e6vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of July, 2006
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(translation of each Registrants name into English)
Suite 500, Gulf Canada Square, 401 9th Avenue, S.W., Calgary, Alberta, Canada, T2P 4Z4
(address of principal executive offices)
Indicate by check mark whether the registrants file or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F o Form 40-F x
Indicate by check mark whether the registrants by furnishing the
information contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934.
Yes o No x
If Yes is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-
The interim financial statements and Managements Discussion & Analysis included in this
Report furnished on Form 6-K shall be incorporated by reference into, or as an exhibit to, as
applicable, each of the following Registration Statements under the Securities Act of 1933 of the
registrant: Form S-8 No. 333-127943 (Canadian Pacific Railway Limited), and Form S-8 No. 333-13962
(Canadian Pacific Railway Limited).
TABLE OF CONTENTS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CANADIAN PACIFIC RAILWAY LIMITED |
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CANADIAN PACIFIC RAILWAY COMPANY |
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(Registrants) |
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Date: July 25, 2006
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Signed:
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Donald F. Barnhardt |
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By:
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Name:
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Donald F. Barnhardt |
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Title:
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Corporate Secretary |
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Canadian Pacific Railway
Managements Discussion and Analysis
Second Quarter Report 2006
Release Date: July 25, 2006
Release Time: 0530 MDT
CANADIAN PACIFIC RAILWAY PRODUCES SOLID SECOND QUARTER RESULTS
CALGARY Canadian Pacific Railway (TSX/NYSE: CP) announced that its second quarter net income
was $378 million, an increase of $254 million over the same period in 2005. This increase included
a $176-million reduction in future income tax expense and a favourable swing in foreign exchange on
long-term debt of $58 million.
CPR faced down a tough second quarter where we saw a reduction of more than $70 million in coal
and potash revenues associated with world markets and still produced solid earnings growth, said
Fred Green, CPR President and CEO. We responded quickly to the drop in volumes with focused
initiatives which produced improved yield and reduced expenses. With the success of our balanced
scheduled railroad and our recent network capacity investments, we are well positioned for the
second half of the year when bulk volumes are expected to increase.
SUMMARY OF SECOND-QUARTER 2006 COMPARED WITH 2005
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Income before foreign exchange gains and losses on long-term debt and other specified
items improved 14 per cent to $160 million |
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Diluted earnings per share before foreign exchange gains and losses on long-term debt
and other specified items improved 15 per cent to $1.00 |
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Operating ratio improved 40 basis points to 75.1 per cent, a Q2 best for CPR |
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Operating expenses, excluding the impact of higher fuel prices, were down more than 2
per cent. |
In the second quarter, total revenues improved by 2 per cent with growth in grain, intermodal,
automotive, and industrial and consumer products offsetting declines in two key business lines,
coal and sulphur and fertilizers where revenues decreased by 28 and 10 per cent respectively.
Other revenue improved by $9 million over the same period last year and included the sale of the
Latta subdivision, which was a part of planned land sales for 2006.
Operating expenses increased 2 per cent, most of which was attributable to higher fuel prices. The
increase in the cost of fuel was largely recovered through a fuel surcharge program. These
increases were partially offset by improvements in operations including the implementation of the
balanced scheduled railroad, reductions in management staff and co-production initiatives.
SUMMARY OF FIRST HALF 2006 COMPARED WITH 2005
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Net income was $489 million, an increase of $285 million over 2005 |
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Income before foreign exchange gains and losses on long-term debt and other specified
items was up 24 per cent to $278 million |
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Diluted earnings per share, excluding foreign exchange gains and losses on long-term
debt and other specified items, increased 24 per cent to $1.74 |
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Operating ratio improved 160 basis points to 77.2 per cent |
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Revenues were up 6 per cent which included double-digit increases in grain, industrial
and consumer products, automotive, and intermodal business lines |
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Operating expenses, excluding the impact of higher fuel prices, decreased slightly in
2006 over 2005. |
2006 OUTLOOK
CPRs outlook for diluted earnings per share in 2006 remains unchanged at a range of $3.60 to
$3.85, excluding foreign exchange gains and losses on long-term debt and other specified items,
specifically the $176 million income tax benefit due to the rate reduction in the second quarter.
The outlook assumes oil prices averaging US$70 per barrel and an average exchange rate of $1.13 per
U.S. dollar (US$0.89). This is a revision to our previous assumptions which were oil prices
averaging US$66 per barrel and an average exchange rate of $1.14 per U.S. dollar (US$0.88). CPR
expects to grow revenue in the range of 5 per cent to 8 per cent and expenses are expected to
increase by 3 per cent to 6 per cent in 2006. Capital investment is anticipated to be between $810
million and $825 million in 2006 and free cash is expected to exceed $200 million for the year.
FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
CPR had a foreign exchange gain on long-term debt of $53 million ($41 million after tax) in the
second quarter of 2006, compared with a loss of $17 million ($17 million after tax) in the same
period of 2005. The second quarter of 2006 included a future income tax benefit of $176 million as
a result of a decrease in Canadian federal and provincial income tax rates. There were no other
specified items in the second quarter of 2005.
In the first half of 2006, CPR had a foreign exchange gain of $46 million ($34 million after tax),
compared with a loss of $20 million ($21 million after tax) in the first half of 2005. Other than
the future income tax benefit mentioned above, there were no additional other specified items in
the first half of 2006, and there were none in the same period of 2005.
Presentation of non-GAAP earnings
CPR presents non-GAAP earnings in this news release to provide a basis for evaluating underlying
earnings trends in our business that can be compared with prior periods results of operations.
These non-GAAP earnings exclude foreign currency translation effects on long-term debt, which can
be volatile and short term, and other specified items, which are not among CPRs normal ongoing
revenues and operating expenses. The impact of volatile short-term rate fluctuations on
foreign-denominated debt is only realized when long-term debt matures or is settled. A
reconciliation of income, excluding foreign exchange gains and losses on long-term debt and other
specified items, to net income as presented in the financial statements is detailed in the attached
Summary of Rail Data. In the second quarter and first half of 2006, there were foreign exchange
gains on long-term debt and one other specified item.
Earnings that exclude foreign exchange currency translation effects on long-term debt and other
specified items, as described in this news release, have no standardized meanings and are not
defined by Canadian generally accepted accounting principles and, therefore, are unlikely to be
comparable to similar measures presented by other companies.
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.
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By its nature, CPRs forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: changes in business strategies;
general global economic and business conditions; risks in agricultural production such as weather
conditions and insect populations; fluctuations in the value of the Canadian dollar relative to the
U.S. dollar; 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;
changes in taxes and tax rates; potential increases in maintenance and operating costs;
uncertainties of litigation; labour disputes; timing of completion of capital and maintenance
projects; interest rate fluctuations; effects of changes in market conditions on the financial
position of pension plans; and various events that could disrupt operations, including severe
weather conditions, security threats and governmental response to them, and technological changes.
There are factors that could cause actual results to differ from those described in the
forward-looking statements contained in this news release. These more specific factors are
identified and discussed in the Outlook section and elsewhere in this news release with the
particular forward-looking statement in question.
CPR undertakes no obligation to update publicly or otherwise revise any forward-looking
information, whether as a result of new information, future events or otherwise.
Canadian Pacific Railway is a transcontinental carrier operating in Canada and the U.S. Its
13,500-mile rail network serves the principal centres of Canada, from Montreal to Vancouver, and
the U.S. Northeast and Midwest regions. CPR feeds directly into Americas heartland from the East
and West coasts. Alliances with other carriers extend its market reach throughout the U.S. and
into Mexico. Canadian Pacific Logistics Solutions provides logistics and supply chain expertise
worldwide. Canadian Pacific Railway is marking its 125th anniversary in 2006.
For more information, visit CPRs website at www.cpr.ca.
end
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Contacts: |
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Media
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Investment Community |
Leslie Pidcock
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Paul Bell, Vice-President Investor Relations |
Tel.: (403) 319-6878
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Tel.: (403) 319-3591 |
e-mail: leslie_pidcock@cpr.ca
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e-mail: investor@cpr.ca |
3
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share data)
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For the three months |
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ended June 30 |
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2006 |
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2005 |
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(unaudited) |
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Revenues |
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Freight |
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$ |
1,086.4 |
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$ |
1,070.2 |
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Other |
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44.6 |
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35.7 |
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1,131.0 |
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1,105.9 |
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Operating expenses |
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Compensation and benefits |
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321.5 |
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322.2 |
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Fuel |
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160.1 |
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145.2 |
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Materials |
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54.5 |
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46.0 |
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Equipment rents |
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44.4 |
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54.7 |
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Depreciation and amortization |
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117.8 |
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110.7 |
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Purchased services and other |
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150.8 |
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156.0 |
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849.1 |
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834.8 |
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Operating income |
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281.9 |
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271.1 |
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Other charges (Note 3) |
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7.7 |
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5.7 |
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Foreign exchange (gains) losses on long-term debt |
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(52.7 |
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17.0 |
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Interest expense (Note 4) |
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48.6 |
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53.2 |
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Income tax (benefit) expense (Note 12) |
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(99.2 |
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72.0 |
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Net income |
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$ |
377.5 |
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$ |
123.2 |
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Basic earnings per share (Note 5) |
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$ |
2.38 |
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$ |
0.78 |
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Diluted earnings per share (Note 5) |
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$ |
2.36 |
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$ |
0.77 |
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See notes to interim consolidated financial statements.
4
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share data)
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For the six months |
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ended June 30 |
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2006 |
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2005 |
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(unaudited) |
Revenues |
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Freight |
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$ |
2,153.6 |
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$ |
2,062.8 |
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Other |
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87.9 |
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57.2 |
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2,241.5 |
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2,120.0 |
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Operating expenses |
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Compensation and benefits |
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671.4 |
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653.3 |
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Fuel |
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318.0 |
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279.7 |
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Materials |
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112.1 |
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104.8 |
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Equipment rents |
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89.0 |
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103.2 |
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Depreciation and amortization |
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232.6 |
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220.2 |
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Purchased services and other |
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307.4 |
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309.0 |
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1,730.5 |
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1,670.2 |
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Operating income |
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511.0 |
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449.8 |
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Other charges (Note 3) |
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14.5 |
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4.7 |
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Foreign exchange (gains) losses on long-term debt |
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(46.3 |
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20.1 |
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Interest expense (Note 4) |
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95.9 |
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104.8 |
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Income tax (benefit) expense (Note 12) |
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(41.6 |
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116.3 |
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Net income |
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$ |
488.5 |
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$ |
203.9 |
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Basic earnings per share (Note 5) |
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$ |
3.08 |
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$ |
1.28 |
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Diluted earnings per share (Note 5) |
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$ |
3.04 |
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$ |
1.27 |
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See notes to interim consolidated financial statements.
5
CONSOLIDATED BALANCE SHEET
(in millions)
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June 30 |
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December 31 |
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2006 |
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2005 |
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(unaudited) |
Assets |
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Current assets |
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Cash and short-term investments |
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$ |
44.3 |
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$ |
121.8 |
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Accounts receivable and other current assets |
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516.8 |
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524.0 |
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Materials and supplies |
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182.0 |
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140.1 |
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Future income taxes |
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105.2 |
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108.0 |
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848.3 |
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893.9 |
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Investments |
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68.7 |
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67.3 |
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Net properties |
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8,839.4 |
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8,790.9 |
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Other assets and deferred charges |
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1,190.3 |
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1,139.0 |
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Total assets |
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$ |
10,946.7 |
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$ |
10,891.1 |
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Liabilities and shareholders equity |
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Current liabilities |
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Accounts payable and accrued liabilities |
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$ |
936.5 |
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$ |
1,032.8 |
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Income and other taxes payable |
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42.0 |
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30.2 |
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Dividends payable |
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29.6 |
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23.7 |
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Long-term debt maturing within one year |
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165.6 |
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30.0 |
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1,173.7 |
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1,116.7 |
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Deferred liabilities |
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724.0 |
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743.5 |
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Long-term debt |
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2,732.5 |
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2,970.8 |
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Future income taxes |
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1,603.5 |
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1,674.4 |
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Shareholders equity |
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Share capital (Note 7) |
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1,174.0 |
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1,141.5 |
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Contributed surplus (Note 7) |
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110.5 |
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241.6 |
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Foreign currency translation adjustments |
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64.4 |
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67.5 |
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Retained income |
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3,364.1 |
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2,935.1 |
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4,713.0 |
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4,385.7 |
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Total liabilities and shareholders equity |
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$ |
10,946.7 |
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$ |
10,891.1 |
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Commitments and contingencies (Note 11).
See notes to interim consolidated financial statements.
6
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions)
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For the three months |
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ended June 30 |
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2006 |
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2005 |
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(unaudited) |
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Operating activities |
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Net income |
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$ |
377.5 |
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$ |
123.2 |
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Add (deduct) items not affecting cash: |
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Depreciation and amortization |
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117.8 |
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110.7 |
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Future income taxes |
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(114.7 |
) |
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68.8 |
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Foreign exchange (gains) losses on long-term debt |
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(52.7 |
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17.0 |
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Amortization of deferred charges |
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4.3 |
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5.0 |
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Restructuring payments |
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(22.8 |
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(13.3 |
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Other operating activities, net |
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(1.0 |
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(10.2 |
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Change in non-cash working capital balances related
to operations |
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(26.0 |
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48.1 |
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Cash provided by operating activities |
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282.4 |
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349.3 |
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Investing activities |
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Additions to properties |
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(177.3 |
) |
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(209.3 |
) |
(Additions) reductions to investments
and other assets (Note 13) |
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(65.3 |
) |
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10.6 |
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Net proceeds from disposal of
transportation properties |
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77.6 |
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3.8 |
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Cash used in investing activities |
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(165.0 |
) |
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(194.9 |
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Financing activities |
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Dividends paid |
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(29.8 |
) |
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(21.0 |
) |
Issuance of CPR Common Shares |
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10.7 |
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1.6 |
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Purchase of CPR Common Shares |
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(98.0 |
) |
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(12.6 |
) |
Net decrease in short-term borrowing |
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(8.6 |
) |
Repayment of long-term debt |
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(3.5 |
) |
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(256.6 |
) |
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|
|
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|
|
|
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Cash used in financing activities |
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|
(120.6 |
) |
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|
(297.2 |
) |
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Cash position |
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Decrease in net cash |
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(3.2 |
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(142.8 |
) |
Net cash at beginning of period |
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|
47.5 |
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|
274.5 |
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Net cash at end of period |
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$ |
44.3 |
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$ |
131.7 |
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Net cash is defined as: |
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Cash and short-term investments |
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$ |
44.3 |
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$ |
131.7 |
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|
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|
See notes to interim consolidated financial statements.
7
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions)
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For the six months |
|
|
|
ended June 30 |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(unaudited) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
488.5 |
|
|
$ |
203.9 |
|
Add (deduct) items not affecting cash: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
232.6 |
|
|
|
220.2 |
|
Future income taxes |
|
|
(70.4 |
) |
|
|
108.9 |
|
Foreign exchange (gains) losses on long-term debt |
|
|
(46.3 |
) |
|
|
20.1 |
|
Amortization of deferred charges |
|
|
8.6 |
|
|
|
10.0 |
|
Restructuring payments |
|
|
(50.6 |
) |
|
|
(26.3 |
) |
Other operating activities, net |
|
|
0.8 |
|
|
|
(21.1 |
) |
Change in non-cash working capital balances related
to operations |
|
|
(106.5 |
) |
|
|
(78.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
456.7 |
|
|
|
437.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Additions to properties |
|
|
(369.0 |
) |
|
|
(352.7 |
) |
(Additions) reductions to investments
and other assets (Note 13) |
|
|
(85.0 |
) |
|
|
1.4 |
|
Net proceeds from disposal of
transportation properties |
|
|
81.9 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(372.1 |
) |
|
|
(345.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(53.5 |
) |
|
|
(42.0 |
) |
Issuance of CPR Common Shares |
|
|
49.2 |
|
|
|
5.7 |
|
Purchase of CPR Common Shares |
|
|
(143.6 |
) |
|
|
(12.6 |
) |
Repayment of long-term debt |
|
|
(14.2 |
) |
|
|
(264.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(162.1 |
) |
|
|
(313.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash position |
|
|
|
|
|
|
|
|
Decrease in net cash |
|
|
(77.5 |
) |
|
|
(221.3 |
) |
Net cash at beginning of period |
|
|
121.8 |
|
|
|
353.0 |
|
|
|
|
|
|
|
Net cash at end of period |
|
$ |
44.3 |
|
|
$ |
131.7 |
|
|
|
|
|
|
|
|
Net cash is defined as: |
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
44.3 |
|
|
$ |
131.7 |
|
|
|
|
|
|
|
See notes to interim consolidated financial statements.
8
STATEMENT OF CONSOLIDATED RETAINED INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
ended June 30 |
|
|
2006 |
|
2005 |
|
|
(unaudited) |
Balance, January 1 |
|
$ |
2,935.1 |
|
|
$ |
2,484.4 |
|
|
|
|
|
|
|
|
|
|
Net income for the period |
|
|
488.5 |
|
|
|
203.9 |
|
Dividends |
|
|
(59.5 |
) |
|
|
(44.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30 |
|
$ |
3,364.1 |
|
|
$ |
2,643.5 |
|
|
|
|
See notes to interim consolidated financial statements.
