Canadian Pacific announces its second-quarter results
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CALGARY, July 22 /PRNewswire-FirstCall/ - Canadian Pacific Railway Limited
(TSX/NYSE: CP) announced its second-quarter results today. Net income in the
second quarter was $155 million, a decrease of 40 per cent from $257 million
in 2007, and diluted earnings per share was $1.00, a decrease from $1.64 in
the second quarter of 2007.
SUMMARY OF SECOND-QUARTER 2008 COMPARED WITH SECOND-QUARTER 2007
- Total revenues were essentially flat at $1.22 billion
- Income before foreign exchange gains and losses on long-term debt and
other specified items decreased to $150 million from $175 million
- Adjusted diluted earnings per share decreased to $0.97 from $1.12
- Operating ratio was 79.4 per cent compared with 74.7 per cent
"This was a tough quarter with the unprecedented rise in fuel prices, the
North American economic downturn, and prolonged flooding on our US mainline,"
said Fred Green, President and CEO. "Combined, these had a significant impact
on CP's earnings."
"We see the current economic conditions continuing, and CP is taking
aggressive steps which should position us well for 2009," continued Mr. Green.
"I have accelerated a rigorous process to improve our productivity,
efficiency, and yield."
Freight revenues increased almost two per cent despite a decrease in traffic.
This was mainly due to pricing, inclusive of fuel recoveries. CP experienced
strong growth in industrial and consumer products of 17 per cent, intermodal
of nine per cent and coal of six per cent. This was offset by decreases in
forest products of 21 per cent, grain of nine per cent, sulphur and
fertilizers of five per cent, and automotive of two per cent.
Operating expenses increased seven per cent with fuel up 34 per cent and
purchased services and other, depreciation and amortization and materials up
from two to nine per cent. This was offset by a decrease in equipment rents of
20 per cent and compensation and benefits of four per cent.
SUMMARY OF FIRST-HALF 2008 COMPARED WITH FIRST-HALF 2007
Net income for the first half of 2008 was $246 million compared with
$385 million in 2007, a decrease of 36 per cent. Diluted earnings per share
was $1.59 down from $2.46.
Freight revenues increased two per cent to $2.3 billion and operating expenses
were up seven per cent to $1.9 billion.
EXCLUDING FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER
SPECIFIED ITEMS
- Income decreased to $267 million from $297 million.
- Diluted earnings per share were $1.72 down from $1.90.
- Operating ratio deteriorated 400 basis points to 81.0 per cent from
77.0 per cent.
2008 OUTLOOK
"We continue to focus on driving positive pricing gains and strengthening our
fuel recovery and cost management programs," said Mike Lambert, Chief
Financial Officer. "However, these will not be enough to offset the challenges
we are facing with the higher price of fuel and the slowing North American
economy. We are updating our guidance to reflect our substantially higher fuel
assumptions and the deteriorating economic conditions. We now expect our
full- year adjusted diluted earnings per share to be in the range of $4.00 to
$4.20, down from our previous guidance of $4.40 to $4.60."
The 2008 estimate assumes an average currency exchange rate of the U.S. dollar
at par with the Canadian dollar. Crude oil prices are expected to average US
$121 per barrel for the year (versus the previous assumption of US $98 per
barrel) with the second half averaging roughly US $140 per barrel. Crack
spreads are expected to average US $23 per barrel for the year (versus the
previous assumption of US $20 per barrel) with the second half averaging US
$27 per barrel. The estimated average all-in fuel price is expected to be
between US $3.80 and $3.90 per U.S. gallon for the year.
CP strives to mitigate the impact of any changes in WTI and crack margins
through fuel recovery programs. However, these programs do not completely
offset the changes in expense caused by changes in WTI and crack margins.
The approximate net annual impact on EPS of changes in WTI and crack margins
given CP's current portfolio of freight contracts is as follows:
- A change in WTI of US $2 per barrel impacts EPS by $0.01
- A change in crack margins of US $1 per barrel impacts EPS by $0.02
These sensitivities do not consider the impact of the lagged implementation of
changes in fuel surcharges from the timing of actual expenses incurred. This
lag is due to regulatory notice requirements for rail price adjustments.
CP expects to grow total revenue by six to eight per cent in 2008, up from
previous guidance of four to six per cent due mostly to increased fuel
recovery, offset somewhat by volume declines. Total operating expenses are
expected to increase by 11 to 13 per cent, revised from the previous guidance
of six to eight per cent due principally to higher fuel cost.
CP expects its normalized tax rate to be between 26 per cent and 27 per cent,
excluding the impact of the Dakota Minnesota & Eastern Railroad (DM&E) equity
pick-up, a change from the previous outlook of 27 per cent to 29 per cent as a
result of decreasing Canadian provincial tax rates.
CP expects free cash to be approximately $150 million, adjusted downwards from
the previous outlook of approximately $200 million in 2008, due to lower
projected earnings.
The 2008 outlook includes the projected after tax earnings of the DM&E on an
equity accounting basis for the full year.
FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED
ITEMS
CP had a foreign exchange gain on long-term debt of $7 million ($5 million
after tax) in the second quarter of 2008, compared with a foreign exchange
gain on long-term debt of $89 million ($65 million after tax) in the second
quarter of 2007. There were no other specified items in the second quarter of
2008. There was a future income tax benefit of $17 million in the second
quarter of 2007 resulting from a reduction in the Canadian federal income tax
rate.
For the first six months of 2008, CP had a foreign exchange loss on long- term
debt of $10 million ($6 million after tax) compared with a foreign exchange
gain of $97 million ($71 million after tax) in the first half of 2007.
At June 30, 2008 CP held investments in Canadian Non-Bank Asset Backed
Commercial Paper (ABCP) with an original cost of approximately $144 million.
In the third-quarter of 2007, CP adjusted the estimated fair value of the
investment and took a charge of $21 million ($15 million after tax) and
classified the investments as long-term investments. In the first quarter of
2008, in recognition of current market conditions impacting these investments,
CP further adjusted the estimated fair value of the investments and took an
additional charge of $21 million ($15 million after tax). The estimated fair
value of the investments as at June 30, 2008 was unchanged from the estimated
fair value at March 31, 2008.
Continuing uncertainties regarding the value of the assets which underlie the
ABCP, the amount and timing of cash flows and the outcome of the restructuring
process could give rise to a material change in the value of the Company's
investments in ABCP which would impact the Company's near-term earnings.
In the first quarter of 2008, the company recorded a $21 million ($15 million
after tax) impairment of the company's investment in ABCP. Other than the
future income tax benefit of $17 million mentioned above, there were no
additional other specified items in the first half of 2007.
Presentation of non-GAAP earnings
CP presents non-GAAP earnings in this news release to provide a basis for
evaluating underlying earnings and liquidity trends in its business that can
be compared with prior periods' results of operations. These non-GAAP earnings
exclude foreign currency translation impacts on long-term debt, which can be
volatile and short term, and other specified items, which are not among CP's
normal ongoing revenues and operating expenses. The impact of volatile
short- term rate fluctuations on foreign-denominated debt is only realized
when long-term debt matures or is settled. A reconciliation of income,
excluding foreign exchange gains and losses on long-term debt and other
specified items, to net income as presented in the financial statements is
detailed in the attached Summary of Rail Data. Diluted EPS, excluding foreign
exchange gains and losses on long-term debt and other specified items, is also
referred to in this news release as "adjusted diluted EPS".
Free cash is calculated as cash provided by operating activities, less cash
used in investing activities and dividends paid, adjusted for the acquisition
of the DM&E, and now excluding changes in the accounts receivable
securitization program, which was terminated in the second quarter. Free cash
is adjusted for the DM&E acquisition, as it is not indicative of normal
day- to-day investments in the Company's asset base. The securitization of
accounts receivable is a financing-type transaction, which is excluded to
clarify the nature of the use of free cash.
Earnings that exclude the foreign exchange currency translation impact on
long-term debt and other specified items, and free cash after dividends, as
described in this news release, have no standardized meanings and are not
defined by Canadian generally accepted accounting principles and, therefore,
are unlikely to be comparable to similar measures presented by other
companies.
Other specified items are material transactions that may include, but are not
limited to, restructuring and asset impairment charges, gains and losses on
non-routine sales of assets, unusual income tax adjustments, and other items
that do not typify normal business activities.
Note on forward-looking information
This news release contains certain forward-looking statements relating but not
limited to our operations, anticipated financial performance and business
prospects. Undue reliance should not be placed on forward-looking information
as actual results may differ materially.
By its nature, CP's forward-looking information involves numerous assumptions,
inherent risks and uncertainties, including but not limited to the following
factors: changes in business strategies; general North American and global
economic and business conditions; risks in agricultural production such as
weather conditions and insect populations; the availability and price of
energy commodities; the effects of competition and pricing pressures; industry
capacity; shifts in market demand; changes in laws and regulations, including
regulation of rates; changes in taxes and tax rates; potential increases in
maintenance and operating costs; uncertainties of litigation; labour disputes;
risks and liabilities arising from derailments; timing of completion of
capital and maintenance projects; currency and interest rate fluctuations;
effects of changes in market conditions on the financial position of pension
plans and investments; and various events that could disrupt operations,
including severe weather conditions, security threats and governmental
response to them, and technological changes.
There are factors that could cause actual results to differ from those
described in the forward-looking statements contained in this news release.
These more specific factors are identified and discussed in the Outlook
section and elsewhere in this news release with the particular forward-looking
statement in question.
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.
Canadian Pacific, through the ingenuity of its employees located across Canada
and in the United States, remains committed to being the safest, most fluid
railway in North America. Our people are the key to delivering innovative
transportation solutions to our customers and to ensuring the safe operation
of our trains through the more than 900 communities where we operate. Our
combined ingenuity makes CPR a better place to work, rail a better way to
ship, and North America a better place to live. Come and visit us at
www.cpr.ca to see how we can put our ingenuity to work for you. Canadian
Pacific is proud to be the official rail freight services provider for the
Vancouver 2010 Olympic and Paralympic Winter Games.
STATEMENT OF CONSOLIDATED INCOME
(in millions of Canadian dollars, except per share data)
For the three months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Revenues
Freight $ 1,193.1 $ 1,174.1
Other 27.2 41.4
-------------------------
1,220.3 1,215.5
Operating expenses
Compensation and benefits 315.5 329.8
Fuel 260.3 193.7
Materials 56.5 55.6
Equipment rents 46.1 57.3
Depreciation and amortization 124.7 119.1
Purchased services and other 166.1 152.3
-------------------------
969.2 907.8
-------------------------
Revenues less operating expenses 251.1 307.7
Other charges (Note 4) 4.9 8.2
Equity income in Dakota, Minnesota & Eastern
Railroad Corporation (Note 10) (13.4) -
Foreign exchange gains on long-term debt (6.8) (88.6)
Interest expense (Note 5) 62.9 49.2
Income tax expense (Note 6) 48.6 82.2
-------------------------
Net income $ 154.9 $ 256.7
-------------------------
-------------------------
Basic earnings per share (Note 7) $ 1.01 $ 1.66
-------------------------
-------------------------
Diluted earnings per share (Note 7) $ 1.00 $ 1.64
-------------------------
-------------------------
See notes to interim consolidated financial statements.
STATEMENT OF CONSOLIDATED INCOME
(in millions of Canadian dollars, except per share data)
For the six months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Revenues
Freight $ 2,317.5 $ 2,265.0
Other 49.7 66.4
-------------------------
2,367.2 2,331.4
Operating expenses
Compensation and benefits 643.8 662.3
Fuel 490.5 364.9
Materials 122.0 118.0
Equipment rents 92.0 112.8
Depreciation and amortization 244.6 237.7
Purchased services and other 325.0 298.7
-------------------------
1,917.9 1,794.4
-------------------------
Revenues less operating expenses 449.3 537.0
Other charges (Note 4) 11.6 13.0
Equity income in Dakota, Minnesota & Eastern
Railroad Corporation (Note 10) (24.4) -
Change in estimated fair value of Canadian third
party asset-backed commercial paper (Note 10) 21.3 -
Foreign exchange losses (gains) on long-term debt 9.5 (97.2)
Interest expense (Note 5) 122.8 96.0
Income tax expense (Note 6) 62.8 139.9
-------------------------
Net income $ 245.7 $ 385.3
-------------------------
-------------------------
Basic earnings per share (Note 7) $ 1.60 $ 2.49
-------------------------
-------------------------
Diluted earnings per share (Note 7) $ 1.59 $ 2.46
-------------------------
-------------------------
See notes to interim consolidated financial statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions of Canadian dollars)
For the three months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Comprehensive income
Net income $ 154.9 $ 256.7
Other comprehensive income
Net change in foreign currency translation
adjustments, net of hedging activities (1.1) (2.9)
Net change in gains on derivatives designated
as cash flow hedges 16.7 (9.8)
-------------------------
Other comprehensive income (loss) before income
taxes 15.6 (12.7)
Income tax expense (5.3) (2.0)
-------------------------
Other comprehensive income (loss) (Note 13) 10.3 (14.7)
-------------------------
Comprehensive income $ 165.2 $ 242.0
-------------------------
-------------------------
For the six months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Comprehensive income
Net income $ 245.7 $ 385.3
Other comprehensive income
Net change in foreign currency translation
adjustments, net of hedging activities 2.2 (3.2)
Net change in gains on derivatives designated
as cash flow hedges 7.9 (13.0)
-------------------------
Other comprehensive income (loss) before income
taxes 10.1 (16.2)
Income tax recovery (expense) 2.7 (1.3)
-------------------------
Other comprehensive income (loss) (Note 13) 12.8 (17.5)
-------------------------
Comprehensive income $ 258.5 $ 367.8
-------------------------
-------------------------
See notes to interim consolidated financial statements.
