e6vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For
the month of July, 2011
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(translation of each Registrants name into English)
Suite 500,
Gulf Canada Square, 401 - 9th Avenue, S.W., Calgary, Alberta, Canada, T2P 4Z4
(address of principal executive offices)
Indicate by check mark whether the registrants file or will file annual reports under cover
Form 20-F or Form 40-F.
Form 20-F
o Form 40-F þ
Indicate by check mark if the registrants are submitting the Form 6-K in paper as permitted by
Regulation S-T Rule
101(b)(1): _______
Indicate by check mark if the registrants are submitting the Form 6-K in paper as permitted by
Regulation S-T Rule
101(b)(7): _______
The interim financial statements, Managements Discussion and Analysis, and updated earnings
coverage calculations included in this Report furnished on Form 6-K shall be incorporated by
reference into, or as an exhibit to, as applicable, each of the following Registration Statements
under the Securities Act of 1933 of the registrant: Form S-8 No. 333-140955 (Canadian Pacific
Railway Limited), Form S-8 No. 333-127943 (Canadian Pacific Railway Limited), Form S-8 No.
333-13962 (Canadian Pacific Railway Limited), and Form F-10 No. 333-175033 (Canadian Pacific
Railway Limited) and Form F-9 No. 333-175032 (Canadian Pacific Railway Company).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CANADIAN PACIFIC RAILWAY LIMITED
(Registrant) |
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Date: July 28, 2011
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Signed: /s/ Karen L. Fleming
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By:
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Name: Karen L. Fleming |
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Title: Corporate Secretary |
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CANADIAN PACIFIC RAILWAY COMPANY |
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(Registrant) |
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Date: July 28, 2011
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Signed: /s/ Karen L. Fleming |
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By:
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Name: Karen L. Fleming
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Title: Corporate Secretary |
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Release: Immediate July 27, 2011
CANADIAN PACIFIC ANNOUNCES SECOND QUARTER 2011 RESULTS
CALGARY Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) announced its second-quarter 2011
results today with reported net income of $128.0 million and diluted earnings per share of $0.75.
Revenue and expense results were unfavourably impacted by extensive flooding.
Throughout the second quarter we experienced difficult operating conditions as a result of
widespread and prolonged flooding along our right of way. We had almost 90 separate outages during
the quarter and our engineering team worked as swiftly as possible to bring the track back, stated
Fred Green, CP President and Chief Executive Officer. We rerouted and detoured traffic over other
railways and incurred significantly higher operating costs to ensure delivery of our customers
shipments. Repairs are now complete and service levels are returning to normal.
SECOND-QUARTER 2011 RESULTS COMPARED WITH SECOND-QUARTER 2010
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Total revenues were $1.3 billion, an increase of $30.3 million |
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Operating expenses were $1.0 billion, an increase of $73.9 million |
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Average fuel price increased 37 per cent to $3.50 U.S. dollars per U.S. gallon |
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Operating income was $230.5 million, a decrease of $43.6 million |
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Net income was $128.0 million, a decrease of $38.6 million |
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Diluted earnings per share were $0.75 per share, a decline of $0.23 per share |
Note on forward-looking information
This news release contains certain forward-looking statements relating but not limited to our
operations, anticipated financial performance and business prospects. Undue reliance should not be
placed on forward-looking information as actual results may differ materially.
By its nature, CPs forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: changes in business strategies;
general North American and global economic, credit and business conditions; risks in agricultural
production such as weather conditions and insect populations; the availability and price of energy
commodities; the effects of competition and pricing pressures; industry capacity; shifts in market
demand; changes in laws and regulations, including regulation of rates; changes in taxes and tax
rates; potential increases in maintenance and operating costs; uncertainties of litigation; labour
disputes; risks and liabilities arising from derailments; transportation of dangerous goods, timing
of completion of capital and maintenance projects; currency and interest rate fluctuations; effects
of changes in market conditions and discount rates on the financial position of pension plans and
investments, including long-term floating rate notes; and various events that could disrupt
operations, including severe weather conditions, security threats and governmental response to
them, and technological changes.
1
Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future events or otherwise.
About Canadian Pacific
Canadian Pacific (TSX: CP) (NYSE: CP) operates a North American transcontinental railway providing
freight transportation services, logistics solutions and supply chain expertise. Incorporating
best-in-class technology and environmental practices, CP is re-defining itself as a modern 21st
century transportation company built on safety, service reliability and operational efficiency.
Visit cpr.ca and see how Canadian Pacific is Driving the Digital Railway.
Contacts:
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Media
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Investment Community |
Nicole Sasaki
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Janet Weiss |
Canadian Pacific
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Canadian Pacific |
Tel.: (403) 835-9005
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Tel.: (403) 319-3233 |
e-mail: nicole_sasaki@cpr.ca
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e-mail: investor@cpr.ca |
2
CANADIAN PACIFIC RAILWAY LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars, except per share data)
(unaudited)
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For the three months |
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For the six months |
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ended June 30 |
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ended June 30 |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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Freight |
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$ |
1,233.2 |
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$ |
1,202.2 |
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$ |
2,368.4 |
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$ |
2,340.4 |
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Other |
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31.3 |
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32.0 |
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59.5 |
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60.6 |
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1,264.5 |
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1,234.2 |
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2,427.9 |
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2,401.0 |
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Operating expenses |
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Compensation and benefits |
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336.1 |
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349.7 |
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700.6 |
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703.5 |
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Fuel |
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237.4 |
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177.9 |
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463.1 |
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359.6 |
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Materials |
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57.4 |
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51.0 |
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129.0 |
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115.0 |
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Equipment rents |
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53.6 |
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54.9 |
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105.0 |
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103.9 |
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Depreciation and amortization |
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122.2 |
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123.3 |
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244.5 |
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244.5 |
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Purchased services and other |
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227.3 |
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203.3 |
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446.0 |
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393.8 |
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1,034.0 |
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960.1 |
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2,088.2 |
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1,920.3 |
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Operating income |
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230.5 |
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274.1 |
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339.7 |
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480.7 |
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Less: |
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Other income and charges |
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(5.0 |
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(3.4 |
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(5.5 |
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(8.3 |
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Net interest expense |
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62.5 |
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64.8 |
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126.7 |
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131.5 |
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Income before income tax expense |
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173.0 |
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212.7 |
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218.5 |
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357.5 |
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Income tax expense (Note 3) |
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45.0 |
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46.1 |
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56.8 |
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89.9 |
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Net income |
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$ |
128.0 |
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$ |
166.6 |
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$ |
161.7 |
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$ |
267.6 |
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Earnings per share (Note 4) |
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Basic |
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$ |
0.76 |
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$ |
0.99 |
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$ |
0.96 |
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$ |
1.59 |
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Diluted |
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$ |
0.75 |
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$ |
0.98 |
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$ |
0.95 |
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$ |
1.58 |
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Weighted average number of shares (millions) |
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Basic |
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169.4 |
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168.6 |
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169.3 |
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168.6 |
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Diluted |
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170.7 |
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169.2 |
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170.6 |
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169.0 |
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Dividends declared per share |
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$ |
0.3000 |
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$ |
0.2700 |
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$ |
0.5700 |
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$ |
0.5175 |
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See notes to Consolidated Financial Statements.
3
CANADIAN PACIFIC RAILWAY LIMITED
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(unaudited)
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June 30 |
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December 31 |
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2011 |
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2010 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
267.8 |
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$ |
360.6 |
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Accounts receivable, net |
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508.9 |
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459.0 |
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Materials and supplies |
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137.3 |
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114.1 |
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Deferred income taxes |
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124.3 |
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222.3 |
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Other current assets |
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69.3 |
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47.8 |
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1,107.6 |
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1,203.8 |
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Investments |
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148.5 |
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144.9 |
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Net properties |
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11,981.2 |
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11,996.8 |
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Goodwill and intangible assets |
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183.3 |
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189.8 |
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Other assets |
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135.2 |
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140.6 |
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Total assets |
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$ |
13,555.8 |
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$ |
13,675.9 |
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Liabilities and shareholders equity |
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Current liabilities |
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Accounts payable and accrued liabilities |
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$ |
991.3 |
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$ |
1,007.8 |
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Long-term debt maturing within one year |
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278.8 |
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281.7 |
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1,270.1 |
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1,289.5 |
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Pension and other benefit liabilities |
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1,019.9 |
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1,115.7 |
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Other long-term liabilities |
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418.0 |
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468.0 |
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Long-term debt |
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3,918.8 |
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4,033.2 |
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Deferred income taxes |
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1,924.4 |
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1,944.8 |
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Total liabilities |
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8,551.2 |
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8,851.2 |
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Shareholders equity |
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Share capital |
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1,825.9 |
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1,812.8 |
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Additional paid-in capital |
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85.1 |
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24.7 |
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Accumulated other comprehensive loss |
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(2,044.6 |
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(2,085.8 |
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Retained earnings |
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5,138.2 |
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5,073.0 |
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5,004.6 |
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4,824.7 |
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Total liabilities and shareholders equity |
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$ |
13,555.8 |
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$ |
13,675.9 |
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Commitments and contingencies (Note 8)
See notes to Consolidated Financial Statements.
4
CANADIAN PACIFIC RAILWAY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(unaudited)
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For the three months |
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For the six months |
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ended June 30 |
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ended June 30 |
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2011 |
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2010 |
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2011 |
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2010 |
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Operating activities |
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Net income |
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$ |
128.0 |
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$ |
166.6 |
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$ |
161.7 |
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$ |
267.6 |
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Reconciliation of net income to cash provided by
operating activities: |
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Depreciation and amortization |
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122.2 |
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123.3 |
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244.5 |
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244.5 |
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Deferred income taxes |
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51.9 |
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43.5 |
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59.8 |
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85.1 |
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Pension funding in excess of expense (Note 7) |
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(13.2 |
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(150.7 |
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(24.7 |
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(160.0 |
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Other operating activities, net |
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(15.6 |
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(5.6 |
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(13.2 |
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6.2 |
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Change in non-cash working capital balances
related to operations |
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(61.0 |
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10.0 |
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(80.8 |
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(72.0 |
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Cash provided by operating activities |
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212.3 |
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187.1 |
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347.3 |
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371.4 |
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Investing activities |
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Additions to properties |
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(218.4 |
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(168.0 |
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(351.6 |
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(258.8 |
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Proceeds from the sale of properties and other assets |
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14.5 |
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17.4 |
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20.1 |
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26.4 |
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Other |
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(0.3 |
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(0.3 |
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Cash used in investing activities |
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(204.2 |
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(150.6 |
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(331.8 |
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(232.4 |
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Financing activities |
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Dividends paid |
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(45.7 |
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(41.7 |
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(91.4 |
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(83.4 |
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Issuance of CP common shares |
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1.7 |
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3.9 |
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10.8 |
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6.9 |
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Collection of receivable from financial institution |
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219.8 |
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219.8 |
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Repayment of long-term debt |
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(5.6 |
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(581.2 |
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(18.0 |
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(590.3 |
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Other |
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0.2 |
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0.2 |
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Cash used in financing activities |
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(49.6 |
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(399.0 |
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(98.6 |
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(446.8 |
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Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents |
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(1.2 |
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12.3 |
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(9.7 |
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2.3 |
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Cash position |
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Decrease in cash and cash equivalents |
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(42.7 |
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(350.2 |
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(92.8 |
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(305.5 |
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Cash and cash equivalents at beginning of period |
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310.5 |
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723.8 |
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360.6 |
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679.1 |
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Cash and cash equivalents at end of period |
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$ |
267.8 |
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$ |
373.6 |
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$ |
267.8 |
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$ |
373.6 |
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Supplemental disclosures of cash flow information: |
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Income taxes paid |
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$ |
3.6 |
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$ |
3.2 |
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$ |
3.5 |
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$ |
5.0 |
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Interest paid |
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$ |
90.6 |
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$ |
174.0 |
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$ |
139.7 |
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$ |
219.1 |
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|
See notes to Consolidated Financial Statements.
5
CANADIAN PACIFIC RAILWAY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in millions of Canadian dollars, except common share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Accumulated other |
|
|
|
|
|
|
Total |
|
|
|
shares |
|
|
Share |
|
|
Additional |
|
|
comprehensive |
|
|
Retained |
|
|
shareholders |
|
|
|
(in millions) |
|
|
capital |
|
|
paid-in capital |
|
|
loss |
|
|
earnings |
|
|
equity |
|
|
|
|
|
|
|
|
Balance at January 1, 2011 |
|
|
169.2 |
|
|
$ |
1,812.8 |
|
|
$ |
24.7 |
|
|
$ |
(2,085.8 |
) |
|
$ |
5,073.0 |
|
|
$ |
4,824.7 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161.7 |
|
|
|
161.7 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.2 |
|
|
|
|
|
|
|
41.2 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96.5 |
) |
|
|
(96.5 |
) |
Effect of stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
10.3 |
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
Change to stock-based compensation
awards (Note 6) |
|
|
|
|
|
|
|
|
|
|
51.9 |
|
|
|
|
|
|
|
|
|
|
|
51.9 |
|
Shares issued under stock option plans |
|
|
0.2 |
|
|
|
13.1 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011 |
|
|
169.4 |
|
|
$ |
1,825.9 |
|
|
$ |
85.1 |
|
|
$ |
(2,044.6 |
) |
|
$ |
5,138.2 |
|
|
$ |
5,004.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
|
income |
|
|
Net income |
|
|
income |
|
|
|
|
Comprehensive income three months ended
June 30, 2011 |
|
$ |
19.9 |
|
|
$ |
128.0 |
|
|
$ |
147.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income six months ended June
30, 2011 |
|
$ |
41.2 |
|
|
$ |
161.7 |
|
|
$ |
202.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
Additional |
|
|
Accumulated other |
|
|
|
|
|
|
Total |
|
|
|
shares |
|
|
Share |
|
|
paid-in |
|
|
comprehensive |
|
|
Retained |
|
|
shareholders |
|
|
|
(in millions) |
|
|
capital |
|
|
capital |
|
|
loss |
|
|
earnings |
|
|
equity |
|
|
|
|
|
|
|
|
Balance at January 1, 2010 |
|
|
168.5 |
|
|
$ |
1,771.1 |
|
|
$ |
30.8 |
|
|
$ |
(1,744.7 |
) |
|
$ |
4,600.9 |
|
|
$ |
4,658.1 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267.6 |
|
|
|
267.6 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.2 |
|
|
|
|
|
|
|
35.2 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87.2 |
) |
|
|
(87.2 |
) |
Effect of stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
Shares issued under stock option plans |
|
|
0.2 |
|
|
|
9.7 |
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
168.7 |
|
|
$ |
1,780.8 |
|
|
$ |
29.4 |
|
|
$ |
(1,709.5 |
) |
|
$ |
4,781.3 |
|
|
$ |
4,882.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
|
income |
|
|
Net income |
|
|
income |
|
|
|
|
Comprehensive income three months ended
June 30, 2010 |
|
$ |
24.6 |
|
|
$ |
166.6 |
|
|
$ |
191.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income six months ended June
30, 2010 |
|
$ |
35.2 |
|
|
$ |
267.6 |
|
|
$ |
302.8 |
|
|
|
|
See notes to Consolidated Financial Statements.
6
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
|
|
These unaudited interim consolidated financial statements of Canadian Pacific Railway
Limited (CP, the Company or Canadian Pacific Railway) reflect managements estimates
and assumptions that are necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States of America (GAAP). They do not include
all disclosures required under GAAP for annual financial statements and should be read in
conjunction with the 2010 consolidated financial statements. The policies used are
consistent with the policies used in preparing the 2010 consolidated financial statements.
The Companys investments in which CP has significant influence, which are not consolidated,
are accounted for using the equity method. |
|
|
CPs operations can be affected by seasonal fluctuations such as changes in customer demand
and weather-related issues. This seasonality could impact quarter-over-quarter comparisons. |
|
|
In managements opinion, the unaudited interim consolidated financial statements include all
adjustments (consisting solely of normal recurring adjustments) necessary to present fairly
such information. Interim results are not necessarily indicative of the results expected for
the fiscal year. |
|
|
Fair value measurement and disclosure |
|
|
In January 2010, the Financial Accounting Standards Board (FASB) amended the disclosure
requirements related to fair value measurements. Most of the new disclosures and
clarifications of existing disclosures were 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 the remaining guidance which did not impact the consolidated
financial statements. |
|
|
|
Future accounting changes |
|
|
In May 2011, the FASB issued amended guidance on fair value measurement which updates some
of the measurement guidance and includes enhanced disclosure requirements. The amended
guidance is effective for interim and annual periods beginning after December 15, 2011.
Adoption is not expected to have a material impact on the results of operations or financial
position but increased quantitative and qualitative disclosure regarding Level 3
measurements is expected. |
|
|
Other comprehensive income |
|
|
In June 2011, the FASB issued an accounting standard update on the Presentation of
Comprehensive Income, which eliminates the current option to report other comprehensive
income and its components in the Consolidated Statement of Changes in Shareholders Equity.
