CANADIAN PACIFIC ANNOUNCES FIRST QUARTER 2011 RESULTS
CALGARY, April 21 /PRNewswire-FirstCall/ - Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) announced its first-quarter 2011 results today. Reported net income in the first-quarter was $33.7 million and diluted earnings per share were $0.20. As previously announced, operations were impacted by unusually severe winter weather decreasing shipping volumes and increasing costs.
"We are intensely focused on improving network velocity and service reliability," said Fred Green, President and Chief Executive Officer. "Demand is strong and we have additional resources coming online to meet our customers' growth."
FIRST-QUARTER 2011 RESULTS COMPARED WITH FIRST-QUARTER 2010
- Total revenues were $1.2 billion, essentially flat
- Operating expenses were $1.1 billion, an increase of $94.0 million
- Average fuel price was $3.12 U.S. dollars per U.S. gallon, an
increase of 28 per cent
- Operating income was $109.2 million, a decrease of $97.4 million
- Net income was $33.7 million, a decrease of $67.3 million
- Diluted earnings per share were $0.20 per share, a decline of
$0.40 per share
"The first quarter was an extremely difficult winter with weather-related outages significantly constraining our capacity and our service to our customers," added Fred Green. "We remain committed to delivering our two- to four-year target of a low 70's operating ratio and providing a quality service offering."
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, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods, timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments, including long-term floating rate notes; and various events that could disrupt operations, including severe weather conditions, security threats and governmental response to them, and technological changes.
Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.
About Canadian Pacific
Canadian Pacific (TSX: CP) (NYSE: CP) operates a North American transcontinental railroad providing freight transportation services, logistics solutions and supply chain expertise. Incorporating best-in-class technology and environmental practices, CP is re-defining itself as a modern 21st century transportation company built on safety, service reliability and operational efficiency. Visit cpr.ca and see how Canadian Pacific is Driving the Digital Railway.
CANADIAN PACIFIC RAILWAY LIMITED
CONSOLIDATED STATEMENT OF INCOME
(in millions of Canadian dollars, except per share data)
(unaudited)
For the three months
ended March 31
2011 2010
Restated
(see Note 2)
--------------------------
Revenues
Freight $ 1,135.2 $ 1,138.2
Other 28.2 28.6
--------------------------
1,163.4 1,166.8
Operating expenses
Compensation and benefits 364.5 353.8
Fuel 225.7 181.7
Materials 71.6 64.0
Equipment rents 51.4 49.0
Depreciation and amortization 122.3 121.2
Purchased services and other 218.7 190.5
--------------------------
1,054.2 960.2
--------------------------
Operating income 109.2 206.6
Less:
Other income and charges (0.5) (4.9)
Net interest expense 64.2 66.7
--------------------------
Income before income tax expense 45.5 144.8
Income tax expense (Note 3) 11.8 43.8
--------------------------
Net income $ 33.7 $ 101.0
--------------------------
--------------------------
Earnings per share (Note 4)
Basic earnings per share $ 0.20 $ 0.60
Diluted earnings per share $ 0.20 $ 0.60
Weighted-average number of shares (millions)
Basic 169.3 168.5
Diluted 170.7 169.1
Dividends declared per share $ 0.2700 $ 0.2475
See notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(in millions of Canadian dollars)
(unaudited)
March 31 December 31
2011 2010
--------------------------
Assets
Current assets
Cash and cash equivalents $ 310.5 $ 360.6
Accounts receivable, net 520.2 459.0
Materials and supplies 122.4 114.1
Deferred income taxes 140.9 222.3
Other current assets 60.2 47.8
--------------------------
1,154.2 1,203.8
Investments 145.5 144.9
Net properties 11,902.6 11,996.8
Goodwill and intangible assets 184.7 189.8
Other assets 136.3 140.6
--------------------------
Total assets $ 13,523.3 $ 13,675.9
--------------------------
--------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities $ 1,029.2 $ 1,007.8
Long-term debt maturing within one year 279.8 281.7
--------------------------
1,309.0 1,289.5
Pension and other benefit liabilities 1,069.3 1,115.7
Other long-term liabilities 420.9 468.0
Long-term debt 3,940.9 4,033.2
Deferred income taxes 1,882.5 1,944.8
--------------------------
Total liabilities 8,622.6 8,851.2
Shareholders' equity
Share capital 1,824.0 1,812.8
Additional paid-in capital 80.2 24.7
Accumulated other comprehensive loss (2,064.5) (2,085.8)
Retained earnings 5,061.0 5,073.0
--------------------------
4,900.7 4,824.7
--------------------------
Total liabilities and shareholders' equity $ 13,523.3 $ 13,675.9
--------------------------
--------------------------
Commitments and contingencies (Note 8)
See notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of Canadian dollars)
(unaudited)
For the three months
ended March 31
2011 2010
Restated
(see Note 2)
--------------------------
Operating activities
Net income $ 33.7 $ 101.0
Reconciliation of net income to cash
provided by operating activities:
Depreciation and amortization 122.3 121.2
Deferred income taxes 7.9 41.5
Pension funding in excess of expense (Note 7) (11.5) (9.3)
Other operating activities, net 2.4 11.9
Change in non-cash working capital balances
related to operations (19.8) (82.0)
--------------------------
Net cash provided by operating activities 135.0 184.3
--------------------------
Investing activities
Additions to properties (133.2) (90.8)
Proceeds from the sale of properties and
other assets 5.6 9.0
--------------------------
Net cash used in investing activities (127.6) (81.8)
--------------------------
Financing activities
Dividends paid (45.7) (41.7)
Issuance of CP Common Shares 9.1 3.0
Repayment of long-term debt (12.4) (9.1)
--------------------------
Net cash used in financing activities (49.0) (47.8)
--------------------------
Effect of foreign currency fluctuations on
U.S. dollar-denominated cash and cash