CONSOLIDATED BALANCE SHEET
(in millions of Canadian dollars)
June 30 December 31
2008 2007
-------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 80.9 $ 378.1
Accounts receivable and other current
assets (Note 9) 681.3 542.8
Materials and supplies 199.5 179.5
Future income taxes 66.7 67.3
-------------------------
1,028.4 1,167.7
Investments (Note 10) 1,717.6 1,668.6
Net properties 9,464.2 9,293.1
Other assets and deferred charges (Note 15) 1,468.0 1,235.6
-------------------------
Total assets $ 13,678.2 $ 13,365.0
-------------------------
-------------------------
Liabilities and shareholders' equity
Current liabilities
Short-term borrowing $ 255.0 $ 229.7
Accounts payable and accrued liabilities 954.2 980.8
Income and other taxes payable 50.7 68.8
Dividends payable 38.1 34.5
Long-term debt maturing within one year 238.4 31.0
-------------------------
1,536.4 1,344.8
Deferred liabilities 717.2 714.6
Long-term debt (Note 11) 4,016.8 4,146.2
Future income taxes 1,741.8 1,701.5
Shareholders' equity
Share capital (Note 12) 1,216.9 1,188.6
Contributed surplus 39.8 42.4
Accumulated other comprehensive income (Note 13) 52.4 39.6
Retained income 4,356.9 4,187.3
-------------------------
5,666.0 5,457.9
-------------------------
Total liabilities and shareholders' equity $ 13,678.2 $ 13,365.0
-------------------------
-------------------------
Commitments and contingencies (Note 19).
See notes to interim consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions of Canadian dollars)
For the three months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Operating activities
Net income $ 154.9 $ 256.7
Add (deduct) items not affecting cash:
Depreciation and amortization 124.7 119.1
Future income taxes 32.4 57.7
Foreign exchange gains on long-term debt (6.8) (88.6)
Amortization of deferred charges 2.6 3.1
Equity income, net of cash received (11.4) -
Restructuring and environmental remediation
payments (Note 8) (10.8) (12.0)
Other operating activities, net 29.9 0.9
Change in non-cash working capital balances
related to operations (Note 9) (132.5) 27.6
-------------------------
Cash provided by operating activities 183.0 364.5
-------------------------
Investing activities
Additions to properties (237.3) (158.4)
Additions to investments and other assets
(Note 15) (57.8) (11.4)
Additions to investment in Dakota, Minnesota
& Eastern Railroad Corporation (Note 10) (1.2) -
Net (cost) proceeds from disposal of
transportation properties (0.1) (0.4)
-------------------------
Cash used in investing activities (296.4) (170.2)
-------------------------
Financing activities
Dividends paid (38.0) (34.7)
Issuance of CP Common Shares 4.8 15.0
Purchase of CP Common Shares - (212.0)
Net (decrease) increase in short-term borrowing 188.3 (77.7)
Issuance of long-term debt (Note 11) 1,068.7 485.1
Repayment of long-term debt (1,069.9) (3.5)
Settlement of treasury rate lock (Note 14) (30.9) -
-------------------------
Cash provided by financing activities 123.0 172.2
-------------------------
Cash position
Increase in cash and cash equivalents 9.6 366.5
Cash and cash equivalents at beginning of period 71.3 25.6
-------------------------
Cash and cash equivalents at end of period $ 80.9 $ 392.1
-------------------------
-------------------------
See notes to interim consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions of Canadian dollars)
For the six months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Operating activities
Net income $ 245.7 $ 385.3
Add (deduct) items not affecting cash:
Depreciation and amortization 244.6 237.7
Future income taxes 27.9 96.2
Change in estimated fair value of Canadian
third party asset-backed commercial paper
(Note 10) 21.3 -
Foreign exchange losses (gains) on
long-term debt 9.5 (97.2)
Amortization of deferred charges 5.1 6.2
Equity income, net of cash received (20.8) -
Restructuring and environmental remediation
payments (Note 8) (24.5) (25.2)
Other operating activities, net 4.4 (1.8)
Change in non-cash working capital balances
related to operations (Note 9) (170.2) (9.0)
-------------------------
Cash provided by operating activities 343.0 592.2
-------------------------
Investing activities
Additions to properties (364.7) (362.6)
Additions to investments and other assets
(Note 15) (192.5) (11.7)
Additions to investment in Dakota, Minnesota
& Eastern Railroad Corporation (Note 10) (7.5) -
Net (cost) proceeds from disposal of
transportation properties (2.6) 8.5
-------------------------
Cash used in investing activities (567.3) (365.8)
-------------------------
Financing activities
Dividends paid (72.5) (63.8)
Issuance of CP Common Shares 17.0 25.1
Purchase of CP Common Shares - (228.1)
Net (decrease) increase in short-term
borrowing 25.3 -
Issuance of long-term debt (Note 11) 1,068.7 485.1
Repayment of long-term debt (1,080.5) (176.9)
Settlement of treasury rate lock (Note 14) (30.9) -
-------------------------
Cash (used in) provided by financing
activities (72.9) 41.4
-------------------------
Cash position
Increase (decrease) in cash and cash equivalents (297.2) 267.8
Cash and cash equivalents at beginning of period 378.1 124.3
-------------------------
Cash and cash equivalents at end of period $ 80.9 $ 392.1
-------------------------
-------------------------
See notes to interim consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions of Canadian dollars)
For the three months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Share capital
Balance, beginning of period $ 1,210.4 $ 1,182.9
Shares issued under stock option plans 6.5 18.5
Shares purchased - (19.4)
-------------------------
Balance, end of period 1,216.9 1,182.0
-------------------------
Contributed surplus
Balance, beginning of period 38.5 37.1
Stock compensation expense 2.3 2.1
Stock compensation expense related to shares
issued under stock option plans (1.0) (0.5)
-------------------------
Balance, end of period 39.8 38.7
-------------------------
Accumulated other comprehensive income
Balance, beginning of period 42.1 77.6
Other comprehensive income (loss) (Note 13) 10.3 (14.7)
-------------------------
Balance, end of period 52.4 62.9
-------------------------
Retained income
Balance, beginning of period 4,240.1 3,641.7
Net income for the period 154.9 256.7
Shares purchased - (168.6)
Dividends (38.1) (34.9)
-------------------------
Balance, end of period 4,356.9 3,694.9
-------------------------
Total accumulated other comprehensive income
and retained income 4,409.3 3,757.8
-------------------------
-------------------------
Shareholders' equity, end of period $ 5,666.0 $ 4,978.5
-------------------------
-------------------------
See notes to interim consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions of Canadian dollars)
For the six months
ended June 30
2008 2007
-------------------------
-------------------------
(unaudited)
Share capital
Balance, beginning of period $ 1,188.6 $ 1,175.7
Shares issued under stock option plans 28.3 30.8
Shares purchased - (24.5)
-------------------------
Balance, end of period 1,216.9 1,182.0
-------------------------
Contributed surplus
Balance, beginning of period 42.4 32.3
Stock compensation expense 6.8 7.4
Stock compensation expense related to shares
issued under stock option plans (9.4) (1.0)
-------------------------
Balance, end of period 39.8 38.7
-------------------------
Accumulated other comprehensive income
Balance, beginning of period 39.6 66.4
Adjustment for change in accounting policy - 14.0
-------------------------
Adjusted balance, beginning of period 39.6 80.4
Other comprehensive income (loss) (Note 13) 12.8 (17.5)
-------------------------
Balance, end of period 52.4 62.9
-------------------------
Retained income
Balance, beginning of period 4,187.3 3,582.1
Adjustment for change in accounting policy - 4.0
-------------------------
Adjusted balance, beginning of period 4,187.3 3,586.1
Net income for the period 245.7 385.3
Shares purchased - (206.6)
Dividends (76.1) (69.9)
-------------------------
Balance, end of period 4,356.9 3,694.9
-------------------------
Total accumulated other comprehensive income
and retained income 4,409.3 3,757.8
-------------------------
-------------------------
Shareholders' equity, end of period $ 5,666.0 $ 4,978.5
-------------------------
-------------------------
See notes to interim consolidated financial statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(unaudited)
1 Basis of presentation
These unaudited interim consolidated financial statements and notes
have been prepared using accounting policies that are consistent with
the policies used in preparing Canadian Pacific Railway Limited's
("CP", "the Company" or "Canadian Pacific Railway") 2007 annual
consolidated financial statements, except as discussed below and in
Note 2 for the adoption of new accounting standards. They do not
include all disclosures required under Generally Accepted Accounting
Principles for annual financial statements and should be read in
conjunction with the annual consolidated financial statements.
CP's 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.
2 New accounting changes
Financial Instrument and Capital Disclosures
The CICA has issued the following accounting standards effective for
fiscal years beginning on or after January 1, 2008: Section 3862
"Financial Instruments - Disclosures", Section 3863 "Financial
Instruments - Presentation", and Section 1535 "Capital Disclosures".
Section 3862 "Financial Instruments - Disclosures" and Section 3863
"Financial Instruments - Presentation" replace Section 3861
"Financial Instruments - Disclosure and Presentation", revising
disclosures related to financial instruments, including hedging
instruments, and carrying forward unchanged presentation
requirements.
Section 1535 "Capital Disclosures" requires the Company to provide
disclosures about the Company's capital and how it is managed.
The adoption of these new accounting standards did not impact the
amounts reported in the Company's financial statements; however, it
did result in expanded note disclosure (see Note 14 and Note 20).
Inventories
Effective January 1, 2008, the CICA has issued accounting standard
Section 3031 "Inventories". Section 3031 "Inventories" provides
guidance on the method of determining the cost of the Company's
materials and supplies. The new accounting standard specifies that
inventories are to be valued at the lower of cost and net realizable
value. The standard requires the reversal of previously recorded
write downs to realizable value when there is clear evidence that net
realizable value has increased. The adoption of Section 3031
"Inventories" did not impact the Company's financial statements.
3 Future accounting changes
In February 2008, the CICA issued accounting standard Section 3064
"Goodwill and intangible assets", replacing accounting standard
Section 3062 "Goodwill and other intangible assets" and accounting
standard Section 3450 "Research and development costs". The new
Section will be applicable on a retrospective basis with restatement
to financial statements relating to fiscal years beginning on or
after October 1, 2008. Accordingly, the Company will adopt the new
standards for its fiscal year beginning January 1, 2009. Section 3064
establishes standards for the recognition, measurement, presentation
and disclosure of goodwill subsequent to its initial recognition and
of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the
previous Section 3062. The Company is currently evaluating the impact
of the adoption of this new Section.
