accounting principles
generally accepted in the United States (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 auditor prior to submission to
the Board for approval. The Audit Committee meets regularly with
management, internal auditors, and the independent auditor to
review accounting policies, and financial reporting. The Audit
Committee also reviews the recommendations of both the
independent and internal auditors for improvements to internal
controls, as well as the actions of management to implement such
recommendations. The internal and independent auditors have full
access to the Audit Committee, with or without the presence of
management.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Management has assessed the effectiveness of the Companys
internal control 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, 2010.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2010 has been
audited by PricewaterhouseCoopers LLP, independent auditor, as
stated in their report, which is included herein.
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KATHRYN B. MCQUADE Executive Vice-President and Chief Financial Officer
February 24, 2011
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FRED J. GREEN
Chief Executive Officer
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INDEPENDENT
AUDITORS REPORT
TO THE
SHAREHOLDERS OF
CANADIAN PACIFIC RAILWAY LIMITED
We have completed integrated audits of Canadian Pacific Railway
Limiteds 2010, 2009 and 2008 consolidated financial
statements and its internal control over financial reporting as
at December 31, 2010. Our opinions, based on our audits,
are presented below.
REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated financial
statements of Canadian Pacific Railway Limited, which comprise
the consolidated balance sheets as at December 31, 2010 and
2009 and the consolidated statements of income, comprehensive
income, cash flows and changes in shareholders equity for
each of the years in the three year period ended
December 31, 2010, and the related notes including a
summary of significant accounting policies.
MANAGEMENTS
RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL
STATEMENTS
Management is responsible for the preparation and fair
presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America and for such internal control as
management determines is necessary to enable the preparation of
consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
AUDITORS
RESPONSIBILITY
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We
conducted our audits 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 whether the consolidated financial
statements are free from material misstatement. Canadian
generally accepted auditing standards require that we comply
with ethical requirements.
An audit involves performing procedures to obtain audit
evidence, on a test basis, about the amounts and disclosures in
the consolidated financial statements. The procedures selected
depend on the auditors judgment, including the assessment
of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the companys preparation and fair presentation
of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances. An
audit also includes evaluating the appropriateness of accounting
principles and policies used and the reasonableness of
accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our
audit opinion on the consolidated financial statements.
OPINION
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of
Canadian Pacific Railway Limited as at December 31, 2010
and 2009 and the results of its operations and cash flows for
each of the years in the three year period ended
December 31, 2010 in accordance with accounting principles
generally accepted in the United States of America.
EMPHASIS OF
MATTER
We draw attention to Note 2 to the consolidated financial
statements which describes the change in accounting policy
related to the treatment of rail grinding costs by Canadian
Pacific Railway Limited. Our opinion is not qualified in respect
of this matter.
REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
We have also audited Canadian Pacific Railway Limiteds
internal control over financial reporting as at
December 31, 2010, based on criteria established in
Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
MANAGEMENTS
RESPONSIBILITY FOR INTERNAL CONTROL OVER FINANCIAL
REPORTING
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.
AUDITORS
RESPONSIBILITY
Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.
An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of
internal control, based on the assessed risk, and performing
such other procedures as we consider necessary in the
circumstances.
We believe that our audit provides a reasonable basis for our
opinion on the companys internal control over financial
reporting.
DEFINITION OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
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
accounting principles generally accepted in the United States of
America. 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 accounting principles generally
accepted in the United States of America, 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.
INHERENT
LIMITATIONS
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.
OPINION
In our opinion, Canadian Pacific Railway Limited maintained, in
all material respects, effective internal control over financial
reporting as at December 31, 2010 based on criteria
established in Internal Control Integrated Framework
issued by COSO.
Chartered Accountants
February 24, 2011
Calgary, Alberta
CANADIAN PACIFIC
RAILWAY LIMITED
CONSOLIDATED
STATEMENT OF INCOME
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Year ended December 31 (in
millions of Canadian dollars, except per share data)
|
|
2010
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
$
|
4,853.3
|
|
|
$
|
4,279.8
|
|
|
$
|
4,921.5
|
|
Other
|
|
|
128.2
|
|
|
|
122.4
|
|
|
|
127.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,981.5
|
|
|
|
4,402.2
|
|
|
|
5,048.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,431.0
|
|
|
|
1,306.6
|
|
|
|
1,289.8
|
|
Fuel
|
|
|
728.1
|
|
|
|
580.3
|
|
|
|
1,005.9
|
|
Materials
|
|
|
214.2
|
|
|
|
217.6
|
|
|
|
257.8
|
|
Equipment rents
|
|
|
206.0
|
|
|
|
226.0
|
|
|
|
218.5
|
|
Depreciation and amortization
|
|
|
489.6
|
|
|
|
483.2
|
|
|
|
428.2
|
|
Purchased services and other
|
|
|
796.5
|
|
|
|
783.0
|
|
|
|
809.3
|
|
Gain on sales of significant properties (Note 3)
|
|
|
|
|
|
|
(79.1
|
)
|
|
|
|
|
Loss on termination of lease with shortline railway (Note 5)
|
|
|
|
|
|
|
54.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,865.4
|
|
|
|
3,572.1
|
|
|
|
4,009.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,116.1
|
|
|
|
830.1
|
|
|
|
1,039.0
|
|
Gain on sale of partnership interest (Note 4)
|
|
|
|
|
|
|
81.2
|
|
|
|
|
|
Equity income in Dakota, Minnesota & Eastern Railroad
Corporation (Note 16)
|
|
|
|
|
|
|
|
|
|
|
50.9
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and charges (Note 6)
|
|
|
(12.0
|
)
|
|
|
12.4
|
|
|
|
72.3
|
|
Net interest expense (Note 7)
|
|
|
257.3
|
|
|
|
267.6
|
|
|
|
239.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
870.8
|
|
|
|
631.3
|
|
|
|
778.0
|
|
Income tax expense (Note 8)
|
|
|
220.1
|
|
|
|
81.3
|
|
|
|
150.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
650.7
|
|
|
$
|
550.0
|
|
|
$
|
627.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
3.86
|
|
|
$
|
3.31
|
|
|
$
|
4.08
|
|
Diluted earnings per share
|
|
$
|
3.85
|
|
|
$
|
3.30
|
|
|
$
|
4.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares (millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
168.8
|
|
|
|
166.3
|
|
|
|
153.7
|
|
Diluted
|
|
|
169.2
|
|
|
|
166.8
|
|
|
|
155.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
1.0575
|
|
|
$
|
0.9900
|
|
|
$
|
0.9900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CANADIAN PACIFIC
RAILWAY LIMITED
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Year ended December 31 (in
millions of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
650.7
|
|
|
$
|
550.0
|
|
|
$
|
627.8
|
|
Net gain (loss) in foreign currency translation adjustments, net
of hedging activities
|
|
|
17.7
|
|
|
|
2.7
|
|
|
|
(5.7
|
)
|
Change in derivatives designated as cash flow hedges
|
|
|
2.3
|
|
|
|
7.3
|
|
|
|
(16.1
|
)
|
Change in pension and post-retirement defined benefit plans
|
|
|
(459.6
|
)
|
|
|
(661.1
|
)
|
|
|
(543.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before income taxes
|
|
|
(439.6
|
)
|
|
|
(651.1
|
)
|
|
|
(565.2
|
)
|
Income tax recovery
|
|
|
98.5
|
|
|
|
131.6
|
|
|
|
193.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss (Note 10)
|
|
|
(341.1
|
)
|
|
|
(519.5
|
)
|
|
|
(371.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
309.6
|
|
|
$
|
30.5
|
|
|
$
|
256.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CANADIAN PACIFIC
RAILWAY LIMITED
CONSOLIDATED
BALANCE SHEET
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Restated
|
|
As at December 31 (in millions
of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 12)
|
|
$
|
360.6
|
|
|
$
|
679.1
|
|
Accounts receivable, net (Note 13)
|
|
|
459.0
|
|
|
|
655.1
|
|
Materials and supplies
|
|
|
114.1
|
|
|
|
132.7
|
|
Deferred income taxes (Note 8)
|
|
|
222.3
|
|
|
|
128.1
|
|
Other current assets
|
|
|
47.8
|
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,203.8
|
|
|
|
1,641.5
|
|
Investments (Note 14)
|
|
|
144.9
|
|
|
|
156.7
|
|
Net properties (Note 15)
|
|
|
11,996.8
|
|
|
|
11,978.5
|
|
Goodwill and intangible assets (Note 17)
|
|
|
189.8
|
|
|
|
202.3
|
|
Other assets (Note 18)
|
|
|
140.6
|
|
|
|
175.8
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,675.9
|
|
|
$
|
14,154.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities (Note 19)
|
|
$
|
1,007.8
|
|
|
$
|
1,000.7
|
|
Long-term debt maturing within one year (Note 20)
|
|
|
281.7
|
|
|
|
605.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,289.5
|
|
|
|
1,606.0
|
|
Pension and other benefit liabilities (Note 26)
|
|
|
1,115.7
|
|
|
|
1,453.9
|
|
Other long-term liabilities (Note 22)
|
|
|
468.0
|
|
|
|
479.9
|
|
Long-term debt (Note 20)
|
|
|
4,033.2
|
|
|
|
4,138.2
|
|
Deferred income taxes (Note 8)
|
|
|
1,944.8
|
|
|
|
1,818.7
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,851.2
|
|
|
|
9,496.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Share capital (Note 25)
|
|
|
1,812.8
|
|
|
|
1,771.1
|
|
Authorized unlimited common shares without par value. Issued and
outstanding are 169.2 million and 168.5 million at
December 31, 2010 and 2009 respectively.
|
|
|
|
|
|
|
|
|
Authorized unlimited number of first and second preferred
shares; none outstanding.
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
24.7
|
|
|
|
30.8
|
|
Accumulated other comprehensive loss (Note 10)
|
|
|
(2,085.8
|
)
|
|
|
(1,744.7
|
)
|
Retained earnings
|
|
|
5,073.0
|
|
|
|
4,600.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,824.7
|
|
|
|
4,658.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
13,675.9
|
|
|
$
|
14,154.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 29).
Certain of the comparative figures have been reclassified in
order to be consistent with the 2010 presentation (Note 2).
See Notes to Consolidated Financial Statements.
|
|
|
|
|
Approved on behalf of the Board:
|
|
|
|
|
|
|
J.E. Cleghorn, Director, Chairman of the Board
|
|
M.W. Wright, Director, Chairman of the Audit, Finance and Risk
Management Committee
|
CANADIAN PACIFIC
RAILWAY LIMITED
CONSOLIDATED
STATEMENT OF CASH FLOWS
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Year ended December 31 (in
millions of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
650.7
|
|
|
$
|
550.0
|
|
|
$
|
627.8
|
|
Reconciliation of net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
489.6
|
|
|
|
483.2
|
|
|
|
428.2
|
|
Deferred income taxes (Note 8)
|
|
|
211.2
|
|
|
|
133.0
|
|
|
|
170.6
|
|
Gain on sale of partnership interest (Note 4)
|
|
|
|
|
|
|
(81.2
|
)
|
|
|
|
|
Gain on sales of significant properties (Note 3)
|
|
|
|
|
|
|
(79.1
|
)
|
|
|
|
|
Pension funding in excess of expense (Note 26)
|
|
|
(800.9
|
)
|
|
|
(572.0
|
)
|
|
|
(66.5
|
)
|
Other operating activities, net
|
|
|
(32.2
|
)
|
|
|
(85.7
|
)
|
|
|
(85.0
|
)
|
Change in non-cash working capital balances related to
operations (Note 11)
|
|
|
(16.3
|
)
|
|
|
102.7
|
|
|
|
(132.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
502.1
|
|
|
|
450.9
|
|
|
|
942.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties (Note 15)
|
|
|
(726.1
|
)
|
|
|
(703.5
|
)
|
|
|
(815.9
|
)
|
Additions to assets held for sale and other
|
|
|
|
|
|
|
|
|
|
|
(222.5
|
)
|
Investment in Dakota, Minnesota & Eastern Railroad
Corporation (Note 16)
|
|
|
|
|
|
|
|
|
|
|
(8.6
|
)
|
Proceeds from sale of properties and other assets
|
|
|
88.9
|
|
|
|
337.4
|
|
|
|
237.2
|
|
Other, net
|
|
|
1.6
|
|
|
|
7.4
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(635.6
|
)
|
|
|
(358.7
|
)
|
|
|
(800.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(174.5
|
)
|
|
|
(162.9
|
)
|
|
|
(148.7
|
)
|
Issuance of CP Common Shares (Note 25)
|
|
|
32.4
|
|
|
|
513.5
|
|
|
|
19.7
|
|
Collection of receivable from financial institution
(Note 13)
|
|
|
219.8
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt (Note 20)
|
|
|
355.2
|
|
|
|
872.7
|
|
|
|
1,148.2
|
|
Repayment of long-term debt
|
|
|
(612.8
|
)
|
|
|
(617.9
|
)
|
|
|
(1,339.9
|
)
|
Net increase (decrease) in short-term borrowing (Note 21)
|
|
|
9.0
|
|
|
|
(150.1
|
)
|
|
|
(79.6
|
)
|
Other financing activities
|
|
|
3.1
|
|
|
|
34.1
|
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(167.8
|
)
|
|
|
489.4
|
|
|
|
(431.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency fluctuations on U.S.
dollar-denominated cash and cash equivalents
|
|
|
(17.2
|
)
|
|
|
(20.0
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash position
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(318.5
|
)
|
|
|
561.6
|
|
|
|
(260.4
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
679.1
|
|
|
|
117.5
|
|
|
|
377.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year (Note 12)
|
|
$
|
360.6
|
|
|
$
|
679.1
|
|
|
$
|
117.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (refunded)
|
|
$
|
8.3
|
|
|
$
|
(38.9
|
)
|
|
$
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
346.8
|
|
|
$
|
289.3
|
|
|
$
|
269.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain of the comparative figures have been reclassified in
order to be consistent with the 2010 presentation (Note 2).
See Notes to Consolidated Financial Statements.
CANADIAN PACIFIC
RAILWAY LIMITED
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
Total
|
|
|
|
Share
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Retained
|
|
|
shareholders
|
|
(in millions of Canadian dollars)
|
|
capital
|
|
|
capital
|
|
|
loss
|
|
|
earnings
|
|
|
equity
|
|
Balance at December 31, 2007
|
|
$
|
1,209.5
|
|
|
$
|
47.6
|
|
|
$
|
(855.4
|
)
|
|
$
|
3,792.9
|
|
|
$
|
4,194.6
|
|
Adjustment for change in accounting policy (Note 2)
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
(51.1
|
)
|
|
|
(49.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007, as restated
|
|
|
1,209.5
|
|
|
|
47.6
|
|
|
|
(853.4
|
)
|
|
|
3,741.8
|
|
|
|
4,145.5
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
627.8
|
|
|
|
627.8
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(371.8
|
)
|
|
|
|
|
|
|
(371.8
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152.2
|
)
|
|
|
(152.2
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
7.7
|
|
Shares issued under stock option plans
|
|
|
32.8
|
|
|
|
(14.7
|
)
|
|
|
|
|
|
|
|
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008, as restated
|
|
|
1,242.3
|
|
|
|
40.6
|
|
|
|
(1,225.2
|
)
|
|
|
4,217.4
|
|
|
|
4,275.1
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550.0
|
|
|
|
550.0
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(519.5
|
)
|
|
|
|
|
|
|
(519.5
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166.5
|
)
|
|
|
(166.5
|
)
|
Shares issued (Note 25)
|
|
|
495.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495.2
|
|
Stock compensation recovery
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
Shares issued under stock option plans
|
|
|
33.6
|
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009, as restated
|
|
|
1,771.1
|
|
|
|
30.8
|
|
|
|
(1,744.7
|
)
|
|
|
4,600.9
|
|
|
|
4,658.1
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650.7
|
|
|
|
650.7
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(341.1
|
)
|
|
|
|
|
|
|
(341.1
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(178.6
|
)
|
|
|
(178.6
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
Shares issued under stock option plans
|
|
|
41.7
|
|
|
|
(7.3
|
)
|
|
|
|
|
|
|
|
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
1,812.8
|
|
|
$
|
24.7
|
|
|
$
|
(2,085.8
|
)
|
|
$
|
5,073.0
|
|
|
$
|
4,824.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CANADIAN PACIFIC
RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
Canadian Pacific Railway Limited (CPRL), through its
subsidiaries (collectively referred to as CP or
the Company), operates a transcontinental railway in
Canada and the United States. Through its subsidiaries, CP
provides rail and intermodal transportation services over a
network of approximately 14,800 miles, serving the
principal business centres of Canada from Montreal, Quebec, to
Vancouver, British Columbia, and the U.S. Northeast and
Midwest regions. CPs railway network feeds directly into
the U.S. heartland from the East and West coasts.
Agreements with other carriers extend the Companys market
reach east of Montreal in Canada, throughout the U.S. and
into Mexico. Through its subsidiaries, CP transports bulk
commodities, merchandise freight and intermodal traffic. Bulk
commodities include grain, coal, sulphur and fertilizers.
Merchandise freight consists of finished vehicles and automotive
parts, as well as forest and industrial and consumer products.
Intermodal traffic consists largely of retail goods in overseas
containers that can be transported by train, ship and truck, and
in domestic containers and trailers that can be moved by train
and truck.
1 Summary
of significant accounting policies
GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
These consolidated financial statements are expressed in
Canadian dollars and have been prepared in accordance with
U.S. GAAP as codified in the Financial Accounting Standards
Board (FASB) Accounting Standards Codification.
PRINCIPLES OF
CONSOLIDATION
These consolidated financial statements include the accounts of
CP and all of its subsidiaries. The Companys investments
in which it has significant influence are accounted for using
the equity method. All intercompany accounts and transactions
have been eliminated.
USE OF
ESTIMATES
The preparation of these consolidated 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, deferred 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. All of these subsidiaries are wholly owned,
directly or indirectly, by CPRL as of December 31, 2010.
|
|
|
|
|
Incorporated under
|
Principal subsidiary
|
|
the laws of
|
Canadian Pacific Railway Company
|
|
Canada
|
Soo Line Railroad Company (Soo Line)
|
|
Minnesota
|
Delaware and Hudson Railway Company, Inc. (D&H)
|
|
Delaware
|
Dakota, Minnesota & Eastern Railroad Corporation
(DM&E)
|
|
Delaware
|
Mount Stephen Properties Inc. (MSP)
|
|
Canada
|
|
|
|
|
|
|
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 expenses recognized as incurred. Volume
rebates to customers are accrued as a reduction of freight
revenues based on estimated volume and contract terms as freight
service is provided. Other revenue, including passenger revenue,
revenue from leasing certain assets and switching fees, is
recognized as service is performed or contractual obligations
are met. Revenues are presented net of taxes collected from
customers and remitted to government authorities.
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents includes highly-liquid short-term
investments that are readily convertible to cash with original
maturities of three months or less.
FOREIGN CURRENCY
TRANSLATION
Assets and liabilities denominated in foreign currencies, other
than those held through 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 foreign subsidiaries, are included in income.
The accounts of the Companys 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, expenses, gains and losses.
Exchange gains and losses arising from translation of these
foreign subsidiaries accounts are included in Other
comprehensive loss. The majority of
U.S. dollar-denominated long-term debt has been designated
as a hedge of the net investment in foreign subsidiaries. As a
result, unrealized foreign exchange (FX) gains and
losses on this U.S. dollar-denominated long-term debt are
offset against foreign exchange gains and losses arising from
translation of foreign subsidiaries accounts in
Other comprehensive income.
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 collectively
bargained amendments to pension plan benefit provisions are
amortized over the term of the applicable union agreement. Prior
service costs arising from all other sources are amortized over
the expected average remaining service period of active
employees who are expected to receive benefits under the plan at
the date of amendment.
Costs for post-retirement and post-employment benefits other
than pensions, including post-retirement health care and life
insurance and some workers compensation and long-term
disability benefits in Canada, are actuarially determined and
accrued on a basis similar to pension costs.
The over or under funded status of defined benefit pension and
other post-retirement benefit plans are recognized 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. In addition, any unrecognized actuarial
gains and losses and prior service costs and credits that arise
during the period are recognized as a component of Other
comprehensive income (loss), net of tax.
Gains and losses on post-employment benefits that do not vest or
accumulate, including some workers compensation and
long-term disability benefits in Canada, are included
immediately in income.
MATERIALS AND
SUPPLIES
Materials and supplies are carried at the lower of average cost
and market.