equivalents (8.5) (10.0)
--------------------------
Cash position
(Decrease) increase in cash and cash
equivalents (50.1) 44.7
Cash and cash equivalents at beginning
of period 360.6 679.1
--------------------------
Cash and cash equivalents at end of period $ 310.5 $ 723.8
--------------------------
--------------------------
Supplemental disclosures of cash flow
information:
Income taxes (refunded) paid $ (0.1) $ 1.9
--------------------------
--------------------------
Interest paid $ 49.1 $ 45.1
--------------------------
--------------------------
See notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions of Canadian dollars, except common share amounts)
(unaudited)
---------- -------------------------------------------------
Accumulated
Common other Total
shares Additional compre- share-
(in Share paid-in hensive Retained holders'
millions) capital capital loss earnings equity
---------- -------------------------------------------------
Balance at
January 1,
2011 169.2 $1,812.8 $ 24.7 $(2,085.8) $5,073.0 $4,824.7
Net income - - - - 33.7 33.7
Other
comprehensive
income - - - 21.3 - 21.3
---------- -------------------------------------------------
Comprehensive
income - - - 21.3 33.7 55.0
---------- -------------------------------------------------
Dividends
declared - - - - (45.7) (45.7)
Effect of
stock-based
compensation
expense - - 5.3 - - 5.3
Change to
stock-based
compensation
awards (Note 6) - - 51.9 - - 51.9
Shares issued
under stock
option plans 0.2 11.2 (1.7) - - 9.5
---------- -------------------------------------------------
Balance at
March 31,
2011 169.4 $1,824.0 $ 80.2 $(2,064.5) $5,061.0 $4,900.7
---------- -------------------------------------------------
---------- -------------------------------------------------
-------------------------------
Other
compre- Compre-
hensive Net hensive
income income income
-------------------------------
Comprehensive income -
three months ended
March 31, 2010 $ 10.6 $ 101.0 $ 111.6
-------------------------------
-------------------------------
See notes to Consolidated Financial Statements.
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(unaudited)
1 Basis of presentation
These unaudited interim consolidated financial statements of Canadian
Pacific Railway Limited ("CP", "the Company" or "Canadian Pacific
Railway") reflect management's estimates and assumptions that are
necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States ("GAAP"). They do
not include all disclosures required under GAAP for annual financial
statements and should be read in conjunction with the 2010
consolidated financial statements. The policies used are consistent
with the policies used in preparing the 2010 consolidated financial
statements. The Company's investments in which CP has significant
influence, which are not consolidated, are accounted for using the
equity method.
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.
In management's opinion, the unaudited interim consolidated financial
statements include all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly such information.
Interim results are not necessarily indicative of the results
expected for the fiscal year.
2 Accounting changes
Fair value measurement and disclosure
In January 2010, the Financial Accounting Standards Board amended the
disclosure requirements related to fair value measurements. Most of
the new disclosures and clarifications of existing disclosures were
effective for interim and annual reporting periods beginning after
December 15, 2009, except for the expanded disclosures in the Level 3
reconciliation, which are effective for fiscal years beginning after
December 15, 2010. The Company has adopted the remaining guidance
which did not impact the consolidated financial statements.
Rail grinding
During the second quarter of 2010, the Company changed its accounting
policy for the treatment of rail grinding costs. In prior periods, CP
had capitalized such costs and depreciated them over the expected
economic life of the rail grinding. The Company concluded that,
although the accounting treatment was within acceptable accounting
standards, it is preferable to expense the costs as incurred, given
the subjectivity in determining the expected economic life and the
associated depreciation methodology. The accounting policy change has
been accounted for on a retrospective basis. The effects of the
adjustment to January 1, 2010 resulted in an adjustment to decrease
net properties by $89.0 million, deferred income tax liability by
$26.3 million, and shareholders' equity by $62.7 million. As a result
of the change the following increases (decreases) to financial
statement line items occurred:
(in millions of Canadian dollars, except per share data)
Changes to the Consolidated Statement For the three
of Income and Comprehensive months ended
Income (Loss) March 31, 2010
-----------------
Depreciation and amortization $ (3.8)
Compensation and benefits 0.3
Materials 0.1
Purchased services and other 1.8
-----------------
Total operating expenses (1.6)
Income tax expense 0.4
-----------------
Net income $ 1.2
-----------------
Basic earnings per share $ 0.01
Diluted earnings per share $ 0.01
Other comprehensive income (loss) 0.5
-----------------
Comprehensive income (loss) $ 1.7
-----------------
-----------------
Changes to the Consolidated Statement
of Cash Flows
Net cash provided by operating activities
(decrease) $ (2.2)
Net cash used in investing activities (decrease) $ (2.2)
As at
Changes to the Consolidated Balance Sheet March 31, 2010
-----------------
Net properties $ (86.5)
Deferred income tax liability (25.5)
Accumulated other comprehensive loss (income) 2.1
Retained earnings (63.1)
3 Income taxes
For the three months
ended March 31
(in millions of Canadian dollars) 2011 2010
Restated
(see Note 2)
--------------------------
Current income tax expense $ 3.9 $ 2.3
Deferred income tax expense 7.9 41.5
--------------------------
Income tax expense $ 11.8 $ 43.8
--------------------------
--------------------------
4 Earnings per share
At March 31, 2011, the number of shares outstanding was 169.4 million
(March 31, 2010 - 168.6 million).
