Canadian Pacific announces first quarter results
CALGARY, April 28 /PRNewswire-FirstCall/ - Canadian Pacific Railway Limited (TSX/NYSE: CP) announced its first-quarter results today. Net income in the first-quarter was $100 million, an increase of 74 per cent from $57 million in first-quarter 2009 and diluted earnings per share were $0.59, up from $0.36 in first-quarter 2009.
"We put in a solid performance this quarter and our results reflect both improvements in the economy and CP's proven ability to rapidly adjust to changes in our customers' demands," said Fred Green, President and CEO. "Our ongoing commitment to service reliability, safety and managing our productivity objectives will continue to drive shareholder value."
FIRST-QUARTER 2010 COMPARED WITH FIRST-QUARTER 2009:
- Total revenues were $1.2 billion, up five per cent from $1.1 billion
- Operating expenses were $962 million, down two per cent from
$977 million
- Operating income increased to $205 million from $132 million, or
55 per cent
- Operating ratio improved 570 basis points to 82.4 per cent
- Diluted earnings per share increased to $0.59 from $0.36, or
64 per cent
- Adjusted diluted earnings per share increased to $0.60 from $0.32, or
88 per cent
Presentation of non-GAAP earnings
Diluted earnings per share, 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 earnings per share".
CP presents non-GAAP earnings measures in this news release to provide an additional basis for evaluating underlying earnings and liquidity trends in its business that can be compared with prior periods' results of operations. When foreign exchange gains and losses on long-term debt and other specified items are excluded from diluted earnings per share, income and income tax expense, these become non-GAAP measures. Capital program is a non-GAAP measure.
These non-GAAP earnings measures exclude foreign currency translation effects on long-term debt and the tax thereon, which can be volatile and short term. The impact of volatile short-term exchange rate fluctuations on foreign-denominated debt is only realized when long-term debt matures or is settled. In addition, these non-GAAP measures exclude other specified items (described below) that are not a part of CP's normal ongoing revenues and operating expenses. 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.
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.
The non-GAAP earnings measures described in this news release have no standardized meanings and are not defined by accounting principles generally accepted in the United States and, therefore, are unlikely to be comparable to similar measures presented by other companies.
FOREIGN EXCHANGE GAIN AND LOSS ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
CP had a net foreign exchange loss after tax of $3 million on long-term debt in the first quarter of 2010, compared with a gain of $7 million after tax in first-quarter 2009.
As part of a consolidated financing strategy, CP structures its U.S. dollar long-term debt in different taxing jurisdictions. As well, a portion of this debt is designated as a net investment hedge against the net investment in foreign subsidiaries. Although the taxes on foreign exchange gains and losses on long-term debt generally offset one another, because they may be in different tax jurisdictions, the resulting net tax can vary significantly.
Other specified items in the first quarter of 2010 include an increase to the estimated fair value of the investment in Long-Term Floating Rate Notes of $1.0 million ($0.9 million after tax). There were no similar other specified items in the first quarter of 2009.
CP began reporting its financial results in accordance with U.S. GAAP as at January 1, 2010. All prior period comparative numbers contained in this release are to U.S. GAAP. Additional historical U.S. GAAP financial reports can be found at www.cpr.ca.
Note on forward-looking information
This news release contains certain forward-looking statements relating but not limited to our operations, pension obligations and tax rates. 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; 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 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.
About Canadian Pacific:
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 1,100 communities where we operate. Come and visit us at www.cpr.ca to see how we can put our ingenuity to work for you.
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
2010 2009
--------------------------
Revenues
Freight $ 1,138.2 $ 1,076.0
Other 28.6 33.6
--------------------------
1,166.8 1,109.6
Operating expenses
Compensation and benefits 353.5 342.9
Fuel 181.7 171.0
Materials 63.9 76.6
Equipment rents 49.0 66.4
Depreciation and amortization 125.0 119.7
Purchased services and other 188.7 200.8
--------------------------
961.8 977.4
--------------------------
Operating income 205.0 132.2
Less:
Other income and charges (4.9) 8.5
Interest expense 66.7 71.6
--------------------------
Income before income tax expense 143.2 52.1
Income tax expense (recovery) (Note 4) 43.4 (5.2)
--------------------------
Net income $ 99.8 $ 57.3
--------------------------
--------------------------
Earnings per share (Note 5)
Basic earnings per share $ 0.59 $ 0.36
Diluted earnings per share $ 0.59 $ 0.36
Weighted average number of shares (millions)
Basic 168.5 160.9
Diluted 169.1 161.2
Dividends declared per share $ 0.2475 $ 0.2475
See notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(in millions of Canadian dollars)
(unaudited)
March 31 December 31
2010 2009
--------------------------
Assets
Current assets
Cash and cash equivalents $ 723.8 $ 679.1
Accounts receivable, net 705.8 655.1
Materials and supplies 122.7 132.7
Deferred income taxes 133.6 128.1
Other current assets 57.6 46.5
--------------------------
1,743.5 1,641.5
Investments 160.5 156.7
Net properties 11,902.6 12,067.5
Goodwill and intangible assets 195.1 202.3
Other assets 172.6 175.8
--------------------------
Total assets $ 14,174.3 $ 14,243.8
--------------------------
--------------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities $ 900.6 $ 927.1
Income and other taxes payable 40.3 31.9
Dividends payable 41.7 41.7
Long-term debt maturing within one year 611.9 605.3
--------------------------
1,594.5 1,606.0
Pension and other benefit liabilities 1,417.7 1,453.9
Other long-term liabilities 477.3 479.9
Long-term debt 4,023.3 4,138.2
Deferred income taxes 1,869.0 1,845.0
--------------------------
Total liabilities 9,381.8 9,523.0
Shareholders' equity
Share capital 1,775.9 1,771.1
Additional paid-in capital 29.5 30.8
Accumulated other comprehensive loss (1,736.2) (1,746.3)
Retained earnings 4,723.3 4,665.2
--------------------------
4,792.5 4,720.8
--------------------------
Total liabilities and shareholders' equity $ 14,174.3 $ 14,243.8
--------------------------
--------------------------
Commitments and contingencies (Note 10)
See notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of Canadian dollars)
(unaudited)
For the three months
ended March 31
2010 2009
--------------------------
Operating activities
Net income $ 99.8 $ 57.3
Reconciliation of net income to cash provided
by operating activities:
Depreciation and amortization 125.0 119.7
Deferred income taxes (Note 4) 41.1 (10.4)
Foreign exchange (gain) loss on long-term debt (4.1) 2.4
Restructuring and environmental payments (5.6) (8.5)
Pension funding in excess of expense (9.3) (15.3)
Other operating activities, net 21.6 1.9
Change in non-cash working capital balances
related to operations (82.0) (11.9)
--------------------------
Cash provided by operating activities 186.5 135.2
--------------------------
Investing activities
Additions to properties (93.0) (123.1)
Proceeds from the sale of properties and
other assets 9.0 8.0
--------------------------
Cash used in investing activities (84.0) (115.1)
--------------------------
Financing activities
Dividends paid (41.7) (38.0)
Issuance of CP Common Shares 3.0 495.8
Net decrease in short-term borrowing - (18.1)
Repayment of long-term debt (9.1) (13.2)
--------------------------
Cash (used in) provided by financing activities (47.8) 426.5
--------------------------
Effect of foreign currency fluctuations on
U.S. dollar-denominated cash and cash
equivalents (10.0) 2.4
--------------------------
Cash position
Increase in cash and cash equivalents 44.7 449.0
Cash and cash equivalents at beginning
of period 679.1 117.5
--------------------------
Cash and cash equivalents at end of period $ 723.8 $ 566.5
--------------------------
--------------------------
Supplemental disclosures of cash flow
information:
Income taxes paid $ 1.9 $ 3.3
--------------------------
--------------------------
Interest paid $ 45.1 $ 58.6
--------------------------
--------------------------
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
December 31,
2009 168.5 $1,771.1 $ 30.8 $(1,746.3) $4,665.2 $4,720.8
Net income - - - - 99.8 99.8
Other
comprehensive
income - - - 10.1 - 10.1
--------- -------------------------------------------------
Comprehensive
income - - - 10.1 99.8 109.9
--------- -------------------------------------------------
Dividends
declared - - - - (41.7) (41.7)
Stock
compensation
expense - - 0.4 - - 0.4
Shares issued
under stock
option plans 0.1 4.8 (1.7) - - 3.1
--------- -------------------------------------------------
Balance at
March 31,
2010 168.6 $1,775.9 $ 29.5 $(1,736.2) $4,723.3 $4,792.5
--------- -------------------------------------------------
--------- -------------------------------------------------
See notes to Consolidated Financial Statements.
