CALGARY, July 25 /PRNewswire-FirstCall/ -- 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 - Income before
foreign exchange gains and losses on long-term debt and other
specified items improved 14 per cent to $160 million - 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 - Operating ratio improved 40 basis points to 75.1 per cent,
a Q2 best for CPR - 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 - Net income was $489 million, an increase of $285
million over 2005 - Income before foreign exchange gains and losses
on long-term debt and other specified items was up 24 per cent to
$278 million - 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 - Operating ratio improved
160 basis points to 77.2 per cent - Revenues were up 6 per cent
which included double-digit increases in grain, industrial and
consumer products, automotive and intermodal business lines -
Operating expenses, excluding the impact of higher fuel prices,
decreased slightly in 2006 over 2005. 2006 OUTLOOK CPR's 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 CPR's normal ongoing revenues
and operating expenses. The impact of volatile short-term rate
fluctuations on foreign-denominated debt is only realized when
long-term debt matures or is settled. A reconciliation of income,
excluding foreign exchange gains and losses on long-term debt and
other specified items, to net income as presented in the financial
statements is detailed in the attached Summary of Rail Data. 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. By its nature, CPR's 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 America's 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 CPR's website at http://www.cpr.ca/. STATEMENT
OF CONSOLIDATED INCOME (in millions, except per share data) For the
three months ended June 30 2006 2005 --------------------------
(unaudited) Revenues Freight $ 1,086.4 $ 1,070.2 Other 44.6 35.7
-------------------------- 1,131.0 1,105.9 Operating expenses
Compensation and benefits 321.5 322.2 Fuel 160.1 145.2 Materials
54.5 46.0 Equipment rents 44.4 54.7 Depreciation and amortization
117.8 110.7 Purchased services and other 150.8 156.0
-------------------------- 849.1 834.8 --------------------------
Operating income 281.9 271.1 Other charges (Note 3) 7.7 5.7 Foreign
exchange (gains) losses on long-term debt (52.7) 17.0 Interest
expense (Note 4) 48.6 53.2 Income tax (benefit) expense (Note 12)
(99.2) 72.0 -------------------------- Net income $ 377.5 $ 123.2
-------------------------- -------------------------- Basic
earnings per share (Note 5) $ 2.38 $ 0.78
-------------------------- -------------------------- Diluted
earnings per share (Note 5) $ 2.36 $ 0.77
-------------------------- -------------------------- See notes to
interim consolidated financial statements. STATEMENT OF
CONSOLIDATED INCOME (in millions, except per share data) For the
six months ended June 30 2006 2005 --------------------------
(unaudited) Revenues Freight $ 2,153.6 $ 2,062.8 Other 87.9 57.2
-------------------------- 2,241.5 2,120.0 Operating expenses
Compensation and benefits 671.4 653.3 Fuel 318.0 279.7 Materials
112.1 104.8 Equipment rents 89.0 103.2 Depreciation and
amortization 232.6 220.2 Purchased services and other 307.4 309.0
-------------------------- 1,730.5 1,670.2
-------------------------- Operating income 511.0 449.8 Other
charges (Note 3) 14.5 4.7 Foreign exchange (gains) losses on
long-term debt (46.3) 20.1 Interest expense (Note 4) 95.9 104.8
Income tax (benefit) expense (Note 12) (41.6) 116.3
-------------------------- Net income $ 488.5 $ 203.9
-------------------------- -------------------------- Basic
earnings per share (Note 5) $ 3.08 $ 1.28
-------------------------- -------------------------- Diluted
earnings per share (Note 5) $ 3.04 $ 1.27
-------------------------- -------------------------- See notes to
interim consolidated financial statements. CONSOLIDATED BALANCE
SHEET (in millions) June 30 December 31 2006 2005
-------------------------- (unaudited) Assets Current assets Cash
and short-term investments $ 44.3 $ 121.8 Accounts receivable and
other current assets 516.8 524.0 Materials and supplies 182.0 140.1
Future income taxes 105.2 108.0 -------------------------- 848.3
893.9 Investments 68.7 67.3 Net properties 8,839.4 8,790.9 Other
assets and deferred charges 1,190.3 1,139.0
-------------------------- Total assets $10,946.7 $10,891.1
-------------------------- -------------------------- Liabilities
and shareholders' equity Current liabilities Accounts payable and
accrued liabilities $ 936.5 $ 1,032.8 Income and other taxes
payable 42.0 30.2 Dividends payable 29.6 23.7 Long-term debt
maturing within one year 165.6 30.0 --------------------------
1,173.7 1,116.7 Deferred liabilities 724.0 743.5 Long-term debt
2,732.5 2,970.8 Future income taxes 1,603.5 1,674.4 Shareholders'
equity Share capital (Note 7) 1,174.0 1,141.5 Contributed surplus
(Note 7) 110.5 241.6 Foreign currency translation adjustments 64.4
67.5 Retained income 3,364.1 2,935.1 --------------------------
4,713.0 4,385.7 -------------------------- Total liabilities and
shareholders' equity $10,946.7 $10,891.1 --------------------------
-------------------------- Commitments and contingencies (Note 11).