The Company can elect to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. As the new guidance
does not change those components that are recognized in net income or those components that
are recognized in other comprehensive income, adoption is expected to impact only the
presentation of the financial statements. The guidance must be applied retrospectively for
all periods presented in the financial statements. The Company has not yet determined which
election will be made when the standard becomes effective for interim and annual periods
beginning after December 15, 2011, or earlier if the Company elects to early adopt as is
permitted. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions of Canadian dollars) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
Current income tax expense |
|
$ |
(6.9 |
) |
|
$ |
2.6 |
|
|
$ |
(3.0 |
) |
|
$ |
4.8 |
|
Deferred income tax expense |
|
|
51.9 |
|
|
|
43.5 |
|
|
|
59.8 |
|
|
|
85.1 |
|
|
|
|
|
|
Income tax expense |
|
$ |
45.0 |
|
|
$ |
46.1 |
|
|
$ |
56.8 |
|
|
$ |
89.9 |
|
|
|
|
|
|
7
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
3 |
|
Income taxes (continued) |
|
|
The lower effective income tax rate for the three months and six months ended June 30, 2010,
compared to the same periods in 2011, is a result of non-taxable foreign exchange gains and
losses related to long-term debt. |
|
|
At June 30, 2011, the number of shares outstanding was 169.4 million (June 30, 2010 168.7
million). |
|
|
Basic earnings per share have been calculated using net income for the period divided by the
weighted average number of common shares outstanding during the period. |
|
|
The number of shares used in earnings per share calculations is reconciled as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
Weighted average shares
outstanding |
|
|
169.4 |
|
|
|
168.6 |
|
|
|
169.3 |
|
|
|
168.6 |
|
Dilutive effect of stock options |
|
|
1.3 |
|
|
|
0.6 |
|
|
|
1.3 |
|
|
|
0.4 |
|
|
|
|
|
|
Weighted average diluted
shares outstanding |
|
|
170.7 |
|
|
|
169.2 |
|
|
|
170.6 |
|
|
|
169.0 |
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2011, 2,023,500 and 1,456,021 options,
respectively, were excluded from the computation of diluted earnings per share because their
effects were not dilutive (three and six months ended June 30, 2010 1,711,200 and
2,120,421, respectively). |
|
A. |
|
Fair values 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. |
|
|
|
Level 1: Unadjusted quoted prices for identical assets and liabilities in
active markets that are accessible at the measurement date. |
|
|
|
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. |
|
|
|
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. 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. 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 $4,197.6 million at June 30, 2011
(December 31, 2010 $4,314.9 million) and a fair value of approximately $4,741.4 million
at June 30, 2011 (December 31, 2010 $4,773.0 million). The fair value of publicly traded
long-term debt is determined based on market prices at June 30, 2011 and December 31, 2010,
respectively. |
8
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
5 |
|
Financial instruments (continued) |
|
|
A detailed analysis of the techniques used to value long-term floating rate notes, which are
classified as Level 3, are discussed below: |
|
|
Gain/loss in fair value of long-term floating rate notes |
|
|
At June 30, 2011 and December 31, 2010, the Company held long-term floating rate notes with
a total settlement value of $105.0 million and $117.0 million, respectively, and carrying
values of $73.6 million and $69.5 million, respectively. At June 30, 2011, the long-term
floating rate notes consisted of Master Asset Vehicle (MAV) 2 notes with eligible assets.
The carrying values, being the estimated fair values, are reported in Investments. |
|
|
The valuation technique used by the Company to estimate the fair value of its investment in
long-term floating rate notes at June 30, 2011 and December 31, 2010, 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. During the second quarter of 2011 the Company sold all of its MAV 2 Class
B and Class C and MAV 3 Class 9 notes for proceeds of $6.4 million and recorded a gain of
$6.3 million. This gain together with accretion and other minor changes in assumptions have
resulted in gains of $8.7 million and $10.5 million in the three and six months ended June
30, 2011, respectively (three and six months ended June 30, 2010 gains of $3.1 million
and $5.6 million, respectively) which were reported in Other income and charges. The
interest rates and maturities of the various long-term floating rate notes, discount rates
and credit losses modelled at June 30, 2011 and December 31, 2010, respectively, are: |
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
Probability weighted average
coupon interest rate |
|
0.8% |
|
0.8% |
Weighted average discount rate |
|
6.9% |
|
7.1% |
Expected repayments of
long-term floating rate notes |
|
Approximately 5 1/2 years |
|
Approximately 6 years |
Credit losses |
|
MAV 2 eligible asset notes: nil |
|
MAV 2 eligible asset notes: 1% to 100% |
|
|
|
|
MAV 3 Class 9 Traditional Asset Tracking notes: 1% |
|
|
The probability weighted discounted cash flows resulted in an estimated fair value of the
Companys long-term floating rate notes of $73.6 million at June 30, 2011 (December 31, 2010
$69.5 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): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
Original |
|
|
Estimated |
|
|
Original |
|
|
Estimated |
|
(in millions of Canadian dollars) |
|
cost |
|
|
fair value |
|
|
cost |
|
|
fair value |
|
|
|
|
As at January 1 |
|
$ |
117.0 |
|
|
$ |
69.5 |
|
|
$ |
129.1 |
|
|
$ |
69.3 |
|
Redemption of notes |
|
|
(12.0 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
Accretion |
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
2.9 |
|
Change in market assumptions |
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
2.7 |
|
|
|
|
|
As at June 30 |
|
$ |
105.0 |
|
|
$ |
73.6 |
|
|
$ |
129.0 |
|
|
$ |
74.9 |
|
|
|
|
|
B. |
|
Financial risk management |
|
|
The Companys policy with respect to using derivative financial instruments is to
selectively reduce volatility associated with fluctuations in interest rates, foreign
exchange (FX) rates, the price of fuel and stock-based compensation expense. Where
derivatives are designated as hedging instruments, the relationship between the hedging
instruments and their associated hedged items is documented, 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 |
9
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
5 |
|
Financial instruments (continued) |
|
|
the Consolidated Balance Sheet, commitments or forecasted transactions. At the time a
derivative contract is entered into, and at least quarterly thereafter, an assessment is
made 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 the Companys intent to use financial derivatives or commodity instruments for
trading or speculative purposes. |
|
|
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 Canada and the United States; as a result, revenues and expenses are incurred
in both Canadian and U.S. dollars. The Company enters 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. |
|
|
Occasionally the Company will enter into short-term FX forward contracts as part of its cash
management strategy. |
|
|
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 against gains and
losses on its net investment. 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. dollar denominated debt
maturities. |
|
|
Foreign exchange forward contracts |
|
|
At June 30, 2011, the Company had FX forward contracts to fix the exchange rate on US$101.4
million of its 5.75% Notes due in May 2013 and US$175.0 million of its 6.50% Notes due in
May 2018, and US$100.0 million of its 7.25% Notes due in May 2019. 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 the three months ended June 30, 2011,
the Company recorded an unrealized foreign exchange loss on long-term debt of $0.8 million
in Other income and charges and $1.3 million in Other comprehensive income in relation
to these derivatives. For the six months ended June 30, 2011, an unrealized foreign
exchange loss of $4.8 million in Other income and charges and $1.6 million in Other
comprehensive income were recorded. During these periods the underlying debt which these
derivatives are designated to hedge benefited largely from an equal and offsetting
unrealized FX gain on long-term debt also recorded in Other income and charges. At June
30, 2011, the unrealized loss derived from these FX forwards was $8.0 million (December 31,
2010 $1.6 million) which was included in Other long-term liabilities with the offset
reflected in Accumulated other comprehensive loss of $2.7 million (December 31, 2010
$1.1 million), and Retained earnings of $5.3 million (December 31, 2010 $0.5 million),
on the Consolidated Balance Sheets. Amounts recorded in Accumulated other comprehensive
loss will be reclassified to earnings during the terms of the Notes. |
|
|
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. |
10
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
5 |
|
Financial instruments (continued) |
|
|
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, designated as fair value hedges,
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. |
|
|
During the three and six months ended June 30, 2011, the Company amortized $1.7 million and
$3.3 million, respectively, (three and six months ended June 30, 2010 $1.2 million and
$2.2 million, respectively) of deferred gains to Net interest expense relating to interest
rate swaps previously unwound in the three months ended September 30, 2010 and three months
ended June 30, 2009. The gains were deferred as a fair value adjustment to the underlying
debts that were hedged and are amortized to Net interest expense until such time the debts
are repaid through May 2013. |
|
|
At June 30, 2011 and December 31, 2010, the Company had no outstanding interest rate
swaps. |
|
|
At June 30, 2011, the Company had net unamortized losses related to interest rate locks,
which are accounted for as cash flow hedges, settled in previous years totalling $22.0
million (December 31, 2010 $22.1 million). This amount is composed of various
unamortized gains and losses related to specific debts which are reflected in Accumulated
other comprehensive loss, net of tax, 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
$0.2 million and $0.1 million for the three and six months ended June 30, 2011, respectively
(three and six months ended June 30, 2010 $1.8 million and $1.7 million, respectively). |
|
|
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 Company entered into a Total Return Swap (TRS) to reduce the volatility to the Company
over time on three types of stock-based compensation programs: tandem share appreciation
rights (TSARs), deferred share units (DSUs), and restricted share units (RSUs). As
the Companys share price appreciates, these instruments create increased compensation
expense. 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. 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 the first quarter of 2011, the
Company reduced the size of the TRS program to reflect the cancellation of SARs in Canada
(see Note 6). |
|
|
Compensation and benefits expense on the Companys Consolidated Statements of Income
included a net loss on these swaps of $1.4 million and $2.1 million for the three and six
months ended June 30, 2011, respectively, which was inclusive of unrealized losses in the
second quarter and both realized gains and unrealized losses in the first half of 2011. For
the same periods in 2010, the Company recorded an unrealized loss on these swaps of $0.4
million and an unrealized gain of $0.4 million. During the first quarter of 2011, CP unwound
a portion of the program for total proceeds of $0.3 million. At June 30, 2011, the
unrealized loss on the remaining TRS of $8.4 million (December 31, 2010 $6.0 million) was
included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets. |
|
|
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 |
11
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
5 |
|
Financial instruments (continued) |
|
|
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. |
|
|
At June 30, 2011, the Company had diesel futures contracts, which are accounted for as cash
flow hedges, to purchase approximately 18.4 million US gallons during the period July 2011
to June 2012 at an average price of US$2.91 per US gallon. This represents approximately 6%
of estimated fuel purchases for this period. At June 30, 2011, the unrealized gain on these
futures contracts was $1.8 million (December 31, 2010 $4.1 million) and was reflected in
Other current assets with the offset, net of tax, reflected in Accumulated other
comprehensive loss on the Consolidated Balance Sheets. Amounts recorded in Accumulated
other comprehensive loss will be reclassified to earnings when the derivative instruments
are realized. |
|
|
During the three and six months ended June 30, 2011, the impact of settled commodity swaps
decreased Fuel expense by $3.4 million and $6.8 million, respectively, as a result of
realized gains on diesel swaps (three and six months ended June 30, 2010 $0.7 million and
$1.6 million, respectively). |
|
|
There was no significant ineffectiveness related to derivatives 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 Statements of Income and in
comprehensive income for the three months and six months ended June 30, 2011 and 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) |
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) |
|
|
Amount of gain (loss) |
|
|
recognized in other |
|
|
|
|
|
|
|
|
|
|
|
recognized in income on |
|
|
recognized in income |
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
derivatives |
|
|
on derivatives |
|
|
income on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the three months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30 |
|
|
ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel future contracts |
|
Fuel expense |
|
$ |
3.4 |
|
|
$ |
0.7 |
|
|
$ |
(6.1 |
) |
|
$ |
(3.7 |
) |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Net interest expense |
|
|
1.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury rate locks |
|
Net interest expense |
|
|
(0.2 |
) |
|
|
(1.8 |
) |
|
|
0.2 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
FX forward contracts |
|
Other income and charges |
|
|
(0.8 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not
designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swap |
|
Compensation and benefits |
|
|
(1.4 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX forward contracts |
|
Other income and charges |
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.7 |
|
|
$ |
1.6 |
|
|
$ |
(7.2 |
) |
|
$ |
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
5 |
|
Financial instruments (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) |
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) |
|
|
Amount of gain (loss) |
|
|
recognized in other |
|
|
|
|
|
|
|
|
|
|
|
recognized in income on |
|
|
recognized in income |
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
derivatives |
|
|
on derivatives |
|
|
income on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
For the six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30 |
|
|
ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel future contracts |
|
Fuel expense |
|
$ |
6.8 |
|
|
$ |
1.6 |
|
|
$ |
(2.3 |
) |
|
$ |
(3.4 |
) |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Net interest expense |
|
|
3.3 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury rate locks |
|
Net interest expense |
|
|
(0.1 |
) |
|
|
(1.7 |
) |
|
|
0.1 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
FX forward contracts |
|
Other income and charges |
|
|
(4.8 |
) |
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not
designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swap |
|
Compensation and benefits |
|
|
(2.1 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.1 |
|
|
$ |
2.5 |
|
|
$ |
(3.8 |
) |
|
$ |
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011, the Company expected that, during the next 12 months, $1.8 million of
unrealized holding gains on diesel future contracts will 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 in
comprehensive income for the three and six months ended June 30, 2011 and 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective portion |
|
|
|
|
|
|
|
|
|
|
|
Location of ineffective |
|
|
|
|
|
|
|
|
|
|
|
recognized in other |
|
|
|
|
|
|
|
|
|
|
|
portion recognized in |
|
|
Ineffective portion |
|
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars) |
|
income |
|
|
recognized in income |
|
|
|
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
For the three months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30 |
|
|
|
ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD within
net investment
hedge |
|
Other income and charges |
|
$ |
|
|
|
$ |
0.6 |
|
|
|
$ |
15.6 |
|
|
$ |
(75.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
|
For the six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30 |
|
|
|
ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD within
net investment
hedge |
|
Other income and charges |
|
$ |
|
|
|
$ |
2.6 |
|
|
|
$ |
89.9 |
|
|
$ |
(25.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Stock-based compensation |
|
|
At June 30, 2011, 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 for the three and six months ended June 30, 2011 of $3.3
million and $15.2 million, respectively (three and six months ended June 30, 2010 $12.9
million and $30.8 million, respectively). |
13
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
6 |
|
Stock-based compensation (continued) |
|
|
Tandem share appreciation rights (TSARs) |
|
|
As a result of changes to Canadian tax legislation, which eliminated the favourable tax
treatment on cash settled compensation awards, the Company offered employees the option of
cancelling the outstanding SAR and keeping in place the outstanding option. Effective
January 31, 2011, the Company cancelled 3.1 million SARs and reclassified the fair value of
the previously recognized liability ($69.8 million) and the recognized deferred tax asset
($17.9 million) to Additional paid-in capital. The terms of the awards were not changed
and as a result no incremental cost was recognized. The weighted average fair value of the
units cancelled at January 31, 2011 was $25.36 per unit. Compensation cost will continue to
be recognized over the remaining vesting period for those options not yet vested. |
|
|
In the first six months of 2011, under CPs stock option plans, the Company issued 632,400
regular options at the weighted average exercise price of $65.03 per share, based on the
closing price on the grant date. |
|
|
Pursuant to the employee plan, these regular options may be exercised upon vesting, which is
between 24 months and 36 months after the grant date, and will expire after 10 years. |
|
|
Under the fair value method, the fair value of the regular options at the grant date was
$12.3 million. The weighted average fair value assumptions were approximately: |
|
|
|
|
|
|
|
For the six months |
|
|
|
ended June 30 |
|
|
|
2011 |
|
Grant price |
|
$ |
65.03 |
|
Expected life (years) (1) |
|
|
6.30 |
|
Risk-free interest rate (2) |
|
|
2.79 |
% |
Expected stock price volatility (3) |
|
|
31.48 |
% |
Expected annual dividends per share (4) |
|
$ |
1.20 |
|
Expected forfeiture rate (5) |
|
|
0.8 |
% |
Weighted average fair value of regular options granted
during the period |
|
$ |
19.44 |
|
|
|
|
|
|
|
|
(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. The Company does not employ
different dividend yields throughout the year. |
|
(5) |
|
The Company estimated forfeitures based on past experience. This rate is
monitored on a periodic basis. |
|
|
Performance share unit (PSU) plan |
|
|
In the first six months of 2011, the Company issued 268,230 PSUs with a grant date fair
value of $15.7 million. 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. |
14
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
7 |
|
Pensions and other benefits |
|
|
In the three months and six months ended June 30, 2011, the Company made contributions of
$24.5 million and $47.5 million, respectively (2010 $159.7 million and $178.4 million,
respectively) to its defined benefit pension plans. The elements of net periodic benefit
cost for defined benefit pension plans and other benefits recognized in the three and six
months ended June 30, 2011, included the following components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
|
|
|
|
|
|
|
|
ended June 30 |
|
|
|
|
|
|
|
Pensions |
|
|
Other benefits |
|
(in millions of Canadian dollars) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
Current service cost (benefits
earned by employees in the period) |
|
$ |
26.1 |
|
|
$ |
21.6 |
|
|
$ |
4.1 |
|
|
$ |
3.9 |
|
Interest cost on benefit obligation |
|
|
114.9 |
|
|
|
116.1 |
|
|
|
6.4 |
|
|
|
7.0 |
|
Expected return on fund assets |
|
|
(168.4 |
) |
|
|
(149.6 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Recognized net actuarial loss |
|
|
35.5 |
|
|
|
17.8 |
|
|
|
1.2 |
|
|
|
1.3 |
|
Amortization of prior service costs |
|
|
3.2 |
|
|
|
3.3 |
|
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
11.3 |
|
|
$ |
9.2 |
|
|
$ |
11.3 |
|
|
$ |
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
|
|
|
|
|
|
|
|
|
ended June 30 |
|
|
|
|
|
|
|
Pensions |
|
|
Other benefits |
|
(in millions of Canadian dollars) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
Current service cost (benefits
earned by employees in the period) |
|
$ |
52.2 |
|
|
$ |
43.2 |
|
|
$ |
8.2 |
|
|
$ |
7.8 |
|
Interest cost on benefit obligation |
|
|
229.8 |
|
|
|
232.2 |
|
|
|
12.8 |
|
|
|
14.0 |
|
Expected return on fund assets |
|
|
(336.7 |
) |
|
|
(299.2 |
) |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
Recognized net actuarial loss |
|
|
71.1 |
|
|
|
35.6 |
|
|
|
2.4 |
|
|
|
2.6 |
|
Amortization of prior service costs |
|
|
6.4 |
|
|
|
6.6 |
|
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
22.8 |
|
|
$ |
18.4 |
|
|
$ |
22.5 |
|
|
$ |
23.2 |
|
|
|
|
8 |
|
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 June 30, 2011, 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 June 30, 2011, the Company had committed to total future capital expenditures amounting
to $587.1 million and operating expenditures amounting to $1,721.4 million for the years
2011-2028. |
|
|
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 |
15
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(unaudited)
8 |
|
Commitments and contingencies (continued) |
|
|
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. The total amount provided at June 30, 2011 was $103.2 million
(December 31, 2010 $107.4 million). Payments are expected to be made over 10 years to
2021. |
|
|
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, are not expected to be material to CPs financial position, but 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 and to
Purchased services and other within operating expenses. The amount charged to income in
the three and six months ended June 30, 2011 was $1.2 million and $1.9 million,
respectively. The amount credited to income in the three months ended June 30, 2010 was
$0.1 million and charged to income in the six months ended June 30, 2010 was $1.5 million. |
|
|
The Dakota, Minnesota & Eastern Railroad Corporation (DM&E) was purchased in 2007 for $1.5
billion resulting in goodwill of $142.2 million (US$147.4 million) as at June 30, 2011.