Basic earnings per share have been calculated using net income for
the period divided by the weighted average number of Canadian Pacific
Railway Limited shares outstanding during the period.
The number of shares used in earnings per share calculations is
reconciled as follows:
For the three months
ended March 31
(in millions) 2011 2010
-------------------------
Weighted average shares outstanding 169.3 168.5
Dilutive effect of stock options 1.4 0.6
-------------------------
Weighted average diluted shares
outstanding 170.7 169.1
-------------------------
-------------------------
For the three months ended March 31, 2011, 888,542 options were
excluded from the computation of diluted earnings per share because
their effects were not dilutive (three months ended March 31, 2010 -
2,529,642).
5 Financial instruments
A. Fair values of financial instruments
The Company categorizes its financial assets and liabilities measured
at fair value into one of three different levels depending on the
observability of the inputs employed in the measurement.
- Level 1: Unadjusted quoted prices for identical assets and
liabilities in active markets that are accessible at the
measurement date.
- Level 2: Directly or indirectly observable inputs other than
quoted prices included within Level 1 or quoted prices for
similar assets and liabilities. Derivative instruments in this
category are valued using models or other industry standard
valuation techniques derived from observable market data.
- Level 3: Valuations based on inputs which are less observable,
unavailable or where the observable data does not support a
significant portion of the instruments' fair value. Generally,
Level 3 valuations are longer dated transactions, occur in
less active markets, occur at locations where pricing
information is not available, or have no binding broker quote
to support Level 2 classifications.
When possible, the estimated fair value is based on quoted market
prices and, if not available, estimates from third party brokers. For
non-exchange traded derivatives classified in Level 2, the Company
uses standard valuation techniques to calculate fair value. These
methods include discounted mark to market for forwards, futures and
swaps. Primary inputs to these techniques include observable market
prices (interest, foreign exchange and commodity) and volatility,
depending on the type of derivative and nature of the underlying
risk. The Company uses inputs and data used by willing market
participants when valuing derivatives and considers its own credit
default swap spread as well as those of its counterparties in its
determination of fair value. Wherever possible the Company uses
observable inputs. All derivatives are classified as Level 2. A
detailed analysis of the techniques used to value long-term floating
rate notes, which are classified as Level 3, is discussed below.
Gain/loss in fair value of long-term floating rate notes
At March 31, 2011, and December 31, 2010, the Company held long-term
floating rate notes with a total settlement value of $117.0 million,
and carrying values of $71.3 million and $69.5 million, respectively.
The carrying values, being the estimated fair values, are reported in
"Investments".
At March 31, 2011 the Company held long-term floating rate notes with
settlement value, as follows:
- $116.8 million Master Asset Vehicle ("MAV") 2 notes with eligible
assets; and
- $0.2 million MAV 3 Class 9 Traditional Asset ("TA") Tracking
notes.
The valuation technique used by the Company to estimate the fair
value of its investment in long-term floating rate notes at March 31,
2011 and December 31, 2010, incorporates probability weighted
discounted cash flows considering the best available public
information regarding market conditions and other factors that a
market participant would consider for such investments. Accretion and
other minor changes in assumptions have resulted in a gain of
$1.8 million in the three months ended March 31, 2011 (three months
ended March 31, 2010 - gain of $2.5 million) which was reported in
"Other income and charges". The interest rates and maturities of the
various long-term floating rate notes, discount rates and credit
losses modelled at March 31, 2011 and December 31, 2010,
respectively, are:
March 31, 2011 December 31, 2010
Probability weighted
average coupon
interest rate 0.8% 0.8%
Weighted average
discount rate 7.4% 7.1%
Expected repayments of
long-term floating Approximately Approximately
rate notes 5 1/2 to 6 years 6 years
Credit losses MAV 2 eligible MAV 2 eligible
asset notes: asset notes:
nil to 100% 1% to 100%
MAV 3 Class 9 TA MAV 3 Class 9 TA
Tracking notes: Tracking notes:
nil 1%
The probability weighted discounted cash flows resulted in an
estimated fair value of the Company's long-term floating rate notes
of $71.3 million at March 31, 2011 (December 31, 2010 -
$69.5 million). The change in the original cost and estimated fair
value of the Company's long-term floating rate notes is as follows
(representing a roll-forward of assets measured at fair value using
Level 3 inputs):
2011 2010
Estimated Estimated
(in millions of Original fair Original fair
Canadian dollars) cost value cost value
--------------------------------------------
As at January 1 $ 117.0 $ 69.5 $ 129.1 $ 69.3
Redemption of notes - - (0.1) -
Accretion - 1.4 - 1.5
Change in market
assumptions - 0.4 - 1.0
--------------------------------------------
As at March 31 $ 117.0 $ 71.3 $ 129.0 $ 71.8
--------------------------------------------
--------------------------------------------
B. Financial risk management
The Company's policy with respect to using derivative financial
instruments is to selectively reduce volatility associated with
fluctuations in interest rates, foreign exchange ("FX") rates, the
price of fuel and stock-based compensation expense. Where derivatives
are designated as hedging instruments, the relationship between the
hedging instruments and their associated hedged items is documented,
as well as the risk management objective and strategy for the use of
the hedging instruments. This documentation includes linking the
derivatives that are designated as fair value or cash flow hedges to
specific assets or liabilities on the Consolidated Balance Sheet,
commitments or forecasted transactions. At the time a derivative
contract is entered into, and at least quarterly thereafter, an
assessment is made whether the derivative item is effective in
offsetting the changes in fair value or cash flows of the hedged
items. The derivative qualifies for hedge accounting treatment if it
is effective in substantially mitigating the risk it was designed to
address.