PROPERTIES
Fixed asset additions and major renewals are recorded at cost,
including direct costs, attributable indirect costs and carrying
costs, less accumulated depreciation and any impairments. 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 recognizes expenditures as additions to properties
or operating expenses based on whether the expenditures increase
the output or service capacity, lower the associated operating
costs or extend the useful life of the properties and whether
the expenditures exceed minimum physical and financial
thresholds.
Much of the additions to properties, both new and replacement
properties, are self-constructed. These are initially recorded
at cost, including direct costs and attributable indirect costs
and carrying costs. Direct costs include, among other things,
labour costs, purchased services, equipment costs and material
costs. Attributable indirect and overhead costs include
incremental long-term variable costs resulting from the
execution of capital projects. Indirect costs include largely
local crew facilities, highway vehicles, work trains and area
management costs. Overhead costs primarily include a portion of
the Companys engineering department which plans, designs
and administers these capital projects. These costs are
allocated to projects by applying a measure consistent with the
nature of the cost based on cost studies. For replacement
properties, dismantling work is performed concurrently with the
installation, the project costs are allocated to dismantling and
installation based on cost studies.
Ballast programs including undercutting, shoulder ballasting and
renewal programs which form part of our annual track program are
capitalized as this work, and the related added ballast
material, significantly improves drainage which in turn extends
the life of ties and other track materials. These costs are
tracked separately from the underlying assets and depreciated
over the period to the next estimated similar ballast program.
Spot replacement of ballast is considered a repair which is
expensed as incurred.
The cost of large refurbishments are capitalized and locomotive
overhauls and rail grinding costs (Note 2) are
expensed as incurred.
The Company capitalizes development costs for major new computer
systems.
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 of changes in
current operations and of technological advances. Actual use and
retirement of assets may vary from current estimates, which
would impact the amount of depreciation expense recognized in
future periods.
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 and if
different than the assumptions under the depreciation study
could potentially result in adjusted depreciation expense over a
period of years. However, when removal costs exceed the salvage
value on assets and the Company had no legal obligation to
remove, the new removal cost is charged to income in the period
in which the asset is removed and is not charged to accumulated
depreciation.
For the sale or retirement of larger groups of depreciable
assets that are unusual and were not considered in depreciation
studies, CP records a gain or loss for the difference between
net proceeds and net book value of the assets sold or retired.
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.
Equipment under capital lease is included in properties and
depreciated over the period of expected use.
ASSETS HELD FOR
SALE
Assets to be disposed that meet the held for sale criteria are
reported at the lower of the carrying amount and fair value,
less costs to sell, and are no longer depreciated.
GOODWILL AND
INTANGIBLE ASSETS
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 which, after
integration of operations with the railway network, may be
different than the acquired business.
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 potentially 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, determined in the same manner as in a business
combination.
Intangible assets with finite lives are amortized on a
straight-line basis over 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 four 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.
FINANCIAL
INSTRUMENTS
Financial instruments are contracts that give rise to a
financial asset of one party and a financial liability or equity
instrument of another party.
Financial instruments are recognized initially at fair value,
which is the amount of consideration that would be agreed upon
in an arms length transaction between willing parties.
Subsequent measurement depends on how the financial instrument
has been classified. Accounts receivable and investments,
classified as loans and receivables, are measured at amortized
cost, using the effective interest method. Certain equity
investments, classified as available for sale, are recognized at
cost as fair value cannot be reliably established. Cash and cash
equivalents and long-term floating rate notes are classified as
held for trading and are measured at fair value. Accounts
payable, accrued liabilities, short-term borrowings, dividends
payable, other long-term liabilities and long-term debt,
classified as financial liabilities, are also measured at
amortized cost.
DERIVATIVE
FINANCIAL INSTRUMENTS
Derivative financial and commodity instruments may be used from
time to time by the Company to manage its exposure to 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.
All derivative instruments are classified as held for trading
and 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 Consolidated Statement
of Income in the line item to which the derivative instrument is
related. On the Consolidated Balance Sheet they are classified
in Other assets, Other long-term
liabilities 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 income and charges, 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. Should a
cash flow hedge relationship become ineffective, previously
unrealized gains and losses remain within Accumulated
other comprehensive loss 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 loss until the related hedged item settles,
at which time amounts recognized in Accumulated other
comprehensive loss are reclassified to the same income or
balance sheet account that records the hedged item.
In the Consolidated Statement of Cash Flows, cash flows relating
to derivative instruments designated as hedges are included in
the same line as the related hedged 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 usually accounted for as cash flow hedges with
gains and losses recorded in Accumulated other
comprehensive loss and amortized to Net interest
expense in the period that interest on the related debt is
charged.
The Company has a fuel-hedging program under which CP acquires
crude oil and / or diesel future 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 may be used as part of the
fuel-hedging program to manage the foreign exchange variability
component of CPs fuel price risk. These agreements are
usually accounted for as cash flow hedges, however, on occasion
derivatives of a short-term duration may not be designated as a
hedge for accounting purposes. 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, prior to 2010, entered into derivatives called
Total Return Swaps (TRS) to mitigate fluctuations in
tandem share appreciation rights (TSAR), deferred
share units (DSU) 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
Restructuring liabilities are recorded at their present value.
The discount related to liabilities is amortized to
Compensation and benefits over the payment period.
Provisions for labour restructuring are recorded in Other
long-term liabilities, except for the current portion,
which is recorded in Accounts payable and accrued
liabilities.
ENVIRONMENTAL
REMEDIATION
Environmental remediation accruals, recorded on an undiscounted
basis, cover site-specific remediation programs. Provisions for
environmental remediation costs are recorded in Other
long-term 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. Deferred income tax assets and liabilities are
determined based on differences between the financial reporting
and tax bases of assets and liabilities using 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 deferred income tax assets and liabilities is recognized in
income in the period during which the change occurs.
When appropriate, we record a valuation allowance against
deferred tax assets to reflect that these tax assets may not be
realized. In determining whether a valuation allowance is
appropriate, we consider whether it is more likely than not that
all or some portion of our deferred tax assets will not be
realized, based on managements judgments using available
evidence about future events.
At times, we may claim tax benefits that may be challenged by a
tax authority. We recognize tax benefits only for tax positions
that are more likely than not to be sustained upon examination
by tax authorities. The amount recognized is measured as the
largest amount of benefit that is greater than 50 percent
likely to be realized upon settlement. A liability for
unrecognized tax benefits is recorded for any tax
benefits claimed in our tax returns that do not meet these
recognition and measurement standards.
Investment tax credits are deferred on the Consolidated Balance
Sheet and amortized to Income tax expense as the
related asset is recognized in income.
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 account for stock
options. Compensation expense and an increase in additional
paid-in capital are recognized for stock options over their
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, based on their estimated fair values on
the grant date, as determined using the Black-Scholes
option-pricing model.
With the granting of regular stock options, employees may be
simultaneously granted share appreciation rights, which provide
the employee the choice to either exercise the stock option for
shares, or to exercise the TSAR and thereby receive the
intrinsic value of the stock option in cash. Options with TSARs
are awards that may call for settlement in cash and, therefore,
are recorded as liabilities. CP follows the fair value based
approach to account for the TSAR liability. The liability is
fair valued and changes in the liability are recorded in
Compensation and benefits expense 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, until exercised. If an employee chooses to
exercise the option, thereby cancelling the TSAR, both the
exercise price and the liability are settled to Share
capital.
Forfeitures of options and tandem options are estimated at
issuance and subsequently at the balance sheet 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 additional
paid-in capital and credited to share capital.
Compensation expense is also recognized for TSARs, DSUs,
performance share units (PSUs) and RSUs using the
fair value method. Forfeitures of TSARs, DSUs, PSUs and RSUs are
estimated at issuance and subsequently at the balance sheet date.
The employee share purchase plan (ESPP) gives rise
to compensation expense that is recognized 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.
2 Accounting
changes
CONSOLIDATIONS
In June 2009, the FASB issued Amendments to Consolidation of
Variable Interest Entities. The guidance retains the scope of
the previous guidance and removes the exemption of entities
previously considered qualifying special purpose entities. In
addition, it replaces the previous quantitative approach with a
qualitative analysis approach for determining whether the
enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity.
The guidance is further amended to require ongoing reassessments
of whether an enterprise is the primary beneficiary of a
variable interest entity and requires enhanced disclosures about
an enterprises involvement in a variable interest entity.
The guidance is applicable to all variable interest entities
that existed at January 1, 2010, the date of adoption, or
are created thereafter. The Company has variable interests in
variable interest entities, however, the adoption of the new
guidance did not change the previous assessment that the Company
is not the primary beneficiary and as such does not consolidate
the variable interest entities. Additional note disclosure
regarding the nature of the Companys variable interests
and where judgment was required to assess the primary
beneficiary of these variable interest entities has been
provided in Note 28.
ACCOUNTING FOR
TRANSFERS OF FINANCIAL ASSETS
The FASB has released additional guidance with respect to the
accounting and disclosure of transfers of financial assets such
as securitized accounts receivable. Although the Company
currently does not have an accounts receivable securitization
program, the guidance, which includes revisions to the
derecognition criteria in a transfer and the treatment of
qualifying special purpose entities, would be applicable to any
future securitization. The new guidance is effective for the
Company from January 1, 2010. The adoption of this guidance
had no impact to the Companys financial statements.
FAIR VALUE
MEASUREMENT AND DISCLOSURE
In January 2010, the FASB amended the disclosure requirements
related to fair value measurements. The update provides for new
disclosures regarding transfers in and out of Level 1 and
Level 2 financial asset and liability categories and
expanded disclosures in the Level 3 reconciliation (see
Note 21 for a definition of Level 1, 2 and 3 financial
asset and liability categories). The update also provides
clarification that the level of disaggregation should be at the
class level and that disclosures about inputs and valuation
techniques are required for both recurring and nonrecurring fair
value measurements that fall in either Level 2 or
Level 3. New disclosures and clarifications of existing
disclosures are effective for interim and annual reporting
periods beginning after December 15, 2009, except for the
expanded disclosures in the Level 3 reconciliation, which
are effective for fiscal years beginning after December 15,
2010. The Company has adopted this guidance resulting in
expanded note disclosure in Note 21.
RAIL
GRINDING
During the second quarter of 2010, the Company changed its
accounting policy for the treatment of rail grinding costs. In
prior periods, CP had capitalized such costs and depreciated
them over the expected economic life of the rail grinding. The
Company concluded that, although the accounting treatment was
within acceptable accounting standards, it is preferable to
expense the costs as incurred, given the subjectivity in
determining the expected economic life and the associated
depreciation methodology. The accounting policy change has been
accounted for on a retrospective basis. The effects of the
adjustment to January 1, 2010 resulted in an adjustment to
decrease net properties by $89.0 million, deferred income
taxes by $26.3 million, and shareholders equity by
$62.7 million. As a result of the change the following
increases (decreases) to financial statement line items occurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31
|
|
(in millions of Canadian dollars,
except per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Changes to Consolidated Statement of Income and Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(15.7
|
)
|
|
$
|
(14.0
|
)
|
|
$
|
(8.9
|
)
|
Compensation and benefits
|
|
|
2.3
|
|
|
|
2.8
|
|
|
|
2.7
|
|
Fuel
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Materials
|
|
|
0.8
|
|
|
|
1.8
|
|
|
|
1.7
|
|
Purchased services and other
|
|
|
13.8
|
|
|
|
15.9
|
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1.2
|
|
|
|
6.6
|
|
|
|
11.0
|
|
Income tax expense
|
|
|
(0.7
|
)
|
|
|
(1.2
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(0.5
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Diluted earnings per share
|
|
$
|
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
0.9
|
|
|
|
2.4
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
0.4
|
|
|
$
|
(3.0
|
)
|
|
$
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities (decrease)
|
|
$
|
(16.9
|
)
|
|
$
|
(20.6
|
)
|
|
$
|
(19.9
|
)
|
Cash used in investing activities (decrease)
|
|
$
|
(16.9
|
)
|
|
$
|
(20.6
|
)
|
|
$
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at
|
|
|
|
|
As at December 31,
|
|
|
January 1,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Changes to Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net properties
|
|
|
$
|
(88.6
|
)
|
|
$
|
(89.0
|
)
|
|
$
|
(86.2
|
)
|
|
$
|
(70.6
|
)
|
Deferred income tax liability
|
|
|
|
(26.3
|
)
|
|
|
(26.3
|
)
|
|
|
(26.5
|
)
|
|
|
(21.5
|
)
|
Accumulated other comprehensive loss (income)
|
|
|
|
2.5
|
|
|
|
1.6
|
|
|
|
(0.8
|
)
|
|
|
2.0
|
|
Retained earnings
|
|
|
|
(64.8
|
)
|
|
|
(64.3
|
)
|
|
|
(58.9
|
)
|
|
|
(51.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUTURE ACCOUNTING
CHANGES
There have been no new accounting pronouncements issued that are
expected to have a significant impact to the Companys
financial statements.
RECLASSIFICATION
OF COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to
be consistent with the 2010 presentation.
3 Gain
on sales of significant properties
During 2009, the Company completed two significant real estate
sales, including Windsor Station and land in western Canada,
resulting in gains of $79.1 million ($68.1 million
after tax).
The Company sold Windsor Station, in Montreal, for proceeds of
$80.0 million, including the assumption of a mortgage of
$16.0 million due in 2011. CP will continue to occupy a
portion of Windsor Station through a lease for a
10-year
period after the sale. As a result, part of the transaction is
considered to be a sale-leaseback and consequently a gain of
$19.5 million related to this part of the transaction has
been deferred and is being amortized over the remainder of the
lease term.
The Company sold land in western Canada for transit purposes for
proceeds of $43.0 million.
4 Gain
on sale of partnership interest
During 2009, the Company completed a sale of a portion of its
investment in the Detroit River Tunnel Partnership
(DRTP) to its existing partner, reducing the
Companys ownership from 50% to 16.5%. The proceeds
received from the transaction were $110.0 million.
Additional proceeds of approximately $22 million are
contingent on achieving certain future freight volumes through
the tunnel, and have not been recognized. The gain on this
transaction was $81.2 million ($68.7 million after
tax).
5 Loss
on termination of lease with shortline railway
During 2009, the Company made a payment of approximately
$73 million to terminate a contract with a lessee in order
to cease through-train operations over the CP owned rail
branchline between Smiths Falls, Ontario and Sudbury, Ontario
including a settlement of a $20.6 million existing
liability. The contract with the lessee provided for the
operation of a minimum number of CP freight trains over the
leased branchline. The loss on the transaction was
$54.5 million ($37.6 million after tax).
6 Other
income and charges
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Accretion income on long-term floating rate notes (Note 21)
|
|
$
|
(5.9
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
|
|
(Gain) loss in fair value of long-term floating rate notes/asset
backed commercial paper (Note 21)
|
|
|
(3.4
|
)
|
|
|
(6.3
|
)
|
|
|
49.4
|
|
Net loss on repurchase of debt (Note 20)
|
|
|
|
|
|
|
16.6
|
|
|
|
|
|
Other foreign exchange (gains) losses
|
|
|
(9.4
|
)
|
|
|
(0.4
|
)
|
|
|
6.1
|
|
Foreign exchange (gain) loss on long-term debt
|
|
|
(2.3
|
)
|
|
|
(3.6
|
)
|
|
|
5.8
|
|
Other
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and charges
|
|
$
|
(12.0
|
)
|
|
$
|
12.4
|
|
|
$
|
72.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 Net
interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Interest cost
|
|
$
|
287.7
|
|
|
$
|
305.1
|
|
|
$
|
291.3
|
|
Interest capitalized to net properties
|
|
|
(19.6
|
)
|
|
|
(19.2
|
)
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
268.1
|
|
|
|
285.9
|
|
|
|
260.4
|
|
Interest income
|
|
|
(10.8
|
)
|
|
|
(18.3
|
)
|
|
|
(20.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
$
|
257.3
|
|
|
$
|
267.6
|
|
|
$
|
239.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense includes interest on capital leases of
$22.4 million for the year ended December 31, 2010
(2009 $26.8 million; 2008
$20.3 million).
8 Income
taxes
The following is a summary of the major components of the
Companys income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Current income tax expense (recovery)
|
|
$
|
8.9
|
|
|
$
|
(51.7
|
)
|
|
$
|
(20.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences
|
|
|
244.9
|
|
|
|
242.6
|
|
|
|
151.1
|
|
Effect of tax rate decreases
|
|
|
|
|
|
|
(35.3
|
)
|
|
|
(10.4
|
)
|
Effect of hedge of net investment in foreign subsidiaries
|
|
|
(18.2
|
)
|
|
|
(31.7
|
)
|
|
|
41.6
|
|
Tax credits
|
|
|
(16.0
|
)
|
|
|
(16.4
|
)
|
|
|
(3.8
|
)
|
Other
|
|
|
0.5
|
|
|
|
(26.2
|
)
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense
|
|
|
211.2
|
|
|
|
133.0
|
|
|
|
170.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
220.1
|
|
|
$
|
81.3
|
|
|
$
|
150.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
576.6
|
|
|
$
|
602.3
|
|
|
$
|
162.9
|
|
Foreign
|
|
|
294.2
|
|
|
|
29.0
|
|
|
|
615.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income tax expense
|
|
$
|
870.8
|
|
|
$
|
631.3
|
|
|
$
|
778.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
(0.8
|
)
|
|
$
|
(51.0
|
)
|
|
$
|
14.0
|
|
Foreign
|
|
|
9.7
|
|
|
|
(0.7
|
)
|
|
|
(34.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense (recovery)
|
|
|
8.9
|
|
|
|
(51.7
|
)
|
|
|
(20.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
122.6
|
|
|
|
81.4
|
|
|
|
63.6
|
|
Foreign
|
|
|
88.6
|
|
|
|
51.6
|
|
|
|
107.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense
|
|
|
211.2
|
|
|
|
133.0
|
|
|
|
170.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
220.1
|
|
|
$
|
81.3
|
|
|
$
|
150.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for deferred 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 deferred income
tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Restated
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Restructuring liability
|
|
$
|
22.1
|
|
|
$
|
21.4
|
|
Amount related to tax losses carried forward
|
|
|
333.6
|
|
|
|
224.2
|
|
Liabilities carrying value in excess of tax basis
|
|
|
266.7
|
|
|
|
358.6
|
|
Future environmental remediation costs
|
|
|
38.4
|
|
|
|
42.6
|
|
Other
|
|
|
123.5
|
|
|
|
82.4
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
784.3
|
|
|
|
729.2
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
Properties carrying value in excess of tax basis
|
|
|
2,465.6
|
|
|
|
2,389.1
|
|
Other long-term assets carrying value in excess of tax basis
|
|
|
17.8
|
|
|
|
8.9
|
|
Other
|
|
|
23.4
|
|
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
2,506.8
|
|
|
|
2,419.8
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax liabilities
|
|
|
1,722.5
|
|
|
|
1,690.6
|
|
Current deferred income tax assets
|
|
|
222.3
|
|
|
|
128.1
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred income tax liabilities
|
|
$
|
1,944.8
|
|
|
$
|
1,818.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
(in millions of Canadian dollars,
except percentage)
|
|
2010
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Statutory federal and provincial income tax rate
|
|
|
29.15
|
%
|
|
|
30.71
|
%
|
|
|
31.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at Canadian enacted statutory tax
rates
|
|
$
|
253.8
|
|
|
$
|
193.9
|
|
|
$
|
245.3
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Items not subject to tax
|
|
|
(3.2
|
)
|
|
|
(24.7
|
)
|
|
|
(63.3
|
)
|
Canadian tax rate differentials
|
|
|
(9.7
|
)
|
|
|
(26.1
|
)
|
|
|
(18.0
|
)
|
Foreign tax rate differentials
|
|
|
0.2
|
|
|
|
(7.1
|
)
|
|
|
(1.1
|
)
|
Effect of tax rate decreases
|
|
|
|
|
|
|
(34.5
|
)
|
|
|
(10.2
|
)
|
Tax credits
|
|
|
(16.0
|
)
|
|
|
(16.4
|
)
|
|
|
(3.8
|
)
|
Other
|
|
|
(5.0
|
)
|
|
|
(3.8
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
220.1
|
|
|
$
|
81.3
|
|
|
$
|
150.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no unrecognized tax benefits from capital losses
at December 31, 2010 and 2009.
The Company has not provided a deferred liability for the income
taxes, if any, which might become payable on any temporary
difference associated with its foreign investments because the
Company intends to indefinitely reinvest in its foreign
investments and has no intention to realize this difference by a
sale of its interest in foreign investments.