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. |
|
|
During the second quarter of 2011, one customer comprised 10.2% of total revenue (second
quarter of 2010 9.3%). No one customer comprised more than 10% of total revenue for the
six months ended June 30, 2011 or 2010. |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Rail Data |
|
|
|
Second Quarter |
|
|
Year-to-date |
|
2011 |
|
|
2010 |
|
|
Fav/(Unfav) |
|
|
% |
|
|
|
2011 |
|
|
2010 |
|
|
Fav/(Unfav) |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial (millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,233.2 |
|
|
$ |
1,202.2 |
|
|
$ |
31.0 |
|
|
2.6 |
|
Freight revenue |
|
$ |
2,368.4 |
|
|
$ |
2,340.4 |
|
|
$ |
28.0 |
|
|
|
1.2 |
|
|
31.3 |
|
|
|
32.0 |
|
|
|
(0.7 |
) |
|
(2.2 |
) |
Other revenue |
|
|
59.5 |
|
|
|
60.6 |
|
|
|
(1.1 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,264.5 |
|
|
|
1,234.2 |
|
|
|
30.3 |
|
|
2.5 |
|
|
|
|
2,427.9 |
|
|
|
2,401.0 |
|
|
|
26.9 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336.1 |
|
|
|
349.7 |
|
|
|
13.6 |
|
|
3.9 |
|
Compensation and benefits |
|
|
700.6 |
|
|
|
703.5 |
|
|
|
2.9 |
|
|
|
0.4 |
|
|
237.4 |
|
|
|
177.9 |
|
|
|
(59.5 |
) |
|
(33.4 |
) |
Fuel |
|
|
463.1 |
|
|
|
359.6 |
|
|
|
(103.5 |
) |
|
|
(28.8 |
) |
|
57.4 |
|
|
|
51.0 |
|
|
|
(6.4 |
) |
|
(12.5) |
|
Materials |
|
|
129.0 |
|
|
|
115.0 |
|
|
|
(14.0 |
) |
|
|
(12.2 |
) |
|
53.6 |
|
|
|
54.9 |
|
|
|
1.3 |
|
|
2.4 |
|
Equipment rents |
|
|
105.0 |
|
|
|
103.9 |
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
122.2 |
|
|
|
123.3 |
|
|
|
1.1 |
|
|
0.9 |
|
Depreciation and amortization |
|
|
244.5 |
|
|
|
244.5 |
|
|
|
|
|
|
|
|
|
|
227.3 |
|
|
|
203.3 |
|
|
|
(24.0 |
) |
|
(11.8 |
) |
Purchased services and other |
|
|
446.0 |
|
|
|
393.8 |
|
|
|
(52.2 |
) |
|
|
(13.3 |
) |
|
1,034.0 |
|
|
|
960.1 |
|
|
|
(73.9 |
) |
|
(7.7 |
) |
|
|
|
2,088.2 |
|
|
|
1,920.3 |
|
|
|
(167.9 |
) |
|
|
(8.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230.5 |
|
|
|
274.1 |
|
|
|
(43.6 |
) |
|
(15.9 |
) |
Operating income |
|
|
339.7 |
|
|
|
480.7 |
|
|
|
(141.0 |
) |
|
|
(29.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.0 |
) |
|
|
(3.4 |
) |
|
|
1.6 |
|
|
47.1 |
|
Other income and charges |
|
|
(5.5 |
) |
|
|
(8.3 |
) |
|
|
(2.8 |
) |
|
|
(33.7 |
) |
|
62.5 |
|
|
|
64.8 |
|
|
|
2.3 |
|
|
3.5 |
|
Net interest expense |
|
|
126.7 |
|
|
|
131.5 |
|
|
|
4.8 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173.0 |
|
|
|
212.7 |
|
|
|
(39.7 |
) |
|
(18.7 |
) |
Income before income tax expense |
|
|
218.5 |
|
|
|
357.5 |
|
|
|
(139.0 |
) |
|
|
(38.9 |
) |
|
45.0 |
|
|
|
46.1 |
|
|
|
1.1 |
|
|
2.4 |
|
Income tax expense |
|
|
56.8 |
|
|
|
89.9 |
|
|
|
33.1 |
|
|
|
36.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
128.0 |
|
|
$ |
166.6 |
|
|
$ |
(38.6 |
) |
|
(23.2 |
) |
Net income |
|
$ |
161.7 |
|
|
$ |
267.6 |
|
|
$ |
(105.9 |
) |
|
|
(39.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.8 |
|
|
|
77.8 |
|
|
|
(4.0 |
) |
|
(400) bps |
|
Operating ratio (%) |
|
|
86.0 |
|
|
|
80.0 |
|
|
|
(6.0 |
) |
|
(600) bps |
|
|
$ |
0.76 |
|
|
$ |
0.99 |
|
|
$ |
(0.23 |
) |
|
(23.2 |
) |
Basic earnings per share |
|
$ |
0.96 |
|
|
$ |
1.59 |
|
|
$ |
(0.63 |
) |
|
|
(39.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.75 |
|
|
$ |
0.98 |
|
|
$ |
(0.23 |
) |
|
(23.5 |
) |
Diluted earnings per share |
|
$ |
0.95 |
|
|
$ |
1.58 |
|
|
$ |
(0.63 |
) |
|
|
(39.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average (avg) number of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169.4 |
|
|
|
168.6 |
|
|
|
0.8 |
|
|
0.5 |
|
outstanding (millions) |
|
|
169.3 |
|
|
|
168.6 |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted avg number of diluted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170.7 |
|
|
|
169.2 |
|
|
|
1.5 |
|
|
0.9 |
|
outstanding (millions) |
|
|
170.6 |
|
|
|
169.0 |
|
|
|
1.6 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.03 |
|
|
|
0.98 |
|
|
|
(0.05 |
) |
|
(5.1 |
) |
Average foreign exchange rate (US$/Canadian$) |
|
|
1.02 |
|
|
|
0.97 |
|
|
|
(0.05 |
) |
|
|
(5.2 |
) |
|
0.97 |
|
|
|
1.02 |
|
|
|
(0.05 |
) |
|
(4.9 |
) |
Average foreign exchange rate (Canadian$/US$) |
|
|
0.98 |
|
|
|
1.03 |
|
|
|
(0.05 |
) |
|
|
(4.9 |
) |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Rail Data (Page 2) |
|
Second Quarter |
|
|
|
|
Year-to-date |
|
2011 |
|
|
2010 |
|
|
Fav/(Unfav) |
|
|
% |
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Fav/(Unfav) |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues (millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
254.6 |
|
|
$ |
264.4 |
|
|
$ |
(9.8 |
) |
|
|
(3.7 |
) |
|
- Grain |
|
$ |
486.6 |
|
|
$ |
535.7 |
|
|
$ |
(49.1 |
) |
|
|
(9.2 |
) |
|
145.3 |
|
|
|
136.7 |
|
|
|
8.6 |
|
|
|
6.3 |
|
|
- Coal |
|
|
251.2 |
|
|
|
247.2 |
|
|
|
4.0 |
|
|
|
1.6 |
|
|
150.5 |
|
|
|
114.9 |
|
|
|
35.6 |
|
|
|
31.0 |
|
|
- Sulphur and fertilizers |
|
|
279.5 |
|
|
|
232.7 |
|
|
|
46.8 |
|
|
|
20.1 |
|
|
46.0 |
|
|
|
44.4 |
|
|
|
1.6 |
|
|
|
3.6 |
|
|
- Forest products |
|
|
91.5 |
|
|
|
87.6 |
|
|
|
3.9 |
|
|
|
4.5 |
|
|
231.8 |
|
|
|
217.0 |
|
|
|
14.8 |
|
|
|
6.8 |
|
|
- Industrial and consumer products |
|
|
462.8 |
|
|
|
422.5 |
|
|
|
40.3 |
|
|
|
9.5 |
|
|
84.2 |
|
|
|
89.0 |
|
|
|
(4.8 |
) |
|
|
(5.4 |
) |
|
- Automotive |
|
|
164.2 |
|
|
|
166.6 |
|
|
|
(2.4 |
) |
|
|
(1.4 |
) |
|
320.8 |
|
|
|
335.8 |
|
|
|
(15.0 |
) |
|
|
(4.5 |
) |
|
- Intermodal |
|
|
632.6 |
|
|
|
648.1 |
|
|
|
(15.5 |
) |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,233.2 |
|
|
$ |
1,202.2 |
|
|
$ |
31.0 |
|
|
|
2.6 |
|
|
Total Freight Revenues |
|
$ |
2,368.4 |
|
|
$ |
2,340.4 |
|
|
$ |
28.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Revenue Ton-Miles (RTM) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
|
|
8,303 |
|
|
|
(487 |
) |
|
|
(5.9 |
) |
|
- Grain |
|
|
15,076 |
|
|
|
16,939 |
|
|
|
(1,863 |
) |
|
|
(11.0 |
) |
|
5,564 |
|
|
|
5,268 |
|
|
|
296 |
|
|
|
5.6 |
|
|
- Coal |
|
|
9,534 |
|
|
|
9,576 |
|
|
|
(42 |
) |
|
|
(0.4 |
) |
|
5,643 |
|
|
|
4,335 |
|
|
|
1,308 |
|
|
|
30.2 |
|
|
- Sulphur and fertilizers |
|
|
10,512 |
|
|
|
8,727 |
|
|
|
1,785 |
|
|
|
20.5 |
|
|
1,179 |
|
|
|
1,275 |
|
|
|
(96 |
) |
|
|
(7.5 |
) |
|
- Forest products (1) |
|
|
2,471 |
|
|
|
2,506 |
|
|
|
(35 |
) |
|
|
(1.4 |
) |
|
5,515 |
|
|
|
5,166 |
|
|
|
349 |
|
|
|
6.8 |
|
|
- Industrial and consumer products (1) |
|
|
11,477 |
|
|
|
10,200 |
|
|
|
1,277 |
|
|
|
12.5 |
|
|
545 |
|
|
|
560 |
|
|
|
(15 |
) |
|
|
(2.7 |
) |
|
- Automotive |
|
|
1,068 |
|
|
|
1,105 |
|
|
|
(37 |
) |
|
|
(3.3 |
) |
|
5,961 |
|
|
|
6,518 |
|
|
|
(557 |
) |
|
|
(8.5 |
) |
|
- Intermodal |
|
|
11,769 |
|
|
|
12,575 |
|
|
|
(806 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,223 |
|
|
|
31,425 |
|
|
|
798 |
|
|
|
2.5 |
|
|
Total RTMs |
|
|
61,907 |
|
|
|
61,628 |
|
|
|
279 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per RTM (cents) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.26 |
|
|
|
3.18 |
|
|
|
0.08 |
|
|
|
2.5 |
|
|
- Grain |
|
|
3.23 |
|
|
|
3.16 |
|
|
|
0.07 |
|
|
|
2.2 |
|
|
2.61 |
|
|
|
2.59 |
|
|
|
0.02 |
|
|
|
0.8 |
|
|
- Coal |
|
|
2.63 |
|
|
|
2.58 |
|
|
|
0.05 |
|
|
|
1.9 |
|
|
2.67 |
|
|
|
2.65 |
|
|
|
0.02 |
|
|
|
0.8 |
|
|
- Sulphur and fertilizers |
|
|
2.66 |
|
|
|
2.67 |
|
|
|
(0.01 |
) |
|
|
(0.4 |
) |
|
3.90 |
|
|
|
3.48 |
|
|
|
0.42 |
|
|
|
12.1 |
|
|
- Forest products (1) |
|
|
3.70 |
|
|
|
3.50 |
|
|
|
0.20 |
|
|
|
5.7 |
|
|
4.20 |
|
|
|
4.20 |
|
|
|
|
|
|
|
|
|
|
- Industrial and consumer products (1) |
|
|
4.03 |
|
|
|
4.14 |
|
|
|
(0.11 |
) |
|
|
(2.7 |
) |
|
15.45 |
|
|
|
15.89 |
|
|
|
(0.44 |
) |
|
|
(2.8 |
) |
|
- Automotive |
|
|
15.37 |
|
|
|
15.08 |
|
|
|
0.29 |
|
|
|
1.9 |
|
|
5.38 |
|
|
|
5.15 |
|
|
|
0.23 |
|
|
|
4.5 |
|
|
- Intermodal |
|
|
5.38 |
|
|
|
5.15 |
|
|
|
0.23 |
|
|
|
4.5 |
|
|
3.83 |
|
|
|
3.83 |
|
|
|
|
|
|
|
|
|
|
Total Freight Revenue per RTM |
|
|
3.83 |
|
|
|
3.80 |
|
|
|
0.03 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carloads (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112.8 |
|
|
|
115.9 |
|
|
|
(3.1 |
) |
|
|
(2.7 |
) |
|
- Grain |
|
|
212.2 |
|
|
|
229.1 |
|
|
|
(16.9 |
) |
|
|
(7.4 |
) |
|
81.0 |
|
|
|
94.6 |
|
|
|
(13.6 |
) |
|
|
(14.4 |
) |
|
- Coal |
|
|
141.3 |
|
|
|
170.6 |
|
|
|
(29.3 |
) |
|
|
(17.2 |
) |
|
54.3 |
|
|
|
43.2 |
|
|
|
11.1 |
|
|
|
25.7 |
|
|
- Sulphur and fertilizers |
|
|
102.8 |
|
|
|
87.5 |
|
|
|
15.3 |
|
|
|
17.5 |
|
|
17.5 |
|
|
|
17.2 |
|
|
|
0.3 |
|
|
|
1.7 |
|
|
- Forest products |
|
|
35.8 |
|
|
|
34.8 |
|
|
|
1.0 |
|
|
|
2.9 |
|
|
96.0 |
|
|
|
96.6 |
|
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
- Industrial and consumer products |
|
|
196.1 |
|
|
|
188.4 |
|
|
|
7.7 |
|
|
|
4.1 |
|
|
37.0 |
|
|
|
37.5 |
|
|
|
(0.5 |
) |
|
|
(1.3 |
) |
|
- Automotive |
|
|
73.3 |
|
|
|
71.0 |
|
|
|
2.3 |
|
|
|
3.2 |
|
|
248.5 |
|
|
|
271.4 |
|
|
|
(22.9 |
) |
|
|
(8.4 |
) |
|
- Intermodal |
|
|
491.5 |
|
|
|
520.0 |
|
|
|
(28.5 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647.1 |
|
|
|
676.4 |
|
|
|
(29.3 |
) |
|
|
(4.3 |
) |
|
Total Carloads |
|
|
1,253.0 |
|
|
|
1,301.4 |
|
|
|
(48.4 |
) |
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per Carload |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,257 |
|
|
$ |
2,281 |
|
|
$ |
(24 |
) |
|
|
(1.1 |
) |
|
- Grain |
|
$ |
2,293 |
|
|
$ |
2,338 |
|
|
$ |
(45 |
) |
|
|
(1.9 |
) |
|
1,794 |
|
|
|
1,445 |
|
|
|
349 |
|
|
|
24.2 |
|
|
- Coal |
|
|
1,778 |
|
|
|
1,449 |
|
|
|
329 |
|
|
|
22.7 |
|
|
2,772 |
|
|
|
2,660 |
|
|
|
112 |
|
|
|
4.2 |
|
|
- Sulphur and fertilizers |
|
|
2,719 |
|
|
|
2,659 |
|
|
|
60 |
|
|
|
2.3 |
|
|
2,629 |
|
|
|
2,581 |
|
|
|
48 |
|
|
|
1.9 |
|
|
- Forest products |
|
|
2,556 |
|
|
|
2,517 |
|
|
|
39 |
|
|
|
1.5 |
|
|
2,415 |
|
|
|
2,246 |
|
|
|
169 |
|
|
|
7.5 |
|
|
- Industrial and consumer products |
|
|
2,360 |
|
|
|
2,243 |
|
|
|
117 |
|
|
|
5.2 |
|
|
2,276 |
|
|
|
2,373 |
|
|
|
(97 |
) |
|
|
(4.1 |
) |
|
- Automotive |
|
|
2,240 |
|
|
|
2,346 |
|
|
|
(106 |
) |
|
|
(4.5 |
) |
|
1,291 |
|
|
|
1,237 |
|
|
|
54 |
|
|
|
4.4 |
|
|
- Intermodal |
|
|
1,287 |
|
|
|
1,246 |
|
|
|
41 |
|
|
|
3.3 |
|
$ |
1,906 |
|
|
$ |
1,777 |
|
|
$ |
129 |
|
|
|
7.3 |
|
|
Total Freight Revenue per Carload |
|
$ |
1,890 |
|
|
$ |
1,798 |
|
|
$ |
92 |
|
|
|
5.1 |
|
|
|
|
(1) |
|
Certain prior period figures have been updated to reflect new information. |
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of Rail Data (Page 3) |
|
Second Quarter |
|
|
|
|
Year-to-date |
|
2011 |
|
|
2010 (1) |
|
|
Fav/(Unfav) |
|
|
% |
|
|
|
|
|
2011 |
|
|
2010 (1) |
|
|
Fav/(Unfav) |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.65 |
|
|
|
1.58 |
|
|
|
(0.07 |
) |
|
|
(4.4 |
) |
|
Total operating expenses per gross ton-miles (GTM) (cents) |
|
|
1.75 |
|
|
|
1.61 |
|
|
|
(0.14 |
) |
|
|
(8.7 |
) |
|
1.65 |
|
|
|
1.58 |
|
|
|
(0.07 |
) |
|
|
(4.4 |
) |
|
Operating expenses, exclusive of land sales, per GTM (cents)(2) |
|
|
1.76 |
|
|
|
1.61 |
|
|
|
(0.15 |
) |
|
|
(9.3 |
) |
|
62,763 |
|
|
|
60,766 |
|
|
|
1,997 |
|
|
|
3.3 |
|
|
Freight gross ton-miles (millions) |
|
|
118,998 |
|
|
|
119,290 |
|
|
|
(292 |
) |
|
|
(0.2 |
) |
|
10,059 |
|
|
|
9,920 |
|
|
|
139 |
|
|
|
1.4 |
|
|
Train miles (000) |
|
|
19,304 |
|
|
|
19,477 |
|
|
|
(173 |
) |
|
|
(0.9 |
) |
|
16,219 |
|
|
|
15,726 |
|
|
|
(493 |
) |
|
|
(3.1 |
) |
|
Average number of active employees Total |
|
|
15,567 |
|
|
|
15,079 |
|
|
|
(488 |
) |
|
|
(3.2 |
) |
|
13,947 |
|
|
|
13,813 |
|
|
|
(134 |
) |
|
|
(1.0 |
) |
|
Average number of active employees Expense |
|
|
13,978 |
|
|
|
13,818 |
|
|
|
(160 |
) |
|
|
(1.2 |
) |
|
16,439 |
|
|
|
15,975 |
|
|
|
(464 |
) |
|
|
(2.9 |
) |
|
Number of employees at end of period Total |
|
|
16,439 |
|
|
|
15,975 |
|
|
|
(464 |
) |
|
|
(2.9 |
) |
|
14,067 |
|
|
|
13,887 |
|
|
|
(180 |
) |
|
|
(1.3 |
) |
|
Number of employees at end of period Expense |
|
|
14,067 |
|
|
|
13,887 |
|
|
|
(180 |
) |
|
|
(1.3 |
) |
|
1.14 |
|
|
|
1.13 |
|
|
|
(0.01 |
) |
|
|
(0.9 |
) |
|
U.S. gallons of locomotive fuel per 1,000 GTMs freight & yard |
|
|
1.22 |
|
|
|
1.18 |
|
|
|
(0.04 |
) |
|
|
(3.4 |
) |
|
70.2 |
|
|
|
68.3 |
|
|
|
(1.9 |
) |
|
|
(2.8 |
) |
|
U.S. gallons of locomotive fuel consumed total (millions) (3) |
|
|
143.3 |
|
|
|
139.8 |
|
|
|
(3.5 |
) |
|
|
(2.5 |
) |
|
3.50 |
|
|
|
2.55 |
|
|
|
(0.95 |
) |
|
|
(37.3 |
) |
|
Average fuel price (U.S. dollars per U.S. gallon) |
|
|
3.31 |
|
|
|
2.49 |
|
|
|
(0.82 |
) |
|
|
(32.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluidity Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.1 |
|
|
|
19.9 |
|
|
|
(0.2 |
) |
|
|
(1.0 |
) |
|
Average terminal dwell AAR definition (hours) |
|
|
21.8 |
|
|
|
21.9 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
20.0 |
|
|
|
23.3 |
|
|
|
(3.3 |
) |
|
|
(14.2 |
) |
|
Average train speed AAR definition (mph) |
|
|
19.9 |
|
|
|
23.1 |
|
|
|
(3.2 |
) |
|
|
(13.9 |
) |
|
154.3 |
|
|
|
169.2 |
|
|
|
(14.9 |
) |
|
|
(8.8 |
) |
|
Car miles per car day (4) |
|
|
146.1 |
|
|
|
158.4 |
|
|
|
(12.3 |
) |
|
|
(7.8 |
) |
|
54.2 |
|
|
|
48.0 |
|
|
|
(6.2 |
) |
|
|
(12.9 |
) |
|
Average daily active cars on-line (000) (4) |
|
|
54.7 |
|
|
|
50.8 |
|
|
|
(3.9 |
) |
|
|
(7.7 |
) |
|
1,114 |
|
|
|
1,034 |
|
|
|
(80 |
) |
|
|
(7.7 |
) |
|
Average daily active road locomotives on-line |
|
|
1,088 |
|
|
|
1,006 |
|
|
|
(82 |
) |
|
|
(8.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Safety |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.75 |
|
|
|
1.26 |
|
|
|
(0.49 |
) |
|
|
(38.9 |
) |
|
FRA personal injuries per 200,000 employee-hours |
|
|