It is not the Company's intent to use financial derivatives or
commodity instruments for trading or speculative purposes.
Foreign exchange management
---------------------------
The Company is exposed to fluctuations of financial commitments,
assets, liabilities, income or cash flows due to changes in FX rates.
The Company conducts business transactions and owns assets in both
Canada and the United States; as a result, revenues and expenses are
incurred in both Canadian and U.S. dollars. We enter into foreign
exchange risk management transactions primarily to manage
fluctuations in the exchange rate between Canadian and U.S.
currencies. In terms of net income, excluding FX on long-term debt,
mitigation of U.S. dollar FX exposure is provided primarily through
offsets created by revenues and expenses incurred in the same
currency. Where appropriate, the Company negotiates with customers
and suppliers to reduce the net exposure.
Occasionally the Company will enter into short-term FX forward
contracts as part of its cash management strategy.
Net investment hedge
The FX gains and losses on long-term debt are mainly unrealized and
can only be realized when U.S. dollar denominated long-term debt
matures or is settled. The Company also has long-term FX exposure on
its investment in U.S. affiliates. The majority of the Company's U.S.
dollar denominated long-term debt has been designated as a hedge of
the net investment in foreign subsidiaries. This designation has the
effect of mitigating volatility on net income by offsetting long-term
FX gains and losses on long-term debt and gains and losses on its net
investment. In addition, the Company may enter into FX forward
contracts to lock-in the amount of Canadian dollars it has to pay on
its U.S. denominated debt maturities.
Foreign exchange forward contracts
At March 31, 2011, the Company had FX forward contracts to fix the
exchange rate on US$101.4 million of its 5.75% Notes due in May 2013
and US$125.0 million of its 6.50% Notes due in May 2018. These
derivatives, which are accounted for as cash flow hedges, guarantee
the amount of Canadian dollars that the Company will repay when these
Notes mature. During the three months ended March 31, 2011, the
Company recorded an unrealized foreign exchange loss on long-term
debt of $4.0 million in "Other income and charges" and $0.3 million
in "Other comprehensive income" in relation to these derivatives.
During this period the underlying debt which these derivatives are
designated to hedge benefited largely from an equal and offsetting
unrealized FX gain on long-term debt also recorded in "Other income
and charges". At March 31, 2011, the unrealized loss derived from
these FX forwards was $5.9 million (December 31, 2010 - $1.6 million)
which was included in "Other long-term liabilities" with the offset,
net of tax, reflected in "Accumulated other comprehensive loss" of
$1.4 million (December 31, 2010 - $1.1 million), and "Retained
earnings" of $4.5 million (December 31, 2010 - $0.5 million), on the
Consolidated Balance Sheet.
At March 31, 2010, the Company had FX forward contracts of
US$70 million to fix the exchange rate on its 6.25% Notes due in
October 2011. This derivative was not designated as a hedge and
changes in fair value were recognized in net income in the period in
which the change occurs. During the three months ended March 31,
2010, the Company recorded an unrealized foreign exchange loss on
long-term debt of $1.9 million in "Other income and charges". At
March 31, 2010, the unrealized loss derived from these FX forwards
was $1.7 million which was included in "Other long-term liabilities".
This derivative was subsequently unwound during the three months
ended June 30, 2010, for total proceeds of $0.2 million.
Interest rate management
------------------------
The Company is exposed to interest rate risk, which is the risk that
the fair value or future cash flows of a financial instrument will
vary as a result of changes in market interest rates. In order to
manage funding needs or capital structure goals, the Company enters
into debt or capital lease agreements that are subject to either
fixed market interest rates set at the time of issue or floating
rates determined by on-going market conditions. Debt subject to
variable interest rates exposes the Company to variability in
interest expense, while debt subject to fixed interest rates exposes
the Company to variability in the fair value of debt.
To manage interest rate exposure, the Company accesses diverse
sources of financing and manages borrowings in line with a targeted
range of capital structure, debt ratings, liquidity needs, maturity
schedule, and currency and interest rate profiles. In anticipation of
future debt issuances, the Company may enter into forward rate
agreements such as treasury rate locks, bond forwards or forward
starting swaps, designated as cash flow hedges, to substantially lock
in all or a portion of the effective future interest expense. The
Company may also enter into swap agreements to manage the mix of
fixed and floating rate debt. The Company does not currently hold any
derivative financial instruments to manage its interest rate risk.
Interest rate swaps
During the three months ended March 31, 2011, the Company amortized
$1.6 million (three months ended March 31, 2010 - $1.1 million) of
deferred gains to "Net interest expense" relating to interest rate
swaps previously unwound in the three months ended September 30, 2010
and three months ended June 30, 2009. The gains were deferred as a
fair value adjustment to the underlying debts that were hedged and
will be amortized to "Net interest expense" until such time the debts
are repaid through May 2013.