See notes to interim consolidated financial statements. STATEMENT
OF CONSOLIDATED CASH FLOWS (in millions) For the three months ended
June 30 2006 2005 -------------------------- (unaudited) Operating
activities Net income $ 377.5 $ 123.2 Add (deduct) items not
affecting cash: Depreciation and amortization 117.8 110.7 Future
income taxes (114.7) 68.8 Foreign exchange (gains) losses on
long-term debt (52.7) 17.0 Amortization of deferred charges 4.3 5.0
Restructuring payments (22.8) (13.3) Other operating activities,
net (1.0) (10.2) Change in non-cash working capital balances
related to operations (26.0) 48.1 -------------------------- Cash
provided by operating activities 282.4 349.3
-------------------------- Investing activities Additions to
properties (177.3) (209.3) (Additions) reductions to investments
and other assets (Note 13) (65.3) 10.6 Net proceeds from disposal
of transportation properties 77.6 3.8 --------------------------
Cash used in investing activities (165.0) (194.9)
-------------------------- Financing activities Dividends paid
(29.8) (21.0) Issuance of CPR Common Shares 10.7 1.6 Purchase of
CPR Common Shares (98.0) (12.6) Net decrease in short-term
borrowing - (8.6) Repayment of long-term debt (3.5) (256.6)
-------------------------- Cash used in financing activities
(120.6) (297.2) -------------------------- Cash position Decrease
in net cash (3.2) (142.8) Net cash at beginning of period 47.5
274.5 -------------------------- 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. STATEMENT OF
CONSOLIDATED CASH FLOWS (in millions) 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. 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. 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 Limited's ("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 For the three months 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 ----------------- ----------------- -----------------
----------------- 4 Interest expense For the For the three months
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 For the three months 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). 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 CPR's liabilities associated with restructuring
and environmental remediation programs: Three months ended June 30,
2006 Opening Closing Balance Amortiz- Foreign Balance (in April 1
ation of Exchange June 30 millions) 2006 Accrued Payments 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 environ- mental remediation liability $ 374.1
(2.8) (22.8) 2.6 (5.3) $ 345.8
----------------------------------------------------------
---------------------------------------------------------- Three
months ended June 30, 2005 Opening Closing Balance Amortiz- Foreign
Balance (in April 1 ation of Exchange June 30 millions) 2005
Accrued Payments 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 environ- mental remediation liability $ 439.6
(1.8) (13.3) 3.3 2.1 $ 429.9
----------------------------------------------------------
---------------------------------------------------------- Six
months ended June 30, 2006 Opening Closing Balance Amortiz- Foreign
Balance (in Jan. 1 ation of Exchange June 30 millions) 2006 Accrued
Payments 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 environ- mental remediation liability $ 398.8
(2.8) (50.6) 5.2 (4.8) $ 345.8
----------------------------------------------------------
---------------------------------------------------------- Six
months ended June 30, 2005 Opening Closing Balance Amortiz- Foreign