9
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
1 |
|
Basis of presentation |
|
|
|
These unaudited interim consolidated financial statements and notes have been prepared
using accounting policies that are consistent with the policies used in preparing Canadian
Pacific Railway Limiteds (CPR, the Company or Canadian Pacific Railway) 2005 annual
consolidated financial statements. They do not include all disclosures required under
Generally Accepted Accounting Principles for annual financial statements and should be read
in conjunction with the annual consolidated financial statements. |
|
2 |
|
New accounting policy |
|
|
|
Effective January 1, 2006, the Company adopted the CICA Accounting Standard Section 3831
Non-Monetary Transactions. This standard is applied prospectively to non-monetary
transactions occurring on or after that date. The standard requires that assets or
liabilities exchanged or transferred in a non-monetary transaction that has commercial
substance be valued at fair value with any gain or loss recorded in income. Commercial
substance exists when, as a result of the transaction, there is a significant change to
future cash flows of the item transferred or the company as a whole. Transactions that
lack commercial substance or for which the fair value of the exchanged assets cannot be
reliably measured will continue to be accounted for at carrying value. There was no impact
to CPR on adoption of this new standard as it is applied prospectively. |
|
3 |
|
Other charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
|
|
ended June 30 |
|
ended June 30 |
(in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
Amortization of discount on
accruals recorded at
present value |
|
$ |
2.7 |
|
|
$ |
4.2 |
|
|
$ |
5.2 |
|
|
$ |
8.4 |
|
Other exchange losses (gains) |
|
|
3.4 |
|
|
|
(1.3 |
) |
|
|
3.5 |
|
|
|
(3.3 |
) |
Loss on sale of accounts
receivable |
|
|
1.2 |
|
|
|
0.9 |
|
|
|
2.3 |
|
|
|
1.8 |
|
Gains on non-hedging
derivative instruments |
|
|
(0.9 |
) |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
(6.6 |
) |
Other |
|
|
1.3 |
|
|
|
2.3 |
|
|
|
3.6 |
|
|
|
4.4 |
|
|
|
|
|
|
Total other charges |
|
$ |
7.7 |
|
|
$ |
5.7 |
|
|
$ |
14.5 |
|
|
$ |
4.7 |
|
|
|
|
|
|
10
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
|
|
ended June 30 |
|
ended June 30 |
(in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
Interest expense |
|
$ |
50.1 |
|
|
$ |
55.8 |
|
|
$ |
99.1 |
|
|
$ |
110.4 |
|
Interest income |
|
|
(1.5 |
) |
|
|
(2.6 |
) |
|
|
(3.2 |
) |
|
|
(5.6 |
) |
|
|
|
|
|
Total interest expense |
|
$ |
48.6 |
|
|
$ |
53.2 |
|
|
$ |
95.9 |
|
|
$ |
104.8 |
|
|
|
|
|
|
5 |
|
Earnings per share |
|
|
|
At June 30, 2006, the number of shares outstanding was 157.2 million. |
|
|
|
Basic earnings per share have been calculated using net income for the period divided by
the weighted average number of CPR shares outstanding during the period. |
|
|
|
Diluted earnings per share have been calculated using the treasury stock method, which
gives effect to the dilutive value of outstanding options. |
|
|
|
The number of shares used in earnings per share calculations is reconciled as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
|
|
ended June 30 |
|
ended June 30 |
(in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
Weighted average shares
outstanding |
|
|
158.3 |
|
|
|
158.9 |
|
|
|
158.4 |
|
|
|
158.8 |
|
Dilutive effect of stock options |
|
|
2.0 |
|
|
|
1.7 |
|
|
|
2.0 |
|
|
|
1.6 |
|
|
|
|
|
|
|
Weighted average diluted
shares outstanding |
|
|
160.3 |
|
|
|
160.6 |
|
|
|
160.4 |
|
|
|
160.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
$2.38 |
|
|
|
$0.78 |
|
|
|
$3.08 |
|
|
|
$1.28 |
|
Diluted earnings per share |
|
|
$2.36 |
|
|
|
$0.77 |
|
|
|
$3.04 |
|
|
|
$1.27 |
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2006, 308,850 options (quarter ended June 30, 2005 no
options) were excluded from the computation of diluted earnings per share because their
effects were not dilutive. For the six months ended June 30, 2006, 305,742 options (six
months ended June 30, 2005 no options) were excluded from the computation of diluted
earnings per share because their effects
were not dilutive. Under the normal course issuer bid, 1.8 million shares were repurchased
during the second quarter of 2006 (2005 0.4 million shares), and 2.7 million shares were
repurchased during the six months ended June 30, 2006 (2005 0.4 million shares). |
11
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
6 |
|
Restructuring and environmental remediation |
|
|
|
At June 30, 2006, the provision for restructuring and environmental remediation was $345.8
million (December 31, 2005 $398.8 million). This provision primarily includes labour
liabilities for restructuring plans. Payments are expected to continue in diminishing
amounts until 2025. The environmental remediation liability includes the cost of a
multi-year soil remediation program. |
|
|
|
Set out below is a reconciliation of CPRs liabilities associated with restructuring and
environmental remediation programs: |
|
|
|
Three months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
April 1 |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2006 |
|
|
Accrued |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2006 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
240.5 |
|
|
|
(8.6 |
) |
|
|
(16.9 |
) |
|
|
2.6 |
|
|
|
(1.8 |
) |
|
$ |
215.8 |
|
Other non-labour
liabilities for
exit plans |
|
|
4.7 |
|
|
|
0.5 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
1.8 |
|
|
|
|
Total restructuring
liability |
|
|
245.2 |
|
|
|
(8.1 |
) |
|
|
(20.1 |
) |
|
|
2.6 |
|
|
|
(2.0 |
) |
|
|
217.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
remediation program |
|
|
128.9 |
|
|
|
5.3 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
(3.3 |
) |
|
|
128.2 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
374.1 |
|
|
|
(2.8 |
) |
|
|
(22.8 |
) |
|
|
2.6 |
|
|
|
(5.3 |
) |
|
$ |
345.8 |
|
|
|
|
Three months ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
April 1 |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2005 |
|
|
Accrued |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2005 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
261.2 |
|
|
|
(1.8 |
) |
|
|
(11.1 |
) |
|
|
3.2 |
|
|
|
0.5 |
|
|
$ |
252.0 |
|
Other non-labour
liabilities for
exit plans |
|
|
6.0 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
6.1 |
|
|
|
|
Total restructuring
liability |
|
|
267.2 |
|
|
|
(1.8 |
) |
|
|
(11.2 |
) |
|
|
3.3 |
|
|
|
0.6 |
|
|
|
258.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
remediation program |
|
|
172.4 |
|
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
1.5 |
|
|
|
171.8 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
439.6 |
|
|
|
(1.8 |
) |
|
|
(13.3 |
) |
|
|
3.3 |
|
|
|
2.1 |
|
|
$ |
429.9 |
|
|
|
|
12
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
6 |
|
Restructuring and environmental remediation (continued) |
|
|
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
Jan. 1 |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2006 |
|
|
Accrued |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2006 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
263.6 |
|
|
|
(9.7 |
) |
|
|
(41.7 |
) |
|
|
5.2 |
|
|
|
(1.6 |
) |
|
$ |
215.8 |
|
Other non-labour
liabilities for
exit plans |
|
|
5.8 |
|
|
|
0.5 |
|
|
|
(4.3 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
1.8 |
|
|
|
|
Total restructuring
liability |
|
|
269.4 |
|
|
|
(9.2 |
) |
|
|
(46.0 |
) |
|
|
5.2 |
|
|
|
(1.8 |
) |
|
|
217.6 |
|
|
|
|
Environmental
remediation program |
|
|
129.4 |
|
|
|
6.4 |
|
|
|
(4.6 |
) |
|
|
|
|
|
|
(3.0 |
) |
|
|
128.2 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
398.8 |
|
|
|
(2.8 |
) |
|
|
(50.6 |
) |
|
|
5.2 |
|
|
|
(4.8 |
) |
|
$ |
345.8 |
|
|
|
|
Six months ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance |
|
|
|
Jan. 1 |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Exchange |
|
|
June 30 |
|
(in millions) |
|
2005 |
|
|
Accrued |
|
|
Payments |
|
|
of Discount |
|
|
Impact |
|
|
2005 |
|
|
|
|
Labour
liability for
terminations and
severances |
|
$ |
269.7 |
|
|
|
(2.0 |
) |
|
|
(22.9 |
) |
|
|
6.3 |
|
|
|
0.9 |
|
|
$ |
252.0 |
|
Other non-labour
liabilities for
exit plans |
|
|
6.1 |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
6.1 |
|
|
|
|
Total restructuring
liability |
|
|
275.8 |
|
|
|
(2.1 |
) |
|
|
(23.0 |
) |
|
|
6.4 |
|
|
|
1.0 |
|
|
|
258.1 |
|
|
|
|
Environmental
remediation program |
|
|
172.9 |
|
|
|
|
|
|
|
(3.3 |
) |
|
|
|
|
|
|
2.2 |
|
|
|
171.8 |
|
|
|
|
Total restructuring
and environmental
remediation
liability |
|
$ |
448.7 |
|
|
|
(2.1 |
) |
|
|
(26.3 |
) |
|
|
6.4 |
|
|
|
3.2 |
|
|
$ |
429.9 |
|
|
|
|
Amortization of Discount is charged to income as Other Charges, Compensation and
Benefits and Purchased Services and Other. New accruals and adjustments to previous
accruals are reflected in Compensation and Benefits and Purchased Services and Other.
13
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
7 |
|
Shareholders equity |
|
|
|
An analysis of Common Share balances is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30 |
|
|
2006 |
|
2005 |
(in millions) |
|
Number |
|
Amount |
|
Number |
|
Amount |
|
|
|
Share capital, April 1 |
|
|
158.6 |
|
|
$ |
1,175.1 |
|
|
|
158.9 |
|
|
$ |
1,124.7 |
|
Shares issued under
stock option
plans |
|
|
0.4 |
|
|
|
12.6 |
|
|
|
0.1 |
|
|
|
2.0 |
|
Shares repurchased |
|
|
(1.8 |
) |
|
|
(13.7 |
) |
|
|
(0.4 |
) |
|
|
(3.1 |
) |
|
|
|
Share capital, June 30 |
|
|
157.2 |
|
|
$ |
1,174.0 |
|
|
|
158.6 |
|
|
$ |
1,123.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30 |
|
|
2006 |
|
2005 |
(in millions) |
|
Number |
|
Amount |
|
Number |
|
Amount |
|
|
|
Share capital, January 1 |
|
|
158.2 |
|
|
$ |
1,141.5 |
|
|
|
158.8 |
|
|
$ |
1,120.6 |
|
Shares issued under
stock option plans |
|
|
1.7 |
|
|
|
52.7 |
|
|
|
0.2 |
|
|
|
6.1 |
|
Shares repurchased |
|
|
(2.7 |
) |
|
|
(20.2 |
) |
|
|
(0.4 |
) |
|
|
(3.1 |
) |
|
|
|
Share
capital, June 30 |
|
|
157.2 |
|
|
$ |
1,174.0 |
|
|
|
158.6 |
|
|
$ |
1,123.6 |
|
|
|
|
14
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
7 |
|
Shareholders equity (continued) |
|
|
|
An analysis of contributed surplus balances is as follows: |
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
ended June 30 |
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
Contributed surplus, April 1 |
|
$ |
198.8 |
|
|
$ |
302.7 |
|
Stock compensation related to shares issued
under stock option plans |
|
|
2.2 |
|
|
|
2.0 |
|
Shares repurchased |
|
|
(90.5 |
) |
|
|
(15.8 |
) |
|
|
|
Contributed surplus, June 30 |
|
$ |
110.5 |
|
|
$ |
288.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
ended June 30 |
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
Contributed surplus, January 1 |
|
$ |
241.6 |
|
|
$ |
300.4 |
|
Stock compensation related to shares issued
under stock option plans |
|
|
4.4 |
|
|
|
4.3 |
|
Shares repurchased |
|
|
(135.5 |
) |
|
|
(15.8 |
) |
|
|
|
Contributed surplus, June 30 |
|
$ |
110.5 |
|
|
$ |
288.9 |
|
|
|
|
|
|
In June 2006, the Company completed the acquisition of Common Shares under the previous
normal course issuer bid and filed a new normal course issuer bid to purchase, for
cancellation, up to 3.9 million of its outstanding Common Shares. Under the new filing,
share purchases may be made during the 12-month period that began June 6, 2006, and ends
June 5, 2007. The purchases are made at the market price on the day of purchase, with
consideration allocated to share capital up to the average carrying amount of the shares,
and any excess allocated to contributed surplus. When shares are repurchased, it takes
three days before the transaction is settled and the shares are cancelled. The cost of
shares purchased in a given month and settled in the following month is accrued in the month
of purchase. During the second quarter of 2006, 1.8 million shares were repurchased at an
average price of $56.62 (2005 0.4 million shares were repurchased at an average price of
$43.58) and for the six months ended June 30, 2006, 2.7 million shares were repurchased at
an average price of $57.01 (2005, 0.4 million shares were repurchased at an average price of
$43.58) . |
15
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
8 |
|
Stock-based compensation |
|
|
|
In 2006, under CPRs stock option plans, the Company issued 1,423,700 options to purchase
Common Shares at the weighted average price of $57.78 per share, based on the closing price
on the day prior to the grant date. In tandem with these options, 487,750 stock
appreciation rights were issued at the weighted average exercise price of $57.78. Also, all
30,000 unvested Restricted Share Units, issued in 2005, were cancelled. |
|
|
|
Pursuant to the employee plan, options may be exercised upon vesting, which is between 24
months and 36 months after the grant date, and will expire after 10 years. Some options
vest after 48 months, unless certain performance targets are achieved, in which case vesting
is accelerated. These options expire five years after the grant date. |
|
|
|
The following is a summary of the Companys fixed stock option plans as of June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
average |
|
|
Number of |
|
|
average |
|
|
|
options |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
|
|
|
|
Outstanding, January 1 |
|
|
7,971,917 |
|
|
$ |
32.07 |
|
|
|
7,752,080 |
|
|
$ |
29.32 |
|
New options granted |
|
|
1,423,700 |
|
|
|
57.78 |
|
|
|
1,548,400 |
|
|
|
42.05 |
|
Exercised |
|
|
(1,719,412 |
) |
|
|
28.61 |
|
|
|
(212,943 |
) |
|
|
26.62 |
|
Forfeited/cancelled |
|
|
(269,295 |
) |
|
|
40.09 |
|
|
|
(92,751 |
) |
|
|
27.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30 |
|
|
7,406,910 |
|
|
$ |
37.52 |
|
|
|
8,994,786 |
|
|
$ |
31.59 |
|
|
|
|
|
|
Options exercisable
at June 30 |
|
|
3,541,610 |
|
|
$ |
29.43 |
|
|
|
2,126,256 |
|
|
$ |
27.31 |
|
|
|
|
|
|
|
|
Compensation expense is recognized over the vesting period for stock options issued since
January 1, 2003, based on their estimated fair values on the date of grants, as determined
by the Black-Scholes option pricing model. Had CPR used the fair value method for options
granted between January 1, 2002, and December 31, 2002, CPRs pro forma basis net income and
earnings per share would have been as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
|
|
|
|
|
|
ended June 30 |
|
ended June 30 |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Net income (in millions) |
|
As reported |
|
$ |
377.5 |
|
|
$ |
123.2 |
|
|
$ |
488.5 |
|
|
$ |
203.9 |
|
|
|
Pro forma |
|
$ |
377.5 |
|
|
$ |
123.0 |
|
|
$ |
488.3 |
|
|
$ |
203.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
As reported |
|
$ |
2.38 |
|
|
$ |
0.78 |
|
|
$ |
3.08 |
|
|
$ |
1.28 |
|
|
|
Pro forma |
|
$ |
2.38 |
|
|
$ |
0.77 |
|
|
$ |
3.08 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
As reported |
|
$ |
2.36 |
|
|
$ |
0.77 |
|
|
$ |
3.04 |
|
|
$ |
1.27 |
|
|
|
Pro forma |
|
$ |
2.36 |
|
|
$ |
0.77 |
|
|
$ |
3.04 |
|
|
$ |
1.27 |
|
|
|
|
|
|
|
|
|
|
16
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
8 |
|
Stock-based compensation (continued) |
|
|
|
Under the fair value method, the fair value of options at the grant date was $11.9 million
for options issued in the first six months of 2006 (first six months of 2005 $10.0
million). The weighted average fair value assumptions were approximately: |
|
|
|
|
|
|
|
|
|
|
|
For the six months |
|
|
ended June 30 |
|
|
2006 |
|
|
2005 |
|
|
|
|
Expected option life (years) |
|
|
4.50 |
|
|
|
4.50 |
|
Risk-free interest rate |
|
|
4.07 |
% |
|
|
3.49 |
% |
Expected stock price volatility |
|
|
22 |
% |
|
|
24 |
% |
Expected annual dividends per share |
|
$ |
0.75 |
|
|
$ |
0.53 |
|
Weighted average fair value of options
granted during the year |
|
$ |
12.98 |
|
|
$ |
9.65 |
|
|
|
|
|
|
Total Return Swaps |
|
|
|
The Company entered into a Total Return Swap (TRS), effective in May 2006, in order to
reduce the volatility and total cost to the Company over time of two stock based
compensation programs, share appreciation rights (SAR) and deferred share units (DSU).
The value of the TRS derivative is linked to the market value of our stock and is intended
to mitigate the impact on expenses of share value movements on SARs and DSUs. Compensation
and Benefits expense on our Statement of Consolidated Income increased by $8.3 million in
the second quarter of 2006 due to unrealized losses for these swaps. These losses
substantially offset benefits recognized in the SAR and DSU stock based compensation
programs due to fluctuations in share price during the period the TRS was in place. |
|
9 |
|
Pensions and other benefits |
|
|
|
The total benefit cost for the Companys defined benefit pension plans, defined contribution
pension plans and post-retirement benefits for the quarter ended June 30, 2006, was $30.3
million (quarter ended June 30, 2005 $21.0 million) and for the six months ended June 30,
2006, was $61.2 million (six months ended June 30, 2005 $41.4 million). |
|
10 |
|
Significant customers |
|
|
|
During the first six months of 2006, one customer comprised 12.1% of total revenue (first
six months of 2005 14.7%). At June 30, 2006, one customer represented 5.8% of total
accounts receivable (June 30, 2005 9.2%). |
17
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
11 |
|
Commitments and contingencies |
|
|
|
In the normal course of its operations, the Company becomes involved in various legal
actions, including claims relating to injuries and damages to property. The Company
maintains provisions it considers to be adequate for such actions. While the final outcome
with respect to actions outstanding or pending at June 30, 2006, cannot be predicted with
certainty, it is the opinion of management that their resolution will not have a material
adverse effect on the Companys financial position or results of operations. |
|
|
|
Capital commitments |
|
|
|
At June 30, 2006, CPR had multi-year capital commitments of $622.5 million, mainly for
locomotive overhaul agreements, in the form of signed contracts. Payments for these
commitments are due in 2006 through 2016. |
|
|
|
Operating lease commitments |
|
|
|
At June 30, 2006, minimum payments under operating leases were estimated at $532.4 million
