CALGARY, Oct. 28 /PRNewswire-FirstCall/ -- Canadian Pacific Railway
Limited (TSX/NYSE: CP) announced its third-quarter results today.
Net income was $173 million down from $219 million in third-quarter
2007 and diluted earnings per share was $1.11 down from $1.41 in
third-quarter 2007. This decrease is primarily due to foreign
exchange impacts on long-term debt in 2007 and charges associated
with the revaluation of an investment in asset backed commercial
paper (ABCP). Excluding these two items, diluted earnings per share
was down two per cent. SUMMARY OF THIRD-QUARTER 2008 COMPARED WITH
THIRD-QUARTER 2007 EXCLUDING FOREIGN EXCHANGE GAINS AND LOSSES ON
LONG-TERM DEBT AND OTHER SPECIFIED ITEMS: - Diluted earnings per
share decreased to $1.20 from $1.23. - Income was $186 million down
from $190 million. - Total revenues rose seven per cent to $1.26
billion from $1.19 billion. - Operating expenses were $962 million
an increase from $866 million with the price of fuel the single
largest driver contributing to the increase in expenses. "Our
pricing gains and focused cost containment helped offset declines
in bulk volumes," said Fred Green, President and CEO. "Fuel
expenses were a serious headwind, but we saw strong recovery in our
operations with progressive improvement as we moved through the
quarter. In a declining market, our operating ratio for the third
quarter improved 340 basis points to 76.0 per cent from second
quarter 2008 of 79.4 per cent." Freight revenues rose eight per
cent in the third quarter on continued pricing strength, inclusive
of fuel recoveries. Industrial and consumer products revenues were
up 24 per cent, with automotive and intermodal revenues increasing
16 and 11 per cent respectively. Sulphur and fertilizer revenue
improved eight per cent with coal improving five per cent over
2007. These gains were offset by a decrease in grain revenue of
four percent due mainly to a late harvest. Operating expenses
increased 11 per cent in the third quarter driven mainly by a 49
per cent ($90 million) increase in fuel expense over the same
quarter in 2007. SUMMARY OF FIRST NINE-MONTHS 2008 COMPARED WITH
FIRST NINE-MONTHS 2007 Net income for the first nine months of 2008
was $418 million compared with $604 million in 2007. Diluted
earnings per share was $2.70 down from $3.87. This decrease was
mostly the result of a large foreign exchange gain on long-term
debt in the first nine months of 2007 and lower operating income in
2008. EXCLUDING FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT
AND OTHER SPECIFIED ITEMS: - Diluted earnings per share was $2.92
down seven per cent from $3.13. - Income decreased seven per cent
to $453 million from $488 million. - Total revenues increased three
per cent to $3.6 billion. - Operating expenses were up eight per
cent to $2.9 billion. 2008 OUTLOOK "The uncertainty associated with
the global economy offsets the positive impact on our financial
results of the decrease in the price of crude oil and the weakening
of the Canadian dollar against the US dollar," said Kathryn
McQuade, Chief Financial Officer. "We are confirming our outlook
for adjusted diluted earnings per share in the range of $4.00 -
$4.20." This outlook assumes an average currency exchange rate of
$1.04 per U.S. dollar (US$0.96) for the full year, a change from
the previous assumption of the Canadian dollar at par with the U.S.
dollar. Crude oil prices (WTI) are estimated to average US $105 per
barrel for the year (versus the previous assumption of US $121 per
barrel). Crack spreads are estimated to average US $20 per barrel
for the year (versus the previous assumption of US $23 per barrel).
The estimated average all-in fuel price is expected to be between
US $3.35 and $3.45 per U.S. gallon for the year. The full year
averages reflect assumptions for the fourth-quarter of an exchange
rate of $1.14 per U.S. dollar (US$0.88) and a crude oil price of
$85 per barrel. The decrease in the price of fuel had an impact on
the outlook for both revenue and expenses. CP expects to grow total
revenue by four to six per cent in 2008, compared with the previous
outlook of six to eight per cent. Total operating expenses are
expected to increase by eight to 10 per cent, down from the
previous outlook of 11 to 13 per cent. CP expects its normalized
tax rate to be between 26 per cent and 27 per cent, excluding the
impact of the Dakota Minnesota & Eastern Railroad (DM&E)
equity pick-up. Free cash is expected to be approximately $150
million. The 2008 outlook excludes the projected revenues and
expenses of the Dakota Minnesota & Eastern Railroad (DM&E)
which will be fully consolidated with CP for November and December
2008. FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER
SPECIFIED ITEMS CP had a foreign exchange loss on long-term debt of
$3 million (a gain of $6 million after tax) in the third quarter of
2008, compared with a foreign exchange gain on long-term debt of
$64 million ($43 million after tax) in the third quarter of 2007.
For the first nine months of 2008, CP had a foreign exchange loss
on long-term debt of $12 million (no gain or loss after tax)
compared with a foreign exchange gain of $162 million ($114 million
after tax) in the first nine months of 2007. At September 30, 2008
CP held investments in Canadian Non-Bank Asset Backed Commercial
Paper (ABCP) with an original cost of approximately
$144 million. In the third-quarter of 2007, CP adjusted the
estimated fair value of the investment and took a charge of $22
million ($15 million after tax) and classified the investments as
long-term investments. In the first quarter 2008 in recognition of
changing market conditions impacting these investments, CP further
adjusted the estimated fair value of the investments and took an
additional charge of $21 million ($15 million after tax). In the
third-quarter, again, in response to changes in market conditions,
CP adjusted the estimated fair value of the investments and took a
charge of $28 million ($20 million after tax), respectively.
Continuing uncertainties regarding the value of the assets which
underlie the ABCP, the amount and timing of cash flows and the
outcome of the restructuring process could give rise to a material
change in the value of the Company's investments in ABCP which
would impact the Company's near-term earnings. In the second
quarter of 2007 the Company recorded a future income tax benefit of
$17 million as an other specified item. Presentation of non-GAAP
earnings CP presents non-GAAP earnings in this news release to
provide a basis for evaluating underlying earnings and liquidity
trends in its 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. In addition these non-GAAP measures
exclude other specified items that are not among CP'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. Diluted EPS, excluding foreign
exchange gains and losses on long-term debt and other specified
items, is also referred to in this news release as "adjusted
diluted EPS". Free cash is calculated as cash provided by operating
activities, less cash used in investing activities and dividends
paid, adjusted for the acquisition of the DM&E, and now
excluding changes in the accounts receivable securitization
program, which was terminated in the second quarter of 2008. Free
cash is adjusted for the DM&E acquisition, as it is not
indicative of normal day-to-day investments in the Company's asset
base. The securitization of accounts receivable is a financing-type
transaction, which is excluded to clarify the nature of the use of
free cash. Earnings that exclude the foreign exchange currency
translation impact on long-term debt and other specified items, and
free cash after dividends, 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. Other
specified items are material transactions that may include, but are
not limited to, restructuring and asset impairment charges, gains
and losses on non-routine sales of assets, unusual income tax
adjustments, and other items that do not typify normal business
activities. Note on forward-looking information This news release
contains certain forward-looking statements relating but not
limited to our operations, anticipated financial performance and
business prospects. Undue reliance should not be placed on
forward-looking information as actual results may differ
materially. By its nature, CP's forward-looking information
involves numerous assumptions, inherent risks and uncertainties,
including but not limited to the following factors: changes in
business strategies; general North American and global economic and
business conditions; risks in agricultural production such as
weather conditions and insect populations; the availability and
price of energy commodities; the effects of competition and pricing
pressures; industry capacity; shifts in market demand; changes in
laws and regulations, including regulation of rates; changes in
taxes and tax rates; potential increases in maintenance and
operating costs; uncertainties of litigation; labour disputes;
risks and liabilities arising from derailments; timing of
completion of capital and maintenance projects; currency and
interest rate fluctuations; effects of changes in market conditions
on the financial position of pension plans and investments; and
various events that could disrupt operations, including severe
weather conditions, security threats and governmental response to
them, and technological changes. There are factors that could cause
actual results to differ from those described in the
forward-looking statements contained in this news release. These
more specific factors are identified and discussed in the Outlook
section and elsewhere in this news release with the particular
forward-looking statement in question. Except as required by law,
CP undertakes no obligation to update publicly or otherwise revise
any forward-looking information, whether as a result of new
information, future events or otherwise. Canadian Pacific, through
the ingenuity of its employees located across Canada and in the
United States, remains committed to being the safest, most fluid
railway in North America. Our people are the key to delivering
innovative transportation solutions to our customers and to
ensuring the safe operation of our trains through the more than 900
communities where we operate. Our combined ingenuity makes CP a
better place to work, rail a better way to ship, and North America
a better place to live. Come and visit us at http://www.cpr.ca/ to
see how we can put our ingenuity to work for you. Canadian Pacific
is proud to be the official rail freight services provider for the
Vancouver 2010 Olympic and Paralympic Winter Games. STATEMENT OF
CONSOLIDATED INCOME (in millions of Canadian dollars, except per
share data) For the three months ended September 30 2008 2007
------------------------ (unaudited) Revenues Freight $ 1,239.5 $
1,147.6 Other 25.2 40.3 ------------------------ 1,264.7 1,187.9
Operating expenses Compensation and benefits 312.3 313.5 Fuel 275.8
185.6 Materials 49.3 49.6 Equipment rents 44.4 49.6 Depreciation
and amortization 120.8 118.0 Purchased services and other 158.9
149.9 ------------------------ 961.5 866.2 ------------------------
Revenues less operating expenses 303.2 321.7 Other charges (Note 4)
2.8 8.1 Equity income in Dakota, Minnesota & Eastern Railroad
Corporation (Note 10) (16.5) - Change in estimated fair value of
Canadian third party asset-backed commercial paper (Note 10) 28.1
21.5 Foreign exchange losses (gains) on long-term debt 2.9 (64.3)
Interest expense (Note 5) 64.5 44.9 Income tax expense (Note 6)
48.7 92.9 ------------------------ Net income $ 172.7 $ 218.6
------------------------ ------------------------ Basic earnings
per share (Note 7) $ 1.12 $ 1.43 ------------------------
------------------------ Diluted earnings per share (Note 7) $ 1.11
$ 1.41 ------------------------ ------------------------ See notes
to interim consolidated financial statements. STATEMENT OF
CONSOLIDATED INCOME (in millions of Canadian dollars, except per
share data) For the nine months ended September 30 2008 2007
------------------------ (unaudited) Revenues Freight $ 3,557.0 $
3,412.6 Other 74.9 106.7 ------------------------ 3,631.9 3,519.3
Operating expenses Compensation and benefits 956.1 975.8 Fuel 766.3
550.5 Materials 171.3 167.6 Equipment rents 136.4 162.4
Depreciation and amortization 365.4 355.7 Purchased services and
other 483.9 448.6 ------------------------ 2,879.4 2,660.6