Balance (in Jan. 1 ation of Exchange June 30 millions) 2005 Accrued
Payments 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 environ- mental 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". 7
Shareholders' equity An analysis of Common Share balances is as
follows: For the three months ended June 30 (in millions) 2006 2005
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 (in millions) 2006 2005 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 --------------------------------------
-------------------------------------- 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). 8 Stock-based
compensation In 2006, under CPR's 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 Company's fixed stock option
plans as of June 30: 2006 2005 -----------------------
----------------------- Weighted Weighted average average Number of
exercise Number of exercise options price options 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, CPR's pro
forma basis net income and earnings per share would have been as
follows: For the For the three months 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
----------------- ----------------- -----------------
----------------- 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
Company's 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%). 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 Company's 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 Company's
other guarantees cannot be reasonably estimated due to the nature
of certain of the guarantees. All or a portion of amounts paid
under certain guarantees could be recoverable from other parties or
through insurance. The Company has accrued for all guarantees that
it expects to pay. At June 30, 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. Summary of Rail Data --------------------
Second Quarter --------------------------------------------- 2006
2005(1) Variance % ---------------------------------------------
Financial (millions, -------------------- except per share data)
---------------------- Revenues -------- Freight revenue $ 1,086.4
$ 1,070.2 $ 16.2 1.5 Other revenue 44.6 35.7 8.9 24.9
---------------------------------- 1,131.0 1,105.9 25.1 2.3
---------------------------------- Operating Expenses
------------------ Compensation and benefits 321.5 322.2 (0.7)
(0.2) Fuel 160.1 145.2 14.9 10.3 Materials 54.5 46.0 8.5 18.5
Equipment rents 44.4 54.7 (10.3) (18.8) Depreciation and
amortization 117.8 110.7 7.1 6.4 Purchased services and other 150.8
156.0 (5.2) (3.3) ---------------------------------- 849.1 834.8
14.3 1.7 ---------------------------------- Operating income 281.9
271.1 10.8 4.0 Other charges 7.7 5.7 2.0 35.1 Interest expense 48.6
53.2 (4.6) (8.6) Income tax expense before foreign exchange (gains)
losses on long-term debt and other specified items(2) 65.5 72.2
(6.7) (9.3) ---------------------------------- Income before
foreign exchange (gains) losses on long-term debt and other
specified items(2) 160.1 140.0 20.1 14.4
---------------------------------- Foreign exchange (gains)
------------------------ losses on long-term debt
------------------------ (FX on LTD) ----------- FX on LTD (52.7)
17.0 (69.7) - Income tax on FX on LTD(3) 11.3 (0.2) 11.5 -
---------------------------------- FX on LTD (net of tax) (41.4)
16.8 (58.2) - Other specified items --------------------- Income
tax benefits due to Federal and Provincial income tax rate
reductions (176.0) - (176.0) - ----------------------------------