1.74 |
|
|
|
1.59 |
|
|
|
(0.15 |
) |
|
|
(9.4 |
) |
|
1.56 |
|
|
|
2.00 |
|
|
|
0.44 |
|
|
|
22.0 |
|
|
FRA train accidents per million train-miles |
|
|
2.01 |
|
|
|
1.72 |
|
|
|
(0.29 |
) |
|
|
(16.9 |
) |
|
|
|
(1) |
|
Certain prior period figures have been revised to conform with current presentation
or have been updated to reflect new information. |
|
(2) |
|
Operating expenses exclusive of land sales, per GTM is calculated consistently with
total operating expenses per GTM except for the exclusion of net gains on land sales of $2.0
million and $0.8 million for the three months ended June 30, 2011 and 2010, respectively, and
$1.8 million and $3.2 million for the six months ended June 30, 2011 and 2010, respectively. |
|
(3) |
|
Includes gallons of fuel consumed from freight, yard and commuter service but
excludes fuel used in capital projects and other non-freight activities. |
|
(4) |
|
Incorporates a new reporting methodology which excludes cars already placed at a
customer location waiting for loading or unloading or cars that cannot be placed at a
customers location due to shipper or receiver issues. |
19
TABLE OF CONTENTS
|
|
|
|
|
1. BUSINESS PROFILE |
|
|
1 |
|
2. STRATEGY |
|
|
1 |
|
3. FORWARD-LOOKING INFORMATION |
|
|
2 |
|
4. ADDITIONAL INFORMATION |
|
|
2 |
|
5. FINANCIAL HIGHLIGHTS |
|
|
3 |
|
6. OPERATING RESULTS |
|
|
3 |
|
7. LINES OF BUSINESS |
|
|
4 |
|
8. PERFORMANCE INDICATORS |
|
|
9 |
|
9. OPERATING EXPENSES |
|
|
10 |
|
10. OTHER INCOME STATEMENT ITEMS |
|
|
12 |
|
11. QUARTERLY FINANCIAL DATA |
|
|
13 |
|
12. CHANGES IN ACCOUNTING POLICY |
|
|
13 |
|
13. LIQUIDITY AND CAPITAL RESOURCES |
|
|
14 |
|
14. NON-GAAP MEASURES |
|
|
15 |
|
15. BALANCE SHEET |
|
|
16 |
|
16. FINANCIAL INSTRUMENTS |
|
|
17 |
|
17. OFF-BALANCE SHEET ARRANGEMENTS |
|
|
19 |
|
18. CONTRACTUAL COMMITMENTS |
|
|
19 |
|
19. FUTURE TRENDS AND COMMITMENTS |
|
|
19 |
|
20. BUSINESS RISKS |
|
|
21 |
|
21. CRITICAL ACCOUNTING ESTIMATES |
|
|
27 |
|
22. SYSTEMS, PROCEDURES AND CONTROLS |
|
|
29 |
|
23. GLOSSARY OF TERMS |
|
|
30 |
|
This Managements Discussion and Analysis (MD&A) is provided in conjunction with the
Consolidated Financial Statements and related notes for the three and six months ended June 30,
2011 prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP). Except where otherwise indicated, all financial information reflected herein is
expressed in Canadian dollars. All information has been prepared in accordance with GAAP, except
as described in Section 14, Non-GAAP Measures of this MD&A.
July 28, 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 23, Glossary of Terms.
Unless otherwise indicated, all comparisons of results for the second quarter and year to date 2011
are against the results for the second quarter and year to date 2010.
1. 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 14,700 miles, serving the principal business centres of Canada from Montreal, Quebec,
to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. Our railway feeds
directly into the U.S. heartland from the East and West coasts. Agreements with other carriers
extend our market reach east of Montreal in Canada, throughout the U.S. and into Mexico. 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. STRATEGY
Our vision is to be the safest and most fluid railway in North America. Through the ingenuity of
our people, our objective is to create long-term value for our 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, merchandise and intermodal 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 bulk, merchandise and intermodal Integrated
Operating Plan (IOP) and driving more value from existing assets and resources by
lengthening our trains, investing in operating and enterprise systems renewal and reducing
our cost structure; and |
|
|
|
|
continuing to develop a dedicated, professional and knowledgeable workforce that is
committed to safety and sustainable financial performance through steady improvement in
profitability, increased free cash flow and a competitive return on investment. |
3. FORWARD-LOOKING INFORMATION
This MD&A, especially but not limited to this section, contains certain forward-looking statements
within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other
relevant securities legislation relating, but not limited to, our operations, anticipated financial
performance, business prospects and strategies. Forward-looking information typically contains
statements with words such as anticipate, believe, expect, plan or similar words suggesting
future outcomes.
Readers are cautioned to not place undue reliance on forward-looking information because it is
possible that we will not achieve predictions, forecasts, projections and other forms of
forward-looking information. In addition, except as required by law, we undertake no obligation to
update publicly or otherwise revise any forward-looking information, whether as a result of new
information, future events or otherwise.
By its nature, our forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including, but not limited to, the following factors: changes in business
strategies; general North American and global economic and business conditions; the availability
and price of energy commodities; the effects of competition and pricing pressures; industry
capacity; shifts in market demands; changes in laws and regulations, including regulation of rates;
changes in taxes and tax rates; potential increases in maintenance and operating costs;
uncertainties of litigation; labour disputes; risks and liabilities arising from derailments;
timing of completion of capital and maintenance projects; currency and interest rate fluctuations;
effects of changes in market conditions on the financial position of pension plans and liquidity of
investments; various events that could disrupt operations, including severe weather conditions;
security threats and governmental response to them; and technological changes.
There are more specific factors that could cause actual results to differ from those described in
the forward-looking statements contained in this MD&A. These more specific factors are identified
and discussed in Section 20, Business Risks and elsewhere in this MD&A.
2011 Financial Assumptions
Financial assumptions are unchanged from information previously provided in CPs 2010 annual MD&A.
Assumptions for 2011 include capital expenditures estimated to range from $950 million to $1.05
billion (discussed further in Section 13, Liquidity and Capital Resources). CP expects its tax
rate to be in the 24% to 26% range (discussed further in Section 10, Other Income Statement Items).
The 2011 pension contributions are currently estimated to be between $100 million and $125 million
(discussed further in Section 19, Future Trends and Commitments). Undue reliance should not be
placed on these assumptions and other forward-looking information.
4. ADDITIONAL INFORMATION
Additional information, including our Consolidated Financial Statements, Annual Information Form,
press releases and other required filing documents, are available on SEDAR at www.sedar.com, on
EDGAR at www.sec.gov 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.
Canadian Pacific 2011 MD&A Q2
2
5. FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions, except percentages and per-share data) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Revenues |
|
$ |
1,264.5 |
|
|
$ |
1,234.2 |
|
|
$ |
2,427.9 |
|
|
$ |
2,401.0 |
|
Operating income |
|
|
230.5 |
|
|
|
274.1 |
|
|
|
339.7 |
|
|
|
480.7 |
|
Net income |
|
|
128.0 |
|
|
|
166.6 |
|
|
|
161.7 |
|
|
|
267.6 |
|
|
Basic earnings per share |
|
|
0.76 |
|
|
|
0.99 |
|
|
|
0.96 |
|
|
|
1.59 |
|
Diluted earnings per share |
|
|
0.75 |
|
|
|
0.98 |
|
|
|
0.95 |
|
|
|
1.58 |
|
Dividends declared per share |
|
|
0.3000 |
|
|
|
0.2700 |
|
|
|
0.5700 |
|
|
|
0.5175 |
|
|
Free cash(1) |
|
|
(38.8 |
) |
|
|
7.1 |
|
|
|
(85.6 |
) |
|
|
57.9 |
|
Total assets at June 30 |
|
|
13,555.8 |
|
|
|
13,739.0 |
|
|
|
13,555.8 |
|
|
|
13,739.0 |
|
Total long-term financial liabilities at June 30(2) |
|
|
4,049.6 |
|
|
|
4,317.1 |
|
|
|
4,049.6 |
|
|
|
4,317.1 |
|
Operating ratio |
|
|
81.8 |
% |
|
|
77.8 |
% |
|
|
86.0 |
% |
|
|
80.0 |
% |
|
|
|
|
(1) |
|
This measure has no standardized meaning prescribed by GAAP and,
therefore, is unlikely to be comparable to similar measures of other companies. This measure is
described in Section 14, Non-GAAP Measures along with a reconciliation of free cash to GAAP cash
position in Section 13, Liquidity and Capital Resources. |
|
(2) |
|
Excludes deferred income taxes: $1,924.4 million and $1,938.1 million; and other
non-financial deferred liabilities of $1,307.1 million and $1,582.3 million at June 30, 2011 and
2010, respectively. |
6. OPERATING RESULTS
Income
Operating income in the second quarter of 2011 was $230.5 million, a decrease of $43.6 million, or
15.9%, from $274.1 million in 2010. Operating income for the first six months of 2011 was $339.7
million, a decrease of $141.0 million, or 29.3% from $480.7 million in 2010.
Operating income decreased primarily due to:
|
|
|
inefficient operations driven by the impacts of winter and the prolonged flooding
conditions experienced in 2011 on revenues and expenses; |
|
|
|
|
the net unfavourable impact of higher fuel costs; and |
|
|
|
|
increased IT costs due to improvements to our SAP and shipment management platforms. |
These decreases in operating income were partially offset by lower incentive and stock-based
compensation.
Net income in the second quarter of 2011 was $128.0 million, a decrease of $38.6 million, or 23.2%,
from $166.6 million in 2010. Net income for the first six months of 2011 was $161.7 million, a
decrease of $105.9 million, or 39.6%, from $267.6 million in 2010. Net income decreased primarily
due to lower operating income.
Diluted Earnings per Share
Diluted earnings per share (EPS) was $0.75 in the second quarter of 2011, a decrease of $0.23 or
23.5% from $0.98 in 2010. Diluted EPS for the first six months of 2011 was $0.95, a decrease of
$0.63, or 39.9% from $1.58 in 2010. These decreases were primarily due to the decrease in net
income.
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. Our operating ratio was 81.8% in the second quarter of
2011, compared with 77.8% in the second quarter of 2010. This ratio was 86.0% for the first six
months of 2011, compared with 80.0% for the first six months of 2010. These increases were
primarily due to weather related costs and inefficiencies, higher fuel costs and increased IT costs
due to improvements to our SAP and shipment management platforms.
Impact of Foreign Exchange on Earnings
Fluctuations in foreign exchange (FX) affect our results because U.S. dollar-denominated revenues
and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses
decrease when the Canadian dollar strengthens in relation to the U.S. dollar.
Canadian Pacific 2011 MD&A Q2
3
The Canadian dollar strengthened against the U.S. dollar by approximately 5% on average during the
second quarter of 2011 and 5% in the first six months of 2011, compared with the same periods in
2010. The average FX rate for converting U.S. dollars to Canadian dollars decreased to $0.97 in
the second quarter of 2011 from $1.02 in the
second quarter of 2010 and decreased to $0.98 for the first six months of 2011 compared to $1.03
for the same period in 2010.
7. LINES OF BUSINESS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
Volumes |
|
ended June 30 |
|
|
ended June 30 |
|
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Carloads (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
112.8 |
|
|
|
115.9 |
|
|
|
(2.7 |
) |
|
|
212.2 |
|
|
|
229.1 |
|
|
|
(7.4 |
) |
Coal |
|
|
81.0 |
|
|
|
94.6 |
|
|
|
(14.4 |
) |
|
|
141.3 |
|
|
|
170.6 |
|
|
|
(17.2 |
) |
Sulphur and fertilizers |
|
|
54.3 |
|
|
|
43.2 |
|
|
|
25.7 |
|
|
|
102.8 |
|
|
|
87.5 |
|
|
|
17.5 |
|
Forest products |
|
|
17.5 |
|
|
|
17.2 |
|
|
|
1.7 |
|
|
|
35.8 |
|
|
|
34.8 |
|
|
|
2.9 |
|
Industrial and consumer products |
|
|
96.0 |
|
|
|
96.6 |
|
|
|
(0.6 |
) |
|
|
196.1 |
|
|
|
188.4 |
|
|
|
4.1 |
|
Automotive |
|
|
37.0 |
|
|
|
37.5 |
|
|
|
(1.3 |
) |
|
|
73.3 |
|
|
|
71.0 |
|
|
|
3.2 |
|
Intermodal |
|
|
248.5 |
|
|
|
271.4 |
|
|
|
(8.4 |
) |
|
|
491.5 |
|
|
|
520.0 |
|
|
|
(5.5 |
) |
|
Total carloads |
|
|
647.1 |
|
|
|
676.4 |
|
|
|
(4.3 |
) |
|
|
1,253.0 |
|
|
|
1,301.4 |
|
|
|
(3.7 |
) |
|
Revenue ton-miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
7,816 |
|
|
|
8,303 |
|
|
|
(5.9 |
) |
|
|
15,076 |
|
|
|
16,939 |
|
|
|
(11.0 |
) |
Coal |
|
|
5,564 |
|
|
|
5,268 |
|
|
|
5.6 |
|
|
|
9,534 |
|
|
|
9,576 |
|
|
|
(0.4 |
) |
Sulphur and fertilizers |
|
|
5,643 |
|
|
|
4,335 |
|
|
|
30.2 |
|
|
|
10,512 |
|
|
|
8,727 |
|
|
|
20.5 |
|
Forest products(1) |
|
|
1,179 |
|
|
|
1,275 |
|
|
|
(7.5 |
) |
|
|
2,471 |
|
|
|
2,506 |
|
|
|
(1.4 |
) |
Industrial and consumer products(1) |
|
|
5,515 |
|
|
|
5,166 |
|
|
|
6.8 |
|
|
|
11,477 |
|
|
|
10,200 |
|
|
|
12.5 |
|
Automotive |
|
|
545 |
|
|
|
560 |
|
|
|
(2.7 |
) |
|
|
1,068 |
|
|
|
1,105 |
|
|
|
(3.3 |
) |
Intermodal |
|
|
5,961 |
|
|
|
6,518 |
|
|
|
(8.5 |
) |
|
|
11,769 |
|
|
|
12,575 |
|
|
|
(6.4 |
) |
|
Total revenue ton-miles |
|
|
32,223 |
|
|
|
31,425 |
|
|
|
2.5 |
|
|
|
61,907 |
|
|
|
61,628 |
|
|
|
0.5 |
|
|
|
|
|
(1) |
|
Certain prior period figures have been updated to reflect new information. |
Changes in freight volumes generally contribute to corresponding changes in freight revenues
and certain variable expenses, such as fuel, equipment rents and crew costs.