4 Other charges
For the three months For the six months
ended June 30 ended June 30
(in millions) 2008 2007 2008 2007
------------------------ ----------------------
Amortization of
discount on
accruals recorded
at present value $ 1.6 $ 2.2 $ 3.1 $ 4.2
Other exchange losses 0.6 2.5 1.9 2.0
Loss on sale of
accounts receivable 1.1 1.4 2.7 2.7
Gains on non-hedging
derivative
instruments (0.9) (0.1) (0.9) (0.4)
Other 2.5 2.2 4.8 4.5
------------------------ ----------------------
Total other charges $ 4.9 $ 8.2 $ 11.6 $ 13.0
------------------------ ----------------------
------------------------ ----------------------
5 Interest expense
For the three months For the six months
ended June 30 ended June 30
(in millions) 2008 2007 2008 2007
------------------------ ----------------------
Interest expense $ 64.8 $ 52.3 $ 129.5 $ 101.1
Interest income (1.9) (3.1) (6.7) (5.1)
------------------------ ----------------------
Total interest
expense $ 62.9 $ 49.2 $ 122.8 $ 96.0
------------------------ ----------------------
------------------------ ----------------------
6 Income taxes
During the six months ended June 30, 2008, legislation was
substantively enacted to reduce provincial income tax rates. As a
result of these changes, the Company recorded a $15.7 million benefit
in future tax liability and income tax expense for the six months
ended June 30, 2008, related to the revaluation of its future income
tax balances as at December 31, 2007. For the three months ended
June 30, 2008, the Company recorded a $5.1 million benefit in future
income tax liability and income tax expenses.
Cash taxes paid for the quarter ended June 30, 2008, was
$13.2 million (three months ended June 30, 2007 - cash taxes refunded
was $1.1 million). Cash taxes paid in the six months ended June 30,
2008 was $57.9 million (six months ended June 30, 2007 -
$8.1 million).
7 Earnings per share
At June 30, 2008, the number of shares outstanding was 153.8 million
(June 30, 2007 - 153.1 million).
Basic earnings per share have been calculated using net income for
the period divided by the weighted average number of CP shares
outstanding during the period.
Diluted earnings per share have been calculated using the treasury
stock method, which gives effect to the dilutive value of outstanding
options.
The number of shares used in earnings per share calculations is
reconciled as follows:
For the three months For the six months
ended June 30 ended June 30
(in millions) 2008 2007 2008 2007
------------------------ ----------------------
Weighted average
shares outstanding 153.7 154.3 153.6 154.9
Dilutive effect of
stock options 1.4 1.8 1.4 1.5
------------------------ ----------------------
Weighted average
diluted shares
outstanding 155.1 156.1 155.0 156.4
------------------------ ----------------------
------------------------ ----------------------
(in dollars)
Basic earnings
per share $ 1.01 $ 1.66 $ 1.60 $ 2.49
Diluted earnings
per share $ 1.00 $ 1.64 $ 1.59 $ 2.46
------------------------ ----------------------
------------------------ ----------------------
For the three and six months ended June 30, 2008, 613,933 and 617,825
options were excluded from the computation of diluted earnings per
share because their effects were not dilutive (three and six months
ended June 30, 2007 - nil and 2,425).
8 Restructuring and environmental remediation
At June, 2008, the provision for restructuring and environmental
remediation was $217.2 million (December 31, 2007 - $234.0 million).
This provision primarily includes labour liabilities for
restructuring plans. Payments are expected to continue in diminishing
amounts until 2025. The environmental remediation liability includes
the cost of a multi-year soil remediation program.
Set out below is a reconciliation of CP's liabilities associated with
restructuring and environmental remediation programs:
Three months ended June 30, 2008
Opening Amorti- Closing
Balance zation Foreign Balance
April 1 of Exchange June 30
(in millions) 2008 Accrued Payments Discount Impact 2008
-------------------------------------------------------
Labour
liability for
terminations
and
severances $ 118.9 1.5 (8.3) 1.1 (0.3) $ 112.9
Other non-labour
liabilities for
exit plans 0.6 - - - - 0.6
-------------------------------------------------------
Total
restructuring
liability 119.5 1.5 (8.3) 1.1 (0.3) 113.5
-------------------------------------------------------
Environmental
remediation
program 105.5 1.0 (2.5) - (0.3) 103.7
-------------------------------------------------------
Total
restructuring
and
environmental
remediation
liability $ 225.0 2.5 (10.8) 1.1 (0.6) $ 217.2
-------------------------------------------------------
-------------------------------------------------------
Three months ended June 30, 2007
Opening Amorti- Closing
Balance zation Foreign Balance
April 1 Accrued of Exchange June 30
(in millions) 2007 (reduced) Payments Discount Impact 2007
-------------------------------------------------------
Labour
liability for
terminations
and
severances $ 176.1 (2.1) (9.6) 1.7 (2.5) $ 163.6
Other non-labour
liabilities for
exit plans 1.3 - - - (0.2) 1.1
-------------------------------------------------------
Total
restructuring
liability 177.4 (2.1) (9.6) 1.7 (2.7) 164.7
-------------------------------------------------------
Environmental
remediation
program 119.2 1.1 (2.4) - (5.2) 112.7
-------------------------------------------------------
Total
restructuring
and
environmental
remediation
liability $ 296.6 (1.0) (12.0) 1.7 (7.9) $ 277.4
-------------------------------------------------------
-------------------------------------------------------
Six months ended June 30, 2008
Opening Amorti- Closing
Balance zation Foreign Balance
Jan. 1 of Exchange June 30
(in millions) 2008 Accrued Payments Discount Impact 2008
-------------------------------------------------------
Labour
liability for
terminations
and
severances $ 129.2 1.5 (20.6) 2.2 0.6 $ 112.9
Other non-labour
liabilities for
exit plans 0.8 - (0.2) - - 0.6
-------------------------------------------------------
Total
restructuring
liability 130.0 1.5 (20.8) 2.2 0.6 113.5
-------------------------------------------------------
Environmental
remediation
program 104.0 1.9 (3.7) - 1.5 103.7
-------------------------------------------------------
Total
restructuring
and
environmental
remediation
liability $ 234.0 3.4 (24.5) 2.2 2.1 $ 217.2
-------------------------------------------------------
-------------------------------------------------------
Six months ended June 30, 2007
Opening Amorti- Closing
Balance zation Foreign Balance
Jan. 1 Accrued of Exchange June 30
(in millions) 2007 (reduced) Payments Discount Impact 2007
-------------------------------------------------------
Labour
liability for
terminations
and
severances $ 187.4 (2.1) (22.1) 3.2 (2.8) $ 163.6
Other non-labour
liabilities for
exit plans 1.4 - (0.1) - (0.2) 1.1
-------------------------------------------------------
Total
restructuring
liability 188.8 (2.1) (22.2) 3.2 (3.0) 164.7
-------------------------------------------------------
Environmental
remediation
program 120.2 1.3 (3.0) - (5.8) 112.7
-------------------------------------------------------
Total
restructuring
and
environmental
remediation
liability $ 309.0 (0.8) (25.2) 3.2 (8.8) $ 277.4
-------------------------------------------------------
-------------------------------------------------------
Amortization of Discount is charged to income as "Other Charges",
"Compensation and Benefits" and "Purchased Services and Other" as
applicable. New accruals and adjustments to previous accruals are
reflected in "Compensation and Benefits" and "Purchased Services and
Other" as applicable.
9 Accounts Receivable
As at March 31, 2008, the Company had an accounts receivable
securitization program. Under the terms of the program, the Company
sold an undivided co-ownership interest in $120.0 million of eligible
freight receivables to an unrelated trust. In the second quarter of
2008, the Company's accounts receivable securitization program was
terminated. As a result of this termination, in the Company's
Consolidated balance sheet, Accounts receivable and other current
assets increased by $120.0 million and in the Statement of
consolidated cash flows the Change in non-cash working capital
balances related to operations reflected an outflow of
$120.0 million. As well, the related servicing asset and liability
which had previously been recognized are no longer required to be
maintained and were settled as part of the termination.
10 Investments
Dakota, Minnesota & Eastern Railroad Corporation ("DM&E")
Effective October 4, 2007, the Company acquired all of the issued and
outstanding shares of DM&E. The Company is currently accounting for
the purchase by the equity method until such time as the acquisition
has been approved by the United States Surface Transportation Board.
The purchase price was $1.499 billion cash payment, including a
$6 million post closing adjustment in the first quarter of 2008,
and transaction costs of $22 million incurred to June 30, 2008.
Future contingent payments of up to approximately US$1.05 billion may
become payable up to December 31, 2025 upon achievement of certain
milestones.
The equity income from the Company's investment in DM&E, which is
recorded net of tax, was $13.4 million during the three months ended
June 30, 2008 and $24.4 million during the six months ended June 30,
2008. The difference between cost and the underlying net book value
of DM&E at the date of acquisition was US$983.5 million. For the
three months ended June 30, 2008 the equity income from the Company's
investment in DM&E was reduced by $3.4 million to recognize
additional depreciation expense based on the assigned cost using fair
values at that date of acquisition and $0.5 million to recognize
amortization of the fair value of intangible assets acquired. For the
six months ended June 30, 2008, the additional depreciation expense
was $6.8 million and the amortization of intangible assets was
$0.9 million.
Canadian Third Party Asset-backed Commercial Paper ("ABCP")
At June 30, 2008, the Company held ABCP issued by a number of trusts
with an original cost of $143.6 million. At the dates the Company
acquired these investments they were rated R1 (High) by DBRS Limited
("DBRS"), the highest credit rating issued for commercial paper, and
backed by R1 (High) rated assets and liquidity agreements. These
investments matured during the third quarter of 2007 but, as a result
of liquidity issues in the ABCP market, did not settle on maturity.
As a result, the Company has classified its ABCP as long-term
investments after initially classifying them as Cash and cash
equivalents.
On August 16, 2007, an announcement was made by a group representing
banks, asset providers and major investors on an agreement in
principle to a long-term proposal and interim agreement to convert
the ABCP into long-term floating rate notes maturing no earlier than
the scheduled maturity of the underlying assets. On September 6,
2007, a pan-Canadian restructuring committee consisting of major
investors was formed. The committee was created to propose a solution
to the liquidity problem affecting the ABCP and has retained legal
and financial advisors to oversee the proposed restructuring process.
The ABCP in which the Company has invested has not traded in an
active market since mid-August 2007 and there are currently no market
quotations available.
On March 17, 2008, a court order was obtained which commenced the
process of restructuring the ABCP under the protection of the
Companies' Creditors Arrangement Act ("CCAA"). A vote of the holders
of the ABCP approving the restructuring occurred on April 25, 2008,
and on June 25, 2008 a court order sanctioning the restructuring of
the ABCP was made pursuant to the CCAA. The sanction order remains
subject to appeals by certain of the holders of ABCP, and the
restructuring is not expected to be implemented until all appeals
have been finally resolved.
On March 20, 2008, the pan-Canadian restructuring committee issued an
Information Statement containing details about the proposed
restructuring. Based on this and other public information it is
estimated that, of the $143.6 million of ABCP in which the Company
has invested:
- $12.5 million is represented by traditional securitized assets
and the Company will, on restructuring, receive replacement TA
Tracking long-term floating rate notes with a maturity of
approximately eight and one half years. As the underlying
assets are primarily comprised of cash and Canadian Lines of
Credit which are subject to an offer to repurchase at par
value, the Company has assumed that these notes will be repaid
in full significantly in advance of maturity;
- $117.7 million is represented by a combination of leveraged
collateralized debt, synthetic assets and traditional
securitized assets and the Company will, on restructuring,
receive replacement senior Class A-1 and Class A-2 and
subordinated Class B and Class C long-term floating rate notes
with maturities of approximately eight years and nine months.
The Company expects to receive replacement notes with par
values as follows:
- Class A-1: $59.7 million
- Class A-2: $46.5 million
- Class B: $8.0 million
- Class C: $3.5 million
The replacement senior notes are expected to obtain a AA rating
while the replacement subordinated notes are likely to be
unrated; and
- $13.4 million is represented by assets that have an exposure to
US mortgages and sub-prime mortgages. On restructuring, the
Company is likely to receive IA Tracking long-term floating
rate notes with maturities of approximately between five years
and three months and eight years and seven months. These notes
may be rated, although at this time the pan-Canadian
restructuring committee has provided no indication of the
rating these notes may receive.
The valuation technique used by the Company to estimate the fair
value of its investment in ABCP at June 30, 2008, incorporates
probability weighted discounted cash flows considering the best
available public information regarding market conditions and other
factors that a market participant would consider for such
investments. The assumptions used in determining the estimated fair
value reflect the details included in the Information Statement
issued by the pan-Canadian restructuring committee and the risks
associated with the long-term floating rate notes. The interest rates
and maturities of the various long-term floating rate notes, discount
rates and credit losses modelled are:
Probability weighted average interest rate 3.2 per cent
Weighted average discount rate 7.4 per cent
Maturity of long-term floating rate notes five to nine years
Credit losses rated notes(1): nil
to 25 percent
unrated notes(2):
15 to 100 percent
(1) TA Tracking, Class A-1 and Class A-2 senior notes and IA
Tracking notes.
