CALGARY, April 19, 2017 /PRNewswire/ - Canadian
Pacific Railway Limited (TSX: CP) (NYSE: CP) today announced
first-quarter revenues of C$1.6
billion, up 1 percent from 2016 and reported diluted
earnings per share (EPS) of $2.93, or
$2.50 on an adjusted diluted EPS
basis.
"Thanks to our hard-working employees, industry-leading
operating model and commitment to service, we produced solid
results this quarter," said Keith
Creel, CP's President and Chief Executive Officer. "We
turned a corner in March and are now seeing positive volumes, which
makes us cautiously optimistic that the demand environment is
improving."
FIRST-QUARTER HIGHLIGHTS
- Revenues increased 1 percent to $1,603
million from $1,591
million
- Reported diluted EPS fell 17 percent to $2.93 from $3.51
and adjusted diluted EPS were flat year-over-year at $2.50
- Reported operating ratio decreased by 80 basis points to 58.1
percent from 58.9 percent. The operating ratio in the first quarter
of 2017 includes a $51-million
recovery associated with the early departure of the previous
CEO
- Adjusted operating ratio, which excludes this gain, increased
by 240 basis points in the first quarter of 2017 to 61.3
percent.
"CP's strong focus on developing its bench strength resulted in
a seamless leadership transition and a seasoned executive team that
is focused on leveraging CP's proven operating model," Creel said.
"Our talented and engaged workforce together with disciplined cost
control gives us a great deal of confidence that we'll be able to
deliver high single-digit adjusted diluted EPS growth in 2017 and
create long-term value for shareholders."
"Given the strength of our foundation, rooted in precision
scheduled railroading, we are well positioned to write the next
chapter of this story - one that focusses on sustainable,
profitable growth," Creel said.
The company will discuss its results with the financial
community in a conference call beginning at: 4:30 p.m. eastern time (2:30 p.m. mountain time) on April 19.
Conference Call Access
Toronto participants dial in
number: 1-647-427-7450
Operator assisted toll free dial in number: 1-888-231-8191
Callers should dial in 10 minutes prior to the call.
Webcast
We encourage you to access the webcast and presentation material
at investor.cpr.ca
A replay of the first-quarter conference call will be available
by phone through to May 19, 2017 at
416-849-0833 or toll free 1-855-859-2056, password 98409081.
Access to the webcast and audio file of the presentation will be
made available at investor.cpr.ca
Non-GAAP Measures
For further information regarding non-GAAP measures, including
reconciliations to the nearest GAAP measures, see the attached
supplementary schedule Non-GAAP Measures.
Note on forward-looking information
This news release contains certain forward-looking information
within the meaning of applicable securities laws relating, but not
limited, to our operations, priorities and plans, anticipated
financial performance, including our 2017 full-year guidance,
business prospects, planned capital expenditures, programs and
strategies. This forward-looking information also includes, but is
not limited to, statements concerning expectations, beliefs, plans,
goals, objectives, assumptions and statements about possible future
events, conditions, and results of operations or performance.
Forward-looking information may contain statements with words or
headings such as "financial expectations", "key assumptions",
"anticipate", "believe", "expect", "plan", "will", "outlook",
"should" or similar words suggesting future outcomes. To the extent
that CP has provided guidance using non-GAAP financial measures,
the Company may not be able to provide a reconciliation to a GAAP
measure, due to unknown variables and uncertainty related to future
results.
Undue reliance should not be placed on forward-looking
information as actual results may differ materially from the
forward-looking information. Forward-looking information is not a
guarantee of future performance. By its nature, CP's
forward-looking information involves numerous assumptions, inherent
risks and uncertainties that could cause actual results to differ
materially from the forward looking information, including but not
limited to the following factors: changes in business strategies;
general North American and global economic, credit and business
conditions; risks in agricultural production such as weather
conditions and insect populations; the availability and price of
energy commodities; the effects of competition and pricing
pressures; industry capacity; shifts in market demand; changes in
commodity prices; uncertainty surrounding timing and volumes of
commodities being shipped via CP; inflation; changes in laws and
regulations, including regulation of rates; changes in taxes and
tax rates; potential increases in maintenance and operating costs;
uncertainties of investigations, proceedings or other types of
claims and litigation; labour disputes; risks and liabilities
arising from derailments; transportation of dangerous goods; timing
of completion of capital and maintenance projects; currency and
interest rate fluctuations; effects of changes in market conditions
and discount rates on the financial position of pension plans and
investments; and various events that could disrupt operations,
including severe weather, droughts, floods, avalanches and
earthquakes as well as security threats and governmental response
to them, and technological changes. The foregoing list of factors
is not exhaustive. These and other factors are detailed from time
to time in reports filed by CP with securities regulators in
Canada and the United States. Reference should be made to
"Item 1A - Risk Factors" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Forward-Looking Information" in CP's annual and interim reports on
Form 10-K and 10- Q. Readers are cautioned not to place undue
reliance on forward-looking information. Forward looking
information is based on current expectations, estimates and
projections and it is possible that predictions, forecasts,
projections, and other forms of forward-looking information will
not be achieved by CP. Except as required by law, CP undertakes no
obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new
information, future events or otherwise.
About Canadian Pacific
Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) is a
transcontinental railway in Canada
and the United States with direct
links to eight major ports, including Vancouver and Montreal, providing North American customers a
competitive rail service with access to key markets in every corner
of the globe. CP is growing with its customers, offering a suite of
freight transportation services, logistics solutions and supply
chain expertise. Visit www.cpr.ca to see the rail advantages of
CP.
ITEM 1. FINANCIAL STATEMENTS
INTERIM CONSOLIDATED STATEMENTS OF
INCOME
(unaudited)
|
For the three
months
ended March 31
|
(in millions of
Canadian dollars, except share and per share data)
|
2017
|
2016
|
Revenues
|
|
|
|
Freight
|
$
|
1,563
|
$
|
1,548
|
|
Non-freight
|
40
|
43
|
Total
revenues
|
1,603
|
1,591
|
Operating
expenses
|
|
|
|
Compensation and
benefits (Note 9)
|
233
|
329
|
|
Fuel
|
170
|
125
|
|
Materials
|
49
|
56
|
|
Equipment
rents
|
36
|
45
|
|
Depreciation and
amortization
|
166
|
162
|
|
Purchased services
and other (Note 4)
|
278
|
221
|
Total operating
expenses
|
932
|
938
|
|
|
|
Operating
income
|
671
|
653
|
Less:
|
|
|
|
Other income and
charges (Note 5)
|
(28)
|
(181)
|
|
Net interest
expense
|
120
|
124
|
Income before
income tax expense
|
579
|
710
|
|
Income tax expense
(Note 6)
|
148
|
170
|
Net
income
|
$
|
431
|
$
|
540
|
|
|
|
Earnings per
share (Note 7)
|
|
|
|
Basic earnings per
share
|
$
|
2.94
|
$
|
3.53
|
|
Diluted earnings per
share
|
$
|
2.93
|
$
|
3.51
|
|
|
|
Weighted-average
number of shares (millions) (Note 7)
|
|
|
|
Basic
|
146.5
|
153.0
|
|
Diluted
|
147.1
|
153.8
|
|
|
|
Dividends declared
per share
|
$
|
0.5000
|
$
|
0.3500
|
|
|
|
|
|
See Notes to Interim
Consolidated Financial Statements
|
|
|
|
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(unaudited)
|
For the three
months
ended March 31
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
Net income
|
$
|
431
|
$
|
540
|
Net gain in foreign
currency translation adjustments, net of hedging
activities
|
5
|
37
|
Change in derivatives
designated as cash flow hedges
|
5
|
(47)
|
Change in pension and
post-retirement defined benefit plans
|
38
|
47
|
Other comprehensive
income before income taxes
|
48
|
37
|
Income tax expense on
above items
|
(18)
|
(41)
|
Other comprehensive
income (loss) (Note 3)
|
30
|
(4)
|
Comprehensive
income
|
$
|
461
|
$
|
536
|
|
|
|
|
|
See Notes to Interim
Consolidated Financial Statements.
|
|
|
|
|
INTERIM CONSOLIDATED BALANCE SHEETS AS
AT
(unaudited)
|
March
31
|
December
31
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
Assets
|
|
|
Current
assets
|
|
|
|
Cash and cash
equivalents
|
$
|
201
|
$
|
164
|
|
Accounts receivable,
net
|
631
|
591
|
|
Materials and
supplies
|
201
|
184
|
|
Other current
assets
|
77
|
70
|
|
1,110
|
1,009
|
Investments
|
183
|
194
|
Properties
|
16,661
|
16,689
|
Goodwill and
intangible assets
|
200
|
202
|
Pension
asset
|
1,165
|
1,070
|
Other
assets
|
78
|
57
|
Total
assets
|
$
|
19,397
|
$
|
19,221
|
Liabilities and
shareholders' equity
|
|
|
Current
liabilities
|
|
|
|
Accounts payable and
accrued liabilities
|
$
|
1,148
|
$
|
1,322
|
|
Long-term debt
maturing within one year
|
31
|
25
|
|
1,179
|
1,347
|
Pension and other
benefit liabilities
|
730
|
734
|
Other long-term
liabilities
|
227
|
284
|
Long-term
debt
|
8,583
|
8,659
|
Deferred income
taxes
|
3,640
|
3,571
|
Total
liabilities
|
14,359
|
14,595
|
Shareholders'
equity
|
|
|
|
Share
capital
|
2,036
|
2,002
|
|
Additional paid-in
capital
|
42
|
52
|
|
Accumulated other
comprehensive loss (Note 3)
|
(1,769)
|
(1,799)
|
|
Retained
earnings
|
4,729
|
4,371
|
|
5,038
|
4,626
|
Total liabilities
and shareholders' equity
|
$
|
19,397
|
$
|
19,221
|
|
|
|
|
|
Contingencies (Note
11)
|
|
|
|
|
See Notes to Interim
Consolidated Financial Statements.
|
|
|
|
|
INTERIM CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
|
For the three
months
ended March 31
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
Operating
activities
|
|
|
Net income
|
$
|
431
|
$
|
540
|
Reconciliation of net
income to cash provided by operating activities:
|
|
|
|
Depreciation and
amortization
|
166
|
162
|
|
Deferred income taxes
(Note 6)
|
67
|
93
|
|
Pension funding in
excess of expense (Note 10)
|
(60)
|
(42)
|
Foreign exchange gain
on long-term debt (Note 5)
|
(28)
|
(181)
|
Other operating
activities, net
|
(85)
|
(66)
|
Change in non-cash
working capital balances related to operations
|
(180)
|
(288)
|
Cash provided by
operating activities
|
311
|
218
|
Investing
activities
|
|
|
Additions to
properties
|
(230)
|
(278)
|
Proceeds from sale of
properties and other assets (Note 4)
|
3
|
60
|
Other
|
5
|
—
|
Cash used in
investing activities
|
(222)
|
(218)
|
Financing
activities
|
|
|
Dividends
paid
|
(73)
|
(54)
|
Issuance of CP Common
Shares
|
28
|
5
|
Repayment of
long-term debt
|
(5)
|
(11)
|
Other
|
—
|
(2)
|
Cash used in
financing activities
|
(50)
|
(62)
|
|
|
|
Effect of foreign
currency fluctuations on U.S. dollar-denominated cash and cash
equivalents
|
(2)
|
(17)
|
Cash
position
|
|
|
Increase (decrease)
in cash and cash equivalents
|
37
|
(79)
|
Cash and cash
equivalents at beginning of period
|
164
|
650
|
Cash and cash
equivalents at end of period
|
$
|
201
|
$
|
571
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Income taxes
paid
|
$
|
170
|
$
|
192
|
Interest
paid
|
$
|
150
|
$
|
155
|
|
|
|
|
|
See Notes to Interim
Consolidated Financial Statements.