At March 31, 2011 and December 31, 2010, the Company had no
outstanding interest rate swaps.
Treasury rate locks
At March 31, 2011, the Company had net unamortized losses related to
interest rate locks, which are accounted for as cash flow hedges,
settled in previous years totalling $22.2 million (December 31, 2010
- $22.1 million). This amount is composed of various unamortized
gains and losses related to specific debts which are reflected in
"Accumulated other comprehensive loss", net of tax, and are amortized
to "Net interest expense" in the period that interest on the related
debt is charged. The amortization of these gains and losses resulted
in a decrease in "Net interest expense" and "Other comprehensive
income" of $0.1 million for the three months ended March 31, 2011
(three months ended March 31, 2010 - $0.1 million).
Stock-based compensation expense management
-------------------------------------------
The Company is exposed to stock-based compensation risk, which is the
probability of increased compensation expense due to the increase in
the Company's share price.
The Company's compensation expense is subject to volatility due to
the movement of CP's share price and its impact on the value of
certain management and director stock-based compensation programs.
These programs include tandem share appreciation rights ("TSARs"),
deferred share units ("DSUs"), restricted share units ("RSUs"), and
performance share units ("PSUs"). As the share price appreciates,
these instruments create increased compensation expense.
The Company entered into a Total Return Swap ("TRS") to reduce the
volatility to the Company over time on three types of stock-based
compensation programs: TSARs, DSUs and RSUs. The TRS is a derivative
that provides price appreciation and dividends, in return for a
charge by the counterparty. The swaps are intended to minimize
volatility to "Compensation and benefits" expense by providing a gain
to offset increased compensation expense as the share price increases
and a loss to offset reduced compensation expense when the share
price falls. If stock-based compensation share units fall out of the
money after entering the program, the loss associated with the swap
would no longer be fully offset by compensation expense reductions,
which would reduce the effectiveness of the swap. This derivative was
not designated as a hedge and changes in fair value were recognized
in net income in the period in which the change occurs. CP has
reduced the size of the TRS program to reflect the cancellation of
SARs in Canada (see Note 6).
"Compensation and benefits" expense on the Company's Consolidated
Statement of Income included a net loss on these swaps of
$0.7 million for the three months ended March 31, 2011, which was
inclusive of both realized gains and unrealized losses (three months
ended March 31, 2010 - unrealized gain of $0.8 million). During the
three months ended March 31, 2011, CP unwound a portion of the
program for total proceeds of $0.3 million. At March 31, 2011, the
unrealized loss on the remaining TRS of $7.0 million (December 31,
2010 - $6.0 million) was included in "Accounts payable and accrued
liabilities" on the Consolidated Balance Sheet.
Fuel price management
---------------------
The Company is exposed to commodity risk related to purchases of
diesel fuel and the potential reduction in net income due to
increases in the price of diesel. Fuel expense constitutes a large
portion of the Company's operating costs and 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.
The impact of variable fuel expense is mitigated substantially
through fuel cost recovery programs which apportion incremental
changes in fuel prices to shippers through price indices, tariffs,
and by contract, within agreed upon guidelines. While these programs
provide effective and meaningful coverage, residual exposure remains
as the fuel expense risk cannot be completely recovered from shippers
due to timing and volatility in the market. The Company continually
monitors residual exposure, and where appropriate, may enter into
derivative instruments.
Derivative instruments used by the Company to manage fuel expense
risk may include, but are not limited to, swaps and options for crude
oil, diesel and crack spreads.
At March 31, 2011, the Company had diesel futures contracts, which
are accounted for as cash flow hedges, to purchase approximately
13.2 million US gallons during the period April 2011 to March 2012 at
an average price of US$2.56 per US gallon. This represents
approximately 5% of estimated fuel purchases for this period. At
March 31, 2011, the unrealized gain on these futures contracts was
$7.9 million (December 31, 2010 - $4.1 million) and was reflected in
"Other current assets" with the offset, net of tax, reflected in
"Accumulated other comprehensive loss" on the Consolidated Balance
Sheet.
The impact of settled commodity swaps decreased "Fuel" expense for
the three months ended March 31, 2011, by $3.4 million (three months
ended March 31, 2010 - $0.9 million) as a result of realized gains on
diesel swaps.
The following table summarizes information on the location and
amounts of gains and losses, before tax, related to derivatives on
the Consolidated Statement of Income and in comprehensive income for
the three months ended March 31, 2011 and 2010:
Amount of gain
(loss) recognized
Location of gain Amount of gain in other
(in millions (loss) recognized (loss) recognized comprehensive
of Canadian in income on in income on income on
dollars) derivatives derivatives derivatives
------------------------------------------------------
For the For the
three months three months
ended March 31 ended March 31
2011 2010 2011 2010
-----------------------------------
Derivatives
designated
as hedging
instruments
Effective
portion
Diesel future
contracts Fuel expense $ 3.4 $ 0.9 $ 3.8 $ 0.3
Interest Net interest
rate swap expense 1.6 1.1
Treasury Net interest
rate locks expense 0.1 0.1 (0.1) (0.1)
FX forward Other income
contracts and charges (4.0) - (0.3) -
Derivatives
not designated
as hedging
instruments
Total return Compensation
swap and benefits (0.7) 0.8
FX forward Other income
contracts and charges - (1.9)
-----------------------------------
$ 0.4 $ 1.0 $ 3.4 $ 0.2
-----------------------------------
-----------------------------------
At March 31, 2011, the Company expected that, during the next
12 months, $7.9 million of unrealized holding gains on diesel future
contracts will be realized and recognized in the consolidated
statement of income, reported in "Fuel" expense as a result of these
derivatives being settled.