(2) Class B and Class C subordinated notes.
Interest rates and credit losses vary by each of the different
replacement long-term floating rate notes to be issued as each has
different credit ratings and risks. Interest rates and credit losses
also vary by the different probable cash flow scenarios that have
been modelled.
Discount rates vary dependent upon the credit rating of the
replacement long-term floating rate notes. Discount rates have been
estimated using Government of Canada benchmark rates plus expected
spreads for similarly rated instruments with similar maturities and
structure. An increase in the estimated discount rates of 1 percent
would reduce the estimated fair value of the Company's investment in
ABCP by approximately $5 million.
Maturities vary by different replacement long-term floating rate
notes as a result of the expected maturity of the underlying assets.
One of the cash flow scenarios modelled is a liquidation scenario
whereby, if the restructuring is not successfully completed, recovery
of the Company's investment is through the liquidation of the
underlying assets of the ABCP trusts. In addition, while the
likelihood is remote, there remains a possibility that a liquidation
scenario may occur even with a successful approval of the
restructuring plan.
In addition, assumptions have also been made as to the amount of
restructuring costs that the Company will bear.
The probability weighted discounted cash flows resulted in an
estimated fair value of the Company's ABCP of $100.8 million at
June 30, 2008. This was unchanged from the estimated fair value at
March 31, 2008. However, it represents a reduction from the estimated
fair value at December 31, 2007 of $122.1 million. A charge to income
of $21.3 million before tax ($15.0 million after tax) was recorded in
the first quarter of 2008. This first quarter charge represents
15 percent of the original value, bringing the aggregate write-down
to a total of approximately 30 percent of the original value.
Sensitivity analysis is presented below for key assumptions:
(in millions) Change in fair value of
ABCP
-------------------------
Probability of successful restructuring
1 percent increase $ 0.4
1 percent decrease $ (0.4)
Interest rate
50 basis point increase $ 2.9
50 basis point decrease $ (2.9)
Discount rate
50 basis point increase $ (2.4)
50 basis point decrease $ 2.5
-------------------------
Continuing uncertainties regarding the value of the assets which
underlie the ABCP, the amount and timing of cash flows and the
outcome of the restructuring process could give rise to a further
material change in the value of the Company's investment in ABCP
which could impact the Company's near term earnings.
11 Long-term debt
During the second quarter of 2008, the Company issued US$400 million
5.75% 5-year notes, US$300 million 6.50% 10-year notes and
CDN$375 million 6.25% 10-year notes. Net proceeds from these
offerings were CDN$1,068.7 million. The notes are unsecured, but
carry a negative pledge. The proceeds from these offerings were used
to partially repay the bridge financing.
12 Shareholders' equity
An analysis of Common Share balances is as follows:
For the three months For the six months
ended June 30 ended June 30
(in millions) 2008 2007 2008 2007
------------------------ ----------------------
Share capital,
beginning of period 153.6 155.2 153.3 155.5
Shares issued under
stock option plans 0.2 0.4 0.5 0.8
Shares purchased - (2.5) - (3.2)
------------------------ ----------------------
Share capital,
end of period 153.8 153.1 153.8 153.1
------------------------ ----------------------
------------------------ ----------------------
For the six months ended June 30, 2008, there were no shares
purchased (2.5 million shares were purchased during the three months
ended June 30, 2007 at an average price per share of $74.16 and for
the six months ended June 30, 2007 3.2 million shares were purchased
at an average price per share of $73.64).
Purchases are made at the market price on the day of purchase, with
consideration allocated to share capital up to the average carrying
amount of the shares, and any excess allocated to retained earnings.
When shares are purchased, it takes three days before the transaction
is settled and the shares are cancelled. The cost of shares purchased
in a given month and settled in the following month is accrued in the
month of purchase.
13 Other comprehensive income and accumulated other comprehensive income
Components of other comprehensive income and the related tax effects
are as follows:
For the three months
ended June 30
(in millions) 2008
Income
Before tax Net of
tax (expense) tax
amount recovery amount
---------------------------------
Unrealized foreign exchange gain on
translation of U.S.
dollar-denominated long-term debt
designated as a hedge of the net
investment in U.S. subsidiaries $ 8.0 $ (1.1) $ 6.9
Unrealized foreign exchange loss on
translation of the net investment
in U.S. subsidiaries (9.1) - (9.1)
Realized gain on cash flow hedges
settled in the period (6.0) 1.9 (4.1)
Decrease in unrealized holding
losses on cash flow hedges 21.0 (6.6) 14.4
Realized loss on cash flow hedges
settled in prior periods 1.7 0.5 2.2
---------------------------------
Other comprehensive income (loss) $ 15.6 $ (5.3) $ 10.3
---------------------------------
---------------------------------
For the three months
ended June 30
(in millions) 2007
Income
Before tax Net of
tax (expense) tax
amount recovery amount
---------------------------------
Unrealized foreign exchange gain on
translation of U.S.
dollar-denominated long-term debt
designated as a hedge of the net
investment in U.S. subsidiaries $ 33.8 $ (5.2) $ 28.6
Unrealized foreign exchange loss on
translation of the net investment
in U.S. subsidiaries (36.7) - (36.7)
Realized gain on cash flow hedges
settled in the period (4.8) 1.5 (3.3)
Decrease in unrealized holding gains
on cash flow hedges (6.6) 2.2 (4.4)
Realized loss on cash flow hedges
settled in prior periods 1.6 (0.5) 1.1
---------------------------------
Other comprehensive loss $ (12.7) $ (2.0) $ (14.7)
---------------------------------
---------------------------------
For the six months
ended June 30
(in millions) 2008
Income
Before tax Net of
tax (expense) tax
amount recovery amount
---------------------------------
Unrealized foreign exchange loss on
translation of U.S.
dollar-denominated long-term debt
designated as a hedge of the net
investment in U.S. subsidiaries $ (35.0) $ 4.7 $ (30.3)
Unrealized foreign exchange gain on
translation of the net investment
in U.S. subsidiaries 37.2 - 37.2
Realized gain on cash flow hedges
settled in the period (8.9) 3.6 (5.3)
Decrease in unrealized holding
losses on cash flow hedges 15.2 (6.1) 9.1
Realized loss on cash flow hedges
settled in prior periods 1.6 0.5 2.1
---------------------------------
Other comprehensive income $ 10.1 $ 2.7 $ 12.8
---------------------------------
---------------------------------
For the six months
ended June 30
(in millions) 2007
Income
Before tax Net of
tax (expense) tax
amount recovery amount
---------------------------------
Unrealized foreign exchange gain on
translation of U.S.
dollar-denominated long-term debt
designated as a hedge of the net
investment in U.S. subsidiaries $ 37.7 $ (5.8) $ 31.9
Unrealized foreign exchange loss on
translation of the net investment
in U.S. subsidiaries (40.9) - (40.9)
Realized gain on cash flow hedges
settled in the period (8.1) 2.8 (5.3)
Decrease in unrealized holding
gains on cash flow hedges (6.5) 2.2 (4.3)
Realized loss on cash flow hedges
settled in prior periods 1.6 (0.5) 1.1
---------------------------------
Other comprehensive loss $ (16.2) $ (1.3) $ (17.5)
---------------------------------
---------------------------------
Changes in the balances of each classification within Accumulated
other comprehensive income are as follows:
Three months ended June 30, 2008
Opening Closing
Balance, Balance,
(in millions) Apr. 1, Period June 30,
2008 change 2008
---------------------------------
Foreign exchange gain on U.S. dollar
debt designated as a hedge of the
net investment in U.S.
subsidiaries $ 259.4 $ 6.9 $ 266.3
Foreign exchange loss on net
investment in U.S. subsidiaries (200.6) (9.1) (209.7)
Unrealized effective losses on
cash flow hedges (12.7) 10.3 (2.4)
Deferred loss on settled
hedge instruments (4.0) 2.2 (1.8)
---------------------------------
Accumulated other comprehensive
income $ 42.1 $ 10.3 $ 52.4
---------------------------------
---------------------------------
Three months ended June 30, 2007
Opening Closing
Balance, Balance,
(in millions) Apr. 1, Period June 30,
2007 change 2007
---------------------------------
Foreign exchange gain on U.S. dollar
debt designated as a hedge of the
net investment in U.S.
subsidiaries $ 238.6 $ 28.6 $ 267.2
Foreign exchange loss on net
investment in U.S. subsidiaries (172.7) (36.7) (209.4)
Unrealized effective gains on cash
flow hedges 17.0 (7.7) 9.3
Deferred loss on settled
hedge instruments (5.3) 1.1 (4.2)
---------------------------------
Accumulated other comprehensive
income $ 77.6 $ (14.7) $ 62.9
---------------------------------
---------------------------------
Six months ended June 30, 2008
Opening Closing
Balance, Balance,
(in millions) Jan. 1, Period June 30,
2008 change 2008
---------------------------------
Foreign exchange gain on U.S. dollar
debt designated as a hedge of the
net investment in U.S. subsidiaries $ 296.6 $ (30.3) $ 266.3
Foreign exchange loss on net
investment in U.S. subsidiaries (246.9) 37.2 (209.7)
Unrealized effective losses on
cash flow hedges (6.2) 3.8 (2.4)
Deferred loss on settled hedge
instruments (3.9) 2.1 (1.8)
---------------------------------
Accumulated other comprehensive
income $ 39.6 $ 12.8 $ 52.4
---------------------------------
---------------------------------
Six months ended June 30, 2007
Adjustment Adjusted
Opening for Opening Closing
Balance, change in Balance, Balance,
(in millions) Jan. 1, accounting Jan. 1, Period June 30,
2007 policy 2007 change 2007
------------------------------------------------------
Foreign exchange
gain on U.S.
dollar debt
designated
as a hedge
of the net
investment
in U.S.
subsidiaries $ 234.9 $ 0.4 $ 235.3 $ 31.9 $ 267.2
Foreign exchange
loss on net
investment
in U.S.
subsidiaries (168.5) - (168.5) (40.9) (209.4)
Unrealized
effective
gains of cash
flow hedges - 18.9 18.9 (9.6) 9.3
Deferred loss
on settled
hedge
instruments - (5.3) (5.3) 1.1 (4.2)
------------------------------------------------------
Accumulated
other
comprehensive
income $ 66.4 $ 14.0 $ 80.4 $ (17.5) $ 62.9
------------------------------------------------------
------------------------------------------------------
During the next twelve months, the Company expects $15.9 million of
unrealized holding gains on derivative instruments to be realized and
recognized in the Statement of Consolidated Income. Existing
derivative instruments designated as cash flow hedges will be fully
matured by December 31, 2009.
14 Financial instruments
The fair value of a financial instrument is the amount of
consideration that would be agreed upon in an arm's length
transaction between willing parties. The Company uses the following
methods and assumptions to estimate fair value of each class of
financial instruments for which carrying amounts are included in the
Consolidated Balance Sheet as follows:
Loans and receivables
---------------------
Accounts receivable and other current assets - The carrying amounts
approximate fair value because of the short maturity of these
instruments.
Investments - Long-term receivable balances are carried at amortized
cost based on an initial fair value as determined at the time using
discounted cash flow analysis and observable market based inputs.
Financial liabilities
---------------------
Accounts payable and accrued liabilities, short-term borrowings, and
deferred liabilities - The carrying amounts approximate fair value
because of the short maturity of these instruments.
Long-term debt - The carrying amount of long-term debt is at
amortized cost based on an initial fair value as determined at the
time using the quoted market prices for the same or similar debt
instruments.
Available for sale
------------------
Investments - Certain equity investments which are recorded on a cost
basis have a carrying value that equals cost as fair value cannot be
reliably established as there are no quoted prices in an active
market for these investments.
Held for trading
----------------
Derivative instruments that are designated as hedging instruments are
measured at fair value determined using the quoted market prices for
the same or similar instruments. Derivative instruments that are not
designated in hedging relationships are classified as held for
trading and measured at fair value determined by using quoted market
prices for similar instruments and changes in fair values of such
derivatives are recognized in net income as they arise.
Cash and cash equivalents - The carrying amounts approximate fair
value because of the short maturity of these instruments.
Investments - Canadian third party asset-backed commercial paper
(ABCP) is carried at fair value, which has been determined using
valuation techniques that incorporate probability weighted discounted
future cash flows reflecting market conditions and other factors that
a market participant would consider (see Note 10).