------------------------ Revenues less operating expenses 752.5
858.7 Other charges (Note 4) 14.4 21.1 Equity income in Dakota,
Minnesota & Eastern Railroad Corporation (Note 10) (40.9) -
Change in estimated fair value of Canadian third party asset-backed
commercial paper (Note 10) 49.4 21.5 Foreign exchange losses
(gains) on long-term debt 12.4 (161.5) Interest expense (Note 5)
187.3 140.9 Income tax expense (Note 6) 111.5 232.8
------------------------ Net income $ 418.4 $ 603.9
------------------------ ------------------------ Basic earnings
per share (Note 7) $ 2.72 $ 3.91 ------------------------
------------------------ Diluted earnings per share (Note 7) $ 2.70
$ 3.87 ------------------------ ------------------------ See notes
to interim consolidated financial statements. CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (in millions of Canadian dollars)
For the three months ended September 30 2008 2007
------------------------ (unaudited) Comprehensive income Net
income $ 172.7 $ 218.6 Other comprehensive income Net change in
foreign currency translation adjustments, net of hedging activities
2.2 (0.7) Net change in losses on derivatives designated as cash
flow hedges (11.3) (5.9) ------------------------ Other
comprehensive loss before income taxes (9.1) (6.6) Income tax
recovery (expense) 10.2 (2.5) ------------------------ Other
comprehensive income (loss) (Note 13) 1.1 (9.1)
------------------------ Comprehensive income $ 173.8 $ 209.5
------------------------ ------------------------ For the nine
months ended September 30 2008 2007 ------------------------
(unaudited) Comprehensive income Net income $ 418.4 $ 603.9 Other
comprehensive income Net change in foreign currency translation
adjustments, net of hedging activities 4.4 (3.9) Net change in
losses on derivatives designated as cash flow hedges (3.4) (18.9)
------------------------ Other comprehensive income (loss) before
income taxes 1.0 (22.8) Income tax recovery (expense) 12.9 (3.8)
------------------------ Other comprehensive income (loss) (Note
13) 13.9 (26.6) ------------------------ Comprehensive income $
432.3 $ 577.3 ------------------------ ------------------------ See
notes to interim consolidated financial statements. CONSOLIDATED
BALANCE SHEET (in millions of Canadian dollars) September 30
December 31 2008 2007 --------------------------- (unaudited)
Assets Current assets Cash and cash equivalents $ 97.9 $ 378.1
Accounts receivable and other current assets (Note 9) 747.0 542.8
Materials and supplies 231.8 179.5 Future income taxes 59.1 67.3
--------------------------- 1,135.8 1,167.7 Investments (Note 10)
1,774.5 1,668.6 Net properties 9,628.9 9,293.1 Other assets and
deferred charges (Note 15) 1,510.5 1,235.6
--------------------------- Total assets $ 14,049.7 $ 13,365.0
--------------------------- --------------------------- Liabilities
and shareholders' equity Current liabilities Short-term borrowing $
280.0 $ 229.7 Accounts payable and accrued liabilities 1,005.9
980.8 Income and other taxes payable 65.2 68.8 Dividends payable
38.1 34.5 Long-term debt maturing within one year 248.4 31.0
--------------------------- 1,637.6 1,344.8 Deferred liabilities
696.1 714.6 Long-term debt (Note 11) 4,140.4 4,146.2 Future income
taxes 1,770.3 1,701.5 Shareholders' equity Share capital (Note 12)
1,218.9 1,188.6 Contributed surplus 41.3 42.4 Accumulated other
comprehensive income (Note 13) 53.5 39.6 Retained income 4,491.6
4,187.3 --------------------------- 5,805.3 5,457.9
--------------------------- Total liabilities and shareholders'
equity $ 14,049.7 $ 13,365.0 ---------------------------
--------------------------- Commitments and contingencies (Note
19). See notes to interim consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS (in millions of Canadian
dollars) For the three months ended September 30 2008 2007
------------------------- (unaudited) Operating activities Net
income $ 172.7 $ 218.6 Add (deduct) items not affecting cash:
Depreciation and amortization 120.8 118.0 Future income taxes 29.9
72.1 Change in estimated fair value of Canadian third party
asset-backed commercial paper (Note 10) 28.1 21.5 Foreign exchange
losses (gains) on long-term debt 2.9 (64.3) Amortization of
deferred charges 2.3 3.0 Equity income, net of cash received (14.2)
- Restructuring and environmental remediation payments (Note 8)
(11.9) (13.8) Other operating activities, net (47.6) (14.2) Change
in non-cash working capital balances related to operations (0.2)
0.5 ------------------------- Cash provided by operating activities
282.8 341.4 ------------------------- Investing activities
Additions to properties (242.1) (206.0) Additions to investments
and other assets (Note 15) (20.5) (4.9) Additions to investment in
Dakota, Minnesota & Eastern Railroad Corporation (Note 10)
(0.8) - Net proceeds from disposal of transportation properties
17.0 0.8 Investment in Canadian third party asset-backed commercial
paper (Note 10) - (143.6) ------------------------- Cash used in
investing activities (246.4) (353.7) -------------------------
Financing activities Dividends paid (38.1) (34.8) Issuance of CP
Common Shares 1.3 4.1 Purchase of CP Common Shares - (3.0) Net
increase in short-term borrowing 25.0 - Repayment of long-term debt
(7.6) (6.9) ------------------------- Cash used in financing
activities (19.4) (40.6) ------------------------- Cash position
Increase (decrease) in cash and cash equivalents 17.0 (52.9) Cash
and cash equivalents at beginning of period 80.9 392.1
------------------------- Cash and cash equivalents at end of
period $ 97.9 $ 339.2 -------------------------
------------------------- See notes to interim consolidated
financial statements. STATEMENT OF CONSOLIDATED CASH FLOWS (in
millions of Canadian dollars) For the nine months ended September
30 2008 2007 ------------------------- (unaudited) Operating
activities Net income $ 418.4 $ 603.9 Add (deduct) items not
affecting cash: Depreciation and amortization 365.4 355.7 Future
income taxes 57.8 168.3 Change in estimated fair value of Canadian
third party asset-backed commercial paper (Note 10) 49.4 21.5
Foreign exchange losses (gains) on long-term debt 12.4 (161.5)
Amortization of deferred charges 7.4 9.2 Equity income, net of cash
received (35.0) - Restructuring and environmental remediation
payments (Note 8) (36.4) (39.0) Other operating activities, net
(43.2) (16.0) Change in non-cash working capital balances related
to operations (Note 9) (170.4) (8.5) ------------------------- Cash
provided by operating activities 625.8 933.6
------------------------- Investing activities Additions to
properties (606.8) (568.6) Additions to investments and other
assets (Note 15) (213.0) (16.6) Additions to investment in Dakota,
Minnesota & Eastern Railroad Corporation (Note 10) (8.3) - Net
proceeds from disposal of transportation properties 14.4 9.3
Investment in Canadian third party asset-backed commercial paper
(Note 10) - (143.6) ------------------------- Cash used in
investing activities (813.7) (719.5) -------------------------
Financing activities Dividends paid (110.6) (98.6) Issuance of CP
Common Shares 18.3 29.2 Purchase of CP Common Shares - (231.1) Net
increase in short-term borrowing 50.3 - Issuance of long-term debt
(Note 11) 1,068.7 485.1 Repayment of long-term debt (1,088.1)
(183.8) Settlement of treasury rate lock (Note 14) (30.9) -
------------------------- Cash (used in) provided by financing
activities (92.3) 0.8 ------------------------- Cash position
(Decrease) increase in cash and cash equivalents (280.2) 214.9 Cash
and cash equivalents at beginning of period 378.1 124.3
------------------------- Cash and cash equivalents at end of
period $ 97.9 $ 339.2 -------------------------
------------------------- See notes to interim consolidated
financial statements. CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (in millions of Canadian dollars) For the
three months ended September 30 2008 2007 -------------------------
(unaudited) Share capital Balance, beginning of period $ 1,216.9 $
1,182.0 Shares issued under stock option plans 2.0 5.2
------------------------- Balance, end of period 1,218.9 1,187.2
------------------------- Contributed surplus Balance, beginning of
period 39.8 38.7 Stock compensation expense 1.5 1.9
------------------------- Balance, end of period 41.3 40.6
------------------------- Accumulated other comprehensive income
Balance, beginning of period 52.4 62.9 Other comprehensive income
(loss) (Note 13) 1.1 (9.1) ------------------------- Balance, end
of period 53.5 53.8 ------------------------- Retained income
Balance, beginning of period 4,356.9 3,694.9 Net income for the
period 172.7 218.6 Dividends (38.0) (34.0)
------------------------- Balance, end of period 4,491.6 3,879.5
------------------------- Total accumulated other comprehensive
income and retained income 4,545.1 3,933.3
------------------------- ------------------------- Shareholders'
equity, end of period $ 5,805.3 $ 5,161.1 -------------------------
------------------------- See notes to interim consolidated
financial statements. CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (in millions of Canadian dollars) For the nine
months ended September 30 2008 2007 -------------------------
(unaudited) Share capital Balance, beginning of period $ 1,188.6 $
1,175.7 Shares issued under stock option plans 30.3 36.0 Shares
purchased - (24.5) ------------------------- Balance, end of period
1,218.9 1,187.2 ------------------------- Contributed surplus
Balance, beginning of period 42.4 32.3 Stock compensation expense
8.3 9.0 Stock compensation related to shares issued under stock
option plans (9.4) (0.7) ------------------------- Balance, end of
period 41.3 40.6 ------------------------- Accumulated other
comprehensive income Balance, beginning of period 39.6 66.4
Adjustment for change in accounting policy - 14.0
------------------------- Adjusted balance, beginning of period
39.6 80.4 Other comprehensive income (loss) (Note 13) 13.9 (26.6)
------------------------- Balance, end of period 53.5 53.8
------------------------- Retained income Balance, beginning of
period 4,187.3 3,582.1 Adjustment for change in accounting policy -
4.0 ------------------------- Adjusted balance, beginning of period
4,187.3 3,586.1 Net income for the period 418.4 603.9 Shares
purchased - (206.6) Dividends (114.1) (103.9)
------------------------- Balance, end of period 4,491.6 3,879.5
------------------------- Total accumulated other comprehensive
income and retained income 4,545.1 3,933.3
------------------------- ------------------------- Shareholders'
equity, end of period $ 5,805.3 $ 5,161.1 -------------------------
------------------------- See notes to interim consolidated
financial statements. NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS SEPTEMBER 30, 2008 (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 ("CP", "the Company" or "Canadian Pacific Railway") 2007
annual consolidated financial statements, except as discussed below
and in Note 2 for the adoption of new accounting standards. They do
not include all disclosures required under Generally Accepted
Accounting Principles ("GAAP") for annual financial statements and
should be read in conjunction with the annual consolidated
financial statements. 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. 2 New accounting changes Financial Instrument and
Capital Disclosures The CICA has issued the following accounting
standards effective for fiscal periods beginning in 2008: Section
3862 "Financial Instruments - Disclosures", Section 3863 "Financial
Instruments - Presentation", and Section 1535 "Capital
Disclosures". Section 3862 "Financial Instruments - Disclosures"
and Section 3863 "Financial Instruments - Presentation" revise
disclosure requirements related to financial instruments, including
hedging instruments. Section 1535 "Capital Disclosures" requires
the Company to provide disclosures about the Company's capital and
how it is managed. These new accounting standards have not impacted
the amounts reported in the Company's financial statements;
however, they have resulted in expanded note disclosure (see Note
14 and Note 20). Inventories The CICA has issued accounting
standard Section 3031 "Inventories" which became effective January
1, 2008. Section 3031 "Inventories" provides guidance on the method
of determining the cost of the Company's materials and supplies.