The following table summarizes information on the effective and
ineffective portions, before tax, of the Company's net investment
hedge on the Consolidated Statement of Income and in comprehensive
income for the three months ended March 31, 2011 and 2010:
Effective
portion
Location of Ineffective recognized
ineffective portion in other
(in millions portion recognized comprehensive
of Canadian recognized in income income
dollars) in income gain/(loss) gain/(loss)
------------------------------------------------------
For the For the
three months three months
ended March 31 ended March 31
2011 2010 2011 2010
-----------------------------------
FX on long-
term debt
within net
investment Other income
hedge and charges $ - $ 2.0 $ 74.3 $ 50.2
-----------------------------------
-----------------------------------
6 Stock-based compensation
At March 31, 2011, the Company had several stock-based compensation
plans, including stock option plans, various cash settled liability
plans and an employee stock savings plan. These plans resulted in an
expense for the three months ended March 31, 2011 of $11.9 million
(three months ended March 31, 2010 - expense of $17.9 million).
Tandem share appreciation rights ("TSARs")
As a result of changes to Canadian tax legislation, which eliminated
the favourable tax treatment on cash settled compensation awards, the
Company offered employees the option of cancelling the outstanding
SAR and keeping in place the outstanding option. Effective
January 31, 2011, the Company cancelled 3.1 million SARs and
reclassified the fair value of the previously recognized liability
($69.8 million) and the recognized deferred tax asset ($17.9 million)
to "Additional paid-in capital". The terms of the awards were not
changed and as a result no incremental cost was recognized. The
weighted average fair value of the units cancelled at January 31,
2011 was $25.36 per unit. Compensation cost will continue to be
recognized over the remaining vesting period for those options not
yet vested.
Regular options
In the first three months of 2011, under CP's stock option plans, the
Company issued 628,900 regular options at the weighted average price
of $65.06 per share, based on the closing price on the grant date.
Pursuant to the employee plan, these regular options may be exercised
upon vesting, which is between 24 months and 36 months after the
grant date, and will expire after 10 years.
Under the fair value method, the fair value of the regular options at
the grant date was $12.2 million. The weighted average fair value
assumptions were approximately:
For the three months
ended March 31
2011
----------------------
Grant price $65.06
Expected life (years)(1) 6.30
Risk-free interest rate(2) 2.79%
Expected stock price volatility(3) 31.48%
Expected annual dividends per share(4) $1.08
Expected forfeiture rate(5) 0.7%
Weighted average fair value of regular
options granted during the period $19.46
----------------------
----------------------
(1) Represents the period of time that awards are expected to be
outstanding. Historical data on exercise behaviour was used to
estimate the expected life of the option.
(2) Based on the implied yield available on zero-coupon government
issues with an equivalent remaining term at the time of the
grant.
(3) Based on the historical stock price volatility of the Company's
stock over a period commensurate with the expected term of the
option.
(4) Determined by the current annual dividend divided by the current
stock price. The Company does not employ different dividend
yields throughout the year.
(5) The Company estimated forfeitures based on past experience. This
rate is monitored on a periodic basis.
Performance share unit ("PSU") plan
In the first three months of 2011, the Company issued 268,230 PSUs
with a grant date fair value of $15.7 million. These units attract
dividend equivalents in the form of additional units based on the
dividends paid on the Company's Common Shares. PSUs vest and are
settled in cash approximately three years after the grant date
contingent upon CP's performance (performance factor). The fair value
of PSUs are measured, both on the grant date and each subsequent
quarter until settlement, using a Monte Carlo simulation model. The
model utilizes multiple input variables that determine the
probability of satisfying the performance and market condition
stipulated in the grant.
7 Pensions and other benefits
In the three months ended March 31, 2011, the Company made
contributions of $23.0 million (2010 - $18.7 million) to its defined
benefit pension plans.
At March 31, the elements of net periodic benefit cost for defined
benefit pension plans and other benefits recognized in the quarter
included the following components:
For the three months
ended March 31
Pensions Other benefits
--------------------------------------------
(in millions of
Canadian dollars) 2011 2010 2011 2010
--------------------------------------------
Current service cost
(benefits earned by
employees in the
period) $ 26.1 $ 21.6 $ 4.1 $ 3.9
Interest cost on
benefit obligation 114.9 116.1 6.4 7.0
Expected return on fund
assets (168.3) (149.6) (0.2) (0.2)
Recognized net
actuarial loss 35.6 17.8 1.2 1.3
Amortization of prior
service costs 3.2 3.3 (0.3) (0.4)
--------------------------------------------
Net periodic benefit
cost $ 11.5 $ 9.2 $ 11.2 $ 11.6
--------------------------------------------
--------------------------------------------
8 Commitments and contingencies
In the normal course of its operations, the Company becomes involved
in various legal actions, including claims relating to injuries and
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 March 31, 2011, 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.
At March 31, 2011, the Company had committed to total future capital
expenditures amounting to $375.8 million and operating expenditures
amounting to $1,419.5 million for the years 2011-2028.