CANADIAN PACIFIC RAILWAY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(unaudited)
1 Basis of presentation
These unaudited 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 2009 U.S. GAAP
consolidated financial statements. The policies used are consistent
with the policies used in preparing the 2009 U.S. GAAP consolidated
financial statements, except as discussed in Note 2. 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. The 2009
global recession has affected financial results such that seasonal
fluctuations may not be consistent with those in prior years. The
timing of a return to seasonal trends consistent with prior years
will depend on the recovery of the economy and the Company's
customers.
2 Accounting changes
Consolidations
In June 2009, the Financial Accounting Standards Board ("FASB")
issued Amendments to Consolidation of Variable Interest Entities. The
guidance retains the scope of the previous guidance with the addition
of entities previously considered qualifying special purpose
entities. In addition, it replaces the previous quantitative approach
with a qualitative analysis approach for determining whether the
enterprise's variable interest or interests give it a controlling
financial interest in a variable interest entity. The guidance is
further amended to require ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity
and requires enhanced disclosures about an enterprise's involvement
in a variable interest entity. The guidance is applicable to all
variable interest entities that existed at January 1, 2010, the date
of adoption, or are created thereafter. The Company has variable
interests in variable interest entities, however, the adoption of the
new guidance did not change the previous assessment that the Company
is not the primary beneficiary and as such does not consolidate the
variable interest entities. Additional note disclosure regarding the
nature of the Company's variable interests and where judgment was
required to assess the primary beneficiary of these variable interest
entities has been provided in Note 9.
Accounting for transfers of financial assets
The FASB has released additional guidance with respect to the
accounting and disclosure of transfers of financial assets such as
securitized accounts receivable. Although the Company currently does
not have an accounts receivable securitization program, the guidance,
which includes revisions to the derecognition criteria in a transfer
and the treatment of qualifying special purpose entities, would be
applicable to any future securitization. The new guidance is
effective for the Company from January 1, 2010. The adoption of this
guidance had no impact to the Company's financial statements.
Fair value measurement and disclosure
In January 2010, the FASB amended the disclosure requirements related
to fair value measurements. The update provides for new disclosures
regarding transfers in and out of Level 1 and Level 2 financial asset
and liability categories and expanded disclosures in the Level 3
reconciliation. The update also provides clarification that the level
of disaggregation should be at the class level and that disclosures
about inputs and valuation techniques are required for both recurring
and nonrecurring fair value measurements that fall in either Level 2
or Level 3. New disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the expanded
disclosures in the Level 3 reconciliation, which are effective for
fiscal years beginning after December 15, 2010. The Company has
adopted this guidance resulting in expanded note disclosure (Note 6).
3 Future accounting changes
There have been no new accounting pronouncements issued that are
expected to have a significant impact to the Company's financial
statements.
4 Income taxes
For the three months
ended March 31
(in millions of Canadian dollars) 2010 2009
-----------------------
Current income tax expense $ 2.3 $ 5.2
Deferred income tax expense (recovery) 41.1 (10.4)
-----------------------
Income tax expense (recovery) $ 43.4 $ (5.2)
-----------------------
-----------------------
During the first quarter of 2009, legislation was enacted to reduce
British Columbia provincial income tax rates. As a result, the
Company recorded a $6.2 million income tax benefit related to the
revaluation of its deferred income tax balances as at December 31,
2008. In addition, during the first quarter of 2009 the Company had
non-taxable foreign exchange gains which reduced expected income tax
expense by approximately $8 million. In the first quarter of 2010,
non-taxable foreign exchange losses increased expected income tax
expense by approximately $6 million.
5 Earnings per share
At March 31, 2010, the number of shares outstanding was 168.6 million
(March 31, 2009 - 168.0 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.
Diluted earnings per share have been calculated using the treasury
stock method, which assumes that any proceeds received from the
exercise of in-the-money options would be used to purchase Common
Shares at the average market price for the period.
The number of shares used in earnings per share calculations is
reconciled as follows:
For the three months
ended March 31
(in millions) 2010 2009
-----------------------
Weighted average shares outstanding 168.5 160.9
Dilutive effect of stock options 0.6 0.3
-----------------------
Weighted average diluted shares outstanding 169.1 161.2
-----------------------
-----------------------
For the three months ended March 31, 2010, 2,529,642 options were
excluded from the computation of diluted earnings per share because
their effects were not dilutive (three months ended March 31, 2009 -
3,393,217).
6 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, 2010 and December 31, 2009, the Company held long-term
floating rate notes with a total settlement value of $129.0 million
and $129.1 million, respectively, and carrying values of
$71.8 million and $69.3 million, respectively. The carrying values,
being the estimated fair values, are reported in "Investments".
The Company received the long-term floating rate notes as part of a
Canadian Court sanctioned restructuring plan completed on January 21,
2009. The notes were in replacement for previously held Canadian
third-party asset backed commercial paper ("ABCP").