in aggregate, with annual payments in each of the next five years of: remainder of 2006
$67.2 million; 2007 $108.8 million; 2008 $80.0 million; 2009 $53.9 million; 2010
$39.2 million. |
|
|
|
Guarantees |
|
|
|
The Company had residual value guarantees on operating lease commitments of $219.3 million
at June 30, 2006. The maximum amount that could be payable under these and all of the
Companys other guarantees cannot be reasonably estimated due to the nature of certain of
the guarantees. All or a portion of amounts paid under certain guarantees could be
recoverable from other parties or through insurance. The Company has accrued for all
guarantees that it expects to pay. At June 30, 2006, these accruals amounted to $12.7
million. |
|
12 |
|
Income tax (benefit) expense |
|
|
|
In the second quarter of 2006, federal and provincial legislation was introduced to reduce
corporate income tax rates over a period of several years. As a result of these changes,
the Company recorded a $176.0 million reduction in future tax liability and income tax
expense. |
|
13 |
|
(Additions) reductions to investments and other assets |
|
|
|
(Additions) reductions to investment and other assets includes the acquisition of $87
million in freight car assets for the six month period ended June 30, 2006 and $66 million
for the three month period ended June 30, 2006. These assets were purchased in anticipation
of a sale and lease back arrangement with a financial institution. |
|
14 |
|
Reclassification |
|
|
|
Certain prior period figures have been reclassified to conform with the presentation adopted
for the second quarter of 2006. |
18
Summary of Rail Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
Year-to-date |
2006 |
|
2005(1) |
|
Variance |
|
% |
|
|
|
2006 |
|
2005(1) |
|
Variance |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial (millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,086.4 |
|
|
$ |
1,070.2 |
|
|
$ |
16.2 |
|
|
|
1.5 |
|
|
Freight revenue |
|
$ |
2,153.6 |
|
|
$ |
2,062.8 |
|
|
$ |
90.8 |
|
|
|
4.4 |
|
|
44.6 |
|
|
|
35.7 |
|
|
|
8.9 |
|
|
|
24.9 |
|
|
Other revenue |
|
|
87.9 |
|
|
|
57.2 |
|
|
|
30.7 |
|
|
|
53.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131.0 |
|
|
|
1,105.9 |
|
|
|
25.1 |
|
|
|
2.3 |
|
|
|
|
|
2,241.5 |
|
|
|
2,120.0 |
|
|
|
121.5 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321.5 |
|
|
|
322.2 |
|
|
|
(0.7 |
) |
|
|
(0.2 |
) |
|
Compensation and benefits |
|
|
671.4 |
|
|
|
653.3 |
|
|
|
18.1 |
|
|
|
2.8 |
|
|
160.1 |
|
|
|
145.2 |
|
|
|
14.9 |
|
|
|
10.3 |
|
|
Fuel |
|
|
318.0 |
|
|
|
279.7 |
|
|
|
38.3 |
|
|
|
13.7 |
|
|
54.5 |
|
|
|
46.0 |
|
|
|
8.5 |
|
|
|
18.5 |
|
|
Materials |
|
|
112.1 |
|
|
|
104.8 |
|
|
|
7.3 |
|
|
|
7.0 |
|
|
44.4 |
|
|
|
54.7 |
|
|
|
(10.3 |
) |
|
|
(18.8 |
) |
|
Equipment rents |
|
|
89.0 |
|
|
|
103.2 |
|
|
|
(14.2 |
) |
|
|
(13.8 |
) |
|
117.8 |
|
|
|
110.7 |
|
|
|
7.1 |
|
|
|
6.4 |
|
|
Depreciation and amortization |
|
|
232.6 |
|
|
|
220.2 |
|
|
|
12.4 |
|
|
|
5.6 |
|
|
150.8 |
|
|
|
156.0 |
|
|
|
(5.2 |
) |
|
|
(3.3 |
) |
|
Purchased services and other |
|
|
307.4 |
|
|
|
309.0 |
|
|
|
(1.6 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849.1 |
|
|
|
834.8 |
|
|
|
14.3 |
|
|
|
1.7 |
|
|
|
|
|
1,730.5 |
|
|
|
1,670.2 |
|
|
|
60.3 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281.9 |
|
|
|
271.1 |
|
|
|
10.8 |
|
|
|
4.0 |
|
|
Operating income |
|
|
511.0 |
|
|
|
449.8 |
|
|
|
61.2 |
|
|
|
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.7 |
|
|
|
5.7 |
|
|
|
2.0 |
|
|
|
35.1 |
|
|
Other charges |
|
|
14.5 |
|
|
|
4.7 |
|
|
|
9.8 |
|
|
|
208.5 |
|
|
48.6 |
|
|
|
53.2 |
|
|
|
(4.6 |
) |
|
|
(8.6 |
) |
|
Interest expense |
|
|
95.9 |
|
|
|
104.8 |
|
|
|
(8.9 |
) |
|
|
(8.5 |
) |
|
65.5 |
|
|
|
72.2 |
|
|
|
(6.7 |
) |
|
|
(9.3 |
) |
|
Income tax expense before foreign exchange (gains) losses on long-term debt and other specified items (2) |
|
|
122.2 |
|
|
|
115.7 |
|
|
|
6.5 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160.1 |
|
|
|
140.0 |
|
|
|
20.1 |
|
|
|
14.4 |
|
|
Income before foreign exchange (gains) losses on long-term debt and other specified items (2) |
|
|
278.4 |
|
|
|
224.6 |
|
|
|
53.8 |
|
|
|
24.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (gains) losses on long-term debt (FX on LTD) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52.7 |
) |
|
|
17.0 |
|
|
|
(69.7 |
) |
|
|
|
|
|
FX on LTD |
|
|
(46.3 |
) |
|
|
20.1 |
|
|
|
(66.4 |
) |
|
|
|
|
|
11.3 |
|
|
|
(0.2 |
) |
|
|
11.5 |
|
|
|
|
|
|
Income tax
on FX on LTD
(3) |
|
|
12.2 |
|
|
|
0.6 |
|
|
|
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41.4 |
) |
|
|
16.8 |
|
|
|
(58.2 |
) |
|
|
|
|
|
FX on LTD (net of tax) |
|
|
(34.1 |
) |
|
|
20.7 |
|
|
|
(54.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176.0 |
) |
|
|
|
|
|
|
(176.0 |
) |
|
|
|
|
|
Income tax
benefits due to Federal and Provincial income tax rate reductions |
|
|
(176.0 |
) |
|
|
|
|
|
|
(176.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
377.5 |
|
|
$ |
123.2 |
|
|
$ |
254.3 |
|
|
|
206.4 |
|
|
Net income |
|
$ |
488.5 |
|
|
$ |
203.9 |
|
|
$ |
284.6 |
|
|
|
139.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (EPS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.38 |
|
|
$ |
0.78 |
|
|
$ |
1.60 |
|
|
|
205.1 |
|
|
Basic earnings per share |
|
$ |
3.08 |
|
|
$ |
1.28 |
|
|
$ |
1.80 |
|
|
|
140.6 |
|
$ |
2.36 |
|
|
$ |
0.77 |
|
|
$ |
1.59 |
|
|
|
206.5 |
|
|
Diluted earnings per share |
|
$ |
3.04 |
|
|
$ |
1.27 |
|
|
$ |
1.77 |
|
|
|
139.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS before FX on LTD and other specified items (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.01 |
|
|
$ |
0.88 |
|
|
$ |
0.13 |
|
|
|
14.8 |
|
|
Basic earnings per share |
|
$ |
1.76 |
|
|
$ |
1.41 |
|
|
$ |
0.35 |
|
|
|
24.8 |
|
$ |
1.00 |
|
|
$ |
0.87 |
|
|
$ |
0.13 |
|
|
|
14.9 |
|
|
Diluted earnings per share |
|
$ |
1.74 |
|
|
$ |
1.40 |
|
|
$ |
0.34 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158.3 |
|
|
|
158.9 |
|
|
|
(0.6 |
) |
|
|
(0.4 |
) |
|
Weighted average number of shares outstanding (millions) |
|
|
158.4 |
|
|
|
158.8 |
|
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
75.1 |
|
|
|
75.5 |
|
|
|
(0.4 |
) |
|
|
|
|
|
Operating ratio (4) (%) |
|
|
77.2 |
|
|
|
78.8 |
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.8 |
|
|
|
8.3 |
|
|
|
1.5 |
|
|
|
|
|
|
ROCE before FX on LTD and other specified items (after tax)(2) (4)(%) |
|
|
9.8 |
|
|
|
8.3 |
|
|
|
1.5 |
|
|
|
|
|
|
|
37.7 |
|
|
|
42.1 |
|
|
|
(4.4 |
) |
|
|
|
|
|
Net debt to net debt plus equity (%) |
|
|
37.7 |
|
|
|
42.1 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
274.2 |
|
|
$ |
265.4 |
|
|
$ |
8.8 |
|
|
|
3.3 |
|
|
EBIT before FX on LTD and other specified items (2) (4) (millions) |
|
$ |
496.5 |
|
|
$ |
445.1 |
|
|
$ |
51.4 |
|
|
|
11.5 |
|
|
$ |
392.0 |
|
|
$ |
376.1 |
|
|
$ |
15.9 |
|
|
|
4.2 |
|
|
EBITDA before FX on LTD and other specified items (2) (4) (millions) |
|
$ |
729.1 |
|
|
$ |
665.3 |
|
|
$ |
63.8 |
|
|
|
9.6 |
|
|
|
|
(1) |
|
Certain comparative period figures have been reclassified to current presentation. |
|
(2) |
|
These are earnings measures that are not in accordance with GAAP and may not be
comparable to similar measures of other companies. See note on non-GAAP earnings measures
attached to commentary. |
|
(3) |
|
Income tax on FX on LTD is discussed in the current MD&A in the Other Income Statement Items section Income Taxes. |
|
(4) |
|
EBIT:
Earnings before interest and taxes. |
|
|
|
EBITDA:
|
|
Earnings before interest, taxes, and depreciation and amortization. |
ROCE (after tax):
|
|
Return on capital employed (after tax) = earnings before interest (last 12 months) divided by average net debt plus equity. |
Operating ratio:
|
|
Operating expenses divided by revenues. |
19
Summary of Rail Data (Page 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
Year-to-date |
2006 |
|
2005(1) |
|
Variance |
|
% |
|
|
|
2006 |
|
2005(1) |
|
Variance |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues (millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
206.4 |
|
|
$ |
173.5 |
|
|
$ |
32.9 |
|
|
|
19.0 |
|
|
- Grain |
|
$ |
417.7 |
|
|
$ |
339.1 |
|
|
$ |
78.6 |
|
|
|
23.2 |
|
|
143.5 |
|
|
|
198.7 |
|
|
|
(55.2 |
) |
|
|
(27.8 |
) |
|
- Coal |
|
|
303.7 |
|
|
|
364.3 |
|
|
|
(60.6 |
) |
|
|
(16.6 |
) |
|
105.5 |
|
|
|
116.9 |
|
|
|
(11.4 |
) |
|
|
(9.8 |
) |
|
- Sulphur and fertilizers |
|
|
198.6 |
|
|
|
236.2 |
|
|
|
(37.6 |
) |
|
|
(15.9 |
) |
|
75.8 |
|
|
|
86.1 |
|
|
|
(10.3 |
) |
|
|
(12.0 |
) |
|
- Forest products |
|
|
159.2 |
|
|
|
167.2 |
|
|
|
(8.0 |
) |
|
|
(4.8 |
) |
|
150.3 |
|
|
|
127.2 |
|
|
|
23.1 |
|
|
|
18.2 |
|
|
- Industrial and consumer products |
|
|
298.6 |
|
|
|
258.1 |
|
|
|
40.5 |
|
|
|
15.7 |
|
|
91.9 |
|
|
|
81.7 |
|
|
|
10.2 |
|
|
|
12.5 |
|
|
- Automotive |
|
|
170.2 |
|
|
|
151.6 |
|
|
|
18.6 |
|
|
|
12.3 |
|
|
313.0 |
|
|
|
286.1 |
|
|
|
26.9 |
|
|
|
9.4 |
|
|
- Intermodal |
|
|
605.6 |
|
|
|
546.3 |
|
|
|
59.3 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,086.4 |
|
|
$ |
1,070.2 |
|
|
$ |
16.2 |
|
|
|
1.5 |
|
|
Total Freight Revenues |
|
$ |
2,153.6 |
|
|
$ |
2,062.8 |
|
|
$ |
90.8 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of Revenue Ton-Miles (RTM) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,048 |
|
|
|
6,160 |
|
|
|
888 |
|
|
|
14.4 |
|
|
- Grain |
|
|
14,522 |
|
|
|
12,297 |
|
|
|
2,225 |
|
|
|
18.1 |
|
|
4,735 |
|
|
|
6,210 |
|
|
|
(1,475 |
) |
|
|
(23.8 |
) |
|
- Coal |
|
|
9,789 |
|
|
|
11,938 |
|
|
|
(2,149 |
) |
|
|
(18.0 |
) |
|
3,858 |
|
|
|
5,382 |
|
|
|
(1,524 |
) |
|
|
(28.3 |
) |
|
- Sulphur and fertilizers |
|
|
7,313 |
|
|
|
10,879 |
|
|
|
(3,566 |
) |
|
|
(32.8 |
) |
|
2,264 |
|
|
|
2,665 |
|
|
|
(401 |
) |
|
|
(15.0 |
) |
|
- Forest products |
|
|
4,698 |
|
|
|
5,186 |
|
|
|
(488 |
) |
|
|
(9.4 |
) |
|
4,162 |
|
|
|
3,819 |
|
|
|
343 |
|
|
|
9.0 |
|
|
- Industrial and consumer products |
|
|
8,503 |
|
|
|
7,747 |
|
|
|
756 |
|
|
|
9.8 |
|
|
746 |
|
|
|
658 |
|
|
|
88 |
|
|
|
13.4 |
|
|
- Automotive |
|
|
1,349 |
|
|
|
1,228 |
|
|
|
121 |
|
|
|
9.9 |
|
|
7,055 |
|
|
|
6,888 |
|
|
|
167 |
|
|
|
2.4 |
|
|
- Intermodal |
|
|
13,782 |
|
|
|
13,227 |
|
|
|
555 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,868 |
|
|
|
31,782 |
|
|
|
(1,914 |
) |
|
|
(6.0 |
) |
|
Total RTMs |
|
|
59,956 |
|
|
|
62,502 |
|
|
|
(2,546 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per RTM (cents) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.93 |
|
|
|
2.82 |
|
|
|
0.11 |
|
|
|
3.9 |
|
|
- Grain |
|
|
2.88 |
|
|
|
2.76 |
|
|
|
0.12 |
|
|
|
4.3 |
|
|
3.03 |
|
|
|
3.20 |
|
|
|
(0.17 |
) |
|
|
(5.3 |
) |
|
- Coal |
|
|
3.10 |
|
|
|
3.05 |
|
|
|
0.05 |
|
|
|
1.6 |
|
|
2.73 |
|
|
|
2.17 |
|
|
|
0.56 |
|
|
|
25.8 |
|
|
- Sulphur and fertilizers |
|
|
2.72 |
|
|
|
2.17 |
|
|
|
0.55 |
|
|
|
25.3 |
|
|
3.35 |
|
|
|
3.23 |
|
|
|
0.12 |
|
|
|
3.7 |
|
|
- Forest products |
|
|
3.39 |
|
|
|
3.22 |
|
|
|
0.17 |
|
|
|
5.3 |
|
|
3.61 |
|
|
|
3.33 |
|
|
|
0.28 |
|
|
|
8.4 |
|
|
- Industrial and consumer products |
|
|
3.51 |
|
|
|
3.33 |
|
|
|
0.18 |
|
|
|
5.4 |
|
|
12.32 |
|
|
|
12.42 |
|
|
|
(0.10 |
) |
|
|
(0.8 |
) |
|
- Automotive |
|
|
12.62 |
|
|
|
12.35 |
|
|
|
0.27 |
|
|
|
2.2 |
|
|
4.44 |
|
|
|
4.15 |
|
|
|
0.29 |
|
|
|
7.0 |
|
|
- Intermodal |
|
|
4.39 |
|
|
|
4.13 |
|
|
|
0.26 |
|
|
|
6.3 |
|
|
3.64 |
|
|
|
3.37 |
|
|
|
0.27 |
|
|
|
8.0 |
|
|
Freight Revenue per RTM |
|
|
3.59 |
|
|
|
3.30 |
|
|
|
0.29 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carloads (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.2 |
|
|
|
79.6 |
|
|
|
9.6 |
|
|
|
12.1 |
|
|
- Grain |
|
|
181.6 |
|
|
|
155.5 |
|
|
|
26.1 |
|
|
|
16.8 |
|
|
68.5 |
|
|
|
91.0 |
|
|
|
(22.5 |
) |
|
|
(24.7 |
) |
|
- Coal |
|
|
147.2 |
|
|
|
176.9 |
|
|
|
(29.7 |
) |
|
|
(16.8 |
) |
|
41.6 |
|
|
|
54.0 |
|
|
|
(12.4 |
) |
|
|
(23.0 |
) |
|
- Sulphur and fertilizers |
|
|
80.6 |
|
|
|
109.5 |
|
|
|
(28.9 |
) |
|
|
(26.4 |
) |
|
33.8 |
|
|
|
40.4 |
|
|
|
(6.6 |
) |
|
|
(16.3 |
) |
|
- Forest products |
|
|
71.4 |
|
|
|
79.7 |
|
|
|
(8.3 |
) |
|
|
(10.4 |
) |
|
80.9 |
|
|
|
79.9 |
|
|
|
1.0 |
|
|
|
1.3 |
|
|
- Industrial and consumer products |
|
|
160.6 |
|
|
|
161.5 |
|
|
|
(0.9 |
) |
|
|
(0.6 |
) |
|
46.8 |
|
|
|
44.6 |
|
|
|
2.2 |
|
|
|
4.9 |
|
|
- Automotive |
|
|
89.1 |
|
|
|
86.6 |
|
|
|
2.5 |
|
|
|
2.9 |
|
|
295.5 |
|
|
|
285.0 |
|
|
|
10.5 |
|
|
|
3.7 |
|
|
- Intermodal |
|
|
577.3 |
|
|
|
552.3 |
|
|
|
25.0 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656.3 |
|
|
|
674.5 |
|
|
|
(18.2 |
) |
|
|
(2.7 |
) |
|
Total Carloads |
|
|
1,307.8 |
|
|
|
1,322.0 |
|
|
|
(14.2 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per Carload |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,314 |
|
|
$ |
2,180 |
|
|
$ |
134 |
|
|
|
6.1 |
|
|
- Grain |
|
$ |
2,300 |
|
|
$ |
2,181 |
|
|
$ |
119 |
|
|
|
5.5 |
|
|
2,095 |
|
|
|
2,184 |
|
|
|
(89 |
) |
|
|
(4.1 |
) |
|
- Coal |
|
|
2,063 |
|
|
|
2,059 |
|
|
|
4 |
|
|
|
0.2 |
|
|
2,536 |
|
|
|
2,165 |
|
|
|
371 |
|
|
|
17.1 |
|
|
- Sulphur and fertilizers |
|
|
2,464 |
|
|
|
2,157 |
|
|
|
307 |
|
|
|
14.2 |
|
|
2,243 |
|
|
|
2,131 |
|
|
|
112 |
|
|
|
5.3 |
|
|
- Forest products |
|
|
2,230 |
|
|
|
2,098 |
|
|
|
132 |
|
|
|
6.3 |
|
|
1,858 |
|
|
|
1,592 |
|
|
|
266 |
|
|
|
16.7 |
|
|
- Industrial and consumer products |
|
|
1,859 |
|
|
|
1,598 |
|
|
|
261 |
|
|
|
16.3 |
|
|
1,964 |
|
|
|
1,832 |
|
|
|
132 |
|
|
|
7.2 |
|
|
- Automotive |
|
|
1,910 |
|
|
|
1,751 |
|
|
|
159 |
|
|
|
9.1 |
|
|
1,059 |
|
|
|
1,004 |
|
|
|
55 |
|
|
|
5.5 |
|
|
- Intermodal |
|
|
1,049 |
|
|
|
989 |
|
|
|
60 |
|
|
|
6.1 |
|
$ |
1,655 |
|
|
$ |
1,587 |
|
|
$ |
68 |
|
|
|
4.3 |
|
|
Freight Revenue per Carload |
|
$ |
1,647 |
|
|
$ |
1,560 |
|
|
$ |
87 |
|
|
|
5.6 |
|
|
|
|
(1) |
|
Certain comparative period figures have been reclassified to current presentation. |
20
Summary of Rail Data (Page 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
Year-to-date |
|
2006 |
|
|
2005(1) |
|
|
Variance |
|
|
% |
|
|
|
|
2006 |
|
|
2005(1) |
|
|
Variance |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and Productivity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,099 |
|
|
|
62,404 |
|
|
|
(4,305 |
) |
|
|
(6.9 |
) |
|
Freight gross ton-miles (GTM) (millions) |
|
|
115,113 |
|
|
|
120,820 |
|
|
|
(5,707 |
) |
|
|
(4.7 |
) |
|
29,868 |
|
|
|
31,782 |
|
|
|
(1,914 |
) |
|
|
(6.0 |
) |
|
Revenue ton-miles (RTM) (millions) |
|
|
59,956 |
|
|
|
62,502 |
|
|
|
(2,546 |
) |
|
|
(4.1 |
) |
|
16,278 |
|
|
|
16,680 |
|
|
|
(402 |
) |
|
|
(2.4 |
) |
|
Average number of active employees |
|
|
15,773 |
|
|
|
16,074 |
|
|
|
(301 |
) |
|
|
(1.9 |
) |
|
16,504 |
|
|
|
16,973 |
|
|
|
(469 |
) |
|
|
(2.8 |
) |
|
Number of employees at end of period |
|
|
16,504 |
|
|
|
16,973 |
|
|
|
(469 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
2.0 |
|
|
|
2.3 |
|
|
|
(0.3 |
) |
|
|
(13.0 |
) |
|
1.9 |
|
|
|
1.3 |
|
|
|
0.6 |
|
|
|
46.2 |
|
|
FRA train accidents per million train-miles |
|
|
1.6 |
|
|
|
2.2 |
|
|
|
(0.6 |
) |
|
|
(27.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.84 |
|
|
|
2.63 |
|
|
|
0.21 |
|
|
|
8.0 |
|
|
Total operating expenses per RTM (cents) |
|
|
2.89 |
|
|
|
2.67 |
|
|
|
0.22 |
|
|
|
8.2 |
|
|
1.46 |
|
|
|
1.34 |
|
|
|
0.12 |
|
|
|
9.0 |
|
|
Total operating expenses per GTM (cents) |
|
|
1.50 |
|
|
|
1.38 |
|
|
|
0.12 |
|
|
|
8.7 |
|
|
0.55 |
|
|
|
0.52 |
|
|
|
0.03 |
|
|
|
5.8 |
|
|
Compensation and benefits expense per GTM (cents) |
|
|
0.58 |
|
|
|
0.54 |
|
|
|
0.04 |
|
|
|
7.4 |
|
|
3,569 |
|
|
|
3,741 |
|
|
|
(172 |
) |
|
|
(4.6 |
) |
|
GTMs per average active employee (000) |
|
|
7,298 |
|
|
|
7,516 |
|
|
|
(218 |
) |
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.0 |
|
|
|
22.0 |
|
|
|
3.0 |
|
|
|
13.6 |
|
|
Average train speed AAR definition (mph) |
|
|
25.1 |
|
|
|
21.9 |
|
|
|
3.2 |
|
|
|
14.6 |
|
|
20.2 |
|
|
|
27.5 |
|
|
|
(7.3 |
) |
|
|
(26.5 |
) |
|
Terminal dwell time AAR definition (hours) |
|
|
20.7 |
|
|
|
29.4 |
|
|
|
(8.7 |
) |
|
|
(29.6 |
) |
|
134.0 |
|
|
|
124.3 |
|
|
|
9.7 |
|
|
|
7.8 |
|
|
Car miles per car day |
|
|
133.1 |
|
|
|
119.8 |
|
|
|
13.3 |
|
|
|
11.1 |
|
|
82.4 |
|
|
|
88.2 |
|
|
|
(5.8 |
) |
|
|
(6.6 |
) |
|
Average daily total cars on-line AAR definition (000) |
|
|
81.6 |
|
|
|
87.7 |
|
|
|
(6.1 |
) |
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.19 |
|
|
|
1.16 |
|
|
|
0.03 |
|
|
|
2.6 |
|
|
U.S. gallons of locomotive fuel per 1,000 GTMs freight & yard |
|
|
1.22 |
|
|
|
1.21 |
|
|
|
0.01 |
|
|
|
0.8 |
|
|
69.1 |
|
|
|
72.1 |
|
|
|
(3.0 |
) |
|
|
(4.2 |
) |
|
U.S. gallons of locomotive fuel consumed total (millions) (2) |
|
|
140.2 |
|
|
|
145.7 |
|
|
|
(5.5 |
) |
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.886 |
|
|
|
0.806 |
|
|
|
0.080 |
|
|
|
9.9 |
|
|
Average foreign exchange rate (US$/Canadian$) |
|
|
0.879 |
|
|
|
0.810 |
|
|
|
0.069 |
|
|
|
8.5 |
|
|
1.129 |
|
|
|
1.241 |
|
|
|
(0.112 |
) |
|
|
(9.0 |
) |
|
Average foreign exchange rate (Canadian$/US$) |
|
|
1.138 |
|
|
|
1.234 |
|
|
|
(0.096 |
) |
|
|
(7.8 |
) |
|
|
|
(1) |
|
Certain comparative period figures have been reclassified 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. |
21
Canadian Pacific Railway
Managements Discussion and Analysis
for the three and six months ended June 30, 2006
Table of Contents
|
|
|
|
|
Business Profile
|
|
|
2 |
|
Strategy
|
|
|
2 |
|
Additional Information
|
|
|
2 |
|
Operating Results
|
|
|
2 |
|
Non-GAAP Earnings
|
|
|
4 |
|
Lines of Business
|
|
|
5 |
|
Volumes
|
|
|
5 |
|
Revenues
|
|
|
5 |
|
Freight Revenue per Carload
|
|
|
7 |
|
Performance Indicators
|
|
|
7 |
|
Operating Expenses
|
|
|
8 |
|
Other Income Statement Items
|
|
|
10 |
|
Changes in Accounting Policy
|
|
|
10 |
|
Off-Balance Sheet Arrangements
|
|
|
10 |
|
Quarterly Financial Data
|
|
|
11 |
|
Liquidity and Capital Resources
|
|
|
12 |
|
Balance Sheet
|
|
|
14 |
|
Financial Instruments
|
|
|
15 |
|
Contractual Commitments
|
|
|
16 |
|
Future Trends, Commitments and Risks
|
|
|
16 |
|
Critical Accounting Estimates
|
|
|
19 |
|
Forward-Looking Information
|
|
|
20 |
|
Glossary of Terms
|
|
|
22 |
|
This Managements Discussion and Analysis (MD&A) supplements the Consolidated Financial
Statements and related notes for the three and six months ended June 30, 2006. Except where
otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.