|
|
|
|
|
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
(unaudited)
(in millions of
Canadian dollars except common share amounts)
|
|
Common
shares (in
millions)
|
|
Share
capital
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
|
Total
shareholders'
equity
|
Balance at January
1, 2017
|
|
146.3
|
|
$
|
2,002
|
$
|
52
|
$
|
(1,799)
|
$
|
4,371
|
$
|
4,626
|
|
Net income
|
|
—
|
|
—
|
—
|
—
|
431
|
431
|
|
Other comprehensive
income (Note 3)
|
|
—
|
|
—
|
—
|
30
|
—
|
30
|
|
Dividends
declared
|
|
—
|
|
—
|
—
|
—
|
(73)
|
(73)
|
|
Effect of stock-based
compensation recovery
|
|
—
|
|
—
|
(3)
|
—
|
—
|
(3)
|
|
Shares issued under
stock option plan
|
|
0.4
|
|
34
|
(7)
|
—
|
—
|
27
|
Balance at March
31, 2017
|
|
146.7
|
|
$
|
2,036
|
$
|
42
|
$
|
(1,769)
|
$
|
4,729
|
$
|
5,038
|
Balance at January 1,
2016
|
|
153.0
|
|
$
|
2,058
|
$
|
43
|
$
|
(1,477)
|
$
|
4,172
|
$
|
4,796
|
|
Net income
|
|
—
|
|
—
|
—
|
—
|
540
|
540
|
|
Other comprehensive
loss (Note 3)
|
|
—
|
|
—
|
—
|
(4)
|
—
|
(4)
|
|
Dividends
declared
|
|
—
|
|
—
|
—
|
—
|
(54)
|
(54)
|
|
Effect of stock-based
compensation expense
|
|
—
|
|
—
|
6
|
—
|
—
|
6
|
|
Shares issued under
stock option plan
|
|
—
|
|
7
|
(1)
|
—
|
—
|
6
|
Balance at March 31,
2016
|
|
153.0
|
|
$
|
2,065
|
$
|
48
|
$
|
(1,481)
|
$
|
4,658
|
$
|
5,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Interim
Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
March 31,
2017
(unaudited)
1 Basis of presentation
These unaudited interim consolidated financial statements of
Canadian Pacific Railway Limited ("CP", or "the Company"),
expressed in Canadian dollars, reflect management's estimates and
assumptions that are necessary for their fair presentation in
conformity with generally accepted accounting principles in
the United States of America
("GAAP"). They do not include all disclosures required under GAAP
for annual financial statements and should be read in conjunction
with the 2016 annual consolidated financial statements and notes
included in CP's 2016 Annual Report on Form 10-K. The accounting
policies used are consistent with the accounting policies used in
preparing the 2016 annual consolidated financial statements, except
for the newly adopted accounting policies discussed in Note 2.
CP's operations can be affected by seasonal fluctuations such as
changes in customer demand and weather-related issues. This
seasonality could impact quarter-over-quarter comparisons.
In management's opinion, the unaudited interim consolidated
financial statements include all adjustments (consisting of normal
and recurring adjustments) necessary to present fairly such
information. Interim results are not necessarily indicative of the
results expected for the fiscal year.
2 Accounting Changes
Implemented in 2017
Compensation - Stock
Compensation
In March 2016, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") 2016-09, Improvements to Employee Share-based
Payment Accounting, under FASB Accounting Standards Codification
("ASC") Topic 718. The amendments clarify the guidance relating to
treatment of excess tax benefits and deficiencies, acceptable
forfeiture rate policies, and treatment of cash paid by an employer
when directly withholding shares for tax-withholding purposes and
the requirement to treat such cash flows as a financing activity.
As a result of this ASU, excess tax benefits are no longer recorded
in Additional paid-in capital and instead are applied against taxes
payable or recognized in the interim consolidated statement of
income. This ASU was effective for CP beginning on January 1, 2017. The Company has determined that
there were no significant changes to disclosure or financial
statement presentation and changes in accounting for excess tax
benefits and deficiencies were not material as a result of
adoption.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU
2015-11, Simplifying the Measurement of Inventory under FASB ASC
Topic 330. The amendments require that reporting entities measure
inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling price in the ordinary
course of business, less reasonably predictable costs of
completion, disposal, and transportation. The amendments apply to
inventory that is measured using the first-in, first-out or average
cost basis. This ASU was effective for CP beginning on January 1, 2017 and was applied prospectively.
The Company determined there were no changes to disclosure,
financial statement presentation, or valuation of inventory as a
result of adoption.
Future changes
Leases
In February 2016, the FASB issued
ASU 2016-02, Leases under FASB ASC Topic 842 which will supersede
the lease recognition and measurement requirements in Topic 840
Leases. This new standard requires recognition of right-of-use
assets and lease liabilities by lessees for those leases classified
as finance and operating leases with a maximum term exceeding 12
months and will be effective for public entities for fiscal years,
and interim periods within those years, beginning on or after
December 15, 2018. For CP this will
be effective commencing January 1,
2019. Entities are required to use a modified retrospective
approach to adopt this new standard meaning there will be no impact
to the consolidated statements of income, however, the comparative
consolidated balance sheet will be adjusted to reflect the
provisions of this standard. The Company has a detailed plan to
implement the new standard and is assessing contractual
arrangements, through a cross functional team, that may qualify as
leases under the new standard. CP is also working with a vendor to
implement a lease management system which will assist in delivering
the required accounting changes. The impact of the new standard
will be a material increase to right of use assets and lease
liabilities on the consolidated balance sheet, primarily, as a
result of operating leases currently not recognized on the balance
sheet. The Company does not anticipate a material impact to the
consolidated statement of income and is currently evaluating the
impact adoption of this new standard will have on disclosure.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU
2014-09, Revenue from Contracts with Customers under FASB ASC Topic
606. In March 2016, the FASB issued
amendment ASU 2016-08, Revenue from Contracts with Customers:
Principal versus Agent Considerations as an update under FASB ASC
Topic 606. The amendments clarify the principal versus agent
guidance in determining whether to recognize revenue on a gross or
net basis. The guidance in Topic 606, as amended, will be effective
for public entities for fiscal years, and interim periods within
those years, beginning on or after December
15, 2017. For CP this new standard will be effective
commencing January 1, 2018, and CP
has the option of adopting the new standard by either a full
retrospective or a modified retrospective approach. CP has analyzed
contracts for a significant proportion of the Company's annual rail
freight revenue, which represents greater than 95% of CP's annual
revenues, and has concluded that recognizing these revenues over
time as rail freight services are performed continues to be
appropriate. Further detailed reviews of a variety of specific
contractual terms that could potentially represent additional
performance obligations, reassessment of certain arrangements in
the context of the new guidance on principal versus agent, and an
assessment of required new disclosures is also currently being
performed. CP is also continuing to assess whether to apply the
full or modified retrospective adoption method on transition. At
this time CP does not expect a material change to revenue
recognition from adopting this standard.
Intangibles - Goodwill and Other
In January 2017, the FASB issued
ASU 2017-04, Simplifying the Test for Goodwill Impairment under
FASB ASC Topic 350. This is intended to simplify how an entity is
required to test goodwill for impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures a goodwill impairment
loss by comparing the implied fair value of a reporting unit's
goodwill with the carrying amount of that goodwill. The amendments
are effective for CP beginning on January 1,
2020. Entities are required to apply the amendments in this
Update prospectively from the date of adoption. The Company does
not anticipate that the adoption of this ASU will impact CP's
financial statements as there is a sufficient excess between the
fair value and carrying value of CP's goodwill. Furthermore CP
expects to continue to apply the Step 0 qualitative assessment when
testing for goodwill impairment.
Compensation - Retirement Benefits
In March 2017, the FASB issued ASU
2017-07, Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Post-retirement Benefit Cost under FASB ASC Topic
715. The amendments clarify presentation requirements for net
periodic pension cost and net periodic post-retirement benefit cost
and require that an employer report the current service cost
component in the same line item or items as other compensation
costs arising from services rendered by the pertinent employees
during the period. The other components of net periodic benefit
cost are required to be presented in the consolidated statement of
income separately from the current service cost component and
outside a subtotal of income from operations if one is presented.
The amendments also restrict capitalization to the current service
cost component when applicable. The amendments are effective for CP
beginning on January 1, 2018. The
amendments related to presentation are required to be applied
retrospectively and the restrictions on capitalization of the
current service cost component are applicable prospectively on the
date of adoption. Adoption of this ASU will result in a
$67 million and $43 million decrease in operating income for the
three months ended March 31, 2017 and
2016, respectively, and an estimated corresponding full year
decrease of $272 million and
$167 million for the years ended
December 31, 2017 and 2016,
respectively. There will be no change to net income or earnings per
share as a result of adoption of this new standard. The new
guidance restricting capitalization of pensions to the current
service cost component of net periodic benefit cost will have no
impact to operating income or amounts capitalized because the
Company currently only capitalizes an appropriate portion of
current service cost for self-constructed properties. CP is
currently assessing the disclosure requirements of this ASU.
3 Changes in accumulated other
comprehensive loss ("AOCL") by component
|
For the three
months ended March 31
|
(in millions of
Canadian dollars)
|
Foreign
currency
net of hedging
activities(1)
|
Derivatives
and
other(1)
|
Pension and
post-retirement
defined benefit
plans(1)
|
Total(1)
|
Opening balance,
January 1, 2017
|
$
|
127
|
$
|
(104)
|
$
|
(1,822)
|
$
|
(1,799)
|
Other comprehensive
(loss) income before reclassifications
|
(2)
|
2
|
—
|
—
|
Amounts reclassified
from accumulated other comprehensive loss
|
—
|
2
|
28
|
30
|
Net current-period
other comprehensive (loss) income
|
(2)
|
4
|
28
|
30
|
Closing balance,
March 31, 2017
|
$
|
125
|
$
|
(100)
|
$
|
(1,794)
|
$
|
(1,769)
|
Opening balance,
January 1, 2016
|
$
|
129
|
$
|
(102)
|
$
|
(1,504)
|
$
|
(1,477)
|
Other comprehensive
(loss) income before reclassifications
|
(4)
|
(36)
|
—
|
(40)
|
Amounts reclassified
from accumulated other comprehensive loss
|
—
|
2
|
34
|
36
|
Net current-period
other comprehensive (loss) income
|
(4)
|
(34)
|
34
|
(4)
|
Closing balance,
March 31, 2016
|
$
|
125
|
$
|
(136)
|
$
|
(1,470)
|
$
|
(1,481)
|
(1)
Amounts are presented net of tax.
|
|
|
|
|
|
|
|
|
Amounts in Pension and post-retirement defined benefit plans
reclassified from AOCL
|
For the three
months ended
March 31
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
Amortization of prior
service costs(1)
|
$
|
(1)
|
$
|
(2)
|
Recognition of net
actuarial loss(1)
|
39
|
49
|
Total before income
tax
|
38
|
47
|
Income tax
recovery
|
(10)
|
(13)
|
Net of income
tax
|
$
|
28
|
$
|
34
|
(1)
Impacts Compensation and benefits on the interim consolidated
statements of income.
|
4 Disposition of properties
Gain on sale of Arbutus Corridor
In March 2016, the Company
completed the sale of CP's Arbutus Corridor (the "Arbutus
Corridor") to the City of
Vancouver for gross proceeds of $55
million. The agreement allows the Company to share in future
proceeds on the eventual development and/or sale of certain parcels
of the Arbutus Corridor. The Company recorded a gain on sale of
$50 million ($43 million after tax) within "Purchased services
and other" from the transaction during the first quarter of
2016.