The table below reconciles carrying value positions of the Company's
financial instruments with Consolidated Balance Sheet categories:
(in millions) June 30, 2008
-----------------------------------
Carrying Carrying
Value of Value of
Financial Other Balance
Assets/ Assets/ Sheet
Liabilities Liabilities Amount
-----------------------------------
Assets
Cash and cash
equivalents $ 80.9 $ - $ 80.9
-----------------------------------
Accounts receivable and other
current assets
Accounts receivable 603.5 -
Current portion of crude
oil swaps 17.5 -
Current portion of interest
rate swaps 2.6 -
Total return swap 2.3 -
Other - 55.4
-----------------------------------
625.9 55.4 681.3
-----------------------------------
Investments
Equity investments at cost 1.2 -
Long-term receivables at
amortized cost 11.3 -
ABCP 100.8 -
Other - 1,604.3
-----------------------------------
113.3 1,604.3 1,717.6
-----------------------------------
Other assets and deferred charges
Long-term portion of crude
oil swaps 9.0 -
Long-term portion of interest
rate swaps 3.5 -
Other - 1,455.5
-----------------------------------
12.5 1,455.5 1,468.0
-----------------------------------
Liabilities
Short-term borrowings 255.0 - 255.0
-----------------------------------
Accounts payable and accrued
liabilities
Accounts payable and accrued
liabilities 782.9 -
Current portion of foreign
exchange contracts on fuel 1.3 -
Current portion of treasury
rate lock - -
Current portion of interest
rate swaps - -
Other - 170.0
-----------------------------------
784.2 170.0 954.2
-----------------------------------
Long-term debt maturing
within one year $ 238.4 $ - $ 238.4
-----------------------------------
Deferred liabilities
Long-term portion of foreign
exchange contracts on fuel 0.7 -
Long-term portion of
currency forward 11.5 -
Long-term portion of
interest rate swaps - -
Total return swap - -
Long-term portion of Accounts
payable and accrued liabilities 42.6 -
Other - 662.4
-----------------------------------
54.8 662.4 717.2
-----------------------------------
Long-term debt 4,016.8 - 4,016.8
-----------------------------------
(in millions) December 31, 2007
-----------------------------------
Carrying Carrying
Value of Value of
Financial Other Balance
Assets/ Assets/ Sheet
Liabilities Liabilities Amount
-----------------------------------
Assets
Cash and cash
equivalents $ 378.1 $ - $ 378.1
-----------------------------------
Accounts receivable and other
current assets
Accounts receivable 483.0 -
Current portion of crude
oil swaps 12.9 -
Current portion of interest
rate swaps - -
Total return swap - -
Other - 46.9
-----------------------------------
495.9 46.9 542.8
-----------------------------------
Investments
Equity investments at cost 1.3 -
Long-term receivables at
amortized cost 17.5 -
ABCP 122.1 -
Other - 1,527.7
-----------------------------------
140.9 1,527.7 1,668.6
-----------------------------------
Other assets and deferred charges
Long-term portion of crude
oil swaps 8.5 -
Long-term portion of interest
rate swaps - -
Other - 1,227.1
-----------------------------------
8.5 1,227.1 1,235.6
-----------------------------------
Liabilities
Short-term borrowings 229.7 - 229.7
-----------------------------------
Accounts payable and accrued
liabilities
Accounts payable and accrued
liabilities 750.6 -
Current portion of foreign
exchange contracts on fuel 2.1 -
Current portion of treasury
rate lock 30.6 -
Current portion of interest
rate swaps (1.0) -
Other - 198.5
-----------------------------------
782.3 198.5 980.8
-----------------------------------
Long-term debt maturing
within one year $ 31.0 $ - $ 31.0
-----------------------------------
Deferred liabilities
Long-term portion of foreign
exchange contracts on fuel 1.5 -
Long-term portion of
currency forward 15.7 -
Long-term portion of
interest rate swaps (4.5) -
Total return swap 3.8 -
Long-term portion of Accounts
payable and accrued liabilities 41.9 -
Other - 656.2
-----------------------------------
58.4 656.2 714.6
-----------------------------------
Long-term debt 4,146.2 - 4,146.2
-----------------------------------
Carrying value and fair value of financial instruments
------------------------------------------------------
The carrying values of financial instruments equal or approximate
their fair values with the exception of long-term debt which has a
carrying value of approximately $4,255.2 million (December 31, 2007 -
$4,177.2 million) and a fair value of approximately $4,240.0 million
at June 30, 2008 (December 31, 2007 - $4,302.6 million). The fair
value of publicly traded long-term debt is determined based on market
prices at June 30, 2008 and December 31, 2007, respectively. The fair
value of other long-term debt is estimated based on rates currently
available to the Company for long-term borrowings, with terms and
conditions similar to those borrowings in place at the applicable
Consolidated Balance Sheet date.
Financial risk management
-------------------------
In the normal course of operations, the Company is exposed to various
market risks such as foreign exchange risk, interest rate risk, other
price risk, as well as credit risk and liquidity risk. To manage
these risks, the Company utilizes a Financial Risk Management (FRM)
framework. The FRM goals and strategy are outlined below:
FRM objectives:
- Maintaining sound financial condition as an ongoing entity;
- Optimizing earnings per share and cash flow;
- Financing operations of the group of CP companies at the optimal
cost of capital; and
- Ensuring liquidity to all Canadian and U.S. operations.
In order to satisfy the objectives above, the Company has adopted the
following strategies:
- Prepare multi-year planning and budget documents at prevailing
market rates to ensure clear, corporate alignment to performance
management and achievement of targets;
- Measure the extent of operating risk within the business;
- Identify the magnitude of the impact of market risk factors on the
overall risk of the business and take advantage of natural risk
reductions that arise from these relationships; and
- Utilize financial instruments, including derivatives to manage the
remaining residual risk to levels that fall within the risk
tolerance of the Company.
Under the governance structure established by the Company and
approved by the Audit, Finance and Financial Risk Management
Committee ("Audit Committee"), the Board of Directors has the
authority to approve the Financial Risk Management Policies of the
Company. The Board has delegated to the Audit Committee the
accountability for ensuring a structure is in place to ensure
compliance with the individual Corporate Risk Management Policies
across the Company's operations.
The policy objective with respect to the utilization of derivative
financial instruments is to selectively mitigate the impact of
fluctuations in foreign exchange ("FX") rates, interest rates, fuel
price, and share price. The use of any derivative instruments is
carried out in accordance with approved trading limits and authorized
counterparties as specified in the policy and/or mandate. It is not
the Company's intent to use financial derivatives or commodity
instruments for trading or speculative purposes.
Risk factors
------------
The following is a discussion of market, credit and liquidity risks
and related mitigation strategies that have been identified through
the FRM framework. This not an exhaustive list of all risks, nor
will the mitigation strategies eliminate all risks listed. Risks
related to the Company's investment in ABCP are discussed in more
detail in Note 10.
Foreign exchange risk
---------------------
This risk refers to the fluctuation of financial commitments, assets,
liabilities, income or cash flows due to changes in FX rates. The
Company conducts business transactions and owns assets in both Canada
and the United States; as a result, revenues and expenses are
incurred in both Canadian dollars and U.S. dollars. The Company's
income is exposed to FX risk largely in the following ways:
- Translation of U.S. dollar denominated revenues and expenses into
Canadian dollars - When the Canadian dollar changes relative to
the U.S. dollar, income reported in Canadian dollars will change.
The impact of a strengthening Canadian dollar on U.S. dollar
revenues and expenses will reduce net income because the Company
has more U.S. dollar revenues than expenses. This impact is
excluded from the sensitivity in the table below; and
- Translation of U.S. dollar denominated debt and other monetary
items - A strengthening Canadian dollar will reduce the Company's
U.S. dollar denominated debt in Canadian dollar terms and generate
a FX gain on long-term debt, which is recorded in income. The
Company calculates FX on long-term debt using the difference in FX
rates at the beginning and at the end of each reporting period.
Other U.S. dollar denominated monetary items will also be impacted
by changes in FX rates.
Foreign exchange management
In terms of net income, excluding FX on long-term debt, mitigation of
U.S. dollar FX exposure is provided primarily through offsets created
by revenues and expenses incurred in the same currency. Where
appropriate the Company negotiates with U.S. customers and suppliers
to reduce the net exposure. The Company may from time to time reduce
residual exposure by hedging revenues through FX forward contracts.
The Company had no revenue forward sales of U.S. dollars outstanding
at June 30, 2008.
The FX gains and losses on long-term debt are mainly unrealized and
can only be realized when U.S. dollar denominated long-term debt
matures or is settled. The Company also has long term FX exposure on
its investment in U.S. affiliates. A portion of the Company's U.S.
dollar denominated long-term debt has been designated as a hedge of
the net investment in self-sustaining foreign subsidiaries. This
designation has the effect of mitigating volatility on net income by
offsetting long-term FX gains and losses on long-term debt. In
addition, for long-term debt denominated in U.S. dollars in Canada,
the Company may enter into currency forwards to hedge debt that is
denominated in U.S. dollars.
Occasionally the Company will enter into short-term FX forward
contracts as part of its cash management strategy.
The table below depicts the quarterly impact to net income and other
comprehensive income of long-term debt had the exchange rate
increased or decreased by one cent. The impact on other U.S. dollar
denominated monetary items is not considered to be material.
Three months ended
(in millions) June 30, 2008
-----------------------
Impact
to Other
compre-
Impact to hensive
Net income income
-----------------------
1 cent strengthening in Canadian dollar $ (1.1) $ (2.1)
1 cent weakening in Canadian dollar 1.1 2.1
-----------------------
-----------------------
Note: All variables excluding FX are held constant. Impact to net
income would be decreased by $10.9 million and to other comprehensive
income would be increased by $10.9 million if the net investment
hedge was not included in the above table.
Foreign exchange forward contracts
In June 2007, the Company entered into a currency forward to fix the
exchange rate on US$400 million 6.250% Notes due 2011. This
derivative guarantees the amount of Canadian dollars that the Company
will repay when its US$400 million 6.25% note matures in
October 2011. During the three months ended June 30, 2008, the
Company recorded a loss of $9.7 million and a gain of $4.2 million
for the first half of 2008 to "Foreign exchange (gain) loss on
long-term debt". For the same periods in 2007, the Company recorded a
loss of $2.0 million. At June 30, 2008, the unrealized loss on the
forward was $11.5 million (December 31, 2007 - $15.7 million).
Interest rate risk
------------------
This refers to the risk that the fair value or income and future cash
flows of a financial instrument will vary as a result of changes in
market interest rates.
In order to manage funding needs or capital structure goals, the
Company enters into debt or capital lease agreements that are subject
to either fixed market interest rates set at the time of issue or
floating rates determined by on-going market conditions. Debt subject
to variable interest rates exposes the Company to variability in
interest expense, while debt subject to fixed interest rates exposes
the Company to variability in the fair value of the debt.
The table below depicts the floating and fixed maturities for all
financial assets and liabilities:
(in millions) June 30, 2008
----------------------
At At
floating fixed
interest interest
rates rates
----------------------
Financial assets
Cash and short-term investments $ 80.9 $ -
ABCP 100.8 -
Financial liabilities
Short-term borrowings 255.0 -
Long-term debt (1) 553.9 3,701.3
--------------------
--------------------
(1) Includes impact of interest rate swaps
Interest rate management
To manage interest rate exposure, the Company accesses diverse
sources of financing and manages borrowings in line with a targeted
range of capital structure, debt ratings, liquidity needs, maturity
schedule, and currency and interest rate profiles. In anticipation of
future debt issuance, the Company may enter into forward rate
agreements such as treasury rate locks, bond forwards or forward
starting swaps to substantially lock in all or a portion of the
effective future interest expense. The Company may also enter into
swap agreements to manage the mix of fixed and floating rate debt.
The table below depicts the quarterly impact to net income and other
comprehensive income had interest rates increased or decreased by
50 basis points. Typically, as rates increase, net income decreases.
Three months ended
(in millions) June 30, 2008
--------------------
Impact to
Net income
--------------------
50 basis point increase in rates $ (0.5)
50 basis point decrease in rates 0.5
--------------------
--------------------
Note: All variables excluding interest rates are held constant.
At June 30, 2008, the Company had outstanding interest rate swap
agreements, classified as a fair value hedge, for a notional amount
of US$200 million or $203.9 million. The swap agreements convert a
portion of the Company's fixed-interest-rate liability into a
variable-rate liability for the 6.250% Notes. During the three months
ended June 30, 2008, the Company recorded a gain of $0.9 million
(three months ended June 30, 2007 - losses of $0.3 million) to
"Interest expense". For the six months ended June 30, 2008 this gain
was $1.1 million (six months ended June 30, 2007 - losses of
$0.8 million). At June 30, 2008, the unrealized gain, derived from
the fair value of the swap, was $6.1 million (December 31, 2007 -
$5.5 million).