Net income $ 377.5 $ 123.2 $ 254.3 206.4
----------------------------------
---------------------------------- Earnings per share (EPS)
------------------------ Basic earnings per share $ 2.38 $ 0.78 $
1.60 205.1 Diluted earnings per share $ 2.36 $ 0.77 $ 1.59 206.5
EPS before FX on LTD and ------------------------ other specified
items(2) ------------------------ Basic earnings per share $ 1.01 $
0.88 $ 0.13 14.8 Diluted earnings per share $ 1.00 $ 0.87 $ 0.13
14.9 Weighted average number of shares outstanding (millions) 158.3
158.9 (0.6) (0.4) Operating ratio(4) (%) 75.1 75.5 (0.4) - ROCE
before FX on LTD and other specified items (after tax)(2)(4) (%)
9.8 8.3 1.5 - Net debt to net debt plus equity (%) 37.7 42.1 (4.4)
- EBIT before FX on LTD and other specified items(2)(4) (millions)
$ 274.2 $ 265.4 $ 8.8 3.3 EBITDA before FX on LTD and other
specified items(2)(4) (millions) $ 392.0 $ 376.1 $ 15.9 4.2
Year-to-date ---------------------------------------------- 2006
2005(1) Variance % ----------------------------------------------
Financial (millions, -------------------- except per share data)
---------------------- Revenues -------- Freight revenue $ 2,153.6
$ 2,062.8 $ 90.8 4.4 Other revenue 87.9 57.2 30.7 53.7
---------------------------------- 2,241.5 2,120.0 121.5 5.7
---------------------------------- Operating Expenses
------------------ Compensation and benefits 671.4 653.3 18.1 2.8
Fuel 318.0 279.7 38.3 13.7 Materials 112.1 104.8 7.3 7.0 Equipment
rents 89.0 103.2 (14.2) (13.8) Depreciation and amortization 232.6
220.2 12.4 5.6 Purchased services and other 307.4 309.0 (1.6) (0.5)
---------------------------------- 1,730.5 1,670.2 60.3 3.6
---------------------------------- Operating income 511.0 449.8
61.2 13.6 Other charges 14.5 4.7 9.8 208.5 Interest expense 95.9
104.8 (8.9) (8.5) 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 ---------------------------------- 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) ----------- FX on LTD (46.3)
20.1 (66.4) - Income tax on FX on LTD(3) 12.2 0.6 11.6 -
---------------------------------- FX on LTD (net of tax) (34.1)
20.7 (54.8) - Other specified items --------------------- Income
tax benefits due to Federal and Provincial income tax rate
reductions (176.0) - (176.0) - ----------------------------------
Net income $ 488.5 $ 203.9 $ 284.6 139.6
----------------------------------
---------------------------------- Earnings per share (EPS)
------------------------ Basic earnings per share $ 3.08 $ 1.28 $
1.80 140.6 Diluted earnings per share $ 3.04 $ 1.27 $ 1.77 139.4
EPS before FX on LTD and ------------------------ other specified
items(2) ------------------------ Basic earnings per share $ 1.76 $
1.41 $ 0.35 24.8 Diluted earnings per share $ 1.74 $ 1.40 $ 0.34
24.3 Weighted average number of shares outstanding (millions) 158.4
158.8 (0.4) (0.3) Operating ratio(4) (%) 77.2 78.8 (1.6) - ROCE
before FX on LTD and other specified items (after tax)(2)(4) (%)
9.8 8.3 1.5 - Net debt to net debt plus equity (%) 37.7 42.1 (4.4)
- EBIT before FX on LTD and other specified items(2)(4) (millions)
$ 496.5 $ 445.1 $ 51.4 11.5 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. Second Quarter
---------------------------------------------- 2006 2005(1)
Variance % ---------------------------------------------- Commodity
Data -------------- Freight Revenues (millions) - Grain $ 206.4 $
173.5 $ 32.9 19.0 - Coal 143.5 198.7 (55.2) (27.8) - Sulphur and