All financial information has been prepared in accordance with Canadian generally accepted
accounting principles (GAAP), except as described in the Non-GAAP Earnings section of this
MD&A.
July 24, 2006
In this MD&A, our, us, we, CPR and the Company refer to Canadian Pacific Railway Limited
and its subsidiaries. Other terms not defined in the body of this MD&A are defined in the Glossary
of Terms.
Business Profile
Canadian Pacific Railway Limited and its subsidiaries operate a transcontinental railway in Canada
and the United States and provide logistics and supply chain expertise. We provide rail and
intermodal transportation services over a network of approximately 13,500 miles, serving the
principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the
U.S. Northeast and Midwest regions. Our railway feeds directly into the U.S. heartland from the
East and West coasts. Agreements with other carriers extend our market reach east of Montreal in
Canada, throughout the U.S. and into Mexico. We transport bulk commodities, merchandise freight
and intermodal traffic. Bulk commodities include grain, coal, sulphur and fertilizers.
Merchandise freight consists of finished vehicles and automotive parts, as well as forest and
industrial and consumer products. Intermodal traffic consists largely of high-value,
time-sensitive retail goods transported in overseas containers that can be handled by train, ship
and truck, and in domestic containers and trailers that can be moved by train and truck.
Strategy
Our objective is to create long-term value for customers, shareholders and employees primarily by
profitably growing within the footprint of our core rail franchise. We seek to accomplish this
objective through the following three-part strategy:
|
i). |
|
generating quality revenue growth by realizing the benefits of demand growth in our
bulk, intermodal and merchandise business lines with targeted infrastructure capacity
investments linked to global trade opportunities; |
|
|
ii). |
|
improving productivity by leveraging strategic marketing and operating partnerships,
executing a scheduled railway through our Integrated Operating Plan, and driving more
value from existing assets and resources by improving fluidity; and |
|
|
iii). |
|
continuing to develop a dedicated, professional and knowledgeable workforce that is
committed to safety and sustainable financial performance through steady improvement in
profitability, increased free cash flow and a competitive return on investment. |
Additional Information
Additional information, including our Consolidated Financial Statements, MD&A, Annual Information
Form, press releases and other required filing documents, is available on SEDAR at www.sedar.com in
Canada, on EDGAR at www.sec.gov in the U.S. and on our website at www.cpr.ca. The
aforementioned documents are issued and made available in accordance with legal requirements and
are not incorporated by reference into this MD&A.
Operating Results
i). Income
Net income for the three months ended June 30, 2006, was $377.5 million, up $254.3 million from
$123.2 million for the same period in 2005. Results included a positive adjustment of $176 million
to income tax expense as a result of reduced income tax rates and after-tax foreign exchange gains
on long-term debt of $41.4 million. Operating income for the second quarter of 2006 was
$281.9 million, an increase of $10.8 million from $271.1 million for the same period in 2005.
Operating results benefited from improvements in operating performance, which were partially offset
by reduced volumes for coal and potash.
The increase in net income and operating income was due mainly to:
|
|
|
higher revenues resulting from increased freight rates, including fuel surcharges; |
|
|
|
|
cost-reduction programs, stemming in particular from our Integrated Operating Plan
(IOP), restructuring and co-production initiatives; and |
|
|
|
|
gains of $17 million realized on the sale of our Latta subdivision, a rail line between
Fayette, near Terre Haute, and Bedford in the State of Indiana (discussed further in this
MD&A in the section Future Trends, Commitments and Risks). |
The increase was partially offset by:
|
|
|
reduced revenues, reflecting lower volumes of coal and potash; |
|
|
|
|
higher fuel prices; and |
|
|
|
|
the impact of inflation on expenses. |
Operating income was also reduced by the net effect of the change in the value of the Canadian
dollar relative to the U.S. dollar (Foreign Exchange) on U.S. dollar-denominated revenues and
expenses.
Net income for the six months ended June 30, 2006, was $488.5 million, up $284.6 million from
$203.9 million for the same period in 2005. The positive adjustment to income tax expense, which
was recorded in the second quarter of 2006, also contributed significantly to the increase in
first-half net income, as well as after-tax foreign exchange gains on long-term debt of $34.1
million. Operating income for the first six months of 2006 was $511.0 million, an increase of
$61.2 million from $449.8 million for the same period in 2005. The growth was driven by and
partially offset by the same circumstances responsible for the second-quarter results, with the
additional offsets of increased costs for compensation and benefits, and amortization and
depreciation (discussed further in
this MD&A in the section Operating Expenses).
2
Fuel prices were significantly higher in the second quarter and first six months of 2006 than
in the same periods of 2005. We continued to mitigate the impact of high prices with fuel
surcharges and hedging. More than three-quarters of our fuel price increase was recovered as a
result of these programs.
ii). Diluted Earnings Per Share
Diluted earnings per share (EPS) increased by $1.59 in second-quarter 2006, generating per share
earnings of $2.36, compared with $0.77 in the same period of 2005. Diluted EPS increased $1.77 in
the first six months of 2006, generating per share earnings of $3.04, compared with $1.27 in the
same period of 2005. Diluted EPS is calculated by dividing net income by the weighted average
number of shares outstanding, adjusted for the dilutive effect of outstanding stock options, as
calculated using the Treasury Stock Method. This method assumes options that have an exercise
price below the market price of the shares are exercised and the proceeds are used to purchase
common shares at the average market price during the period. There was a positive impact on
diluted EPS in the second quarter and first six months of 2006 resulting from a reduction in the
number of shares outstanding as shares were cancelled through our share repurchase plan under a
normal course issuer bid (discussed further in this MD&A under the sub-heading Share Capital in
the section Balance Sheet).
iii). Operating Ratio
Our operating ratio was 75.1% in the second quarter of 2006, an improvement of 0.4 percentage
points from 75.5% in the same period of 2005. This ratio was 77.2% in the first half of 2006, an
improvement of 1.6 percentage points from 78.8% for first-half 2005 The operating ratio, which
excludes other specified items (discussed further in this MD&A under the sub-heading Other
Specified Items), provides the percentage of revenues used to operate the railway. A lower
percentage indicates higher efficiency.
iv). Effect of Foreign Exchange on Earnings
|
|
|
|
|
|
|
|
|
Favourable (unfavourable) effect on earnings |
|
For the three |
|
For the six |
due to the change in Foreign Exchange |
|
months ended |
|
months ended |
(in millions, except foreign exchange rate) |
|
June 30 |
|
June 30 |
(unaudited) |
|
2006 vs. 2005 |
|
Average quarterly foreign exchange rate |
|
$1.13 vs. $1.24 |
|
$1.14 vs. $1.23 |
|
Freight revenues |
|
|
|
|
|
|
|
|
Grain |
|
$ |
(7 |
) |
|
$ |
(13 |
) |
Coal |
|
|
(2 |
) |
|
|
(4 |
) |
Sulphur and fertilizers |
|
|
(3 |
) |
|
|
(5 |
) |
Forest products |
|
|
(6 |
) |
|
|
(9 |
) |
Industrial and consumer products |
|
|
(8 |
) |
|
|
(14 |
) |
Automotive |
|
|
(5 |
) |
|
|
(8 |
) |
Intermodal |
|
|
(7 |
) |
|
|
(12 |
) |
Other revenues |
|
|
(1 |
) |
|
|
(1 |
) |
|
Total effect |
|
|
(39 |
) |
|
|
(66 |
) |
|
Operating expenses |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
7 |
|
|
|
13 |
|
Fuel |
|
|
10 |
|
|
|
16 |
|
Materials |
|
|
1 |
|
|
|
2 |
|
Equipment rents |
|
|
5 |
|
|
|
7 |
|
Depreciation and amortization |
|
|
1 |
|
|
|
3 |
|
Purchased services and other |
|
|
5 |
|
|
|
8 |
|
|
Total effect |
|
|
29 |
|
|
|
49 |
|
|
Effect on operating income |
|
|
(10 |
) |
|
|
(17 |
) |
|
Other expenses |
|
|
|
|
|
|
|
|
Other charges |
|
|
|
|
|
|
|
|
Interest expense |
|
|
4 |
|
|
|
6 |
|
Income tax expense, before FX on LTD(1) |
|
|
2 |
|
|
|
4 |
|
|
Effect on income, before FX on LTD(1) |
|
$ |
(4 |
) |
|
$ |
(7 |
) |
|
|
|
|
(1) |
|
These earnings measures have no standardized meanings prescribed by Canadian GAAP
and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in the Non-GAAP Earnings section of
this MD&A. |
Fluctuations in Foreign Exchange were significant year over year, as the Canadian dollar
strengthened against the U.S. dollar by approximately 9% in the second quarter of 2006 and 8% in
the first six months of 2006. The average foreign exchange rate for converting U.S. dollars to
Canadian dollars decreased to $1.13 in second-quarter 2006 from $1.24 in the second quarter of
2005, and decreased to $1.14 in the first six months of 2006 from $1.23 in the same period of
2005. The adjoining table shows the approximate effect of the change in Foreign Exchange on our
revenues, expenses and income before foreign exchange gains and losses on long-term debt (FX on
LTD). This analysis does not include the effects of the change in Foreign Exchange on balance
sheet accounts or on foreign exchange hedging activity.
On average, a $0.01 strengthening (or weakening) in the Canadian dollar reduces (or increases)
annual operating income by approximately $3 million to $4 million. Foreign Exchange fluctuations reduced operating income by $10 million
in second-quarter 2006 and $17 million in the first six months of 2006, compared with the same
periods of 2005, as illustrated in the adjoining table. From time to time, we use foreign
exchange forward contracts to partially hedge the effects on our business of Foreign Exchange
transaction gains and losses and other economic factors. In addition, we have designated a
portion of our U.S. dollar-denominated long-term debt as a hedge of our net investment in
self-sustaining foreign subsidiaries. Our hedging instruments are discussed further in this MD&A
in the section Financial Instruments.
3
Non-GAAP Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summarized statement of consolidated income |
|
For the three months |
|
For the six months |
(reconciliation of non-GAAP earnings to GAAP earnings) |
|
ended June 30 |
|
ended June 30 |
(in millions, except EPS) (unaudited) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Revenues |
|
$ |
1,131.0 |
|
|
$ |
1,105.9 |
|
|
$ |
2,241.5 |
|
|
$ |
2,120.0 |
|
Operating expenses |
|
|
849.1 |
|
|
|
834.8 |
|
|
|
1,730.5 |
|
|
|
1,670.2 |
|
|
Operating income |
|
|
281.9 |
|
|
|
271.1 |
|
|
|
511.0 |
|
|
|
449.8 |
|
|
Other charges |
|
|
7.7 |
|
|
|
5.7 |
|
|
|
14.5 |
|
|
|
4.7 |
|
Interest expense |
|
|
48.6 |
|
|
|
53.2 |
|
|
|
95.9 |
|
|
|
104.8 |
|
Income tax expense, before income tax on FX on LTD and
other specified item(1) |
|
|
65.5 |
|
|
|
72.2 |
|
|
|
122.2 |
|
|
|
115.7 |
|
|
Income, before FX on LTD and other specified
item(1) |
|
|
160.1 |
|
|
|
140.0 |
|
|
|
278.4 |
|
|
|
224.6 |
|
|
Foreign exchange (gains) losses on long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD (gains) losses |
|
|
(52.7 |
) |
|
|
17.0 |
|
|
|
(46.3 |
) |
|
|
20.1 |
|
Income tax expense (benefit) on FX on LTD |
|
|
11.3 |
|
|
|
(0.2 |
) |
|
|
12.2 |
|
|
|
0.6 |
|
|
|
|
FX on LTD (net of tax) |
|
|
(41.4 |
) |
|
|
16.8 |
|
|
|
(34.1 |
) |
|
|
20.7 |
|
Other specified item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits due to tax rate reductions |
|
|
(176.0 |
) |
|
|
|
|
|
|
(176.0 |
) |
|
|
|
|
|
Net income |
|
$ |
377.5 |
|
|
$ |
123.2 |
|
|
$ |
488.5 |
|
|
$ |
203.9 |
|
|
Diluted EPS, before FX on LTD and other specified
item(1) |
|
$ |
1.00 |
|
|
$ |
0.87 |
|
|
$ |
1.74 |
|
|
$ |
1.40 |
|
Diluted EPS, related to FX on LTD (net of tax) |
|
|
0.27 |
|
|
|
(0.10 |
) |
|
|
0.21 |
|
|
|
(0.13 |
) |
Diluted EPS, related to other specified item (net of tax) |
|
|
1.09 |
|
|
|
|
|
|
|
1.09 |
|
|
|
|
|
|
Diluted EPS, as determined by GAAP |
|
$ |
2.36 |
|
|
$ |
0.77 |
|
|
$ |
3.04 |
|
|
$ |
1.27 |
|
|
|
|
|
(1) |
|
These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are
unlikely to be comparable to similar measures of other companies. These earnings measures and the other specified item
are described in this section of the MD&A. |
We present non-GAAP earnings and cash flow information in this MD&A to provide a basis for
evaluating underlying earnings and liquidity trends in our business that can be compared with
results of our operations in prior periods. These non-GAAP earnings exclude foreign currency
translation effects on long-term debt, which can be volatile and short term, and other specified
items that are not among our normal ongoing revenues and operating expenses. The adjoining table
details a reconciliation of income, before FX on LTD, to net income, as presented in the financial
statements. Free cash excludes cash provided by or used in financing activities but is after
payment of dividends. Free cash is discussed further in the Liquidity and Capital Resources
section of this MD&A.
Earnings that exclude FX on LTD and other specified items, and free cash as described in this MD&A,
have no standardized meanings and are not defined by Canadian GAAP and, therefore, are unlikely to
be comparable to similar measures presented by other companies.
Ø |
|
Foreign Exchange Gains and Losses on Long-Term Debt |
Foreign exchange gains and losses on long-term debt arise mainly as a result of translating U.S.
dollar-denominated debt into Canadian dollars. Income before FX on LTD, disclosed in the table
above, excludes FX on LTD from our earnings in order to eliminate the impact of volatile short-term
exchange rate fluctuations. For every $0.01 the Canadian dollar strengthens (or weakens) relative
to the U.S. dollar, the conversion of U.S. dollar-denominated long-term debt to Canadian dollars
creates a pre-tax foreign exchange gain (or loss) of approximately $10 million, net of hedging.
We calculate FX on LTD using the difference in foreign exchange rates at the beginning and at the
end of each reporting period. There were foreign exchange gains on LTD in the second quarter of
2006 as the Canadian dollar strengthened relative to the U.S. dollar on June 30, 2006 (rate of
$1.1162 ), compared with the rate on March 31, 2006 (rate of $1.1680). There were also foreign
exchange gains on LTD in the first six months of 2006 as the Canadian dollar strengthened relative
to the U.S. dollar on June 30, 2006, compared with the rate of $1.1630 on December 31,2005.
Foreign exchange gains on LTD (before tax) were $52.7 million in the second quarter and $46.3
million in the first half of 2006, compared with foreign exchange losses on LTD (before tax) of
$17.0 million in the second quarter and $20.1 million in the first six months of 2005.
Income tax expense (or benefit) related to FX on LTD capital gains is discussed further in this
MD&A under the sub-heading Income Taxes in the section Other Income Statement Items.
4
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.
There was one other specified item in the first half of 2006, which occurred in the second quarter.
There were no other specified items in the first half of 2005.
|
|
|
In the second quarter of 2006, the Government of Canada and the governments of the
provinces of Alberta, Saskatchewan and Manitoba introduced legislation to reduce corporate
income tax rates over a period of several years. We recorded a future income tax benefit of
$176 million to reflect the positive impact of these tax rate reductions on transactions in
prior years for which future taxes will be paid. |
Lines of Business
Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
Volumes |
|
ended June 30 |
|
ended June 30 |
(unaudited) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Carloads (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
89.2 |
|
|
|
79.6 |
|
|
|
181.6 |
|
|
|
155.5 |
|
Coal |
|
|
68.5 |
|
|
|
91.0 |
|
|
|
147.2 |
|
|
|
176.9 |
|
Sulphur and fertilizers |
|
|
41.6 |
|
|
|
54.0 |
|
|
|
80.6 |
|
|
|
109.5 |
|
Forest products |
|
|
33.8 |
|
|
|
40.4 |
|
|
|
71.4 |
|
|
|
79.7 |
|
Industrial and consumer products |
|
|
80.9 |
|
|
|
79.9 |
|
|
|
160.6 |
|
|
|
161.5 |
|
Automotive |
|
|
46.8 |
|
|
|
44.6 |
|
|
|
89.1 |
|
|
|
86.6 |
|
Intermodal |
|
|
295.5 |
|
|
|
285.0 |
|
|
|
577.3 |
|
|
|
552.3 |
|
|
Total carloads |
|
|
656.3 |
|
|
|
674.5 |
|
|
|
1,307.8 |
|
|
|
1,322.0 |
|
|
Revenue ton-miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
7,048 |
|
|
|
6,160 |
|
|
|
14,522 |
|
|
|
12,297 |
|
Coal |
|
|
4,735 |
|
|
|
6,210 |
|
|
|
9,789 |
|
|
|
11,938 |
|
Sulphur and fertilizers |
|
|
3,858 |
|
|
|
5,382 |
|
|
|
7,313 |
|
|
|
10,879 |
|
Forest products |
|
|
2,264 |
|
|
|
2,665 |
|
|
|
4,698 |
|
|
|
5,186 |
|
Industrial and consumer products |
|
|
4,162 |
|
|
|
3,819 |
|
|
|
8,503 |
|
|
|
7,747 |
|
Automotive |
|
|
746 |
|
|
|
658 |
|
|
|
1,349 |
|
|
|
1,228 |
|
Intermodal |
|
|
7,055 |
|
|
|
6,888 |
|
|
|
13,782 |
|
|
|
13,227 |
|
|
Total revenue ton-miles |
|
|
29,868 |
|
|
|
31,782 |
|
|
|
59,956 |
|
|
|
62,502 |
|
|
In the second quarter of 2006, volumes, as measured by total carloads, decreased by 18 thousand,
or 3%, while total revenue ton-miles (RTM) decreased by 1,914 million, or 6%, compared with the
same period in 2005. In the first half of 2006, volumes, as measured by total carloads, decreased
by 14 thousand, or 1%, while total RTMs decreased by 2,546 million, or 4%, compared with the same
period in 2005. The decrease was due mainly to a decline in demand in our customers markets for
coal and potash, and the sale of two CPR track lines.
Growth in our grain, intermodal, and industrial and consumer products volumes almost offset the
reduction in RTMs and carloads of coal and potash.