5 Other income and charges
|
For the three
months ended
March 31
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
Foreign exchange
gains on long-term debt
|
$
|
(28)
|
$
|
(181)
|
Net other foreign
exchange gains
|
(1)
|
(7)
|
Other
|
1
|
7
|
Total other income
and charges
|
$
|
(28)
|
$
|
(181)
|
6 Income taxes
|
For the three
months ended
March 31
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
Current income tax
expense
|
$
|
81
|
$
|
77
|
Deferred income tax
expense
|
67
|
93
|
Income tax
expense
|
$
|
148
|
$
|
170
|
|
|
|
|
|
The effective tax rate in the first quarter is 25.60%, compared
to 23.89% for the same period in 2016.
The estimated 2017 annual effective tax rate for the first
quarter, excluding the discrete items of the management transition
recovery of $51 million related to
the retirement of the Company's Chief Executive Officer and the
foreign exchange gain of $28 million
($181 million in 2016) on the
Company's U.S. dollar-denominated debt, is 26.50%, one percent
lower compared to 27.50% for the same period in 2016.
7 Earnings per share
At March 31, 2017, the number of shares outstanding was
146.7 million (March 31, 2016 - 153.0 million).
Basic earnings per share have been calculated using net income
for the period divided by the weighted-average number of shares
outstanding during the period.
The number of shares used in earnings per share calculations is
reconciled as follows:
|
For the three
months ended
March 31
|
(in
millions)
|
2017
|
2016
|
Weighted-average
basic shares outstanding
|
146.5
|
153.0
|
Dilutive effect of
stock options
|
0.6
|
0.8
|
Weighted-average
diluted shares outstanding
|
147.1
|
153.8
|
|
|
|
For the three months ended March 31, 2017, 502,000 options
were excluded from the computation of diluted earnings per share
because their effects were not dilutive (three months ended
March 31, 2016 - 445,991 options).
8 Financial instruments
A. Fair values of financial instruments
The Company categorizes its financial assets and liabilities
measured at fair value into a three-level hierarchy established by
GAAP that prioritizes those inputs to valuation techniques used to
measure fair value based on the degree to which they are
observable. The three levels of the fair value hierarchy are as
follows: Level 1 inputs are quoted prices in active markets for
identical assets and liabilities; Level 2 inputs, other than quoted
prices included within Level 1, are observable for the asset or
liability either directly or indirectly; and Level 3 inputs are not
observable in the market.
When possible, the estimated fair value is based on quoted
market prices and, if not available, estimates from third-party
brokers. For non-exchange traded derivatives classified in Level 2,
the Company uses standard valuation techniques to calculate fair
value. Primary inputs to these techniques include observable market
prices (interest, foreign exchange (FX) and commodity) and
volatility, depending on the type of derivative and nature of the
underlying risk. The Company uses inputs and data used by willing
market participants when valuing derivatives and considers its own
credit default swap spread as well as those of its counterparties
in its determination of fair value.
The carrying values of financial instruments equal or
approximate their fair values with the exception of long-term debt
which has a fair value of approximately $9,958 million (December
31, 2016 - $9,981 million) and
a carrying value of $8,614
million (December 31, 2016 - $8,684 million) at March 31, 2017. The
estimated fair value of current and long-term borrowings has been
determined based on market information where available, or by
discounting future payments of interest and principal at estimated
interest rates expected to be available to the Company at period
end. All derivatives and long-term debt are classified as Level
2.
B. Financial risk management
Derivative financial instruments
Derivative financial instruments may be used to selectively
reduce volatility associated with fluctuations in interest rates,
FX rates, the price of fuel and stock-based compensation expense.
Where derivatives are designated as hedging instruments, the
relationship between the hedging instruments and their associated
hedged items is documented, as well as the risk management
objective and strategy for the use of the hedging instruments. This
documentation includes linking the derivatives that are designated
as fair value or cash flow hedges to specific assets or liabilities
on the interim consolidated balance sheets, commitments or
forecasted transactions. At the time a derivative contract is
entered into, and at least quarterly thereafter, an assessment is
made as to whether the derivative item is effective in offsetting
the changes in fair value or cash flows of the hedged items. The
derivative qualifies for hedge accounting treatment if it is
effective in substantially mitigating the risk it was designed to
address.
It is not the Company's intent to use financial derivatives or
commodity instruments for trading or speculative purposes.
FX management
The Company conducts business transactions and owns assets in
both Canada and the United States. As a result, the Company is
exposed to fluctuations in value of financial commitments, assets,
liabilities, income or cash flows due to changes in FX rates. The
Company may enter into FX risk management transactions primarily to
manage fluctuations in the exchange rate between Canadian and U.S.
currencies. FX exposure is primarily mitigated through natural
offsets created by revenues, expenditures and balance sheet
positions incurred in the same currency. Where appropriate, the
Company may negotiate with customers and suppliers to reduce the
net exposure.
Net investment hedge
The FX gains and losses on long-term debt are mainly unrealized
and can only be realized when U.S. dollar denominated long-term
debt matures or is settled. The Company also has long-term FX
exposure on its investment in U.S. affiliates. The majority of the
Company's U.S. dollar denominated long-term debt has been
designated as a hedge of the net investment in foreign
subsidiaries. This designation has the effect of mitigating
volatility on net income by offsetting long-term FX gains and
losses on U.S. dollar denominated long-term debt and gains and
losses on its net investment. The effective portion recognized in
"Other comprehensive income (loss)" for the three months ended
March 31, 2017 was an unrealized FX gain of $46 million (three months ended March 31,
2016 - unrealized FX gain of $308
million). There was no ineffectiveness during the
three months ended March 31, 2017 (three months ended
March 31, 2016 - $nil).
Interest rate management
The Company is exposed to interest rate risk, which is the risk
that the fair value or future cash flows of a financial instrument
will vary as a result of changes in market interest rates. In order
to manage funding needs or capital structure goals, the Company
enters into debt or capital lease agreements that are subject to
either fixed market interest rates set at the time of issue or
floating rates determined by ongoing market conditions. Debt
subject to variable interest rates exposes the Company to
variability in interest expense, while debt subject to fixed
interest rates exposes the Company to variability in the fair value
of debt.
To manage interest rate exposure, the Company accesses diverse
sources of financing and manages borrowings in line with a targeted
range of capital structure, debt ratings, liquidity needs, maturity
schedule, and currency and interest rate profiles. In anticipation
of future debt issuances, the Company may enter into forward rate
agreements, that are designated as cash flow hedges, to
substantially lock in all or a portion of the effective future
interest expense. The Company may also enter into swap agreements,
designated as fair value hedges, to manage the mix of fixed and
floating rate debt.
Forward starting swaps
As at March 31, 2017, the Company had forward starting
floating-to-fixed interest rate swap agreements ("forward starting
swaps") totaling a notional U.S. $700
million to fix the benchmark rate on cash flows associated
with highly probable forecasted issuances of long-term notes. The
effective portion of changes in fair value on the forward starting
swaps is recorded in "Accumulated other comprehensive loss", net of
tax, as cash flow hedges until the highly probable forecasted notes
are issued. Subsequent to the notes issuance, amounts in
"Accumulated other comprehensive loss" are reclassified to "Net
interest expense".
During the second quarter of 2016, the Company rolled the
notional U.S. $700 million forward
starting swaps. The Company de-designated the hedging relationship
for U.S. $700 million of forward
starting swaps. The Company did not cash settle these swaps. There
was no ineffectiveness to record upon de-designation.
Concurrently the Company re-designated the forward starting
swaps totaling U.S. $700 million to
fix the benchmark rate on cash flows associated with a highly
probable forecasted debt issuance of long-term notes.
As at March 31, 2017, the total fair value loss of
$67 million (December 31, 2016 -
fair value loss of $69 million)
derived from the forward starting swaps was included in "Accounts
payable and accrued liabilities". Changes in fair value from the
forward starting swaps for the three months ended March 31,
2017 was a gain of $2 million (three
months ended March 31, 2016 - loss of $52 million). The effective portion for the three
months ended March 31, 2017 was a gain of $2 million (three months ended March 31,
2016 - loss of $50 million) and is
recorded in "Other comprehensive income". For the three months
ended March 31, 2017, the ineffective portion was a loss of
$nil (three months ended March 31, 2016 - loss of $2 million) and is recorded to "Net interest
expense" on the interim consolidated statements of income.
For the three months ended March 31, 2017, a loss of
$3 million related to previous
forward starting swap hedges has been amortized to "Net interest
expense" (three months ended March 31, 2016 - a loss of
$2 million). The Company expects that
during the next 12 months $11 million
of losses will be amortized to "Net interest expense".
9 Stock-based compensation
At March 31, 2017, the Company had several stock-based
compensation plans, including stock option plans, various cash
settled liability plans and an employee stock savings plan. These
plans resulted in a recovery for the three months ended
March 31, 2017 of $12 million
(three months ended March 31, 2016 - expense $14 million).
Effective January 31, 2017, Mr.
E. Hunter Harrison resigned from all
positions held by him at the Company, including as the Company's
Chief Executive Officer and a member of the Board of Directors of
the Company. In connection with Mr. Harrison's resignation,
the Company entered into a separation agreement with
Mr. Harrison. Under the terms of the separation agreement, the
Company has agreed to a limited waiver of Mr. Harrison's
non-competition and non-solicitation obligations.
Effective January 31, 2017,
pursuant to the separation agreement, Mr. Harrison forfeited
certain pension and post-retirement benefits and agreed to the
surrender for cancellation of 22,514 performance share units
("PSU"), 68,612 deferred share units ("DSU"), and 752,145 stock
options.
As a result of this agreement, the Company has recognized a
recovery of $51 million in
"Compensation and benefits" in the first quarter of 2017. Of this
amount, $27 million relates to a
recovery from cancellation of certain pension benefits.
Stock option plan
In the three months ended March 31, 2017, under CP's stock
option plans, the Company issued 366,930 stock options at the
weighted average price of $198.98 per
share, based on the closing price on the grant date.