Volumes in the second quarter of 2011, as measured by total carloads, decreased by approximately
29,300 units, or 4.3% compared to 2010. Volumes for the first six months of 2011, as measured by
total carloads, decreased by 48,400 units, or 3.7% compared to 2010.
These decreases in carloads were primarily due to the impact of significant flooding in
Saskatchewan and North Dakota, and the following:
|
|
|
lower volumes of coal due to certain short haul U.S coal volumes that CP chose not to
renew; |
|
|
|
|
lower volumes of import/export intermodal traffic; and |
|
|
|
|
lower Canadian originating grain shipments. |
These decreases in carloads were partially offset by increased volumes of export and domestic
potash.
Revenue ton-miles (RTMs) in the second quarter of 2011 increased by approximately 798 million, or
2.5%, compared to 2010. RTMs for the first six months of 2011 increased by approximately 279
million, or 0.5%, compared to 2010.
These increases in RTMs, in spite of lower carloads, were primarily due to:
|
|
|
higher volumes of export and domestic potash; |
|
|
|
|
increased average length of haul in coal; and |
|
|
|
|
increased length of haul in industrial and consumer products. |
These increases in RTMs were partially offset by the lower average length of haul in forest
products.
Canadian Pacific 2011 MD&A Q2
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Freight revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
$ |
254.6 |
|
|
$ |
264.4 |
|
|
|
(3.7 |
) |
|
$ |
486.6 |
|
|
$ |
535.7 |
|
|
|
(9.2 |
) |
Coal |
|
|
145.3 |
|
|
|
136.7 |
|
|
|
6.3 |
|
|
|
251.2 |
|
|
|
247.2 |
|
|
|
1.6 |
|
Sulphur and fertilizers |
|
|
150.5 |
|
|
|
114.9 |
|
|
|
31.0 |
|
|
|
279.5 |
|
|
|
232.7 |
|
|
|
20.1 |
|
Forest products |
|
|
46.0 |
|
|
|
44.4 |
|
|
|
3.6 |
|
|
|
91.5 |
|
|
|
87.6 |
|
|
|
4.5 |
|
Industrial and
consumer products |
|
|
231.8 |
|
|
|
217.0 |
|
|
|
6.8 |
|
|
|
462.8 |
|
|
|
422.5 |
|
|
|
9.5 |
|
Automotive |
|
|
84.2 |
|
|
|
89.0 |
|
|
|
(5.4 |
) |
|
|
164.2 |
|
|
|
166.6 |
|
|
|
(1.4 |
) |
Intermodal |
|
|
320.8 |
|
|
|
335.8 |
|
|
|
(4.5 |
) |
|
|
632.6 |
|
|
|
648.1 |
|
|
|
(2.4 |
) |
|
Total freight revenues |
|
|
1,233.2 |
|
|
|
1,202.2 |
|
|
|
2.6 |
|
|
|
2,368.4 |
|
|
|
2,340.4 |
|
|
|
1.2 |
|
Other revenue |
|
|
31.3 |
|
|
|
32.0 |
|
|
|
(2.2 |
) |
|
|
59.5 |
|
|
|
60.6 |
|
|
|
(1.8 |
) |
|
Total revenues |
|
$ |
1,264.5 |
|
|
$ |
1,234.2 |
|
|
|
2.5 |
|
|
$ |
2,427.9 |
|
|
$ |
2,401.0 |
|
|
|
1.1 |
|
|
CPs revenues are primarily derived from transporting freight. Other revenues are generated mainly
from leasing of certain assets, switching fees and passenger revenue.
During the second quarter of 2011, one customer comprised 10.2% of total revenue compared to 9.3%
in the same period of 2010. No one customer comprised more than 10% of total revenue for the six
months ended June 30, 2011 or 2010.
Freight Revenues
Freight revenues are earned from transporting bulk commodities, merchandise and intermodal goods,
and include fuel recoveries billed to our customers. Freight revenues were $1,233.2 million in the
second quarter of 2011, an increase of $31.0 million, or 2.6% from $1,202.2 million in 2010.
Freight revenues were $2,368.4 million in the first six months of 2011, an increase of $28.0
million, or 1.2%, from $2,340.4 million in the same period of 2010. This increase was driven
primarily by higher volumes of export and domestic potash, an increase in fuel cost recovery
revenues due to fuel price increases, and higher freight rates. This increase was partially offset
by lower overall traffic volumes, as measured in carloads, and the unfavourable impact of the
change in FX on U.S. dollar-denominated revenue.
Fuel Cost Recovery Programs
A change in fuel prices may adversely impact the Companys expenses and revenues. As such, CP
employs a fuel cost recovery program designed to mechanistically respond to fluctuations in fuel
prices and help mitigate the financial impact of rising fuel prices. CP has continued to modify
its fuel cost recovery program utilizing a 15 day average fuel index price to further reduce fuel
price volatility exposure.
Grain
Grain revenues for the second quarter of 2011 were $254.6 million, a decrease of $9.8 million, or
3.7%, from $264.4 million in 2010.
This decrease was primarily due to:
|
|
|
significant flooding in Saskatchewan and North Dakota; |
|
|
|
|
lower grain volumes shipped to eastern Canadian destinations; and |
|
|
|
|
the unfavourable impact of the change in FX. |
This decrease was partially offset by:
|
|
|
increased U.S. originating shipments in non-flooded areas; |
|
|
|
|
higher fuel cost recovery revenues due to the change in fuel prices; and |
|
|
|
|
increased freight rates. |
Canadian Pacific 2011 MD&A Q2
5
Grain revenues for the first six months of 2011 were $486.6 million, a decrease of $49.1 million,
or 9.2%, from $535.7 million for the same period in 2010. This decrease was primarily due to
unusually difficult winter weather and other related supply chain issues lowering Canadian grain
shipments and CPs market share in the first quarter of 2011 and the unfavourable impact of the
change in FX.
This decrease was partially offset by:
|
|
|
increased U.S. originating shipments in non-flooded areas; |
|
|
|
|
higher fuel cost recovery revenues due to the change in fuel prices; and |
|
|
|
|
increased freight rates. |
Coal
Coal revenues for the second quarter of 2011 were $145.3 million, an increase of $8.6 million, or
6.3%, from $136.7 million in 2010. Coal revenues for the first six months of 2011 were $251.2
million, an increase of $4.0 million, or 1.6%, from $247.2 million in 2010.
These increases were primarily due to:
|
|
|
an increased length of haul due to changes in traffic mix; |
|
|
|
|
the return of certain export coal volumes; and |
|
|
|
|
higher fuel cost recovery revenues due to the change in fuel prices. |
These increases were partially offset by CP choosing not to renew certain short haul U.S thermal
coal contracts and the unfavourable impact of the change in FX.
Sulphur and Fertilizers
Sulphur and fertilizers revenues for the second quarter of 2011 were $150.5 million, an increase of
$35.6 million, or 31.0%, from $114.9 million in 2010. For the first six months of 2011, these
revenues were $279.5 million, an increase of $46.8 million, or 20.1%, from $232.7 million for the
same period in 2010.
These increases were primarily due to:
|
|
|
higher export potash shipments as volumes return to pre-recession levels; |
|
|
|
|
higher domestic potash shipments due to increased overall demand and rising commodity
prices; |
|
|
|
|
higher fuel cost recovery revenues due to the change in fuel price; and |
|
|
|
|
increased freight rates. |
These increases were partially offset by the lower shipments of sulphur and the unfavourable impact
of the change in FX.
Forest Products
Forest products revenues for the second quarter of 2011 were $46.0 million, an increase of $1.6
million, or 3.6%, from $44.4 million in 2010. For the first six months of 2011, these revenues
were $91.5 million, an increase of $3.9 million, or 4.5% from $87.6 million for the same period in
2010.
These increases were primarily due to:
|
|
|
higher overall shipments of pulp and paper products due to the re-opening of a mill on
our line; |
|
|
|
|
higher fuel cost recovery revenues due to the change in fuel price; and |
|
|
|
|
increased freight rates. |
These increases were partially offset by the lower average length of haul and the unfavourable
impact of the change in FX.
Industrial and Consumer Products
Industrial and consumer products revenues for the second quarter of 2011 were $231.8 million, an
increase of $14.8 million, or 6.8%, from $217.0 million in 2010. For the first six months of 2011,
these revenues were $462.8 million, an increase of $40.3 million, or 9.5%, from $422.5 million for
the same period in 2010.
These increases were primarily due to:
|
|
|
increased shipments of chemicals and energy products; |
|
|
|
|
higher fuel cost recovery revenues due to the change in fuel price; and |
|
|
|
|
increased freight rates. |
Canadian Pacific 2011 MD&A Q2
6
These increases were partially offset by the unfavourable impact of the change in FX and reduced
carloads due to the significant flooding in Saskatchewan and North Dakota.
Automotive
Automotive revenues for the second quarter of 2011 were
$84.2 million, a decrease of $4.8 million,
or 5.4%, from $89.0 million in 2010. For the first six months of 2011, these revenues were $164.2
million, a decrease of $2.4 million, or 1.4%, from $166.6 million for the same period in 2010.
These decreases were primarily due to reduced volumes for Toyota, Honda and Mazda as
imports through the Port Metro Vancouver and production at North American plants were significantly
impacted by the earthquake and tsunami in Japan, and the unfavourable impact of the change in FX.
These decreases were partially offset by increased shipments as a result of higher North American
auto sales and higher overall auto production by domestic producers and higher fuel cost recovery
revenues.
Intermodal
Intermodal revenues for the second quarter of 2011 were $320.8 million, a decrease of $15.0
million, or 4.5%, from $335.8 million in 2010. For the first six months of 2011, these revenues
were $632.6 million, a decrease of $15.5 million, or 2.4%, from $648.1 million in 2010.
These decreases were primarily due to:
|
|
|
the impact of weather on our service reliability and capacity; |
|
|
|
|
lower overall import/export volumes through the Port Metro Vancouver; and |
|
|
|
|
the unfavourable impact of the change in FX. |
These decreases were partially offset by increased freight rates and higher fuel cost recovery
revenues due to the increase in fuel price.
Other Revenues
Other revenues for the second quarter of 2011 were $31.3 million, a decrease of $0.7 million, or
2.2% from $32.0 million in 2010. Other revenues for the first six months of 2011 were $59.5
million, a decrease of $1.1 million, or 1.8%, from $60.6 million in 2010 These decreases were
primarily due to lower passenger revenues caused by CP choosing not to renew a contract and the
unfavourable impact of the change in FX, partially offset by higher leasing and switching revenues.
Canadian Pacific 2011 MD&A Q2
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per Carload |
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(dollars) |
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Freight revenue per carload |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
$ |
2,257 |
|
|
$ |
2,281 |
|
|
|
(1.1 |
) |
|
$ |
2,293 |
|
|
$ |
2,338 |
|
|
|
(1.9 |
) |
Coal |
|
|
1,794 |
|
|
|
1,445 |
|
|
|
24.2 |
|
|
|
1,778 |
|
|
|
1,449 |
|
|
|
22.7 |
|
Sulphur and fertilizers |
|
|
2,772 |
|
|
|
2,660 |
|
|
|
4.2 |
|
|
|
2,719 |
|
|
|
2,659 |
|
|
|
2.3 |
|
Forest products |
|
|
2,629 |
|
|
|
2,581 |
|
|
|
1.9 |
|
|
|
2,556 |
|
|
|
2,517 |
|
|
|
1.5 |
|
Industrial and consumer products |
|
|
2,415 |
|
|
|
2,246 |
|
|
|
7.5 |
|
|
|
2,360 |
|
|
|
2,243 |
|
|
|
5.2 |
|
Automotive |
|
|
2,276 |
|
|
|
2,373 |
|
|
|
(4.1 |
) |
|
|
2,240 |
|
|
|
2,346 |
|
|
|
(4.5 |
) |
Intermodal |
|
|
1,291 |
|
|
|
1,237 |
|
|
|
4.4 |
|
|
|
1,287 |
|
|
|
1,246 |
|
|
|
3.3 |
|
|
Total freight revenue per carload |
|
$ |
1,906 |
|
|
$ |
1,777 |
|
|
|
7.3 |
|
|
$ |
1,890 |
|
|
$ |
1,798 |
|
|
|
5.1 |
|
|
Total freight revenue per carload in the second quarter of 2011 increased by 7.3% compared to the
same period of 2010. Total freight revenue per carload for the first six months of 2011 represents
an increase of 5.1% compared to the same period of 2010. These increases were due to changes in
coal traffic mix reflecting reductions in lower revenue per carload movements, higher fuel cost
recovery revenues and increased freight rates. These increases were partially offset by the
unfavourable impact of the change in FX.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per Revenue Ton-mile |
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(cents) |
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Freight revenue per revenue ton-mile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
3.26 |
|
|
|
3.18 |
|
|
|
2.5 |
|
|
|
3.23 |
|
|
|
3.16 |
|
|
|
2.2 |
|
Coal |
|
|
2.61 |
|
|
|
2.59 |
|
|
|
0.8 |
|
|
|
2.63 |
|
|
|
2.58 |
|
|
|
1.9 |
|
Sulphur and fertilizers |
|
|
2.67 |
|
|
|
2.65 |
|
|
|
0.8 |
|
|
|
2.66 |
|
|
|
2.67 |
|
|
|
(0.4 |
) |
Forest products(1) |
|
|
3.90 |
|
|
|
3.48 |
|
|
|
12.1 |
|
|
|
3.70 |
|
|
|
3.50 |
|
|
|
5.7 |
|
Industrial and consumer products(1) |
|
|
4.20 |
|
|
|
4.20 |
|
|
|
|
|
|
|
4.03 |
|
|
|
4.14 |
|
|
|
(2.7 |
) |
Automotive |
|
|
15.45 |
|
|
|
15.89 |
|
|
|
(2.8 |
) |
|
|
15.37 |
|
|
|
15.08 |
|
|
|
1.9 |
|
Intermodal |
|
|
5.38 |
|
|
|
5.15 |
|
|
|
4.5 |
|
|
|
5.38 |
|
|
|
5.15 |
|
|
|
4.5 |
|
|
Total freight revenue per revenue ton-mile |
|
|
3.83 |
|
|
|
3.83 |
|
|
|
|
|
|
|
3.83 |
|
|
|
3.80 |
|
|
|
0.8 |
|
|
|
|
|
(1) |
|
Certain prior period figures have been updated to reflect new information. |
Freight revenue per RTM in the second quarter of 2011 was flat compared to the same period in
2010. Freight revenue per RTM for the first six months of 2011 was relatively flat compared to the
same period in 2010. This was due to higher fuel cost recovery and increases in freight rates
being offset by traffic mix changes due to strong growth in the sulphur and fertilizers line of
business, which generate lower revenue per RTM.
Canadian Pacific 2011 MD&A Q2
8
8. PERFORMANCE INDICATORS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Efficiency and other indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight gross ton-miles (GTMs) (millions) |
|
|
62,763 |
|
|
|
60,766 |
|
|
|
3.3 |
|
|
|
118,998 |
|
|
|
119,290 |
|
|
|
(0.2 |
) |
Train miles (thousands) |
|
|
10,059 |
|
|
|
9,920 |
|
|
|
1.4 |
|
|
|
19,304 |
|
|
|
19,477 |
|
|
|
(0.9 |
) |
U.S. gallons of locomotive fuel consumed per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000 GTMs freight and yard |
|
|
1.14 |
|
|
|
1.13 |
|
|
|
0.9 |
|
|
|
1.22 |
|
|
|
1.18 |
|
|
|
3.4 |
|
Average number of active employees expense |
|
|
13,947 |
|
|
|
13,813 |
|
|
|
1.0 |
|
|
|
13,978 |
|
|
|
13,818 |
|
|
|
1.2 |
|
Car miles per car day |
|
|
154.3 |
|
|
|
169.2 |
|
|
|
(8.8 |
) |
|
|
146.1 |
|
|
|
158.4 |
|
|
|
(7.8 |
) |
Average terminal dwell (hours) |
|
|
20.1 |
|
|
|
19.9 |
|
|
|
1.0 |
|
|
|
21.8 |
|
|
|
21.9 |
|
|
|
(0.5 |
) |
Average train speed (miles per hour) |
|
|
20.0 |
|
|
|
23.3 |
|
|
|
(14.2 |
) |
|
|
19.9 |
|
|
|
23.1 |
|
|
|
(13.9 |
) |
Safety indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
1.75 |
|
|
|
1.26 |
|
|
|
38.9 |
|
|
|
1.74 |
|
|
|
1.59 |
|
|
|
9.4 |
|
FRA train accidents per million train-miles |
|
|
1.56 |
|
|
|
2.00 |
|
|
|
(22.0 |
) |
|
|
2.01 |
|
|
|
1.72 |
|
|
|
16.9 |
|
|
The indicators listed in this table are key measures of our operating performance. Certain
comparative period figures have been updated to reflect new information. Definitions of these
performance indicators are provided in Section 23, Glossary of Terms.