During the first quarter of 2010 the Company received $0.1 million in
partial redemption, at par, of certain of the notes held. At March
31, 2010 the Company held long-term floating rate notes with
settlement value, as follows:
- $116.7 million Master Asset Vehicle ("MAV") 2 notes with eligible
assets;
- $12.1 million MAV 2 Ineligible Asset ("IA") Tracking notes; 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,
2010 and December 31, 2009, incorporates probability weighted
discounted cash flows considering the best available public
information regarding market conditions and other factors that a
market participant would consider for such investments. The above
noted redemption of notes, accretion and other minor changes in
assumptions have resulted in a gain of $2.5 million in the first
quarter of 2010 (first quarter 2009 - no gain or loss). The interest
rates and maturities of the various long-term floating rate notes,
discount rates and credit losses modelled at March 31, 2010 and
December 31, 2009, respectively, are:
March 31, 2010 December 31, 2009
Probability weighted 0.1% Nil
average coupon
interest rate
Weighted average 7.6% 7.9%
discount rate
Expected repayments Three to 19 years Three and a half to
of long-term floating 19 years
rate notes
Credit losses MAV 2 eligible asset MAV 2 eligible asset
notes: nil to 100% notes: nil to 100%
MAV 2 IA Tracking MAV 2 IA Tracking
notes: 25% notes: 25%
MAV 3 Class 9 TA MAV 3 Class 9 TA
Tracking notes: nil Tracking notes: nil
The probability weighted discounted cash flows resulted in an
estimated fair value of the Company's long-term floating rate notes
of $71.8 million at March 31, 2010 (December 31, 2009 -
$69.3 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):
Original Estimated
(in millions of Canadian dollars) cost fair value
-----------------------
As at January 1, 2010 $ 129.1 $ 69.3
Redemption of notes (0.1) -
Accretion - 1.5
Change in market assumptions - 1.0
-----------------------
As at March 31, 2010 $ 129.0 $ 71.8
-----------------------
-----------------------
Accretion and gains and losses from the redemption of notes and
change in market assumptions are reported in "Other income and
charges".
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.
Financial derivatives or commodity instruments are used to mitigate
financial risk and are not for trading or speculative purposes.
Foreign exchange management
---------------------------
The Company is exposed to fluctuations of financial commitments,
assets, liabilities, income or cash flows due to changes in FX rates.
The Company conducts business transactions and owns assets in Canada,
the United States and other countries; as a result, revenues and
expenses are incurred in both Canadian and U.S. dollars. The Company
enters into foreign exchange risk management transactions primarily
to manage fluctuations in the exchange rate between Canadian and U.S.
currencies. In terms of net income, excluding FX on long-term debt,
mitigation of U.S. dollar FX exposure is provided primarily through
offsets created by revenues and expenses incurred in the same
currency.
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 foreign subsidiaries. This designation has the
effect of mitigating volatility on net income by offsetting long-term
FX gains and losses on long-term debt against gains and losses on its
net investment. In addition, the Company may enter into FX forward
contracts to lock in the amount of Canadian dollars it has to pay on
its U.S. denominated debt maturities.
Occasionally the Company will enter into short-term FX forward
contracts as part of its cash management strategy.
Foreign exchange forward contracts
In 2007, the Company entered into a FX forward contract to fix the
exchange rate on US$400 million 6.250% Notes due 2011. This
derivative guaranteed the amount of Canadian dollars that the Company
will repay when its US$400 million 6.250% Notes mature in October
2011. This derivative is not designated as a hedge and changes in
fair value are recognized in net income in the period in which the
change occurs. During the three months ended March 31, 2009, CP
unwound US$25 million of the US$400 million for total proceeds of
$4.5 million, which was settled in the second quarter of 2009. During
the remainder of 2009, CP unwound a further US$305 million for total
proceeds of $29.6 million.
During the three months ended March 31, 2010, the Company recorded an
unrealized foreign exchange loss on long-term debt of $1.9 million to
"Other income and charges" related to the currency forward. For the
same period in 2009, the Company recorded a net gain of
$14.1 million, which was inclusive of both realized and unrealized
gains.
At March 31, 2010, the unrealized loss of $1.7 million on the
remaining FX forward of US$70 million was included in "Other long-
term liabilities". At December 31, 2009, the unrealized gain on the
remaining FX forward of $0.2 million was included in "Other assets".
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, 2010 the Company amortized
$1.1 million of a deferred gain to "Interest expense" relating to an
interest rate swap previously unwound.
Prior to the unwind, accounting for the associated debt at the
floating interest rate decreased "Interest expense" by $1.4 million
for the three months ended March 31, 2009.
At March 31, 2010 and December 31, 2009, the Company had no
outstanding interest rate swaps.
Treasury rate locks
At March 31, 2010, the Company had net unamortized losses related to
interest rate locks settled in previous years totalling $24.0 million
(December 31, 2009 - $23.9 million), which are reflected in
"Accumulated other comprehensive loss". This amount is composed of
various unamortized gains and losses related to specific debts. These
unamortized gains and losses are amortized to "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
"Interest expense" and "Other comprehensive income" of $0.1 million
for the three months ended March 31, 2010 (three months ended March
31, 2009 - $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 were intended to minimize
volatility to "Compensation and benefits" expense by providing a gain
to offset increased compensation expense as the share price increased
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. During 2009, the
Company decided not to expand its TRS program.
"Compensation and benefits" expense included an unrealized gain on
these swaps of $0.8 million for the three months ended March 31,
2010. For the same period in 2009, the Company recorded a net loss of
$10.7 million for the quarter, which was inclusive of both realized
losses and unrealized gains. During the three months ended March 31,
2009, in order to improve the effectiveness of the TRS in mitigating
the volatility of stock-based compensation programs, CP unwound a
portion of the program for a total cost of $31.1 million. This cost
had previously been recognized in "Compensation and benefits"
expense and was settled in the second quarter of 2009. At March 31,
2010, the unrealized loss on the TRS of $17.4 million was
included in "Accounts payable and accrued liabilities" (December 31,
2009 - $18.2 million).
Fuel price management
---------------------
The Company is exposed to potential volatility in net income due to
increases or decreases in the price of diesel. Volatility in diesel
fuel prices can have a significant impact on the Company's income.
The impact of variable fuel expense is mitigated substantially
through fuel cost recovery programs. 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.
At March 31, 2010, the Company had diesel futures contracts, which
are accounted for as cash flow hedges, to purchase approximately
13.5 million US gallons during the period April 2010 to March 2011 at
an average price of US$2.05 per US gallon. This represents
approximately 5% of estimated fuel purchases for this period. At
March 31, 2010, the unrealized gain on these futures contracts was
$2.8 million (December 31, 2009 - $2.5 million) and was reflected in
"Other current assets" with the offset, net of tax, reflected in
"Accumulated other comprehensive loss".
At March 31, 2010 and December 31, 2009, the Company had no remaining
crude futures and associated FX forward contracts.
During the three months ended March 31, 2010, the impact of settled
commodity swaps benefited "Fuel" expense by $0.9 million as a result
of realized gains on diesel swaps. For the same period in 2009, the
net impact of settled commodity swaps increased "Fuel" expense in the
quarter by $5.7 million as a result of realized losses on diesel
swaps, offset in part by gains on West Texas Intermediate ("WTI")
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, 2010 and 2009:
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 ended
March 31 March 31
2010 2009 2010 2009
------------------------------------
Derivatives
designated
as hedging
instruments
Effective
portion
Crude oil
swaps Fuel expense $ - $ 0.2 $ - $ (0.6)
Diesel future
contracts Fuel expense 0.9 (5.9) 0.3 4.4
FX contracts
on fuel Fuel expense - - - 0.2
Interest
rate swap Interest expense 1.1 1.4 - -
Treasury
rate locks Interest expense 0.1 0.1 (0.1) (0.1)
Derivatives
not designated
as hedging
instruments
Total return Compensation
swap and benefits 0.8 (10.7) - -
FX forward Other income
contracts and charges (1.9) 14.1 - -
------------------------------------
$ 1.0 $ (0.8) $ 0.2 $ 3.9
------------------------------------
------------------------------------
At March 31, 2010, the Company expected that, during the next
12 months, $2.8 million of unrealized holding gains on diesel future
contracts will be realized and recognized in the consolidated
statement of income, reported in "Fuel" expense as a result of these
derivatives being settled.