Pursuant to the employee plan, these stock options may be
exercised upon vesting, which is between 12 months and 60 months
after the grant date, and will expire after 7 years. Certain stock
options granted in 2017 vest upon the achievement of specific
performance criteria.
Under the fair value method, the value of the stock options at
the grant date was approximately $17
million. The weighted average fair value assumptions were
approximately:
|
For the three
months ended
March 31, 2017
|
Grant
price
|
$198.98
|
Expected option life
(years)(1)
|
5.48
|
Risk-free interest
rate(2)
|
1.85%
|
Expected stock price
volatility(3)
|
26.95%
|
Expected annual
dividends per share(4)
|
$2.00
|
Expected forfeiture
rate(5)
|
3.0%
|
Weighted-average
grant date fair value per option granted during the
period
|
$45.78
|
(1)
|
Represents the period
of time that awards are expected to be outstanding. Historical data
on exercise behaviour, or when available, specific expectations
regarding future exercise behaviour, were used to estimate the
expected life of the option.
|
(2)
|
Based on the implied
yield available on zero-coupon government issues with an equivalent
remaining term at the time of the grant.
|
(3)
|
Based on the
historical stock price volatility of the Company's stock over a
period commensurate with the expected term of the
option.
|
(4)
|
Determined by the
current annual dividend at the time of grant. The Company does not
employ different dividend yields throughout the contractual term of
the option.
|
(5)
|
The Company estimated
forfeitures based on past experience. This rate is monitored on a
periodic basis.
|
|
Performance share unit plan
In the three months ended March 31, 2017, the Company
issued 133,448 PSUs with a grant date fair value of approximately
$27 million. These units attract
dividend equivalents in the form of additional units based on the
dividends paid on the Company's Common Shares. PSUs vest and are
settled in cash, or in CP Common Shares, approximately three years
after the grant date, contingent upon CP's performance
("performance factor"). Grant recipients who are eligible to retire
and have provided six months of service during the performance
period are entitled to the full award. The fair value of PSUs is
measured periodically until settlement, using a lattice-based
valuation model.
The performance period for PSUs issued in the three months ended
March 31, 2017 is January 1,
2017 to December 31, 2019. The
performance factors for these PSUs are Return on Invested Capital,
Total Shareholder Return ("TSR") compared to the S&P/TSX Capped
Industrial Index, and TSR compared to S&P 1500 Road and Rail
Index.
The performance period for the PSUs issued in 2014 was
January 1, 2014 to December 31, 2016. The performance factors for
these PSUs were Operating Ratio, Free cash flow, TSR compared to
the S&P/TSX 60 index, and TSR compared to Class 1 railways. The
resulting payout was 118% of the Company's average share price that
was calculated using the last 30 trading days preceding
December 31, 2016. In the three months ended March 31,
2017, payouts occurred on the total outstanding awards, including
dividends reinvested totaling $31
million on 133,728 outstanding awards.
Deferred share unit ("DSU") plan
In the three months ended March 31, 2017, the Company
granted 14,055 DSUs with a grant date fair value of approximately
$3 million. DSUs vest over various
periods of up to 48 months and are only redeemable for a specified
period after employment is terminated. An expense to income for
DSUs is recognized over the vesting period for both the initial
subscription price and the change in value between reporting
periods.
10 Pension and other benefits
In the three months ended March 31, 2017, the Company made
contributions of $12 million (three
months ended March 31, 2016 - $20
million) to its defined benefit pension plans. The elements
of net periodic benefit cost for defined benefit pension plans and
other benefits recognized in the quarter included the following
components:
|
For the three
months ended March 31
|
|
Pensions
|
Other
benefits
|
(in millions of
Canadian dollars)
|
2017
|
2016
|
2017
|
2016
|
Current service cost
(benefits earned by employees in the period)
|
$
|
25
|
$
|
27
|
$
|
3
|
$
|
3
|
Interest cost on
benefit obligation
|
113
|
117
|
5
|
5
|
Expected return on
fund assets
|
(223)
|
(212)
|
—
|
—
|
Recognized net
actuarial loss
|
38
|
48
|
1
|
1
|
Amortization of prior
service costs
|
(1)
|
(2)
|
—
|
—
|
Net periodic benefit
(recovery) cost
|
$
|
(48)
|
$
|
(22)
|
$
|
9
|
$
|
9
|
11 Contingencies
In the normal course of its operations, the Company becomes
involved in various legal actions, including claims relating to
injuries and damage to property. The Company maintains provisions
it considers to be adequate for such actions. While the final
outcome with respect to actions outstanding or pending at
March 31, 2017 cannot be predicted with certainty, it is the
opinion of management that their resolution will not have a
material adverse effect on the Company's financial position or
results of operations.
Legal proceedings related to Lac-Mégantic rail
accident
On July 6, 2013, a
train carrying crude oil operated by Montreal Maine and Atlantic
Railway ("MMA") or a subsidiary, Montreal Maine & Atlantic
Canada Co. ("MMAC" and collectively the "MMA Group") derailed and
exploded in Lac-Mégantic, Québec. The accident occurred on a
section of railway owned and operated by the MMA Group. The
previous day CP had interchanged the train to the MMA Group, and
after the interchange, the MMA Group exclusively controlled the
train.
Following this incident, Québec's Minister of Sustainable
Development, Environment, Wildlife and Parks (the "Minister")
ordered the named parties to recover the contaminants and to clean
up the derailment site. On August 14,
2013, the Minister added CP as a party (the "Amended Cleanup
Order"). CP appealed the Amended Cleanup Order to the
Administrative Tribunal of Québec. On July
5, 2016, the Minister served a Notice of Claim for nearly
$95 million of compensation spent on
cleanup, alleging that CP refused or neglected to undertake the
work. On September 6, 2016, CP filed
a contestation of the Notice of Claim with the Administrative
Tribunal of Québec. In October 2016,
CP and the Minister agreed to stay the tribunal proceedings pending
the outcome of the Province of Québec's action, set out below. The
Court's decision to stay the tribunal proceedings is pending, but
de facto, the file has been suspended. Directly related to that
matter, on July 6, 2015, the Province
of Québec sued CP in Québec Superior Court claiming $409 million in derailment damages, including
cleanup costs. The Province alleges that CP exercised custody or
control over the crude oil lading and that CP was otherwise
negligent. Therefore, CP is said to be solidarily (joint and
severally) liable with third parties responsible for the accident.
The Province filed a motion for leave to amend its complaint in
September 2016, but no date has been
fixed for the hearing of this motion, as most of the Attorney
General of Québec's lawyers were on strike at that time and until
early March 2017. While the strike
has ended, the Province has yet to further advance this motion. To
date, no timetable governing the conduct of this lawsuit has been
ordered by the Quebec Superior Court. This proceeding appears to be
duplicative of the administrative proceedings.
A class action lawsuit has also been filed in the Québec
Superior Court on behalf of persons and entities residing in,
owning or leasing property in, operating a business in or
physically present in Lac-Mégantic at the time of the derailment
(the "Class Action"). That lawsuit seeks derailment damages,
including for wrongful death, personal injury, and property harm.
On August 16, 2013, CP was added as a
defendant. On May 8, 2015, the Québec
Superior Court authorized (certified) the Class Action against CP,
the shipper – Western Petroleum, and the shipper's parent – World
Fuel Services (collectively, the "World Fuel Entities"). The World
Fuel Entities have since settled. The plaintiffs filed a motion for
leave to amend their complaint, but subsequently withdrew it.
On October 24, 2016, the Quebec
Superior Court authorized class action proceedings against two
additional defendants in the same matter discussed above, i.e.
against MMAC and Mr. Thomas Harding.
On December 9, 2016, the Superior
Court granted CP's motion seeking to confirm the validity of the
opt-outs from this class action by most of the estates of the
deceased parties following the train derailment who had opted out
to allow them to sue in the United
States instead (i.e. the wrongful death cases, filed in
the United States, which are
further discussed). Draft Case Protocols setting out proposed
timetables for the conduct of this lawsuit were submitted to the
Superior Court in mid-March 2017 by
both the plaintiffs and defendants. On March 27, 2017 the Superior Court adopted several
of the steps included in the Case Protocol submitted by CP. Under
the Case Protocol, CP's statement of defense will be
submitted by June 2 and thereafter
production of documents, examinations for discovery and the
exchange of expert reports by the parties is to occur between
mid-2017 and the end of 2018. A trial date has yet to be fixed.
On July 4, 2016, eight subrogated
insurers served CP with claims of approximately $16 million. On July 11,
2016, two additional subrogated insurers served CP with
claims of approximately $3 million.
The lawsuits do not identify the parties to which the insurers are
subrogated, and therefore the extent of claim overlap and the
extent that claims will be satisfied after proof of claim review
and distribution from the Plans, referred to below, is difficult to
determine. These lawsuits have been stayed until June 2, 2017.
In the wake of the derailment and ensuing litigation, MMAC filed
for bankruptcy in Canada (the
"Canadian Proceeding") and MMA filed for bankruptcy in the United States (the "U.S. Proceeding").
Plans of arrangement have been approved in both the Canadian
Proceeding and the U.S. Proceeding (the "Plans"). These Plans
provide for the distribution of a fund of approximately
$440 million amongst those claiming
derailment damages. The Plans also provide settling parties broadly
worded third-party releases and injunctions preventing lawsuits
against settlement contributors. CP has not settled and therefore
will not benefit from those provisions. Both Plans do, however,
contain judgment reduction provisions, affording CP a credit for
the greater of (i) the settlement monies received by the
plaintiff(s), or (ii) the amount, in contribution or indemnity,
that CP would have been entitled to charge against third parties
other than MMA and MMAC, but for the Plans' releases and
injunctions. CP may also have judgment reduction rights, as part of
the contribution/indemnification credit, for the fault of the MMA
Group. Finally, the Plans provide for a potential re-allocation of
the MMA Group's liability among plaintiffs and CP, the only
non-settling party.
An Adversary Proceeding filed by the MMA U.S. bankruptcy trustee
(now, estate representative) against CP, Irving Oil, and the World
Fuel Entities accuses CP of failing to ensure that World Fuel
Entities or Irving Oil properly classified the oil lading and of
not refusing to ship the misclassified oil as packaged. By that
action the estate representative seeks to recover MMA's going
concern value supposedly destroyed by the derailment. The
estate representative has since settled with the World Fuel
Entities and Irving Oil and now bases CP misfeasance on the
railroad's failure to abide in North
Dakota by a Canadian regulation. That regulation supposedly
would have caused the railroads to not move the crude oil train
because an inaccurate classification was supposedly suspected. In a
recently amended complaint, the estate representative named a CP
affiliate, Soo Line Railroad Company ("Soo Line"), and asserts that
CP and Soo Line breached terms or
warranties allegedly contained in the bill of lading. CP's motion
to dismiss this amended complaint was heard on December 20, 2016 and a decision is pending.