The following table discloses the terms of the swap agreements at
June 30, 2008:
Expiration October 15, 2011
Notional amount of principal (in CDN$ millions) $ 203.9
Fixed receiving rate 6.250%
Variable paying rate - YTD 4.859%
---------------------------------------------------------------------
Based on U.S. three-month LIBOR.
During 2007, the Company entered into derivative agreements, which
were designated as cash flow hedges, that established the benchmark
rate on $350.0 million of 30 year debt that was expected to be
issued. These hedges were de- designated on May 13, 2008 when it was
no longer probable that the Company would issue 30 year debt. On
May 23, 2008, the fair value of these instruments was a loss of
$30.9 million at the time of the issuance of the debt and the
settlement of the derivative instrument. A gain of $1.3 million from
the date of de-designation to the date of settlement of the
derivative instrument was recorded in net income. Losses of $0.2 and
$1.1 million due to some ineffectiveness were recognized and recorded
in net income during the 3 months and six months ended June 30, 2008,
respectively. Effective hedge losses of $28.7 million will be
deferred in accumulated other comprehensive income and will be
amortized in earnings as an adjustment to interest expense.
Stock-based compensation risk
-----------------------------
This risk refers to the probability of increased compensation expense
due to the increase in the Company's share price.
The Company's compensation expense is subject to volatility due to
the movement of share price and its impact on the value of certain
management and director stock-based compensation programs. These
programs, as described in the management proxy circular, include
deferred share units, restricted share units, performance share units
and share appreciation rights. As the share price appreciates, these
instruments are marked to market increasing compensation expense.
Stock-based compensation expense management
To minimize the volatility to compensation expense created by changes
in share price, the Company entered into a Total Return Swap ("TRS")
to reduce the volatility and total cost to the Company over time of
the four types of stock-based compensation programs noted above.
These are derivatives that provide price appreciation and dividends,
in return for a charge by the counterparty. The swaps minimize
volatility to compensation expense by providing a gain to
substantially offset increased compensation expense as the share
price increases and a loss to offset reduced compensation expense
when the share price falls. If stock-based compensation share units
fall out of the money after entering the program, the loss associated
with the swap would no longer be offset by any compensation expense
reductions.
The table below depicts the quarterly impact to net income as a
result of the TRS had the share price increased or decreased $1 from
the closing share price on June 30, 2008.
Three months ended
(in millions) June 30, 2008
--------------------
Impact to
Net income
--------------------
$1 increase in share price $ 1.7
$1 decrease in share price (1.7)
--------------------
--------------------
Note: All variables excluding share price are held constant.
During the three months ended June 30, 2008, Compensation and
benefits expense decreased by $3.3 million (three months ended
June 30, 2007 - $16.5 million) and $6.0 million for the six months
ended June 30, 2008 (six months ended June 30, 2007 - $22.8 million)
due to unrealized gains for these swaps. At June 30, 2008, the
unrealized gain on the swap was $2.3 million (December 31, 2007 -
unrealized loss of $3.8 million).
Commodity risk
--------------
The Company is exposed to commodity risk related to purchases of
diesel fuel and the potential reduction in net income due to
increases in the price of diesel. Because fuel expense constitutes a
large portion of the Company's operating costs, volatility in diesel
fuel prices can have a significant impact on the Company's income.
Items affecting volatility in diesel prices include, but are not
limited to, fluctuations in world markets for crude oil and
distillate fuels, which can be affected by supply disruptions and
geopolitical events.
Fuel price management
The impact of variable fuel expense is mitigated substantially
through fuel recovery programs which apportion incremental changes in
fuel prices to shippers through price indices, tariffs, and, by
contract, within agreed upon guidelines. While these programs provide
effective and meaningful coverage, residual exposure remains as the
fuel expense risk cannot be completely recovered from shippers due to
timing and volatility in the market. The Company continually monitors
residual exposure, and where appropriate, may enter into derivative
instruments.
Derivative instruments used by the Company to manage fuel expense
risk may include, but are not limited to, swaps and options for crude
oil and diesel. In addition, the Company may combine FX forward
contracts with fuel derivatives to effectively hedge the risk
associated with FX variability on fuel purchases and commodity
hedges.
The table below depicts the quarterly impact to net income (excluding
recoveries through pricing mechanisms) and other comprehensive income
as a result of our crude forward contracts had the price of West
Texas Intermediate ("WTI") changed by $1 for the three months ended
June 30, 2008:
Three months ended
(in millions) June 30, 2008
---------------------------
Impact
to Other
Impact to Comprehensive
Net income income
---------------------------
$1 increase in price per barrel $ 0.1 $ 0.2
$1 decrease in price per barrel (0.1) (0.2)
---------------------------
---------------------------
Note: All variables excluding WTI per barrel are held constant.
At June 30, 2008, the Company had crude forwards contracts, which are
accounted for as cash flow hedges, to purchase approximately
258,000 barrels over the 2008-2009 period at average quarterly prices
ranging from US$35.17 to US$38.19 per barrel. This represents
approximately 2% of estimated fuel purchases in 2008 and 2009. At
June 30, 2008, the unrealized gain on these forward contracts was
$26.6 million (December 31, 2007 - $21.4 million).
At June 30, 2008, the Company had FX forward contracts (in
conjunction with the crude purchases above), which are accounted for
as cash flow hedges, totalling US$9.4 million over the 2008-2009
period at exchange rates ranging from 1.2276 to 1.2611. At June 30,
2008, the unrealized loss on these forward contracts was $1.9 million
(December 31, 2007 - $3.5 million).
For the three months ended June 30, 2008, fuel expense was reduced by
$5.2 million (three months ended June 30, 2007 - $4.8 million) as a
result of $5.8 million in realized gains (three months ended June 30,
2007 - $5.6 million) arising from settled swaps, partially offset by
$0.7 million in realized losses (three months ended June 30, 2007 -
$0.8 million) arising from the settled FX forward contracts. For the
six months ended June 30, 2008, fuel expense was reduced by
$8.8 million (six months ended June 30, 2007 - $9.4 million) as a
result of $10.1 million in realized gains (six months ended June 30,
2007 - $10.5 million) arising from settled swaps, partially offset by
$1.3 million in realized losses (six months ended June 30, 2007 -
$1.1 million) arising from settled FX forward contracts.
Credit risk
-----------
Credit risk refers to the possibility that a customer or counterparty
will fail to fulfil its obligations under a contract and as a result,
create a financial loss for the Company. The Company's credit risk
regarding its investment in ABCP are discussed in more detail in
Note 10.
Credit risk management
The railway industry services predominantly financially established
customers and the Company has experienced limited financial loss with
respect to credit risk. The credit worthiness of customers is
assessed using credit scores supplied by a third party, and through
direct monitoring of their financial well-being on a continual basis.
The Company establishes guidelines for customer credit limits and
should thresholds in these areas be reached, appropriate precautions
are taken to improve collectibility. Pursuant to their respective
terms, accounts receivable are aged as follows at June 30, 2008:
(in millions)
Up to date $ 463.7
Under 30 days past due 81.0
30-60 days past due 22.3
61-90 days past due 8.6
Over 91 days past due 27.9
------------
$ 603.5
------------
------------
Counterparties to financial instruments expose the Company to credit
losses in the event of non-performance. Counterparties for derivative
and cash transactions are limited to high credit quality financial
institutions, which are monitored on an ongoing basis. Counterparty
credit assessments are based on the financial health of the
institutions and their credit ratings from external agencies. With
exception of ABCP, the Company does not anticipate non-performance
that would materially impact the Company's financial statements.
With the exception of ABCP, the Company believes there are no
significant concentrations of credit risk. The maximum exposure to
credit risk can be taken from our financial assets values reported in
the table reconciling the carrying value positions of the Company's
financial instruments with Consolidated Balance Sheet categories and
as discussed in Note 19 under guarantees.
Liquidity risk
--------------
The Company monitors and manages its liquidity risk to ensure access
to sufficient funds to meet operational and investing requirements.
Liquidity risk management
The Company has long-term debt ratings of Baa3, BBB, and BBB from
Moody's Investors Service, Inc. ("Moody's"), Standard and Poor's
Corporation ("S&P"), and DBRS respectively. The S&P rating has a
negative outlook, while the ratings of Moody's and DBRS have a stable
outlook. The Company intends to manage its capital structure and
liquidity at levels that sustain an investment grade rating.
The Company has a five year revolving credit facility of
$945 million, with an accordion feature to $1.15 billion, of which
$351 million was available on June 30, 2008.
This facility is arranged with a core group of highly rated
international financial institutions and they incorporate pre-agreed
pricing. The revolving credit facility is available on next day
terms.
The Company plans to access both Canadian and U.S. capital markets to
secure long term financing for the temporary credit facility. Market
conditions allowing, the Company will access debt capital markets in
various maturities periodically prior to the expiry of the temporary
credit facility in order to minimize risk and optimize pricing. It is
the Company's intention to manage its long term financing structure
to maintain its investment grade rating. The Company may decide to
enter certain derivative instruments to reduce interest rate and
foreign exchange exposure in advance of these issuances.
Surplus cash is invested into a range of short dated money market
instruments meeting or exceeding the parameters of the Company's
investment policy.
The table below reflects the contractual maturity of the Company's
undiscounted cash flows for its financial liabilities and
derivatives:
(in millions) As at June 30, 2008
-------------------------------------------
2009-
2008 2011 2012+ Total
-------------------------------------------
Financial liabilities
Short-term borrowings $ 255.0 $ - $ - $ 255.0
Accounts payable and
accrued liabilities 782.9 42.6 - 825.5
Foreign exchange
contracts on fuel 0.7 1.3 - 2.0
Currency forward - 13.0 - 13.0
Long-term debt 32.5 1,193.9 3,642.4 4,868.8
-------------------------------------------
-------------------------------------------
15 Additions to investments and other assets
Additions to investment and other assets includes the acquisition of
locomotives and freight car assets of $57.4 million and
$192.1 million for the three and six months ended June 30, 2008,
respectively, (three and six months ended June 30, 2007 -
$12.0 million). These assets were purchased in anticipation of a sale
and lease back arrangement with a financial institution.
16 Stock-based compensation
In 2008, under CP's stock option plans, the Company issued 1,360,400
options to purchase Common Shares at the weighted average price of
$71.59 per share, based on the closing price on the grant date. In
tandem with these options, 425,650 stock appreciation rights were
issued at the weighted average exercise price of $71.54.
Pursuant to the employee plan, options may be exercised upon vesting,
which is between 24 months and 36 months after the grant date, and
will expire after 10 years. Some options vest after 48 months, unless
certain performance targets are achieved, in which case vesting is
accelerated. These options expire five years after the grant date.
Other options only vest if certain performance targets are achieved
and expire approximately five years after the grant date.
The following is a summary of the Company's fixed stock option plans
as of June 30 (including options granted under the Directors' Stock
Option Plan, which was suspended in 2003):
2008 2007
-------------------------- --------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
-------------------------- --------------------------
Outstanding,
January 1 6,981,108 43.97 6,815,494 $ 38.50
New options
granted 1,360,400 71.59 1,302,700 62.59
Exercised (493,460) 34.40 (811,856) 31.78
Forfeited/
cancelled (85,050) 47.09 (111,725) 39.38
------------ ------------
Outstanding,
June 30 7,762,998 49.39 7,194,613 $ 43.61
-------------------------- --------------------------
-------------------------- --------------------------
Options
exercisable
at June 30 4,637,348 38.33 4,239,713 $ 34.01
-------------------------- --------------------------
-------------------------- --------------------------
Compensation expense is recognized over the vesting period for stock
options issued since January 1, 2003, based on their estimated fair
values on the date of grants, as determined by the Black-Scholes
option pricing model.
Under the fair value method, the fair value of options at the grant
date was $14.1 million for options issued in the first six months of
2008 (first six months of 2007 - $11.3 million). The weighted average
fair value assumptions were approximately:
For the six months
ended June 30
2008 2007
-------------------------
Expected option life (years) 4.39 4.00
Risk-free interest rate 3.54% 3.90%
Expected stock price volatility 22% 22%
Expected annual dividends per share $ 0.99 $ 0.90
Weighted average fair value of options
granted during the year $ 15.12 $ 12.96
-------------------------
-------------------------
17 Pensions and other benefits
The total benefit cost for the Company's defined benefit pension
plans and post-retirement benefits for the three months ended
June 30, 2008, was $19.9 million (three months ended June 30, 2007 -
$27.1 million) and for the six months ended June 30, 2008, was
$39.0 million (six months ended June 30, 2007 - $54.5 million).