The new accounting standard specifies that inventories are to be
valued at the lower of cost and net realizable value. The standard
requires the reversal of previously recorded write downs to
realizable value when there is clear evidence that net realizable
value has increased. The adoption of Section 3031 "Inventories" did
not impact the Company's financial statements. 3 Future accounting
changes Goodwill and intangible assets In February 2008, the CICA
issued accounting standard Section 3064 "Goodwill and intangible
assets", replacing accounting standard Section 3062 "Goodwill and
other intangible assets" and accounting standard Section 3450
"Research and development costs". The new Section will be
applicable on a retrospective basis with restatement to financial
statements relating to fiscal years beginning on or after October
1, 2008. Accordingly, the Company will adopt the new standards for
its fiscal year beginning January 1, 2009. Section 3064 establishes
standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of
intangible assets. Standards concerning goodwill are unchanged from
the standards included in the previous Section 3062. The Company is
currently evaluating the impact of the adoption of this new
Section. International Financial Reporting Standards ("IFRS") On
February 13, 2008, the Canadian Accounting Standards Board ("AcSB")
confirmed that publicly accountable enterprises will be required to
adopt IFRS in place of Canadian GAAP for interim and annual
reporting purposes for fiscal years beginning on or after January
1, 2011. At this time the impact on the Company's future financial
position and results of operations is not reasonably determinable
or estimable. CP is currently developing appropriate accounting
policies under IFRS and assessing the impact that these policy
changes will have. 4 Other charges For the three For the nine
months ended months ended September 30 September 30 (in millions)
2008 2007 2008 2007 ------------------- -------------------
Amortization of discount on accruals recorded at present value $
1.5 $ 2.0 $ 4.6 $ 6.2 Other exchange (gains) losses (0.7) 2.3 1.2
4.3 Loss on sale of accounts receivable - 1.5 2.7 4.2 Losses
(gains) on non-hedging derivative instruments 0.3 0.5 (0.6) 0.1
Other 1.7 1.8 6.5 6.3 ------------------- ------------------- Total
other charges $ 2.8 $ 8.1 $ 14.4 $ 21.1 -------------------
------------------- ------------------- ------------------- 5
Interest expense For the three For the nine months ended months
ended September 30 September 30 (in millions) 2008 2007 2008 2007
------------------- ------------------- Interest expense $ 66.2 $
51.5 $ 195.7 $ 152.6 Interest income (1.7) (6.6) (8.4) (11.7)
------------------- ------------------- Total interest expense $
64.5 $ 44.9 $ 187.3 $ 140.9 ------------------- -------------------
------------------- ------------------- 6 Income taxes During the
nine months ended September 30, 2008, legislation was substantively
enacted to reduce provincial income tax rates. As a result of these
changes, the Company recorded a $15.7 million benefit in future tax
liability and income tax expense for the nine months ended
September 30, 2008, related to the revaluation of its future income
tax balances as at December 31, 2007. For the three months ended
September 30, 2008, no benefits were recorded. Cash taxes paid for
the quarter ended September 30, 2008, were $4.9 million (three
months ended September 30, 2007 - cash taxes refunded were $0.9
million). Cash taxes paid in the nine months ended September 30,
2008 were $62.8 million (nine months ended September 30, 2007 -
$8.9 million). 7 Earnings per share At September 30, 2008, the
number of shares outstanding was 153.8 million (September 30, 2007
- 153.2 million). Basic earnings per share have been calculated
using net income for the period divided by the weighted average
number of CP shares outstanding during the period. Diluted earnings
per share have been calculated using the treasury stock method,
which gives effect to the dilutive value of outstanding options.
The number of shares used in earnings per share calculations is
reconciled as follows: For the three For the nine months ended
months ended September 30 September 30 (in millions) 2008 2007 2008
2007 ------------------- ------------------- Weighted average
shares outstanding 153.8 153.2 153.6 154.3 Dilutive effect of stock
options 1.3 1.8 1.6 1.6 ------------------- -------------------
Weighted average diluted shares outstanding 155.1 155.0 155.2 155.9
------------------- ------------------- -------------------
------------------- (in dollars) Basic earnings per share $ 1.12 $
1.43 $ 2.72 $ 3.91 Diluted earnings per share $ 1.11 $ 1.41 $ 2.70
$ 3.87 ------------------- ------------------- -------------------
------------------- For the three and nine months ended September
30, 2008, 1,227,750 and 821,133 options were excluded from the
computation of diluted earnings per share because their effects
were not dilutive (three and nine months ended September 30, 2007 -
733 and 1,861 options). 8 Restructuring and environmental
remediation At September 30, 2008, the provision for restructuring
and environmental remediation was $210.7 million (December 31, 2007
- $234.0 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 CP's
liabilities associated with restructuring and environmental
remediation programs: Three months ended September 30, 2008 Closing
Opening Amorti- Balance Balance zation Foreign Septem- July 1 of
Exchange ber 30 (in millions) 2008 Accrued Payments Discount Impact
2008 ----------------------------------------------------- Labour
liability for terminations and severances $ 112.9 - (8.8) 0.9 1.2 $
106.2 Other non-labour liabilities for exit plans 0.6 - (0.1) - -
0.5 ----------------------------------------------------- Total
restructuring liability 113.5 - (8.9) 0.9 1.2 106.7
----------------------------------------------------- Environmental
remediation program 103.7 1.0 (3.0) - 2.3 104.0
----------------------------------------------------- Total
restructuring and environmental remediation liability $ 217.2 1.0
(11.9) 0.9 3.5 $ 210.7
-----------------------------------------------------
----------------------------------------------------- Three months
ended September 30, 2007 Closing Opening Amorti- Balance Balance
zation Foreign Septem- July 1 Accrued of Exchange ber 30 (in
millions) 2007 (reduced) Payments Discount Impact 2007
----------------------------------------------------- Labour
liability for terminations and severances $ 163.6 0.5 (10.7) 1.5
(2.1) $ 152.8 Other non-labour liabilities for exit plans 1.1 (0.2)
(0.1) - - 0.8 -----------------------------------------------------
Total restructuring liability 164.7 0.3 (10.8) 1.5 (2.1) 153.6
----------------------------------------------------- Environmental
remediation program 112.7 0.9 (3.0) - (3.9) 106.7
----------------------------------------------------- Total
restructuring and environmental remediation liability $ 277.4 1.2
(13.8) 1.5 (6.0) $ 260.3
-----------------------------------------------------
----------------------------------------------------- Nine months
ended September 30, 2008 Closing Opening Amorti- Balance Balance
zation Foreign Septem- July 1 of Exchange ber 30 (in millions) 2008
Accrued Payments Discount Impact 2008
----------------------------------------------------- Labour
liability for terminations and severances $ 129.2 1.5 (29.4) 3.1
1.8 $ 106.2 Other non-labour liabilities for exit plans 0.8 - (0.3)
- - 0.5 ----------------------------------------------------- Total
restructuring liability 130.0 1.5 (29.7) 3.1 1.8 106.7
----------------------------------------------------- Environmental
remediation program 104.0 2.9 (6.7) - 3.8 104.0
----------------------------------------------------- Total
restructuring and environmental remediation liability $ 234.0 4.4
(36.4) 3.1 5.6 $ 210.7
-----------------------------------------------------
----------------------------------------------------- Nine months
ended September 30, 2007 (in millions) Closing Opening Amorti-
Balance Balance zation Foreign Septem- July 1 Accrued of Exchange
ber 30 (in millions) 2007 (reduced) Payments Discount Impact 2007
----------------------------------------------------- Labour
liability for terminations and severances $ 187.4 (1.6) (32.8) 4.7
(4.9) $ 152.8 Other non-labour liabilities for exit plans 1.4 (0.2)
(0.2) - (0.2) 0.8
----------------------------------------------------- Total
restructuring liability 188.8 (1.8) (33.0) 4.7 (5.1) 153.6
----------------------------------------------------- Environmental
remediation program 120.2 2.2 (6.0) - (9.7) 106.7
----------------------------------------------------- Total
restructuring and environmental remediation liability $ 309.0 0.4
(39.0) 4.7 (14.8) $ 260.3
-----------------------------------------------------
----------------------------------------------------- Amortization
of Discount is charged to income as "Other Charges", "Compensation
and Benefits" and "Purchased Services and Other" as applicable. New
accruals and adjustments to previous accruals are reflected in
"Compensation and Benefits" and "Purchased Services and Other" as
applicable. 9 Accounts Receivable As at March 31, 2008, the Company
had an accounts receivable securitization program. Under the terms
of the program, the Company sold an undivided co-ownership interest
in $120.0 million of eligible freight receivables to an unrelated
trust. In the second quarter of 2008, the Company's accounts
receivable securitization program was terminated and settled. As a
result, the Company's Consolidated balance sheet, Accounts
receivable and other current assets increased by $120.0 million and
in the Statement of consolidated cash flows the Change in non-cash
working capital balances related to operations reflected an outflow
of $120.0 million. As well, the related servicing asset and
liability which had previously been recognized are no longer
required to be maintained and were settled as part of the
termination. 10 Investments Dakota, Minnesota & Eastern
Railroad Corporation ("DM&E") On October 4, 2007, the Company
acquired all of the issued and outstanding shares of DM&E. The
Company is currently accounting for the purchase by the equity
method until the effective date of the approval of the acquisition
by the United States Surface Transportation Board ( "STB"). On
September 30, 2008, the Company received regulatory approval for
the acquisition from the STB effective October 30, 2008. The
Company will consolidate its investment in DM&E subsequent to
the effective date. The purchase price was a $1.496 billion cash
payment, including a $6 million post closing adjustment in the
first quarter of 2008, and transaction costs of $16 million
incurred to September 30, 2008. Future contingent payments of up to
approximately US$1.05 billion plus certain interest and
inflationary adjustments may become payable up to December 31, 2025
upon achievement of certain milestones. The equity income from the
Company's investment in DM&E, which is recorded net of tax, was
$16.5 million during the three months ended September 30, 2008 and
$40.9 million during the nine months ended September 30, 2008. The
difference between cost and the net book value of DM&E at the
date of acquisition was US$976.4 million. For the three months
ended September 30, 2008 the equity income from the Company's
investment in DM&E was reduced by $3.7 million to recognize
additional depreciation expense based on the assigned cost using
fair values at the date of acquisition and $0.5 million to
recognize amortization of the fair value of intangible assets
acquired. For the nine months ended September 30, 2008, the
additional depreciation expense was $10.4 million and the
amortization of intangible assets was $1.4 million. The following
table reflects the revised purchase price allocation, based on the
fair value of DM&E's assets and liabilities acquired at
acquisition, which are subject to final valuations in the fourth
quarter of 2008. The impact of these valuations is not expected to
have a material effect on the results of operations. (in millions)
October 4, 2007
---------------------------------------------------------------------
Current assets $ 93 Railroad properties 1,943 Intangible assets 50
Goodwill 156 Other assets 2 ----------------- Total assets acquired
2,244 ----------------- Current liabilities 104 Future income taxes
576 Debt and other liabilities 68 ----------------- Total
liabilities assumed 748 ----------------- Investment in net assets
of DM&E $ 1,496
---------------------------------------------------------------------
---------------------------------------------------------------------
Canadian Third Party Asset-backed Commercial Paper ("ABCP") At
September 30, 2008, the Company held ABCP issued by a number of
trusts with an original cost of $143.6 million. At the dates the
Company acquired these investments they were rated R1 (High) by
DBRS Limited ("DBRS"), the highest credit rating issued for