In response to one of CP's motions to withdraw the Adversary
Proceedings bankruptcy reference, the estate representative
maintained that Canadian law rather than U.S. law controlled. The
Article III court that heard the motion found that if U.S. federal
regulations governed, the case was not complex enough to warrant
withdrawal. Before the bankruptcy court, CP moved to dismiss for
want of personal jurisdiction, but the court denied the motion
because CP had participated in the bankruptcy proceedings.
Lac-Mégantic residents and wrongful death representatives
commenced a class action and a mass action in Texas and wrongful death and personal injury
actions in Illinois and
Maine. CP removed all of these
lawsuits to federal court, and a federal court thereafter
consolidated those cases in Maine.
These actions generally charge CP with misclassification and
mis-packaging (that is, using inappropriate DOT-111 tank cars)
negligence. On CP's motion, the Maine court dismissed all wrongful death and
personal injury actions on several grounds on September 28, 2016. The plaintiffs' subsequent
motion for reconsideration was denied on January 9, 2017. The plaintiffs filed a
notice of appeal on January 19, 2017.
The appeal has yet to be docketed by the appellate court. Once
docketed, and if not dismissed by the appellate court on its own
motion, CP will file a motion to dismiss the appeal. If the ruling
is upheld on appeal these cases will be litigated, if anywhere, in
Canada. As previously mentioned,
many of these plaintiffs had previously opted-out of the Quebec
Class Action in order to bring their claims in the United States. CP brought a motion on
December 1, 2016 to seek a
declaration from the Quebec Superior Court that the plaintiffs who
had opted out were precluded from opting back into the Quebec Class
Action. CP's motion was successful. Accordingly, if these
plaintiffs seek to sue CP, they would have to do so in Quebec in individual actions (they could also
join their individual claims in the same individual action).
CP has received two damage to cargo notices of claims from the
shipper of the oil, Western Petroleum. Western Petroleum submitted
U.S. and Canadian notices of claims for the same damages and under
the Carmack Amendment (49 U.S.C. Section 11706) Western Petroleum
seeks to recover for all injuries associated with, and
indemnification for, the derailment. Both jurisdictions permit a
shipper to recover the value of damaged lading against any carrier
in the delivery chain, subject to limitations in the carrier's
tariffs. CP's tariffs significantly restrict shipper damage claim
rights. Western Petroleum is part of the World Fuel Services
Entities, and those companies settled with the trustee. In
settlements with the estate representative the World Fuel Services
Entities and the consignee (Irving Oil) assigned all claims against
CP, if any, including Carmack Amendment claims. The estate
representative has since designated a trust formed for the benefit
of the wrongful death plaintiff to pursue those claims.
On April 12, 2016, the Trustee
(the "WD Trustee") for a wrongful death trust (the "WD Trust"), as
defined and established under the confirmed Plans, sued CP in
North Dakota federal court,
asserting Carmack Amendment claims. The WD Trustee maintains that
the estate representative assigned Carmack Amendment claims to the
WD Trustee. The Plan supposedly gave the estate representative
Carmack Amendment assignment rights. The WD Trustee seeks to
recover amounts for damaged rail cars (approximately $6 million), and the settlement amounts the
consignor (i.e., the shipper, the World Fuel Entities) and the
consignee (Irving Oil) paid to the bankruptcy estates, alleged to
be $110 million and $60 million, respectively. The WD Trustee
maintains that Carmack Amendment liability extends beyond lading
losses to cover all derailment related damages suffered by the
World Fuel Entities or Irving Oil. CP disputes this interpretation
of Carmack Amendment exposure and maintains that CP's tariffs
preclude anything except a minimal recovery. CP brought a motion to
dismiss the Carmack Amendment claims. On March 24, 2017 the federal court in North Dakota dismissed, with prejudice, these
claims. The court determined the claims asserted by the WD Trustee
were brought too late. On March 28,
2017, the WD Trustee filed a notice of appeal to
the United States Court of Appeals
for the Eighth Circuit. The appeal is pending.
At this early stage of the proceedings, any potential
responsibility and the quantum of potential losses cannot be
determined. Nevertheless, CP denies liability and intends to
vigorously defend against all derailment-related proceedings.
Environmental liabilities
Environmental remediation accruals, recorded on an undiscounted
basis unless a reliable, determinable estimate as to an amount and
timing of costs can be established, cover site-specific remediation
programs.
The accruals for environmental remediation represent CP's best
estimate of its probable future obligation and include both
asserted and unasserted claims, without reduction for anticipated
recoveries from third parties. Although the recorded accruals
include CP's best estimate of all probable costs, CP's total
environmental remediation costs cannot be predicted with certainty.
Accruals for environmental remediation may change from time to time
as new information about previously untested sites becomes known,
and as environmental laws and regulations evolve and advances are
made in environmental remediation technology. The accruals may also
vary as the courts decide legal proceedings against outside parties
responsible for contamination. These potential charges, which
cannot be quantified at this time, may materially affect income in
the particular period in which a charge is recognized. Costs
related to existing, but as yet unknown, or future contamination
will be accrued in the period in which they become probable and
reasonably estimable.
The expense included in "Purchased services and other" for the
three months ended March 31, 2017 was $1 million (three months ended March 31,
2016 - $1 million). Provisions
for environmental remediation costs are recorded in "Other
long-term liabilities", except for the current portion which is
recorded in "Accounts payable and accrued liabilities". The total
amount provided at March 31, 2017 was $89 million (December 31, 2016 -
$85 million). Payments are expected
to be made over 10 years through 2026.
12 Condensed consolidating financial
information
Canadian Pacific Railway Company, a 100%-owned subsidiary
of Canadian Pacific Railway Limited ("CPRL"), is the issuer of
certain debt securities, which are fully and unconditionally
guaranteed by CPRL. The following tables present condensed
consolidating financial information ("CCFI") in accordance with
Rule 3-10(c) of Regulation S-X.
Investments in subsidiaries are accounted for under the equity
method when presenting the CCFI.
The tables include all adjustments necessary to reconcile the
CCFI on a consolidated basis to CPRL's consolidated financial
statements for the periods presented.
Interim Condensed Consolidating Statements of
Income
For the three months ended March 31,
2017
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC
(Subsidiary Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Revenues
|
|
|
|
|
|
|
Freight
|
$
|
—
|
$
|
1,089
|
$
|
474
|
$
|
—
|
$
|
1,563
|
|
Non-freight
|
—
|
32
|
93
|
(85)
|
40
|
Total
revenues
|
—
|
1,121
|
567
|
(85)
|
1,603
|
Operating
expenses
|
|
|
|
|
|
|
Compensation and
benefits
|
—
|
124
|
108
|
1
|
233
|
|
Fuel
|
—
|
132
|
38
|
—
|
170
|
|
Materials
|
—
|
34
|
9
|
6
|
49
|
|
Equipment
rents
|
—
|
36
|
—
|
—
|
36
|
|
Depreciation and
amortization
|
—
|
109
|
57
|
—
|
166
|
|
Purchased services
and other
|
—
|
208
|
162
|
(92)
|
278
|
Total operating
expenses
|
—
|
643
|
374
|
(85)
|
932
|
Operating
income
|
—
|
478
|
193
|
—
|
671
|
Less:
|
|
|
|
|
|
|
Other income and
charges
|
(20)
|
(7)
|
(1)
|
—
|
(28)
|
|
Net interest expense
(income)
|
2
|
125
|
(7)
|
—
|
120
|
Income before income tax expense and equity in net
earnings of subsidiaries
|
18
|
360
|
201
|
—
|
579
|
|
Less: Income tax
expense
|
1
|
98
|
49
|
—
|
148
|
|
Add: Equity in net
earnings of subsidiaries
|
414
|
152
|
—
|
(566)
|
—
|
Net
income
|
$
|
431
|
$
|
414
|
$
|
152
|
$
|
(566)
|
$
|
431
|
Interim Condensed Consolidating Statements of
Income
For the three months ended March 31,
2016
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Revenues
|
|
|
|
|
|
|
Freight
|
$
|
—
|
$
|