The following table summarizes information on the effective and
ineffective portions, before tax, of the Company's net investment
hedge on the Consolidated Statement of Income and in comprehensive
income for the three months ended March 31, 2010 and 2009:
Effective
Location of portion
ineffective Ineffective recognized
(in millions portion portion in other
of Canadian recognized recognized comprehensive
dollars) in income in income income
------------------------------------------------------
For the For the
three months three months
ended ended
March 31 March 31
2010 2009 2010 2009
------------------------------------
FX on LTD
within net
investment Other income
hedge and charges $ 2.0 $ (3.6) $ 50.2 $ (57.9)
------------------------------------
------------------------------------
7 Stock-based compensation
At March 31, 2010, the Company had several stock-based compensation
plans, including stock option plans, various cash settled liability
plans and an employee stock savings plan. These plans resulted in an
expense for the three months ended March 31, 2010 of $17.9 million
(three months ended March 31, 2009 - recovery of $4.0 million).
Regular options and TSARs
-------------------------
In the first three months of 2010, under CP's stock option plans, the
Company issued 758,400 TSARs at the weighted average price of $51.17
per share, based on the closing price on the grant date.
Pursuant to the employee plan, these TSARs 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 TSARs at the grant
date was $10.6 million (2009 - $5.4 million). The weighted average
fair value assumptions were approximately:
For the three months
ended March 31
2010 2009
---------------------------
Grant price $51.17 $36.29
Expected life (years)(1) 6.25 5.00
Risk-free interest rate(2) 2.72% 2.14%
Expected stock price volatility(3) 30% 30%
Expected annual dividends per share(4) $0.99 $0.99
Weighted average fair value of TSARs
granted during the period $14.02 $7.24
---------------------------
---------------------------
(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.
Performance share unit ("PSU") plan
-----------------------------------
In the first three months of 2010, the Company issued 314,820 PSUs
with a grant date fair value of $14.5 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 Black-Scholes option-pricing model
and 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.
8 Pensions and other benefits
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) 2010 2009 2010 2009
----------------------------------------
Current service cost
(benefits earned by
employees in the period) $ 21.6 $ 16.9 $ 3.9 $ 4.2
Interest cost on benefit
obligation 116.1 120.7 7.0 7.9
Expected return on fund
assets (149.6) (139.5) (0.2) (0.3)
Recognized net actuarial loss 17.8 1.9 1.3 0.9
Amortization of prior
service costs 3.3 5.7 (0.4) (0.4)
----------------------------------------
Net periodic benefit cost $ 9.2 $ 5.7 $ 11.6 $ 12.3
----------------------------------------
----------------------------------------
9 Variable interest entities
The Company leases equipment from certain trusts, which have been
determined to be variable interest entities financed by a combination
of debt and equity provided by unrelated third parties. The lease
agreements, which are classified as operating leases, have a fixed
price purchase option which create the Company's variable interest
and result in the trusts being considered variable interest entities.
These fixed price purchase options are set at the estimated fair
market value as determined at the inception of the lease and could
provide the Company with potential gains. These options are
considered variable interests, however, they are not expected to
provide a significant benefit to the Company.
The Company is responsible for maintaining and operating the leased
assets according to specific contractual obligations outlined in the
terms of the lease agreements and industry standards. The rigor of
the contractual terms of the lease agreements and industry standards
are such that the Company has limited discretion over the maintenance
activities associated with these assets. As such the Company
concluded these terms do not provide the Company with the power to
direct the activities of the variable interest entities in a way that
has a significant impact on the entities' economic performance.
The Company's financial exposure as a result of its involvement with
the variable interest entities is equal to the fixed lease payments
due to the trusts. In 2010 lease payments after tax will amount to
$9.3 million. Future minimum lease payments, before tax, of $246
million will be payable over the next 20 years (Note 10). The Company
does not guarantee the residual value of the assets to the lessor,
however, it must deliver to the lessor the assets in good operating
condition, subject to normal wear and tear, at the end of the lease
term.
As the Company's actions and decisions do not have the most
significant effect on the variable interest entities' performance,
and the Company's fixed purchase price option is not considered to be
potentially significant to the variable interest entities, the
Company is not considered to be the primary beneficiary, and does not
consolidate these variable interest entities. As the leases are
considered to be operating leases, the Company does not recognize any
balances in the Consolidated Balance Sheet in relation to the
variable interest entities.
10 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, 2010, 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, 2010, the Company had committed to total future capital
expenditures amounting to $195.4 million and operating expenditures
amounting to $1,722.1 million for the years 2010-2028.
Operating lease commitments
At March 31, 2010, minimum payments under operating leases were
estimated at $881.3 million in aggregate, with annual payments in
each of the next five years of: balance of 2010 - $105.4 million;
2011 - $127.8 million; 2012 - $117.3 million; 2013 - $103.3 million;
2014 - $77.2 million.
Environmental remediation accruals
Environmental remediation accruals cover site-specific remediation
programs. Environmental remediation accruals are measured on an
undiscounted basis and are recorded when the costs to remediate are
probable and reasonably estimable. The estimate of the probable costs
to be incurred in the remediation of properties contaminated by past
railway use reflects the nature of contamination at individual sites
according to typical activities and scale of operations conducted. CP
has developed remediation strategies for each property based on the
nature and extent of the contamination, as well as the location of
the property and surrounding areas that may be adversely affected by
the presence of contaminants, considering available technologies,
treatment and disposal facilities and the acceptability of site-
specific plans based on the local regulatory environment. Site-
specific plans range from containment and risk management of the
contaminants through to the removal and treatment of the contaminants
and affected soils and ground water. The details of the estimates
reflect the environmental liability at each property. Provisions for
environmental remediation costs are recorded in "Other long-term
liabilities", except for the current portion which is recorded in
"Accounts payable and accrued liabilities". Payments are expected to
be made over 10 years to 2020.
The accruals for environmental remediation represent CP's best
estimate of its probable future obligation and include 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, 2010 was $1.6 million (three months
ended March 31, 2009 - $1.0 million).
Guarantees
At March 31, 2010, the Company had residual value guarantees on
operating lease commitments of $163.5 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 March 31, 2010, these accruals amounted to $9.1 million.
11 Reconciliation of U.S. GAAP to Canadian GAAP
The unaudited consolidated financial statements of the Company
have been prepared in accordance with U.S. GAAP. The material
differences between U.S. GAAP and Canadian generally accepted
accounting principles ("Canadian GAAP") as they relate to the
Company are explained and quantified below, along with their
effect on the Company's Consolidated Statement of Income and
Consolidated Balance Sheet.
(a) Accounting for derivative instruments and hedging: The
measurement and recognition rules for derivative instruments and
hedging under Canadian GAAP, as described in Canadian Institute
of Chartered Accountants ("CICA") accounting standards Section
3855 "Financial Instruments, Recognition and Measurement",
Section 3862 "Financial Instruments - Disclosures", Section 3865
"Hedging", Section 1530 "Comprehensive Income" and Section 3251
"Equity", are largely harmonized with U.S. GAAP. However, under
Canadian GAAP, only the ineffective portion of a net investment
hedge that represents an over hedge is recognized in income,
whereas under U.S. GAAP, any ineffective portion is recognized in
income immediately.