commercial paper, and backed by R1 (High) rated assets and
liquidity agreements. These investments matured during the third
quarter of 2007 but, as a result of liquidity issues in the ABCP
market, did not settle on maturity. As a result, the Company has
classified its ABCP as long- term investments after initially
classifying them as Cash and cash equivalents. On August 16, 2007,
an announcement was made by a group representing banks, asset
providers and major investors on an agreement in principle to a
long-term proposal and interim agreement to convert the ABCP into
long-term floating rate notes maturing no earlier than the
scheduled maturity of the underlying assets. On September 6, 2007,
a pan-Canadian restructuring committee consisting of major
investors was formed. The committee was created to propose a
solution to the liquidity problem affecting the ABCP and has
retained legal and financial advisors to oversee the proposed
restructuring process. The ABCP in which the Company has invested
has not traded in an active market since mid-August 2007 and there
are currently no market quotations available. On March 17, 2008, a
court order was obtained which commenced the process of
restructuring the ABCP under the protection of the Companies'
Creditors Arrangement Act ("CCAA"). A vote of the holders of the
ABCP approving the restructuring occurred on April 25, 2008, and on
June 25, 2008 a court order sanctioning the restructuring of the
ABCP was made pursuant to the CCAA. All appeals of the sanction
order have been dismissed or denied and it is now final. On March
20, 2008, the pan-Canadian restructuring committee issued an
Information Statement containing details about the proposed
restructuring. Based on this and other public information it is
estimated that, of the $143.6 million of ABCP in which the Company
has invested: - $12.5 million is represented by traditional
securitized assets and the Company will, on restructuring, receive
replacement Traditional Asset (TA) Tracking long-term floating rate
notes with a maturity of approximately eight and one-half years. As
the underlying assets are primarily comprised of cash and Canadian
Lines of Credit which are subject to an offer to repurchase at par
value, the Company has assumed that these notes will be repaid in
full significantly in advance of maturity; - $117.7 million is
represented by a combination of leveraged collateralized debt,
synthetic assets and traditional securitized assets and the Company
will, on restructuring, receive replacement senior Class A-1 and
Class A-2 and subordinated Class B and Class C long-term floating
rate notes with maturities of approximately eight years and nine
months. The Company expects to receive replacement notes with par
values as follows: - Class A-1: $59.7 million - Class A-2: $46.5
million - Class B: $8.0 million - Class C: $3.5 million The
replacement senior notes are expected to obtain a AA rating while
the replacement subordinated notes are likely to be unrated; and -
$13.4 million is represented by assets that have an exposure to US
mortgages and sub-prime mortgages and assets that are held in a
satellite trust that will be terminated when the restructuring is
effective. On restructuring, the Company is likely to receive
Ineligible Asset (IA) Tracking long-term floating rate notes with
maturities of approximately between five years and three months and
eight years and seven months. In addition, the Company will receive
other tracking notes of approximately $1.2 million which are
expected to be paid down when the restructuring is effective with
recoveries of 5.9% of principal. Certain of these notes may be
rated, although at this time the pan-Canadian restructuring
committee has provided no indication of the rating these notes may
receive. DBRS has indicated that certain IA tracking notes may be
unrated. The valuation technique used by the Company to estimate
the fair value of its investment in ABCP at September 30, 2008,
incorporates probability weighted discounted cash flows considering
the best available public information regarding market conditions
and other factors that a market participant would consider for such
investments. The assumptions used in determining the estimated fair
value reflect the details included in the Information Statement
issued by the pan-Canadian restructuring committee and the risks
associated with the long-term floating rate notes. The interest
rates and maturities of the various long-term floating rate notes,
discount rates and credit losses modelled are: Probability weighted
average interest rate 3.6 per cent Weighted average discount rate
8.1 per cent Maturity of long-term floating rate notes five to nine
years, other than certain tracking notes to be paid down on
restructuring Credit losses rated notes(1): nil to 55 percent
unrated notes(2): 15 to 100 percent (1) TA Tracking, Class A-1 and
Class A-2 senior notes and IA Tracking notes. (2) Class B and Class
C subordinated notes and other tracking notes. Interest rates and
credit losses vary by each of the different replacement long-term
floating rate notes to be issued as each has different credit
ratings and risks. Interest rates and credit losses also vary by
the different probable cash flow scenarios that have been modelled.
Discount rates vary dependent upon the credit rating of the
replacement long-term floating rate notes. Discount rates have been
estimated using Government of Canada benchmark rates plus expected
spreads for similarly rated instruments with similar maturities and
structure. Maturities vary by different replacement long-term
floating rate notes as a result of the expected maturity of the
underlying assets. One of the cash flow scenarios modelled is a
liquidation scenario whereby, if the restructuring is not
successfully completed, recovery of the Company's investment is
through the liquidation of the underlying assets of the ABCP
trusts. In addition, while the likelihood is remote, there remains
a possibility that a liquidation scenario may occur even with a
successful approval of the restructuring plan. In addition,
assumptions have also been made as to the amount of restructuring
costs that the Company will bear. The probability weighted
discounted cash flows resulted in an estimated fair value of the
Company's ABCP of $72.7 million at September 30, 2008, excluding
$6.1 million of accrued interest, which has been recognized
separately in the balance sheet. This represents a reduction in the
estimated fair value of $28.1 million from June 30, 2008 as a
result of the worsening credit markets and expected termination of
certain tracking notes. In addition, it represents a reduction of
$49.4 million from the estimated fair value at December 31, 2007.
Charges to income of $28.1 million before tax ($19.8 million after
tax) and $21.3 million before tax ($15.0 million after tax) were
recorded in the third and the first quarters of 2008, respectively.
These represent 20 percent and 15 percent of the original value,
bringing the total write-down to an aggregate of approximately 49
percent of the original value, or 47 percent of the original value
plus accrued interest. In addition, a charge to income of $21.5
million ($15 million after tax), representing approximately 15
percent of the original value, was recorded in the third quarter of
2007. Sensitivity analysis is presented below for key assumptions:
Change in fair value (in millions) of ABCP ----------- Probability
of successful restructuring 1 percent increase $ 0.1 1 percent
decrease $ (0.1) Interest rate 50 basis point increase $ 2.5 50
basis point decrease $ (2.5) Discount rate 50 basis point increase
$ (2.2) 50 basis point decrease $ 2.3 ----------- Continuing
uncertainties regarding the value of the assets which underlie the
ABCP, the amount and timing of cash flows and the outcome of the
restructuring process could give rise to a further material change
in the value of the Company's investment in ABCP which could impact
the Company's near term earnings. 11 Long-term debt During the
second quarter of 2008, the Company issued US$400 million 5.75%
5-year notes, US$300 million 6.50% 10-year notes and CDN$375
million 6.25% 10-year notes. Net proceeds from these offerings were
CDN$1,068.7 million. The notes are unsecured, but carry a negative
pledge. The proceeds from these offerings were used to partially
repay the bridge financing. 12 Shareholders' equity An analysis of
Common Share balances is as follows: For the three For the nine
months ended months ended September 30 September 30 (in millions)
2008 2007 2008 2007 --------------------------------------- Share
capital, beginning of period 153.8 153.1 153.3 155.5 Shares issued
under stock option plans - 0.1 0.5 0.9 Shares purchased - - - (3.2)
--------------------------------------- Share capital, end of
period 153.8 153.2 153.8 153.2
---------------------------------------
--------------------------------------- For the nine months ended
September 30, 2008, there were no shares repurchased (for the nine
months ended September 30, 2007, 3.2 million shares were purchased
at an average price per share of $71.99). 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 retained earnings. When shares are
purchased, 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. 13 Other comprehensive income and accumulated
other comprehensive income Components of other comprehensive income
and the related tax effects are as follows: For the three months
ended September 30 (in millions) 2008 Income Before tax Income tax
(expense) tax amount recovery amount -----------------------------
Unrealized foreign exchange loss on translation of U.S.
dollar-denominated long-term debt designated as a hedge of the net
investment in U.S. subsidiaries $ (57.8) $ 7.9 $ (49.9) Unrealized
foreign exchange gain on translation of the net investment in U.S.
subsidiaries 60.0 - 60.0 Realized gain on cash flow hedges settled
in the period (3.5) 1.0 (2.5) Increase in unrealized holding losses
on cash flow hedges (7.7) 2.3 (5.4) Realized gain on cash flow
hedges settled in prior periods (0.1) (1.0) (1.1)
----------------------------- Other comprehensive (loss) income $
(9.1) $ 10.2 $ 1.1 -----------------------------
----------------------------- For the three months ended September
30 (in millions) 2007 Income Before tax Net of tax (expense) tax
amount recovery amount ----------------------------- Unrealized
foreign exchange gain on translation of U.S. dollar-denominated
long-term debt designated as a hedge of the net investment in U.S.
subsidiaries $ 29.8 $ (4.6) $ 25.2 Unrealized foreign exchange loss
on translation of the net investment in U.S. subsidiaries (30.5) -
(30.5) Realized gain on cash flow hedges settled in the period
(3.1) 1.1 (2.0) Decrease in unrealized holding gains on cash flow
hedges (2.7) 1.0 (1.7) Realized gain on cash flow hedges settled in
prior periods (0.1) - (0.1) ----------------------------- Other
comprehensive loss $ (6.6) $ (2.5) $ (9.1)
----------------------------- ----------------------------- For the
nine months ended (in millions) 2008 Income Before tax Income tax
(expense) tax amount recovery amount -----------------------------
Unrealized foreign exchange loss on translation of U.S.
dollar-denominated long-term debt designated as a hedge of the net
investment in U.S. subsidiaries $ (92.8) $ 12.6 $ (80.2) Unrealized
foreign exchange gain on translation of the net investment in U.S.
subsidiaries 97.2 - 97.2 Realized gain on cash flow hedges settled
in the period (12.4) 3.7 (8.7) Decrease in unrealized holding
losses on cash flow hedges 7.5 (2.9) 4.6 Realized loss on cash flow
hedges settled in prior periods 1.5 (0.5) 1.0
----------------------------- Other comprehensive income $ 1.0 $
12.9 $ 13.9 -----------------------------
----------------------------- For the nine months ended September
30 (in millions) 2007 Income Before tax Net of tax (expense) tax
amount recovery amount ----------------------------- Unrealized
foreign exchange gain on translation of U.S. dollar-denominated
long-term debt designated as a hedge of the net investment in U.S.
subsidiaries $ 67.5 $ (10.4) $ 57.1 Unrealized foreign exchange
loss on translation of the net investment in U.S. subsidiaries
(71.4) - (71.4) Realized gain on cash flow hedges settled in the
period (11.2) 3.9 (7.3) Decrease in unrealized holding gains on
cash flow hedges (9.2) 3.2 (6.0) Realized loss on cash flow hedges
settled in prior periods 1.5 (0.5) 1.0
----------------------------- Other comprehensive loss $ (22.8) $
(3.8) $ (26.6) -----------------------------
----------------------------- Changes in the balances of each
classification within Accumulated other comprehensive income are as
follows: Accumulated other comprehensive income Three months ended
September 30, 2008 Opening Closing Balance, Balance, July 1, Period
Sept. 30, (in millions) 2008 change 2008
----------------------------- Foreign exchange gain on U.S. dollar
debt designated as a hedge of the net investment in U.S.