1,097
|
$
|
451
|
$
|
—
|
$
|
1,548
|
|
Non-freight
|
—
|
33
|
96
|
(86)
|
43
|
Total
revenues
|
—
|
1,130
|
547
|
(86)
|
1,591
|
Operating
expenses
|
|
|
|
|
|
|
Compensation and
benefits
|
—
|
201
|
126
|
2
|
329
|
|
Fuel
|
—
|
103
|
22
|
—
|
125
|
|
Materials
|
—
|
38
|
10
|
8
|
56
|
|
Equipment
rents
|
—
|
54
|
(9)
|
—
|
45
|
|
Depreciation and
amortization
|
—
|
107
|
55
|
—
|
162
|
|
Purchased services
and other
|
—
|
136
|
181
|
(96)
|
221
|
Total operating
expenses
|
—
|
639
|
385
|
(86)
|
938
|
Operating
income
|
—
|
491
|
162
|
—
|
653
|
Less:
|
|
|
|
|
|
|
Other income and
charges
|
(69)
|
(138)
|
26
|
—
|
(181)
|
|
Net interest (income)
expense
|
(1)
|
131
|
(6)
|
—
|
124
|
Income before
income tax expense and equity in net earnings of
subsidiaries
|
70
|
498
|
142
|
—
|
710
|
|
Less: Income tax
expense
|
9
|
111
|
50
|
—
|
170
|
|
Add: Equity in net
earnings of subsidiaries
|
479
|
92
|
—
|
(571)
|
—
|
Net
income
|
$
|
540
|
$
|
479
|
$
|
92
|
$
|
(571)
|
$
|
540
|
Interim Condensed Consolidating Statements of Comprehensive
Income
For the three months ended March 31,
2017
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Net income
|
$
|
431
|
$
|
414
|
$
|
152
|
$
|
(566)
|
$
|
431
|
Net gain (loss) in
foreign currency translation
adjustments, net of
hedging activities
|
—
|
45
|
(40)
|
—
|
5
|
Change in derivatives
designated as cash flow
hedges
|
—
|
5
|
—
|
—
|
5
|
Change in pension and
post-retirement defined
benefit
plans
|
—
|
36
|
2
|
—
|
38
|
Other
comprehensive income (loss) before income taxes
|
—
|
86
|
(38)
|
—
|
48
|
Income tax expense on
above items
|
—
|
(17)
|
(1)
|
—
|
(18)
|
Equity accounted
investments
|
30
|
(39)
|
—
|
9
|
—
|
Other
comprehensive income (loss)
|
30
|
30
|
(39)
|
9
|
30
|
Comprehensive
income
|
$
|
461
|
$
|
444
|
$
|
113
|
$
|
(557)
|
$
|
461
|
Interim Condensed Consolidating Statements of Comprehensive
Income
For the three months ended March 31,
2016
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Net income
|
$
|
540
|
$
|
479
|
$
|
92
|
$
|
(571)
|
$
|
540
|
Net gain (loss) in
foreign currency translation
adjustments, net of hedging activities
|
—
|
310
|
(273)
|
—
|
37
|
Change in derivatives
designated as cash flow
hedges
|
—
|
(47)
|
—
|
—
|
(47)
|
Change in pension and
post-retirement defined
benefit plans
|
—
|
45
|
2
|
—
|
47
|
Other
comprehensive income (loss) before income taxes
|
—
|
308
|
(271)
|
—
|
37
|
Income tax expense on
above items
|
—
|
(41)
|
—
|
—
|
(41)
|
Equity accounted
investments
|
(4)
|
(271)
|
—
|
275
|
—
|
Other
comprehensive loss
|
(4)
|
(4)
|
(271)
|
275
|
(4)
|
Comprehensive
income (loss)
|
$
|
536
|
$
|
475
|
$
|
(179)
|
$
|
(296)
|
$
|
536
|
Interim Condensed Consolidating Balance Sheets
As
at March 31, 2017
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Assets
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
—
|
$
|
83
|
$
|
118
|
$
|
—
|
$
|
201
|
|
Accounts receivable,
net
|
—
|
447
|
184
|
—
|
631
|
|
Accounts receivable,
inter-company
|
92
|
152
|
194
|
(438)
|
—
|
|
Short-term advances
to affiliates
|
500
|
513
|
4,167
|
(5,180)
|
—
|
|
Materials and
supplies
|
—
|
167
|
34
|
—
|
201
|
|
Other current
assets
|
—
|
52
|
25
|
—
|
77
|
|
592
|
1,414
|
4,722
|
(5,618)
|
1,110
|
Long-term advances to
affiliates
|
1
|
—
|
90
|
(91)
|
—
|
Investments
|
—
|
40
|
143
|
—
|
183
|
Investments in
subsidiaries
|
8,882
|
10,404
|
—
|
(19,286)
|
—
|
Properties
|
—
|
8,763
|
7,898
|
—
|
16,661
|
Goodwill and
intangible assets
|
—
|
—
|
200
|
—
|
200
|
Pension
asset
|
—
|
1,165
|
—
|
—
|
1,165
|
Other
assets
|
—
|
69
|
9
|
—
|
78
|
Deferred income
taxes
|
11
|
—
|
—
|
(11)
|
—
|
Total
assets
|
$
|
9,486
|
$
|
21,855
|
$
|
13,062
|
$
|
(25,006)
|
$
|
19,397
|
Liabilities and
shareholders' equity
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
$
|
73
|
$
|
804
|
$
|
271
|
$
|
—
|
$
|
1,148
|
|
Accounts payable,
inter-company
|
17
|
281
|
140
|
(438)
|
—
|
|
Short-term advances
from affiliates
|
4,358
|
813
|
9
|
(5,180)
|
—
|
|
Long-term debt
maturing within one year
|
—
|
31
|
—
|
—
|
31
|
|
4,448
|
1,929
|
420
|
(5,618)
|
1,179
|
Pension and other
benefit liabilities
|
—
|
656
|
74
|
—
|
730
|
Long-term advances
from affiliates
|
—
|
91
|
—
|
(91)
|
—
|
Other long-term
liabilities
|
—
|
96
|
131
|
—
|
227
|
Long-term
debt
|
—
|
8,529
|
54
|
—
|
8,583
|
Deferred income
taxes
|
—
|
1,672
|
1,979
|
(11)
|
3,640
|
Total
liabilities
|
4,448
|
12,973
|
2,658
|
(5,720)
|
14,359
|
Shareholders'
equity
|
|
|
|
|
|
|
Share
capital
|
2,036
|
1,037
|
5,891
|
(6,928)
|
2,036
|
|
Additional paid-in
capital
|
42
|
1,637
|
300
|
(1,937)
|
42
|
|
Accumulated other
comprehensive (loss) income
|
(1,769)
|
(1,770)
|
672
|
1,098
|
(1,769)
|
|
Retained
earnings
|
4,729
|
7,978
|
3,541
|
(11,519)
|
4,729
|
|
5,038
|
8,882
|
10,404
|
(19,286)
|
5,038
|
Total liabilities
and shareholders' equity
|
$
|
9,486
|
$
|
21,855
|
$
|
13,062
|
$
|
(25,006)
|
$
|
19,397
|
Condensed Consolidating Balance Sheets
As At
December 31,
2016
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Assets
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
—
|
$
|
100
|
$
|
64
|
$
|
—
|
$
|
164
|
|
Accounts receivable,
net
|
—
|
435
|
156
|
—
|
591
|
|
Accounts receivable,
inter-company
|
90
|
113
|
206
|
(409)
|
—
|
|
Short-term advances
to affiliates
|
500
|
692
|
4,035
|
(5,227)
|
—
|
|
Materials and
supplies
|
—
|
150
|
34
|
—
|
184
|
|
Other current
assets
|
—
|
38
|
32
|
—
|
70
|
|
590
|
1,528
|
4,527
|
(5,636)
|
1,009
|
Long-term advances to
affiliates
|
1
|
—
|
91
|
(92)
|
—
|
Investments
|
—
|
47
|
147
|
—
|
194
|
Investments in
subsidiaries
|
8,513
|
10,249
|
—
|
(18,762)
|
—
|
Properties
|
—
|
8,756
|
7,933
|
—
|
16,689
|
Goodwill and
intangible assets
|
—
|
—
|
202
|
—
|
202
|
Pension
asset
|
—
|
1,070
|
—
|
—
|
1,070
|
Other
assets
|
1
|
48
|
8
|
—
|
57
|
Deferred income
taxes
|
11
|
—
|
—
|
(11)
|
—
|
Total
assets
|
$
|
9,116
|
$
|
21,698
|
$
|
12,908
|
$
|
(24,501)
|
$
|
19,221
|
Liabilities and
shareholders' equity
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
$
|
73
|
$
|
945
|
$
|
304
|
$
|
—
|
$
|
1,322
|
|
Accounts payable,
inter-company
|
14
|
292
|
103
|
(409)
|
—
|
|
Short-term advances
from affiliates
|
4,403
|
816
|
8
|
(5,227)
|
—
|
|
Long-term debt
maturing within one year
|
—
|
25
|
—
|
—
|
25
|
|
4,490
|
2,078
|
415
|
(5,636)
|
1,347
|
Pension and other
benefit liabilities
|
—
|
658
|
76
|
—
|
734
|
Long-term advances
from affiliates
|
—
|
92
|
—
|
(92)
|
—
|
Other long-term
liabilities
|
—
|
152
|
132
|
—
|
284
|
Long-term
debt
|
—
|
8,605
|
54
|
—
|
8,659
|
Deferred income
taxes
|
—
|
1,600
|
1,982
|
(11)
|
3,571
|
Total
liabilities
|
4,490
|
13,185
|
2,659
|
(5,739)
|
14,595
|
Shareholders'
equity
|
|
|
|
|
|
|
Share
capital
|
2,002
|
1,037
|
5,823
|
(6,860)
|
2,002
|
|
Additional paid-in
capital
|
52
|
1,638
|
298
|
(1,936)
|
52
|
|
Accumulated other
comprehensive (loss) income
|
(1,799)
|
(1,799)
|
712
|
1,087
|
(1,799)
|
|
Retained
earnings
|
4,371
|
7,637
|
3,416
|
(11,053)
|
4,371
|
|
4,626
|
8,513
|
10,249
|
(18,762)
|
4,626
|
Total liabilities
and shareholders' equity
|
$
|
9,116
|
$
|
21,698
|
$
|
12,908
|
$
|
(24,501)
|
$
|
19,221
|
Interim Condensed Consolidating Statements of Cash
Flows
For the three months ended March 31,
2017
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Cash provided by
operating activities
|
$
|
63
|
$
|
85
|
$
|
264
|
$
|
(101)
|
$
|
311
|
Investing
activities
|
|
|
|
|
|
Additions to
properties
|
—
|
(109)
|
(121)
|
—
|
(230)
|
Proceeds from sale of
properties and other assets
|
—
|
1
|
2
|
—
|
3
|
Advances to
affiliates
|
(152)
|
—
|
(134)
|
286
|
—
|
Capital contributions
to affiliates
|
—
|
(68)
|
—
|
68
|
—
|
Other
|
—
|
5
|
—
|
—
|
5
|
Cash used in
investing activities
|
(152)
|
(171)
|
(253)
|
354
|
(222)
|
Financing
activities
|
|
|
|
|
|
Dividends
paid
|
(73)
|
(73)
|
(28)
|
101
|
(73)
|
Issuance of share
capital
|
—
|
—
|
68
|
(68)
|
—
|
Issuance of CP Common
Shares
|
28
|
—
|
—
|
—
|
28
|
Repayment of
long-term debt, excluding commercial paper
|
—
|
(5)
|
—
|
—
|
(5)
|
Advances from
affiliates
|
134
|
149
|
3
|
(286)
|
—
|
Cash provided by
(used in) financing activities
|
89
|
71
|
43
|
(253)
|
(50)
|
Effect of foreign
currency fluctuations on U.S. dollar-denominated cash and cash
equivalents
|
—
|
(2)
|
—
|
—
|
(2)
|
Cash
position
|
|
|
|
|
|
(Decrease) increase
in cash and cash equivalents
|
—
|
(17)
|
54
|
—
|
37
|
Cash and cash
equivalents at beginning of period
|
—
|
100
|
64
|
—
|
164
|
Cash and cash
equivalents at end of period
|
$
|
—
|
$
|
83
|
$
|
118
|
$
|
—
|
$
|
201
|