(b) Pensions and post-retirement benefits: The Company is required to
recognize the over or under funded status of defined benefit
pension and other post-retirement benefit plans on the balance
sheet under U.S. GAAP. The over or under funded status is
measured as the difference between the fair value of the plan
assets and the benefit obligation, being the projected benefit
obligation for pension plans and the accumulated benefit
obligation for other post-retirement benefit plans. In addition,
any previously unrecognized actuarial gains and losses and prior
service costs and credits that arise during the period will be
recognized as a component of other comprehensive income ("OCI"),
net of tax. Under Canadian GAAP the over or under funded status
of defined benefit pension and post-retirement benefit plans is
not recognized in the balance sheet. Canadian GAAP recognizes an
asset for contributions made in excess of amounts recognized as
expense in the Consolidated Statement of Income and a liability
when contributions are less than amounts recognized as expense.
Prior service costs are amortized under Canadian GAAP and U.S.
GAAP. However, the period over which costs related to events
before 2000 are amortized differs between Canadian GAAP and U.S.
GAAP.
(c) Post-employment benefits: Post-employment benefits are covered by
the CICA Section 3461 "Employee Future Benefits". Consistent with
accounting for post-retirement benefits, the policy permits
amortization of actuarial gains and losses only if they fall
outside of the corridor. Under U.S. GAAP, such gains and losses
on post-employment benefits that do not vest or accumulate are
included immediately in income.
(d) Termination and severance benefits: Termination and severance
benefits are covered by the CICA Section 3461 "Employee Future
Benefits" and the CICA Emerging Issues Committee Abstract 134
"Accounting for Severance and Termination Benefits" ("EIC 134").
Upon transition to the CICA Section 3461 effective January 1,
2000, a net transitional asset was created and was being
amortized to income. During the first quarter of 2009 this
transitional asset was fully amortized. Under U.S. GAAP, the
expected benefits were not accrued and are expensed when paid.
(e) Stock-based compensation: U.S. GAAP requires the use of an
option-pricing model to fair value, at the grant date, share-
based awards issued to employees, including stock options, TSARs,
PSUs, RSUs, and DSUs. TSARs, PSUs, RSUs, and DSUs are
subsequently re-measured at fair value each reporting period.
Under Canadian GAAP, liability awards, such as TSARs, PSUs, RSUs
and DSUs, are accounted for using the intrinsic method. U.S. GAAP
also requires that CP accounts for forfeitures on an estimated
basis. Under Canadian GAAP, CP has elected to account for
forfeitures on an actual basis as they occur.
Under U.S. GAAP compensation expense must be recorded if the
intrinsic value of stock options is not exactly the same
immediately before and after an equity restructuring. As a result
of the Canadian Pacific Limited ("CPL") corporate reorganization
in 2001, CPL underwent an equity restructuring, which resulted in
replacement options in CP stock having a different intrinsic
value after the restructuring than prior to it. Canadian GAAP did
not require the revaluation of these options. The Company adopted
on a prospective basis effective January 2003 the CICA Section
3870 "Stock-based Compensation and Other Stock-based Payments",
which requires companies to account for stock options at their
fair value. Concurrently, the Company elected to also account for
stock options at their fair value under U.S. GAAP.
(f) Internal use software: Under U.S. GAAP certain costs, including
preliminary project phase costs, are expensed as incurred. These
costs are capitalized and depreciated under Canadian GAAP.
(g) Capitalization of interest: U.S. GAAP requires interest costs to
be capitalized for all qualifying capital programs. Under
Canadian GAAP capitalization of interest is a policy choice and
the Company expenses interest related to capital projects
undertaken during the year unless specific debt is attributed to
a capital program. Differences in GAAP result in additional
capitalization of interest under U.S. GAAP and subsequent related
depreciation.
(h) Joint venture: The CICA Section 3055 "Interest in Joint Ventures"
requires the proportionate consolidation method to be applied to
the recognition of interests in joint ventures in consolidated
financial statements. Until April 1, 2009, the Company accounted
for its joint-venture interest in the Detroit River Tunnel
Partnership ("DRTP") under Canadian GAAP using the proportionate
consolidation method. During the second quarter of 2009, the
Company completed a sale of a portion of its investment in the
DRTP to its existing partner, reducing the Company's ownership
from 50% to 16.5%. Effective April 1, 2009, the Company
discontinued proportionate consolidation and accounts for its
remaining investment in the DRTP under the equity method of
accounting. U.S. GAAP requires the equity method of accounting to
be applied to interests in joint ventures. This had no effect on
net income as it represents a classification difference within
the Consolidated Statement of Income and Consolidated Balance
Sheet.
(i) Long-term debt: Under Canadian GAAP, offsetting amounts with the
same party and with a legal right to offset are netted against
each other. U.S. GAAP does not allow netting of assets and
liabilities among three parties. In 2003, the Company and one of
its subsidiaries entered into a contract with a financial
institution resulting in a receivable amount and long-term debt
payable.
As well, transaction costs have been added to the fair value of
the "Long-term debt" under Canadian GAAP whereas under U.S. GAAP
such costs are recorded separately with "Other assets".
(j) Capital leases: Under U.S. GAAP, certain leases, which are
recorded as capital leases under Canadian GAAP, do not meet the
criteria for capital leases and are recorded as operating leases.
These relate to equipment leases, previously recorded as
operating leases under Canadian and U.S. GAAP, which were renewed
within the last 25 percent of the equipment's useful life.
(k) Investment tax credits: Under U.S. GAAP investment tax credits
are credited against income tax expense whereas under Canadian
GAAP these tax credits are offset against the related operating
expense. There is no impact to net income as a result of this
GAAP difference.
(l) Cash flows: There are no material differences between cash flows
under U.S. GAAP and Canadian GAAP.
Comparative income statement
Consolidated net income is reconciled from Canadian to U.S. GAAP in
the following manner.
(in millions of Canadian dollars,
except per share data)
(unaudited) Three months ended March 31
2010
Canadian U.S. GAAP U.S.
GAAP adjustments GAAP
Revenues
Freight (h) $1,138.2 $ - $1,138.2
Other (h) 28.6 - 28.6
-----------------------------------
1,166.8 - 1,166.8
Operating expenses
Compensation and benefits
(b, c, d, e, f) 345.0 8.5 353.5
Fuel 181.7 - 181.7
Materials (f) 62.0 1.9 63.9
Equipment rents (j) 48.7 0.3 49.0
Depreciation and amortization
(f, g, h, j, k) 124.3 0.7 125.0
Purchased services and other
(c, f, h, k) 193.3 (4.6) 188.7
-----------------------------------
955.0 6.8 961.8
Operating income 211.8 (6.8) 205.0
Less:
Other income and charges (a) (3.0) (1.9) (4.9)
Interest expense (g, j) 69.2 (2.5) 66.7
-----------------------------------
Income before income tax expense 145.6 (2.4) 143.2
Income tax expense
(recovery) (k)(2) 41.7 1.7 43.4
-----------------------------------
Net income $ 103.9 $ (4.1) $ 99.8
-----------------------------------
-----------------------------------
Basic earnings per share $ 0.62 $ (0.03) $ 0.59
Diluted earnings per share $ 0.61 $ (0.02) $ 0.59
(in millions of Canadian dollars,
except per share data)
(unaudited) Three months ended March 31
2009
Canadian U.S. GAAP U.S.