Revenues
Our revenues are derived primarily from transporting freight. Other revenues are generated mainly
from leasing certain assets, switching fees, land sales and income from business partnerships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
For the three months |
|
For the six months |
(in millions) |
|
ended June 30 |
|
ended June 30 |
(unaudited) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Grain |
|
$ |
206.4 |
|
|
$ |
173.5 |
|
|
$ |
417.7 |
|
|
$ |
339.1 |
|
Coal |
|
|
143.5 |
|
|
|
198.7 |
|
|
|
303.7 |
|
|
|
364.3 |
|
Sulphur and fertilizers |
|
|
105.5 |
|
|
|
116.9 |
|
|
|
198.6 |
|
|
|
236.2 |
|
Forest products |
|
|
75.8 |
|
|
|
86.1 |
|
|
|
159.2 |
|
|
|
167.2 |
|
Industrial and consumer products |
|
|
150.3 |
|
|
|
127.2 |
|
|
|
298.6 |
|
|
|
258.1 |
|
Automotive |
|
|
91.9 |
|
|
|
81.7 |
|
|
|
170.2 |
|
|
|
151.6 |
|
Intermodal |
|
|
313.0 |
|
|
|
286.1 |
|
|
|
605.6 |
|
|
|
546.3 |
|
|
Total freight revenues |
|
$ |
1,086.4 |
|
|
$ |
1,070.2 |
|
|
$ |
2,153.6 |
|
|
$ |
2,062.8 |
|
Other revenues |
|
|
44.6 |
|
|
|
35.7 |
|
|
|
87.9 |
|
|
|
57.2 |
|
|
Total revenues |
|
$ |
1,131.0 |
|
|
$ |
1,105.9 |
|
|
$ |
2,241.5 |
|
|
$ |
2,120.0 |
|
|
Freight Revenues
Freight revenues are earned from transporting bulk, merchandise and intermodal goods, and include
fuel surcharges billed to our customers. Freight revenues grew $16.2 million, or 2%, in the second
quarter of 2006, compared with second-quarter 2005. Freight revenues increased $90.8 million, or
4%, in the first half of 2006, compared with the same period in 2005.
Higher freight rates drove up freight revenues in the majority of our business lines, including
significant revenue increases in the grain, intermodal, and industrial and consumer products
businesses. However, there was also a considerable offsetting impact from lower volumes of coal
and potash as our customers experienced a decline in demand in these markets. Freight revenue
increases were also partially offset by the change in Foreign Exchange, which had negative impacts
of approximately $39 million in the second quarter of 2006 and $66 million in the first six months
of 2006, compared with the same periods of 2005. In addition, the decline in coal revenues in the
first half of 2006 reflected a positive adjustment of $23 million in the first quarter of 2005
related to services provided to our main coal customer in 2004.
5
Fuel surcharges in the second quarter and first half of 2006 and 2005 reflected price increases for
West Texas Intermediate (WTI), heating oil, and the retail and wholesale price of diesel for
vehicles. We recovered more than three-quarters of our fuel price increase in these periods
through surcharge revenues (which are included in freight revenues) and the benefits of hedging.
On May 26, 2006, the U.S. Surface Transportation Board approved the sale of our Latta subdivision
to Indiana Rail Road Co. (discussed further in this MD&A in the section Future Trends, Commitments
and Risks). The annual impact on our volumes is expected to be a decrease of approximately 54,000
carloads. This sale is not expected to materially affect our financial results on an annual basis.
At June 30, 2006, one customer comprised 12.1% of total year-to-date revenues and 5.8% of our total
accounts receivable. At June 30, 2005, one customer comprised 14.7% of total year-to-date revenues
and 9.2% of our total accounts receivable.
Grain revenues for the second quarter of 2006 were $206.4 million, an increase of $32.9 million
from $173.5 million for the same period of 2005. Grain revenues for the first six months of 2006
were $417.7 million, an increase of $78.6 million from $339.1 million for the same period of 2005.
The increase was due to:
|
|
|
higher volumes as a result of a larger harvest; |
|
|
|
|
improved crop quality, increased export volumes and strong worldwide demand for Canadian and U.S. grain; and |
|
|
|
|
higher freight rates. |
The revenue increase was partially offset by the effect of the change in Foreign Exchange.
Coal revenues in second-quarter 2006 were $143.5 million, a decrease of $55.2 million from $198.7
million for the same period of 2005. Coal revenues for the first six months of 2006 were $303.7
million, a decrease of $60.6 million from $364.3 million for the first half of 2005. The decline in
the second quarter of 2006 was caused by a decrease in coal volumes as a result of reduced export
sales. In addition to reduced export sales, the year-to-date decrease was caused by a positive
adjustment of $23 million in the first half of 2005 for services provided to our main coal customer
in 2004.
Ø |
|
Sulphur and Fertilizers |
Revenues from sulphur and fertilizers for the second quarter of 2006 were $105.5 million, a
decrease of $11.4 million from $116.9 million for the same period of 2005. Revenues for the first
half of 2006 were $198.6 million, a decrease of $37.6 million from $236.2 million for the same six
months of 2005. The decline was due to:
|
|
|
lower export potash shipments caused by ongoing global price negotiations; |
|
|
|
|
lower North American demand for potash due to high product prices; and |
|
|
|
|
the effect of the change in Foreign Exchange. |
The volume decrease was partially offset by higher freight rates.
Forest products revenues for second-quarter 2006 were $75.8 million, a decrease of $10.3 million
from $86.1 million in second-quarter 2005. Revenues for the first six months of 2006 were $159.2
million, a decrease of $8.0 million from $167.2 million for the same period of 2005. The decrease
was due to the effect of the change in Foreign Exchange and reduced volumes as a result of
shutdowns at customer facilities, partially offset by higher freight rates. The strengthening
Canadian dollar has had a negative impact on the competitiveness of the Canadian forest products
industry, resulting in the shutdowns.
Ø |
|
Industrial and Consumer Products |
Industrial and consumer products revenues for the second quarter of 2006 were $150.3 million, an
increase of $23.1 million from $127.2 million in the same period of 2005. Revenues for the first
six months of 2006 were $298.6 million, an increase of $40.5 million from $258.1 million for the
same period of 2005. The increase was caused by:
|
|
|
higher freight rates; and |
|
|
|
|
strong demand for steel, energy products and aggregates, driven by Alberta oilsands activity. |
The higher revenues were partially offset by the effect of the change in Foreign Exchange.
Automotive revenues for second-quarter 2006 were $91.9 million, an increase of $10.2 million from
$81.7 million for the second quarter of 2005. Revenues for the first half of 2006 were $170.2
million, an increase of $18.6 million from $151.6 million for the same period of 2005. The
increase was due primarily to:
|
|
|
higher freight rates; |
|
|
|
|
increased volumes of imported vehicles; and |
|
|
|
|
growth in long-haul traffic. |
These increases were partially offset by the effect of the change in Foreign Exchange.
6
Ø Intermodal
Intermodal revenues for the second quarter of 2006 were $313.0 million, an increase of $26.9
million from $286.1 million in second-quarter 2005. Revenues for the first six months of 2006 were
$605.6 million, an increase of $59.3 million from $546.3 million for the first half of 2005.
International intermodal revenues increased as a result of higher freight rates and container
volume growth at the ports of Vancouver and Montreal driven by strong global trade. These
increases were partially offset by the effect of the change in Foreign Exchange.
Revenue growth in domestic intermodal was due to increased volumes in the retail sector and higher
freight rates.
Other Revenues
Other revenues for the second quarter of 2006 were $44.6 million, an increase of $8.9 million from
$35.7 million for second-quarter 2005. Other revenues for year-to-date 2006 were $87.9 million, an
increase of $30.7 million from $57.2 million for the same period of 2005. Other revenues increased
in the second quarter and the first six months due to a gain of approximately $17 million realized
from the sale of our Latta subdivision (discussed further in the section Future Trends,
Commitments and Risks). In addition, revenue growth during the six-month period reflected
increased land sales, in particular, the sale of a property to a university in Montreal.
Freight Revenue per Carload
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
For the six months |
Freight revenue per carload |
|
ended June 30 |
|
ended June 30 |
($) (unaudited) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Total freight revenue per carload |
|
$ |
1,655 |
|
|
$ |
1,587 |
|
|
$ |
1,647 |
|
|
$ |
1,560 |
|
|
Grain |
|
|
2,314 |
|
|
|
2,180 |
|
|
|
2,300 |
|
|
|
2,181 |
|
Coal |
|
|
2,095 |
|
|
|
2,184 |
|
|
|
2,063 |
|
|
|
2,059 |
|
Sulphur and fertilizers |
|
|
2,536 |
|
|
|
2,165 |
|
|
|
2,464 |
|
|
|
2,157 |
|
Forest products |
|
|
2,243 |
|
|
|
2,131 |
|
|
|
2,230 |
|
|
|
2,098 |
|
Industrial and consumer products |
|
|
1,858 |
|
|
|
1,592 |
|
|
|
1,859 |
|
|
|
1,598 |
|
Automotive |
|
|
1,964 |
|
|
|
1,832 |
|
|
|
1,910 |
|
|
|
1,751 |
|
Intermodal |
|
|
1,059 |
|
|
|
1,004 |
|
|
|
1,049 |
|
|
|
989 |
|
Total freight revenue per carload increased $68, or 4%, in the second quarter of 2006 and $87 or 6%
in the first half of 2006, compared with the same periods of 2005.
The increase was due to higher freight rates, which more than offset the negative effect of the
change in Foreign Exchange.
Performance Indicators
The indicators listed in this table are key measures of our operating performance. Definitions of
these performance indicators are provided in the Glossary of Terms at the end of this MD&A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
Performance indicators(1) |
|
ended June 30 |
|
|
ended June 30 |
(unaudited) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Safety indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
1.9 |
|
|
|
1.9 |
|
|
|
2.0 |
|
|
|
2.3 |
|
FRA train accidents per million train-miles |
|
|
1.9 |
|
|
|
1.3 |
|
|
|
1.6 |
|
|
|
2.2 |
|
Efficiency and other indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles (GTM) of freight (millions) |
|
|
58,099 |
|
|
|
62,404 |
|
|
|
115,113 |
|
|
|
120,820 |
|
Car miles per car day |
|
|
134.0 |
|
|
|
124.3 |
|
|
|
133.1 |
|
|
|
119.8 |
|
U.S. gallons of locomotive fuel consumed per
1,000 GTMs freight and yard |
|
|
1.19 |
|
|
|
1.16 |
|
|
|
1.22 |
|
|
|
1.21 |
|
Terminal dwell (hours) |
|
|
20.2 |
|
|
|
27.5 |
|
|
|
20.7 |
|
|
|
29.4 |
|
Average train speed (miles per hour) |
|
|
25.0 |
|
|
|
22.0 |
|
|
|
25.1 |
|
|
|
21.9 |
|
Number of active employees end of period |
|
|
16,504 |
|
|
|
16,973 |
|
|
|
16,504 |
|
|
|
16,973 |
|
Freight revenue per RTM (cents) |
|
|
3.64 |
|
|
|
3.37 |
|
|
|
3.59 |
|
|
|
3.30 |
|
|
|
|
(1) |
|
Train-miles, average train weights, and miles of road operated at the end of the period are no
longer reported as we no longer consider these to be the main drivers for managing our operating costs. |
Safety Indicators
Safety is a key priority for our management and Board of Directors. Our two main safety indicators
personal injuries and train accidents follow strict U.S. Federal Railroad Administration
(FRA) reporting guidelines.
|
|
The FRA personal injury rate per 200,000 employee-hours was 1.9 in the second quarter
of 2006, unchanged from the same period of 2005. The rate was 2.0 for the first six months
of 2006, a 13% improvement compared with the same period of 2005. New safety rules,
including changes in procedures used by train crew personnel to get on and off trains,
contributed to the improvement in personal safety in the first half of 2006. |
|
|
The FRA train accident rate was 1.9 per million train-miles in the second quarter of 2006,
an increase of 46% over the same period of 2005. The increase was caused mainly by higher
incidents of track and equipment failures. On a year-to-date basis, our train accident rate
improved 27% to 1.6, reflecting fewer small incidents as well as reduced track and equipment
failures.
|
7
Efficiency and Other Indicators
|
|
|
Terminal dwell, the average time a freight car resides in a terminal, decreased 27% in the
second quarter of 2006 and 30% in the first half of 2006, compared with the same periods of
2005. The improvement was largely due to the successful adherence to our IOP to assemble
trains more quickly by minimizing the number of times cars are handled, and to better
processes within our yards. Reducing the time trains spend waiting in terminals also enabled
us to decrease our fleet of freight cars used during the periods. |
|
|
|
|
Average train speed increased 14% in the second quarter of 2006 and 15% in the first half
of 2006, compared with the same periods in 2005. Trains made fewer stops and were able to
move at faster speeds for longer distances as a result of our expanded track capacity in
western Canada, adhering to our IOP and co-production agreements with other railroads that
allow us to move trains more efficiently. Trains speeds also increased as a result of
transporting lower bulk volumes, which move in heavy trains that travel more slowly. |
|
|
|
|
GTMs declined 7% in second-quarter 2006 and 5% in the first six months of 2006, compared
with the same periods in 2005. The decreases were mainly due to lower coal and potash
volumes. Fluctuations in GTMs normally drive fluctuations in certain variable costs, such as
fuel and crew costs. |
|
|
|
|
Car miles per car day increased 8% in second-quarter 2006 and 11% in the first six months
of 2006, compared with the same periods in 2005. The improvement was due to more efficient
movement of traffic over our network, enabling a reduction in rail car fleet size. |
|
|
|
|
U.S. gallons of locomotive fuel consumed per 1,000 GTMs in both freight and yard activity
increased 3% in the second quarter of 2006 and 1% in the first half of 2006, compared with
the same periods in 2005. The increase reflected a decrease in bulk freight, which consumes
fuel at a lower rate than other types of freight. The increases were partially offset by
increased utilization of fuel-efficient locomotives, improved execution of our IOP and
successful fuel-conservation efforts (discussed under the sub-heading Crude Oil Prices in
the section Future Trends, Commitments and Risks in this MD&A). Mild winter weather also
helped to reduce fuel consumption in the first half of 2006. |
|
|
|
|
The number of active employees at June 30, 2006, decreased 3% compared with the number at
June 30, 2005. The decrease was due mainly to job reductions made under restructuring
initiatives (discussed under the sub-heading Restructuring in the section Future Trends,
Commitments and Risks in this MD&A). Approximately 13% of employees were working on capital
projects at June 30, 2006, unchanged from the percentage at June 30, 2005. |
|
|
|
|
Freight revenue per RTM increased 8% in the second quarter of 2006 and 9% in the first six
months in 2006, compared with the same periods of 2005. The increases were due to higher
freight rates, partially offset by the negative effect of the change in Foreign Exchange. In
addition, during the second quarter of 2006 we transported relatively more Intermodal and
Automotive freight, which generates higher revenue per RTM than bulk freight. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30 |
|
For the six months ended June 30 |
Operating expenses |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
(in millions) |
|
|
|
% of |
|
|
|
% of |
|
|
|
% of |
|
|
|
% of |
(unaudited) |
|
Expense |
|
revenue |
|
Expense |
|
revenue |
|
Expense |
|
revenue |
|
Expense |
|
revenue |
|
Compensation and benefits |
|
$ |
321.5 |
|
|
|
28.5 |
|
|
$ |
322.2 |
|
|
|
29.1 |
|
|
$ |
671.4 |
|
|
|
29.9 |
|
|
$ |
653.3 |
|
|
|
30.8 |
|
Fuel |
|
|
160.1 |
|
|
|
14.2 |
|
|
|
145.2 |
|
|
|
13.1 |
|
|
|
318.0 |
|
|
|
14.2 |
|
|
|
279.7 |
|
|
|
13.2 |
|
Materials |
|
|
54.5 |
|
|
|
4.8 |
|
|
|
46.0 |
|
|
|
4.2 |
|
|
|
112.1 |
|
|
|
5.0 |
|
|
|
104.8 |
|
|
|
4.9 |
|
Equipment rents |
|
|
44.4 |
|
|
|
3.9 |
|
|
|
54.7 |
|
|
|
5.0 |
|
|
|
89.0 |
|
|
|
4.0 |
|
|
|
103.2 |
|
|
|
4.9 |
|
Depreciation and amortization |
|
|
117.8 |
|
|
|
10.4 |
|
|
|
110.7 |
|
|
|
10.0 |
|
|
|
232.6 |
|
|
|
10.4 |
|
|
|
220.2 |
|
|
|
10.4 |
|
Purchased services and other |
|
|
150.8 |
|
|
|
13.3 |
|
|
|
156.0 |
|
|
|
14.1 |
|
|
|
307.4 |
|
|
|
13.7 |
|
|
|
309.0 |
|
|
|
14.6 |
|
|
Total |
|
$ |
849.1 |
|
|
|
75.1 |
|
|
$ |
834.8 |
|
|
|
75.5 |
|
|
$ |
1,730.5 |
|
|
|
77.2 |
|
|
$ |
1,670.2 |
|
|
|
78.8 |
|
|
Operating Expenses
Operating expenses were $849.1 million in the second quarter of 2006, up $14.3 million from $834.8
million in the same period of 2005. Operating expenses were $1,730.5 million in the first six
months of 2006, an increase of $60.3 million from $1,670.2 million in the same period of 2005.
The increase was mainly due to higher fuel costs. In addition, there was a decrease in bulk
freight, which generates lower handling costs. The increase in expenses was partially offset by
improved operating efficiencies, cost-containment initiatives, lower GTMs, a favourable Foreign
Exchange impact, and mild winter weather. The change in Foreign Exchange reduced operating
expenses by approximately $29 million and $49 million in second-quarter and first-half 2006,
respectively. In addition, higher fuel costs are largely recovered in revenue from fuel
surcharges.
8
Ø Compensation and Benefits
Compensation and benefits expense was $321.5 million in second-quarter 2006, relatively unchanged
from $322.2 million in the same period of 2005. The expense was $671.4 million in the first six
months of 2006, an increase of $18.1 million from $653.3 million in the same period of 2005.
Compensation and benefits expense in both periods was negatively affected by the impact of
inflation and increased pension costs. The increase in the first half of 2006 reflected higher
costs associated with employee incentive compensation (discussed further under the sub-heading
Stock Prices in the section Future Trends, Commitments and Risks) driven by the effect of
increased share prices on stock-based compensation.
The increases were partially offset by:
|
|
|
reduced costs as a result of lower freight volumes and restructuring initiatives
(discussed further under the sub-heading Restructuring in the section Future Trends,
Commitments and Risks); |
|
|
|
|
savings realized from efficiencies gained through our IOP (discussed further in the
section Future Trends, Commitments and Risks); |
|
|
|
|
a favourable adjustment to restructuring accruals in the second quarter of 2006; and |
|
|
|
|
the positive impact of the change in Foreign Exchange. |
Ø Fuel
Fuel expense was $160.1 million in the second quarter of 2006, an increase of $14.9 million from
$145.2 million in second-quarter 2005. The expense was $318.0 million in the first half of 2006,
an increase of $38.3 million from $279.7 million in the same period of 2005. The increase in the
second quarter and first half of 2006 was due to higher crude oil prices and refining charges,
partially offset by the effect of the change in Foreign Exchange and reduced workload, as measured
by GTMs.
Fuel price increases are also mitigated by our fuel surcharge program (discussed in this MD&A under
the sub-heading Freight Revenues in the section Lines of Business).
Ø Materials
Materials expense was $54.5 million in the second quarter of 2006, an increase of $8.5 million from
$46.0 million in the same period of 2005. The expense was $112.1 million in the first six months
of 2006, an increase of $7.3 million from $104.8 million in the same period of 2005. The increase
in the second quarter and first half of 2006 was due mainly to:
|
|
|
higher cost of materials for freight car and locomotive repairs and train servicing,
particularly with freight car wheel replacement; and |
|
|
|
|
favourable adjustments taken in the second quarter of 2005 for a recovery from a supplier
of costs to repaint freight cars and for a price amendment from another supplier. |
The increase in the first six months of 2006 was partially offset by an unfavourable inventory
adjustment in the first quarter of 2005.
Ø Equipment Rents
Equipment rents expense was $44.4 million in second-quarter 2006, a decrease of $10.3 million from
$54.7 million in the second quarter of 2005. The expense was $89.0 million in the first half of
2006, a decrease of $14.2 million from $103.2 million in the same period of 2005. The decrease in
the second quarter and first half of 2006 was due mainly to:
|
|
|
more efficient movement of traffic over our network, which decreased our need to rent
locomotives and freight cars, reducing equipment rental payments to other railways; and |
|
|
|
|
the effect of the change in Foreign Exchange. |
These decreases were partially offset by lower receipts from other railways and customers
for the use of our freight cars. In addition, the decrease in the first half of 2006 was further
offset by favourable adjustments in the first quarter of 2005 for freight car rentals pertaining to
prior periods.