At December 31, 2010, the Company has income tax operating
losses carried forward of $1,208.3 million, which have been
recognized as a deferred tax asset. Certain of these losses
carried forward will begin to expire in 2016, with the majority
expiring between 2026 and 2029. The Company also has alternative
minimum tax credits of approximately $32.2 million that
will begin to expire in 2016 as well as investment tax credits
of $28.2 million, certain of which will begin to expire in
2018, and track maintenance credits of $33.6 million which
will begin to expire in 2025.
It is more likely than not that the Company will realize the
majority of its deferred income tax assets from the generation
of future taxable income, as the payments for provisions,
reserves and accruals are made and losses and tax credit
carryforwards are utilized.
The following table provides a reconciliation of uncertain tax
positions in relation to unrecognized tax benefits for Canada
and the United States for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Unrecognized tax benefits at January 1
|
|
$
|
87.7
|
|
|
$
|
85.6
|
|
|
$
|
79.2
|
|
Increase in unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits related to the current year
|
|
|
5.2
|
|
|
|
13.9
|
|
|
|
9.4
|
|
Gross uncertain tax benefits related to prior years
|
|
|
1.9
|
|
|
|
11.2
|
|
|
|
7.7
|
|
Accrued interest and penalties on uncertain tax benefits
|
|
|
3.7
|
|
|
|
18.2
|
|
|
|
7.6
|
|
Dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross uncertain tax benefits related to prior years
|
|
|
(4.9
|
)
|
|
|
(14.7
|
)
|
|
|
(13.5
|
)
|
Settlements with tax authorities
|
|
|
(3.2
|
)
|
|
|
(26.5
|
)
|
|
|
|
|
Accrued interest and penalties on uncertain tax benefits
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits as at December 31
|
|
$
|
79.9
|
|
|
$
|
87.7
|
|
|
$
|
85.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If these uncertain tax positions were recognized all of the
amount of unrecognized tax positions as at December 31,
2010 would impact the Companys effective tax rate.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense
in the Companys Consolidated Statement of Income. The
total amount of accrued interest and penalties in 2010 was a
credit of $6.8 million (2009 expensed
$18.2 million; 2008 expensed
$2.8 million). The total amount of accrued interest and
penalties included in unrecognized tax benefit at
December 31, 2010 was $20.3 million (2009
$27.1 million; 2008 $8.9 million).
The Company and its subsidiaries are subject to either Canadian
federal and provincial income tax, U.S. federal, state and
local income tax, or the relevant income tax in other
international jurisdictions. The Company has substantially
concluded all Canadian federal and provincial income tax matters
for the years through 2006. The federal and provincial income
tax returns filed for 2007 and subsequent years remain subject
to examination by the taxation authorities.
All U.S. federal income tax returns and generally all
U.S. state and local income tax returns are closed to 2006.
The income tax returns for 2007 and subsequent years continue to
remain subject to examination by the taxation authorities.
The Company does not anticipate any material changes to the
unrecognized tax benefits previously disclosed within the next
12 months as at December 31, 2010.
9 Earnings
per share
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, 2010, there were 2.7 million dilutive
options outstanding (2009 1.6 million;
2008 1.5 million). These option totals at
December 31, 2010 exclude 3.6 million options
(2009 1.3 million; 2008
1.0 million) for which there are TSARs outstanding
(Note 27), 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)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Weighted average shares outstanding
|
|
|
168.8
|
|
|
|
166.3
|
|
|
|
153.7
|
|
Dilutive effect of weighted average number of stock options
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
169.2
|
|
|
|
166.8
|
|
|
|
155.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, the weighted-average number of options excluded from
the computation of diluted earnings per share because their
effect was not dilutive was 1,631,631 (2009
2,818,398; 2008 1,344,669).
As a result of changes in Canadian tax law, subsequent to 2010,
the Company has initiated a plan to cancel the majority of the
TSAR component of tandem stock option awards. The related
options will not be cancelled and will be included in the
calculation of diluted earnings per share in future periods.
10 Other
comprehensive loss and accumulated other comprehensive
loss
The components of Accumulated other comprehensive
loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Restated
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
Unrealized foreign exchange loss on translation of the net
investment in U.S. subsidiaries
|
|
$
|
(308.5
|
)
|
|
$
|
(184.6
|
)
|
Unrealized foreign exchange gain on translation of the U.S.
dollar-denominated long-term debt designated
as a hedge of the net investment in U.S. subsidiaries
|
|
|
372.7
|
|
|
|
249.3
|
|
Deferred loss on settled hedge instruments
|
|
|
(17.0
|
)
|
|
|
(18.3
|
)
|
Unrealized effective gains on cash flow hedges
|
|
|
1.9
|
|
|
|
1.7
|
|
Amounts for defined benefit pension and other post-retirement
plans not recognized in income
|
|
|
(2,134.9
|
)
|
|
|
(1,792.8
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(2,085.8
|
)
|
|
$
|
(1,744.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive loss and the related tax
effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Accumulated other comprehensive loss January 1
|
|
$
|
(1,744.7
|
)
|
|
$
|
(1,225.2
|
)
|
|
$
|
(853.4
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange (loss) gain on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
|
|
(123.9
|
)
|
|
|
(244.0
|
)
|
|
|
302.3
|
|
Translation of the U.S. dollar-denominated long-term debt
designated as a hedge of the net investment in U.S. subsidiaries
(net of tax of $(18.2) million, $(31.7) million, and
$41.6 million, respectively)
|
|
|
123.4
|
|
|
|
215.0
|
|
|
|
(266.4
|
)
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gain) loss on cash flow hedges recognized in income
(net of tax of $nil, $(1.4) million, and $3.2 million,
respectively)
|
|
|
(0.1
|
)
|
|
|
3.4
|
|
|
|
(7.8
|
)
|
Unrealized gain (loss) on cash flow hedges (net of tax of
$(0.8) million, $(0.8) million, and $1.4 million,
respectively)
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
(3.7
|
)
|
Change in pension and other benefits actuarial gains and losses
(net of tax of $120.5 million, $170.8 million and
$141.2 million, respectively)
|
|
|
(350.7
|
)
|
|
|
(511.5
|
)
|
|
|
(380.1
|
)
|
Change in prior service pension and other benefit costs (net of
tax of $(3.0) million, $(5.3) million and
$6.0 million, respectively)
|
|
|
8.6
|
|
|
|
15.9
|
|
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(341.1
|
)
|
|
|
(519.5
|
)
|
|
|
(371.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss December 31
|
|
$
|
(2,085.8
|
)
|
|
$
|
(1,744.7
|
)
|
|
$
|
(1,225.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 Change
in non-cash working capital balances related to
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Source (use) of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
(8.8
|
)
|
|
$
|
206.4
|
|
|
$
|
(47.9
|
)
|
Materials and supplies
|
|
|
22.5
|
|
|
|
75.5
|
|
|
|
(23.4
|
)
|
Other current assets
|
|
|
(1.3
|
)
|
|
|
18.5
|
|
|
|
(21.2
|
)
|
Accounts payable and accrued liabilities
|
|
|
(28.7
|
)
|
|
|
(197.7
|
)
|
|
|
(39.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in non-cash working capital
|
|
$
|
(16.3
|
)
|
|
$
|
102.7
|
|
|
$
|
(132.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Cash
|
|
$
|
38.9
|
|
|
$
|
35.8
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Government guaranteed investments
|
|
|
119.1
|
|
|
|
628.6
|
|
Deposits with financial institutions
|
|
|
202.6
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
360.6
|
|
|
$
|
679.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Accounts
receivable, net
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Freight
|
|
$
|
327.1
|
|
|
$
|
316.8
|
|
Non-freight
|
|
|
162.0
|
|
|
|
155.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489.1
|
|
|
|
472.0
|
|
Allowance for doubtful accounts
|
|
|
(30.1
|
)
|
|
|
(31.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
459.0
|
|
|
|
441.0
|
|
Accounts receivable from a financial institution
|
|
|
|
|
|
|
214.1
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
459.0
|
|
|
$
|
655.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010, allowances of $30.1 million
(2009 $31.0 million) were recorded in
Accounts receivable, net. During 2010,
$5.0 million related to doubtful accounts (2009
$4.6 million; 2008 $14.4 million) was
expensed within Purchased services and other.
In 2010, the Company collected $219.8 million, including
accrued interest, in settlement of a receivable from a major
Canadian bank which carried an effective interest rate of 5.883%.
14 Investments
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Rail investments accounted for on an equity basis (Notes 4
and 16)
|
|
$
|
58.1
|
|
|
$
|
56.1
|
|
Long-term floating rate notes (Note 21)
|
|
|
69.5
|
|
|
|
69.3
|
|
Other investments
|
|
|
17.3
|
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
144.9
|
|
|
$
|
156.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Average annual
|
|
|
2010
|
|
|
|
|
|
Restated (Note 2)
|
|
|
|
|
|
|
depreciation
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
(in millions of Canadian dollars)
|
|
rate
|
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
Track and roadway
|
|
|
3.0%
|
|
|
$
|
11,980.3
|
|
|
$
|
3,305.2
|
|
|
$
|
8,675.1
|
|
|
$
|
11,666.8
|
|
|
$
|
3,237.2
|
|
|
$
|
8,429.6
|
|
Buildings
|
|
|
3.0%
|
|
|
|
440.4
|
|
|
|
265.9
|
|
|
|
174.5
|
|
|
|
357.4
|
|
|
|
115.4
|
|
|
|
242.0
|
|
Rolling stock
|
|
|
2.8%
|
|
|
|
3,244.6
|
|
|
|
1,319.1
|
|
|
|
1,925.5
|
|
|
|
3,358.8
|
|
|
|
1,324.9
|
|
|
|
2,033.9
|
|
Information
systems(1)
|
|
|
8.5%
|
|
|
|
600.0
|
|
|
|
303.5
|
|
|
|
296.5
|
|
|
|
591.6
|
|
|
|
279.3
|
|
|
|
312.3
|
|
Other
|
|
|
4.9%
|
|
|
|
1,354.8
|
|
|
|
429.6
|
|
|
|
925.2
|
|
|
|
1,387.3
|
|
|
|
426.6
|
|
|
|
960.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
17,620.1
|
|
|
$
|
5,623.3
|
|
|
$
|
11,996.8
|
|
|
$
|
17,361.9
|
|
|
$
|
5,383.4
|
|
|
$
|
11,978.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net additions during 2010 were
$53.7 million (2009 $39.1 million;
2008 $37.5 million) and depreciation expense
was $54.1 million (2009 $40.1 million;
2008 $35.3 million).
|
CAPITAL LEASES INCLUDED IN PROPERTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
(in millions of Canadian dollars)
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
Buildings
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
Rolling stock
|
|
|
517.6
|
|
|
|
151.9
|
|
|
|
365.7
|
|
|
|
525.3
|
|
|
|
137.1
|
|
|
|
388.2
|
|
Other
|
|
|
2.2
|
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
4.5
|
|
|
|
1.8
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets held under capital lease
|
|
$
|
520.3
|
|
|
$
|
153.2
|
|
|
$
|
367.1
|
|
|
$
|
530.3
|
|
|
$
|
139.0
|
|
|
$
|
391.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010, properties were acquired under the Companys
capital program at an aggregate cost of $743.4 million
(2009 $703.3 million; 2008
$905.3 million), $1.1 million of which were acquired
by means of capital leases (2009 $0.8 million;
2008 $79.5 million). Cash payments related to
capital purchases were $726.1 million in 2010
(2009 $703.5 million; 2008
$815.9 million).
16 Equity
income
DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION
(DM&E)
DM&E was acquired on October 4, 2007. The Company
accounted for its investment in DM&E using the equity
method until the acquisition was approved by the Surface
Transportation Board (STB) and the Company assumed
control effective on October 30, 2008. Equity income in
DM&E in 2008 earned prior to STB approval effective
October 30, 2008 of $50.9 million, was recorded in
Equity income in Dakota, Minnesota and Eastern Railroad
Corporation on the Consolidated Statement of Income.
Subsequent to October 30, 2008 the results of DM&E are
consolidated on a
line-by-line
basis.
As at December 31, 2008 the earnings and financial position
of DM&E were reflected in the results and financial
position of the Company on a consolidated basis. Income
statement items presented in the following table reflect the
operations in DM&E for the period from January 1 to
October 29, 2008.
|
|
|
|
|
|
|
Period from January 1 to
|
|
(in millions of Canadian dollars)
|
|
October 29, 2008
|
|
Revenues
|
|
$
|
300.7
|
|
Revenues less operating expenses
|
|
|
86.2
|
|
Net income
|
|
|
50.9
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INVESTMENTS
Equity income from CPs investment in the DRTP, over which
the Company exerts significant influence, was $3.8 million
in 2010 (2009 $3.4 million; 2008
$8.6 million). The equity income from the Companys
investment in the CNCP Niagara-Windsor Partnership was
$1.6 million in 2010 (2009 loss of
$0.5 million; 2008 loss of $0.6 million).
CPs investment in the Indiana Harbor Belt Railroad Company
generated equity income of $4.4 million in 2010
(2009 $2.2 million; 2008
$5.6 million). CPs other equity investments generated
equity income of $0.1 million in 2010 (2009
$nil; 2008 $nil). Equity income (loss) from these
rail investments is recorded in Purchased services and
other on the Consolidated Statement of Income, as they
form an integral part of CPs rail operations.
17 Goodwill
and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net carrying
|
|
(in millions of Canadian dollars)
|
|
Goodwill
|
|
|
Cost
|
|
|
amortization
|
|
|
amount
|
|
Balance at December 31, 2008
|
|
$
|
179.6
|
|
|
$
|
59.6
|
|
|
$
|
(2.0
|
)
|
|
$
|
57.6
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
Foreign exchange impact
|
|
|
(24.7
|
)
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
154.9
|
|
|
$
|
51.9
|
|
|
$
|
(4.5
|
)
|
|
$
|
47.4
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(1.7
|
)
|
Foreign exchange impact
|
|
|
(8.3
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
146.6
|
|
|
$
|
49.4
|
|
|
$
|
(6.2
|
)
|
|
$
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of the acquisition of DM&E in 2007, CP recognized
goodwill of US$147.4 million on the allocation of the
purchase price, determined as the excess of the purchase price
over the fair value of the net assets acquired. Since the
acquisition, the operations of DM&E have been integrated
with CPs U.S. operations and the related goodwill is
now allocated to CPs U.S. reporting unit. Goodwill is
tested for impairment at least once per year as at
October 1st. The goodwill impairment test determines if the
fair value of the reporting unit continues to exceed its net
book value, or whether an impairment charge is required. The
fair value of the reporting unit is affected by projections of
its profitability including estimates of revenue growth, which
are inherently uncertain. The annual test for impairment
determined that the fair value of CPs U.S. reporting
unit exceeded the carrying value of the allocated goodwill by
approximately 40% (2009 10%). Decreases to the
profit projections, which could be caused by a prolonged
economic recession, or increases to the discount rate used in
the valuation could require an impairment in future periods. The
carrying value of CPs goodwill changes from period to
period due to changes in the exchange rate. As at
December 31, 2010 goodwill was $146.6 million
(2009 $154.9 million).
Intangible assets of $43.2 million include the unamortized
costs of an option to expand the track network, favourable
leases, customer relationships and interline contracts.
Intangible assets with determinable lives are amortized on a
straight-line basis over their estimated useful lives.
The estimated amortization expense for intangible assets is:
2011 $1.4 million, 2012
$1.0 million, 2013 $1.0 million,
2014 $1.0 million and 2015
$1.0 million.
18 Other
assets
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Unamortized fees on long-term debt
|
|
$
|
50.0
|
|
|
$
|
47.4
|
|
Long-term receivables
|
|
|
6.6
|
|
|
|
32.9
|
|
Contracted customer incentives
|
|
|
13.7
|
|
|
|
14.4
|
|
Long-term materials
|
|
|
10.0
|
|
|
|
13.5
|
|
Other
|
|
|
60.3
|
|
|
|
67.6
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
140.6
|
|
|
$
|
175.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees on long-term debt and contracted customer incentives are
amortized to income over the term of the related debt and over
the term of the related revenue contract, respectively.
19 Accounts
payable and accrued liabilities
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Trade payables
|
|
$
|
226.0
|
|
|
$
|
249.3
|
|
Payroll-related accruals
|
|
|
165.1
|
|
|
|
145.6
|
|
Accrued vacation
|
|
|
77.5
|
|
|
|
83.0
|
|
Accrued charges
|
|
|
191.0
|
|
|
|
177.8
|
|
Accrued interest
|
|
|
64.0
|
|
|
|
64.1
|
|
Personal injury and other claims provision
|
|
|
50.5
|
|
|
|
75.1
|
|
Provision for environmental remediation and restructuring
|
|
|
42.9
|
|
|
|
34.3
|
|
Stock-based compensation liabilities
|
|
|
66.3
|
|
|
|
41.5
|
|
Total return swap
|
|
|
6.0
|
|
|
|
18.2
|
|
Income and other taxes payable
|
|
|
30.9
|
|
|
|
31.9
|
|
Dividends payable
|
|
|
45.7
|
|
|
|
41.7
|
|
Other
|
|
|
41.9
|
|
|
|
38.2
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities
|
|
$
|
1,007.8
|
|
|
$
|
1,000.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 Long-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
in which
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Maturity
|
|
|
payable
|
|
|
2010
|
|
|
2009
|
|
4.90% 7-year
Medium Term Notes (A)
|
|
|
June 2010
|
|
|
|
CDN$
|
|
|
$
|
|
|
|
$
|
350.0
|
|
6.250%
10-year
Notes (A)
|
|
|
Oct. 2011
|
|
|
|
US$
|
|
|
|
249.7
|
|
|
|
266.1
|
|
5.75% 5-year
Notes (A)
|
|
|
May 2013
|
|
|
|
US$
|
|
|
|
103.0
|
|
|
|
105.6
|
|
6.50%
10-year
Notes (A)
|
|
|
May 2018
|
|
|
|
US$
|
|
|
|
272.9
|
|
|
|
288.2
|
|
6.25%
10-year
Medium Term Notes (A)
|
|
|
June 2018
|
|
|
|
CDN$
|
|
|
|
373.2
|
|
|
|
372.9
|
|
7.250%
10-year
Notes (A)
|
|
|
May 2019
|
|
|
|
US$
|
|
|
|
344.7
|
|
|
|
363.9
|
|
9.450%
30-year
Debentures (A)
|
|
|
Aug. 2021
|
|
|
|
US$
|
|
|
|
248.6
|
|
|
|
262.7
|
|
4.450% 12.5-year Notes (A)
|
|
|
Mar. 2023
|
|
|
|
US$
|
|
|
|
346.6
|
|
|
|
|
|
7.125%
30-year
Debentures (A)
|
|
|
Oct. 2031
|
|
|
|
US$
|
|
|
|
348.1
|
|
|
|
367.8
|
|
5.750%
30-year
Debentures (A)
|
|
|
Mar. 2033
|
|
|
|
US$
|
|
|
|
248.6
|
|
|
|
261.8
|
|
5.95%
30-year
Notes (A)
|
|
|
May 2037
|
|
|
|
US$
|
|
|
|
440.1
|
|
|
|
465.4
|
|
6.45%
30-year
Notes (A)
|
|
|
Nov. 2039
|
|
|
|
CDN$
|
|
|
|
400.0
|
|
|
|
400.0
|
|
Secured Equipment Loan (B)
|
|
|
Aug. 2015
|
|
|
|
CDN$
|
|
|
|
128.2
|
|
|
|
136.4
|
|
5.41% Senior Secured Notes (C)
|
|
|
Mar. 2024
|
|
|
|
US$
|
|
|
|
121.1
|
|
|
|
133.7
|
|
6.91% Secured Equipment Notes (D)
|
|
|
Oct. 2024
|
|
|
|
CDN$
|
|
|
|
194.1
|
|
|
|
202.2
|
|
5.57% Senior Secured Notes (E)
|
|
|
Dec. 2024
|
|
|
|
US$
|
|
|
|
62.8
|
|
|
|
68.0
|
|
7.49% Equipment Trust Certificates (F)
|
|
|
Jan. 2021
|
|
|
|
US$
|
|
|
|
103.2
|
|
|
|
112.6
|
|
Bank loan (5.883%) (G)
|
|
|
June 2010
|
|
|
|
CDN$
|
|
|
|
|
|
|
|
219.8
|
|
Other long-term loans (nil% 5.50%)
|
|
|
2014-2024
|
|
|
|
US$
|
|
|
|
4.4
|
|
|
|
5.3
|
|
Obligations under capital leases (4.90% 7.63%) (H)
|
|
|
2011-2026
|
|
|
|
US$
|
|
|
|
286.6
|
|
|
|
319.7
|
|
Obligations under capital leases (12.77%) (H)
|
|
|
Jan. 2031
|
|
|
|
CDN$
|
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,279.1
|
|
|
|
4,705.1
|
|
Perpetual 4% Consolidated Debenture Stock (I)
|
|
|
|
|
|
|
US$
|
|
|
|
30.2
|
|
|
|
32.0
|
|
Perpetual 4% Consolidated Debenture Stock (I)
|
|
|
|
|
|
|
GB£
|
|
|
|
5.6
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,314.9
|
|
|
|
4,743.5
|
|
Less: Long-term debt maturing within one year
|
|
|
|
|
|
|
|
|
|
|
281.7
|
|
|
|
605.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,033.2
|
|
|
$
|
4,138.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the gross amount of long-term debt
denominated in U.S. dollars was US$3,234.2 million
(2009 US$2,911.2 million).