GAAP(1) adjustments GAAP
Revenues
Freight (h) $1,079.1 $ (3.1) $1,076.0
Other (h) 30.0 3.6 33.6
-----------------------------------
1,109.1 0.5 1,109.6
Operating expenses
Compensation and benefits
(b, c, d, e, f) 341.2 1.7 342.9
Fuel 171.0 - 171.0
Materials (f) 76.1 0.5 76.6
Equipment rents (j) 66.1 0.3 66.4
Depreciation and amortization
(f, g, h, j, k) 121.5 (1.8) 119.7
Purchased services and other
(c, f, h, k) 196.3 4.5 200.8
-----------------------------------
972.2 5.2 977.4
Operating income 136.9 (4.7) 132.2
Less:
Other income and charges (a) 7.7 0.8 8.5
Interest expense (g, j) 72.3 (0.7) 71.6
-----------------------------------
Income before income tax expense 56.9 (4.8) 52.1
Income tax expense
(recovery) (k)(2) (3.2) (2.0) (5.2)
-----------------------------------
Net income $ 60.1 $ (2.8) $ 57.3
-----------------------------------
-----------------------------------
Basic earnings per share $ 0.37 $ (0.01) $ 0.36
Diluted earnings per share $ 0.37 $ (0.01) $ 0.36
(1) Restated for the Company's change in accounting policies in
relation to the accounting for locomotive overhauls and
amortization of pension plan amendments for unionized employees,
discussed in Note 2 to the Company's 2009 annual consolidated
financial statements. In addition, certain revenue and operating
expense items have been reclassified in order to be consistent
with the U.S. GAAP presentation.
(2) Adjustment for income tax expense (recovery) includes the tax
effect of other U.S. to Canadian GAAP differences, in addition to
the impact of difference (k) Investment tax credits.
Consolidated balance sheet
The Consolidated Balance Sheet is reconciled from Canadian to U.S.
GAAP in the following manner:
March 31, 2010
(in millions of Canadian dollars) Canadian U.S. GAAP U.S.
(unaudited) GAAP adjustments GAAP
Assets
Current assets
Cash and cash equivalents $ 723.8 $ - $ 723.8
Accounts receivable, net (i) 488.6 217.2 705.8
Materials and supplies 122.7 - 122.7
Deferred income taxes 133.6 - 133.6
Other current assets 57.6 - 57.6
-----------------------------------
1,526.3 217.2 1,743.5
Investments 160.5 - 160.5
Net properties (e, f, g, j) 11,803.7 98.9 11,902.6
Goodwill and intangible assets 195.1 - 195.1
Other assets (b, i) 1,866.5 (1,693.9) 172.6
-----------------------------------
Total assets $15,552.1 $(1,377.8) $14,174.3
-----------------------------------
-----------------------------------
Liabilities and shareholders'
equity
Current liabilities
Accounts payable and accrued
liabilities (e) $ 883.9 $ 16.7 $ 900.6
Income and other taxes payable 40.3 - 40.3
Dividends payable 41.7 - 41.7
Long-term debt maturing within
one year (i, j) 395.6 216.3 611.9
-----------------------------------
1,361.5 233.0 1,594.5
Pension and other benefit
liabilities (b, c) - 1,417.7 1,417.7
Other long-term liabilities
(b, c, e) 786.5 (309.2) 477.3
Long-term debt (i, j) 4,074.2 (50.9) 4,023.3
Future/deferred income taxes
(b, c, e, f, g, j) 2,566.6 (697.6) 1,869.0
-----------------------------------
Total liabilities 8,788.8 593.0 9,381.8
Shareholders' equity
Share capital (e) 1,750.1 25.8 1,775.9
Contributed surplus/Additional
paid-in capital (e) 33.5 (4.0) 29.5
Accumulated other comprehensive
income (loss) (a, b) 41.0 (1,777.2) (1,736.2)
Retained income/earnings
(a, b, c, e, f, g, j) 4,938.7 (215.4) 4,723.3
-----------------------------------
6,763.3 (1,970.8) 4,792.5
-----------------------------------
Total liabilities and
shareholders' equity $15,552.1 $(1,377.8) $14,174.3
-----------------------------------
-----------------------------------
December 31, 2009
(in millions of Canadian dollars) Canadian U.S. GAAP U.S.
(unaudited) GAAP adjustments GAAP
Assets
Current assets
Cash and cash equivalents $ 679.1 $ - $ 679.1
Accounts receivable, net (i) 441.0 214.1 655.1
Materials and supplies 132.7 - 132.7
Deferred income taxes 128.1 - 128.1
Other current assets 46.5 - 46.5
-----------------------------------
1,427.4 214.1 1,641.5
Investments 156.7 - 156.7
Net properties (e, f, g, j) 11,967.8 99.7 12,067.5
Goodwill and intangible assets 202.3 - 202.3
Other assets (b, i) 1,777.2 (1,601.4) 175.8
-----------------------------------
Total assets $15,531.4 $(1,287.6) $14,243.8
-----------------------------------
-----------------------------------
Liabilities and shareholders'
equity
Current liabilities
Accounts payable and accrued
liabilities (e) $ 917.3 $ 9.8 $ 927.1
Income and other taxes payable 31.9 - 31.9
Dividends payable 41.7 - 41.7
Long-term debt maturing within
one year (i, j) 392.1 213.2 605.3
-----------------------------------
1,383.0 223.0 1,606.0
Pension and other benefit
liabilities (b, c) - 1,453.9 1,453.9
Other long-term liabilities
(b, c, e) 790.2 (310.3) 479.9
Long-term debt (i, j) 4,102.7 35.5 4,138.2
Future/deferred income taxes
(b, c, e, f, g, j) 2,549.5 (704.5) 1,845.0
-----------------------------------
Total liabilities 8,825.4 697.6 9,523.0
Shareholders' equity
Share capital (e) 1,746.4 24.7 1,771.1
Contributed surplus/Additional
paid-in capital (e) 33.5 (2.7) 30.8
Accumulated other comprehensive
income (loss) (a, b) 49.5 (1,795.8) (1,746.3)
Retained income/earnings
(a, b, c, e, f, g, j) 4,876.6 (211.4) 4,665.2
-----------------------------------
6,706.0 (1,985.2) 4,720.8
-----------------------------------
Total liabilities and
shareholders' equity $15,531.4 $(1,287.6) $14,243.8
-----------------------------------
-----------------------------------
Disclosures required by Canadian GAAP
Future accounting changes
-------------------------
U.S. GAAP/International Financial Reporting Standards ("IFRS")
On February 13, 2008, the Canadian Accounting Standards Board
("AcSB") confirmed that publicly accountable enterprises will be
required to adopt IFRS in place of Canadian GAAP for interim and
annual reporting purposes for fiscal years beginning on or after
January 1, 2011, unless, as permitted by Canadian securities
regulations, registrants were to adopt U.S. GAAP on or before this
date. Commencing on January 1, 2010, CP adopted U.S. GAAP for its
financial reporting, which is consistent with the reporting of other
North American Class I railways. As a result, CP will not be adopting
IFRS in 2011.