Efficiency and Other Indicators
GTMs for the second quarter of 2011 were 62,763 million, an increase of 3.3% compared with 60,766
million GTMs in the second quarter of 2010. This increase was primarily driven by higher volumes,
as measured by RTMs, for sulphur and fertilizers, industrial and consumer products and coal offset,
in part, by reductions in grain and intermodal. In addition, GTMs were impacted by the increased
workload or distance travelled as a result of rerouting trains due to prolonged flooding on our
network. These are unproductive moves, as CP is not compensated for the incremental costs incurred
due to further distances travelled. GTMs for the first six months of 2011 decreased by 0.2%
compared to the same period of 2010. This decrease was mainly due to the severity, breadth and
duration of winter events in the first quarter.
Train miles increased by 1.4% in the second quarter of 2011 compared to 2010. This increase was
mainly due to increased GTMs offset, in part, by improvements in train weights. Train miles
decreased by 0.9% for the first six months of 2011. This decrease was mainly due to a slight
traffic reduction and improvements in train weights associated with our long train strategy.
U.S. gallons of locomotive fuel consumed per 1,000 GTMs in both freight and yard activity increased
by 0.9% in the second quarter of 2011 compared to 2010. U.S. gallons of locomotive fuel consumed
per 1,000 GTMs in both freight and yard activity increased by 3.4% in the first six months of 2011.
These increases were primarily due to the impacts of difficult operating conditions, including the
rerouting and staging of trains due to the prolonged flooding outages and the activation of older
less fuel efficient locomotives.
The average number of active expense employees for the second quarter of 2011 increased by 134 or
1.0%, compared with the same period in 2010. The average number of expense employees for the first
six months of 2011 increased by 160 or 1.2%, compared with the same period in 2010. The average
active expense employees increased due to additional hiring to address volume growth projections
and attrition.
Car miles per car day were 154.3 in the second quarter of 2011, a decrease of 8.8% compared to
169.2 in the second quarter of 2010. This decrease was primarily due to the prolonged flooding
events that prevented fluid operations and the resulting need for more cars travelling increased
miles on reroutes. Car miles per car day decreased by 7.8% in the first six months of 2011,
compared to the same period of 2010. This decrease was primarily due to the residual impacts of
severe winter, supply pipeline issues and line outages due to prolonged flooding.
Average terminal dwell, the average time a freight car resides in a terminal, increased by 1.0% in
the second quarter of 2011 compared with the same period of 2010. The increase was primarily due
to the prolonged flooding events that prevented fluid operations. In the first six months of 2011,
average terminal dwell decreased by 0.5% compared with the same period of 2010 due to a focus on
maintaining yard fluidity and implementation of our local service reliability program.
Canadian Pacific 2011 MD&A Q2
9
Average train speed decreased by 14.2% in the second quarter of 2011, compared with the same period
of 2010. This decrease was primarily due to the prolonged flooding events that prevented fluid
operations and changes in traffic mix. In the first six months of 2011, average train speed
decreased by 13.9%, compared with the same period of 2010. The decrease was primarily due to the
impacts of severe weather, supply pipeline issues and line outages due to prolonged flooding.
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 1.75 for the second quarter of
2011, compared with 1.26 in the same period of 2010. This rate was 1.74 for the first six months
of 2011, compared with 1.59 for the same period in 2010. Difficult operating conditions for our
field personnel contributed to the increase.
The FRA train accident rate for CP for the second quarter of 2011 was 1.56 accidents per million
train-miles, compared with 2.00 in the same period of 2010. This rate was 2.01 for the first six
months of 2011, compared with 1.72 for the same period in 2010.
9. OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
336.1 |
|
|
$ |
349.7 |
|
|
|
(3.9 |
) |
|
$ |
700.6 |
|
|
$ |
703.5 |
|
|
|
(0.4 |
) |
Fuel |
|
|
237.4 |
|
|
|
177.9 |
|
|
|
33.4 |
|
|
|
463.1 |
|
|
|
359.6 |
|
|
|
28.8 |
|
Materials |
|
|
57.4 |
|
|
|
51.0 |
|
|
|
12.5 |
|
|
|
129.0 |
|
|
|
115.0 |
|
|
|
12.2 |
|
Equipment rents |
|
|
53.6 |
|
|
|
54.9 |
|
|
|
(2.4 |
) |
|
|
105.0 |
|
|
|
103.9 |
|
|
|
1.1 |
|
Depreciation and
amortization |
|
|
122.2 |
|
|
|
123.3 |
|
|
|
(0.9 |
) |
|
|
244.5 |
|
|
|
244.5 |
|
|
|
|
|
Purchased services and other |
|
|
227.3 |
|
|
|
203.3 |
|
|
|
11.8 |
|
|
|
446.0 |
|
|
|
393.8 |
|
|
|
13.3 |
|
|
Total operating expenses |
|
$ |
1,034.0 |
|
|
$ |
960.1 |
|
|
|
7.7 |
|
|
$ |
2,088.2 |
|
|
$ |
1,920.3 |
|
|
|
8.7 |
|
|
Operating expenses for the second quarter of 2011 were $1,034.0 million, an increase of $73.9
million, or 7.7%, from $960.1 million in the same period of 2010. Operating expenses were $2,088.2
million for the first six months of 2011, an increase of $167.9 million, or 8.7%, from $1,920.3
million in the same period of 2010.
Operating expenses for the second quarter and the first six months of 2011 increased primarily due
to:
|
|
|
higher fuel expenses as a result of increased prices; |
|
|
|
|
increased IT costs due to improvements to our SAP and shipment management platforms,
included in Purchased services and other; and |
|
|
|
|
increased expenses due to flooding, impacting Compensation and benefits, Fuel, Purchased
services and other and Equipment rents. |
These increases in operating expenses were partially offset by lower incentive and stock-based
compensation and by the favourable impact in the change in FX.
Compensation and Benefits
Compensation and benefits expense was $336.1 million in the second quarter of 2011, a decrease of
$13.6 million, or 3.9%, from $349.7 million in 2010. Compensation and benefits expense was $700.6
million for the first six months of 2011, a decrease of $2.9 million, or 0.4%, from $703.5 million
in 2010. These decreases were primarily due to significantly lower incentive and stock-based
compensation and by the favourable impact in the change in FX.
These decreases were partially offset by:
|
|
|
higher crew costs driven by less efficient operations due to the residual
impacts of winter and prolonged flooding conditions; |
|
|
|
|
labour and benefits inflation; and |
|
|
|
|
increased training of newly hired employees in response to anticipated volume
growth and attrition. |
Canadian Pacific 2011 MD&A Q2
10
Fuel
Fuel expense was $237.4 million in the second quarter of 2011, an increase of $59.5 million, or
33.4%, from $177.9 million in 2010. Fuel expense was $463.1 million for the first six months of
2011, an increase of $103.5 million, or 28.8%, from $359.6 million in 2010. These increases were
primarily due to higher fuel prices and increased consumption, partially offset by the favourable
impact of the change in FX and hedging.
Materials
Materials expense was $57.4 million in the second quarter of 2011, an increase of $6.4 million, or
12.5%, from $51.0 million in 2010. Materials expense was $129.0 million in the first six months of
2011, an increase of $14.0 million, or 12.2%, from $115.0 million in 2010. These increases were
primarily due to a higher number of wheels replaced for freight cars and higher servicing and
repair costs for additional locomotives needed to assist in restoring fluidity across our entire
network as a result of extreme winter weather and subsequent flooding outages in the second quarter
of 2011. Higher non-locomotive fuel costs and reduced scrap credits due to changes in market
conditions also contributed to the increase. These increases were partially offset by the
favourable impact of the change in FX.
Equipment Rents
Equipment rents expense was $53.6 million in the second quarter of 2011, a decrease of $1.3 million
or 2.4%, from $54.9 million in 2010. This decrease was primarily due to higher per diem receipts
from foreign railways for the use of our freight cars and the favourable impact of the change in
FX. This decrease was partially offset by higher per diem payments made to foreign railways for
the use of their freight cars as flooding conditions in the second quarter and the continued impact
of winter weather conditions from the first quarter reduced asset velocity.
Equipment rents expense was $105.0 million for the first six months of 2011, an increase of $1.1
million or 1.1%, from $103.9 million in 2010. This increase was primarily due to higher locomotive
and freight car leasing costs in anticipation of higher demand, and higher per diem payments to
foreign railways as extreme winter weather conditions and the subsequent flooding in the first six
months of this year decreased asset velocity. This increase was partially offset by higher per
diem receipts from foreign railways for the use of our freight cars and the favourable impact of
the change in FX.
Depreciation and Amortization
Depreciation and amortization expense was $122.2 million in the second quarter of 2011, a decrease
of $1.1 million, or 0.9%, from $123.3 million in 2010. This decrease was primarily due to the
favourable impacts of the change in FX and the implementation of depreciation study results. These
were largely offset by an increase due to capital additions. Depreciation and amortization expense
was $244.5 million in the first six months of 2011, no change from $244.5 million in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Services and Other |
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
|
Purchased services and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support and facilities |
|
$ |
97.5 |
|
|
$ |
86.0 |
|
|
|
13.4 |
|
|
$ |
195.7 |
|
|
$ |
174.2 |
|
|
|
12.3 |
|
Track and operations |
|
|
43.9 |
|
|
|
35.7 |
|
|
|
23.0 |
|
|
|
92.7 |
|
|
|
68.7 |
|
|
|
34.9 |
|
Intermodal |
|
|
38.1 |
|
|
|
34.0 |
|
|
|
12.1 |
|
|
|
72.0 |
|
|
|
66.0 |
|
|
|
9.1 |
|
Equipment |
|
|
19.6 |
|
|
|
21.6 |
|
|
|
(9.3 |
) |
|
|
26.7 |
|
|
|
36.7 |
|
|
|
(27.2 |
) |
Casualty |
|
|
23.0 |
|
|
|
20.1 |
|
|
|
14.4 |
|
|
|
44.9 |
|
|
|
32.5 |
|
|
|
38.2 |
|
Other |
|
|
7.2 |
|
|
|
6.7 |
|
|
|
7.5 |
|
|
|
15.8 |
|
|
|
18.9 |
|
|
|
(16.4 |
) |
|
|
|
|
229.3 |
|
|
|
204.1 |
|
|
|
12.3 |
|
|
|
447.8 |
|
|
|
397.0 |
|
|
|
12.8 |
|
Land sales |
|
|
(2.0 |
) |
|
|
(0.8 |
) |
|
|
150.0 |
|
|
|
(1.8 |
) |
|
|
(3.2 |
) |
|
|
(43.8 |
) |
|
Total purchased services and other |
|
$ |
227.3 |
|
|
$ |
203.3 |
|
|
|
11.8 |
|
|
$ |
446.0 |
|
|
$ |
393.8 |
|
|
|
13.3 |
|
|
Purchased services and other expense was $227.3 million in the second quarter of 2011, an increase
of $24.0 million, or 11.8%, from $203.3 million in 2010. Purchased services and other expense was
$446.0 million for the first six months of 2011, an increase of $52.2 million, or 13.3%, from
$393.8 million in 2010.
These increases were primarily due to:
|
|
|
increased IT costs due to improvements to our SAP and shipment management platforms
included in Support and facilities; |
|
|
|
|
higher relocation costs driven by our strategic restructuring activities included in
Track and operations; and |
Canadian Pacific 2011 MD&A Q2
11
|
|
|
higher costs associated with inefficient operations. |
These increases were partially offset by reduced consulting costs and the favourable impact of the
change in FX.
10. OTHER INCOME STATEMENT ITEMS
Other Income and Charges
Other income and charges was a credit to income of $5.0 million in the second quarter of 2011,
compared to income of $3.4 million in the second quarter of 2010, and income of $5.5 million for
the first six months of 2011, compared to income of $8.3 million for the first six months of 2010.
Income in the second quarter and the first six months of 2011 was primarily due to the sale of
long-term floating rate notes in May 2011 for a gain of $6.3 million. These were partially offset
by foreign exchange losses on long term debt and working capital in 2011, compared to foreign
exchange gains in both periods of 2010.
Net Interest Expense
Net interest expense was $62.5 million in the second quarter of 2011, a decrease of $2.3 million or
3.5%, from $64.8 million. Net interest expense was $126.7 million in the first six months of 2011,
a decrease of $4.8 million or 3.7%, from $131.5 million for the same period in 2010. These
decreases were primarily due to the repayment of debt during 2010 and the favourable impact of the
change in FX on U.S. dollar-denominated interest expense. These decreases were partially offset by
the issuance of new debt during 2010, lower interest capitalized on capital projects during 2011
and lower interest income resulting from the collection of an interest bearing receivable during
the second quarter of 2010.
Income Taxes
Income tax expense was $45.0 million in the second quarter of 2011, a decrease of $1.1 million or
2.4%, from $46.1 million in 2010. For the first six months of 2011, income tax expense was $56.8
million, a decrease of $33.1 million or 36.8%, from $89.9 million for the same period in 2010.
These decreases were mainly due to lower earnings in 2011.
The effective income tax rate for second-quarter 2011 was 26.0%, compared with an effective tax
rate of 21.7% for second-quarter 2010. For the first six months of 2011, this rate was 26.0%
compared with 25.1% in 2010. These changes in tax rate are primarily due to the tax impact of
non-taxable gains and losses on unrealized FX on LTD.
We expect an effective income tax rate in 2011 of between 24% and 26% which is based on certain
estimates and assumptions for the year (discussed further in Section 20, Business Risks).
As part of a consolidated financial 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 our net investment in U.S. subsidiaries. As a result, the tax of gains
and losses on FX on LTD in different tax jurisdictions can vary significantly.
Canadian Pacific 2011 MD&A Q2
12
11. QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
2011 |
|
|
2010 |
|
|
2009 |
|
(in millions, except per share data) |
|
Jun. 30 |
|
|
Mar. 31 |
|
|
Dec. 31 |
|
|
Sept. 30 |
|
|
Jun. 30 |
|
|
Mar. 31 |
|
|
Dec. 31 |
|
|
Sept. 30 |
|
|
Total revenue |
|
$ |
1,264.5 |
|
|
$ |
1,163.4 |
|
|
$ |
1,294.3 |
|
|
$ |
1,286.2 |
|
|
$ |
1,234.2 |
|
|
$ |
1,166.8 |
|
|
$ |
1,143.2 |
|
|
$ |
1,118.1 |
|
Operating income |
|
|
230.5 |
|
|
|
109.2 |
|
|
|
297.7 |
|
|
|
337.7 |
|
|
|
274.1 |
|
|
|
206.6 |
|
|
|
167.5 |
|
|
|
342.9 |
|
Net income |
|
|
128.0 |
|
|
|
33.7 |
|
|
|
185.8 |
|
|
|
197.3 |
|
|
|
166.6 |
|
|
|
101.0 |
|
|
|
146.2 |
|
|
|
209.3 |
|
|
Basic earnings per
share |
|
$ |
0.76 |
|
|
$ |
0.20 |
|
|
$ |
1.10 |
|
|
$ |
1.17 |
|
|
$ |
0.99 |
|
|
$ |
0.60 |
|
|
$ |
0.87 |
|
|
$ |
1.25 |
|
Diluted earnings
per share |
|
$ |
0.75 |
|
|
$ |
0.20 |
|
|
$ |
1.09 |
|
|
$ |
1.17 |
|
|
$ |
0.98 |
|
|
$ |
0.60 |
|
|
$ |
0.87 |
|
|
$ |
1.24 |
|
|
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 typically influenced by these seasonal fluctuations in customer demand
and weather-related issues.
12. CHANGES IN ACCOUNTING POLICY
2011 Accounting Change
Fair value measurement and disclosure
In January 2010, the Financial Accounting Standards Board (FASB) amended the disclosure
requirements related to fair value measurements. Most of the new disclosures and clarifications of
existing disclosures were 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 the
remaining guidance which did not impact the consolidated financial statements.
Future Accounting Changes
Fair value measurement
In May 2011, the FASB issued amended guidance on fair value measurement which updates some of the
measurement guidance and includes enhanced disclosure requirements. The amended guidance is
effective for interim and annual periods beginning after December 15, 2011. Adoption is not
expected to have a material impact on the results of operations or financial position but increased
quantitative and qualitative disclosure regarding Level 3 measurements is expected.
Other comprehensive income
In June 2011, the FASB issued an accounting standard update on the Presentation of Comprehensive
Income, which eliminates the current option to report other comprehensive income and its components
in the Consolidated Statements of Changes in Shareholders Equity. The Company can elect to
present items of net income and other comprehensive income in one continuous statement or in two
separate, but consecutive, statements. As the new guidance does not change those components that
are recognized in net income or those components that are recognized in other comprehensive income,
adoption is expected to impact only the presentation of the financial statements. The guidance
must be applied retrospectively for all periods presented in the financial statements. The Company
has not yet determined which election will be made when the standard becomes effective for interim
and annual periods beginning after December 15, 2011, or earlier if the Company elects to early
adopt as is permitted.
Canadian Pacific 2011 MD&A Q2
13
13. 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 18, Contractual Commitments and Section 19, Future Trends and 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 20, Business Risks. The following discussion of operating,
investing and financing activities describes our indicators of liquidity and capital resources.