Annual maturities and principal repayments requirements,
excluding those pertaining to capital leases, for each of the
five years following 2010 are (in millions): 2011
$273.2; 2012 $37.5; 2013 $141.9;
2014 $43.2; 2015 $117.5.
A. These debentures and notes pay interest semi-annually
and are unsecured, but carry a negative pledge.
During 2010, the Company issued US$350 million of
4.45% Notes due March 15, 2023. Net proceeds from this
offering were CDN$355.2 million and were used to make a
voluntary prepayment to the Companys main Canadian defined
benefit pension plan.
During 2009, the Company issued US$350 million 7.25%
10-year
Notes for net proceeds of approximately CDN$409 million.
The proceeds from this offering contributed to the repurchase of
debt with a carrying amount of CDN$555.3 million, net of
deferred costs of $1.4 million, pursuant to a tender offer
for a total cost of $571.9 million. Upon repurchase of the
debt a net loss of $16.6 million was recognized to
Other income and charges. The loss consisted largely
of premiums paid to bond holders to tender their debt, and the
write-off of unamortized fees, partly
offset by a fair value adjustment (gain) recognized on the
unwind of interest rate swaps associated with the
6.250% Notes that were repurchased (Note 21).
The following table summarizes the principal amount, carrying
amount and cost to redeem repurchased debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Carrying
|
|
|
Cost to
|
|
|
|
|
|
|
|
|
|
amount
|
|
|
amount
|
|
|
redeem
|
|
|
|
|
(in millions)
|
|
Maturity
|
|
|
in USD
|
|
|
in
CDN(2)
|
|
|
in CDN
|
|
|
|
|
6.250% Notes
|
|
|
2011
|
|
|
$
|
154.3
|
|
|
$
|
184.1
|
|
|
$
|
184.6
|
|
|
|
|
|
5.75% Notes
|
|
|
2013
|
|
|
|
298.6
|
|
|
|
342.7
|
|
|
|
359.1
|
|
|
|
|
|
6.50% Notes
|
|
|
2018
|
|
|
|
24.8
|
(1)
|
|
|
28.5
|
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt tendered
|
|
|
|
|
|
$
|
477.7
|
|
|
$
|
555.3
|
|
|
$
|
571.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
US$2.7 million principal amount of debt repurchased prior
to commencement of the debt tender.
(2) Net
of deferred costs of $1.4 million.
During 2009, the Company issued $400 million 6.45%
30-year
Notes. Net proceeds from this offering were $397.8 million.
The proceeds from this offering were used for general corporate
purposes.
B. The Secured Equipment Loan is collateralized by specific
locomotive units with a carrying value of $118.9 million at
December 31, 2010. 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 (2010 1.39%;
2009 1.82%; 2008 4.28%). The Company
makes blended payments of principal and interest semi-annually.
Final repayment of the remaining principal balance of
$53.2 million is due in August 2015.
C. The 5.41% Senior Secured Notes are collateralized
by specific locomotive units with a carrying value of
$158.8 million at December 31, 2010. The Company pays
equal blended semi-annual payments of principal and interest.
Final repayment of the remaining principal of
US$49.4 million is due in March 2024.
D. 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 of
$162.0 million at December 31, 2010. The Company pays
equal blended semi-annual payments of principal and interest up
to and including October 2024.
E. During 2009, the Company issued US$64.7 million of
5.57% Senior Secured Notes for net proceeds of
CDN$66.7 million. The Notes are secured by specific
locomotive units and other rolling stock with a combined
carrying value of $71.3 million at December 31, 2010.
The Company pays equal blended semi-annual payments of principal
and interest up to and including December 2024. Final repayment
of the remaining principal of US$32.9 million is due in
December 2024.
F. The 7.49% Equipment Trust Certificates are
collateralized by specific locomotive units with a carrying
value of $109.3 million at December 31, 2010. The
Company makes semi-annual payments that vary in amount and are
interest-only payments or blended principal and interest
payments. Final repayment of the remaining principal of
US$10.9 million is due in January 2021.
G. The bank loan matured in 2010 and carried an interest
rate of 5.883%.
H. At December 31, 2010, capital lease obligations
included in long-term debt were as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Year
|
|
|
Capital leases
|
|
Minimum lease payments in:
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
$
|
29.4
|
|
|
|
|
2012
|
|
|
|
28.3
|
|
|
|
|
2013
|
|
|
|
26.8
|
|
|
|
|
2014
|
|
|
|
167.7
|
|
|
|
|
2015
|
|
|
|
12.9
|
|
|
|
|
Thereafter
|
|
|
|
183.3
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
|
|
|
|
448.4
|
|
Less: Imputed interest
|
|
|
|
|
|
|
(158.6
|
)
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
|
|
|
|
289.8
|
|
Less: Current portion
|
|
|
|
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
|
|
|
|
$
|
281.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year the Company had additions to property, plant and
equipment under capital lease obligations of $1.1 million
(2009 $0.8 million; 2008
$79.5 million).
The carrying value of the assets collateralizing the capital
lease obligations was $367.0 million at December 31,
2010.
I. 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.
21 Financial
instruments
A. Fair
values of financial instruments
The Company uses the following methods and assumptions to
estimate initial and subsequent fair values of each class of
financial instrument for recognition and / or
disclosure as follows:
Loans and
receivables
Accounts receivable, net The carrying amounts
approximate fair value because of the short maturity of these
instruments.
Investments The fair value of long-term receivables
is determined using discounted cash flow analysis and observable
market based inputs.
Financial
liabilities
Accounts payable and accrued liabilities The
carrying amounts approximate fair value because of the short
maturity of these instruments.
Other long-term liabilities The fair value of
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 fair value of publicly traded
long-term debt is determined based on market prices. 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.
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 from an active market for these investments.
Held for
trading
Derivative instruments 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 amount is
equal to fair value because of the short maturity of these
instruments.
Investments Long-term floating rate notes are
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.
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 $4,314.9 million at
December 31, 2010 (December 31, 2009
$4,743.5 million) and a fair value of approximately
$4,773.0 million at December 31, 2010
(December 31, 2009 $5,029.4 million). The
fair value of publicly traded long-term debt is determined based
on market prices at December 31, 2010 and December 31,
2009, respectively.
The Company categorizes its financial assets and liabilities
measured at fair value into one of three different levels
depending on the observability of the inputs employed in the
measurement.
|
|
o
|
Level 1: Unadjusted quoted prices for identical assets and
liabilities in active markets that are accessible at the
measurement date.
|
|
o
|
Level 2: Directly or indirectly observable inputs other
than quoted prices included within Level 1 or quoted prices
for similar assets and liabilities. Derivative instruments in
this category are valued using models or other industry standard
valuation techniques derived from observable market data.
|
|
o
|
Level 3: Valuations based on inputs which are less
observable, unavailable or where the observable data does not
support a significant portion of the instruments fair
value. Generally, Level 3 valuations are longer dated
transactions, occur in less active markets, occur at locations
where pricing information is not available, or have no binding
broker quote to support Level 2 classifications.
|
When possible the estimated fair value is based on quoted market
prices, and, if not available, estimates from third party
brokers. For non exchange traded derivatives classified in
Level 2, the Company uses standard valuation techniques to
calculate fair value. These methods include discounted mark to
market for forwards, futures and swaps. Primary inputs to these
techniques include observable market prices (interest, foreign
exchange and commodity) and volatility, depending on the type of
derivative and nature of the underlying risk. The Company uses
inputs and data used by willing market participants when valuing
derivatives and considers its own credit default swap spread as
well as those of its counterparties in its determination of fair
value. Wherever possible the Company uses observable inputs. All
derivatives are classified as Level 2. A detailed analysis
of the techniques used to value the Companys long-term
floating rate notes, which are classified as Level 3, is
discussed further below.
FAIR VALUE OF
LONG-TERM FLOATING RATE NOTES
At December 31, 2010 and December 31, 2009, the
Company held long-term floating rate notes with a total
settlement value of $117.0 million and $129.1 million,
respectively, and carrying values of $69.5 million and
$69.3 million, respectively. The carrying values, being the
estimated fair values, are reported in Investments.
During 2010, the Company received $0.1 million in partial
redemption of certain of the notes held (2009
$12.5 million). In addition, in 2010, notes with a
settlement value of $12.0 million were used to settle a
$9.0 million credit facility with a major Canadian bank.
The notes had an estimated fair value of $7.6 million. At
December 31, 2010, the Company held long-term floating rate
notes with settlement value, as follows:
|
|
o
|
$116.8 million Master Asset Vehicle (MAV) 2
notes with eligible assets; and
|
|
o
|
$0.2 million MAV 3 Class 9 Traditional Asset
(TA) Tracking notes.
|
At December 31, 2009, the Company held long-term floating
rate notes with settlement value, as follows:
|
|
o
|
$116.8 million MAV 2 notes with eligible assets;
|
|
o
|
$12.1 million MAV 2 Ineligible Asset (IA)
Tracking notes with ineligible assets; and
|
|
o
|
$0.2 million MAV 3 Class 9 TA Tracking notes.
|
During 2010, DBRS upgraded the rating of the MAV 2
Class A-1
notes from A Under Review with Positive Implications to A
(high). The MAV 2
Class A-2
notes have received a BBB (low) rating from DBRS, unchanged from
2009.
In January 2009, under a Canadian Court granted order, a
restructuring of asset-backed commercial paper was completed. As
a result, CP received new replacement long-term floating rate
notes with a total settlement value of $142.8 million.
The valuation technique used by the Company to estimate the fair
value of its investment in long-term floating rate notes at
December 31, 2010 and December 31, 2009 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 above noted redemption of notes, accretion and
other minor changes in assumptions have resulted in gains of
$9.3 million in 2010 (2009 $9.2 million;
2008 losses of
$49.4 million). The interest rates and maturities of the
various long-term floating rate notes, discount rates and credit
losses modelled at December 31, 2010 and December 31,
2009, respectively, are:
|
|
|
|
|
|
|
December 31, 2010
|
|
December 31, 2009
|
Probability weighted average coupon interest rate
|
|
0.8%
|
|
Nil
|
Weighted average discount rate
|
|
7.1%
|
|
7.9%
|
Expected repayments of long-term floating rate notes
|
|
Approximately 6 years
|
|
31/2
to 19 years
|
Credit losses
|
|
MAV 2 eligible asset notes: 1% to 100%
|
|
MAV 2 eligible asset notes: nil to 100%
|
|
|
MAV 2 IA Tracking notes: N/A
|
|
MAV 2 IA Tracking notes: 25%
|
|
|
MAV 3 Class 9 TA Tracking notes: 1%
|
|
MAV 3 Class 9 TA Tracking notes: nil
|
|
|
|
|
|
|
|
|
|
|
The probability weighted discounted cash flows resulted in an
estimated fair value of the Companys long-term floating
rate notes of $69.5 million at December 31, 2010
(2009 $69.3 million). The change in the
original cost and estimated fair value of the Companys
long-term floating rate notes is as follows (representing a
roll-forward of assets measured at fair value using Level 3
inputs):
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Estimated
|
|
(in millions of Canadian dollars)
|
|
cost
|
|
|
fair value
|
|
As at January 1, 2009
|
|
$
|
143.6
|
|
|
$
|
72.7
|
|
Change due to restructuring, January 21, 2009
|
|
|
(0.8
|
)
|
|
|
|
|
Redemption of notes
|
|
|
(13.7
|
)
|
|
|
(8.0
|
)
|
Accretion
|
|
|
|
|
|
|
2.9
|
|
Change in market assumptions
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2009
|
|
|
129.1
|
|
|
|
69.3
|
|
Redemption of notes
|
|
|
(12.1
|
)
|
|
|
(7.7
|
)
|
Accretion
|
|
|
|
|
|
|
5.9
|
|
Change in market assumptions
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010
|
|
$
|
117.0
|
|
|
$
|
69.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion and gains and losses from the redemption of notes and
change in market assumptions are reported in Other income
and charges.
Sensitivity analysis is presented below for key assumptions at
December 31, 2010:
|
|
|
|
|
|
|
Change in fair value of
|
|
(in millions of Canadian dollars)
|
|
long-term floating rate notes
|
|
Coupon interest
rate(1)
|
|
|
|
|
50 basis point increase
|
|
$
|
Nil
|
|
50 basis point decrease
|
|
$
|
Nil
|
|
Discount rate
|
|
|
|
|
50 basis point increase
|
|
$
|
(1.9
|
)
|
50 basis point decrease
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
(1) Sensitivity
is after reflecting anticipated credit losses.
Continuing uncertainties regarding the value of the assets which
underlie the long-term floating rate notes and the amount and
timing of cash flows could give rise to a further material
change in the value of the Companys investment in
long-term floating rate notes which could impact the
Companys near-term earnings.
B. 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, stock-based
compensation risk, as well as credit risk and liquidity risk. To
manage these risks, the Company utilizes a financial risk
management (FRM) framework. A risk management
committee, composed of senior management, monitors the
Companys risk environment and reviews FRM policies,
procedures, processes and controls to be implemented across the
Company. This management committee monitors the effectiveness of
and compliance to such policies, processes and controls and
reports regularly to the Audit, Finance, and Risk Management
Committee (Audit Committee) who have been delegated
oversight of FRM by the Board of Directors.
Our policy with respect to using derivative financial
instruments is to selectively reduce volatility associated with
fluctuations in interest rates, FX rates, the price of fuel and
stock-based compensation expense. Where derivatives are
designated as hedging instruments, 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
Consolidated Balance Sheet, commitments or forecasted
transactions. At the time a derivative contract is entered into,
and at least quarterly, we assess whether the derivative item is
effective in offsetting the changes in fair value or cash flows
of the hedged items. The derivative qualifies for hedge
accounting treatment if it is effective in substantially
mitigating the risk it was designed to address.
It is not our intent to use financial derivatives or commodity
instruments for trading or speculative purposes.
Credit risk
management
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 long-term floating rate notes is discussed in more detail
above.
The railway industry predominantly serves financially
established customers and 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. The Company
establishes guidelines for customer credit limits and should
thresholds in these areas be reached, appropriate precautions
are taken to improve collectibility.
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. The Company does not anticipate
non-performance that would materially impact the Companys
financial statements. In addition, the Company believes there
are no significant concentrations of credit risk.
Foreign
exchange management
The Company is exposed to fluctuations 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 and U.S.
dollars. We enter into foreign exchange risk management
transactions primarily to manage fluctuations in the exchange
rate between Canadian and U.S. currencies. 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
customers and suppliers to reduce the net exposure.
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.
The majority of the Companys U.S. dollar denominated
long-term debt has been designated as a hedge of the net
investment in 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,
the Company may enter into FX forward contracts to lock-in the
amount of Canadian dollars it has to pay on its
U.S. denominated debt maturities.
Occasionally the Company will enter into short-term FX forward
contracts as part of its cash management strategy.
FOREIGN EXCHANGE
FORWARD CONTRACTS ON LONG-TERM DEBT
In 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 guaranteed the amount of Canadian dollars
that the Company will repay when its US$400 million
6.250% Notes mature in October 2011. This derivative was
not designated as a hedge and changes in fair value were
recognized in net income in the period in which the change
occurs. During 2009, CP unwound and settled US$330 million
of the US$400 million currency forward for total proceeds
of $34.1 million. During 2010, CP unwound the remaining
US$70 million for total proceeds of $0.2 million.
During 2010, no gain or loss was reported on the derivative.
During 2009, a net loss of $23.0 million, inclusive of both
realized and unrealized losses, was recorded to Other
income and charges.
During 2010, the Company entered into FX forward contracts to
fix the exchange rate on US$50.0 million of its
5.75% Notes due in May 2013 and US$75.0 million of its
6.50% Notes due in May 2018. These derivatives, which are
accounted for as cash flow hedges, guarantee the amount of
Canadian dollars that the Company will repay when these Notes
mature. During 2010, the Company recorded an unrealized foreign
exchange loss on long-term debt of $0.5 million in
Other income and charges and $1.1 million in
Other comprehensive loss in relation to these
derivatives. At December 31, 2010, the unrealized loss
derived from these FX forwards was $1.6 million which was
included in Other long-term liabilities with the
offset, net of tax, reflected in Accumulated other
comprehensive loss and Retained earnings on
the Consolidated Balance Sheet.
Interest rate
management
The Company is exposed to interest rate risk, which is the risk
that the fair value or 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 debt.
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 issuances, the Company
may enter into forward rate agreements such as treasury rate
locks, bond forwards or forward starting swaps, designated as
cash flow hedges, 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 Company does not currently hold any
derivative financial instruments to manage its interest rate
risk.
INTEREST RATE
SWAPS
During 2010, the Company entered into interest rate swaps,
accounted for as fair value hedges, for a notional amount of
US$101.4 million. The swap agreements converted the
Companys outstanding fixed interest rate liability into a
variable rate liability for the 5.75% Notes due in May
2013. Subsequently in 2010, these swap agreements were unwound
for a gain of $2.9 million, of which $0.6 million was
recognized in the year as a reduction to Net interest
expense. The gain was deferred as a fair value adjustment
to the underlying debt that was hedged and will be amortized to
Net interest expense until such time the
5.75% Notes are repaid. At December 31, 2010 and
December 31, 2009, the Company had no outstanding interest
rate swaps.
During 2009, CP unwound its outstanding
fixed-to-floating
interest rate swap, which converted a portion of its
US$400 million 6.250% Notes to floating-rate debt, for
a gain of $16.8 million. The gain was deferred as a fair
value adjustment to the underlying debt that was hedged and will
be amortized to Net interest expense until such time
the 6.250% Notes are repaid. Subsequently in 2009, CP
repurchased a portion of the underlying debt as part of a tender
offer and recognized $6.5 million of the deferred gain in
Other income and charges offsetting part of the
recognized loss on repurchase of debt.
The impact of the above noted settled interest rate swaps
reduced Net interest expense in 2010 by
$3.5 million (2009 $5.5 million).
TREASURY RATE
LOCKS
At December 31, 2010, the Company had net unamortized
losses related to interest rate locks, which are accounted for
as cash flow hedges, settled in previous years totalling
$22.1 million (December 31, 2009
$23.9 million). This amount is composed of various
unamortized gains and losses related to specific debts which are
reflected in Accumulated other comprehensive loss
and are amortized to Net interest expense in the
period that interest on the related debt is charged. The
amortization of these gains and losses resulted in an increase
in Net interest expense and Other
comprehensive income of $1.8 million in 2010
(2009 $3.5 million).
Stock-based
compensation expense management
The Company is exposed to stock-based compensation risk, which
is 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 include TSARs, DSUs, RSUs,
and PSUs. As the share price appreciates, these instruments
create increased compensation expense.
The Company entered into a TRS to reduce the volatility to the
Company over time on three types of stock-based compensation
programs: TSARs, DSUs and RSUs. The TRS is a derivative that
provides price appreciation and dividends, in return for a
charge by the counterparty. The swaps are intended to minimize
volatility to Compensation and benefits expense by
providing a gain to 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 swap would no longer be fully
offset by compensation expense reductions, which would reduce
the effectiveness of the swap. Over time it is CPs
intention to reduce the size of the TRS program and in 2009 and
2010 CP unwound portions of the program.
Compensation and benefits expense on the
Companys Consolidated Statement of Income included a net
gain on these swaps of $12.0 million in 2010 which was
inclusive of both realized and unrealized gains
(2009 $18.6 million). During 2009, in order to
improve the effectiveness of the TRS in mitigating the
volatility of stock-based compensation programs, CP unwound a
portion of the program for a total cost of $31.1 million.
This cost had previously been recognized in Compensation
and benefits expense. During 2010, the Company unwound and
settled a further portion of the program for a total cost of
$0.2 million. At December 31, 2010, the unrealized
loss on the remaining TRS of $6.0 million
(December 31, 2009 $18.2 million) was
included in Accounts payable and accrued liabilities
on the Consolidated Balance Sheet.