Environmental remediation accruals cover site-specific remediation
programs. Environmental remediation accruals are measured on an
undiscounted basis and are recorded when the costs to remediate are
probable and reasonably estimable. The estimate of the probable costs
to be incurred in the remediation of properties contaminated by past
railway use reflects the nature of contamination at individual sites
according to typical activities and scale of operations conducted. CP
has developed remediation strategies for each property based on the
nature and extent of the contamination, as well as the location of
the property and surrounding areas that may be adversely affected by
the presence of contaminants, considering available technologies,
treatment and disposal facilities and the acceptability of site-
specific plans based on the local regulatory environment. Site-
specific plans range from containment and risk management of the
contaminants through to the removal and treatment of the contaminants
and affected soils and ground water. The details of the estimates
reflect the environmental liability at each property. Provisions for
environmental remediation costs are recorded in "Other long-term
liabilities", except for the current portion which is recorded in
"Accounts payable and accrued liabilities". The total amount provided
at March 31, 2011 was $104.6 million (December 31, 2010 -
$107.4 million). Payments are expected to be made over 10 years to
2021.
The accruals for environmental remediation represent CP's best
estimate of its probable future obligation and includes both asserted
and unasserted claims, without reduction for anticipated recoveries
from third parties. Although the recorded accruals include CP's best
estimate of all probable costs, CP's total environmental remediation
costs cannot be predicted with certainty. Accruals for environmental
remediation may change from time to time as new information about
previously untested sites becomes known, environmental laws and
regulations evolve and advances are made in environmental remediation
technology. The accruals may also vary as the courts decide legal
proceedings against outside parties responsible for contamination.
These potential charges, which cannot be quantified at this time, are
not expected to be material to CP's financial position, but may
materially affect income in the particular period in which a charge
is recognized. Costs related to existing, but as yet unknown, or
future contamination will be accrued in the period in which they
become probable and reasonably estimable. Changes to costs are
reflected as changes to "Other long-term liabilities" or "Accounts
payable and accrued liabilities" and to "Purchased services and
other" within operating expenses. The amount charged to income in the
three months ended March 31, 2011 was $0.7 million (three months
ended March 31, 2010 - $1.6 million).
The DM&E was purchased for $1.5 billion resulting in goodwill of
$142.9 million (US$147.4 million) as at March 31, 2011. Future
contingent payments of up to approximately US$1.1 billion consisting
of US$390 million which would become due if construction of the
Powder River Basin expansion project starts prior to December 31,
2025 and up to approximately US$740 million would become due upon the
movement of specified volumes over the Powder River Basin extension
prior to December 31, 2025. Certain interest and inflationary
adjustments would also become payable up to December 31, 2025 upon
achievement of certain milestones. The contingent payments would be
accounted for as an increase in the purchase price. Certain
intangible assets acquired are subject to amortization.
Summary of Rail Data
--------------------
First Quarter
--------------------------------------------
2011 2010(1) Fav/(Unfav) %
--------------------------------------------
Financial (millions, except
---------------------------
per share data)
---------------
Revenues
--------
Freight revenue $ 1,135.2 $ 1,138.2 $ (3.0) (0.3)
Other revenue 28.2 28.6 (0.4) (1.4)
---------------------------------
1,163.4 1,166.8 (3.4) (0.3)
---------------------------------
Operating expenses
------------------
Compensation and benefits 364.5 353.8 (10.7) (3.0)
Fuel 225.7 181.7 (44.0) (24.2)
Materials 71.6 64.0 (7.6) (11.9)
Equipment rents 51.4 49.0 (2.4) (4.9)
Depreciation and
amortization 122.3 121.2 (1.1) (0.9)
Purchased services and other 218.7 190.5 (28.2) (14.8)
---------------------------------
1,054.2 960.2 (94.0) (9.8)
---------------------------------
Operating income 109.2 206.6 (97.4) (47.1)
Less:
Other income and charges (0.5) (4.9) (4.4) (89.8)
Net interest expense 64.2 66.7 2.5 3.7
---------------------------------
Income before income tax
expense 45.5 144.8 (99.3) (68.6)
Income tax expense 11.8 43.8 32.0 73.1
---------------------------------
Net income $ 33.7 $ 101.0 $ (67.3) (66.6)
---------------------------------
---------------------------------
Operating ratio (%) 90.6 82.3 (8.3) (830) bps
---------------------------------
---------------------------------
Basic earnings per share $ 0.20 $ 0.60 $ (0.40) (66.7)
---------------------------------
---------------------------------
Diluted earnings per share $ 0.20 $ 0.60 $ (0.40) (66.7)
---------------------------------
---------------------------------
Shares Outstanding
------------------
Weighted average number
of shares outstanding
(millions) 169.3 168.5 0.8 0.5
Weighted average number
of diluted shares
outstanding (millions) 170.7 169.1 1.6 0.9
Foreign Exchange
----------------
Average foreign exchange
rate (US$/Canadian$) 1.01 0.96 (0.05) (5.2)
Average foreign exchange
rate (Canadian$/US$) 0.99 1.04 (0.05) (4.8)
(1) Restated for the Company's change in accounting policy in relation to
the accounting for rail grinding.