Ø Depreciation and Amortization
Depreciation and amortization expense was $117.8 million in the second quarter of 2006, an increase
of $7.1 million from $110.7 million in the same period of 2005. The expense was $232.6 million in
the first six months of 2006, an increase of $12.4 million from $220.2 million in the same period
of 2005. The increase in the second quarter and first half of 2006 was due largely to additions to
capital assets for track and locomotives, including our Western Canada expansion, partially offset
by the effect of the change in Foreign Exchange and asset retirements.
Ø Purchased Services and Other
Purchased services and other expense was $150.8 million in the second quarter of 2006, a decrease
of $5.2 million from $156.0 million in the same period of 2005. The expense was $307.4 million in
the first six months of 2006, a decrease of $1.6 million from $309.0 million in the same period of
2005. The improvement was due largely to lower joint-facility inter-railway expenditures stemming
mainly from our co-production initiatives, adhering to our IOP and our track capacity expansion in
Western Canada.
9
Other Income Statement Items
Ø Other Charges
Other charges were $7.7 million in the second quarter of 2006, an increase of $2.0 million from
$5.7 million in the same period of 2005 and were $14.5 million in the first half of 2006, an
increase of $9.8 million from $4.7 million in the same period of 2005. The increase was due mainly
to a gain realized in the first quarter of 2005 when interest rate locks were settled, and to the
effect of the change in Foreign Exchange on working capital accounts.
Ø Interest Expense
Interest expense was $48.6 million in the second quarter of 2006, a decrease of $4.6 million from
$53.2 million in second-quarter 2005. The expense was $95.9 million in the first six months of
2006, a decrease of $8.9 million from $104.8 million in the first six months of 2005.
Interest expense decreased due to the positive effect of the change in Foreign Exchange and the
retirement of $250-million Medium Term Notes in June 2005. The improvements were partially offset
by higher interest charges on variable-interest rate debt tied to the London Interbank Offered Rate
(LIBOR), which increased in the period.
Ø Income Taxes
There was a benefit for income taxes of $99.2 million in the second quarter of 2006, compared with
income tax expense of $72.0 million in the same three months of 2005. The benefit in the first six
months of 2006 was $41.6 million, compared with income tax expense of $116.3 million in the same
period of 2005. The recoveries were mainly due to a positive adjustment taken in the second quarter
of 2006 (described below), partially offset by an increase in taxes as a result of higher income.
The effective income tax rate for second-quarter 2006 was -35.7% and -9.3% for the first half of
2006, compared with 36.9% and 36.3% for the same periods in 2005, respectively. The normalized
rate (income tax rate based on income adjusted for FX on LTD and the other specified item) was
29.0% for second-quarter 2006 and 30.5% for the first half of 2006, compared with 34.0% for each of
the same periods in 2005. The reduction in our tax rates is due to changes in Canadian federal and
provincial corporate income tax rates (discussed below) and tax planning initiatives.
In the second quarter of 2006, the Government of Canada and the governments of the provinces of
Alberta, Saskatchewan and Manitoba introduced legislation to reduce corporate income tax rates over
a period of several years. We recorded a future income tax benefit of $176 million to reflect the
positive impact of these tax rate reductions on transactions in prior years for which future taxes
will be paid.
We expect a normalized 2006 income tax rate of between 30% and 32%.
In recent years, we have utilized non-capital tax loss carryforwards to offset current taxable
income. We anticipate that these non-capital tax loss carryforwards will be exhausted during 2006
and we will have an increase in our cash tax payments in future years.
Beginning in the fourth quarter of 2005, certain capital losses were no longer available to offset
capital gains arising from FX on LTD and other capital transactions. Following a review of
impending transactions during third-quarter 2005, we concluded that our remaining unrecognized
capital loss carryforwards for tax would more than likely be utilized. Consequently, we recorded a
future tax asset for all
previously unrecognized capital loss carryforwards. As a result, any future capital gains
recorded, including FX on LTD, will be taxable, where historically they had resulted in no net tax
expense.
Also as a result of this review, the income tax associated with FX on LTD decreased by $1.1 million
in the second quarter of 2006 and increased by $1.3 million year to date. The income tax expense,
before income tax on FX on LTD, was increased in second-quarter 2006 and reduced in first-half 2006
by the same amounts. This reclassification moves previously recognized capital losses that
historically were allocated to unrealized FX on LTD gains and includes them in the calculation of
income tax for other realized capital transactions, which are included in income tax expense,
before income tax on FX on LTD. With this reclassification, the tax benefit of these losses is
matched to the transactions that utilize them.
Changes in Accounting Policy
There have been no accounting policy changes other than those disclosed in our MD&A for the year
ended December 31, 2005, and for the first quarter of 2006.
Off-Balance Sheet Arrangements
The information on off-balance sheet arrangements disclosed in our MD&A for the year ended December
31, 2005, and for the first quarter of 2006 remains substantially unchanged, except for the
following recent developments:
Sale of Accounts Receivable
At June 30, 2006, the outstanding undivided co-ownership interest held by an unrelated trust under
our accounts receivable securitization program was $120.0 million (June 30, 2005 $120.0 million).
Losses of $1.2 million on the securitization program in the second quarter in 2006 (second-quarter
2005 losses of $0.9 million) and losses of $2.3 million in the first half of 2006
10
(first-half 2005 losses of $1.8 million) were included in Other Charges on our Statement of
Consolidated Income. We provide a credit enhancement amount to absorb all credit losses. The
trust has no recourse to the co-ownership interest in receivables that we retain, other than in
respect of the credit enhancement amount. This amount was recognized as a retained interest. The
fair value of the retained interest at June 30, 2006, was approximately 19% of receivables sold, or
$23 million (June 30, 2005 approximately 15%, or $18.0 million) and was included in Accounts
Receivable and Other Current Assets on our Consolidated Balance Sheet. The fair value of the
retained interest approximated its carrying value as a result of the short collection cycle of the
receivables and expected credit losses amounting to less than 0.05% of total receivables. Proceeds
from collections reinvested in the accounts receivable securitization program were $359.4 million
for the second quarter of 2006 and $726.5 million for the first half of 2006. We have complied
with all termination tests during the program.
Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data |
|
For the quarter ended |
(in millions, except per share data) |
|
2006 |
|
2005 |
|
2004 |
(unaudited) |
|
June 30 |
|
Mar. 31 |
|
Dec. 31 |
|
Sept. 30 |
|
June 30 |
|
Mar. 31 |
|
Dec. 31 |
|
Sept. 30 |
|
Total revenue(1) |
|
$ |
1,131.0 |
|
|
$ |
1,110.5 |
|
|
$ |
1,166.9 |
|
|
$ |
1,104.7 |
|
|
$ |
1,105.9 |
|
|
$ |
1,014.1 |
|
|
$ |
1,021.9 |
|
|
$ |
989.7 |
|
Operating income(1) |
|
$ |
281.9 |
|
|
$ |
229.1 |
|
|
$ |
258.0 |
|
|
$ |
283.3 |
|
|
$ |
271.1 |
|
|
$ |
178.7 |
|
|
$ |
161.1 |
|
|
$ |
218.9 |
|
Net income(1) |
|
$ |
377.5 |
|
|
$ |
111.0 |
|
|
$ |
135.4 |
|
|
$ |
203.6 |
|
|
$ |
123.2 |
|
|
$ |
80.7 |
|
|
$ |
129.3 |
|
|
$ |
176.5 |
|
Operating income, before other
specified items(2) |
|
$ |
281.9 |
|
|
$ |
229.1 |
|
|
$ |
302.2 |
|
|
$ |
249.4 |
|
|
$ |
271.1 |
|
|
$ |
178.7 |
|
|
$ |
233.0 |
|
|
$ |
218.9 |
|
Income, before FX on LTD and other
specified items(2) |
|
$ |
160.1 |
|
|
$ |
118.3 |
|
|
$ |
168.8 |
|
|
$ |
134.9 |
|
|
$ |
140.0 |
|
|
$ |
84.6 |
|
|
$ |
116.3 |
|
|
$ |
103.8 |
|
|
Basic earnings per share(1) |
|
$ |
2.38 |
|
|
$ |
0.70 |
|
|
$ |
0.86 |
|
|
$ |
1.29 |
|
|
$ |
0.78 |
|
|
$ |
0.51 |
|
|
$ |
0.81 |
|
|
$ |
1.11 |
|
Diluted earnings per share(1) |
|
$ |
2.36 |
|
|
$ |
0.69 |
|
|
$ |
0.85 |
|
|
$ |
1.27 |
|
|
$ |
0.77 |
|
|
$ |
0.50 |
|
|
$ |
0.81 |
|
|
$ |
1.11 |
|
Diluted earnings per share, before FX
on LTD and other specified
items(2) |
|
$ |
1.00 |
|
|
$ |
0.74 |
|
|
$ |
1.06 |
|
|
$ |
0.84 |
|
|
$ |
0.87 |
|
|
$ |
0.53 |
|
|
$ |
0.73 |
|
|
$ |
0.65 |
|
|
|
|
|
(1) |
|
This information is in Canadian dollars and has been prepared in accordance with Canadian GAAP. |
|
(2) |
|
These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in the Non-GAAP Earnings section of this MD&A. A reconciliation of income and EPS, before FX on LTD and other specified
items, to net income and EPS, as presented in the financial statements is provided in the Non-GAAP Earnings section. This information is in Canadian dollars. |
Volumes of, and therefore, revenues from certain goods are stronger during different periods of the
year. First-quarter revenues can be lower mainly due to winter weather conditions, closure of the
Great Lakes ports and reduced transportation of retail goods. Second- and third-quarter revenues
generally improve over the first quarter as fertilizer volumes are typically highest during the
second quarter and demand for construction-related goods is generally highest in the third quarter.
Revenues are typically strongest in the fourth quarter, primarily as a result of the
transportation of grain after the harvest, fall fertilizer programs and increased demand for retail
goods moved by rail. Fertilizer revenues were lower than normal in the first half of 2006 as
third-party negotiations caused a delay in potash shipments to China.
Operating income is also affected by seasonal fluctuations. Operating income is typically lowest in
the first quarter due to higher operating costs associated with winter conditions. However, mild
weather in the first quarter of 2006 helped to reduce the negative impact of winter on both
revenues and expenses. During the first and second quarters of 2005, a total of $23 million in
additional revenues was recorded as a result of an agreement reached with our largest coal shipper.
Operating and net income also increased in these two quarters of 2005 as a result of the
additional revenues.
Net income is also influenced by seasonal fluctuations in customer demand, weather-related costs,
FX on LTD, and other specified items.
Reduced income tax expense contributed significantly to an increase in net income in the second
quarter of 2006. The Government of Canada and several provincial governments reduced their
corporate income tax rates (discussed further under the sub-heading Income Taxes in the section
Other Income Statement Items). We recorded a future income tax benefit of $176 million to
reflect the positive impact of these tax rate reductions on transactions in prior years for which
future taxes will be paid.
Operating and net income in 2005 were influenced by two other specified items:
|
|
|
A special charge taken in the fourth quarter of 2005 for a new restructuring initiative to
reduce management and administrative costs. The special charge reduced net income by $28.3
million and operating income by $44.2 million. |
|
|
|
|
A reduction, taken in the third quarter of 2005, to a special charge originally taken in
the fourth quarter of 2004 to cover environmental clean-up costs. The reduction, which was
the result of a binding settlement with another responsible party, increased net income by
$20.6 million and operating income by $33.9 million. |
11
Operating and net income in the fourth quarter of 2004 were also influenced by two other specified
items:
|
|
|
A special charge to reflect the estimated costs to clean up environmental contamination at
a property in the U.S. The special charge reduced fourth-quarter 2004 net income by $55.2
million and operating income by $90.9 million. |
|
|
|
|
A favourable adjustment recorded in fourth-quarter 2004 reflected a reduction to a labour
liability included in a special charge originally taken in the second quarter of 2003. The
reduction, which was to the portion of the labour liability to be incurred in restructuring
our northeastern U.S. operations, increased fourth-quarter net income by $12.4 million and
operating income by $19.0 million. |
Liquidity and Capital Resources
We believe adequate amounts of cash and cash equivalents are available in the normal course of
business to provide for ongoing operations, including the obligations identified in the tables in
the section Contractual Commitments and in the section Future Trends, Commitments and Risks
under the sub-heading Financial Commitments. We are not aware of any trends or expected
fluctuations in our liquidity that would create any deficiencies. The following discussion of
operating, investing and financing activities describes our indicators of liquidity and capital
resources.
Cash provided by operating activities was $282.4 million in the second quarter of 2006, a decrease
of $66.9 million from $349.3 million in the same period of 2005. Cash provided by operating
activities was $456.7 million in the first six months of 2006, an increase of $19.2 million from
$437.5 million in the same period of 2005.
The decrease in the second quarter of 2006, compared with the same period in 2005, was largely due to:
|
|
|
an increase in inventory purchases, mainly for track materials and fuel; and |
|
|
|
|
cash received in the second quarter of 2005 from resolution of a dispute with a customer. |
In the first half of 2006, compared with the same period in 2005, higher income more than offset
the above-mentioned decreases and higher restructuring payments and seasonal reductions in accounts
payable.
There are no specific or unusual requirements relating to our working capital. In addition, there
are no unusual restrictions on any subsidiarys ability to transfer funds to CPRL.
Cash used in investing activities was $165.0 million in the second quarter of 2006, a decrease of
$29.9 million from $194.9 million in the same period of 2005. Cash used in investing activities
was $372.1 million in the first half of 2006, an increase of $26.3 million from $345.8 million in
the same period of 2005. Cash used in investing activities decreased in the second quarter of
2006, compared with second-quarter 2005, mainly as a result of:
|
|
|
proceeds from the sale of our Latta subdivision; |
|
|
|
|
reduced capital spending in 2006, compared with 2005 when capacity on our track in western Canada was expanded; and |
|
|
|
|
lower capital spending arising from a mild winter that allowed capital work in the first
quarter that would normally take place in the second quarter when weather conditions are
milder. |
Theses decreases were partially offset by purchases of freight cars, which we intend to sell to and
lease back from a financial institution under an operating lease at a later date. In the first
half of 2006, the freight car purchases more than offset the proceeds from the sale of our Latta
subdivision.
Capital spending in 2006 is projected to be between $810 million and $825 million. Our 2006
capital spending outlook assumes capital additions will decrease in 2006, as track-related
investments return to a more normal level following the completion in 2005 of the capacity
expansion. Our capital spending outlook is based on certain assumptions about events and
developments that may not materialize or that may be offset entirely or partially by other events
and developments (discussed further in the Forward-Looking Information section of this MD&A).
We intend to finance capital expenditures with cash from operations but may partially finance these
expenditures with new debt, if required. Our decision whether to finance equipment acquisitions
through debt will be influenced by such factors as the need to keep our capital structure within
debt covenants and to maintain a net-debt to net-debt-plus-equity ratio (discussed in this section
under the sub-heading Financing Activities) that would preserve our investment grade standing, as
well as the amount of cash flow we believe can be generated from operations and the prevailing
interest rate environment.
12
Cash used in financing activities was $120.6 million in the second quarter of 2006, compared with
$297.2 million in the same period of 2005. Cash used in financing activities was $162.1 million in
the first half of 2006, compared with $313.0 million in the same period of 2005. The decreased use
of cash was due to:
|
|
|
the repayment in the second quarter of 2005 of our 7.2% $250-million Medium Term Notes; |
|
|
|
|
increased proceeds from the issue of shares for stock options exercised in the second
quarter and first six months of 2006; and |
|
|
|
|
was partially offset by higher payments made in both the second quarter and first half
of 2006 to buy back more shares through our share repurchase program under a normal course
issuer bid (discussed further under the sub-heading Share Capital in the section Balance
Sheet). |
We have available, as sources of financing, unused credit facilities of up to $520.0 million, as
well as an uncommitted amount of US$15.0 million. Our unsecured long-term debt securities are
rated Baa2, BBB and BBB(high) by Moodys Investors Service, Inc., Standard and Poors
Corporation and Dominion Bond Rating Service, respectively.
At June 30, 2006, our net-debt to net-debt-plus-equity ratio improved to 37.7%, compared with 42.1%
at June 30, 2005. The improvement was due primarily to an increase in equity from earnings and the
favourable year-over-year impact of U.S. foreign exchange rates on long-term debt. Net debt is the
sum of long-term debt, long-term debt maturing within one year and short-term borrowing, less cash
and short-term investments. This sum is divided by total net debt plus total shareholders equity
as presented on our Consolidated Balance Sheet.
Management is committed to maintaining its net-debt to net-debt-plus-equity ratio at an acceptable
level and intends to continue to manage capital employed so that we retain our solid
investment-grade credit ratings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of free cash (reconciliation of free cash to GAAP cash position) |
|
For
the three months ended June 30 |
|
For
the six months ended June 30 |
|
(in millions) (unaudited) |
|
2006 |
|
2005(2) |
|
2006 |
|
2005(2) |
|
Cash provided by operating activities |
|
$ |
282.4 |
|
|
$ |
349.3 |
|
|
$ |
456.7 |
|
|
$ |
437.5 |
|
Cash used in investing activities |
|
|
(165.0 |
) |
|
|
(194.9 |
) |
|
|
(372.1 |
) |
|
|
(345.8 |
) |
Dividends paid on Common Shares |
|
|
(29.8 |
) |
|
|
(21.0 |
) |
|
|
(53.5 |
) |
|
|
(42.0 |
) |
|
Free cash(1) |
|
|
87.6 |
|
|
|
133.4 |
|
|
|
31.1 |
|
|
|
49.7 |
|
Cash used in financing activities,
before dividend payment |
|
|
(90.8 |
) |
|
|
(276.2 |
) |
|
|
(108.6 |
) |
|
|
(271.0 |
) |
|
Decrease in cash, as shown on the
Statement of Consolidated Cash Flows |
|
|
(3.2 |
) |
|
|
(142.8 |
) |
|
|
(77.5 |
) |
|
|
(221.3 |
) |
Net cash at beginning of period |
|
|
47.5 |
|
|
|
274.5 |
|
|
|
121.8 |
|
|
|
353.0 |
|
|
Net cash at end of period |
|
$ |
44.3 |
|
|
$ |
131.7 |
|
|
$ |
44.3 |
|
|
$ |
131.7 |
|
|
|
|
|
(1) |
|
These measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies. |
|
(2) |
|
Certain prior period figures have been restated to conform with presentation adopted in 2006. |
Free cash is a non-GAAP measure that management considers to be an indicator of liquidity. Free
cash after dividends is calculated as cash provided by operating activities, less cash used in
investing activities and dividends.
There was free cash of $87.6 million in the second quarter of 2006, and $133.4 million in the same
period of 2005. Free cash was $31.1 million for the first six months in 2006, compared with $49.7
million for the same period in 2005. The decrease in the second quarter was due largely to
operating activities, which generated less cash (discussed in this section under the sub-heading
Operating Activities), the purchase of freight cars we intend to sell and lease back (discussed
in this section under the sub-heading Investing Activities) and a higher dividend payment,
partially offset by lower capital spending and proceeds from the sale of our Latta subdivision.
The decrease in the first six months of the year was due to the purchase of freight cars and a
higher dividend payment, partially offset by the proceeds from the sale of our Latta subdivision
and higher cash generated through operations.
We expect to generate more than $200 million in free cash in 2006, after dividends and before our
share repurchases (discussed in the section Balance Sheet), compared with $92 million in 2005.
The increase will be generated mainly through improved cash flow from operations and lower capital
expenditures. Our free cash outlook is based on certain assumptions about events and developments
that may not materialize or that may be offset entirely or partially by other events and
developments (discussed in the Forward-Looking Information section of this MD&A). Our free cash
outlook relies on the assumptions established for earnings and capital expenditures, which are
discussed in this MD&A under the sub-heading Revenues in the section Lines of Business, and in
the sections Operating Expenses, Liquidity and Capital Resources and Other Income Statement
Items.
13
Balance Sheet
Assets totalled $10,946.7 million at June 30, 2006, compared with $10,891.1 million at December 31,
2005. The increase was mainly due to:
|
|
|
capital additions, most of which were locomotives and track replacement; |
|
|
|
|
purchases of freight cars, which we intend to sell to and lease back from a financial
institution under an operating lease at a later date; |
|
|
|
|
an increase in inventory purchases, mainly for track materials and fuel; and |
|
|
|
|
cash received from share options being exercised and proceeds from the sale of our Latta subdivision. |
These increases were partially offset by a reduction in cash balances as a result of capital
purchases and share repurchases.