Operating Activities
Cash provided by operating activities was $212.3 million in the second quarter of 2011, an increase
of $25.2 million from $187.1 million in the same period of 2010. This increase was mainly due to
lower pension contributions (discussed further in Section 19, Future Trends and Commitments),
offset in part by unfavourable changes in non-cash working capital balances and lower earnings.
Cash provided by operating activities was $347.3 million for the first six months of 2011, a
decrease of $24.1 million from $371.4 million in the same period of 2010. This decrease was mainly
due to lower earnings offset in part by lower pension contributions (discussed further in Section
19, Future Trends and Commitments).
Investing Activities
Cash used in investing activities was $204.2 million in the second quarter of 2011, an increase of
$53.6 million from $150.6 million in the same period of 2010. Cash used in investing activities
was $331.8 million for the first six months of 2011, an increase of $99.4 million from $232.4
million in the same period of 2010. These increases were largely due to higher additions to
properties.
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, $200 million for volume growth and productivity initiatives and
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 positive train control. The top end of the range for our
2011 capital programs represents an approximate 45% increase over our expenditures on capital
programs in 2010 of $726.1 million.
Our capital spending outlook is based on certain assumptions about events and developments that may
not materialize or that may be offset entirely or partially by other events and developments (see
Section 20, Business Risks for a discussion of these assumptions and other factors affecting our
expectations for 2011).
Financing Activities
Cash used in financing activities was $49.6 million in the second quarter of 2011, a decrease of
$349.4 million from $399.0 million in the same period of 2010. Cash used in financing activities
was $98.6 million for the first six months of 2011, a decrease of $348.2 million from $446.8
million in the same period of 2010. The decreases in cash used were mainly due to the repayment in
2010 of $350 million 4.9% 7-year Medium Term Notes; repayment of a $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.
The Company has available, as sources of financing, unused credit facilities of up to $694 million.
Debt to Total Capitalization
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 Sheets. At June 30, 2011, our debt to total capitalization decreased
to 45.6%, compared with 46.2% at June 30, 2010. This decrease in 2011 was primarily due to an
increase in equity driven by earnings during the last 12 months and the impact of the stronger
Canadian dollar on U.S. dollar-denominated debt at June 30, 2011, compared with June 30, 2010.
This decrease was partially offset by the issuance of long-term debt in 2010 and an increase in the
accumulated actuarial loss of the pension plans which was recognized within Accumulated other
comprehensive loss resulting in decreased equity.
Interest Coverage Ratio
Interest coverage ratio, a non-GAAP measure, is a metric used in assessing the Companys debt
servicing capabilities, (discussed further in Section 14, Non-GAAP Measures). At June 30, 2011,
our interest coverage ratio increased to 3.9, compared with 3.8 at June 30, 2010. This increase was
primarily due to slightly higher earnings combined with lower interest expense based on the twelve
month period ending June 30, 2011.
Canadian Pacific 2011 MD&A Q2
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Free Cash |
|
For the three months |
|
|
For the six months |
|
(Reconciliation of free cash to GAAP cash position) |
|
ended June 30 |
|
|
ended June 30 |
|
(in millions) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Cash provided by operating activities |
|
$ |
212.3 |
|
|
$ |
187.1 |
|
|
$ |
347.3 |
|
|
$ |
371.4 |
|
Cash used in investing activities |
|
|
(204.2 |
) |
|
|
(150.6 |
) |
|
|
(331.8 |
) |
|
|
(232.4 |
) |
Dividends paid |
|
|
(45.7 |
) |
|
|
(41.7 |
) |
|
|
(91.4 |
) |
|
|
(83.4 |
) |
Foreign exchange effect on cash and cash equivalents |
|
|
(1.2 |
) |
|
|
12.3 |
|
|
|
(9.7 |
) |
|
|
2.3 |
|
|
Free cash(1) |
|
|
(38.8 |
) |
|
|
7.1 |
|
|
|
(85.6 |
) |
|
|
57.9 |
|
Cash used in financing activities, excluding dividend payment |
|
|
(3.9 |
) |
|
|
(357.3 |
) |
|
|
(7.2 |
) |
|
|
(363.4 |
) |
|
Decrease in cash and cash equivalents, as shown |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on the Consolidated Statements of Cash Flows |
|
|
(42.7 |
) |
|
|
(350.2 |
) |
|
|
(92.8 |
) |
|
|
(305.5 |
) |
Cash and cash equivalents at beginning of period |
|
|
310.5 |
|
|
|
723.8 |
|
|
|
360.6 |
|
|
|
679.1 |
|
|
Cash and cash equivalents at end of period |
|
$ |
267.8 |
|
|
$ |
373.6 |
|
|
$ |
267.8 |
|
|
$ |
373.6 |
|
|
|
|
|
(1) |
|
Free cash has no standardized meaning prescribed by GAAP and, therefore,
is unlikely to be comparable to similar measures of other companies. Free cash is discussed
further in Section 14, Non-GAAP Measures. |
There was negative free cash of $38.8 million in the second quarter of 2011 and positive free cash
of $7.1 million in the same period of 2010. For the first six months of 2011, there was negative
free cash of $85.6 million and positive free cash of $57.9 million in the same period of 2010. The
decreases in free cash were primarily due to higher additions to properties, lower earnings, and
unfavourable changes in non-cash working capital balances. These decreases were offset in part by
lower pension contributions (discussed further in Section 19, Future Trends and Commitments).
Free cash is affected by the seasonal fluctuations (discussed further in Section 11, Quarterly
Financial Data) and by other factors including the size of our capital programs. Capital additions
in the second quarter of 2011 were $218.4 million, $50.4 million higher than in the same period of
2010, and for the first six months of 2011 were $351.6 million, $92.8 million higher than the same
period of 2010. Our 2011 capital programs are discussed further above.
14. NON-GAAP MEASURES
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 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.
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 provides 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. Free cash is discussed further and is
reconciled to the change in cash and cash equivalents as presented in the financial statements in
Section 13, Liquidity and Capital Resources.
Interest Coverage Ratio
Interest coverage ratio, a non-GAAP measure, is 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), a non-GAAP measure, which can be calculated as
operating income less other income and charges, before other specified items. The ratio is
reported quarterly and is measured on a twelve month rolling basis. Interest coverage ratio is
discussed further in Section 13, Liquidity and Capital Resources.
Income, before 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
Canadian Pacific 2011 MD&A Q2
15
EPS, before 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 and six months ended June 30, 2011 and June 30, 2010. 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.
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. There were no
other specified items included in net income for the three and six months ended June 30, 2011 and
2010.
15. BALANCE SHEET
Tandem Share Appreciation Rights
As a result of changes to Canadian tax legislation which eliminated the favourable tax treatment on
cash settled compensation awards, the Company offered employees the option of cancelling the
outstanding share appreciation rights (SAR) and keeping in place the outstanding option.
Effective January 31, 2011, the Company cancelled 3.1 million SARs and reclassified the fair value
of the previously recognized liability ($69.8 million) and the recognized deferred tax asset ($17.9
million) to Additional paid-in capital. The terms of the awards were not changed and as a result
no incremental cost was recognized. The weighted average fair value of the units cancelled at
January 31, 2011 was $25.36 per unit. Compensation cost will continue to be recognized over the
remaining vesting period for those options not yet vested.
Total Assets
Assets totaled $13,555.8 million at June 30, 2011, compared with $13,675.9 million at December 31,
2010. The decrease in assets in the first six months of 2011 reflected reductions in Cash and
cash equivalents, due to negative free cash in the first six months of 2011 (discussed further in
Section 13, Liquidity and Capital Resources), Deferred income taxes resulting from lower net
income reducing the amount of income tax assets that CP expects to be able to realize in the
current year and a reduction in Net properties due to the unfavourable impact of the
strengthening of the Canadian dollar on U.S. dollar-denominated assets.
The decrease was partially offset by an increase in Accounts receivable, net mostly reflecting
increased billings, as well as increases in Materials and supplies.
Total Liabilities
Our total liabilities were $8,551.2 million at June 30, 2011, compared with $8,851.2 million at
December 31, 2010. The decrease reflected reductions in Long-term debt due to the favourable
impact of the strengthening Canadian dollar on U.S. dollar-denominated debt, Pension and other
benefit liabilities as a result of our expected return on fund assets exceeding the interest cost
on our benefit obligation, Other long-term liabilities due to the reclassification of the
liability related to certain SARs and Deferred income taxes as a result of the expected reduction
in the amount of income tax assets that CP expects to realize in the current year.
Shareholders Equity
At June 30, 2011, our Consolidated Balance Sheets reflected $5,004.6 million in equity, compared
with an equity balance of $4,824.7 million at December 31, 2010. This increase in equity was
primarily due to comprehensive income in excess of dividends and the reclassification to equity of
the fair value of the liability related to cancelled SARs.
Share Capital
At July 26, 2011, 169,435,274 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 July 26, 2011, 10.9 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.
Canadian Pacific 2011 MD&A Q2
16
Dividends
On May 11, 2011, our Board of Directors declared a quarterly dividend of $0.30 per share (2010 -
$0.27 per share) on the outstanding common shares. The dividend is payable on July 25, 2011 to
holders of record at the close of business on June 24, 2011.
16. FINANCIAL INSTRUMENTS
Carrying Value and Fair Value of Financial Instruments
The carrying values of financial instruments equal or approximate their fair values with the
exception of long-term debt which has a carrying value of $4,197.6 million at June 30, 2011
(December 31, 2010 $4,314.9 million) and a fair value of approximately $4,741.4 million at June
30, 2011 (December 31, 2010 $4,773.0 million). The fair value of publicly traded long-term debt
is determined based on market prices at June 30, 2011 and December 31, 2010, respectively.
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 the 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.
The nature and extent of CPs use of financial instruments, as well as the risks associated with
the instruments have not changed from our MD&A for the year ended December 31, 2010, except as
described below:
Interest Rate Management
Interest Rate Swaps
During the three and six months ended June 30, 2011, the Company amortized $1.7 million and $3.3
million, respectively (three and six months ended June 30, 2010 $1.2 million and $2.2 million,
respectively) of deferred gains to Net interest expense relating to interest rate swaps
previously unwound in the three months ended September 30, 2010 and three months ended June 30,
2009. The gains were deferred as a fair value adjustment to the underlying debts that were hedged
and are amortized to Net interest expense until such time the debts are repaid through May 2013.
At June 30, 2011 and December 31, 2010, the Company had no outstanding interest rate swaps.
Treasury Rate Locks
At June 30, 2011, the Company had net unamortized losses related to interest rate locks, which are
accounted for as cash flow hedges, settled in previous years totaling $22.0 million (December 31,
2010 $22.1 million). This amount is composed of various unamortized gains and losses related to
specific debts which are reflected in Accumulated other comprehensive loss, net of tax, 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 $0.2 million and $0.1 million for the three and six months ended
June 30, 2011, respectively (three and six months ended June 30, 2010 $1.8 million and $1.7
million, respectively).
Net Investment Hedge
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 against gains and losses on its net investment. 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. dollar-denominated debt maturities.
Canadian Pacific 2011 MD&A Q2
17
Foreign Exchange Forward Contracts on Long-term Debt
At June 30, 2011, the Company had FX forward contracts to fix the exchange rate on US$101.4 million
of its 5.75% Notes due in May 2013 and US$175.0 million of its 6.50% Notes due in May 2018 and
US$100.0 million of its 7.25% Notes due in May 2019. 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 the three months ended June 30, 2011, the Company recorded an unrealized FX
loss on long-term debt of $0.8 million in Other income and charges and $1.3 million in Other
comprehensive income in relation to these derivatives. For the six months ended June 30, 2011, an
unrealized foreign exchange loss of $4.8 million in Other income and charges and $1.6 million in
Other comprehensive income were recorded. During these periods the underlying debt which these
derivatives are designated to hedge benefited largely from an equal and offsetting unrealized FX
gain on long-term debt also recorded in Other income and charges. At June 30, 2011, the
unrealized loss derived from these FX forwards was $8.0 million (December 31, 2010 $1.6 million)
which was included in Other long-term liabilities with the offset reflected in Accumulated other
comprehensive loss of $2.7 million (December 31, 2010 $1.1 million), and Retained earnings of
$5.3 million (December 31, 2010 $0.5 million) on the Consolidated Balance Sheets. Amounts
recorded in Accumulated other comprehensive loss will be reclassified to earnings during the
terms of the Notes.
Fuel Price Management
Energy Futures
At June 30, 2011, the Company had diesel futures contracts, which are accounted for as cash flow
hedges, to purchase approximately 18.4 million U.S. gallons during the period July 2011 to June
2012 at an average price of US$2.91 per U.S. gallon. This represents approximately 6% of estimated
fuel purchases for this period. At June 30, 2011, the unrealized gain on these futures contracts
was $1.8 million (December 31, 2010 $4.1 million) and was reflected in Other current assets
with the offset, net of tax, reflected in Accumulated other comprehensive loss on the
Consolidated Balance Sheets. Amounts recorded in Accumulated other comprehensive loss will be
reclassified to earnings when the derivative instruments are realized.
During the three and six months ended June 30, 2011, the impact of settled commodity swaps
decreased Fuel expense by $3.4 million and $6.8 million, respectively (three and six months ended
June 30, 2010 $0.7 million and $1.6 million, respectively) as a result of realized gains on
diesel swaps.
For every one cent increase in the price of a U.S. gallon of diesel, fuel expense before tax and
hedging will increase by approximately $3 million on an annual basis, assuming current FX rates and
fuel consumption levels. We have a fuel risk mitigation program to moderate the impact of
increases in fuel prices, which includes these swaps and our fuel cost recovery program.
Stock-Based Compensation Expense Management
Total Return Swaps (TRS)
The Company entered into a TRS to reduce the volatility to the Company over time on three types of
stock-based compensation programs: tandem share appreciation rights, deferred share units and
restricted share units. As the Companys share price appreciates, these instruments create
increased compensation expense. 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. 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 the first quarter of 2011, CP reduced the size of the TRS
program to reflect the cancellation of SARs in Canada, (discussed further in Section 15, Balance
Sheet).
Compensation and benefits expense on the Companys Consolidated Statements of Income included a
net loss on these swaps of $1.4 million and $2.1 million for the three and six months ended June
30, 2011, respectively, which was inclusive of unrealized losses in the second quarter and both
realized gains and unrealized losses in the first half of 2011. For the same periods in 2010, the
Company recorded an unrealized loss on these swaps of $0.4 million and an unrealized gain of $0.4
million. During the first quarter of 2011, CP unwound a portion of the program for total proceeds
of $0.3 million. At June 30, 2011, the unrealized loss on the remaining TRS of $8.4 million
(December 31, 2010 $6.0 million) was included in Accounts payable and accrued liabilities on
the Consolidated Balance Sheets.
Canadian Pacific 2011 MD&A Q2
18
17. OFF-BALANCE SHEET ARRANGEMENTS
The information on off-balance sheet arrangements disclosed in our MD&A for the year ended December
31, 2010 remains substantially unchanged, except as updated as follows:
Guarantees
At June 30, 2011, the Company had residual value guarantees on operating lease commitments of
$146.8 million compared to $169.9 million in 2010. 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 guarantees. All or a portion of amounts paid under certain guarantees could be recoverable
from other parties or through insurance. The Company has accrued for all guarantees that it
expects to pay. At June 30, 2011, these accruals amounted to $9.2 million compared to $9.4 million
in 2010.
18. CONTRACTUAL COMMITMENTS
The accompanying table indicates our known obligations and commitments to make future payments for
contracts, such as debt and capital lease and commercial arrangements.
At June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
|
|
2012 & |
|
|
2014 & |
|
|
2016 & |
|
(in millions) |
|
Total |
|
|
2011 |
|
|
2013 |
|
|
2015 |
|
|
beyond |
|
|
Contractual commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
3,931.1 |
|
|
$ |
253.8 |
|
|
$ |
175.8 |
|
|
$ |
158.8 |
|
|
$ |
3,342.7 |
|
Capital lease |
|
|
275.3 |
|
|
|
2.5 |
|
|
|
16.8 |
|
|
|
129.8 |
|
|
|
126.2 |
|
Operating lease(1) |
|
|
797.6 |
|
|
|
66.3 |
|
|
|
251.2 |
|
|
|
165.3 |
|
|
|
314.8 |
|
Supplier purchase |
|
|
1,721.4 |
|
|
|
140.4 |
|
|
|
260.4 |
|
|
|
274.9 |
|
|
|
1,045.7 |
|
Other long-term liabilities(2) |
|
|
723.4 |
|
|
|
56.3 |
|
|
|
158.2 |
|
|
|
137.1 |
|
|
|
371.8 |
|
|
Total contractual commitments |
|
$ |
7,448.8 |
|
|
$ |
519.3 |
|
|
$ |
862.4 |
|
|
$ |
865.9 |
|
|
$ |
5,201.2 |
|
|
|
|
|
(1) |
|
Residual value guarantees on certain leased equipment with a maximum exposure of
$146.8 million (discussed further in Section 17, Off-Balance Sheet Arrangements) 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 and certain other long-term liabilities. Future payments for pension benefits
and stock-based compensation liabilities are not included as these may vary as a result of future
changes in underlying assumptions used to calculate these liabilities. Pension payments are
discussed further in Section 19, Future Trends and Commitments. In addition, deferred income tax
liabilities are excluded as these may vary according to changes in tax rates, tax regulations and
the operating results of the Company. Deferred income taxes are further discussed in Section 21,
Critical Accounting Estimates. |
19. FUTURE TRENDS AND COMMITMENTS
The information on future trends and commitments disclosed in our MD&A for the year ended December
31, 2010 remains substantially unchanged, except as updated as follows:
Change in Executive Officer
On April 1, 2011, Mr. Ed Harris retired as Executive Vice-President and Chief Operations Officer
and Mr. Michael Franczak was appointed Executive Vice-President, Operations. Mr. Harris will act
as an advisor to Mr. Franczak through 2011. Mr. Franczak reports to the President and Chief
Executive Officer and has assumed responsibility for operations activity across Canadian Pacifics
North American network.