Summary of Rail Data (Page 2)
-----------------------------
First Quarter
--------------------------------------------
2011 2010 Fav/(Unfav) %
--------------------------------------------
Commodity Data
--------------
Freight Revenues (millions)
- Grain $ 232.0 $ 271.3 $ (39.3) (14.5)
- Coal 105.9 110.5 (4.6) (4.2)
- Sulphur and fertilizers 129.0 117.8 11.2 9.5
- Forest products 45.5 43.2 2.3 5.3
- Industrial and consumer
products 231.0 205.5 25.5 12.4
- Automotive 80.0 77.6 2.4 3.1
- Intermodal 311.8 312.3 (0.5) (0.2)
---------------------------------
Total Freight Revenues $ 1,135.2 $ 1,138.2 $ (3.0) (0.3)
---------------------------------
Millions of Revenue
Ton-Miles (RTM)
- Grain 7,260 8,636 (1,376) (15.9)
- Coal 3,970 4,308 (338) (7.8)
- Sulphur and fertilizers 4,869 4,392 477 10.9
- Forest products(1) 1,292 1,231 61 5.0
- Industrial and consumer
products(1) 5,962 5,034 928 18.4
- Automotive 523 545 (22) (4.0)
- Intermodal 5,808 6,057 (249) (4.1)
---------------------------------
Total RTMs 29,684 30,203 (519) (1.7)
---------------------------------
Freight Revenue per RTM
(cents)
- Grain 3.20 3.14 0.06 1.9
- Coal 2.67 2.56 0.11 4.3
- Sulphur and fertilizers 2.65 2.68 (0.03) (1.1)
- Forest products(1) 3.52 3.51 0.01 0.3
- Industrial and consumer
products(1) 3.87 4.08 (0.21) (5.1)
- Automotive 15.30 14.24 1.06 7.4
- Intermodal 5.37 5.16 0.21 4.1
Total Freight Revenue per RTM 3.82 3.77 0.05 1.3
Carloads (thousands)
- Grain 99.4 113.2 (13.8) (12.2)
- Coal 60.3 76.0 (15.7) (20.7)
- Sulphur and fertilizers 48.5 44.3 4.2 9.5
- Forest products 18.3 17.6 0.7 4.0
- Industrial and consumer
products 100.1 91.8 8.3 9.0
- Automotive 36.3 33.5 2.8 8.4
- Intermodal 243.0 248.6 (5.6) (2.3)
---------------------------------
Total Carloads 605.9 625.0 (19.1) (3.1)
---------------------------------
Freight Revenue per Carload
- Grain $ 2,334 $ 2,397 $ (63) (2.6)
- Coal 1,756 1,454 302 20.8
- Sulphur and fertilizers 2,660 2,659 1 -
- Forest products 2,486 2,455 31 1.3
- Industrial and consumer
products 2,308 2,239 69 3.1
- Automotive 2,204 2,316 (112) (4.8)
- Intermodal 1,283 1,256 27 2.1
Total Freight Revenue per
Carload $ 1,874 $ 1,821 $ 53 2.9
(1) Certain prior period figures have been updated to reflect new
information.
Summary of Rail Data (Page 3)
-----------------------------
First Quarter
--------------------------------------------
2011 2010(1) Fav/(Unfav) %
--------------------------------------------
Operations Performance
----------------------
Total operating expenses
per gross ton-miles (GTM)
(cents)(2) 1.87 1.64 (0.23) (14.0)
Operating expenses, exclusive
of land sales, per GTM
(cents)(2)(3) 1.87 1.64 (0.23) (14.0)
Freight gross ton-miles
(millions) 56,235 58,524 (2,289) (3.9)
Train miles (000) 9,245 9,557 (312) (3.3)
Average number of active
employees - Total 14,915 14,431 (484) (3.4)
Average number of active
employees - Expense 14,009 13,824 (185) (1.3)
Number of employees at end
of period - Total 15,143 14,530 (613) (4.2)
Number of employees at end
of period - Expense 13,969 13,840 (129) (0.9)
U.S. gallons of locomotive
fuel consumed per 1,000 GTMs
- freight & yard 1.31 1.23 (0.08) (6.5)
U.S. gallons of locomotive
fuel consumed - total
(millions)(4) 73.1 71.5 (1.6) (2.2)
Average fuel price (U.S.
dollars per U.S. gallon) 3.12 2.44 (0.68) (27.9)
Fluidity Data
-------------
Average terminal dwell -
AAR definition (hours) 23.7 24.1 0.4 1.7
Average train speed -
AAR definition (mph) 19.8 22.9 (3.1) (13.5)
Car miles per car day(5) 137.9 148.6 (10.7) (7.2)
Average daily active cars
on-line (000)(5) 55.1 53.6 (1.5) (2.8)
Average daily active road
locomotives on-line 1,062 978 (84) (8.6)
Safety
------
FRA personal injuries per
200,000 employee-hours 1.73 1.98 0.25 12.6
FRA train accidents per
million train-miles 2.26 1.44 (0.82) (56.9)
(1) Certain prior period figures have been revised to conform with
current presentation or have been updated to reflect new information.
(2) Restated for the Company's change in accounting policy in relation to
the accounting for rail grinding.
(3) Operating expenses, exclusive of land sales, per GTM is calculated
consistently with total operating expenses per GTM except for the
exclusion of net (loss)/gain on land sales of $(0.2) million and
$2.4 million for the three months ended March 31, 2011 and 2010
respectively.
(4) Includes gallons of fuel consumed from freight, yard and commuter
service but excludes fuel used in capital projects and other non-
freight activities.
(5) Incorporates a new reporting methodology which excludes cars already
placed at a customer location waiting for loading or unloading or
cars that cannot be placed at a customer location due to shipper or
receiver issues.
SOURCE Canadian Pacific
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