Business combinations, consolidated financial statements and non-
controlling interests
In January 2009, the CICA issued three new standards:
Business Combinations, Section 1582
This section which replaces the former Section 1581 "Business
Combinations" and provides the Canadian equivalent to IFRS 3
"Business Combinations" (January 2008). The new standard requires the
acquiring entity in a business combination to recognize most of the
assets acquired and liabilities assumed in the transaction at fair
value including contingent assets and liabilities; and to recognize
and measure the goodwill acquired in the business combination or a
gain from a bargain purchase. Acquisition-related costs are also to
be expensed.
Consolidated Financial Statements, Section 1601 and Non-controlling
Interests, Section 1602
These two sections replace Section 1600 "Consolidated Financial
Statements". Section 1601 "Consolidated Financial Statements" carries
forward guidance from Section 1600 "Consolidated Financial
Statements" with the exception of non-controlling interests which are
addressed in a separate section. Section 1602 "Non-controlling
Interests", requires the Company to report non-controlling interests
within equity, separately from the equity of the owners of the
parent, and transactions between an entity and non-controlling
interests as equity transactions.
All three standards are effective January 1, 2011 and therefore will
not impact the Company as it has adopted U.S. GAAP for financial
reporting.
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 thereof; 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 light
of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust its capital
structure, the Company may, among other things, adjust the amount of
dividends paid to shareholders, purchase shares for cancellation
pursuant to normal course issuer bids, issue new shares, issue new
debt, and/or issue new debt to replace existing debt with different
characteristics.
The Company monitors capital using a number of key financial metrics,
including:
- debt to total capitalization; and
- interest coverage ratio.
The calculations for the aforementioned key financial metrics are as
follows:
Debt to total capitalization
----------------------------
Debt is the sum of long-term debt, long-term debt maturing within one
year and short-term borrowing. This sum is divided by debt plus total
shareholders' equity as presented on our Consolidated Balance Sheet.
Interest coverage ratio
-----------------------
Interest coverage ratio is measured, on a twelve month rolling basis,
as adjusted EBIT divided by interest expense. Adjusted EBIT excludes
changes in the estimated fair value of the Company's investment in
long-term floating rate notes/ABCP, the gains on sales of partnership
interest and significant properties and the loss on termination of a
lease with a shortline railway as these are not in the normal course
of business and foreign exchange gains and losses on long-term debt,
which can be volatile and short term. The interest coverage ratio and
adjusted EBIT are non-GAAP measures and do not have standardized
meanings prescribed by GAAP and, therefore, are unlikely to be
comparable to similar measures of other companies.
The following table illustrates the financial metrics and their
corresponding guidelines currently in place:
---------------------------------------------------------------------
(in millions of Canadian March 31, March 31,
dollars, U.S. GAAP) Guidelines 2010 2009
---------------------------------------------------------------------
Long-term debt $ 4,023.3 $ 5,024.4
Long-term debt maturing
within one year 611.9 64.4
Short-term borrowing - 132.0
---------------------------------------------------------------------
Total debt $ 4,635.2 $ 5,220.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Shareholders' equity $ 4,792.5 $ 4,847.2
Total debt 4,635.2 5,220.8
---------------------------------------------------------------------
Total debt plus equity $ 9,427.7 $ 10,068.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating income $ 909.5 $ 970.8
Less:
Other income and charges (1.0) 38.8
Plus:
(Gain) loss in long-term
floating rate notes/ABCP (7.3) 28.1
Foreign exchange (gain)
loss on long-term debt (10.1) (7.2)
Equity income in DM&E - 39.9
Gain on sales of
significant properties (79.1) -
Loss on termination of lease
with shortline railway 54.5 -
---------------------------------------------------------------------
Adjusted EBIT(1)(2) $ 868.5 $ 992.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Total debt $ 4,635.2 $ 5,220.8
Total debt plus equity $ 9,427.7 $ 10,068.0
---------------------------------------------------------------------
Total debt to total No more
capitalization(1) than 50.0% 49.2% 51.9%
---------------------------------------------------------------------
Adjusted EBIT(1)(2) $ 868.5 $ 992.8
Interest expense(2) $ 262.7 $ 258.1
---------------------------------------------------------------------
No less
Interest coverage ratio(1)(2) than 4.0 3.3 3.8
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 amount is calculated on a twelve month rolling 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 management targets are monitored on a quarterly basis. The
interest coverage ratio has decreased during the twelve-month period
ended March 31, 2010 due to a reduction in year-over-year earnings.
The interest coverage ratio for the period is below the management
target provided in the above table, due to lower volumes as a result
of the global recession that occurred during the period.
The Company is subject to a financial covenant of funded debt to
total capitalization in the revolver loan agreement. Performance to
this financial covenant is well within permitted limits.
Summary of Rail Data
-----------------------
(Reconciliation of GAAP earnings to non-GAAP earnings on page 2)
----------------------------------------------------------------
First Quarter
-------------------------------------------
2010 2009 Fav/(Unfav) %
-------------------------------------------
Financial (millions, except
---------------------------
per share data)
---------------
Revenues
--------
Freight revenue $ 1,138.2 $ 1,076.0 $ 62.2 5.8
Other revenue 28.6 33.6 (5.0) (14.9)
--------------------------------
1,166.8 1,109.6 57.2 5.2
--------------------------------
Operating expenses
------------------
Compensation and benefits 353.5 342.9 (10.6) (3.1)
Fuel 181.7 171.0 (10.7) (6.3)
Materials 63.9 76.6 12.7 16.6
Equipment rents 49.0 66.4 17.4 26.2
Depreciation and
amortization 125.0 119.7 (5.3) (4.4)
Purchased services and other 188.7 200.8 12.1 6.0
--------------------------------
961.8 977.4 15.6 1.6
--------------------------------
Operating income 205.0 132.2 72.8 55.1
Less:
Other income and charges (4.9) 8.5 13.4 157.6
Interest expense 66.7 71.6 4.9 6.8
--------------------------------
Income before income tax
expense 143.2 52.1 91.1 174.9
Income tax expense
(recovery) 43.4 (5.2) (48.6) -
--------------------------------
Net income $ 99.8 $ 57.3 $ 42.5 74.2
--------------------------------
--------------------------------
Basic earnings per share $ 0.59 $ 0.36 $ 0.23 63.9
--------------------------------
--------------------------------
Diluted earnings per share $ 0.59 $ 0.36 $ 0.23 63.9
--------------------------------
--------------------------------
Summary of Rail Data (Page 2)
-----------------------------
Reconciliation of GAAP earnings to non-GAAP earnings
----------------------------------------------------
First Quarter
-------------------------------------------
2010 2009 Fav/(Unfav) %
-------------------------------------------
Financial (millions)
--------------------
Net income $ 99.8 $ 57.3 $ 42.5 74.2
Exclude:
Foreign exchange (gain)
------------------------
loss on long-term debt
-----------------------
(FX on LTD)
-----------
FX on LTD (4.1) 2.4 6.5 -
Income tax expense
(recovery) on FX on LTD(1) 7.2 (8.9) (16.1) -
--------------------------------
FX on LTD (net of tax) 3.1 (6.5) (9.6) -
Other specified items
---------------------
Gain in fair value of
long-term floating rate
notes (1.0) - 1.0 -
Income tax expense 0.1 - (0.1) -
--------------------------------
Gain in fair value of
long-term floating rate
notes (net of tax) (0.9) - 0.9 -
--------------------------------
Income before FX on LTD and
other specified items(2) $ 102.0 $ 50.8 $ 51.2 100.8
--------------------------------
--------------------------------
Earnings per share (EPS)
------------------------
Diluted EPS $ 0.59 $ 0.36 $ 0.23 63.9
Exclude (gain) loss:
Diluted EPS, related to
FX on LTD, net of tax(2) 0.02 (0.04) (0.06) -
Diluted EPS, related to
other specified items,
net of tax(2) (0.01) - 0.01 -
--------------------------------
Diluted EPS, before FX
on LTD and other
specified items(2) $ 0.60 $ 0.32 $ 0.28 87.5
--------------------------------
--------------------------------
Operating ratio (%)(3) 82.4 88.1 5.7 -
Shares Outstanding
------------------
Weighted average number
of shares outstanding
(millions) 168.5 160.9 7.6 4.7
Weighted average number
of diluted shares
outstanding (millions) 169.1 161.2 7.9 4.9
Foreign Exchange
----------------
Average foreign exchange
rate (US$/Canadian$) 0.96 0.81 (0.15) (18.5)
Average foreign exchange
rate (Canadian$/US$) 1.04 1.24 (0.20) (16.1)
(1) Income tax on FX on LTD is discussed in the MD&A in the "Other Income
Statement Items" section - "Income Taxes".