Stock Price
The market value of our Common Shares decreased $2.15 per share on the Toronto Stock Exchange in
the second quarter of 2011 (from $62.32 to $60.17) and decreased $4.45 in the first half of 2011
(from $64.62 to $60.17). The market value of our Common Shares decreased $0.18 per share on the
Toronto Stock Exchange in the second quarter of 2010 (from $57.24 to $57.06) and increased $0.27 in
the first half of 2010 (from $56.79 to $57.06). These changes in share price contributed to
increases/decreases in the value of our outstanding stock-based compensation.
Environmental
Cash payments related to our environmental remediation program (described in Section 21, Critical
Accounting Estimates) totaled $2.3 million in the second quarter of 2011, compared with $2.5
million in 2010. Cash payments related to our environmental remediation program for the first six
months of 2011 were $3.8 million, compared with $3.2 million in 2010. Cash payments for
environmental initiatives are estimated to be approximately $13 million for
Canadian Pacific 2011 MD&A Q2
19
the remainder of 2011,
$15 million in 2012, $12 million in 2013 and a total of approximately $63 million over the
remaining years through 2021, 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.
Certain Other Financial Commitments
At June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of commitment per period |
|
|
|
|
|
|
|
|
|
2012 & |
|
|
2014 & |
|
|
2016 & |
|
(in millions) |
|
Total |
|
|
2011 |
|
|
2013 |
|
|
2015 |
|
|
beyond |
|
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
$ |
356.6 |
|
|
$ |
258.6 |
|
|
$ |
98.0 |
|
|
$ |
|
|
|
$ |
|
|
Capital commitments |
|
|
587.1 |
|
|
|
315.0 |
|
|
|
271.2 |
|
|
|
0.1 |
|
|
|
0.8 |
|
|
Total commitments |
|
$ |
943.7 |
|
|
$ |
573.6 |
|
|
$ |
369.2 |
|
|
$ |
0.1 |
|
|
$ |
0.8 |
|
|
In addition to the financial commitments mentioned previously in Section 17, Off-Balance Sheet
Arrangements and Section 18, Contractual Commitments, we are party to certain other financial
commitments set forth in the table above and discussed below.
Letters of Credit
Letters of credit are obtained mainly to provide security to third parties as part of various
agreements, such as required by our workers compensation and pension fund requirements. We are
liable for these contract amounts in the case of non-performance under these agreements. As a
result, our available line of credit is adjusted for contractual amounts obtained through letters
of credit currently included within our revolving credit facility.
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 into contracts with suppliers to make
various capital purchases related to track programs and the acquisition of new locomotives.
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.
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 43% and 49% 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 $24.5 million to the defined benefit pension plans in the second quarter
of 2011 and $47.5 million in the first half of 2011, compared with $159.7 million and $178.4
million in the same periods of 2010.
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 $150 million in each of the subsequent four years.
These estimates reflect the Companys
Canadian Pacific 2011 MD&A Q2
20
intentions with respect to the rate at which the Company will
apply the $500 million and $650 million voluntary prepayments made in December 2009 and September
2010 against contribution requirements in 2011 and subsequent years. 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.
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.
Restructuring
Cash payments related to severance under all restructuring initiatives totaled $6.1 million during
the second quarter of 2011 and $12.7 million for the first six months of 2011, compared with $3.5
million and $8.4 million for the same period of 2010. Cash payments for restructuring initiatives
are estimated to be approximately $17 million for the remainder of 2011, $18 million in 2012, $11
million in 2013, and a total of approximately $25 million over the remaining years through 2025.
These amounts include residual payments to protected employees for previous restructuring plans
that have been completed.
20. BUSINESS RISKS
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 framework to support consistent achievement of key business
objectives through daily pro-active management of risk. The objective of the program is to
identify events that result from risks, thereby requiring active management. Each event identified
is assessed based on the potential impact and likelihood, taking account of financial,
environmental, reputation 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.
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:
|
|
|
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; |
|
|
|
|
renewing and maintaining infrastructure to enable safe and fluid operations; |
|
|
|
|
improving handling through our IOP to reduce costs and enhance quality and reliability
of service; and |
|
|
|
|
exercising a disciplined yield approach to competitive contract renewals and bids. |
Liquidity
CP has in place a revolving credit facility of $945 million, with an accordion feature to $1,150
million, of which $357 million was committed for letters of credit and $588 million was available
on June 30, 2011. 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 $106 million, of which $106 million of this facility was available on June 30, 2011 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 June 30, 2011, 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.
Canadian Pacific 2011 MD&A Q2
21
Surplus cash is invested into a range of short dated money market instruments meeting or exceeding
the parameters of our investment policy.
Regulatory Authorities
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 U.S. Surface Transportation Board
(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 maximum revenue entitlement, 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.
Transport Canada regulates safety-related aspects of our railway operations in Canada. On March
26, 2011, the Canadian Parliament was dissolved for an election held on May 2, 2011. As a result,
all outstanding business before the House of Commons, including Bill C-33 (an Act to amend the
Railway Safety Act and make consequential amendments to the Canada Transportation Act) expired on
the Order Paper. No assurance can be given to the content, timing or effect on CP of any
anticipated additional legislation or future legislative action.
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. On March 18, 2011 the RFSR Panel released the final report and the
Government of Canada announced its response to the RFSR. On the same day, the federal government
announced a series of supply chain initiatives to take place over the next several months further
to the release of the RFSR final report, including the intention to table a bill to give shippers
the right to a service agreement. The Company will work with the government on these initiatives.
It is too soon to determine if these initiatives will have a material impact on the Companys
financial condition and results of operation.
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 below); 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 held a hearing to review existing exemptions from railroad-transportation regulations for
certain commodities, boxcar and intermodal freight and held a hearing in June 2011 on rail
competition. The industry and CP participated.
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.
Canadian Pacific 2011 MD&A Q2
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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.
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. |
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 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
June 30, 2011, total expenditures to date related to PTC are approximately $20 million, including
approximately $6 million for the first six months of 2011.
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 June 30, 2011, 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 all bargaining units that represent our employees in Canada
and 16 of 32 bargaining units that represent employees in our U.S. operations.
Canadian Pacific 2011 MD&A Q2
23
Canada
We are party to collective agreements with seven bargaining units in our Canadian operations.
Currently, collective agreements are in effect with all seven bargaining units. On February 5,
2011, CP and the Canadian Auto Workers union (CAW), representing shop maintenance workers
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 agreement with the CAW expires at the end of 2014. Two agreements 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). Four
agreements expire at the end of 2012: 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.
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 three bargaining units of our DM&E subsidiary,
and have commenced first contract negotiations with a bargaining unit certified to represent DM&E
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. A tentative agreement has been reached with the train service employees and
the yard supervisors and completion of the ratification process is expected by early September.
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 apply the outcome of wage, benefits, and rules negotiations at the
national table.
DM&E currently has an agreement in place with three bargaining units that cover all DM&E engineers,
conductors and signal and communication workers. Negotiations on the first contract to cover track
maintainers and mechanics continue.
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:
Canadian Pacific 2011 MD&A Q2
24
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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. |
Financial Risks
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.
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, Financial
Instruments). 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 monthly rolling hedges of 1012% of our fuel requirements.
Using this approach CP will, at any point in time, have 57% of the next 12 months fuel
consumption and 810% of the next quarters fuel consumption hedged.
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, Financial Instruments.
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, Financial Instruments.
Canadian Pacific 2011 MD&A Q2
25
General and Other Risks
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.
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 conditions and
liquidity.
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.
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 as
was experienced in the first half of 2011.
General Risks
There are factors and developments that are beyond the influence or control of the railway industry
generally and CP specifically which may have a material adverse effect on our business or operating
results. Our freight volumes and revenues are largely dependent upon the performance of the North
American and global economies, which remains uncertain, and other factors affecting the volumes and
patterns of international trade. CPs bulk traffic is dominated by grain, metallurgical coal,
fertilizers and sulphur. Factors outside of CPs control which affect bulk traffic include:
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with respect to grain volumes, domestic production-related factors such as weather
conditions, acreage plantings, yields and insect populations; |
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with respect to coal volumes, global steel production; |
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with respect to fertilizer volumes, grain and other crop markets, with both production
levels and prices relevant; and |
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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.
Canadian Pacific 2011 MD&A Q2
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21. CRITICAL ACCOUNTING ESTIMATES
To prepare consolidated financial statements that conform with 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.
Environmental Liabilities
At June 30, 2011, the accrual for environmental remediation on our Consolidated Balance Sheets
amounted to $103.2 million, of which the long-term portion amounting to $87.2 million was included
in Other long-term liabilities and the short-term portion amounting to $16.0 million, was
included in Accounts payable and accrued liabilities. Total payments were $2.3 million in the
second quarter of 2011 and $3.8 million in the six months of 2011, compared with $2.5 million and
$3.2 million for the same periods of 2010, respectively. The U.S. dollar-denominated portion of
the liability was affected by the change in FX, resulting in a decrease in environmental
liabilities of $0.3 million in second-quarter 2011 and $2.3 million in the first six months of
2011, compared with an increase of $4.1 million in second-quarter 2010 and $1.1 million in the
first six months of 2010.
Pensions and Other Benefits
We included pension benefit liabilities of $570.0 million in Pension and other benefit
liabilities on our June 30, 2011 Consolidated Balance Sheet. We also included post-retirement
benefits accruals of $350.6 million in Pension and other benefit liabilities and post-retirement
benefits accruals of $21.6 million in Accounts payable and accrued liabilities on our June 30,
2011 Consolidated Balance Sheet. Accruals for self-insured workers compensation and long-term
disability benefit plans are discussed below, in Legal and Personal Injury Liabilities.
Net periodic benefit costs for pensions and post-retirement benefits were included in Compensation
and benefits on our June 30, 2011 Consolidated Statement of Income. Combined net periodic benefit
costs for pensions and post-retirement benefits (excluding self-insured workers compensation and
long-term disability benefits) were $19.3 million in the second quarter of 2011 and $39.1 million
in the first half of 2011, compared with $17.3 million and $34.8 million in the same periods of
2010.
Net periodic benefit costs for pensions were $12.4 million in the second quarter of 2011 and $25.4
million for the first half of 2011, compared with $9.9 million and $20.0 million in the same
periods of 2010. The portion of this related to defined benefit pensions was $11.3 million in the
second quarter of 2011 and $22.8 million in the first half of 2011, compared with $9.2 million and
$18.4 million in the same periods of 2010, and the portion related to defined contribution pensions
(equal to contributions) was $1.1 million for the second quarter of 2011 and $2.6 million in the
first half of 2011, compared with $0.7 million and $1.6 million for the same periods of 2010. Net
periodic benefit costs for post-retirement benefits were $6.9 million in the second quarter of 2011
and $13.7 million in the first half of 2011, compared with $7.4 million and $14.8 million in the
same periods of 2010.
Property, Plant and Equipment
At June 30, 2011, accumulated depreciation was $5,768.9 million. Depreciation expense relating to
properties amounted to $122.2 million in the second quarter of 2011 and $244.5 million for the six
months of 2011, compared with $123.3 million and $244.5 million in 2010, respectively.
Revisions to the estimated useful lives and net salvage projections for properties constitute a
change in accounting estimate and we address these prospectively by amending depreciation rates.
It is anticipated that there will be changes in the estimates of weighted average useful lives and
net salvage for each property group as assets are acquired, used and retired. Substantial changes
in either the useful lives of properties or the salvage assumptions could result in significant
changes to depreciation expense. For example, if the estimated average life of road locomotives,
our largest asset group, increased (or decreased) by 5% annual depreciation expense would decrease
(or increase) by approximately $3 million.
We review the carrying amounts of our properties when circumstances indicate that such carrying
amounts may not be recoverable based on future undiscounted cash flows. When such properties are
determined to be impaired, recorded asset values are revised to the fair value and an impairment
loss is recognized.
Canadian Pacific 2011 MD&A Q2
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Deferred Income Taxes
A deferred income tax expense of $51.9 million was included in total income tax expense for the
second quarter of 2011 and $59.8 million for the first half of 2011, compared with a deferred
income tax expense of $43.5 million and expense of $85.1 million for the same periods of 2010. The
change in the second quarter was primarily due to the impact of non-taxable gains and losses on
unrealized FX on LTD recorded in the second quarter of 2010. The change in the year to date
deferred income tax expense was primarily due to lower earnings in 2011. At June 30, 2011,
deferred income tax liabilities of $1,924.4 million were recorded as a long-term liability and
comprised largely of temporary differences related to accounting for properties. Deferred income
tax benefits of $124.3 million realizable within one year were recorded as a current asset.
Legal and Personal Injury Liabilities
Provisions for incidents, claims and litigation charged to income, which are included in Purchased
services and other expense, amounted to $18.7 million in the second quarter of 2011 and $36.8
million for the first six months of 2011, compared with $14.7 million and $24.7 million for the
same periods in 2010.
Accruals for incidents, claims and litigation, including accruals for self-insured workers
compensation and long-term disability benefit plans, totaled $167.5 million, net of insurance
recoveries, at June 30, 2011. The total accrual included $99.4 million in Pension and other
benefit liabilities, $12.6 million in Other long-term liabilities and $56.5 million in Accounts
payable and accrued liabilities, offset by $0.8 million in Other assets and $0.2 million in
Accounts receivable, net.
Long-term Floating Rate Notes
At June 30, 2011 and December 31, 2010, the Company held long-term floating rate notes with a total
settlement value of $105.0 million and $117.0 million, respectively, and carrying values of $73.6
million and $69.5 million, respectively. At June 30, 2011, the long-term floating rate notes
consisted of Master Asset Vehicle (MAV) 2 notes with eligible assets. The carrying values, being
the estimated fair values, are reported in Investments.
The valuation technique used by the Company to estimate the fair value of its investment in
long-term floating rate notes at June 30, 2011 and December 31, 2010, 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. During
the second quarter of 2011 the Company sold all of its MAV 2 Class B and Class C and MAV 3 Class 9
notes for proceeds of $6.4 million and recorded a gain of $6.3 million. This gain together with
accretion and other minor changes in assumptions have resulted in gains of $8.7 million and $10.5
million in the three and six months ended June 30, 2011, respectively (three and six months ended
June 30, 2010 gains of $3.1 million and $5.6 million, respectively) which were reported in
Other income and charges. The interest rates and maturities of the various long-term floating
rate notes, discount rates and credit losses modelled at June 30, 2011 and December 31, 2010,
respectively, are:
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Long-term floating rate notes |
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June 30, 2011 |
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December 31, 2010 |
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Probability weighted average coupon interest rate
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0.8%
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0.8% |
Weighted average discount rate
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6.9%
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7.1% |
Expected repayments of long-term floating rate notes
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Approximately 51/2 years
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Approximately 6 years |
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Credit losses
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MAV 2 eligible asset
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MAV 2 eligible asset |
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notes: nil
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notes: 1% to 100% |
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MAV 3 Class 9 Traditional |
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Asset Tracking notes: 1% |
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.
Canadian Pacific 2011 MD&A Q2
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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 (CP U.S.). 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. CP also monitors the fair value of the
related reporting unit for potential impairment during the year and there was no indication of
potential impairment for the first half of 2011. 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% and that no impairment was required in 2010.
The impairment test was performed primarily using an income approach based on discounted cash
flows, in which discount rates of 8.5% 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% 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 June 30, 2011 goodwill was $142.2 million ($146.6 million as at December 31, 2010).
Intangible assets of $41.1 million ($43.2 million as at December 31, 2010), 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.
22. SYSTEMS, PROCEDURES AND CONTROLS
The Companys Chief Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the U.S. Securities Exchange Act of 1934 (as amended)) to ensure that material information relating
to the Company is made known to them. The Chief Executive Officer and Chief Financial Officer have
a process to evaluate these disclosure controls and are satisfied that they are adequate for
ensuring that such material information is made known to them.
Canadian Pacific 2011 MD&A Q2
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23. GLOSSARY OF TERMS
Average number of 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 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-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.
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$8,900 in the U.S. or $11,000 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).
Canadian Pacific 2011 MD&A Q2
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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.
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.
SAP: SAP is an information technology software application. The software is an integrated
enterprise resource planning software manufactured by SAP AG.
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.
Canadian Pacific 2011 MD&A Q2
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Suite 500 Gulf Canada Square
401 9th Avenue SW
Calgary Alberta T2P 4Z4
www.cpr.ca TSX/NYSE: CP |
CANADIAN PACIFIC RAILWAY LIMITED (CPRL)
Supplemental Financial Information (unaudited)
Exhibit to June 30, 2011 Consolidated Financial Statements
CONSOLIDATED EARNINGS COVERAGE RATIO MEDIUM TERM NOTES AND DEBT SECURITIES
The following ratio, based on the consolidated financial statements, is provided in connection with
the continuous offering of medium term notes and debt securities by Canadian Pacific Railway
Company, a wholly-owned subsidiary of CPRL, and is for the twelve month period then ended.
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Twelve Months Ended June 30, 2011 |
Earnings Coverage on long-term debt(1) (2) |
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3.8x |
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Notes:
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(1) |
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Earnings coverage is equal to income before interest expense and income tax
expense, divided by interest expense on all long-term debt plus the amount of interest that has
been capitalized during the period. |
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(2) |
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The earnings coverage ratio has been calculated excluding carrying charges for the
$278.8 million in long-term debt maturing within one year reflected as current liabilities in
CPRLs consolidated balance sheet as at June 30, 2011. If such long-term debt maturing within one
year had been classified in its entirety as long-term debt for purposes of calculating the earnings
coverage ratio, the entire amount of the annual carrying charges for such long-term debt maturing
within one year would have been reflected in the calculation of CPRLs earnings coverage ratio.
For the twelve-month period ended June 30, 2011, earnings coverage on long-term debt would have
been 3.7x. |