subsidiaries $ 266.3 $ (49.9) $ 216.4 Foreign exchange loss on net
investment in U.S. subsidiaries (209.7) 60.0 (149.7) Unrealized
effective losses on cash flow hedges (2.4) (7.9) (10.3) Deferred
loss on settled hedge instruments (1.8) (1.1) (2.9)
----------------------------- Accumulated other comprehensive
income $ 52.4 $ 1.1 $ 53.5 -----------------------------
----------------------------- Three months ended September 30, 2007
Opening Closing Balance, Balance, July 1, Period Sept. 30, (in
millions) 2007 change 2007 ----------------------------- Foreign
exchange gain on U.S. dollar debt designated as a hedge of the net
investment in U.S. subsidiaries $ 267.2 $ 25.2 $ 292.4 Foreign
exchange loss on net investment in U.S. subsidiaries (209.4) (30.5)
(239.9) Unrealized effective gains on cash flow hedges 9.3 (3.7)
5.6 Deferred loss on settled hedge instruments (4.2) (0.1) (4.3)
----------------------------- Accumulated other comprehensive
income $ 62.9 $ (9.1) $ 53.8 -----------------------------
----------------------------- Accumulated other comprehensive
income Nine months ended September 30, 2008 Opening Closing
Balance, Balance, Jan. 1, Period Sept. 30, (in millions) 2008
change 2008 ----------------------------- Foreign exchange gain on
U.S. dollar debt designated as a hedge of the net investment in
U.S. subsidiaries $ 296.6 $ (80.2) $ 216.4 Foreign exchange loss on
net investment in U.S. subsidiaries (246.9) 97.2 (149.7) Unrealized
effective losses on cash flow hedges (6.2) (4.1) (10.3) Deferred
loss on settled hedge instruments (3.9) 1.0 (2.9)
----------------------------- Accumulated other comprehensive
income $ 39.6 $ 13.9 $ 53.5 -----------------------------
----------------------------- Nine months ended September 30, 2007
Adjustment for change Adjusted Opening in Opening Closing Balance,
account- Balance, Balance, Jan. 1, ing Jan. 1, Period Sept. 30, (in
millions) 2007 policy 2007 change 2007
------------------------------------------------ Foreign exchange
gain on U.S. dollar debt designated as a hedge of the net
investment in U.S. subsidiaries $ 234.9 $ 0.4 $ 235.3 $ 57.1 $
292.4 Foreign exchange loss on net investment in U.S. subsidiaries
(168.5) - (168.5) (71.4) (239.9) Unrealized effective gains of cash
flow hedges - 18.9 18.9 (13.3) 5.6 Deferred loss on settled hedge
instruments - (5.3) (5.3) 1.0 (4.3)
------------------------------------------------ Accumulated other
comprehensive income $ 66.4 $ 14.0 $ 80.4 $ (26.6) $ 53.8
------------------------------------------------
------------------------------------------------ During the next
twelve months, the Company expects $10.3 million of unrealized
holding gains on derivative instruments to be realized and
recognized in the Statement of Consolidated Income. Existing
derivative instruments designated as cash flow hedges will be fully
matured by December 31, 2009. 14 Financial instruments The fair
value of a financial instrument is the amount of consideration that
would be agreed upon in an arm's length transaction between willing
parties. The Company uses the following methods and assumptions to
estimate fair value of each class of financial instruments for
which carrying amounts are included in the Consolidated Balance
Sheet as follows: Loans and receivables ---------------------
Accounts receivable and other current assets - The carrying amounts
approximate fair value because of the short maturity of these
instruments. Investments - Long-term receivable balances are
carried at amortized cost based on an initial fair value as
determined at the time using discounted cash flow analysis and
observable market based inputs. Financial liabilities
--------------------- Accounts payable and accrued liabilities,
short-term borrowings, and deferred liabilities - The carrying
amounts approximate fair value because of the short maturity of
these instruments. Long-term debt - The carrying amount of
long-term debt is at amortized cost based on an initial fair value
as determined at the time using the quoted market prices for the
same or similar debt instruments. Available for sale
------------------ Investments - Certain equity investments which
are recorded on a cost basis have a carrying value that equals cost
as fair value cannot be reliably established as there are no quoted
prices in an active market for these investments. Held for trading
---------------- Derivative instruments that are designated as
hedging instruments are measured at fair value determined using the
quoted market prices for the same or similar instruments.
Derivative instruments that are not designated in hedging
relationships are classified as held for trading and measured at
fair value determined by using quoted market prices for similar
instruments and changes in fair values of such derivatives are
recognized in net income as they arise. Cash and cash equivalents -
The carrying amounts approximate fair value because of the short
maturity of these instruments. Investments - Canadian third party
asset-backed commercial paper (ABCP) is carried at fair value,
which has been determined using valuation techniques that
incorporate probability weighted discounted future cash flows
reflecting market conditions and other factors that a market
participant would consider (see Note 10). The table below
reconciles carrying value positions of the Company's financial
instruments with Consolidated Balance Sheet categories: (in
millions) September 30, 2008 ------------------------------
Carrying Carrying Value of Value of Financial Other Assets / Assets
/ Balance Liabi- Liabi- Sheet lities lities Amount
------------------------------ Assets Cash and cash equivalents $
97.9 $ - $ 97.9 ------------------------------ Accounts receivable
and other current assets Accounts receivable 681.7 - Current
portion of crude oil swaps 11.7 - Current portion of interest rate
swaps 3.8 - Other - 49.8 ------------------------------ 697.2 49.8
747.0 ------------------------------ Investments Equity investments
at cost 1.4 - Long-term receivables at amortized cost 10.7 - ABCP
72.7 - Other - 1,689.7 ------------------------------ 84.8 1,689.7
1,774.5 ------------------------------ Other assets and deferred
charges Long-term portion of crude oil swaps 3.0 - Long-term
portion of currency forward 3.5 - Long-term portion of interest
rate swaps 4.5 - Other - 1,499.5 ------------------------------
11.0 1,499.5 1,510.5 ------------------------------ Liabilities
Short-term borrowings $ 280.0 - $ 280.0
------------------------------ Accounts payable and accrued
liabilities Accounts payable and accrued liabilities 765.9 -
Current portion of foreign exchange contracts on fuel 1.1 - Current
portion of treasury rate lock - - Current portion of interest rate
swaps - - Total return swap 25.7 - Other - 213.2
------------------------------ 792.7 213.2 1,005.9
------------------------------ Long-term debt maturing within one
year 248.4 - 248.4 ------------------------------ Deferred
liabilities Long-term portion of foreign exchange contracts on fuel
0.3 - Long-term portion of currency forward - - Long-term portion
of interest rate swaps - - Total return swap - - Long-term portion
of Accounts payable and accrued liabilities 39.6 - Other - 656.2
------------------------------ 39.9 656.2 696.1
------------------------------ Long-term debt 4,140.4 - 4,140.4
------------------------------ (in millions) December 31, 2007
----------------------------- Carrying Carrying Value of Value of
Financial Other Assets / Assets / Balance Liabi- Liabi- Sheet
lities lities Amount ------------------------------ Assets Cash and
cash equivalents $ 378.1 $ - $ 378.1 ------------------------------
Accounts receivable and other current assets Accounts receivable
483.0 - Current portion of crude oil swaps 12.9 - Current portion
of interest rate swaps - - Other - 46.9
------------------------------ 495.9 46.9 542.8
------------------------------ Investments Equity investments at
cost 1.3 - Long-term receivables at amortized cost 17.5 - ABCP
122.1 - Other - 1,527.7 ------------------------------ 140.9
1,527.7 1,668.6 ------------------------------ Other assets and
deferred charges Long-term portion of crude oil swaps 8.5 -
Long-term portion of currency forward - - Long-term portion of
interest rate swaps - - Other - 1,227.1
------------------------------ 8.5 1,227.1 1,235.6
------------------------------ Liabilities Short-term borrowings $
229.7 - $ 229.7 ------------------------------ Accounts payable and
accrued liabilities Accounts payable and accrued liabilities 750.6
- Current portion of foreign exchange contracts on fuel 2.1 -
Current portion of treasury rate lock 30.6 - Current portion of
interest rate swaps (1.0) - Total return swap - - Other - 198.5
------------------------------ 782.3 198.5 980.8
------------------------------ Long-term debt maturing within one
year 31.0 - 31.0 ------------------------------ Deferred
liabilities Long-term portion of foreign exchange contracts on fuel
1.5 - Long-term portion of currency forward 15.7 - Long-term
portion of interest rate swaps (4.5) - Total return swap 3.8 -
Long-term portion of Accounts payable and accrued liabilities 41.9
- Other - 656.2 ------------------------------ 58.4 656.2 714.6
------------------------------ Long-term debt 4,146.2 - 4,146.2
------------------------------ Carrying value and fair value of
financial instruments
------------------------------------------------------ The carrying
values of financial instruments equal or approximate their fair
values with the exception of long-term debt which has a carrying
value of $4,388.8 million at September 30, 2008 (December 31, 2007
- $4,177.2 million) and a fair value of approximately $4,302.1
million at September 30, 2008 (December 31, 2007 - $4,302.6
million). The fair value of publicly traded long-term debt is
determined based on market prices at September 30, 2008 and
December 31, 2007, respectively. The fair value of other long-term
debt is estimated based on rates currently available to the Company
for long-term borrowings, with terms and conditions similar to
those borrowings in place at the applicable Consolidated Balance
Sheet date. Financial risk management ------------------------- In
the normal course of operations, the Company is exposed to various
market risks such as foreign exchange risk, interest rate risk,
other price risk, as well as credit risk and liquidity risk. To
manage these risks, the Company utilizes a Financial Risk
Management (FRM) framework. The FRM goals and strategy are outlined
below: FRM objectives: - Maintaining sound financial condition as
an ongoing entity; - Optimizing earnings per share and cash flow; -
Financing operations of the group of CP companies at the optimal
cost of capital; and - Ensuring liquidity to all Canadian and U.S.