Fuel price
management
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. Fuel expense constitutes a
large portion of the Companys operating costs and
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.
The impact of variable fuel expense is mitigated substantially
through fuel cost 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, diesel and crack spreads. 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.
At December 31, 2010, the Company had diesel futures
contracts, which are accounted for as cash flow hedges, to
purchase 14.2 million U.S. gallons during the period
January 2011 to December 2011 at an average price of US$2.29 per
U.S. gallon. This represents approximately 5% of estimated
fuel purchases for this period. At December 31, 2010, the
unrealized gain on these futures contracts was $4.1 million
(December 31, 2009 $2.5 million) and was
reflected in Other current assets with the offset,
net of tax, reflected in Accumulated other comprehensive
loss on the Consolidated Balance Sheet.
The impact of settled commodity swaps decreased Fuel
expense in 2010 by $2.5 million as a result of realized
gains on diesel swaps. The net impact of settled swaps increased
Fuel expense in 2009 by $1.2 million due to a
combination of realized losses of $0.8 million arising from
settled commodity swaps and $0.4 million arising from
settled FX forward contracts. Included in the $0.8 million
realized losses on commodity swaps in 2009 were
$0.2 million in realized gains from settled derivatives
that were not designated as hedges.
The following table summarizes information on the location and
amounts of gains and losses, before tax, related to derivatives
on the Consolidated Statement of Income and the Consolidated
Statement of Comprehensive Income for the years 2010, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of gain
|
|
|
Amount of gain (loss)
|
|
|
Amount of gain (loss)
|
|
|
|
(loss) recognized
|
|
|
recognized in income on
|
|
|
recognized in other
|
|
|
|
in income on
|
|
|
derivatives
|
|
|
comprehensive income on derivatives
|
|
(in millions of Canadian dollars)
|
|
derivatives
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil swaps
|
|
|
Fuel expense
|
|
|
$
|
|
|
|
$
|
4.2
|
|
|
$
|
15.8
|
|
|
$
|
|
|
|
$
|
(3.2
|
)
|
|
$
|
(18.2
|
)
|
Diesel future contracts
|
|
|
Fuel expense
|
|
|
|
2.5
|
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
1.6
|
|
|
|
6.9
|
|
|
|
(4.4
|
)
|
FX contracts on fuel
|
|
|
Fuel expense
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
3.5
|
|
FX forward contracts
|
|
|
Other income and
charges
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
Net interest expense
|
|
|
|
3.5
|
|
|
|
5.5
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and
charges
|
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury rate locks
|
|
|
Net interest expense
|
|
|
|
(1.8
|
)
|
|
|
(3.5
|
)
|
|
|
(3.3
|
)
|
|
|
1.8
|
|
|
|
3.5
|
|
|
|
3.0
|
|
Ineffective portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel hedges
|
|
|
Fuel expense
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury rate locks
|
|
|
Net interest expense
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
|
Compensation and benefits
|
|
|
|
12.0
|
|
|
|
18.6
|
|
|
|
(64.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel future contracts
|
|
|
Fuel expense
|
|
|
|
|
|
|
|
|
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating oil crack spreads
|
|
|
Fuel expense
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX forward contracts
|
|
|
Other income and
charges
|
|
|
|
|
|
|
|
(23.0
|
)
|
|
|
73.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury rate locks
|
|
|
Net interest expense
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15.7
|
|
|
$
|
2.2
|
|
|
$
|
13.1
|
|
|
$
|
2.3
|
|
|
$
|
7.3
|
|
|
$
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010, the Company expected that, during
the next twelve months, $4.1 million of unrealized holding
gains on diesel future contracts to be realized and recognized
in the Consolidated Statement of Income, reported in
Fuel expense as a result of these derivatives being
settled.
The following table summarizes information on the effective and
ineffective portions, before tax, of the Companys net
investment hedge on the Consolidated Statement of Income and the
Consolidated Statement of Comprehensive Income for the years
ended 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
Ineffective portion
|
|
|
Effective portion recognized
|
|
|
|
ineffective portion
|
|
|
recognized in income
|
|
|
in other comprehensive
|
|
|
|
recognized in
|
|
|
gain (loss)
|
|
|
income gain (loss)
|
|
(in millions of Canadian dollars)
|
|
income
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
FX on LTD within net investment hedge
|
|
|
Other income and charges
|
|
|
$
|
2.6
|
|
|
$
|
(1.8
|
)
|
|
$
|
9.9
|
|
|
$
|
141.6
|
|
|
$
|
246.7
|
|
|
$
|
(308.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 Other
long-term liabilities
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Provision for environmental remediation, net of current
portion(1)
|
|
$
|
91.0
|
|
|
$
|
106.5
|
|
Provision for restructuring, net of current
portion(2)
(Note 24)
|
|
|
45.6
|
|
|
|
57.5
|
|
Deferred gains on sale leaseback transactions
|
|
|
40.9
|
|
|
|
44.3
|
|
Deferred revenue on
rights-of-way
license agreements, net of current portion
|
|
|
36.2
|
|
|
|
40.6
|
|
Deferred income credits
|
|
|
30.1
|
|
|
|
38.0
|
|
Stock-based compensation liabilities, net of current portion
|
|
|
82.2
|
|
|
|
39.0
|
|
Asset retirement obligations (Note 23)
|
|
|
22.4
|
|
|
|
26.6
|
|
Other, net of current portion
|
|
|
119.6
|
|
|
|
127.4
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$
|
468.0
|
|
|
$
|
479.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) As
at December 31, 2010, the aggregate provision for
environmental remediation, including the current portion was
$107.4 million (2009 $121.3 million).
(2) As
at December 31, 2010, the aggregate provision for
restructuring, including the current portion was
$72.1 million (2009 $77.0 million).
The deferred revenue on
rights-of-way
license agreements, and deferred gains on sale leaseback
transactions are being amortized to income on a straight-line
basis over the related lease terms. Deferred income credits are
being amortized over the life of the related asset.
ENVIRONMENTAL
REMEDIATION ACCRUALS
Environmental remediation accruals cover site-specific
remediation programs. Environmental remediation accruals are
measured on an undiscounted basis and are recorded when the
costs to remediate are probable and reasonably estimable. The
estimate of the probable costs to be incurred in the remediation
of properties contaminated by past railway use reflects the
nature of contamination at individual sites according to typical
activities and scale of operations conducted. CP has developed
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, considering 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. Provisions for
environmental remediation costs are recorded in Other
long-term liabilities, except for the current portion
which is recorded in Accounts payable and accrued
liabilities. Payments are expected to be made over
10 years to 2020.
The accruals for environmental remediation represent CPs
best estimate of its probable future obligation and includes
both asserted and unasserted claims, without reduction for
anticipated recoveries from third parties. Although the recorded
accruals include CPs best estimate of all probable costs,
CPs total environmental remediation costs cannot be
predicted with certainty. Accruals for environmental remediation
may change from time to time as new information about previously
untested sites becomes known, environmental laws and regulations
evolve and advances are made in environmental remediation
technology. The accruals 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, may materially affect income in the
particular period in which a charge is recognized. Costs related
to existing, but as yet unknown, or future contamination will be
accrued in the period in which they become probable and
reasonably estimable. Changes to costs are reflected as changes
to Other long-term liabilities or Accounts
payable and accrued liabilities on CPs Consolidated
Balance Sheet and to Purchased services and other
within operating expenses on CPs Consolidated Statement of
Income. The amount charged to income in 2010 was
$3.9 million (2009 $2.7 million;
2008 $4.0 million).
23 Asset
retirement obligations
Asset retirement obligations (ARO) are recorded in
Other long-term liabilities. These liabilities are
discounted at 6.25%. Accretion expense is included in
Depreciation and amortization on the Consolidated
Statement of Income.
|
|
|
|
|
|
|
|
|
(In millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Opening balance, January 1
|
|
$
|
26.6
|
|
|
$
|
31.9
|
|
Liabilities incurred
|
|
|
|
|
|
|
0.3
|
|
Accretion
|
|
|
1.7
|
|
|
|
1.8
|
|
Liabilities settled
|
|
|
(5.1
|
)
|
|
|
(5.9
|
)
|
Revision to estimated cash flows
|
|
|
(0.8
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance, December 31
|
|
$
|
22.4
|
|
|
$
|
26.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $40.6 million
at December 31, 2010 (2009 $46.0 million),
which, when present valued, was $20.1 million at
December 31, 2010 (2009 $24.5 million).
The payments are expected to be made in the 2011
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, 2010, was $18.0 million (2009
$17.3 million), which, when present valued, was
$2.0 million at December 31, 2010 (2009
$1.8 million). For purposes of estimating this liability,
the payment related to the retirement of the joint facility is
anticipated to be made in 34 years.
24 Restructuring
accrual
At December 31, 2010, the provision for restructuring was
$72.1 million (2009 $77.0 million). The
restructuring accrual is primarily for labour liabilities
arising from historic initiatives. Payments are expected to
continue in diminishing amounts until 2025.
Set out below is a reconciliation of CPs liabilities
associated with its restructuring accrual:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Opening balance, January 1
|
|
$
|
77.0
|
|
|
$
|
98.6
|
|
Accrued
|
|
|
13.0
|
|
|
|
1.2
|
|
Payments
|
|
|
(20.3
|
)
|
|
|
(27.0
|
)
|
Amortization of
discount(1)
|
|
|
3.6
|
|
|
|
7.4
|
|
Foreign exchange impact
|
|
|
(1.2
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance, December 31
|
|
$
|
72.1
|
|
|
$
|
77.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amortization
of discount is charged to income as Compensation and
benefits.
25 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, 2010, no Preferred Shares had been issued.
An analysis of Common Share balances is as follows:
|
|
|
|
|
|
|
|
|
(number of shares in millions)
|
|
2010
|
|
|
2009
|
|
Share capital, January 1
|
|
|
168.5
|
|
|
|
153.8
|
|
Shares issued
|
|
|
|
|
|
|
13.9
|
|
Shares issued under stock option plans
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Share capital, December 31
|
|
|
169.2
|
|
|
|
168.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the U.S., of up
to 13,900,000 CP common shares at a price of $36.75 Canadian per
share. 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 and including deferred
taxes are $495.2 million).
The change in the Share capital balances includes
$2.1 million (2009 $0.6 million) related
to the cancellation of the TSARs liability on exercise of tandem
stock options, and $7.3 million (2009
$8.0 million) of stock-based compensation transferred from
Additional paid-in capital.
26 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.
The Pension Committee of the Board of Directors has approved an
investment policy that establishes long-term asset mix targets
which take into account the Companys expected risk
tolerances. Pension plan assets are managed by a suite of
independent investment managers, with the allocation by manager
reflecting these asset mix targets. Most of the assets are
actively managed with the objective of outperforming applicable
capital market indices. In accordance with the investment
policy, derivative instruments are used to replicate stock
market index returns, to partially hedge foreign currency
exposures and to reduce asset/liability interest rate mismatch
risk. The investment policy allows the managers to invest in
securities of the Company or its subsidiaries, subject to
prescribed limits.
To develop the expected long-term rate of return assumption used
in the calculation of net periodic benefit cost applicable to
the market-related value of assets, the Company considers the
expected composition of the plans assets, past experience
and future estimates of long-term investment returns. Future
estimates of investment returns reflect the expected annual
yield on applicable fixed income capital market indices, the
long-term expected risk premium (relative to long-term
government bond yields) for public equity, real estate and
infrastructure securities and the expected added value (relative
to applicable capital market indices) from active management of
pension fund assets.
The Company has elected to use a market-related value of assets
for the purpose of calculating net periodic benefit cost,
developed from a
five-year
average of market values for the plans 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 plans
fixed income, real estate and infrastructure securities.
The benefit obligation is discounted using a discount rate that
is a blended interest rate for a portfolio of high-quality
corporate debt instruments that has the same duration as the
benefit obligation. The discount rate is determined by
management with the aid of third-party actuaries.
The elements of net periodic 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)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Current service cost (benefits earned by employees in the year)
|
|
$
|
86.0
|
|
|
$
|
67.1
|
|
|
$
|
97.4
|
|
|
$
|
15.6
|
|
|
$
|
14.3
|
|
|
$
|
16.1
|
|
Interest cost on benefit obligation
|
|
|
464.0
|
|
|
|
482.2
|
|
|
|
445.2
|
|
|
|
27.8
|
|
|
|
29.1
|
|
|
|
27.0
|
|
Expected return on fund assets
|
|
|
(598.3
|
)
|
|
|
(557.3
|
)
|
|
|
(583.2
|
)
|
|
|
(0.7
|
)
|
|
|
(0.9
|
)
|
|
|
(0.7
|
)
|
Recognized net actuarial loss (gain)
|
|
|
71.5
|
|
|
|
7.4
|
|
|
|
47.8
|
|
|
|
1.9
|
|
|
|
34.8
|
|
|
|
(1.9
|
)
|
Amortization of prior service costs
|
|
|
13.1
|
|
|
|
22.7
|
|
|
|
21.4
|
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
Settlement
gain(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
36.3
|
|
|
$
|
22.1
|
|
|
$
|
28.6
|
|
|
$
|
43.1
|
|
|
$
|
67.8
|
|
|
$
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Settlement
gains resulted 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)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
8,032.8
|
|
|
$
|
7,068.3
|
|
|
$
|
484.1
|
|
|
$
|
438.0
|
|
Current service cost
|
|
|
86.0
|
|
|
|
67.1
|
|
|
|
15.6
|
|
|
|
14.3
|
|
Interest cost
|
|
|
464.0
|
|
|
|
482.2
|
|
|
|
27.8
|
|
|
|
29.1
|
|
Employee contributions
|
|
|
53.9
|
|
|
|
48.4
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Benefits paid
|
|
|
(468.7
|
)
|
|
|
(457.5
|
)
|
|
|
(34.7
|
)
|
|
|
(39.5
|
)
|
Foreign currency changes
|
|
|
(8.0
|
)
|
|
|
(22.8
|
)
|
|
|
(1.2
|
)
|
|
|
(5.1
|
)
|
Actuarial loss
|
|
|
823.8
|
|
|
|
847.1
|
|
|
|
2.3
|
|
|
|
57.5
|
|
Release due to settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at December 31
|
|
$
|
8,983.8
|
|
|
$
|
8,032.8
|
|
|
$
|
494.2
|
|
|
$
|
484.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fund assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at January 1
|
|
$
|
7,013.8
|
|
|
$
|
6,118.5
|
|
|
$
|
11.5
|
|
|
$
|
12.1
|
|
Actual return on fund assets
|
|
|
880.3
|
|
|
|
723.0
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Employer contributions
|
|
|
837.2
|
|
|
|
595.2
|
|
|
|
33.7
|
|
|
|
38.3
|
|
Employee contributions
|
|
|
53.9
|
|
|
|
48.4
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Benefits paid
|
|
|
(468.7
|
)
|
|
|
(457.5
|
)
|
|
|
(34.7
|
)
|
|
|
(39.5
|
)
|
Foreign currency changes
|
|
|
(6.1
|
)
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at December 31
|
|
$
|
8,310.4
|
|
|
$
|
7,013.8
|
|
|
$
|
11.0
|
|
|
$
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status plan deficit
|
|
$
|
(673.4
|
)
|
|
$
|
(1,019.0
|
)
|
|
$
|
(483.2
|
)
|
|
$
|
(472.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Companys Consolidated Balance
Sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
Other benefits
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Accounts payable and accrued liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40.9
|
|
|
$
|
37.7
|
|
Pension and other benefit liabilities
|
|
|
673.4
|
|
|
|
1,019.0
|
|
|
|
442.3
|
|
|
|
434.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
$
|
673.4
|
|
|
$
|
1,019.0
|
|
|
$
|
483.2
|
|
|
$
|
472.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The defined benefit pension plans accumulated benefit
obligation as at December 31, 2010 was
$8,579.8 million (2009 $7,621.9 million).
The accumulated benefit obligation is calculated on a basis
similar to the projected benefit obligation, except no future
salary increases are assumed in the projection of future
benefits.
The measurement date used to determine the plan assets and the
accrued benefit obligation is December 31. The most recent
actuarial valuation for pension funding purposes for the
Companys main Canadian pension plan was performed as at
January 1, 2010. During 2011, the Company expects to file a
new valuation.
Amounts recognized in accumulated other comprehensive loss are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
Other benefits
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net actuarial loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than deferred investment losses
|
|
$
|
2,309.2
|
|
|
$
|
1,548.8
|
|
|
$
|
98.9
|
|
|
$
|
98.1
|
|
Deferred investment losses
|
|
|
547.2
|
|
|
|
837.2
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
17.3
|
|
|
|
30.4
|
|
|
|
(3.4
|
)
|
|
|
(4.9
|
)
|
Deferred income tax
|
|
|
(807.4
|
)
|
|
|
(690.2
|
)
|
|
|
(26.9
|
)
|
|
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,066.3
|
|
|
$
|
1,726.2
|
|
|
$
|
68.6
|
|
|
$
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unamortized actuarial loss and the unamortized prior service
cost included in Accumulated other comprehensive
loss that is expected to be recognized in net periodic
benefit cost during 2011 are $142.5 million and
$12.9 million, respectively, for pensions and
$4.9 million and a recovery of $1.4 million,
respectively, for other post-retirement benefits.
Actuarial assumptions used were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
(percentages)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Benefit obligation at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.20
|
|
|
|
5.90
|
|
|
|
7.00
|
|
Projected future salary increases
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
Health care cost trend rate
|
|
|
8.00
|
(1)
|
|
|
8.50
|
(2)
|
|
|
9.00
|
(2)
|
Benefit cost for year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.90
|
|
|
|
7.00
|
|
|
|
5.60
|
|
Expected rate of return on fund assets
|
|
|
7.75
|
|
|
|
7.75
|
|
|
|
8.00
|
|
Projected future salary increases
|
|
|
3.00
|
|
|
|
3.00
|
|
|
|
3.00
|
|
Health care cost trend rate
|
|
|
8.50
|
(2)
|
|
|
9.00
|
(2)
|
|
|
9.50
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
health care cost trend rate is assumed to be 8.0% in 2011, 2012,
and 2013, and then decreasing by 0.5% per year to an ultimate
rate of 5.0% per year in 2019 and after.
(2) The
health care cost trend rate was previously projected to decrease
by 0.5% per year 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
|
|
(in millions of Canadian dollars)
Favourable (unfavourable)
|
|
point increase
|
|
|
point decrease
|
|
Effect on the total of service and interest costs
|
|
|
(0.6
|
)
|
|
|
0.6
|
|
Effect on post-retirement benefit obligation
|
|
|
(8.4
|
)
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PLAN
ASSETS
Plan assets are recorded at fair value. The major asset
categories are public equity securities, debt securities, and
real estate and infrastructure funds. The fair values of the
public equity and debt securities (other than Level 3
mortgages) are based on quoted market prices. The fair value of
each Level 3 mortgage is based on the yield of a similar
term Government of Canada bond plus a yield spread provided by a
third party that reflects the mortgages credit quality.
Real estate values are based on annual valuations performed by
external parties, taking into account current market conditions
and recent sales transactions where practical and appropriate.
Infrastructure values are based on the fair value of each
funds assets as calculated by the fund manager, generally
using a discounted cash flow analysis that takes into account
current market conditions and recent sales transactions where
practical and appropriate.