Our combined short-term and long-term liabilities were $6,233.7 million at June 30, 2006, compared
with $6,505.4 million at December 31, 2005. The decrease was due mainly to:
|
|
|
reductions to restructuring accruals; |
|
|
|
|
a reduction in accounts payable and accrued liabilities in the first quarter of 2006 due
to payment of incentive compensation; and |
|
|
|
|
a reduction in future income taxes as a result of a reduction in corporate income tax
rates (discussed further under the sub-heading Income Taxes in the section Other Income
Statement Items). |
At June 30, 2006, our Consolidated Balance Sheet reflected $4,713.0 million in equity, compared
with equity balances of $4,385.7 million at December 31, 2005. The increase was due primarily to
growth in retained income and the issuance of Common Shares for stock options exercised, partially
offset by shares repurchased under a normal course issuer bid (discussed below).
At June 30, 2006, 157.2 million Common Shares and no Preferred Shares were issued and outstanding.
At June 30, 2006, 7.3 million options were outstanding under our Management Stock Option Incentive
Plan, and there were 0.3 million Common Shares available for the granting of future options out of
the 11.0 million Common Shares currently authorized. Each option granted can be exercised for one
Common Share.
On February 21, 2006, our Board of Directors authorized the purchase of up to 5.5 million of our
outstanding common shares for cancellation through normal course issuer bid purchases. This
represents approximately 3.5% of our common shares outstanding at December 31, 2005.
On March 1, 2006, we completed the necessary filings to increase the number of common shares
eligible for purchase under our then existing normal course issuer bid (the 2005 NCIB), which was
discussed in our December 31, 2005 MD&A, to 3,325,000 common shares during the 12 month period
ending June 5, 2006. This amendment to the 2005 NCIB enabled us to purchase a portion of the
shares authorized to be purchased by our Board of Directors during the period covered by it.
From June 6, 2005 to June 5, 2006, we purchased 3,325,000 Common Shares under the 2005 NCIB at an
average price of $51.82 per share.
On June 1, 2006 we completed the filings for a new normal course issuer bid (the 2006 NCIB) to
enable us to purchase for cancellation up to 3,936,000 of our outstanding shares during the 12
month period from June 6, 2006 to June 5, 2007. This latest NCIB will allow us to complete the
repurchase of up to 5.5 million Common Shares in the calendar year 2006, as announced in February,
2006. The number of shares that may be purchased under the 2006 NCIB represents approximately 2.5%
of our 158,321,252 common shares outstanding on May 31, 2006. Purchases may be made through the
facilities of the Toronto Stock Exchange and the New York Stock Exchange. The prices that we pay
for any shares will be the market price at the time of purchase. The purpose and business reason
for purchasing shares as a result of the 2006 NCIB is that the purchase of Common Shares may be an
attractive and appropriate use of corporate funds in light of potential benefits to remaining
shareholders. The 2006 NCIB enables us to purchase the remaining shares authorized to be purchased
by our Board of Directors.
From June 6, 2006, to June 30, 2006, we purchased 1,165,500 Common Shares under the 2006 NCIB at an
average price of $54.83 per share.
Shareholders may obtain, without charge, a copy of our Notices of Intention to Make a Normal Course
Issuer Bid by writing The Office of the Corporate Secretary, Canadian Pacific Railway Limited,
Suite 920, Gulf Canada Square, 401 9th Avenue S.W., Calgary, Alberta, T2P 4Z4, by telephone at
(403) 319-7165 or 1-866-861-4289, by fax at (403) 319-6770, or by e-mail at
shareholder@cpr.ca.
14
As announced in the first quarter of 2006, a dividend of $0.1875 per share was paid on April 24,
2006. On May 5, 2006, our Board of Directors declared a quarterly dividend of $0.1875 per share
(2005 $0.15 per share) on the outstanding Common Shares. The dividend is payable on July 31,
2006, to holders of record at the close of business on June 30, 2006.
Financial Instruments
Our policy with respect to using financial instruments is to selectively reduce volatility
associated with fluctuations in interest and foreign exchange rates and in the price of diesel
fuel. We assess on a quarterly or more frequent basis whether a derivative item is effective in
offsetting the changes in fair value or cash flows from the hedged items. The derivative qualifies
for hedge accounting treatment if it is effective. If the derivative is not effective, its book
value is adjusted to its market value each quarter and the associated gains or losses are included
in Other Charges on our Statement of Consolidated Income.
It is not our intent to use financial derivatives or commodity instruments for trading or
speculative purposes.
We are exposed to counterparty credit risk in the event of non-performance by counterparties. In
order to mitigate this risk, limits are set by our Board of Directors for counterparty transactions
and we conduct regular monitoring of the credit standing of the counterparties or their guarantors.
We do not anticipate any losses with respect to counterparty credit risk.
The information on financial instruments disclosed in our MD&A for the year ended December 31,
2005, and for the first quarter of 2006 remains substantially unchanged, except for the following
recent developments:
Ø |
|
Interest Rate Management |
Interest Rate Swaps
In 2003 and 2004, we entered into fixed-to-floating interest rate swap agreements totalling US$200
million to convert a portion of our US$400-million 6.25% Notes to floating-rate debt. These swaps
are accounted for as a fair value hedge. Accounting for these swaps increased Interest Expense
on the Statement of Consolidated Income by $0.2 million in the second quarter of 2006 (second
quarter of 2005 $1.2 million) and by $0.1 million in the first six months of 2006 (first half of
2005 $2.1 million). At June 30, 2006, an unrealized loss of $8.3 million (June 30, 2005 gain
of $9.4 million) from these interest rate swaps was calculated based on their fair value utilizing
swap, currency and basis-spread curves from Reuters. We have not recorded the fair value of these
swaps on our Consolidated Balance Sheet.
Interest and Treasury Rate Locks
At June 30, 2006, Other Assets and Deferred Charges on the Consolidated Balance Sheet included
unamortized losses of $15.2 million (June 30, 2005 $18.6 million) for previously settled interest and treasury rate
locks, and Deferred Liabilities on the Consolidated Balance Sheet included an unamortized gain of
$8.4 million (June 30, 2005 $8.7 million) from interest rate locks. These gains and losses are
being amortized over the lives of their underlying debt. Amortization of the gains and losses
resulted in net expense amounts of $0.8 million for the second quarter of 2006 (second quarter of
2005 $0.8 million) and $1.6 million for the first half of 2006 (first half of 2005 $1.6
million), which are included in Interest Expense on the Statement of Consolidated Income.
Ø |
|
Foreign Exchange Management |
Foreign Exchange Forward Contracts
We hedged a portion of our U.S. dollar-denominated freight revenues earned in Canada by selling
forward U.S. dollars. At June 30, 2006, we had US$12.4 million (June 30, 2005 US$96.1 million)
of forward sales of U.S. dollars outstanding to be settled in 2006. The unrealized gain on these
forward contracts, calculated using the trading value of the U.S. dollar from the Bank of Canada,
was $1.1 million at June 30, 2006 (June 30, 2005 loss of $1.5 million). We did not include this gain
in our financial statements at June 30, 2006, as it remained unrealized at that time. Freight
Revenues on our Statement of Consolidated Income included realized gains on these foreign exchange
forward contracts of $1.4 million in the second quarter (second-quarter 2005 loss of $1.5
million) and $2.9 million in the first half of 2006 (first half of 2005 loss of $2.6 million).
Swaps and fuel surcharges (discussed in this MD&A under the sub-heading Freight Revenues in the
section Lines of Business), together with fuel conservation practices, are the key elements of
our program to manage the risk arising from fuel price volatility.
Crude Oil Swaps
We may enter into crude oil or heating oil swap contracts to help mitigate future price increases
related to the purchase of fuel. We generally enter into commodity swap purchase contracts, and
unrealized gains or losses related to these swaps are deferred until the related fuel purchases are
realized. However, this activity has been temporarily suspended and no swaps have been purchased
since January 2005. Our decision to resume hedging fuel purchases will depend on assessments of
the crude oil and refined products markets in the future.
At June 30, 2006, an unrealized gain of $59.0 million (June 30, 2005 $81.0 million) was
calculated based on the fair value of
our swaps, which was derived from the WTI price, as quoted by
recognized dealers or as developed based upon the present value of
15
expected future cash flows
discounted at the applicable U.S. Treasury Rate, LIBOR or swap spread. We have not included any
unrealized gains in our financial statements in the second quarter of 2006.
Fuel purchases and commodity swap contracts have an element of foreign exchange variability. From
time to time, we use foreign exchange forward contracts to manage this element of fuel-price risk.
An unrealized loss of $7.5 million (June 30, 2005 loss of
$5.0 million) related to the forward purchases of U.S. dollars (which were coupled with the crude
oil swaps) was calculated based on the fair value of these forward contracts at June 30, 2006.
Forward curves from Reuters were utilized to establish the fair value. The loss has not been
recorded in our financial statements in second-quarter 2006, as it remains unrealized. These
forward contracts will settle in 2006 through 2009.
Fuel expense was reduced by $7.7 million in the second quarter of 2006 (second quarter of 2005 -
$10.6 million) as a result of $8.8 million (second quarter of 2005 $11.0 million) in realized gains arising from settled swaps,
partially offset by $1.1 million (second quarter of 2005 $0.4 million) in realized losses arising
from the settled foreign exchange forward contracts. Fuel expense was reduced by $14.3 million
in the first six months of 2006 (first half of 2005 $18.0 million) as a result of $16.4 million
(first half of 2005 $19.3 million) in realized gains arising from settled swaps, partially offset
by $2.1 million (first half of 2005 $1.3 million) in realized losses arising from the settled
foreign exchange forward contracts.
For every US$1 increase in the price of WTI, fuel expense, before hedging, will increase by
approximately $8 million, assuming current foreign exchange rates and fuel consumption levels. We
have fuel hedges for approximately 13% of our estimated fuel purchases in 2006, 8% in 2007, 3% in
2008, and 3% in 2009.
Ø |
|
Stock-Based Compensation Expense Management |
Total Return Swaps
We entered into a Total Return Swap (TRS), effective in May 2006, in order to reduce the
volatility and total cost to the Company over time of two types of stock-based compensation: share
appreciation rights (SAR) and deferred share units (DSU) (discussed further under the
sub-heading Stock Prices in the section Future Trends, Risks and Commitments). The value of the
TRS derivative is linked to the market value of our stock and is intended to mitigate the impact on
expenses of share value movements on SARs and DSUs. Compensation and Benefits expense on our
Statement of Consolidated Income included an unrealized loss on these swaps of $8.3 million in the
second quarter of 2006. These losses substantially offset benefits recognized in the SARs and DSUs
stock-based compensation programs due to fluctuations in our share price during the period the TRS
was in place.
Contractual Commitments
The accompanying table indicates our known obligations and commitments to make future payments for
contracts, such as debt and capital lease and commercial arrangements.
In the first six months of 2006, we purchased 44 new loco-motives, which were previously held under
an operating lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual commitments |
|
Payments due by period |
at June 30, 2006 |
|
|
|
remainder |
|
|
1 3 |
|
3 5 |
|
After |
(in millions) |
|
Total |
|
of 2006 |
|
|
years |
|
years |
|
5 years |
|
Long-term debt |
|
$ |
2,594.1 |
|
|
$ |
151.0 |
|
|
$ |
36.1 |
|
|
$ |
393.6 |
|
|
$ |
2,013.4 |
|
|
Capital lease obligations |
|
|
304.0 |
|
|
|
0.5 |
|
|
|
15.9 |
|
|
|
34.9 |
|
|
|
252.7 |
|
|
Operating lease obligations(1) |
|
|
532.4 |
|
|
|
67.2 |
|
|
|
188.8 |
|
|
|
93.1 |
|
|
|
183.3 |
|
|
Supplier purchase obligations |
|
|
543.7 |
|
|
|
53.5 |
|
|
|
149.8 |
|
|
|
115.8 |
|
|
|
224.6 |
|
|
Other long-term liabilities reflected on
our Consolidated Balance Sheet
(2) |
|
|
882.3 |
|
|
|
60.3 |
|
|
|
216.0 |
|
|
|
177.1 |
|
|
|
428.9 |
|
|
Total contractual obligations |
|
$ |
4,856.5 |
|
|
$ |
332.5 |
|
|
$ |
606.6 |
|
|
$ |
814.5 |
|
|
$ |
3,102.9 |
|
|
|
|
|
(1) |
|
We have guaranteed residual values on certain leased equipment with a maximum exposure of $219.3 million, primarily in 2006 and beyond. Management
estimates that we will have no net payments under these residual guarantees and, as such, has not included any amounts with respect to these guaranteed
residual values in the minimum payments shown above. |
|
(2) |
|
Includes expected cash payments for restructuring, environmental remediation, asset retirement obligations, post-retirement benefits, workers
compensation benefits and pension benefit payments for a pension plan that we administer. Projected payments for post-retirement and workers compensation
benefits include the anticipated payments for years 2006 to 2015. Pension contributions and pension benefit payments for our two main pension plans are not
included due to the volatility in calculating them. Pension payments are discussed further under the sub-heading Pension Plan Deficit in the section
Future Trends, Commitments and Risks. |
Future Trends, Commitments and Risks
The future trends, commitments and risks disclosed in our MD&A for the year ended December 31,
2005, and for the first quarter of 2006 remain substantially unchanged, except for the following
recent developments:
Change in Executive Officers and Chairman of the Board
On May 5, 2006, CPRs Chief Executive Officer (CEO), Robert J. Ritchie, retired and Fred J. Green
assumed the position of CEO. Mr. Green also retained his position as President.
On May 5, 2006, the Chairman of our Board, J.E. (Ted) Newall, retired and was replaced by John E.
Cleghorn.
16
Effective April 14, 2006, CPRs Executive Vice-President and Chief Financial Officer (CFO),
Michael T. Waites, resigned. Brian W. Grassby, Vice-President and Comptroller, assumed the
position of Acting CFO.
Sale of Latta Subdivision
On May 26, 2006, the U.S. Surface Transportation Board approved the sale of our Latta Subdivision
to Indiana Rail Road Co. (INRD). The Latta Subdivision, located in the State of Indiana, is a
rail line between Fayette, near Terre Haute, and Bedford. The sale also included rights of INRD to
use certain track of CSX Transportation between Chicago, Illinois, and Louisville, Kentucky. INRD
assumed all rail operations on the line beginning May 27, 2006. We do not expect the sale of this
portion of our operations to materially impact our financial results. This sale was not segregated
as a discontinued operation on our financial statements because it did not generate its own
identifiable cash flow.
Rail Network Capacity
Significant increases in rail traffic volumes have created capacity challenges for the North
American rail sector. In particular, a rapid surge in exports and imports has created pressure on
railway systems to and from the Pacific Coast. In 2005 we completed a major expansion of our track
network in western Canada between the prairies and the Port of Vancouver on the Pacific Coast. Any
further expansion will be tied to ongoing market conditions and the continuation of a stable
regulatory environment in Canada. We are also maximizing our freight handling capacity by
acquiring new and more powerful locomotives and replacing older freight cars with more efficient
and higher-capacity freight cars. Market conditions in our coal and potash businesses prevented us
from realizing sufficient volume growth in the first half of 2006 to fully consume the additional
capacity created by the track expansion in western Canada. However, we do not expect this to be a
long-term market trend and it is our expectation that we will eventually be able to fully utilize
this capacity.
Integrated Operating Plan
We manage scheduled operations through our IOP. The key principles upon which our IOP is built
include moving freight cars across the network with as few handlings as possible, creating balance
in the directional flow of trains in our corridors by day of week, and minimizing the time that
locomotives and freight cars are idle. During the first half of 2006, execution of our IOP,
generated productivity and efficiency improvements that reduced expenses in key areas, while
improving service reliability to support rate increases and grow market share. Areas of expense
reduction included labour, purchased services and equipment costs.
Canadian Government Covered Hopper Car Fleet
We move grain using our covered hopper car fleet, which consists of owned, leased and managed
freight cars. The managed segment consists of cars provided by federal and provincial governments
for the purpose of transporting grain. The Canadian government has announced its intention to
retain ownership of its 6,300 cars utilized by CPR and negotiate a new operating agreement with
Canadas major railways. We view this government position in a positive way. It provides clarity
in a substantial business segment, removes an additional administrative level proposed by the
previous government, and allows for the negotiation of a progressive operating agreement geared
towards ensuring an efficient, low-cost grain handling and transportation system.
Stock Price
The market value of our Common Shares on the Toronto Stock Exchange decreased $1.35 per share (from
$58.26 to $56.91) in the second quarter of 2006 and increased $8.20 per share in the first six
months of 2006 (from $48.71 to $56.91). The market value of our Common Shares on the Toronto Stock
Exchange decreased $1.36 per share (from $43.75 to $42.39) in the second quarter of 2005 and
increased $1.29 per share in the first six months of 2005 (from $41.10 to $42.39). The changes in
share price caused corresponding changes in the value of our outstanding share appreciation rights
(SAR) and deferred share units (DSU). Effective the second quarter of 2006, we put in place a
Total Return Swap (TRS) (discussed in this MD&A under the sub-heading Total Return Swaps in the
section Financial Instruments) to mitigate gains and losses associated with the effect of our
share price on the SARs and DSUs. Excluding the impact of our TRS, the cost of our SARs and DSUs
resulted in a decrease in compensation and benefits expense of $0.2 million in second-quarter 2006
and an increase of $14.5 million in the first six months of 2006, compared with the same periods of
2005.
Crude Oil Prices
Crude oil prices continued to escalate in the first half of 2006 and remain volatile due to strong
world demand and geopolitical events that disrupt and threaten to disrupt supply. We will continue
to mitigate the impact of increases in fuel prices through a fuel risk mitigation program, which
includes fuel surcharges (discussed in this MD&A under the sub-heading Freight Revenues in the
section Lines of Business). We currently have hedges in place (discussed in this MD&A in the
section Financial Instruments) that partially offset the effects of rising fuel prices. Revenue
from fuel surcharges and the benefits of hedging resulted in the recovery of more than
three-quarters of our fuel price increase in the second quarter and first half of 2006. We are
also reducing fuel costs by acquiring more fuel-efficient locomotives and employing fuel-efficiency
initiatives through our IOP.
17
Border Security
We strive to ensure our customers have unimpeded access to North American markets by working
closely with Canadian and U.S. customs officials and other railways to facilitate the safe and
secure movement of goods between Canada and the U.S. We also take all necessary precautions to
prevent smuggling and other illegal activities.
A new Vehicle and Cargo Inspection System (VACIS) has been installed at five of our border
crossings under a co-operative program with the Canada Border Services agency and U.S. Customs and
Border Protection. The final phase of this project is nearly complete.
Labour Relations
Agreements are in place with all seven bargaining units in Canada and 11 of 28 bargaining units in
the U.S. All negotiations currently under way are progressing positively and we do not anticipate
any labour disruptions. The following is a summary of the status of unsettled and recently settled
agreements:
Negotiations commenced in April 2006 with the Transportation Communications Local 1976 United
Steelworkers of America (TC-USWA). Our collective agreement with the TC-USWA, which represents
clerical and administrative staff, expires at the end of 2006. On June 22, 2006, CPR and the
TC-USWA reached a tentative, three-year agreement extending to the end of 2009. The agreement has
been submitted to a ratification vote and results are expected in the third quarter of 2006.
We are party to collective agreements with 28 bargaining units: 15 on our Soo Line Railroad (Soo
Line) subsidiary and 13 on our Delaware and Hudson Railway (D&H) subsidiary.
On the Soo Line, negotiations have commenced with 14 bargaining units representing track
maintainers, conductors, clerks, car repair employees, mechanical labourers, machinists,
electricians, train dispatchers, signal repair employees, police, blacksmiths and boilermakers,
sheet metal workers, locomotive engineers and mechanical supervisors. An agreement with the
bargaining unit representing yard supervisors extends through 2008.
D&H has agreements in place with 10 unions representing freight car repair employees, clerks,
locomotive engineers, signal repair employees, mechanical supervisors, mechanical labourers,
machinists, electricians, engineering supervisors and police. Negotiations are continuing with the
remaining three bargaining units, which represent track maintainers, conductors and yard
supervisors.
Environmental
We continue to be responsible for remediation work on portions of a property in the State of
Minnesota and continue to retain liability accruals for remaining future expected costs. The
states voluntary investigation and clean-up program will oversee the work to ensure it is
completed in accordance with applicable standards.