18 Significant customers
During the first six months of 2008, one customer comprised 12.3% of
total revenue (first six months of 2007 - 11.7%). At June 30, 2008,
that same customer represented 5.4% of total accounts receivable
(June 30, 2007 - 5.2%).
19 Commitments and contingencies
In the normal course of its operations, the Company becomes involved
in various legal actions, including claims relating to injuries and
damages to property. The Company maintains provisions it considers to
be adequate for such actions. While the final outcome with respect to
actions outstanding or pending at June 30, 2008, cannot be predicted
with certainty, it is the opinion of management that their resolution
will not have a material adverse effect on the Company's financial
position or results of operations.
During the quarter ended March 31, 2008, the Canadian Transportation
Agency announced a Decision directing a downward adjustment of the
railway maximum revenue entitlement for movement of regulated grain
under the Canada Transportation Act, for the period from August 1,
2007 to July 31, 2008. The Company has applied to the Federal Court
of Appeal for leave to appeal the decision. A provision considered
adequate by management is maintained for the prospective adjustment.
The retroactive component of the adjustment, which is estimated to be
$23 million, is not considered to be legally supportable and as such
a provision has not been made.
Capital commitments
At June 30, 2008, the Company had multi-year capital commitments of
$566.5 million, mainly for locomotive overhaul agreements, in the
form of signed contracts. Payments for these commitments are due in
2008 through 2022.
Operating lease commitments
At June 30, 2008, minimum payments under operating leases were
estimated at $707.7 million in aggregate, with annual payments in
each of the next five years of: 2008 - $71.1 million; 2009 -
$114.5 million; 2010 - $92.6 million; 2011 - $81.9 million; 2012 -
$76.8 million.
Guarantees
At June 30, 2008, the Company had residual value guarantees on
operating lease commitments of $246.9 million and certain guarantees
related to the Company's investment in the DM&E, which include
minimum lease payments of $58.5 million, residual value guarantees of
$11.6 million, and a line of credit of US$25 million. The maximum
amount that could be payable under these and all of the Company's
other guarantees cannot be reasonably estimated due to the nature of
certain of the guarantees. All or a portion of amounts paid under
certain guarantees could be recoverable from other parties or through
insurance. The Company has accrued for all guarantees that it expects
to pay. At June 30, 2008, these accruals amounted to $6.0 million.
20 Capital disclosures
The Company's objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost
of capital at acceptable risk while providing an appropriate
return to its shareholders;
- to manage capital in a manner which balances the interests of
equity and debt holders;
- to manage capital in a manner that will maintain compliance with
its financial covenants;
- to manage its long term financing structure to maintain its
investment grade rating; and
- to maintain a strong capital base so as to maintain investor,
creditor and market confidence and to sustain future development
of the business.
The Company defines its capital as follows:
- shareholders' equity;
- long-term debt, including the current portion; and
- short-term borrowing.
The Company manages its capital structure and makes adjustments to it
in accordance with the aforementioned objectives, as well as in the
light of changes in economic conditions and the risk characteristics
of the underlying assets. In order to maintain or adjust its capital
structure, the Company may adjust the amount of dividends paid to
shareholders, purchase shares for cancellation pursuant to normal
course issuer bids, issue new shares, issue new debt, and/or issue
new debt to replace existing debt with different characteristics.
The Company monitors capital using a number of key financial metrics,
including:
- net-debt to net-debt-plus-equity; and
- interest coverage ratio: earnings before interest and taxes
("EBIT") to interest expense.
Both of these metrics have no standardized meanings prescribed by
GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies.
The calculations for the aforementioned key financial metrics are as
follows:
Net-debt to net-debt-plus-equity
--------------------------------
Net debt, which is a non-GAAP measure, is the sum of long-term debt,
long-term debt maturing within one year and short-term borrowing,
less cash and short-term investments. This sum is divided by total
net debt plus total shareholders' equity as presented on our
Consolidated Balance Sheet.
Interest coverage ratio
-----------------------
EBIT, which is a non-GAAP measure that is calculated, on a twelve
month rolling basis, as revenues less operating expenses, less change
in estimated fair value of ABCP, other income and charges, and equity
income in DM&E, divided by interest expense.
The following table illustrates the financial metrics and their
corresponding guidelines currently in place:
---------------------------------------------------------------------
June 30, June 30,
(in millions) Guidelines 2008 2007
---------------------------------------------------------------------
Long-term debt $ 4,016.8 $ 3,046.6
Long-term debt maturing
within one year 238.4 30.6
Short-term borrowing 255.0 -
Less:
Cash and cash equivalents (80.9) (392.1)
---------------------------------------------------------------------
Net Debt(1) $ 4,429.3 $ 2,685.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Shareholders' equity $ 5,666.0 $ 4,978.5
Net debt 4,429.3 2,685.1
---------------------------------------------------------------------
Net Debt plus Equity(1) $ 10,095.3 $ 7,663.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenues less operating expenses $ 1,076.5 $ 1,156.2
Less:
ABCP (42.8) -
Other income and charges (28.2) (26.3)
Equity income in DM&E 36.7 -
---------------------------------------------------------------------
EBIT(1)(2) $ 1,042.2 $ 1,129.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Net debt $ 4,429.3 $ 2,685.1
Net debt plus equity $ 10,095.3 $ 7,663.6
---------------------------------------------------------------------
Net-debt to Net-debt-
plus-equity(1) No more than 50.0% 43.9% 35.0%
---------------------------------------------------------------------
---------------------------------------------------------------------
EBIT $ 1,042.2 $ 1,129.9
Interest expense $ 231.1 $ 194.6
---------------------------------------------------------------------
Interest Coverage
Ratio(1)(2) No less than 4.0 4.5 5.8
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) These earnings measures have no standardized meanings prescribed
by GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies.
(2) The balance is calculated on a rolling twelve month basis.
The Company's financial objectives and strategy as described above
have remained substantially unchanged over the last two fiscal years.
The objectives are reviewed on an annual basis and financial metrics
and their guidelines are monitored on a quarterly basis. The Company
believes that adherence to these guidelines increases its ability to
access to capital at a reasonable cost and maintain credit ratings of
an investment grade. The Company believes that these ratios are
within reasonable limits, in light of the relative size of the
Company and its capital management objectives.
The Company is also subject to financial covenants in the bridge
financing agreement obtained for the acquisition of DM&E and revolver
loan agreements. Net-debt to net-debt-plus-equity and interest
coverage ratio are two financial metrics that provide indicators as
to whether the Company will be in compliance with its financial
covenants. The Company is in compliance with all financial covenants.
Summary of Rail Data
--------------------
Second Quarter
-------------------------------------------
2008 2007 Variance %
---------- ---------- ---------- ----------
Financial (millions, except
---------------------------
per share data and ratios)
--------------------------
Revenues
--------
Freight revenue $1,193.1 $1,174.1 $ 19.0 1.6
Other revenue 27.2 41.4 (14.2) (34.3)
---------- ---------- ----------
1,220.3 1,215.5 4.8 0.4
---------- ---------- ----------
Operating expenses
------------------
Compensation and benefits 315.5 329.8 (14.3) (4.3)
Fuel 260.3 193.7 66.6 34.4
Materials 56.5 55.6 0.9 1.6
Equipment rents 46.1 57.3 (11.2) (19.5)
Depreciation and amortization 124.7 119.1 5.6 4.7
Purchased services and other 166.1 152.3 13.8 9.1
---------- ---------- ----------
969.2 907.8 61.4 6.8
---------- ---------- ----------
Operating income 251.1 307.7 (56.6) (18.4)
Equity income (net of tax)
in Dakota, Minnesota &
Eastern Railroad
Corporation (DM&E) (13.4) - (13.4) -
Other charges 4.9 8.2 (3.3) (40.2)
Interest expense 62.9 49.2 13.7 27.8
Income tax expense before
foreign exchange (gains)
losses on long-term debt
and other specified items(1) 46.3 75.5 (29.2) (38.7)
---------- ---------- ----------
Income before foreign
exchange (gains) losses
on long-term debt and
other specified items(1) 150.4 174.8 (24.4) (14.0)
---------- ---------- ----------
Foreign exchange (gains) losses
-------------------------------
on long-term debt (FX on LTD)
-----------------------------
FX on LTD (6.8) (88.6) 81.8 -
Income tax on FX on LTD(2) 2.3 23.8 (21.5) -
---------- ---------- ----------
FX on LTD (net of tax) (4.5) (64.8) 60.3 -
Other specified items
---------------------
Change in estimated fair
value of Canadian third
party asset-backed
commercial paper (ABCP) - - - -
Income tax on special charges - - - -
---------- ---------- ----------
Change in estimated fair
value of ABCP (net of tax) - - - -
Income tax benefits due to
rate reductions on opening
future income tax balances - (17.1) 17.1 -
---------- ---------- ----------
Net income $ 154.9 $ 256.7 $ (101.8) (39.7)
---------- ---------- ----------
---------- ---------- ----------
Earnings per share (EPS)
------------------------
Basic earnings per share $ 1.01 $ 1.66 $ (0.65) (39.2)
Diluted earnings per share $ 1.00 $ 1.64 $ (0.64) (39.0)
EPS before FX on LTD and
------------------------
other specified items(1)
------------------------
Basic earnings per share $ 0.98 $ 1.13 $ (0.15) (13.3)
Diluted earnings per share $ 0.97 $ 1.12 $ (0.15) (13.4)
Weighted average (avg) number
of shares outstanding
(millions) 153.7 154.3 (0.6) (0.4)
Weighted avg number of
diluted shares outstanding
(millions) 155.1 156.1 (1.0) (0.6)
Operating ratio(1)(3)(%) 79.4 74.7 4.7 -
ROCE before FX on LTD and
other specified items
(after tax)(1)(3)(%) 9.2 10.3 (1.1) -
Net debt to net debt plus
equity (%) 43.9 35.0 8.9 -
EBIT before FX on LTD and
other specified items(1)(3)
(millions) $ 259.6 $ 299.5 $ (39.9) (13.3)
EBITDA before FX on LTD and
other specified items(1)(3)
(millions) $ 384.3 $ 418.6 $ (34.3) (8.2)
Year-to-date
-------------------------------------------
2008 2007 Variance %
---------- ---------- ---------- ----------
Financial (millions, except
---------------------------
per share data and ratios)
--------------------------
Revenues
--------
Freight revenue $2,317.5 $2,265.0 $ 52.5 2.3
Other revenue 49.7 66.4 (16.7) (25.2)
---------- ---------- ----------
2,367.2 2,331.4 35.8 1.5
---------- ---------- ----------
Operating expenses
------------------
Compensation and benefits 643.8 662.3 (18.5) (2.8)
Fuel 490.5 364.9 125.6 34.4
Materials 122.0 118.0 4.0 3.4
Equipment rents 92.0 112.8 (20.8) (18.4)
Depreciation and amortization 244.6 237.7 6.9 2.9
Purchased services and other 325.0 298.7 26.3 8.8
---------- ---------- ----------
1,917.9 1,794.4 123.5 6.9
---------- ---------- ----------
Operating income 449.3 537.0 (87.7) (16.3)
Equity income (net of tax)
in Dakota, Minnesota &
Eastern Railroad
Corporation (DM&E) (24.4) - (24.4) -
Other charges 11.6 13.0 (1.4) (10.8)
Interest expense 122.8 96.0 26.8 27.9
Income tax expense before
foreign exchange (gains)
losses on long-term debt
and other specified items(1) 72.5 130.6 (58.1) (44.5)
---------- ---------- ----------
Income before foreign
exchange (gains) losses
on long-term debt and
other specified items(1) 266.8 297.4 (30.6) (10.3)
---------- ---------- ----------
Foreign exchange (gains) losses
-------------------------------
on long-term debt (FX on LTD)
-----------------------------
FX on LTD 9.5 (97.2) 106.7 -
Income tax on FX on LTD(2) (3.4) 26.4 (29.8) -
---------- ---------- ----------
FX on LTD (net of tax) 6.1 (70.8) 76.9 -
Other specified items
---------------------
Change in estimated fair
value of Canadian third
party asset-backed
commercial paper (ABCP) 21.3 - 21.3 -
Income tax on special charges (6.3) - (6.3) -
---------- ---------- ----------
Change in estimated fair
value of ABCP (net of tax) 15.0 - 15.0 -
Income tax benefits due to
rate reductions on opening
future income tax balances - (17.1) 17.1 -
---------- ---------- ----------
Net income $ 245.7 $ 385.3 $ (139.6) (36.2)
---------- ---------- ----------
---------- ---------- ----------
Earnings per share (EPS)
------------------------
Basic earnings per share $ 1.60 $ 2.49 $ (0.89) (35.7)
Diluted earnings per share $ 1.59 $ 2.46 $ (0.87) (35.4)
EPS before FX on LTD and
------------------------
other specified items(1)
------------------------
Basic earnings per share $ 1.74 $ 1.92 $ (0.18) (9.4)
Diluted earnings per share $ 1.72 $ 1.90 $ (0.18) (9.5)
Weighted average (avg) number
of shares outstanding
(millions) 153.6 154.9 (1.3) (0.8)
Weighted avg number of
diluted shares outstanding
(millions) 155.0 156.4 (1.4) (0.9)
Operating ratio(1)(3)(%) 81.0 77.0 4.0 -
ROCE before FX on LTD and
other specified items
(after tax)(1)(3)(%) 9.2 10.3 (1.1) -
Net debt to net debt plus
equity (%) 43.9 35.0 8.9 -
EBIT before FX on LTD and
other specified items(1)(3)
(millions) $ 462.1 $ 524.0 $ (61.9) (11.8)
EBITDA before FX on LTD and
other specified items(1)(3)
(millions) $ 706.7 $ 761.7 $ (55.0) (7.2)
(1) These earnings measures have no standardized meanings prescribed by
GAAP and may not be comparable to similar measures of other
companies.