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
|
|
|
2010
|
|
|
2009
|
|
Public equity securities
|
|
|
45 51
|
|
|
|
47.7
|
|
|
|
45.9
|
|
Debt securities
|
|
|
37 43
|
|
|
|
41.8
|
|
|
|
42.3
|
|
Real estate and infrastructure
|
|
|
8 16
|
|
|
|
10.5
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the assets of the Companys
defined benefit pension plans at fair values at
December 31, 2010 and a comparative summary at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
active markets for
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
identical assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
(in millions of Canadian dollars)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34.8
|
|
|
$
|
71.3
|
|
|
$
|
|
|
|
$
|
106.1
|
|
Government bonds
|
|
|
|
|
|
|
2,398.1
|
|
|
|
|
|
|
|
2,398.1
|
|
Corporate bonds
|
|
|
|
|
|
|
940.9
|
|
|
|
|
|
|
|
940.9
|
|
Mortgages
|
|
|
|
|
|
|
15.6
|
|
|
|
5.2
|
|
|
|
20.8
|
|
Public equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
1,050.5
|
|
|
|
67.0
|
|
|
|
|
|
|
|
1,117.5
|
|
U.S. and international
|
|
|
2,437.9
|
|
|
|
44.6
|
|
|
|
|
|
|
|
2,482.5
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
619.6
|
|
|
|
619.6
|
|
Infrastructure
|
|
|
|
|
|
|
|
|
|
|
254.2
|
|
|
|
254.2
|
|
Derivative
assets(1)
|
|
|
|
|
|
|
370.7
|
|
|
|
|
|
|
|
370.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,523.2
|
|
|
$
|
3,908.2
|
|
|
$
|
879.0
|
|
|
$
|
8,310.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
active markets for
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
identical assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
(in millions of Canadian dollars)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16.2
|
|
|
$
|
238.2
|
|
|
$
|
|
|
|
$
|
254.4
|
|
Government bonds
|
|
|
|
|
|
|
1,935.2
|
|
|
|
|
|
|
|
1,935.2
|
|
Corporate bonds
|
|
|
|
|
|
|
753.6
|
|
|
|
|
|
|
|
753.6
|
|
Mortgages
|
|
|
|
|
|
|
15.8
|
|
|
|
11.8
|
|
|
|
27.6
|
|
Public equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
793.9
|
|
|
|
59.7
|
|
|
|
|
|
|
|
853.6
|
|
U.S. and international
|
|
|
2,036.3
|
|
|
|
54.6
|
|
|
|
|
|
|
|
2,090.9
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
576.3
|
|
|
|
576.3
|
|
Infrastructure
|
|
|
|
|
|
|
|
|
|
|
240.2
|
|
|
|
240.2
|
|
Derivative
assets(1)
|
|
|
|
|
|
|
284.1
|
|
|
|
|
|
|
|
284.1
|
|
Derivative
liabilities(1)
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,846.4
|
|
|
$
|
3,339.1
|
|
|
$
|
828.3
|
|
|
$
|
7,013.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys pension funds
utilize the following derivative instruments: equity futures to
replicate equity index returns (Level 2); currency forwards
to partially hedge foreign currency exposures (Level 2);
and bond forwards to reduce asset/liability interest rate risk
exposures (Level 2).
|
During 2010 the portion of the assets of the Companys
defined benefit pension plans measured at fair value using
unobservable inputs (Level 3) changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Mortgages
|
|
|
Real Estate
|
|
|
Infrastructure
|
|
|
Total
|
|
As at January 1, 2009
|
|
$
|
27.9
|
|
|
$
|
596.4
|
|
|
$
|
198.7
|
|
|
$
|
823.0
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
63.7
|
|
|
|
63.7
|
|
Disbursements
|
|
|
(16.1
|
)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
(21.1
|
)
|
Decrease in net unrealized gains
|
|
|
|
|
|
|
(15.1
|
)
|
|
|
(22.2
|
)
|
|
|
(37.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2009
|
|
$
|
11.8
|
|
|
$
|
576.3
|
|
|
$
|
240.2
|
|
|
$
|
828.3
|
|
Contributions
|
|
|
|
|
|
|
10.0
|
|
|
|
52.9
|
|
|
|
62.9
|
|
Disbursements
|
|
|
(7.2
|
)
|
|
|
(17.0
|
)
|
|
|
(44.2
|
)
|
|
|
(68.4
|
)
|
Net realized gain (loss)
|
|
|
|
|
|
|
26.3
|
|
|
|
(2.0
|
)
|
|
|
24.3
|
|
Increase in net unrealized gains
|
|
|
0.6
|
|
|
|
24.0
|
|
|
|
7.3
|
|
|
|
31.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010
|
|
$
|
5.2
|
|
|
$
|
619.6
|
|
|
$
|
254.2
|
|
|
$
|
879.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment strategy is to achieve a long-term
(five to ten-year period) real rate of return of 5.25%, net of
all fees and expenses. The Companys best estimate of
long-term inflation of 2.5% yields an expected long-term nominal
target of 7.75%, net of all fees and expenses. In identifying
the asset allocation ranges, consideration was given to the
long-term nature of the underlying plan liabilities, the
solvency and going-concern financial position of the plan,
long-term return expectations and the risks associated with key
asset classes as well as the relationships of 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.
When investing in foreign securities, the plans are exposed to
foreign currency risk. Most of the plans non-Canadian
public equity and infrastructure foreign currency exposures are
50% hedged. Most of the plans debt securities and all of
the plans real estate holdings are Canadian-dollar
denominated. Net of the above hedging, the plans were 11%
exposed to the U.S. dollar, 5% exposed to European
currencies, and 5% exposed to various other currencies, as at
December 31, 2010.
At December 31, 2010, fund assets consisted primarily of
listed stocks and bonds, including 147,540 of the Companys
Common Shares (2009 82,800) at a market value of
$9.5 million (2009 $4.7 million), 6.91%
Secured Equipment Notes issued by the Company at a par value of
$3.5 million (2009 $3.7 million) and a
market value of $4.0 million (2009
$4.0 million), and 6.25% Unsecured Notes issued by the
Company at a par value of $2.0 million (2009
$nil) and a market value of $2.3 million (2009
$nil). At December 31, 2009, the fund assets also included
6.45% Unsecured Notes issued by the Company at a par value of
$3.5 million and a market value of $3.5 million.
CASH
FLOWS
In 2010, the Company contributed $840.6 million to its
pension plans (2009 $597.9 million;
2008 $98.5 million), including
$3.4 million to the defined contribution plan
(2009 $2.7 million; 2008
$3.1 million), $828.9 million to the Canadian
registered and U.S. qualified defined benefit pension plans
(2009 $587.3 million; 2008
$86.9 million), and $8.3 million to the Canadian
non-registered supplemental pension plans (2009
$7.9 million; 2008 $8.5 million). In 2010,
the contributions to the Canadian registered defined benefit
pension plan included a voluntary prepayment of
$650 million. In 2009, the contributions to the Canadian
registered defined benefit pension plan included a voluntary
prepayment of $500 million and the contributions to the
U.S. qualified defined benefit pension plans included a
voluntary prepayment of $7.4 million. These prepayments
were made in order to reduce the volatility of future pension
funding requirements. In addition, the Company made payments
directly to employees, their beneficiaries or estates or to
third-party benefit administrators of $33.7 million
(2009 $38.3 million; 2008
$34.2 million) with respect to other benefits.
Total contributions for all of the Companys defined
benefit pension plans are expected to be in the range of
$100 million to $125 million in 2011.
ESTIMATED FUTURE
BENEFIT PAYMENTS
The estimated future pension and other post-retirement benefit
payments to be paid by the plans for each of the next five years
and the subsequent five-year period are as follows:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Pensions
|
|
|
Other benefits
|
|
2011
|
|
$
|
459.7
|
|
|
$
|
38.9
|
|
2012
|
|
|
469.4
|
|
|
|
39.3
|
|
2013
|
|
|
486.7
|
|
|
|
39.7
|
|
2014
|
|
|
505.1
|
|
|
|
40.5
|
|
2015
|
|
|
525.0
|
|
|
|
41.4
|
|
2016 2020
|
|
|
2,912.6
|
|
|
|
215.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit payments from the Canadian registered and
U.S. qualified defined benefit pension plans are payable
from their respective pension funds. Benefit payments from the
supplemental pension plans and from the other benefits plans are
payable directly from the Company.
DEFINED
CONTRIBUTION PLAN
Canadian non-unionized employees hired prior to July 1,
2010 had the option to participate in the DC plan. All Canadian
non-unionized employees hired after such date must 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 2010, the
net cost of this plan, which generally equals the
employers required contribution, was $3.4 million
(2009 $2.7 million; 2008
$3.1 million).
CONTRIBUTIONS TO
MULTI-EMPLOYER PLANS
Some of the Companys unionized employees in the
U.S. are members of a U.S. national multi-employer
benefit plan. Contributions made by the Company to this plan in
2010 in respect of post-retirement medical benefits were
$5.0 million (2009 $3.2 million, 2008 -
$2.2 million).
27 Stock-based
compensation
At December 31, 2010, the Company had several stock-based
compensation plans, including stock option plans, various cash
settled liability plans and an employee stock savings plan.
These plans resulted in an expense in 2010 of $71.2 million
(2009 expense of $67.7 million;
2008 recovery of $30.6 million).
Regular options and TSARs
With the granting of regular options, employees may be
simultaneously granted TSARs equivalent to the number of regular
options granted (stock options granted prior to January 2009
were simultaneously granted TSARs equivalent to one-half the
regular options granted). A TSAR 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 TSAR over the related
option exercise price. The liability for TSARs is recognized and
measured at its fair value. Regular options and TSARs 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 TSAR of equal intrinsic value.
Performance Options
Performance options, granted prior to 2007, 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). Beginning in 2007, performance options granted
will only vest when certain performance targets are achieved and
will not vest if the performance targets are not achieved within
a specific time frame. These options will expire five years and
three months after the grant date (performance-contingent
options).
Summary of regular and performance options
The following table summarizes the Companys fixed stock
option plans (that do not have a TSAR attached to them) as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested options
|
|
|
|
|
Options outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
Number of
|
|
|
average
|
|
|
|
Number of
|
|
|
grant date
|
|
|
|
|
options
|
|
|
exercise price
|
|
|
|
options
|
|
|
fair value
|
|
Outstanding, January 1, 2010
|
|
|
|
4,094,296
|
|
|
$
|
52.71
|
|
|
|
|
1,488,913
|
|
|
$
|
17.34
|
|
New options granted
|
|
|
|
31,900
|
|
|
|
57.10
|
|
|
|
|
31,900
|
|
|
|
15.90
|
|
Exercised
|
|
|
|
(551,878
|
)
|
|
|
48.41
|
|
|
|
|
NA
|
|
|
|
NA
|
|
Vested
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
(407,500
|
)
|
|
|
14.97
|
|
Forfeited
|
|
|
|
(43,620
|
)
|
|
|
57.71
|
|
|
|
|
(17,038
|
)
|
|
|
17.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
|
3,530,698
|
|
|
$
|
53.36
|
|
|
|
|
1,096,275
|
|
|
$
|
18.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31,
2010(1)
|
|
|
|
2,664,803
|
|
|
$
|
48.75
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
2,434,423
|
|
|
$
|
46.82
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As at December 31, 2010, the weighted average remaining
term of vested or expected to vest options was 4.4 years
with an aggregate intrinsic value of $45.0 million.
|
The following table provides the number of stock options
outstanding and exercisable as at December 31, 2010 by
range of exercise price and their related intrinsic aggregate
value, and for options outstanding, the weighted-average years
to expiration. The table also provides the aggregate intrinsic
value for
in-the-money
stock options, which represents the amount that would have been
received by option holders had they exercised their options on
December 31, 2010 at the Companys closing stock price
of $64.62.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
Weighted
|
|
|
intrinsic
|
|
|
|
|
|
Weighted
|
|
|
intrinsic
|
|
Range of
|
|
Number of
|
|
|
years to
|
|
|
average
|
|
|
value
|
|
|
Number of
|
|
|
average
|
|
|
value
|
|
exercise prices
|
|
options
|
|
|
expiration
|
|
|
exercise price
|
|
|
(millions)
|
|
|
options
|
|
|
exercise price
|
|
|
(millions)
|
|
$27.62 $40.47
|
|
|
959,298
|
|
|
|
2.1
|
|
|
$
|
31.17
|
|
|
$
|
32.1
|
|
|
|
956,448
|
|
|
$
|
31.15
|
|
|
$
|
32.0
|
|
$42.05 $62.56
|
|
|
1,697,450
|
|
|
|
4.1
|
|
|
|
56.53
|
|
|
|
13.7
|
|
|
|
1,275,750
|
|
|
|
54.67
|
|
|
|
12.7
|
|
$62.90 $74.89
|
|
|
873,950
|
|
|
|
4.5
|
|
|
|
71.56
|
|
|
|
|
|
|
|
202,225
|
|
|
|
71.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
|
3,530,698
|
|
|
|
3.6
|
|
|
$
|
53.36
|
|
|
$
|
45.8
|
|
|
|
2,434,423
|
|
|
$
|
46.82
|
|
|
$
|
44.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As at December 31, 2010, the total number of
in-the-money
stock options outstanding was 2,663,398 with a weighted-average
exercise price of $47.41. The weighted-average years to
expiration of exercisable stock options is 3.9 years.
|
Under the fair value method, the fair value of options at the
grant date was approximately $0.5 million for options
issued in 2010 (2009 $nil; 2008
$14.2 million). The weighted average fair value assumptions
were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Expected option life
(years)(1)
|
|
|
6.25
|
|
|
|
5.0
|
|
|
|
4.39
|
|
Risk-free interest
rate(2)
|
|
|
2.78
|
%
|
|
|
2.35
|
%
|
|
|
3.53
|
%
|
Expected stock price
volatility(3)
|
|
|
30
|
%
|
|
|
23
|
%
|
|
|
23
|
%
|
Expected annual dividends per
share(4)
|
|
$
|
1.08
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
Estimated forfeiture
rate(5)
|
|
|
0.7
|
%
|
|
|
2.3
|
%
|
|
|
2.0
|
%
|
Weighted average grant date fair value of options granted during
the year
|
|
$
|
15.90
|
|
|
$
|
6.52
|
|
|
$
|
15.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents
the period of time that awards are expected to be outstanding.
Historical data on exercise behaviour was used to estimate the
expected life of the option.
(2) Based
on the implied yield available on zero-coupon government issues
with an equivalent remaining term at the time of the grant.
(3) Based
on the historical stock price volatility of the Companys
stock over a period commensurate with the expected term of the
option.
|
|
(4)
|
Determined by the current annual dividend divided by the current
stock price. The Company does not employ different dividend
yields throughout the year.
|
|
(5)
|
The Company estimated forfeitures based on past experience. The
rate is monitored on a periodic basis.
|
In 2010, the expense for stock options (regular and performance)
was $1.7 million (2009 expense recovery of
$0.9 million; 2008 expense of
$3.2 million). At December 31, 2010, there was
$0.5 million of total unrecognized compensation related to
stock options which is expected to be recognized over a
weighted-average period of approximately 1.2 years.
Currently, the Company is not subject to post vesting
restrictions on its stock option plans prior to expiry.
At December 31, 2010, there were 1,048,531
(2009 1,831,361; 2008 2,334,861) Common
Shares available for the granting of future options under the
stock option plans, out of the 15,578,642 (2009
15,578,642; 2008 15,578,642) Common Shares currently
authorized.
Summary of TSARs
The following table summarizes information related to the
Companys TSARs as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested TSARs
|
|
|
|
|
TSARs outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
Number of
|
|
|
average
|
|
|
|
Number of
|
|
|
grant date
|
|
|
|
|
TSARs
|
|
|
exercise price
|
|
|
|
TSARs
|
|
|
fair value
|
|
Outstanding, January 1, 2010
|
|
|
|
3,357,397
|
|
|
$
|
45.92
|
|
|
|
|
1,375,587
|
|
|
$
|
10.94
|
|
New TSARs granted
|
|
|
|
812,900
|
|
|
|
51.81
|
|
|
|
|
812,900
|
|
|
|
14.27
|
|
Exercised as TSARs
|
|
|
|
(7,720
|
)
|
|
|
38.25
|
|
|
|
|
NA
|
|
|
|
NA
|
|
Exercised as Options
|
|
|
|
(145,317
|
)
|
|
|
36.80
|
|
|
|
|
NA
|
|
|
|
NA
|
|
Vested
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
(407,500
|
)
|
|
|
14.97
|
|
Forfeited
|
|
|
|
(18,350
|
)
|
|
|
54.27
|
|
|
|
|
(14,012
|
)
|
|
|
10.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
|
3,998,910
|
|
|
$
|
47.43
|
|
|
|
|
1,766,975
|
|
|
$
|
11.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31,
2010(1)
|
|
|
|
3,990,461
|
|
|
$
|
47.42
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
2,231,935
|
|
|
$
|
47.31
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) As
at December 31, 2010, the weighted average remaining term
of vested or expected to vest TSARs was 6.1 years with an
aggregate intrinsic value of $71.4 million.
The following table provides the number of TSARs outstanding and
exercisable as at December 31, 2010 by range of exercise
price and their related intrinsic value, and for TSARs
outstanding, the weighted-average years to expiration. The table
also provides the aggregate intrinsic
value for
in-the-money
TSARs, which represents the amount that would have been received
by TSAR holders had they exercised their TSAR on
December 31, 2010 at the Companys closing stock price
of $64.62.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSARs outstanding
|
|
|
TSARs exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
intrinsic
|
|
|
|
|
|
average
|
|
|
intrinsic
|
|
|
|
Number
|
|
|
years to
|
|
|
exercise
|
|
|
value
|
|
|
Number of
|
|
|
exercise
|
|
|
value
|
|
Range of exercise prices
|
|
of TSARs
|
|
|
expiration
|
|
|
price
|
|
|
(millions)
|
|
|
TSARs
|
|
|
price
|
|
|
(millions)
|
|
$27.62 $40.47
|
|
|
1,574,635
|
|
|
|
5.0
|
|
|
$
|
33.63
|
|
|
$
|
48.8
|
|
|
|
837,785
|
|
|
$
|
31.29
|
|
|
$
|
27.9
|
|
$42.05 $62.56
|
|
|
2,025,725
|
|
|
|
6.8
|
|
|
|
53.41
|
|
|
|
22.7
|
|
|
|
1,191,925
|
|
|
|
54.46
|
|
|
|
12.1
|
|
$62.90 $74.89
|
|
|
398,550
|
|
|
|
7.0
|
|
|
|
71.50
|
|
|
|
|
|
|
|
202,225
|
|
|
|
71.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
|
3,998,910
|
|
|
|
6.1
|
|
|
$
|
47.43
|
|
|
$
|
71.5
|
|
|
|
2,231,935
|
|
|
$
|
47.31
|
|
|
$
|
40.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) As
at December 31, 2010, the total number of
in-the-money
TSARs outstanding was 3,602,610 with a weighted-average exercise
price of $44.77. The weighted-average years to expiration of
exercisable TSARs is 4.2 years.
Under the fair value method, the fair value of TSARs at the
grant date was $11.6 million for TSARs issued in 2010
(2009 $5.7 million; 2008
$7.0 million). The weighted average fair value of TSARs
granted during the year was $14.27 (2009 $7.39;
2008 $16.09). The weighted average fair value
assumptions used are similar to those disclosed above for
Options, with the exception of the expected annual dividends per
share, which was $0.99 at the time the TSARs were granted.
In 2010, the expense for TSARs was $32.3 million
(2009 expense of $43.3 million;
2008 recovery of $38.0 million). At
December 31, 2010 there was $11.4 million of total
unrecognized compensation related to TSARs which is expected to
be recognized over a weighted-average period of approximately
1.3 years.
As a result of changes in Canadian tax law, subsequent to 2010,
the Company has initiated a plan to cancel the majority of the
TSAR component of tandem stock option awards.
Summary of stock option plans
The following table refers to the total fair value of shares
vested for all stock option plans (including TSARs) during the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Regular stock option plan
|
|
$
|
6.1
|
|
|
$
|
5.9
|
|
|
$
|
5.4
|
|
Performance stock option plan
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
TSARs
|
|
|
6.1
|
|
|
|
5.9
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12.2
|
|
|
$
|
11.8
|
|
|
$
|
13.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information related to all options
exercised in the stock option plans during the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Total intrinsic value
|
|
$
|
10.1
|
|
|
$
|
8.4
|
|
|
$
|
19.4
|
|
Cash received by the Company upon exercise of options
|
|
|
32.4
|
|
|
|
24.2
|
|
|
|
19.6
|
|
Related tax benefits
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B. OTHER SHARE-BASED PLANS
Performance share unit (PSU) plan
During 2010, the Company issued 328,020 PSUs. These units
attract dividend equivalents in the form of additional units
based on the dividends paid on the Companys Common Shares.
PSUs vest and are settled in cash approximately three years
after the grant date contingent upon CPs performance
(performance factor). The fair value of PSUs are measured, both
on the grant date and each subsequent quarter until settlement,
using a Monte Carlo simulation model. The model utilizes
multiple input variables that determine the probability of
satisfying the performance and market condition stipulated in
the grant.
The following table summarizes information related to the
Companys PSUs as at December 31:
|
|
|
|
|
|
|
|
|
|
|
PSUs outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
Number of
|
|
|
grant date
|
|
|
|
PSUs
|
|
|
fair value
|
|
Outstanding, January 1, 2010
|
|
|
422,534
|
|
|
$
|
38.72
|
|
Granted
|
|
|
328,020
|
|
|
|
46.86
|
|
Units, in lieu of dividends
|
|
|
10,707
|
|
|
|
59.57
|
|
Vested
|
|
|
NA
|
|
|
|
NA
|
|
Forfeited
|
|
|
(24,816
|
)
|
|
|
77.71
|
|
Cancelled
|
|
|
(35,977
|
)
|
|
|
39.83
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
700,468
|
|
|
$
|
41.41
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the fair value method, the fair value of PSUs at the grant
date was $15.4 million for PSUs issued in 2010
(2009 $14.7 million; 2008 $nil).