Financial Commitments
In addition to the financial commitments mentioned previously in the sections Off-Balance Sheet
Arrangements and Contractual Commitments, we are party to certain other financial commitments
set forth in the adjacent table and discussed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain other financial |
|
|
commitments at |
|
Amount of commitment per period |
June 30, 2006 |
|
|
|
Remainder |
|
|
2007 & |
|
2009 & |
|
2011 & |
(in millions) (unaudited) |
|
Total |
|
of 2006 |
|
|
2008 |
|
2010 |
|
beyond |
|
Letters of credit |
|
$ |
353.7 |
|
|
$ |
0.8 |
|
|
$ |
352.9 |
|
|
$ |
|
|
|
$ |
|
|
|
Capital commitments(1) |
|
|
622.5 |
|
|
|
273.3 |
|
|
|
172.1 |
|
|
|
68.7 |
|
|
|
108.4 |
|
|
Offset financial liability |
|
|
174.2 |
|
|
|
174.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
1,150.4 |
|
|
$ |
448.3 |
|
|
$ |
525.0 |
|
|
$ |
68.7 |
|
|
$ |
108.4 |
|
|
|
|
|
(1) |
|
We have several contracts outstanding with termination payments ranging from $nil to $20.5 million per contract and resulting in a minimum exposure
of $3.3 million and a maximum exposure of $45.3 million, depending on the date of termination. These contracts are not reflected in the commitments above and terminate
mainly between 2008 and 2013. |
Our available line of credit is adjusted for the letters of credit contract amounts currently
included within our revolving credit facility.
We are obligated to make various capital purchases involving track programs, locomotive
acquisitions and overhauls, freight cars, and land. At June 30, 2006, we had multi-year capital
commitments of $622.5 million in the form of signed contracts or letters of intent, largely for
locomotive overhaul agreements. Payments for these commitments are due in 2006 through 2016.
These expenditures are expected to be financed by cash generated from operations or by issuing new
debt.
|
|
Offset Financial Liability |
At June 30, 2006, a loan to finance certain equipment had a balance of $178.9 million, offset by a
financial asset of $174.2 million. The remainder is included in Long-Term Debt on our
Consolidated Balance Sheet.
18
Pension Plan Deficit
We estimate that every 1.0 percentage point increase (or decrease) in the discount rate can cause
our defined benefit pension plans deficit to decrease (or increase) by approximately $625 million,
after reflecting the expected loss (gain) on the value of the pension funds debt securities with
respect to corresponding changes in long-term interest rates. Similarly, every 1.0 percentage
point the actual return on assets varies above (or below) the estimated return for the year can
cause the deficit to decrease (or increase) by approximately $70 million. Adverse experience with
respect to these factors could eventually increase funding and pension expense significantly, while
favourable experience with respect to these factors could eventually decrease funding and pension
expense significantly.
Between 51% and 57% of the plans assets are invested in equity securities. As a result, stock
market performance is the key driver in determining the pension funds asset performance. Most of
the plans remaining assets are invested in debt securities, which, as mentioned above, provide a
partial offset to the increase (or decrease) in our pension deficit caused by decreases (or
increases) in the discount rate.
The deficit will fluctuate according to future market conditions and funding will be revised as
necessary to reflect such fluctuations. We will continue to make contributions towards the deficit
that, as a minimum, meet requirements as prescribed by Canadian pension supervisory authorities.
Contributions of $19.8 million were made to the defined benefit pension plans in the second quarter
of 2006, compared with $18.2 million in the same period of 2005. Contributions of $37.4 million
were made to the defined benefit pension plans in first-half 2006, compared with $34.9 million in
the same period of 2005.
Our minimum contribution requirement is set out in an updated actuarial valuation as at January 1,
2006 (which was completed in June 2006). We expect our pension contribution in 2006 to be
approximately $210 million, which represents the estimated minimum required contribution after
applying the remaining balance of the $300-million voluntary contribution made in December 2003.
Our pension contributions for 2007, 2008 and 2009 will be highly dependent on our actual experience
over 2006, 2007 and 2008 with such variables as investment returns, interest rate fluctuations,
demographic changes and any revisions to pension funding regulations. If mid and long Canada bond
yields remain at their levels on June 30, 2006 (i.e. approximately 0.5% higher than their levels on
December 31, 2005) and pension funding regulations remain unchanged, we project our pension
contributions to be approximately $150 million in 2007, declining to approximately $100 million in
2008. The Canadian government has proposed changes to its pension funding regulations. The
precise impact of these regulations will not be known until they are enacted.
Restructuring
Restructuring initiatives to improve efficiency in our administrative areas were begun in 2003. We
have committed to eliminate 1,220 management and administrative positions under these initiatives.
At June 30, 2006, 1,215 positions had been eliminated, of which 82 and 370 positions were
eliminated in the three and six months ending June 30, 2006, respectively. We will continue to
hire selectively in specific areas of the business, as required by growth or changes in traffic
patterns.
Cash payments related to severance under all restructuring initiatives and to our environmental
remediation program (described in this MD&A under the sub-heading Critical Accounting Estimates)
totalled $22.8 million in the second quarter of 2006 and $50.6 million in the first half of 2006,
compared with $13.3 million and $26.3 million in the same periods of 2005, respectively. Of these
amounts, payments related only to labour liabilities were $16.9 million in the second quarter of
2006 and $41.7 million in the first half of 2006, compared with $11.1 million and $22.9 million in
the same periods of 2005, respectively.
Cash payments for restructuring and environmental initiatives are estimated to be $39 million for
the remainder of 2006, $69 million in 2007, $49 million in 2008, and a total of $194 million over
the remaining years through 2025, which will be paid in decreasing amounts. All payments will be
funded from general operations. Of these amounts, cash payments related only to the restructuring
initiatives are expected to be $22 million for the remainder of 2006, $41 million in 2007, $33
million in 2008 and a total of $125 million over the remaining years to 2025. These amounts include
residual payments to protected employees for previous restructuring plans that are substantially
complete.
Critical Accounting Estimates
The development, selection and disclosure of these estimates, as well as this MD&A, have been
reviewed by the Board of Directors Audit, Finance and Risk Management Committee, which is
comprised entirely of independent directors.
The critical accounting estimates disclosed in our MD&A for the year ended December 31, 2005, and
for the first quarter of 2006 remain substantially unchanged, except for the following recent
developments:
Ø |
|
Environmental Liabilities |
At June 30, 2006, the accrual for environmental remediation on our Consolidated Balance Sheet
amounted to $128.2 million, of which the long-term portion amounting to $103.3 million was included
in Deferred Liabilities and the short-term portion amounting to $24.9 million was included in
Accounts Payable and Accrued Liabilities. Total payments were $2.7 million in the second quarter
of 2006 and $2.1 million in the same period of 2005. Total payments were $4.6 million in the first
half of 2006 and $3.3 million in the same period of 2005.
19
Ø |
|
Pensions and Other Benefits |
Other Assets and Deferred Charges on our June 30, 2006, Consolidated Balance Sheet included
prepaid pension costs of $947.2 million. Our Consolidated Balance Sheet also included $0.7 million in Accounts Payable and
Accrued Liabilities and $0.9 million in Deferred Liabilities for pension obligations.
We included post-retirement benefits accruals of $186.9 million in Deferred Liabilities and
post-retirement benefits accruals of $3.4 million in Accounts Payable and Accrued Liabilities on our June 30, 2006, Consolidated
Balance Sheet.
Pension and post-retirement benefits expenses (excluding workers compensation benefits) were
included in Compensation and Benefits on our December 31, 2005, Statement of Consolidated Income.
Combined pension and post-retirement benefits expenses were $30.3 million in the second quarter of
2006, compared with $21.0 million in the same period of 2005. Combined pension and post-retirement
benefits expenses were $61.2 million in the first half of 2006, compared with $41.4 million in the
same period of 2005.
Pension expense consists of defined benefit pension expense plus defined contribution pension
expense (equal to contributions). Pension expense was $19.5 million in second-quarter 2006 and
$39.5 million in the first half of 2006, compared with $10.1 million and $19.4 million for the same
periods in 2005, respectively. Defined benefit pension expense was $18.9 million in the second
quarter of 2006 and $37.8 million in the first half of 2006, compared with $9.4 million and $17.8
million in the same periods of 2005, respectively. Defined contribution pension expense was $0.6
million in the second quarter of 2006 and $1.7 million in the first six months of 2006, compared
with $0.7 million and $1.6 million in the same periods of 2005, respectively. Post-retirement
benefits expense was $10.8 million in the second quarter of 2006 and $21.7 million in the first
half of 2006, compared with $10.9 million and $22.0 million in the same periods of 2005,
respectively.
Ø |
|
Property, Plant and Equipment |
At June 30, 2006, accumulated depreciation was $4,937.6 million. Depreciation expense related to
properties amounted to $117.8 million in the second quarter of 2006, compared with $110.7 million
in the same period of 2005. Depreciation expense related to properties amounted to $232.6 million
in the first six months of 2006, compared with $220.2 million in the same period of 2005.
Revisions to the estimated useful lives and net salvage projections for properties constitute a
change in accounting estimate and we address these prospectively by amending depreciation rates.
We estimate that if the average life of road locomotives increased (or decreased) by 5%, annual
depreciation expense would decrease (or increase) by approximately $3 million.
Regular depreciation studies are conducted to establish the estimated useful life of each property
group. Depreciation expense increased $1.5 million in the second quarter of 2006 and $2.9 million
in the first half of 2006, due to rate revisions mainly for locomotives and miscellaneous
equipment.
Future income tax benefits totalling $114.7 million and $70.4 million were included in income taxes
for the second quarter and first six months in 2006, respectively, compared with future income tax
expense of $68.8 million and $108.9 million included in income taxes for the same periods in 2005,
respectively. At June 30, 2006, future income tax liabilities of $1,603.5 million were recorded as
a long-term liability, comprised largely of temporary differences related to accounting for
properties. Future income tax benefits of $105.2 million realizable within one year were recorded
as a current asset. We believe our future income tax provisions are adequate.
In the second quarter of 2006, we reduced our future income tax liability by $176 million due to a
reduction in income tax rates by the Government of Canada and certain provincial governments
(discussed under the sub-heading Income Taxes in the section Other Income Statement Items).
Ø |
|
Legal and Personal Injury Liabilities |
Provisions for incidents, claims and litigation charged to income, which are included in Purchased
Services and Other on our Statement of Consolidated Income, amounted to $3.4 million in the second
quarter of 2006 and $19.7 million in the first half of 2006, compared with $9.0 million and $24.2
million in the same periods of 2005, respectively.
Accruals for incidents, claims and litigation, including Workers Compensation Board accruals,
totalled $148.9 million, net of insurance recoveries, at June 30, 2006. The total accrual included
$102.7 million in Deferred Liabilities and $77.4 million in Accounts Payable and Accrued
Liabilities, offset by $13.5 million in Other Assets and Deferred Charges and $17.7 million in
Accounts Receivable.
Forward-Looking Information
This MD&A contains certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (United States) relating but not limited to our operations,
anticipated financial performance, business prospects and strategies. Forward-looking information
typically contains statements with words such as anticipate, believe, expect, plan or
similar words suggesting future outcomes.
20
Readers are cautioned to not place undue reliance on forward-looking information because it is
possible that we will not achieve predictions, forecasts, projections and other forms of
forward-looking information. In addition, we undertake no obligation to update publicly or
otherwise revise any forward-looking information, whether as a result of new information, future
events or otherwise.
By its nature, our forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: changes in business strategies;
general global economic and business conditions; the availability and price of energy commodities;
the effects of competition and pricing pressures; industry overcapacity; shifts in market demands;
changes in laws and regulations, including regulation of rates; potential increases in maintenance
and operating costs; uncertainties of litigation; labour disputes; timing of completion of capital
and maintenance projects; currency and interest rate fluctuations; effects of changes in market
conditions on the financial position of pension plans; various events that could disrupt
operations, including severe weather conditions; security threats; and technological changes.
The performance of the North American and global economies remains uncertain. Grain production and
yield in Canada improved in the last crop year and is expected to remain stable in the current crop
year, after a period of significant drought-induced decline. However, factors over which we have
no control, such as weather conditions and insect populations, affect crop production and yield in
the grain collection areas we serve. Fuel prices also remain uncertain, as they are influenced by
many factors, including, without limitation, worldwide oil demand, international politics, severe
weather, labour and political instability in major oil-producing countries and the ability of these
countries to comply with agreed-upon production quotas. We intend to continue our fuel cost
mitigation program to attempt to offset the effects of high crude oil prices.
In Canada Bill C-11, legislation amending the Canada Transportation Act (CTA), was introduced in
Parliament in spring 2006. Bill C-11 contains some of the amendments that had been included in Bill C-44, which was introduced
in 2005 but was terminated when Parliament was dissolved on November 29, 2005. Bill C-11 includes,
among other things, amendments concerning the grain revenue cap, commuter and passenger access, and
railway noise. Amendments concerning Final Offer Arbitration (FOA) and other shipper remedies
are not included in Bill C-11. There may be additional changes to the CTA in respect of FOA and
other matters that had been dealt with in Bill C-44. No assurance can be given as to the effect on
CPR of the provisions of Bill C-11 or as to the content, timing or effect on CPR of any anticipated
additional legislation.
There are factors that could cause actual results to differ from those described in the
forward-looking statements contained in this MD&A. These more specific factors are identified and
discussed in the Future Trends, Commitments and Risks section and elsewhere in this MD&A with the
particular forward-looking statement in question.
21
|
|
|
Glossary of Terms |
|
|
|
|
|
Average train speed
|
|
The average speed attained as a train travels between terminals, calculated
by dividing the total train miles traveled by the total hours operated.
This calculation does not include the travel time or the distance traveled
by: i) trains used in or around CPRs yards; ii) passenger train; and iii)
trains used for repairing track. The calculation also does not include the
time trains spend waiting in the terminals. |
|
|
|
Car-miles per car-day
|
|
the total car-miles for a period divided by the total number of active cars.
Total car-miles includes the distance travelled by every car on a
revenue-producing train and a train used in or around our yards.
|
|
|
|
|
|
A car-day is assumed to equal one active car. An active car is a
revenue-producing car that is generating costs to CPR on an hourly or
mileage basis. Excluded from this count are i) cars that are not on the
track or are being stored; ii) cars that are in need of repair; iii) cars
that are used to carry materials for track repair; iv) cars owned by
customers that are on the customers tracks; and v) cars that are idle and
waiting to be reclaimed by us. |
|
|
|
Carloads
|
|
revenue-generating shipments of containers, trailers and freight cars. |
|
|
|
CICA
|
|
Canadian Institute of Chartered Accountants. |
|
|
|
Class 1 Railway
|
|
a railway earning a minimum of US$258.5 million in revenues annually. |
|
|
|
CPRL
|
|
Canadian Pacific Railway Limited. |
|
|
|
CPR, the Company
|
|
CPRL and its subsidiaries. |
|
|
|
Diluted EPS, before FX on LTD
|
|
a variation of the calculation of diluted EPS, which is calculated by
dividing income, before FX on LTD, by the weighted average number of shares
outstanding, adjusted for outstanding stock options using the Treasury
Stock Method, as described on page 3. |
|
|
|
D&H
|
|
Delaware and Hudson Railway Company, Inc., a wholly owned indirect U.S.
subsidiary of CPRL. |
|
|
|
EPS
|
|
earnings per share. |
|
|
|
Fluidity
|
|
obtaining more value from our existing assets and resources. |
|
|
|
Foreign Exchange
|
|
the net effect of a change in the value of the Canadian dollar relative to
the U.S. dollar (exclusive of any impact on market demand). |
|
|
|
FRA
|
|
U.S. Federal Railroad Administration, a regulatory agency whose purpose is
to promulgate and enforce rail safety regulations; administer railroad
assistance programs; conduct research and development in support of
improved railroad safety and national rail transportation policy; provide
for the rehabilitation of Northeast Corridor rail passenger service; and
consolidate government support of rail transportation activities. |
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FRA personal injuries per 200,000 employee-hours
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the number of personal injuries, multiplied by 200,000 and divided by total
employee-hours. Personal injuries are defined as injuries that require
employees to lose time away from work, modify their normal duties or obtain
medical treatment beyond minor first aid. Employee-hours are the total
hours worked, excluding vacation and sick time, by all employees, excluding
contractors. |
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FRA train accidents per million train-miles
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the number of train accidents, multiplied by 1,000,000 and divided by total
train-miles. Train accidents included in this metric meet or exceed the FRA
reporting threshold of US$6,700 in damage. |
22
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Glossary of Terms |
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Freight revenue per carload
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Freight revenue per carload is the amount of freight revenue earned for
every carload moved, calculated by dividing the freight revenue for a
commodity by the number of carloads of the commodity transported in the
period. |
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Freight revenue per RTM
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the amount of freight revenue earned for every RTM moved, calculated by
dividing the total freight revenue by the total RTMs in the period. |
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FX on LTD
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foreign exchange gains and losses on long-term debt. |
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GAAP
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Canadian generally accepted accounting principles. |
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GTMs or gross ton-miles
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the movement of total train weight over a distance of one mile. Total
train weight is comprised of the weight of the freight cars, their contents
and any inactive locomotives. An increase in GTMs indicates additional
productivity. |
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IOP
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Integrated Operating Plan, the foundation for our scheduled railway
operations. |
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LIBOR
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London Interbank Offered Rate. |
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MD&A
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Managements Discussion and Analysis. |
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Number of active employees end of period
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the number of actively employed workers during the last month of the
period. This includes employees who are taking vacation and statutory
holidays and other forms of short-term paid leave, and excludes individuals
who have a continuing employment relationship with us but are not currently
working. |
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Operating ratio
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the ratio of total operating expenses to total revenues. A lower percentage
indicates higher efficiency. |
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RTMs or revenue ton-miles
|
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the movement of one revenue-producing ton of freight over a distance of one
mile. |
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Soo Line
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Soo Line Railroad Company, a wholly owned indirect U.S. subsidiary of CPRL. |
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STB
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U.S. Surface Transportation Board, a regulatory agency with jurisdiction
over railway rate and service issues and rail restructuring, including
mergers and sales. |
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Terminal dwell
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The average time a freight car resides at a specified terminal location.
The timing starts with a train arriving in the terminal, a customer
releasing the car to us, or a car arriving that is to be transferred to
another railway. The timing ends when the train leaves, a customer
receives the car from us or the freight car is transferred to another
railway. Freight cars are excluded if: i) a train is moving through the
terminal without stopping; ii) they are being stored at the terminal; iii)
they are in need of repair; or iv) they are used in track repairs. |
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U.S. gallons of locomotive fuel per 1,000 GTMs
consumed freight and yard
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represents the total fuel consumed in freight and yard operations for every
1,000 GTMs traveled. This is calculated by dividing the total amount of
fuel issued to our locomotives, excluding commuter and non-freight
activities, by the total freight-related GTMs. The result indicates how
efficiently we are using fuel. |
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WTI
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West Texas Intermediate, a commonly used index for the price of a barrel of
crude oil. |
23
Suite 500 Gulf Canada Square
401 9th Avenue SW Calgary Alberta T2P 4Z4
www.cpr.ca
TSX/NYSE:
CP
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, F. J. Green, Chief Executive Officer of Canadian Pacific Railway Limited, certify that:
1. |
|
I have reviewed the interim filings (as this term is defined in Multilateral Instrument
52-109 Certification of Disclosure in Issuers Annual and Interim Filings) of Canadian Pacific
Railway Limited (the issuer) for the interim period ending June 30, 2006; |
|
2. |
|
Based on my knowledge, the interim filings do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated or that is necessary to make a
statement not misleading in light of the circumstances under which it was made, with respect
to the period covered by the interim filings; |
|
3. |
|
Based on my knowledge, the interim financial statements together with the other financial
information included in the interim filings fairly represent in all material respects the
financial condition, results of operations and cash flows of the issuer, as of the date and
for the periods presented in the interim filings; |
|
4. |
|
The issuers other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures for the issuer, and we have: |
|
(a) |
|
designed such disclosure controls and procedures, or caused them to be
designed under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which
the interim filings are being prepared. |
Date: July 25, 2006
Signed: F. J. Green
F. J. Green
Chief Executive Officer
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, B. W. Grassby, Acting Chief Financial Officer of Canadian Pacific Railway Limited, certify that:
1. |
|
I have reviewed the interim filings (as this term is defined in Multilateral Instrument
52-109 Certification of Disclosure in Issuers Annual and Interim Filings) of Canadian Pacific
Railway Limited (the issuer) for the interim period ending June 30, 2006; |
|
2. |
|
Based on my knowledge, the interim filings do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated or that is necessary to make a
statement not misleading in light of the circumstances under which it was made, with respect
to the period covered by the interim filings; |
|
3. |
|
Based on my knowledge, the interim financial statements together with the other financial
information included in the interim filings fairly represent in all material respects the
financial condition, results of operations and cash flows of the issuer, as of the date and
for the periods presented in the interim filings; |
|
4. |
|
The issuers other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures for the issuer, and we have: |
|
(a) |
|
designed such disclosure controls and procedures, or caused them to be
designed under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which
the interim filings are being prepared. |
Date: July 25, 2006
Signed: B.W. Grassby
B.W. Grassby
Acting Chief Financial Officer