fertilizers 105.5 116.9 (11.4) (9.8) - Forest products 75.8 86.1
(10.3) (12.0) - Industrial and consumer products 150.3 127.2 23.1
18.2 - Automotive 91.9 81.7 10.2 12.5 - Intermodal 313.0 286.1 26.9
9.4 ---------------------------------- Total Freight Revenues $
1,086.4 $ 1,070.2 $ 16.2 1.5 ----------------------------------
Millions of Revenue Ton-Miles (RTM) - Grain 7,048 6,160 888 14.4 -
Coal 4,735 6,210 (1,475) (23.8) - Sulphur and fertilizers 3,858
5,382 (1,524) (28.3) - Forest products 2,264 2,665 (401) (15.0) -
Industrial and consumer products 4,162 3,819 343 9.0 - Automotive
746 658 88 13.4 - Intermodal 7,055 6,888 167 2.4
---------------------------------- Total RTMs 29,868 31,782 (1,914)
(6.0) ---------------------------------- Freight Revenue per RTM
(cents) - Grain 2.93 2.82 0.11 3.9 - Coal 3.03 3.20 (0.17) (5.3) -
Sulphur and fertilizers 2.73 2.17 0.56 25.8 - Forest products 3.35
3.23 0.12 3.7 - Industrial and consumer products 3.61 3.33 0.28 8.4
- Automotive 12.32 12.42 (0.10) (0.8) - Intermodal 4.44 4.15 0.29
7.0 Freight Revenue per RTM 3.64 3.37 0.27 8.0 Carloads (thousands)
- Grain 89.2 79.6 9.6 12.1 - Coal 68.5 91.0 (22.5) (24.7) - Sulphur
and fertilizers 41.6 54.0 (12.4) (23.0) - Forest products 33.8 40.4
(6.6) (16.3) - Industrial and consumer products 80.9 79.9 1.0 1.3 -
Automotive 46.8 44.6 2.2 4.9 - Intermodal 295.5 285.0 10.5 3.7
---------------------------------- Total Carloads 656.3 674.5
(18.2) (2.7) ---------------------------------- Freight Revenue per
Carload - Grain $ 2,314 $ 2,180 $ 134 6.1 - Coal 2,095 2,184 (89)
(4.1) - Sulphur and fertilizers 2,536 2,165 371 17.1 - Forest
products 2,243 2,131 112 5.3 - Industrial and consumer products
1,858 1,592 266 16.7 - Automotive 1,964 1,832 132 7.2 - Intermodal
1,059 1,004 55 5.5 Freight Revenue per Carload $ 1,655 $ 1,587 $ 68
4.3 Year-to-date ----------------------------------------------
2006 2005(1) Variance %
---------------------------------------------- Commodity Data
-------------- Freight Revenues (millions) - Grain $ 417.7 $ 339.1
$ 78.6 23.2 - Coal 303.7 364.3 (60.6) (16.6) - Sulphur and
fertilizers 198.6 236.2 (37.6) (15.9) - Forest products 159.2 167.2
(8.0) (4.8) - Industrial and consumer products 298.6 258.1 40.5
15.7 - Automotive 170.2 151.6 18.6 12.3 - Intermodal 605.6 546.3
59.3 10.9 ---------------------------------- Total Freight Revenues
$ 2,153.6 $ 2,062.8 $ 90.8 4.4 ----------------------------------
Millions of Revenue Ton-Miles (RTM) - Grain 14,522 12,297 2,225
18.1 - Coal 9,789 11,938 (2,149) (18.0) - Sulphur and fertilizers
7,313 10,879 (3,566) (32.8) - Forest products 4,698 5,186 (488)
(9.4) - Industrial and consumer products 8,503 7,747 756 9.8 -
Automotive 1,349 1,228 121 9.9 - Intermodal 13,782 13,227 555 4.2
---------------------------------- Total RTMs 59,956 62,502 (2,546)
(4.1) ---------------------------------- Freight Revenue per RTM
(cents) - Grain 2.88 2.76 0.12 4.3 - Coal 3.10 3.05 0.05 1.6 -
Sulphur and fertilizers 2.72 2.17 0.55 25.3 - Forest products 3.39
3.22 0.17 5.3 - Industrial and consumer products 3.51 3.33 0.18 5.4
- Automotive 12.62 12.35 0.27 2.2 - Intermodal 4.39 4.13 0.26 6.3
Freight Revenue per RTM 3.59 3.30 0.29 8.8 Carloads (thousands) -
Grain 181.6 155.5 26.1 16.8 - Coal 147.2 176.9 (29.7) (16.8) -
Sulphur and fertilizers 80.6 109.5 (28.9) (26.4) - Forest products
71.4 79.7 (8.3) (10.4) - Industrial and consumer products 160.6
161.5 (0.9) (0.6) - Automotive 89.1 86.6 2.5 2.9 - Intermodal 577.3
552.3 25.0 4.5 ---------------------------------- Total Carloads