operations. In order to satisfy the objectives above, the Company
has adopted the following strategies: - Prepare multi-year planning
and budget documents at prevailing market rates to ensure clear,
corporate alignment to performance management and achievement of
targets; - Measure the extent of operating risk within the
business; - Identify the magnitude of the impact of market risk
factors on the overall risk of the business and take advantage of
natural risk reductions that arise from these relationships; and -
Utilize financial instruments, including derivatives to manage the
remaining residual risk to levels that fall within the risk
tolerance of the Company. Under the governance structure
established by the Company and approved by the Audit, Finance and
Financial Risk Management Committee ("Audit Committee"), the Board
of Directors has the authority to approve the Financial Risk
Management Policies of the Company. The Board has delegated to the
Audit Committee the accountability for ensuring a structure is in
place to ensure compliance with the individual Corporate Risk
Management Policies across the Company's operations. The policy
objective with respect to the utilization of derivative financial
instruments is to selectively mitigate the impact of fluctuations
in foreign exchange ("FX") rates, interest rates, fuel price, and
share price. The use of any derivative instruments is carried out
in accordance with approved trading limits and authorized
counterparties as specified in the policy and/or mandate. It is not
the Company's intent to use financial derivatives or commodity
instruments for trading or speculative purposes. Risk factors
------------ The following is a discussion of market, credit and
liquidity risks and related mitigation strategies that have been
identified through the FRM framework. This is not an exhaustive
list of all risks, nor will the mitigation strategies eliminate all
risks listed. Risks related to the Company's investment in ABCP are
discussed in more detail in Note 10. Foreign exchange risk
--------------------- This risk refers to the fluctuation of
financial commitments, assets, liabilities, income or cash flows
due to changes in FX rates. The Company conducts business
transactions and owns assets in both Canada and the United States;
as a result, revenues and expenses are incurred in both Canadian
dollars and U.S. dollars. The Company's income is exposed to FX
risk largely in the following ways: - Translation of U.S. dollar
denominated revenues and expenses into Canadian dollars - When the
Canadian dollar changes relative to the U.S. dollar, income
reported in Canadian dollars will change. The impact of a
strengthening Canadian dollar on U.S. dollar revenues and expenses
will reduce net income because the Company has more U.S. dollar
revenues than expenses. This impact is excluded from the
sensitivity in the table below; and - Translation of U.S. dollar
denominated debt and other monetary items - A strengthening
Canadian dollar will reduce the Company's U.S. dollar denominated
debt in Canadian dollar terms and generate a FX gain on long-term
debt, which is recorded in income. The Company calculates FX on
long-term debt using the difference in FX rates at the beginning
and at the end of each reporting period. Other U.S. dollar
denominated monetary items will also be impacted by changes in FX
rates. Foreign exchange management In terms of net income,
excluding FX on long-term debt, mitigation of U.S. dollar FX
exposure is provided primarily through offsets created by revenues
and expenses incurred in the same currency. Where appropriate the
Company negotiates with U.S. customers and suppliers to reduce the
net exposure. The Company may from time to time reduce residual
exposure by hedging revenues through FX forward contracts. The
Company had no revenue forward sales of U.S. dollars outstanding at
September 30, 2008. The FX gains and losses on long-term debt are
mainly unrealized and can only be realized when U.S. dollar
denominated long-term debt matures or is settled. The Company also
has long-term FX exposure on its investment in U.S. affiliates. A
portion of the Company's U.S. dollar denominated long-term debt has
been designated as a hedge of the net investment in self-sustaining
foreign subsidiaries. This designation has the effect of mitigating
volatility on net income by offsetting long-term FX gains and
losses on long-term debt. In addition, for long-term debt
denominated in U.S. dollars in Canada, the Company may enter into
currency forwards to hedge debt that is denominated in U.S.
dollars. Occasionally the Company will enter into short-term FX
forward contracts as part of its cash management strategy. The
table below depicts the quarterly impact to net income and other
comprehensive income of long-term debt, including currency forward
contracts on long-term debt, had the exchange rate increased or
decreased by one cent. The impact on other U.S. dollar denominated
monetary items is not considered to be material. (in millions)
Three months ended September 30, 2008 --------------------- Impact
to Other compreh- Impact to ensive Net income income
--------------------- 1 cent strengthening in Canadian dollar $
(1.6) $ (2.2) 1 cent weakening in Canadian dollar 1.6 2.2
--------------------- Note: All variables excluding FX are held
constant. Impact to net income would be decreased by $11.2 million
and to other comprehensive income would be increased by $11.2
million if the net investment hedge was not included in the above
table. Foreign exchange forward contracts In June 2007, the Company
entered into a currency forward to fix the exchange rate on US$400
million 6.250% Notes due 2011. This derivative guarantees the
amount of Canadian dollars that the Company will repay when its
US$400 million 6.25% note matures in October 2011. During the three
and nine months ended September 30, 2008, the Company recorded a
gain on this derivative of $15.0 million and $19.2 million,
respectively, in "Foreign exchange (gain) loss on long-term debt".
For the three months ended September 30, 2007, the Company recorded
a loss of $17.6 million and a loss of $19.6 million for the nine
months ended September 30, 2007. At September 30, 2008, the
unrealized gain on the forward was $3.5 million (December 31, 2007
- unrealized loss of $15.7 million). Interest rate risk
------------------ This refers to the risk that the fair value or
income and future cash flows of a financial instrument will vary as
a result of changes in market interest rates. In order to manage
funding needs or capital structure goals, the Company enters into
debt or capital lease agreements that are subject to either fixed
market interest rates set at the time of issue or floating rates
determined by on-going market conditions. Debt subject to variable
interest rates exposes the Company to variability in interest
expense, while debt subject to fixed interest rates exposes the
Company to variability in the fair value of the debt. The table
below depicts the exposure to floating and fixed interest rates for
all financial assets and liabilities: (in millions) September 30,
2008 ------------------- At At floating fixed interest interest
rates rates ------------------- Financial assets Cash and
short-term investments $ 97.9 $ - ABCP 72.7 - Financial liabilities
Short-term borrowings 280.0 - Long-term debt(1) 569.6 3,819.2
------------------- (1) Includes impact of interest rate swaps
Interest rate management 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 issuance,
the Company may enter into forward rate agreements such as treasury
rate locks, bond forwards or forward starting swaps to
substantially lock in all or a portion of the effective future
interest expense. The Company may also enter into swap agreements
to manage the mix of fixed and floating rate debt. The table below
depicts the quarterly impact to net income and other comprehensive
income had interest rates increased or decreased by 50 basis
points. Typically, as rates increase, net income decreases. Three
months ended (in millions) September 30, 2008 -------------------
Impact to Net income ------------------- 50 basis point increase in
rates $ (0.5) 50 basis point decrease in rates 0.5
------------------- Note: All variables excluding interest rates
are held constant. At September 30, 2008, the Company had
outstanding interest rate swap agreements, classified as a fair
value hedge, for a notional amount of US$200 million or $212.8
million. The swap agreements convert a portion of the Company's
fixed-interest-rate liability into a variable-rate liability for
the 6.250% Notes. During the three months ended September 30, 2008,
the Company recorded a gain of $1.0 million and a gain of $2.1
million for the nine months ended September 30, 2008, to "Interest
expense". For the three months ended September 30, 2007, the
Company recorded a loss of $0.3 million and a loss of $1.1 million
for the nine months ended September 30, 2007. At September 30,
2008, the unrealized gain, derived from the fair value of the swap,
was $8.2 million (December 31, 2007 - $5.5 million). The following
table discloses the terms of the swap agreements at September 30,
2008: Expiration October 15, 2011 Notional amount of principal (in
CDN$ millions) $ 212.8 Fixed receiving rate 6.250% Variable paying
rate - three months ended September 30, 2008 4.570%
-------------------------------------------------------------------
Based on U.S. three-month LIBOR. During 2007, the Company entered
into derivative agreements, which were designated as cash flow
hedges, that established the benchmark rate on $350.0 million of 30
year debt that was expected to be issued. These hedges were
de-designated on May 13, 2008 when it was no longer probable that
the Company would issue 30 year debt. On May 23, 2008, the fair
value of these instruments was a loss of $30.9 million at the time
of the issuance of the debt and the settlement of the derivative
instrument. A gain of $1.3 million from the date of de-designation
to the date of settlement of the derivative instrument was recorded
in net income. Prior to de- designation losses of $1.3 million due
to some ineffectiveness were recognized and recorded in net income
during 2008. Effective hedge losses of $28.7 million will be
deferred in accumulated other comprehensive income and will be
amortized in earnings as an adjustment to interest expense.
Stock-based compensation risk ----------------------------- This
risk refers to the probability of increased compensation expense
due to the increase in the Company's share price. The Company's
compensation expense is subject to volatility due to the movement
of share price and its impact on the value of certain management
and director stock-based compensation programs. These programs, as
described in the management proxy circular, include deferred share
units, restricted share units, performance share units and share
appreciation rights. As the share price appreciates, these
instruments are marked to market increasing compensation expense.
Stock-based compensation expense management To minimize the
volatility to compensation expense created by changes in share
price, the Company entered into a Total Return Swap ("TRS") to
reduce the volatility and total cost to the Company over time of
the four types of stock-based compensation programs noted above.
These are derivatives that provide price appreciation and
dividends, in return for a charge by the counterparty. The swaps
minimize volatility to compensation expense by providing a gain to
substantially offset increased compensation expense as the share
price increases and a loss to offset reduced compensation expense
when the share price falls. If stock-based compensation share units
fall out of the money after entering the program, the loss
associated with the swap would no longer be offset by any
compensation expense reductions. The table below depicts the
quarterly impact to net income as a result of the TRS had the share
price increased or decreased $1 from the closing share price on
September 30, 2008. (in millions) Three months ended September 30,
2008 ------------------- Impact to Net income -------------------
$1 increase in share price $ 1.7 $1 decrease in share price (1.7)
------------------- Note: All variables excluding share price are
held constant. During the three months ended September 30, 2008,
Compensation and benefits expense increased by $27.9 million and
$21.9 million for the nine months ended September 30, 2008 due to
unrealized losses for these swaps. For the three months ended
September 30, 2007, the Company recorded an unrealized loss of
$10.0 million and an unrealized gain of $12.8 million for the nine
months ended September 30, 2007. At September 30, 2008, the
unrealized loss on the swap was $25.7 million (December 31, 2007 -
unrealized loss of $3.8 million). Commodity risk -------------- The
Company is exposed to commodity risk related to purchases of diesel
fuel and the potential reduction in net income due to increases in
the price of diesel. Because fuel expense constitutes a large
portion of the Company's operating costs, volatility in diesel fuel
prices can have a significant impact on the Company's income. Items
affecting volatility in diesel prices include, but are not limited
to, fluctuations in world markets for crude oil and distillate
fuels, which can be affected by supply disruptions and geopolitical
events. Fuel price management The impact of variable fuel expense
is mitigated substantially through fuel recovery programs which
apportion incremental changes in fuel prices to shippers through
price indices, tariffs, and by contract, within agreed upon
guidelines. While these programs provide effective and meaningful
coverage, residual exposure remains as the fuel expense risk cannot
be completely recovered from shippers due to timing and volatility
in the market. The Company continually monitors residual exposure,
and where appropriate, may enter into derivative instruments.