Interim Condensed Consolidating Statements of Cash
Flows
For the three months ended March 31,
2016
(in millions of
Canadian dollars)
|
CPRL (Parent
Guarantor)
|
CPRC (Subsidiary
Issuer)
|
Non-Guarantor
Subsidiaries
|
Consolidating
Adjustments and Eliminations
|
CPRL
Consolidated
|
Cash provided by
operating activities
|
$
|
23
|
$
|
51
|
$
|
198
|
$
|
(54)
|
$
|
218
|
Investing
activities
|
|
|
|
|
|
Additions to
properties
|
—
|
(132)
|
(146)
|
—
|
(278)
|
Proceeds from sale of
properties and other assets
|
—
|
57
|
3
|
—
|
60
|
Advances to
affiliates
|
—
|
(35)
|
—
|
35
|
—
|
Capital contributions
to affiliates
|
—
|
(9)
|
—
|
9
|
—
|
Repurchase of share
capital from affiliates
|
—
|
6
|
—
|
(6)
|
—
|
Cash used in
investing activities
|
—
|
(113)
|
(143)
|
38
|
(218)
|
Financing
activities
|
|
|
|
|
|
Dividends
paid
|
(54)
|
(54)
|
—
|
54
|
(54)
|
Issuance of share
capital
|
—
|
—
|
9
|
(9)
|
—
|
Return of share
capital to affiliates
|
—
|
—
|
(6)
|
6
|
—
|
Issuance of CP Common
Shares
|
5
|
—
|
—
|
—
|
5
|
Repayment of
long-term debt, excluding commercial paper
|
—
|
(4)
|
(7)
|
—
|
(11)
|
Advances from
affiliates
|
26
|
—
|
9
|
(35)
|
—
|
Other
|
—
|
(2)
|
—
|
—
|
(2)
|
Cash (used in)
provided by financing activities
|
(23)
|
(60)
|
5
|
16
|
(62)
|
Effect of foreign
currency fluctuations on U.S. dollar-denominated cash and cash
equivalents
|
—
|
(4)
|
(13)
|
—
|
(17)
|
Cash
position
|
|
|
|
|
|
(Decrease) increase
in cash and cash equivalents
|
—
|
(126)
|
47
|
—
|
(79)
|
Cash and cash
equivalents at beginning of year
|
—
|
502
|
148
|
—
|
650
|
Cash and cash
equivalents at end of year
|
$
|
—
|
$
|
376
|
$
|
195
|
$
|
—
|
$
|
571
|
Summary of Rail
Data
|
|
|
|
First
Quarter
|
Financial
(millions, except per share data)
|
2017
|
2016
|
Total
Change
|
%
Change
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Freight
revenue
|
$
|
1,563
|
$
|
1,548
|
$
|
15
|
1
|
|
Other
revenue
|
40
|
43
|
(3)
|
(7)
|
Total
revenues
|
1,603
|
1,591
|
12
|
1
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
Compensation and
benefits
|
233
|
329
|
(96)
|
(29)
|
|
Fuel
|
170
|
125
|
45
|
36
|
|
Materials
|
49
|
56
|
(7)
|
(13)
|
|
Equipment
rents
|
36
|
45
|
(9)
|
(20)
|
|
Depreciation and
amortization
|
166
|
162
|
4
|
2
|
|
Purchased services
and other
|
278
|
221
|
57
|
26
|
Total operating
expenses
|
932
|
938
|
(6)
|
(1)
|
|
|
|
|
|
Operating
income
|
671
|
653
|
18
|
3
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and
charges
|
(28)
|
(181)
|
153
|
(85)
|
|
Net interest
expense
|
120
|
124
|
(4)
|
(3)
|
|
|
|
|
|
Income before income
tax expense
|
579
|
710
|
(131)
|
(18)
|
|
|
|
|
|
|
Income tax
expense
|
148
|
170
|
(22)
|
(13)
|
|
|
|
|
|
Net income
|
$
|
431
|
$
|
540
|
$
|
(109)
|
(20)
|
Operating ratio
(%)
|
58.1
|
58.9
|
(0.8)
|
(80)
bps
|
|
|
|
|
|
Basic earnings per
share
|
$
|
2.94
|
$
|
3.53
|
$
|
(0.59)
|
(17)
|
|
|
|
|
|
Diluted earnings per
share
|
$
|
2.93
|
$
|
3.51
|
$
|
(0.58)
|
(17)
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
|
|
Weighted average
number of shares outstanding (millions)
|
146.5
|
153.0
|
(6.5)
|
(4)
|
|
Weighted average
number of diluted shares outstanding (millions)
|
147.1
|
153.8
|
(6.7)
|
(4)
|
|
|
|
|
|
Foreign
Exchange
|
|
|
|
|
|
Average foreign
exchange rate (US$/Canadian$)
|
0.76
|
0.73
|
0.03
|
4
|
|
Average foreign
exchange rate (Canadian$/US$)
|
1.32
|
1.37
|
(0.05)
|
(4)
|
Summary of Rail
Data (Page 2)
|
|
|
|
First
Quarter
|
Commodity
Data(1)
|
2017
|
2016
|
Total
Change
|
%
Change
|
FX Adjusted
% Change(2)
|
|
|
|
|
|
|
Freight Revenues
(millions)
|
|
|
|
|
|
|
|
- Grain
|
$
|
393
|
$
|
367
|
$
|
26
|
7
|
9
|
|
- Coal
|
148
|
145
|
3
|
2
|
3
|
|
- Potash
|
98
|
82
|
16
|
20
|
23
|
|
- Fertilizers and
sulphur
|
59
|
81
|
(22)
|
(27)
|
(25)
|
|
- Forest
products
|
67
|
71
|
(4)
|
(6)
|
(3)
|
|
- Energy, chemicals,
and plastics
|
227
|
265
|
(38)
|
(14)
|
(11)
|
|
- Metals, minerals,
and consumer
products
|
170
|
133
|
37
|
28
|
32
|
|
-
Automotive
|
76
|
91
|
(15)
|
(16)
|
(14)
|
|
-
Intermodal
|
325
|
313
|
12
|
4
|
5
|
|
|
|
|
|
|
Total Freight
Revenues
|
$
|
1,563
|
$
|
1,548
|
$
|
15
|
1
|
3
|
|
|
|
|
|
|
Freight Revenue
per Revenue Ton-Miles (RTM) (cents)
|
|
|
|
|
|
|
- Grain
|
4.19
|
3.97
|
0.22
|
6
|
8
|
|
- Coal
|
2.88
|
2.70
|
0.18
|
7
|
7
|
|
- Potash
|
2.67
|
2.58
|
0.09
|
3
|
6
|
|
- Fertilizers and
sulphur
|
6.17
|
6.93
|
(0.76)
|
(11)
|
(9)
|
|
- Forest
products
|
6.11
|
6.17
|
(0.06)
|
(1)
|
2
|
|
- Energy, chemicals,
and plastics
|
4.25
|
4.33
|
(0.08)
|
(2)
|
1
|
|
- Metals, minerals,
and consumer products
|
6.63
|
7.38
|
(0.75)
|
(10)
|
(7)
|
|
-
Automotive
|
22.29
|
21.75
|
0.54
|
2
|
6
|
|
-
Intermodal
|
5.66
|
5.32
|
0.34
|
6
|
8
|
|
|
|
|
|
|
Total Freight Revenue
per RTM
|
4.57
|
4.51
|
0.06
|
1
|
4
|
|
|
|
|
|
|
|
Freight Revenue
per Carload
|
|
|
|
|
|
|
- Grain
|
$
|
3,688
|
$
|
3,658
|
$
|
30
|
1
|
3
|
|
- Coal
|
2,096
|
2,001
|
95
|
5
|
5
|
|
- Potash
|
3,130
|
3,064
|
66
|
2
|
4
|
|
- Fertilizers and
sulphur
|
4,217
|
4,993
|
(776)
|
(16)
|
(13)
|
|
- Forest
products
|
4,128
|
4,216
|
(88)
|
(2)
|
1
|
|
- Energy, chemicals,
and plastics
|
3,412
|
3,753
|
(341)
|
(9)
|
(6)
|
|
- Metals, minerals,
and consumer products
|
2,851
|
2,977
|
(126)
|
(4)
|
(1)
|
|
-
Automotive
|
2,792
|
2,754
|
38
|
1
|
5
|
|
-
Intermodal
|
1,391
|
1,338
|
53
|
4
|
5
|
|
|
|
|
|
|
Total Freight Revenue
per Carload
|
$
|
2,499
|
$
|
2,520
|
$
|
(21)
|
(1)
|
1
|
|
(1)
|
In the first quarter
of 2017, CP revised the grouping of revenues, and aggregated
certain lines of business where "Canadian Grain" and "U.S. Grain"
were aggregated into the line of business "Grain"; "Chemicals and
Plastics" and "Crude" were aggregated into the line of business
"Energy, Chemicals and Plastics"; and "Domestic Intermodal" and
"International Intermodal" were aggregated into the line of
business "Intermodal". Prior period figures have been aggregated
accordingly.
|
|
(2)
|
This earnings
measures has no standardized meaning prescribed by GAAP and,
therefore, is unlikely to be comparable to similar measures
presented by other companies. This measure is defined and
reconciled in Non-GAAP Measures of this Earnings
Release.
|
Summary of Rail
Data (Page 3)
|
|
|
|
First
Quarter
|
Commodity Data
(Continued)(1)
|
2017
|
2016
|
Total
Change
|
%
Change
|
|
|
|
|
|
Millions of
Revenue Ton-Miles (RTM)
|
|
|
|
|
|
- Grain
|
9,383
|
9,255
|
128
|
1
|
|
- Coal
|
5,123
|
5,348
|
(225)
|
(4)
|
|
- Potash
|
3,677
|
3,185
|
492
|
15
|
|
- Fertilizers and
sulphur
|
962
|
1,167
|
(205)
|
(18)
|
|
- Forest
products
|
1,102
|
1,157
|
(55)
|
(5)
|
|
- Energy, chemicals,
and plastics
|
5,340
|
6,122
|
(782)
|
(13)
|
|
- Metals, minerals,
and consumer products
|
2,560
|
1,807
|
753
|
42
|
|
-
Automotive
|
340
|
417
|
(77)
|
(18)
|
|
-
Intermodal
|
5,725
|
5,877
|
(152)
|
(3)
|
|
|
|
|
|
Total RTMs
|
34,212
|
34,335
|
(123)
|
—
|
|
|
|
|
|
Carloads
(thousands)
|
|
|
|
|
|
- Grain
|
107
|
100
|
7
|
7
|
|
- Coal
|
70
|
72
|
(2)
|
(3)
|
|
- Potash
|
31
|
27
|
4
|
15
|
|
- Fertilizers and
sulphur
|
14
|
16
|
(2)
|
(13)
|
|
- Forest
products
|
16
|
17
|
(1)
|
(6)
|
|
- Energy, chemicals,
and plastics
|
67
|
71
|
(4)
|
(6)
|
|
- Metals, minerals,
and consumer products
|
60
|
45
|
15
|
33
|
|
-
Automotive
|
27
|
33
|
(6)
|
(18)
|
|
-
Intermodal
|
233
|
233
|
—
|
—
|
|
|
|
|
|
Total
Carloads
|
625
|
614
|
11
|
2
|
|
First
Quarter
|
Operating Expenses
(millions)
|
2017
|
2016
|
Total
Change
|
%
Change
|
FX Adjusted
% Change(2)
|
|
|
|
|
|
|
|
Compensation and
benefits
|
233
|
329
|
(96)
|
(29)
|
(28)
|
|
Fuel
|
170
|
125
|
45
|
36
|
39
|
|
Materials
|
49
|
56
|
(7)
|
(13)
|
(11)
|
|
Equipment
rents
|
36
|
45
|
(9)
|
(20)
|
(18)
|
|
Depreciation and
amortization
|
166
|
162
|
4
|
2
|
4
|
|
Purchased services
and
other
|
278
|
221
|
57
|
26
|
29
|
|
|
|
|
|
|
Total Operating
Expenses
|
932
|
938
|
(6)
|
(1)
|
1
|
|
(1)
|
In the first quarter
of 2017, CP revised the grouping of revenues, and aggregated
certain lines of business where "Canadian Grain" and "U.S. Grain"
were aggregated into the line of business "Grain"; "Chemicals and
Plastics" and "Crude" were aggregated into the line of business
"Energy, Chemicals and Plastics"; and "Domestic Intermodal" and
"International Intermodal" were aggregated into the line of
business "Intermodal". Prior period figures have been aggregated
accordingly.
|
|
(2)
|
This earnings
measures has no standardized meaning prescribed by GAAP and,
therefore, is unlikely to be comparable to similar measures
presented by other companies. This measure is defined and
reconciled in Non-GAAP Measures of this Earnings
Release.