1,307.8 1,322.0 (14.2) (1.1) ----------------------------------
Freight Revenue per Carload - Grain $ 2,300 $ 2,181 $ 119 5.5 -
Coal 2,063 2,059 4 0.2 - Sulphur and fertilizers 2,464 2,157 307
14.2 - Forest products 2,230 2,098 132 6.3 - Industrial and
consumer products 1,859 1,598 261 16.3 - Automotive 1,910 1,751 159
9.1 - Intermodal 1,049 989 60 6.1 Freight Revenue per Carload $
1,647 $ 1,560 $ 87 5.6 (1) Certain comparative period figures have
been reclassified to current presentation. Second Quarter
---------------------------------------------- 2006 2005(1)
Variance % ----------------------------------------------
Operations and Productivity --------------------------- Freight
gross ton-miles (GTM) (millions) 58,099 62,404 (4,305) (6.9)
Revenue ton-miles (RTM) (millions) 29,868 31,782 (1,914) (6.0)
Average number of active employees 16,278 16,680 (402) (2.4) Number
of employees at end of period 16,504 16,973 (469) (2.8) FRA
personal injuries per 200,000 employee-hours 1.9 1.9 - - FRA train
accidents per million train-miles 1.9 1.3 0.6 46.2 Total operating
expenses per RTM (cents) 2.84 2.63 0.21 8.0 Total operating
expenses per GTM (cents) 1.46 1.34 0.12 9.0 Compensation and
benefits expense per GTM (cents) 0.55 0.52 0.03 5.8 GTMs per
average active employee (000) 3,569 3,741 (172) (4.6) Average train
speed - AAR definition (mph) 25.0 22.0 3.0 13.6 Terminal dwell time
- AAR definition (hours) 20.2 27.5 (7.3) (26.5) Car miles per car
day 134.0 124.3 9.7 7.8 Average daily total cars on-line - AAR
definition (000) 82.4 88.2 (5.8) (6.6) U.S. gallons of locomotive
fuel per 1,000 GTMs - freight & yard 1.19 1.16 0.03 2.6 U.S.
gallons of locomotive fuel consumed - total (millions)(2) 69.1 72.1
(3.0) (4.2) Average foreign exchange rate (US$/Canadian$) 0.886
0.806 0.080 9.9 Average foreign exchange rate (Canadian$/US$) 1.129
1.241 (0.112) (9.0) Year-to-date
---------------------------------------------- 2006 2005(1)
Variance % ----------------------------------------------
Operations and Productivity --------------------------- Freight
gross ton-miles (GTM) (millions) 115,113 120,820 (5,707) (4.7)
Revenue ton-miles (RTM) (millions) 59,956 62,502 (2,546) (4.1)
Average number of active employees 15,773 16,074 (301) (1.9) Number
of employees at end of period 16,504 16,973 (469) (2.8) FRA
personal injuries per 200,000 employee-hours 2.0 2.3 (0.3) (13.0)
FRA train accidents per million train-miles 1.6 2.2 (0.6) (27.3)
Total operating expenses per RTM (cents) 2.89 2.67 0.22 8.2 Total
operating expenses per GTM (cents) 1.50 1.38 0.12 8.7 Compensation
and benefits expense per GTM (cents) 0.58 0.54 0.04 7.4 GTMs per
average active employee (000) 7,298 7,516 (218) (2.9) Average train
speed - AAR definition (mph) 25.1 21.9 3.2 14.6 Terminal dwell time
- AAR definition (hours) 20.7 29.4 (8.7) (29.6) Car miles per car
day 133.1 119.8 13.3 11.1 Average daily total cars on-line - AAR
definition (000) 81.6 87.7 (6.1) (7.0) U.S. gallons of locomotive
fuel per 1,000 GTMs - freight & yard 1.22 1.21 0.01 0.8 U.S.
gallons of locomotive fuel consumed - total (millions)(2) 140.2
145.7 (5.5) (3.8) Average foreign exchange rate (US$/Canadian$)
0.879 0.810 0.069 8.5 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.
DATASOURCE: Canadian Pacific Railway CONTACT: Media, Leslie
Pidcock, Tel.: (403) 319-6878, e-mail: ; Investment Community, Paul
Bell, Vice-President, Investor Relations, Tel.: (403) 319-3591,
e-mail:
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