See note on non-GAAP earnings measures attached to commentary.
(2) Income tax on FX on LTD is discussed in the MD&A in the "Other Income
Statement Items" section - "Income Taxes".
(3) EBIT: Earnings before interest and taxes.
EBITDA: Earnings before interest, taxes, and depreciation
and amortization.
ROCE (after tax): Return on capital employed (after tax)
= earnings before after-tax interest
expense (last 12 months) divided by average net
debt plus equity.
Operating ratio: Operating expenses divided by revenues.
Second Quarter
-------------------------------------------
2008 2007 Variance %
---------- ---------- ---------- ----------
Commodity Data
--------------
Freight Revenues (millions)
- Grain $ 203.0 $ 224.0 $ (21.0) (9.4)
- Coal 172.4 162.4 10.0 6.2
- Sulphur and fertilizers 137.9 144.5 (6.6) (4.6)
- Forest products 58.4 74.3 (15.9) (21.4)
- Industrial and consumer
products 185.3 158.8 26.5 16.7
- Automotive 86.7 88.5 (1.8) (2.0)
- Intermodal 349.4 321.6 27.8 8.6
---------- ---------- ----------
Total Freight Revenues $1,193.1 $1,174.1 $ 19.0 1.6
---------- ---------- ----------
Millions of Revenue
Ton-Miles (RTM)
- Grain 6,775 7,309 (534) (7.3)
- Coal 6,118 5,834 284 4.9
- Sulphur and fertilizers 5,552 6,106 (554) (9.1)
- Forest products 1,438 2,019 (581) (28.8)
- Industrial and consumer
products 4,655 4,177 478 11.4
- Automotive 645 659 (14) (2.1)
- Intermodal 7,296 7,424 (128) (1.7)
---------- ---------- ----------
Total RTMs 32,479 33,528 (1,049) (3.1)
---------- ---------- ----------
Freight Revenue per RTM
(cents)
- Grain 3.00 3.06 (0.06) (2.0)
- Coal 2.82 2.78 0.04 1.4
- Sulphur and fertilizers 2.48 2.37 0.11 4.6
- Forest products 4.06 3.68 0.38 10.3
- Industrial and consumer
products 3.98 3.80 0.18 4.7
- Automotive 13.44 13.43 0.01 0.1
- Intermodal 4.79 4.33 0.46 10.6
Freight Revenue per RTM 3.67 3.50 0.17 4.9
Carloads (thousands)
- Grain 87.7 91.2 (3.5) (3.8)
- Coal 77.2 75.0 2.2 2.9
- Sulphur and fertilizers 53.4 61.3 (7.9) (12.9)
- Forest products 23.1 29.9 (6.8) (22.7)
- Industrial and consumer
products 86.4 79.2 7.2 9.1
- Automotive 40.1 45.7 (5.6) (12.3)
- Intermodal 315.1 311.9 3.2 1.0
---------- ---------- ----------
Total Carloads 683.0 694.2 (11.2) (1.6)
---------- ---------- ----------
Freight Revenue per Carload
- Grain $ 2,315 $ 2,456 $ (141) (5.7)
- Coal 2,233 2,165 68 3.1
- Sulphur and fertilizers 2,582 2,357 225 9.5
- Forest products 2,528 2,485 43 1.7
- Industrial and consumer
products 2,145 2,005 140 7.0
- Automotive 2,162 1,937 225 11.6
- Intermodal 1,109 1,031 78 7.6
Freight Revenue per Carload $ 1,747 $ 1,691 $ 56 3.3
Year-to-date
-------------------------------------------
2008 2007 Variance %
---------- ---------- ---------- ----------
Commodity Data
--------------
Freight Revenues (millions)
- Grain $ 435.4 $ 443.6 $ (8.2) (1.8)
- Coal 312.5 293.7 18.8 6.4
- Sulphur and fertilizers 268.6 266.9 1.7 0.6
- Forest products 116.4 146.3 (29.9) (20.4)
- Industrial and consumer
products 352.7 310.7 42.0 13.5
- Automotive 158.8 170.6 (11.8) (6.9)
- Intermodal 673.1 633.2 39.9 6.3
---------- ---------- ----------
Total Freight Revenues $2,317.5 $2,265.0 $ 52.5 2.3
---------- ---------- ----------
Millions of Revenue
Ton-Miles (RTM)
- Grain 14,273 14,793 (520) (3.5)
- Coal 11,204 10,417 787 7.6
- Sulphur and fertilizers 10,982 11,090 (108) (1.0)
- Forest products 2,963 4,019 (1,056) (26.3)
- Industrial and consumer
products 9,142 8,310 832 10.0
- Automotive 1,193 1,284 (91) (7.1)
- Intermodal 14,264 14,350 (86) (0.6)
---------- ---------- ----------
Total RTMs 64,021 64,263 (242) (0.4)
---------- ---------- ----------
Freight Revenue per RTM
(cents)
- Grain 3.05 3.00 0.05 1.7
- Coal 2.79 2.82 (0.03) (1.1)
- Sulphur and fertilizers 2.45 2.41 0.04 1.7
- Forest products 3.93 3.64 0.29 8.0
- Industrial and consumer
products 3.86 3.74 0.12 3.2
- Automotive 13.31 13.29 0.02 0.2
- Intermodal 4.72 4.41 0.31 7.0
Freight Revenue per RTM 3.62 3.52 0.10 2.8
Carloads (thousands)
- Grain 180.0 180.5 (0.5) (0.3)
- Coal 142.0 133.5 8.5 6.4
- Sulphur and fertilizers 105.7 111.5 (5.8) (5.2)
- Forest products 47.6 60.0 (12.4) (20.7)
- Industrial and consumer
products 167.3 154.9 12.4 8.0
- Automotive 76.4 88.1 (11.7) (13.3)
- Intermodal 611.8 599.5 12.3 2.1
---------- ---------- ----------
Total Carloads 1,330.8 1,328.0 2.8 0.2
---------- ---------- ----------
Freight Revenue per Carload
- Grain $ 2,419 $ 2,458 $ (39) (1.6)
- Coal 2,201 2,200 1 -
- Sulphur and fertilizers 2,541 2,394 147 6.1
- Forest products 2,445 2,438 7 0.3
- Industrial and consumer
products 2,108 2,006 102 5.1
- Automotive 2,079 1,936 143 7.4
- Intermodal 1,100 1,056 44 4.2
Freight Revenue per Carload $ 1,741 $ 1,706 $ 35 2.1
Second Quarter
-------------------------------------------
2008 2007 Variance %
---------- ---------- ---------- ----------
Operations and Productivity
---------------------------
Freight gross ton-miles
(GTM) (millions) 62,397 64,481 (2,084) (3.2)
Revenue ton-miles (RTM)
(millions) 32,479 33,528 (1,049) (3.1)
Average number of active
employees 16,223 15,878 345 2.2
Number of employees at end
of period 16,407 15,720 687 4.4
FRA personal injuries per
200,000 employee-hours(1) 1.11 2.09 (0.98) (46.9)
FRA train accidents per
million train-miles(1) 1.11 2.11 (1.00) (47.4)
Total operating expenses
per RTM (cents) 2.98 2.71 0.27 10.0
Total operating expenses
per GTM (cents) 1.55 1.41 0.14 9.9
Compensation and benefits
expense per GTM (cents) 0.51 0.51 - -
GTMs per average active
employee (000) 3,846 4,061 (215) (5.3)
Miles of road operated at
end of period(2) 13,199 13,260 (61) (0.5)
Average train speed - AAR
definition (mph) 24.1 23.5 0.6 2.6
Terminal dwell time - AAR
definition (hours) 21.6 21.7 (0.1) (0.5)
Car miles per car day 147.3 147.5 (0.2) (0.1)
Average daily total cars
on-line - AAR definition (000) 83.7 81.5 2.2 2.7
Average daily active cars
on-line (000) 55.7 59.0 (3.3) (5.6)
U.S. gallons of locomotive
fuel per 1,000 GTMs -
freight & yard 1.19 1.19 - -
U.S. gallons of locomotive
fuel consumed - total
(millions)(3) 73.6 76.8 (3.2) (4.2)
Average foreign exchange
rate (US$/Canadian$) 0.991 0.901 0.090 10.0
Average foreign exchange
rate (Canadian$/US$) 1.009 1.111 (0.102) (9.2)
Year-to-date
-------------------------------------------
2008 2007 Variance %
---------- ---------- ---------- ----------
Operations and Productivity
---------------------------
Freight gross ton-miles
(GTM) (millions) 122,258 122,041 217 0.2
Revenue ton-miles (RTM)
(millions) 64,021 64,263 (242) (0.4)
Average number of active
employees 15,648 15,381 267 1.7
Number of employees at end
of period 16,407 15,720 687 4.4
FRA personal injuries per
200,000 employee-hours(1) 1.25 1.95 (0.70) (35.9)
FRA train accidents per
million train-miles(1) 1.65 2.06 (0.41) (19.9)
Total operating expenses
per RTM (cents) 3.00 2.79 0.21 7.5
Total operating expenses
per GTM (cents) 1.57 1.47 0.10 6.8
Compensation and benefits
expense per GTM (cents) 0.53 0.54 (0.01) (1.9)
GTMs per average active
employee (000) 7,813 7,935 (122) (1.5)
Miles of road operated at
end of period(2) 13,199 13,260 (61) (0.5)
Average train speed - AAR
definition (mph) 23.7 23.3 0.4 1.7
Terminal dwell time - AAR
definition (hours) 22.8 22.8 - -
Car miles per car day 142.7 141.0 1.7 1.2
Average daily total cars
on-line - AAR definition (000) 83.2 81.4 1.8 2.2
Average daily active cars
on-line (000) 56.4 59.0 (2.6) (4.4)
U.S. gallons of locomotive
fuel per 1,000 GTMs -
freight & yard 1.24 1.22 0.02 1.6
U.S. gallons of locomotive
fuel consumed - total
(millions)(3) 149.9 149.1 0.8 0.5
Average foreign exchange
rate (US$/Canadian$) 0.999 0.877 0.122 13.9
Average foreign exchange
rate (Canadian$/US$) 1.001 1.141 (0.140) (12.3)
(1) Certain prior period figures have been revised to conform with
current presentation or have been updated to reflect new information.
(2) Excludes track on which CP has haulage rights.
(3) Includes gallons of fuel consumed from freight, yard and commuter
service but excludes fuel used in capital projects and other non-
freight activities.
SOURCE Canadian Pacific Railway
Media, Leslie Pidcock, Tel.: (403) 319-6878, email: leslie_pidcock@cpr.ca;
Investment Community, Janet Weiss, Assistant Vice-President, Investor
Relations, Tel.: (403) 319-3591, email: investor@cpr.ca
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