|
Summary of Rail
Data (Page 4)
|
|
|
|
|
First
Quarter
|
|
|
2017
|
|
2016 (1)
|
|
Total
Change
|
|
%
Change
|
|
Operations
Performance
|
|
|
|
|
|
|
|
|
|
Gross ton-miles
("GTMs") (millions)
|
60,827
|
|
62,219
|
|
(1,392)
|
|
(2)
|
|
Train miles
(thousands)
|
7,511
|
|
7,930
|
|
(419)
|
|
(5)
|
|
Average train
weight - excluding local traffic (tons)
|
8,647
|
|
8,480
|
|
167
|
|
2
|
|
Average train
length - excluding local traffic (feet)
|
7,143
|
|
7,103
|
|
40
|
|
1
|
|
Average terminal
dwell (hours)
|
7.1
|
|
6.9
|
|
0.2
|
|
3
|
|
Average train speed
(miles per hour)(2)
|
22.3
|
|
23.4
|
|
(1.1)
|
|
(5)
|
|
Fuel efficiency (U.S.
gallons of locomotive fuel consumed /1,000 GTMs)
|
1.012
|
|
1.002
|
|
0.010
|
|
1
|
|
U.S. gallons of
locomotive fuel consumed (millions)(3)
|
61.0
|
|
62.0
|
|
(1.0)
|
|
(2)
|
|
Average fuel price
(U.S. dollars per U.S. gallon)
|
2.11
|
|
1.48
|
|
0.63
|
|
43
|
|
|
|
|
|
|
Total employees
(average)(4)
|
11,648
|
|
12,434
|
|
(786)
|
|
(6)
|
|
Total employees (end
of period)(4)
|
11,794
|
|
12,443
|
|
(649)
|
|
(5)
|
|
Workforce (end of
period)(5)
|
11,829
|
|
12,508
|
|
(679)
|
|
(5)
|
|
|
|
|
|
|
Safety
|
|
|
|
|
|
|
|
|
|
FRA personal injuries
per 200,000 employee-hours
|
1.89
|
|
1.45
|
|
0.44
|
|
30
|
|
FRA train accidents
per million train-miles
|
0.85
|
|
0.93
|
|
(0.08)
|
|
(9)
|
|
|
(1)
|
Certain figures have
been revised to conform with current presentation or have been
updated to reflect new information.
|
(2)
|
Average train speed
is defined as a measure of the line-haul movement from origin to
destination including terminal dwell hours. It excludes delay time
related to customer or foreign railways, and also excludes the time
and distance travelled by: i) trains used in or around CP's yards;
ii) passenger trains; and iii) trains used for repairing
track.
|
(3)
|
Includes gallons of
fuel consumed from freight, yard and commuter service but excludes
fuel used in capital projects and other non-freight
activities.
|
(4)
|
An employee is
defined as an individual currently engaged in full-time, part-time
or seasonal employment with CP.
|
(5)
|
Workforce is defined
as total employees plus contractors and consultants.
|
Non-GAAP Measures - Unaudited
The Company presents non-GAAP measures and cash flow information
to provide a basis for evaluating underlying earnings and liquidity
trends in the Company's business that can be compared with the
results of operations in prior periods. In addition, these non-GAAP
measures facilitate a multi-period assessment of long-term
profitability, allowing management and other external users of the
Company's consolidated financial information to compare
profitability on a long-term basis, including assessing future
profitability, with that of the Company's peers.
These non-GAAP measures have no standardized meaning and are not
defined by GAAP and, therefore may not be comparable to similar
measures presented by other companies. The presentation of these
non-GAAP measures is not intended to be considered in isolation
from, as a substitute for, or as superior to the financial
information presented in accordance with GAAP.
Adjusted Performance Measures
The Company uses Adjusted income, Adjusted diluted earnings per
share, Adjusted operating income and Adjusted operating ratio to
evaluate the Company's operating performance and for planning and
forecasting future business operations and future profitability.
These non-GAAP measures provide meaningful supplemental information
regarding operating results because they exclude certain
significant items that are not considered indicative of future
financial trends either by nature or amount. As a result, these
items are excluded for management assessment of operational
performance, allocation of resources and preparation of annual
budgets. These significant items may include, but are not limited
to, restructuring and asset impairment charges, individually
significant gains and losses from sales of assets and certain items
outside the control of management. These items may not be
non-recurring. However, excluding these significant items from GAAP
results allows for a consistent understanding of the Company's
consolidated financial performance when performing a multi-period
assessment including assessing the likelihood of future results.
Accordingly, these non-GAAP financial measures may provide insight
to investors and other external users of the Company's consolidated
financial information.
In the first quarter of 2017, there were two significant items
included in Net income as follows:
- management transition recovery of $51
million related to the retirement of Mr. E. Hunter Harrison as CEO of CP ($39 million after deferred tax) that favourably
impacted Diluted EPS by 27 cents;
and
- a net non-cash gain of $28
million ($24 million after
deferred tax) due to foreign exchange ("FX") translation of the
Company's U.S. dollar-denominated debt that favourably impacted
Diluted EPS by 16 cents.
In the first quarter of 2016, there was one significant item
included in Net income as follows:
- a net non-cash gain of $181
million ($156 million after
deferred tax) that favourably impacted Diluted EPS by $1.01.
Reconciliation of GAAP Performance Measures to Non-GAAP
Performance Measures
The following tables reconcile the most directly comparable
measures presented in accordance with GAAP to the non-GAAP measures
for the three months ended March 31,
2017 and 2016:
Adjusted income is calculated as Net income reported on a GAAP
basis less significant items.
|
For the three
months ended
March 31
|
|
(in
millions)
|
2017
|
|
2016
|
|
Net income as
reported
|
$
|
431
|
|
$
|
540
|
|
Less significant
items (pretax):
|
|
|
|
Management transition
recovery
|
51
|
|
—
|
|
|
Impact of FX
translation on U.S. dollar-denominated debt
|
28
|
|
181
|
|
Tax effect of
adjustments(1)
|
16
|
|
25
|
|
Adjusted
income
|
$
|
368
|
|
$
|
384
|
|
(1)
|
The tax effect of
adjustments was calculated as the pretax effect of the adjustments
multiplied by the effective tax rate for each of the above items
for the periods presented.
|
Adjusted diluted earnings per share is calculated using Adjusted
income, as defined above, divided by the weighted-average diluted
shares outstanding during the period as determined in accordance
with GAAP.
|
For the three
months ended
March 31
|
|
|
2017
|
|
2016
|
|
Diluted earnings
per share as reported
|
$
|
2.93
|
|
$
|
3.51
|
|
Less significant
items:
|
|
|
|
Management transition
recovery
|
0.35
|
|
—
|
|
|
Impact of FX
translation on U.S. dollar-denominated debt
|
0.19
|
|
1.17
|
|
Tax effect of
adjustments(1)
|
0.11
|
|
0.16
|
|
Adjusted diluted
earnings per share
|
$
|
2.50
|
|
$
|
2.50
|
|
(1)
|
The tax effect of
adjustments was calculated as the pretax effect of the adjustments
multiplied by the effective tax rate for each of the above items
for the periods presented.
|
Adjusted operating income is calculated as Operating income
reported on a GAAP basis less significant items.
|
For the three
months ended
March 31
|
|
(in
millions)
|
2017
|
|
2016
|
|
Operating income
as reported
|
$
|
671
|
|
$
|
653
|
|
Less significant
item:
|
|
|
|
Management transition
recovery
|
51
|
|
—
|
|
Adjusted operating
income
|
$
|
620
|
|
$
|
653
|
|
Adjusted operating ratio excludes those significant items that
are reported within Operating income.
|
For the three
months ended
March 31
|
|
2017
|
2016
|
Operating ratio as
reported
|
58.1
|
%
|
58.9
|
%
|
Less significant
item:
|
|
|
|
Management transition
recovery
|
(3.2)
|
%
|
—
|
%
|
Adjusted operating
ratio
|
61.3
|
%
|
58.9
|
%
|
Free Cash
Free cash is calculated as Cash provided by operating
activities, less Cash used in investing activities, adjusted for
changes in cash and cash equivalents balances resulting from FX
fluctuations. Free cash is a measure that management considers to
be an indicator of liquidity. Free cash is useful to investors and
other external users of the consolidated financial statements as it
assists with the evaluation of the Company's ability to generate
cash from its operations without incurring additional external
financing. Positive Free cash indicates the amount of cash
available for reinvestment in the business, or cash that can be
returned to investors through dividends, stock repurchase programs,
debt retirements or a combination of these. Conversely, negative
Free cash indicates the amount of cash that must be raised from
investors through new debt or equity issues, reduction in available
cash balances or a combination of these. Free cash should be
considered in addition to, rather than as a substitute for, Cash
provided by operating activities.
Reconciliation of Cash Provided by Operating Activities to
Free Cash
|
For the three
months ended
March 31
|
|
(in
millions)
|
2017
|
|
2016
|
|
Cash provided by
operating activities
|
$
|
311
|
|
$
|
218
|
|
Cash used in
investing activities
|
(222)
|
|
(218)
|
|
Effect of foreign
currency fluctuations on U.S. dollar-denominated cash and cash
equivalents
|
(2)
|
|
(17)
|
|
Free
cash(1)
|
$
|
87
|
|
$
|
(17)
|
|
(1)
|
The definition of
Free cash has been revised to exclude the deduction of dividends
paid. As a result of this change, Free cash was increased by $54
million for the three months ended March 31, 2016.
|
FX Adjusted Variance
FX adjusted variance allows certain financial results to be
viewed without the impact of fluctuations in foreign currency
exchange rates, thereby facilitating period-to-period comparisons
in the analysis of trends in business performance. Financial result
variances at constant currency are obtained by translating the
comparable period of the prior year results denominated in U.S.
dollars at the foreign exchange rates of the current period.
|
For the three
months ended March 31
|
|
(in
millions)
|
Reported
2017
|
|
Reported
2016
|
|
Variance
due to FX
|
|
FX Adjusted
2016
|
|
FX Adjusted
% Change
|
|
Freight
revenues
|
$
|
1,563
|
|
$
|
1,548
|
|
$
|
(33)
|
|
$
|
1,515
|
|
3
|
|
Non-freight
revenues
|
40
|
|
43
|
|
—
|
|
43
|
|
(7)
|
|
Total
revenues
|
1,603
|
|
1,591
|
|
(33)
|
|
1,558
|
|
3
|
|
Compensation and
benefits
|
233
|
|
329
|
|
(4)
|
|
325
|
|
(28)
|
|
Fuel
|
170
|
|
125
|
|
(3)
|
|
122
|
|
39
|
|
Materials
|
49
|
|
56
|
|
(1)
|
|
55
|
|
(11)
|
|
Equipment
rents
|
36
|
|
45
|
|
(1)
|
|
44
|
|
(18)
|
|
Depreciation and
amortization
|
166
|
|
162
|
|
(2)
|
|
160
|
|
4
|
|
Purchased services
and other
|
278
|
|
221
|
|
(5)
|
|
216
|
|
29
|
|
Total operating
expenses
|
932
|
|
938
|
|
(16)
|
|
922
|
|
1
|
|
Operating
income
|
$
|
671
|
|
$
|
653
|
|
$
|
(17)
|
|
$
|
636
|
|
6
|
|
SOURCE Canadian Pacific