In 2010, the expense for PSUs was $28.9 million
(2009 expense of $10.0 million;
2008 expense recovery of $0.7 million). At
December 31, 2010, there was $24.5 million of total
unrecognized compensation related to PSUs which is expected to
be recognized over a weighted-average period of approximately
1.7 years.
Deferred share
unit plan
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.
The following table summarizes information related to the DSUs
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Outstanding, January 1
|
|
|
345,843
|
|
|
|
292,982
|
|
Granted
|
|
|
37,802
|
|
|
|
55,273
|
|
Transferred from RSUs
|
|
|
18,756
|
|
|
|
|
|
Units, in lieu of dividends
|
|
|
6,226
|
|
|
|
7,093
|
|
Redeemed
|
|
|
(20,281
|
)
|
|
|
(9,505
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31
|
|
|
388,346
|
|
|
|
345,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, the expense for DSUs was $6.3 million
(2009 expense of $7.5 million; 2008
recovery of $5.4 million). At December 31, 2010, there
was $0.6 million of total unrecognized compensation related
to DSUs which is expected to be recognized over a
weighted-average period of approximately 1.2 years.
Restricted share unit plan
The Company issued 151 RSUs in 2010 (2009 405,
2008 276). The RSUs are subject to time vesting. An
expense to income for RSUs is recognized over the vesting
period. In 2010, the expense for RSUs was $0.2 million
(2009 $0.5 million; 2008
$0.2 million).
All outstanding RSUs vested on May 31, 2010 and were
converted to DSUs.
Summary of share based liabilities paid
The following table summarizes the total share based liabilities
paid for each of the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
TSARs
|
|
$
|
0.2
|
|
|
$
|
2.6
|
|
|
$
|
1.6
|
|
DSUs
|
|
|
1.8
|
|
|
|
0.3
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.0
|
|
|
$
|
2.9
|
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. |
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. On April 1, 2009, the Company suspended its
match to employee ESPP contributions. The match to non-union
employee contributions was reinstated effective January 1,
2010.
At December 31, 2010, there were 13,525 participants
(2009 13,261; 2008 12,923) in the plan.
The total number of shares purchased in 2010 on behalf of
participants, including the Company contribution, was 618,272
(2009 883,737; 2008 969,921). In 2010,
the Companys contributions totalled $3.2 million
(2009 $3.3 million; 2008
$11.6 million) and the related expense was
$1.5 million (2009 $7.0 million;
2008 $9.8 million).
28 Variable
interest entities
The Company leases equipment from certain trusts, which have
been determined to be variable interest entities financed by a
combination of debt and equity provided by unrelated third
parties. The lease agreements, which are classified as operating
leases, have a fixed price purchase option which create the
Companys variable interest and result in the trusts being
considered variable interest entities. These fixed price
purchase options are set at the estimated fair market value as
determined at the inception of the lease and could provide the
Company with potential gains. These options are considered
variable interests, however, they are not expected to provide a
significant benefit to the Company.
Responsibility for maintaining and operating the leased assets
according to specific contractual obligations outlined in the
terms of the lease agreements and industry standards is the
Companys. The rigor of the contractual terms of the lease
agreements and industry standards are such that the Company has
limited discretion over the maintenance activities associated
with these assets. As such the Company concluded these terms do
not provide the Company with the power to direct the activities
of the variable interest entities in a way that has a
significant impact on the entities economic performance.
The financial exposure to the Company as a result of its
involvement with the variable interest entities is equal to the
fixed lease payments due to the trusts. In 2010, lease payments
after tax were $9.8 million. Future minimum lease payments,
before tax, of $234.2 million will be payable over the next
20 years (Note 29).
The Company does not guarantee the residual value of the assets
to the lessor, however, it must deliver to the lessor the assets
in good operating condition, subject to normal wear and tear, at
the end of the lease term.
As the Companys actions and decisions do not significantly
affect the variable interest entities performance, and the
Companys fixed purchase price option is not considered to
be potentially significant to the variable interest entities,
the Company is not considered to be the primary beneficiary, and
does not consolidate these variable interest entities. As the
leases are considered to be operating leases, the Company does
not recognize any balances in the Consolidated Balance Sheet in
relation to the variable interest entities.
29 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, 2010, 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, 2010, the Company had committed to total
future capital expenditures amounting to $236.9 million and
operating expenditures amounting to $1,541.1 million for
the years
2011-2028.
CP has in place a revolving credit facility of
$945 million, with an accordion feature to
$1,150 million, of which $358 million was committed
for letters of credit and $587 million was available on
December 31, 2010. This facility is arranged with a core
group of 15 highly rated international financial institutions
and incorporates pre-agreed pricing. Arrangements with 14 of the
15 financial institutions extend through November 2012, with one
institution extending through November 2011. In addition, CP
also has available from a financial institution a credit
facility of $118 million, of which $118 million of
this facility was available on December 31, 2010. This
facility is available through the end of 2011. Both facilities
are available on next day terms and are subject to a minimum
debt to total capitalization ratio. There were no draw downs in
2010, however the weighted average interest rate of these
facilities for 2009 was 1.91%. Should our senior unsecured debt
not be rated at least investment grade by Moodys and
S&P, we will be further required to maintain a minimum
fixed charge coverage ratio. At December 31, 2010, the
Company satisfied the thresholds stipulated in both financial
covenants.
Minimum payments under operating leases were estimated at
$782.0 million in aggregate, with annual payments in each
of the five years following 2010 of (in millions):
2011 $133.3; 2012 $121.5;
2013 $104.9; 2014 $77.4;
2015 $68.2.
Expenses for operating leases for the year ended
December 31, 2010 was $169.1 million (2009
$196.2 million, 2008 $180.8 million).
The DM&E was purchased for $1.5 billion resulting in
goodwill of $146.6 million (US$147.4 million)
(Note 17) as at December 31, 2010. Future
contingent payments of up to approximately US$1.1 billion
consisting of US$390 million which would become due if
construction of the Powder River Basin expansion project starts
prior to December 31, 2025 and up to approximately
US$740 million would become due upon the movement of
specified volumes over the Powder River Basin extension prior to
December 31, 2025. Certain interest and inflationary
adjustments would also become payable up to December 31,
2025 upon achievement of certain milestones. The contingent
payments would be accounted for as an increase in the purchase
price. Certain intangible assets acquired are subject to
amortization.
30 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
$162.5 million at December 31, 2010;
|
|
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, 2010, these accruals amounted to
$5.4 million (2009 $9.3 million), recorded
in Accounts payable and accrued liabilities.
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,
2010, 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.
31 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.
In 2010 and 2009, no one customer comprised more than 10% of
total revenues and accounts receivable. For the year ended as at
December 31, 2008, one customer comprised 11.0% of total
revenues and 1.7% of total trade accounts receivable,
respectively.
GEOGRAPHIC
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Canada
|
|
|
United States
|
|
|
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,635.5
|
|
|
$
|
1,346.0
|
|
|
$
|
4,981.5
|
|
Long-term assets excluding financial instruments, mortgages
receivable and deferred tax assets
|
|
$
|
8,458.2
|
|
|
$
|
4,012.8
|
|
|
$
|
12,471.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (Restated Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,166.2
|
|
|
$
|
1,236.0
|
|
|
$
|
4,402.2
|
|
Long-term assets excluding financial instruments, mortgages
receivable and deferred tax assets
|
|
$
|
8,363.5
|
|
|
$
|
4,134.2
|
|
|
$
|
12,497.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,921.5
|
|
|
$
|
1,127.0
|
|
|
$
|
5,048.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. As part of
the Companys consolidation process, CPs
subsidiaries unconsolidated accounts have been adjusted
from these regulatory accounting bases to U.S. GAAP.
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 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Consolidating
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
Canada
|
|
|
United States
|
|
|
countries
|
|
|
entries
|
|
|
Total
|
|
|
|
Revenues
|
|
$
|
3,635.5
|
|
|
$
|
1,346.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,981.5
|
|
|
|
Operating expenses
|
|
|
2,921.9
|
|
|
|
1,027.9
|
|
|
|
|
|
|
|
(84.4
|
)
|
|
|
3,865.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating expenses
|
|
|
713.6
|
|
|
|
318.1
|
|
|
|
|
|
|
|
84.4
|
|
|
|
1,116.1
|
|
|
|
Net interest expense and other income and charges
|
|
|
226.6
|
|
|
|
81.8
|
|
|
|
(57.8
|
)
|
|
|
(5.3
|
)
|
|
|
245.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
487.0
|
|
|
|
236.3
|
|
|
|
57.8
|
|
|
|
89.7
|
|
|
|
870.8
|
|
|
|
Income tax expense
|
|
|
104.8
|
|
|
|
97.1
|
|
|
|
1.5
|
|
|
|
16.7
|
|
|
|
220.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
382.2
|
|
|
$
|
139.2
|
|
|
$
|
56.3
|
|
|
$
|
73.0
|
|
|
$
|
650.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
757.8
|
|
|
$
|
508.4
|
|
|
$
|
21.6
|
|
|
$
|
(84.0
|
)
|
|
$
|
1,203.8
|
|
|
|
Net properties
|
|
|
6,334.3
|
|
|
|
3,744.5
|
|
|
|
|
|
|
|
1,918.0
|
|
|
|
11,996.8
|
|
|
|
Other long-term assets
|
|
|
1,460.2
|
|
|
|
268.6
|
|
|
|
1,291.6
|
|
|
|
(2,545.1
|
)
|
|
|
475.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,552.3
|
|
|
$
|
4,521.5
|
|
|
$
|
1,313.2
|
|
|
$
|
(711.1
|
)
|
|
$
|
13,675.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,105.0
|
|
|
$
|
272.0
|
|
|
$
|
1.2
|
|
|
$
|
(88.7
|
)
|
|
$
|
1,289.5
|
|
|
|
Long-term liabilities
|
|
|
5,031.7
|
|
|
|
3,629.9
|
|
|
|
|
|
|
|
(1,099.9
|
)
|
|
|
7,561.7
|
|
|
|
Shareholders equity
|
|
|
2,415.6
|
|
|
|
619.6
|
|
|
|
1,312.0
|
|
|
|
477.5
|
|
|
|
4,824.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
8,552.3
|
|
|
$
|
4,521.5
|
|
|
$
|
1,313.2
|
|
|
$
|
(711.1
|
)
|
|
$
|
13,675.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 Reconciliation
of Canadian GAAP and U.S. GAAP
The consolidated financial statements of the Company have been
prepared in accordance with U.S. GAAP. The material
differences between U.S. GAAP and Canadian generally
accepted accounting principles (Canadian GAAP) as
they relate to the Company are explained and quantified below,
along with their effect on the Companys Consolidated
Statement of Income, Consolidated Balance Sheet and Consolidated
Statement of Cash Flows.
(a) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING:
The measurement and recognition rules for derivative instruments
and hedging under Canadian GAAP are largely harmonized with
U.S. GAAP. 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.
(b) PENSIONS AND POST-RETIREMENT BENEFITS:
The Company is required to recognize the over or under funded
status of defined benefit pension and other post-retirement
benefit plans on the balance sheet under U.S. GAAP. The
over or under funded status is measured as the difference
between the fair value of the plan assets and the benefit
obligation, being the projected benefit obligation for pension
plans and the accumulated benefit obligation for other
post-retirement benefit plans. In addition, any previously
unrecognized actuarial gains and losses and prior service costs
and credits that arise during the period will be recognized as a
component of Other comprehensive loss, net of tax.
Under Canadian GAAP the over or under funded status of defined
benefit pension and post-retirement benefit plans is not
recognized in the balance sheet. Canadian GAAP recognizes an
asset for contributions made in excess of amounts recognized as
expense in the Consolidated Statement of Income and a liability
when contributions are less than amounts recognized as expense.
Prior service costs are amortized under Canadian GAAP and
U.S. GAAP. However, the period over which costs related to
events before 2000 are amortized differs between Canadian GAAP
and U.S. GAAP.
(c) POST-EMPLOYMENT BENEFITS:
Post-employment benefits are covered by the CICA Section 3461
Employee Future Benefits. Consistent with accounting
for post-retirement benefits, the policy permits amortization of
actuarial gains and losses if they fall outside of the corridor.
Under U.S. GAAP, 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 Employee Future Benefits 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
was being amortized to income. During the first quarter of 2009
this transitional asset was fully amortized. 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, TSARs, PSUs, RSUs, and DSUs.
TSARs, PSUs, RSUs, and DSUs are subsequently re-measured at fair
value each reporting period. Under Canadian GAAP, liability
awards that are settled, such as TSARs, PSUs, RSUs 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.
(f) INTERNAL USE SOFTWARE:
Under U.S. GAAP certain costs, including preliminary
project phase costs, are expensed as incurred. These costs are
capitalized and depreciated under Canadian GAAP.
(g) CAPITALIZATION OF INTEREST:
U.S. GAAP requires interest costs to be capitalized for all
qualifying capital programs. Under Canadian GAAP capitalization
of interest is a policy choice and the Company expenses interest
related to capital projects undertaken during the year unless
specific debt is attributed to a capital program. Differences in
GAAP result in additional capitalization of interest under
U.S. GAAP and subsequent related depreciation.
(h) 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. Until April 1, 2009,
the Company accounted for its joint-venture interest in the DRTP
under Canadian GAAP using the proportionate consolidation
method. During the second quarter of 2009, the Company completed
a sale of a portion of its investment in the DRTP to its
existing partner, reducing the Companys ownership from 50%
to 16.5%. Effective April 1, 2009, the Company discontinued
proportionate consolidation and accounts for its remaining
investment in the DRTP under the equity method of
accounting. U.S. GAAP requires the equity method of
accounting to be applied to interests in joint ventures. This
had no effect on net income as it represents a classification
difference within the Consolidated Statement of Income and
Consolidated Balance Sheet for periods prior to April 1,
2009.
(i) LONG-TERM DEBT:
Under Canadian GAAP, offsetting amounts with the same party and
with a legal right to offset are netted against each other.
U.S. GAAP does not allow netting of assets and liabilities
among three parties. In 2003, the Company and one of its
subsidiaries entered into contracts with a financial institution
resulting in a receivable amount and long-term debt payable. In
the second quarter of 2010, these contracts were unwound
eliminating this difference.
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 within
Other assets.
(j) CAPITAL LEASES:
Under U.S. GAAP, certain leases, which are 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.
(k) INVESTMENT TAX CREDITS AND TAX CREDIT
CARRYFORWARDS:
Under U.S. GAAP, CP has credited investment tax credits
against income tax expense whereas under Canadian GAAP these tax
credits are offset against the related operating expense. There
is no impact to net income as a result of this GAAP difference.
In addition, U.S. GAAP includes tax credit carryforwards
within Deferred income taxes on the Consolidated
Balance Sheet while these are included in Other
assets under Canadian GAAP.
(l) GAIN ON SALE OF SIGNIFICANT PROPERTIES:
Under U.S. GAAP these gains are credited against operating
expenses while Canadian GAAP permits recognition of these gains
after operating income.
(m) CASH FLOWS:
There are no material differences between cash flows under
U.S. GAAP and Canadian GAAP.
CONSOLIDATED
STATEMENT OF INCOME RECONCILIATION
Consolidated net income is reconciled from U.S. GAAP to
Canadian GAAP in the following manner:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
(in millions of Canadian dollars,
except per share data)
|
|
2010
|
|
|
Restated (Note 2)
|
|
|
Restated (Note 2)
|
|
Net income U.S. GAAP
|
|
$
|
650.7
|
|
|
$
|
550.0
|
|
|
$
|
627.8
|
|
Increased (decreased) by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension costs (b)
|
|
|
(11.4
|
)
|
|
|
17.0
|
|
|
|
(13.3
|
)
|
Post-retirement benefits costs (b)
|
|
|
(10.0
|
)
|
|
|
(9.8
|
)
|
|
|
(9.6
|
)
|
Post-employment benefits costs (c)
|
|
|
(4.9
|
)
|
|
|
30.3
|
|
|
|
(11.0
|
)
|
Termination and severance benefits (d)
|
|
|
|
|
|
|
1.5
|
|
|
|
8.7
|
|
Internal use software additions (f)
|
|
|
16.8
|
|
|
|
3.8
|
|
|
|
18.1
|
|
Internal use software depreciation (f)
|
|
|
(8.6
|
)
|
|
|
(7.4
|
)
|
|
|
(9.2
|
)
|
Stock-based compensation (e)
|
|
|
2.5
|
|
|
|
14.7
|
|
|
|
(6.9
|
)
|
Gain (loss) on ineffective portion of hedges (a)
|
|
|
1.9
|
|
|
|
2.2
|
|
|
|
(10.5
|
)
|
Capitalized interest additions (g)
|
|
|
(4.9
|
)
|
|
|
(4.9
|
)
|
|
|
(21.0
|
)
|
Capitalized interest depreciation (g)
|
|
|
6.4
|
|
|
|
12.3
|
|
|
|
5.3
|
|
Capital lease equipment rents (j)
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Capital lease depreciation (j)
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
Capital lease interest (j)
|
|
|
(0.5
|
)
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
Future/deferred income tax expense related to above differences
|
|
|
4.4
|
|
|
|
(2.5
|
)
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Canadian GAAP
|
|
$
|
642.8
|
|
|
$
|
607.0
|
|
|
$
|
599.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
Restated (Note 2)
|
|
|
Restated (Note 2)
|
|
Earnings per share Canadian GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
3.81
|
|
|
$
|
3.65
|
|
|
$
|
3.90
|
|
Diluted earnings per share
|
|
$
|
3.80
|
|
|
$
|
3.64
|
|
|
$
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET RECONCILIATION
The Consolidated Balance Sheet is reconciled from U.S. GAAP
to Canadian GAAP:
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
Receivable from bank (i)
|
|
$
|
|
|
|
$
|
(214.1
|
)
|
Long-term assets
|
|
|
|
|
|
|
|
|
Net properties
|
|
|
|
|
|
|
|
|
Capitalized interest (g)
|
|
|
(166.6
|
)
|
|
|
(168.3
|
)
|
Internal use software (f)
|
|
|
68.0
|
|
|
|
59.9
|
|
Stock-based compensation (e)
|
|
|
(1.1
|
)
|
|
|
|
|
Capital leases (j)
|
|
|
7.8
|
|
|
|
8.7
|
|
Prepaid pension costs and other assets
|
|
|
|
|
|
|
|
|
Pension (b)
|
|
|
2,432.6
|
|
|
|
1,644.4
|
|
Transaction costs on long-term debt (i)
|
|
|
(46.9
|
)
|
|
|
(43.6
|
)
|
Investment tax credits and tax credit carryforwards (k)
|
|
|
28.2
|
|
|
|
|
|
Internal use software (f)
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,322.6
|
|
|
$
|
1,287.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET RECONCILIATION
(CONTINUED)
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
|
2010
|
|
|
2009
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
Stock-based compensation (e)
|
|
$
|
(12.2
|
)
|
|
$
|
(9.8
|
)
|
Long-term debt maturing within one year
|
|
|
|
|
|
|
|
|
Capital leases (j)
|
|
|
0.9
|
|
|
|
0.9
|
|
Bank loan (i)
|
|
|
|
|
|
|
(214.1
|
)
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
Post-employment benefit liability (c)
|
|
|
(19.6
|
)
|
|
|
(24.6
|
)
|
Under funded status of defined benefit pension and other
post-retirement plans (b)
|
|
|
(764.8
|
)
|
|
|
(1,116.8
|
)
|
Stock-based compensation (e)
|
|
|
(3.6
|
)
|
|
|
(2.2
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
Capital leases (j)
|
|
|
7.3
|
|
|
|
8.1
|
|
Transaction costs on long-term debt (i)
|
|
|
(46.9
|
)
|
|
|
(43.6
|
)
|
Future/deferred income taxes
|
|
|
843.7
|
|
|
|
704.5
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4.8
|
|
|
|
(697.6
|
)
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
|
|
|
|
|
|
Stock-based compensation (e)
|
|
|
(26.1
|
)
|
|
|
(24.7
|
)
|
Contributed surplus/additional paid in capital
|
|
|
|
|
|
|
|
|
Stock-based compensation (e)
|
|
|
4.3
|
|
|
|
2.7
|
|
Retained income / earnings
|
|
|
203.4
|
|
|
|
211.4
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
Funding status of defined benefit pension and other
post-retirement plans (b)
|
|
|
2,134.9
|
|
|
|
1,792.8
|
|
Unrealized foreign exchange loss on designated net investment
hedge (a)
|
|
|
1.3
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,322.6
|
|
|
$
|
1,287.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CANADIAN
GAAP CONSOLIDATED STATEMENT OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Freight
|
|
$
|
4,175.2
|
|
|
$
|
4,814.8
|
|
Other
|
|
|
128.0
|
|
|
|
116.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,303.2
|
|
|
|
4,931.6
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,278.0
|
|
|
|
1,308.8
|
|
Fuel
|
|
|
580.3
|
|
|
|
1,005.9
|
|
Materials
|
|
|
216.9
|
|
|
|
254.0
|
|
Equipment rents
|
|
|
184.8
|
|
|
|
182.2
|
|
Depreciation and amortization
|
|
|
474.9
|
|
|
|
433.6
|
|
Purchased services and other
|
|
|
674.8
|
|
|
|
716.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,409.7
|
|
|
|
3,900.9
|
|
|
|
|
|
|
|
|
|
|
Revenues less operating expenses
|
|
|
893.5
|
|
|
|
1,030.7
|
|
Gain on sale of partnership interest
|
|
|
81.2
|
|
|
|
|
|
Gain on sales of significant properties
|
|
|
79.1
|
|
|
|
|
|
Equity income in Dakota, Minnesota & Eastern Railroad
Corporation
|
|
|
|
|
|
|
50.9
|
|
Less:
|
|
|
|
|
|
|
|
|
Loss on termination of lease with shortline railway
|
|
|
54.5
|
|
|
|
|
|
Other income and charges
|
|
|
18.9
|
|
|
|
88.4
|
|
Net interest expense
|
|
|
273.1
|
|
|
|
261.1
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
707.3
|
|
|
|
732.1
|
|
Income tax expense
|
|
|
100.3
|
|
|
|
132.7
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
607.0
|
|
|
$
|
599.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
3.65
|
|
|
$
|
3.90
|
|
Diluted earnings per share
|
|
$
|
3.64
|
|
|
$
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CANADIAN
GAAP CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
As at
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
|
Restated
|
|
|
|
(Note 2)
|
|
Assets
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
679.1
|
|
Accounts receivable, net
|
|
|
441.0
|
|
Materials and supplies
|
|
|
132.7
|
|
Future income taxes
|
|
|
128.1
|
|
Other current assets
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
1,427.4
|
|
Investments
|
|
|
156.7
|
|
Net properties
|
|
|
11,878.8
|
|
Goodwill and intangible assets
|
|
|
202.3
|
|
Prepaid pension costs and other assets
|
|
|
1,777.2
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,442.4
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
990.9
|
|
Long-term debt maturing within one year
|
|
|
392.1
|
|
|
|
|
|
|
|
|
|
1,383.0
|
|
Other long-term liabilities
|
|
|
790.2
|
|
Long-term debt
|
|
|
4,102.7
|
|
Future income taxes
|
|
|
2,523.2
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,799.1
|
|
Shareholders equity
|
|
|
|
|
Share capital
|
|
|
1,746.4
|
|
Contributed surplus
|
|
|
33.5
|
|
Accumulated other comprehensive income
|
|
|
51.1
|
|
Retained income
|
|
|
4,812.3
|
|
|
|
|
|
|
|
|
|
6,643.3
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
15,442.4
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 29).