(2) 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.
(3) Operating ratio is the percentage derived by dividing operating
expenses by total revenues.
Summary of Rail Data (Page 3)
-----------------------------
First Quarter
-------------------------------------------
2010 2009 Fav/(Unfav) %
-------------------------------------------
Financial (millions, except
---------------------------
per share data)
---------------
Operating income $ 205.0 $ 132.2 $ 72.8 55.1
Other income and charges,
before FX on LTD and
other specified items(1) 0.2 6.1 5.9 96.7
Interest expense 66.7 71.6 4.9 6.8
Income tax expense,
before income tax on FX
on LTD and other
specified items(1) 36.1 3.7 (32.4) -
--------------------------------
Income before FX on LTD and
other specified items(1) $ 102.0 $ 50.8 $ 51.2 100.8
--------------------------------
--------------------------------
Operating ratio (%)(2) 82.4 88.1 5.7 -
Diluted EPS, before FX on LTD
and other specified items(1) $ 0.60 $ 0.32 $ 0.28 87.5
(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) Operating ratio is the percentage derived by dividing operating
expenses by total revenues.
Summary of Rail Data (Page 4)
-----------------------------
First Quarter
-------------------------------------------
2010 2009 Fav/(Unfav) %
-------------------------------------------
Commodity Data
--------------
Freight Revenues (millions)
- Grain $ 271.3 $ 287.7 $ (16.4) (5.7)
- Coal 110.5 116.5 (6.0) (5.2)
- Sulphur and fertilizers 117.8 76.2 41.6 54.6
- Forest products 43.2 45.4 (2.2) (4.8)
- Industrial and consumer
products 205.5 205.8 (0.3) (0.1)
- Automotive 77.6 51.9 25.7 49.5
- Intermodal 312.3 292.5 19.8 6.8
--------------------------------
Total Freight Revenues $ 1,138.2 $ 1,076.0 $ 62.2 5.8
--------------------------------
Millions of Revenue Ton-Miles
(RTM)
- Grain 8,636 8,528 108 1.3
- Coal 4,308 3,832 476 12.4
- Sulphur and fertilizers 4,392 2,180 2,212 101.5
- Forest products 1,378 1,064 314 29.5
- Industrial and consumer
products 4,887 4,350 537 12.3
- Automotive 545 363 182 50.1
- Intermodal 6,057 5,608 449 8.0
--------------------------------
Total RTMs 30,203 25,925 4,278 16.5
--------------------------------
Freight Revenue per RTM (cents)
- Grain 3.14 3.37 (0.23) (6.8)
- Coal 2.56 3.04 (0.48) (15.8)
- Sulphur and fertilizers 2.68 3.50 (0.82) (23.4)
- Forest products 3.13 4.27 (1.14) (26.7)
- Industrial and consumer
products 4.21 4.73 (0.52) (11.0)
- Automotive 14.24 14.30 (0.06) (0.4)
- Intermodal 5.16 5.22 (0.06) (1.1)
Total Freight Revenue per RTM 3.77 4.15 (0.38) (9.2)
Carloads (thousands)
- Grain 113.2 111.5 1.7 1.5
- Coal 76.0 70.8 5.2 7.3
- Sulphur and fertilizers 44.3 24.9 19.4 77.9
- Forest products 17.6 17.5 0.1 0.6
- Industrial and consumer
products 91.8 86.6 5.2 6.0
- Automotive 33.5 21.0 12.5 59.5
- Intermodal 248.6 244.0 4.6 1.9
--------------------------------
Total Carloads 625.0 576.3 48.7 8.5
--------------------------------
Freight Revenue per Carload
- Grain $ 2,397 $ 2,580 $ (183) (7.1)
- Coal 1,454 1,645 (191) (11.6)
- Sulphur and fertilizers 2,659 3,060 (401) (13.1)
- Forest products 2,455 2,594 (139) (5.4)
- Industrial and consumer
products 2,239 2,376 (137) (5.8)
- Automotive 2,316 2,471 (155) (6.3)
- Intermodal 1,256 1,199 57 4.8
Total Freight Revenue per
Carload $ 1,821 $ 1,867 $ (46) (2.5)
Summary of Rail Data (Page 5)
-----------------------------
First Quarter
-------------------------------------------
2010 2009(1) Fav/(Unfav) %
-------------------------------------------
Operations Performance
----------------------
Total operating expenses
per GTM (cents) 1.64 1.92 0.28 14.6
Freight gross ton-miles
(GTM) (millions) 58,524 50,933 7,591 14.9
Train miles (000) 9,557 8,907 650 7.3
Average number of active
employees - Total 14,431 15,051 620 4.1
Average number of active
employees - Expense 13,824 14,384 560 3.9
Number of employees at end
of the period - Total 14,530 14,970 440 2.9
Number of employees at end
of the period - Expense 13,840 14,125 285 2.0
U.S. gallons of locomotive
fuel consumed per 1,000 GTMs
- freight & yard 1.23 1.34 0.11 8.2
U.S. gallons of locomotive
fuel consumed - total
(millions)(2) 71.5 67.7 (3.8) (5.6)
Average fuel price (U.S.
dollars per U.S. gallon) 2.44 2.04 (0.40) (19.6)
Fluidity Data (excluding DM&E)
------------------------------
Average terminal dwell - AAR
definition (hours) 24.1 23.2 (0.9) (3.9)
Average train speed - AAR
definition (mph) 24.2 25.0 (0.8) (3.2)
Car miles per car day 144.2 140.0 4.2 3.0
Average daily active cars
on-line (000) 52.5 48.7 (3.8) (7.8)
Average daily active road
locomotives on-line 860 833 (27) (3.2)
Safety
------
FRA personal injuries per
200,000 employee-hours 2.07 1.80 (0.27) (15.0)
FRA train accidents per
million train-miles 1.36 1.97 0.61 31.0
(1) Certain prior period figures have been revised to conform with
current presentation or have been updated to reflect new information.
(2) 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
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