Derivative instruments used by the Company to manage fuel expense
risk may include, but are not limited to, swaps and options for
crude oil and diesel. In addition, the Company may combine FX
forward contracts with fuel derivatives to effectively hedge the
risk associated with FX variability on fuel purchases and commodity
hedges. The table below depicts the quarterly impact to net income
(excluding recoveries through pricing mechanisms) and other
comprehensive income as a result of our crude forward contracts had
the price of West Texas Intermediate ("WTI") changed by $1 for the
three months ended September 30, 2008: (in millions) Three months
ended September 30, 2008 --------------------- Impact to Other
Compreh- Impact to ensive Net income income ---------------------
$1 increase in price per barrel $ 0.1 $ 0.2 $1 decrease in price
per barrel (0.1) (0.2) --------------------- Note: All variables
excluding WTI per barrel are held constant. At September 30, 2008,
the Company had crude forward contracts, which are accounted for as
cash flow hedges, to purchase approximately 219,000 barrels over
the 2008-2009 period at average quarterly prices ranging from
US$35.17 to US$38.19 per barrel. This represents approximately 2%
of estimated fuel purchases in 2008 and 2009. At September 30,
2008, the unrealized gain on these forward contracts was $14.7
million (December 31, 2007 - $21.4 million). At September 30, 2008,
the Company had FX forward contracts (in conjunction with the crude
purchases above), which are accounted for as cash flow hedges,
totalling US$8.0 million over the 2008-2009 period at exchange
rates ranging from 1.2276 to 1.2611. At September 30, 2008, the
unrealized loss on these forward contracts was $1.3 million
(December 31, 2007 - $3.5 million). In addition at September 30,
2008, the Company had diesel forward contracts which were not
designated and accounted for as cash flow hedges, to purchase
approximately 30,000 barrels during the fourth quarter of 2008 at
an average price of US$130.83 per barrel. This represents
approximately 2% of estimated fuel purchases in the quarter. At
September 30, 2008, the unrealized gain on these forward contracts
was not significant. For the three months ended September 30, 2008,
"Fuel expense" was reduced by $3.4 million (three months ended
September 30, 2007 - $3.5 million) as a result of $3.8 million in
realized gains (three months ended September 30, 2007 - $4.1
million) arising from settled swaps, partially offset by $0.4
million in realized losses (three months ended September 30, 2007 -
$0.6 million) arising from the settled FX forward contracts. For
the nine months ended September 30, 2008, fuel expense was reduced
by $12.2 million (nine months ended September 30, 2007 - $12.9
million) as a result of $13.9 million in realized gains (nine
months ended September 30, 2007 - $14.7 million) arising from
settled swaps, partially offset by $1.7 million in realized losses
(nine months ended September 30, 2007 - $1.8 million) arising from
settled FX forward contracts. Credit risk ----------- Credit risk
refers to the possibility that a customer or counterparty will fail
to fulfil its obligations under a contract and as a result, create
a financial loss for the Company. The Company's credit risk
regarding its investment in ABCP are discussed in more detail in
Note 10. Credit risk management The railway industry serves
predominantly financially established customers and as a result the
Company has experienced limited financial losses with respect to
credit risk. The credit worthiness of customers is assessed using
credit scores supplied by a third party, and through direct
monitoring of their financial well-being on a continual basis. The
Company establishes guidelines for customer credit limits and
should thresholds in these areas be reached, appropriate
precautions are taken to improve collectibility. Pursuant to their
respective terms, accounts receivable are aged as follows at
September 30, 2008: (in millions) Up to date $ 518.7 Under 30 days
past due 98.4 30-60 days past due 18.7 61-90 days past due 11.2
Over 91 days past due 34.7 -------- $ 681.7 -------- --------
Counterparties to financial instruments expose the Company to
credit losses in the event of non-performance. Counterparties for
derivative and cash transactions are limited to high credit quality
financial institutions, which are monitored on an ongoing basis.
Counterparty credit assessments are based on the financial health
of the institutions and their credit ratings from external
agencies. With the exception of ABCP, the Company does not
anticipate non- performance that would materially impact the
Company's financial statements. With the exception of ABCP, the
Company believes there are no significant concentrations of credit
risk. The maximum exposure to credit risk include our financial
asset values reported in the table above, reconciling the carrying
value positions of the Company's financial instruments with
Consolidated Balance Sheet categories, and an indeterminable
maximum under guarantees as discussed in Note 19. Liquidity risk
-------------- The Company monitors and manages its liquidity risk
to ensure access to sufficient funds to meet operational and
investing requirements. Liquidity risk management The Company has
long-term debt ratings of Baa3, BBB, and BBB from Moody's Investors
Service, Inc. ("Moody's"), Standard and Poor's Corporation
("S&P"), and DBRS respectively. The S&P rating has a
negative outlook, while the ratings of Moody's and DBRS have a
stable outlook. The Company intends to manage its capital structure
and liquidity at levels that sustain an investment grade rating.
The Company has a five year revolving credit facility of $945
million, with an accordion feature to $1.15 billion, of which $325
million was available on September 30, 2008. This facility is
arranged with a core group of highly rated international financial
institutions and they incorporate pre-agreed pricing. The revolving
credit facility is available on next day terms. Surplus cash is
invested into a range of short dated money market instruments
meeting or exceeding the parameters of the Company's investment
policy. The table below reflects the contractual maturity of the
Company's undiscounted cash flows for its financial liabilities and
derivatives: (in millions) As at September 30, 2008
-------------------------------------- 2009 - 2008 2011 2012+ Total
-------------------------------------- Financial liabilities
Short-term borrowings $ 280.0 $ - $ - $ 280.0 Accounts payable and
accrued liabilities 765.9 39.6 - 805.5 Total return swap - 25.7 -
25.7 Foreign exchange contracts on fuel 1.1 0.3 - 1.4 Long-term
debt(1) 9.7 1,228.4 3,770.1 5,008.2
-------------------------------------- (1) Includes principal on
long-term debt and undiscounted payments on capital leases 15
Additions to investments and other assets Additions to investment
and other assets includes the acquisition of locomotives and
freight car assets of $20.9 million and $213.0 million for the
three and nine months ended September 30, 2008, respectively (three
and nine months ended September 30, 2007 - $2.6 million and 14.5
million, respectively). These assets were purchased in anticipation
of a sale and lease back arrangement with a financial institution.
16 Stock-based compensation In 2008, under CP's stock option plans,
the Company issued 1,360,800 options to purchase Common Shares at
the weighted average price of $71.59 per share, based on the
closing price on the grant date. In tandem with these options,
425,850 stock appreciation rights were issued at the weighted
average exercise price of $71.53. 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. Other options only
vest if certain performance targets are achieved and expire
approximately five years after the grant date. The following is a
summary of the Company's fixed stock option plans as of September
30 (including options granted under the Directors' Stock Option
Plan, which was suspended in 2003): 2008 2007
----------------------- ----------------------- Weighted Weighted
average average Number of exercise Number of exercise options price
options price ----------------------- -----------------------
Outstanding, January 1 6,981,108 43.97 6,815,494 $ 38.50 New
options granted 1,360,800 71.59 1,304,200 62.60 Exercised (531,860)
34.49 (934,381) 31.99 Forfeited/cancelled (91,450) 47.78 (165,855)
36.16 ----------- ----------- Outstanding, September 30 7,718,598
49.45 7,019,458 $ 43.90 -----------------------
----------------------- -----------------------
----------------------- Options exercisable at September 30
4,608,798 38.39 4,068,654 $ 34.08 -----------------------
----------------------- -----------------------
----------------------- 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. Under the
fair value method, the fair value of options at the grant date was
$14.1 million for options issued in the first nine months of 2008
(first nine months of 2007 - $11.3 million). The weighted average
fair value assumptions were approximately: For the nine months
ended September 30 2008 2007 ------------------ Expected option
life (years) 4.39 4.00 Risk-free interest rate 3.54% 3.90% Expected
stock price volatility 22% 22% Expected annual dividends per share
$ 0.99 $ 0.90 Weighted average fair value of options granted during
the year $ 15.12 $ 12.97 ------------------ 17 Pensions and other
benefits The total benefit cost for the Company's defined benefit
pension plans and post-retirement benefits for the three months
ended September 30, 2008, was $21.6 million (three months ended
September 30, 2007 - $15.9 million) and for the nine months ended
September 30, 2008, was $58.9 million (nine months ended September
30, 2007 - $68.6 million). 18 Significant customers During the
first nine months of 2008, one customer comprised 11.9% of total
revenue (first nine months of 2007 - 11.6%). At September 30, 2008,
that same customer represented 4.7% of total accounts receivable
(September 30, 2007 - 6.0%). 19 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 September 30, 2008,
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. During
the quarter ended March 31, 2008, the Canadian Transportation
Agency announced a Decision directing a downward adjustment of the
railway maximum revenue entitlement for movement of regulated grain
under the Canada Transportation Act, for the period from August 1,
2007 to July 31, 2008. The Company has applied to the Federal Court
of Appeal for leave to appeal the decision. The appeal was heard on
October 15 and 16, 2008, and the decision is outstanding at this
time. A provision considered adequate by management is maintained
for the prospective adjustment. The retroactive component of the
adjustment, relating to the period from August 1, 2007 to February
19, 2008, which is estimated to be $23 million, is not considered
to be legally supportable and as such a provision has not been
made. Capital commitments At September 30, 2008, the Company had
multi-year capital commitments of $570.5 million, mainly for
locomotive overhaul agreements, in the form of signed contracts.
Payments for these commitments are due in 2008 through 2022.
Operating lease commitments At September 30, 2008, minimum payments
under operating leases were estimated at $717.0 million in
aggregate, with annual payments in each of the next five years of:
2008 - $37.9 million; 2009 - $120.9 million; 2010 - $98.9 million;
2011 - $86.8 million; 2012 - $80.2 million. Guarantees At September
30, 2008, the Company had residual value guarantees on operating
lease commitments of $248.2 million. In addition, the Company had
residual value guarantees of $12.1 related to the Company's
investment in the DM&E, which include minimum lease payments of
$68.0 million, residual value guarantees of $12.1 million, and a
line of credit of US$25 million. The maximum amount that could be
payable under these and all of the Company's other guarantees
cannot be reasonably estimated due to the nature of certain of the
guarantees. All or a portion of amounts paid under certain
guarantees could be recoverable from other parties or through
insurance. The Company has accrued for all guarantees that it
expects to pay. At September 30, 2008, these accruals amounted to
$6.1 million. 20 Capital disclosures The Company's objectives when
managing its capital are: - to maintain a flexible capital
structure which optimizes the cost of capital at acceptable risk
while providing an appropriate return to its shareholders; - to
manage capital in a manner which balances the interests of equity
and debt holders; - to manage capital in a manner that will
maintain compliance with its financial covenants; - to manage its
long term financing structure to maintain its investment grade
rating; and - to maintain a strong capital base so as to maintain
investor, creditor and market confidence and to sustain future
development of the business. The Company defines its capital as
follows: - shareholders' equity; - long-term debt, including the
current portion thereof; and - short-term borrowing. The Company
manages its capital structure and makes adjustments to it in
accordance with the aforementioned objectives, as well as in light
of changes in economic conditions and the risk characteristics of
the underlying assets. In order to maintain or adjust its capital
structure, the Company may adjust the amount of dividends paid to
shareholders, purchase shares for cancellation pursuant to normal
course issuer bids, issue new shares, issue new debt, and/or issue
new debt to replace existing debt with different characteristics.
The Company monitors capital using a number of key financial
metrics, including: - net-debt to net-debt-plus-equity ratio; and -
interest coverage ratio: earnings before interest and taxes
("EBIT") to interest expense. Both of these metrics have no
standardized meanings prescribed by GAAP and, therefore, are
unlikely to be comparable to similar measures of other companies.