CANADIAN
GAAP CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
(Note 2)
|
|
|
(Note 2)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
607.0
|
|
|
$
|
599.4
|
|
Reconciliation of net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
474.9
|
|
|
|
433.6
|
|
Future income taxes
|
|
|
152.0
|
|
|
|
153.1
|
|
Gain on sale of partnership interest
|
|
|
(81.2
|
)
|
|
|
|
|
Gain on sales of significant properties
|
|
|
(79.1
|
)
|
|
|
|
|
Pension funding in excess of expense
|
|
|
(589.0
|
)
|
|
|
(53.2
|
)
|
Other operating activities, net
|
|
|
(56.4
|
)
|
|
|
(0.9
|
)
|
Change in non-cash working capital balances related to operations
|
|
|
102.7
|
|
|
|
(132.2
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
530.9
|
|
|
|
999.8
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Additions to properties
|
|
|
(701.8
|
)
|
|
|
(813.0
|
)
|
Additions to assets held for sale and other
|
|
|
|
|
|
|
(222.5
|
)
|
Proceeds from sale of properties and other assets
|
|
|
256.3
|
|
|
|
257.6
|
|
Other, net
|
|
|
7.4
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(438.1
|
)
|
|
|
(776.8
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(162.9
|
)
|
|
|
(148.7
|
)
|
Issuance of CP Common Shares
|
|
|
513.5
|
|
|
|
19.7
|
|
Issuance of long-term debt
|
|
|
872.7
|
|
|
|
1,068.7
|
|
Repayment of long-term debt
|
|
|
(618.6
|
)
|
|
|
(1,340.7
|
)
|
Net decrease in short-term borrowing
|
|
|
(150.1
|
)
|
|
|
(79.6
|
)
|
Other financing activities
|
|
|
34.1
|
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
488.7
|
|
|
|
(511.5
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency fluctuations on U.S.
dollar-denominated cash and cash equivalents
|
|
|
(20.0
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
Cash position
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
561.5
|
|
|
|
(260.5
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
117.6
|
|
|
|
378.1
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
679.1
|
|
|
$
|
117.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes (refunded) paid
|
|
$
|
(38.9
|
)
|
|
$
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
289.3
|
|
|
$
|
269.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, among other
things, 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
|
debt to total capitalization; and
|
|
o
|
interest coverage ratio.
|
The calculations for the aforementioned key financial metrics
are as follows:
Debt to total capitalization
Debt is the sum of long-term debt, long-term debt maturing
within one year and short-term borrowing. This sum is divided by
debt plus total shareholders equity as presented on our
Consolidated Balance Sheet.
Interest coverage ratio
Interest coverage ratio is measured, on a twelve month rolling
basis, as adjusted EBIT divided by net interest expense.
Adjusted EBIT excludes changes in the estimated fair value of
the Companys investment in long-term floating rate notes,
the gains on sales of partnership interest and significant
properties and the loss on termination of a lease with a
shortline railway as these are not in the normal course of
business and foreign exchange gains and losses on long-term
debt, which can be volatile and short term. The interest
coverage ratio and adjusted EBIT are non-GAAP measures and do
not have standardized meanings prescribed by GAAP and,
therefore, are unlikely to be comparable to similar measures of
other companies.
The following table illustrates the financial metrics and their
corresponding guidelines currently in place:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
December 31,
|
|
|
Restated
|
|
(in millions of Canadian dollars,
U.S. GAAP)
|
|
Guidelines
|
|
|
2010
|
|
|
(See Note 2)
|
|
Long-term debt
|
|
|
|
|
|
$
|
4,033.2
|
|
|
$
|
4,138.2
|
|
Long-term debt maturing within one year
|
|
|
|
|
|
|
281.7
|
|
|
|
605.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
$
|
4,314.9
|
|
|
$
|
4,743.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
$
|
4,824.7
|
|
|
$
|
4,658.1
|
|
Total debt
|
|
|
|
|
|
|
4,314.9
|
|
|
|
4,743.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt plus equity
|
|
|
|
|
|
$
|
9,139.6
|
|
|
$
|
9,401.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income for the twelve months ended December 31
|
|
|
|
|
|
$
|
1,116.1
|
|
|
$
|
830.1
|
|
Gain on sale of significant properties
|
|
|
|
|
|
|
|
|
|
|
(79.1
|
)
|
Loss on termination of lease with shortline railway
|
|
|
|
|
|
|
|
|
|
|
54.5
|
|
Other income and charges
|
|
|
|
|
|
|
12.0
|
|
|
|
(12.4
|
)
|
Gain in long-term floating rate notes
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
(6.3
|
)
|
Foreign exchange gain on long-term debt
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBIT(1)(2)
for the twelve months ended December 31
|
|
|
|
|
|
$
|
1,122.4
|
|
|
$
|
783.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
$
|
4,314.9
|
|
|
$
|
4,743.5
|
|
Total debt plus equity
|
|
|
|
|
|
$
|
9,139.6
|
|
|
$
|
9,401.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capitalization
|
|
|
No more than 50.0%
|
|
|
|
47.2
|
%
|
|
|
50.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBIT(1)(2)
|
|
|
|
|
|
$
|
1,122.4
|
|
|
$
|
783.2
|
|
Net interest
expense(2)
|
|
|
|
|
|
$
|
257.3
|
|
|
$
|
267.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage
ratio(1)(2)
|
|
|
No less than 4.0
|
|
|
|
4.4
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 amount is calculated on a twelve month rolling 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 management targets are
monitored on a quarterly basis. The interest coverage ratio has
improved during the twelve-month period ended December 31,
2010 due to an increase in
year-over-year
adjusted earnings and a reduction in
year-over-year
interest expense.
The Company is subject to a financial covenant of funded debt to
total capitalization in the revolver loan agreement. Performance
to this financial covenant is well within permitted limits.
FIVE-YEAR
SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
|
|
U.S. GAAP
|
|
|
GAAP
|
|
(in millions)
|
|
2010
|
|
|
2009(1)
|
|
|
2008(1)(3)
|
|
|
2007(1)(2)
|
|
|
2006(1)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain
|
|
$
|
1,135.7
|
|
|
$
|
1,137.1
|
|
|
$
|
977.2
|
|
|
$
|
944.0
|
|
|
$
|
904.6
|
|
Coal
|
|
|
490.8
|
|
|
|
443.8
|
|
|
|
611.4
|
|
|
|
576.5
|
|
|
|
592.0
|
|
Sulphur and fertilizers
|
|
|
474.8
|
|
|
|
309.3
|
|
|
|
511.9
|
|
|
|
504.6
|
|
|
|
439.3
|
|
Forest products
|
|
|
184.9
|
|
|
|
176.1
|
|
|
|
241.1
|
|
|
|
277.5
|
|
|
|
316.4
|
|
Industrial and consumer products
|
|
|
902.8
|
|
|
|
786.1
|
|
|
|
772.0
|
|
|
|
631.4
|
|
|
|
603.8
|
|
Automotive
|
|
|
316.4
|
|
|
|
229.3
|
|
|
|
325.6
|
|
|
|
320.8
|
|
|
|
314.4
|
|
Intermodal
|
|
|
1,347.9
|
|
|
|
1,198.1
|
|
|
|
1,482.3
|
|
|
|
1,368.3
|
|
|
|
1,256.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,853.3
|
|
|
|
4,279.8
|
|
|
|
4,921.5
|
|
|
|
4,623.1
|
|
|
|
4,427.3
|
|
Other revenues
|
|
|
128.2
|
|
|
|
122.4
|
|
|
|
127.0
|
|
|
|
131.0
|
|
|
|
155.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
4,981.5
|
|
|
|
4,402.2
|
|
|
|
5,048.5
|
|
|
|
4,754.1
|
|
|
|
4,583.2
|
|
Adjusted operating
expenses(4)(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,431.0
|
|
|
|
1,306.6
|
|
|
|
1,289.8
|
|
|
|
1,266.0
|
|
|
|
1,350.3
|
|
Fuel
|
|
|
728.1
|
|
|
|
580.3
|
|
|
|
1,005.9
|
|
|
|
746.9
|
|
|
|
650.6
|
|
Materials
|
|
|
214.2
|
|
|
|
217.6
|
|
|
|
257.8
|
|
|
|
256.0
|
|
|
|
256.0
|
|
Equipment rents
|
|
|
206.0
|
|
|
|
226.0
|
|
|
|
218.5
|
|
|
|
234.8
|
|
|
|
181.2
|
|
Depreciation and amortization
|
|
|
489.6
|
|
|
|
483.2
|
|
|
|
428.2
|
|
|
|
413.5
|
|
|
|
411.0
|
|
Purchased services and other
|
|
|
796.5
|
|
|
|
783.0
|
|
|
|
809.3
|
|
|
|
676.7
|
|
|
|
651.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted operating
expenses(4)(7)
|
|
|
3,865.4
|
|
|
|
3,596.7
|
|
|
|
4,009.5
|
|
|
|
3,593.9
|
|
|
|
3,500.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
income(4)(7)
|
|
|
1,116.1
|
|
|
|
805.5
|
|
|
|
1,039.0
|
|
|
|
1,160.2
|
|
|
|
1,082.5
|
|
Equity income (net of income tax) in Dakota,
Minnesota & Eastern Railroad Corporation (DM&E)
|
|
|
|
|
|
|
|
|
|
|
50.9
|
|
|
|
11.2
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and charges, before foreign exchange gains and
losses on long-term debt and other specified
items(5)(6)(7)
|
|
|
(6.3
|
)
|
|
|
22.3
|
|
|
|
17.1
|
|
|
|
20.9
|
|
|
|
27.8
|
|
Net interest expense
|
|
|
257.3
|
|
|
|
267.6
|
|
|
|
239.6
|
|
|
|
190.0
|
|
|
|
194.5
|
|
Income tax expense, before income tax on foreign exchange gains
and losses on long-term debt and other specified items
(5)(6)(7)
|
|
|
210.9
|
|
|
|
97.3
|
|
|
|
202.0
|
|
|
|
262.8
|
|
|
|
266.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, before foreign exchange gains and losses on long-term
debt and other specified
items(5)(6)(7)
|
|
|
654.2
|
|
|
|
418.3
|
|
|
|
631.2
|
|
|
|
697.7
|
|
|
|
593.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss) on long-term debt (net of income
tax)(6)
|
|
|
(5.9
|
)
|
|
|
(27.7
|
)
|
|
|
31.4
|
|
|
|
125.2
|
|
|
|
(7.2
|
)
|
Other specified items (net of income
tax)(5)(7)
|
|
|
2.4
|
|
|
|
159.4
|
|
|
|
(34.8
|
)
|
|
|
84.7
|
|
|
|
166.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
650.7
|
|
|
$
|
550.0
|
|
|
$
|
627.8
|
|
|
$
|
907.6
|
|
|
$
|
752.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Certain comparative period figures have been restated for the
accounting policy change related to rail grinding costs.
|
|
(2)
|
The 2007 figures include equity income for DM&E from
October 4, 2007 to December 31, 2007.
|
|
(3)
|
The 2008 figures include the results of the DM&E on an
equity accounting basis through October 29, 2008 and on a
consolidated basis after that date.
|
|
(4)
|
Before other specified items as follows: For 2009, a
$54.5 million loss on termination of lease with shortline
railway and a gain of $79.1 million on sales of significant
properties.
|
|
|
(5)
|
Before other specified items as follows: For 2010, a
$3.4 million gain in fair value of long-term floating rate
notes ($2.4 million after tax); for 2009, a
$54.5 million loss on termination of lease with shortline
railway ($37.6 million after tax), a gain of
$160.3 million on sales of partnership interest and
significant properties ($136.8 million after tax), a
$6.3 million gain in fair value of long-term floating rate
notes ($4.5 million after tax), and income tax benefits of
$55.7 million due to Provincial income tax rate reductions
and a settlement related to a prior year; 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 $99.7 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 $166.2 million income tax benefit was recorded
due to Federal and Provincial income tax rate reductions.
|
|
(6)
|
Before foreign exchange gain (loss) on long-term debt as
follows: For 2010, a $2.3 million ($5.9 million loss
after tax) foreign exchange gain on long-term debt; for 2009, a
$3.6 million ($27.7 million loss after tax) foreign
exchange gain on long-term debt; for 2008, a $5.8 million
($31.4 million gain after tax) foreign exchange loss on
long-term debt; for 2007, a $169.4 million
($125.2 million after tax) foreign exchange gain on
long-term debt; for 2006, a $0.1 million ($7.2 million
loss after tax) foreign exchange loss on long-term debt.
|
|
(7)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Toronto Stock Exchange
(Canadian dollars)
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
|
57.54
|
|
|
|
49.58
|
|
|
|
46.09
|
|
|
|
32.36
|
|
Second Quarter
|
|
|
62.90
|
|
|
|
53.57
|
|
|
|
48.41
|
|
|
|
36.80
|
|
Third Quarter
|
|
|
65.82
|
|
|
|
55.65
|
|
|
|
55.96
|
|
|
|
38.35
|
|
Fourth Quarter
|
|
|
67.50
|
|
|
|
61.60
|
|
|
|
58.17
|
|
|
|
45.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
67.50
|
|
|
|
49.58
|
|
|
|
58.17
|
|
|
|
32.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
New York Stock Exchange
Composite transactions
(U.S. dollars)
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
|
56.65
|
|
|
|
46.13
|
|
|
|
38.98
|
|
|
|
25.11
|
|
Second Quarter
|
|
|
61.98
|
|
|
|
49.98
|
|
|
|
43.91
|
|
|
|
29.19
|
|
Third Quarter
|
|
|
63.47
|
|
|
|
52.15
|
|
|
|
51.64
|
|
|
|
32.96
|
|
Fourth Quarter
|
|
|
67.03
|
|
|
|
60.14
|
|
|
|
55.43
|
|
|
|
42.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
67.03
|
|
|
|
46.13
|
|
|
|
55.43
|
|
|
|
25.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of registered shareholders at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,950
|
|
Closing market prices at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toronto Stock Exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDN$
|
64.62
|
|
New York Stock Exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
64.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1-877-4-CP-RAIL (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
INFORMATION
REGARDING DIRECT REGISTRATION
The Direct Registration System, or DRS, allows registered
holders to hold securities in book entry form
without having a physical certificate issued as evidence of
ownership. Instead, securities are held in the name of the
registered holder and registered electronically on the
issuers records maintained by the issuers transfer
agent. If you are a registered holder of shares and wish to hold
your shares using the DRS, please contact the transfer agent at
the phone number or address shown above, or;
for more information about direct registration, log on to
Computershares website at
www.computershare.com/investorcentrecanada and click on
Questions and Answers.
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 can enroll for direct
deposit either by phone or by completing a direct deposit
enrolment form. For more information about direct deposit,
please contact Computershare Investor Services Inc. at
1-877-4-CP-RAIL (1-877-427-7245).
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
Stock Exchange (UK pounds 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.
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 2011 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.
2011 ANNUAL AND
SPECIAL MEETING
The Annual and Special Meeting of Shareholders will be held on
Thursday, May 12, 2011, at The Fairmont Palliser Hotel
located at 133 9th Avenue SW, Calgary, Alberta, at
9:00 a.m. Mountain 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
INFORMATION
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 AND
COMMITTEES
John E. Cleghorn, O.C.,
F.C.A.(2)
Chairman
Canadian Pacific Railway Limited
Toronto, Ontario
Tim W.
Faithfull(2)(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 and Chief Executive
Officer
Xcel Energy, Inc.
Minneapolis, Minnesota
The Honourable John P.
Manley(1)(2)(5)*
President and Chief Executive
Officer
Canadian Council of Chief
Executives
Ottawa, Ontario
Linda J.
Morgan(1)(3)
Counsel
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
David W.
Raisbeck(4)(5)
Retired Vice-Chairman
Cargill Inc.
Sanibel, Florida
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
Edmond L.
Harris(1)(2)
Executive Vice-President and Chief
Operations Officer
Spring Lake, Michigan
Kathryn B.
McQuade(1)
Executive Vice-President and Chief
Financial Officer
Mesquite, Nevada
Jane A.
OHagan(1)
Executive Vice-President and Chief
Marketing Officer
Calgary, Alberta
Donald B.
Campbell(1)
Senior Vice-President, Strategy
and Financial Planning
Calgary, Alberta
J. Michael
Franczak(1)(2)
Senior Vice-President, Operations
Calgary, Alberta
Brian W.
Grassby(1)
Senior Vice-President, Finance and
Comptroller
Calgary, Alberta
Brock M.
Winter(1)
Senior Vice-President, Engineering
and
Mechanical
Calgary, Alberta
Raymond H.
Foot(1)
Group Vice-President, Sales
Calgary, Alberta
Marlowe G. Allison
Vice-President and Treasurer
Calgary, Alberta
Peter J.
Edwards(1)
Vice-President Human Resources and
Industrial
Relations
Calgary, Alberta
Paul A. Guthrie,
Q.C.(1)
Vice-President, Law and Risk
Management
Municipal District of Rocky View,
Alberta
Karen L. Fleming
Corporate Secretary
Calgary, Alberta
(1) Executive
Committee of Canadian Pacific Railway Company
(2) Effective
April 1, 2011, Mr. Harris will be retiring and
Mr. Franczak will be appointed Executive Vice-President
Operations