The calculations for the aforementioned key financial metrics are
as follows: Net-debt to net-debt-plus-equity ratio
-------------------------------------- Net debt, which is a
non-GAAP measure, is the sum of long-term debt, long-term debt
maturing within one year and short-term borrowing, less cash and
short-term investments. This sum is divided by total net debt plus
total shareholders' equity as presented on our Consolidated Balance
Sheet. Interest coverage ratio ----------------------- EBIT, which
is a non-GAAP measure that is calculated, on a twelve month rolling
basis, as revenues less operating expenses, less other income and
charges, plus equity income in DM&E, divided by interest
expense. The ratio excludes changes in the estimated fair value of
the Company's investment in ABCP as these are not in the normal
course of business. The following table illustrates the financial
metrics and their corresponding guidelines currently in place:
---------------------------------------------------------------------
September September (in millions) Guidelines 30, 2008 30, 2007
---------------------------------------------------------------------
Long-term debt $ 4,140.4 $ 2,896.4 Long-term debt maturing within
one year 248.4 30.9 Short-term borrowing 280.0 - Less: Cash and
cash equivalents (97.9) (339.2)
---------------------------------------------------------------------
Net Debt(1) $ 4,570.9 $ 2,588.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Shareholders' equity $ 5,805.3 $ 5,161.1 Net debt 4,570.9 2,588.1
---------------------------------------------------------------------
Net Debt plus Equity(1) $ 10,376.2 $ 7,749.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenues less operating expenses(2) $ 1,058.0 $ 1,179.4 Less: Other
income and charges(2) (22.9) (27.5) Plus: Equity income in
DM&E(2) 53.2 -
---------------------------------------------------------------------
EBIT(1)(2) $ 1,088.3 $ 1,151.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Net debt $ 4,570.9 $ 2,588.1 Net debt plus equity $ 10,376.2 $
7,749.2
---------------------------------------------------------------------
Net-debt to Net-debt-plus- equity(1) No more than 50.0% 44.1% 33.4%
---------------------------------------------------------------------
---------------------------------------------------------------------
EBIT $ 1,088.3 $ 1,151.9 Interest expense $ 250.7 $ 190.7
---------------------------------------------------------------------
Interest Coverage Ratio(1)(2) No less than 4.0 4.3 6.0
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) These earnings measures have no standardized meanings
prescribed by GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. (2) The balance is calculated
on a rolling twelve month basis. The Company's financial objectives
and strategy as described above have remained substantially
unchanged over the last two fiscal years. The objectives are
reviewed on an annual basis and financial metrics and their
guidelines are monitored on a quarterly basis. The interest
coverage ratio has decreased during 2008 due to a reduction in year
over year earnings and an increase in interest expense associated
with the debt assumed in the acquisition of the DM&E. The
Company believes that both the interest coverage and net debt to
net debt plus equity ratios remain within reasonable limits, in
light of the relative size of the Company and its capital
management objectives. The Company is also subject to a financial
covenant 'of funded debt to total capitalization' in the revolver
loan agreement and the bridge financing agreement obtained for the
acquisition of DM&E. Performance to this financial covenant is
well within limits. The Company remains in compliance with all
financial covenants. Summary of Rail Data --------------------
Third Quarter --------------------------------------------------
2008 2007 Variance %
-------------------------------------------------- Financial
(millions, except per share data and ratios) ----------------------
Revenues -------- Freight revenue $ 1,239.5 $ 1,147.6 $ 91.9 8.0
Other revenue 25.2 40.3 (15.1) (37.5)
------------------------------------- 1,264.7 1,187.9 76.8 6.5
------------------------------------- Operating Expenses
------------------ Compensation and benefits 312.3 313.5 (1.2)
(0.4) Fuel 275.8 185.6 90.2 48.6 Materials 49.3 49.6 (0.3) (0.6)
Equipment rents 44.4 49.6 (5.2) (10.5) Depreciation and
amortization 120.8 118.0 2.8 2.4 Purchased services and other 158.9
149.9 9.0 6.0 ------------------------------------- 961.5 866.2
95.3 11.0 ------------------------------------- Operating income
303.2 321.7 (18.5) (5.8) Equity income (net of tax) in Dakota,
Minnesota & Eastern Railroad Corporation (DM&E) (16.5) -
(16.5) - Other charges 2.8 8.1 (5.3) (65.4) Interest expense 64.5
44.9 19.6 43.7 Income tax expense before foreign exchange (gains)
losses on long-term debt and other specified items(1) 66.0 78.4
(12.4) (15.8) ------------------------------------- Income before
foreign exchange (gains) losses on long-term debt and other
specified items(1) 186.4 190.3 (3.9) (2.0)
------------------------------------- Foreign exchange (gains)
losses on long-term debt (FX on LTD) ------------------------- FX
on LTD 2.9 (64.3) 67.2 - Income tax on FX on LTD(2) (9.0) 21.0
(30.0) - ------------------------------------- FX on LTD (net of
tax) (6.1) (43.3) 37.2 - Other specified items
--------------------- Change in estimated fair value of Canadian
third party asset-backed commercial paper (ABCP) 28.1 21.5 6.6 -
Income tax on special charges (8.3) (6.5) (1.8) -
------------------------------------- Change in estimated fair
value of ABCP (net of tax) 19.8 15.0 4.8 - Income tax benefits due
to rate reductions on opening future income tax balances - - - -
------------------------------------- Net income $ 172.7 $ 218.6 $
(45.9) (21.0) -------------------------------------
------------------------------------- Earnings per share (EPS)
------------------------ Basic earnings per share $ 1.12 $ 1.43 $
(0.31) (21.7) Diluted earnings per share $ 1.11 $ 1.41 $ (0.30)
(21.3) EPS before FX on LTD and other specified items(1)
-------------------- Basic earnings per share $ 1.21 $ 1.24 $
(0.03) (2.4) Diluted earnings per share $ 1.20 $ 1.23 $ (0.03)
(2.4) Weighted average (avg)number of shares outstanding (millions)
153.8 153.2 0.6 0.4 Weighted avg number of diluted shares
outstanding (millions) 155.1 155.0 0.1 0.1 Operating ratio(1)(3)(%)
76.0 72.9 3.1 - ROCE before FX on LTD and other specified items
(after tax)(1)(3)(%) 9.1 10.4 (1.3) - Net debt to net debt plus
equity(%) 44.1 33.4 10.7 - EBIT before FX on LTD and other
specified items(1)(3)(millions) $ 316.9 $ 313.6 $ 3.3 1.1 EBITDA
before FX on LTD and other specified items(1)(3)(millions) $ 437.7
$ 431.6 $ 6.1 1.4 Year-to-date
-------------------------------------------------- 2008 2007
Variance % --------------------------------------------------
Financial (millions, except per share data and ratios)
---------------------- Revenues -------- Freight revenue $ 3,557.0
$ 3,412.6 $ 144.4 4.2 Other revenue 74.9 106.7 (31.8) (29.8)
------------------------------------- 3,631.9 3,519.3 112.6 3.2
------------------------------------- Operating Expenses
------------------ Compensation and benefits 956.1 975.8 (19.7)
(2.0) Fuel 766.3 550.5 215.8 39.2 Materials 171.3 167.6 3.7 2.2
Equipment rents 136.4 162.4 (26.0) (16.0) Depreciation and
amortization 365.4 355.7 9.7 2.7 Purchased services and other 483.9
448.6 35.3 7.9 ------------------------------------- 2,879.4
2,660.6 218.8 8.2 ------------------------------------- Operating
income 752.5 858.7 (106.2) (12.4) Equity income (net of tax) in
Dakota, Minnesota & Eastern Railroad Corporation (DM&E)
(40.9) - (40.9) - Other charges 14.4 21.1 (6.7) (31.8) Interest
expense 187.3 140.9 46.4 32.9 Income tax expense before foreign
exchange (gains) losses on long-term debt and other specified
items(1) 138.5 209.0 (70.5) (33.7)
------------------------------------- Income before foreign
exchange (gains) losses on long-term debt and other specified
items(1) 453.2 487.7 (34.5) (7.1)
------------------------------------- Foreign exchange (gains)
losses on long-term debt (FX on LTD) ------------------------- FX
on LTD 12.4 (161.5) 173.9 - Income tax on FX on LTD(2) (12.4) 47.4
(59.8) - ------------------------------------- FX on LTD (net of
tax) - (114.1) 114.1 - Other specified items ---------------------
Change in estimated fair value of Canadian third party asset-backed
commercial paper (ABCP) 49.4 21.5 27.9 - Income tax on special
charges (14.6) (6.5) (8.1) - -------------------------------------
Change in estimated fair value of ABCP (net of tax) 34.8 15.0 19.8
- Income tax benefits due to rate reductions on opening future
income tax balances - (17.1) 17.1 -
------------------------------------- Net income $ 418.4 $ 603.9 $
(185.5) (30.7) -------------------------------------
------------------------------------- Earnings per share (EPS)
------------------------ Basic earnings per share $ 2.72 $ 3.91 $
(1.19) (30.4) Diluted earnings per share $ 2.70 $ 3.87 $ (1.17)
(30.2) EPS before FX on LTD and other specified items(1)
-------------------- Basic earnings per share $ 2.95 $ 3.16 $
(0.21) (6.6) Diluted earnings per share $ 2.92 $ 3.13 $ (0.21)
(6.7) Weighted average (avg) number of shares outstanding
(millions) 153.6 154.3 (0.7) (0.5) Weighted avg number of diluted
shares outstanding (millions) 155.2 155.9 (0.7) (0.4) Operating
ratio(1)(3)(%) 79.3 75.6 3.7 - ROCE before FX on LTD and other
specified items (after tax)(1)(3)(%) 9.1 10.4 (1.3) - Net debt to
net debt plus equity(%) 44.1 33.4 10.7 - EBIT before FX on LTD and
other specified items(1)(3)(millions) $ 779.0 $ 837.6 $ (58.6)
(7.0) EBITDA before FX on LTD and other specified
items(1)(3)(millions) $ 1,144.4 $ 1,193.3 $ (48.9) (4.1) (1) These
earnings measures have no standardized meanings prescribed by GAAP
and may not be comparable to similar measures of other companies.
See note on non-GAAP earnings measures attached to commentary. (2)
Income tax on FX on LTD is discussed in the MD&A in the "Other
Income Statement Items" section - "Income Taxes". (3) 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
after-tax interest expense (last 12 months) divided by average net
debt plus equity. Operating ratio: Operating expenses divided by
revenues. Third Quarter
-------------------------------------------------- 2008 2007
Variance % --------------------------------------------------
Commodity Data -------------- Freight Revenues (millions) - Grain $
227.5 $ 237.8 $ (10.3) (4.3) - Coal 155.5 148.7 6.8 4.6 - Sulphur
and fertilizers 122.5 113.9 8.6 7.6 - Forest products 65.7 68.0
(2.3) (3.4) - Industrial and consumer products 197.4 159.3 38.1
23.9 - Automotive 83.1 71.4 11.7 16.4 - Intermodal 387.8 348.5 39.3
11.3 ------------------------------------- Total Freight Revenues $
1,239.5 $ 1,147.6 $ 91.9 8.0 -------------------------------------
Millions of Revenue Ton-Miles (RTM) - Grain 6,491 7,614 (1,123)
(14.7) - Coal 5,455 5,400 55 1.0 - Sulphur and fertilizers 4,722
4,967 (245) (4.9) - Forest products 1,458 1,867 (409) (21.9) -
Industrial and consumer products 4,649 4,228 421 10.0 - Automotive
530 566 (36) (6.4) - Intermodal 7,381 7,907 (526) (6.7)
------------------------------------- Total RTMs 30,686 32,549
(1,863) (5.7) ------------------------------------- Freight Revenue
per RTM (cents) - Grain 3.50 3.12 0.38 12.2 - Coal 2.85 2.75 0.10
3.6 - Sulphur and fertilizers 2.59 2.29 0.30 13.1 - Forest products
4.51 3.64 0.87 23.9 - Industrial and consumer products 4.25 3.77
0.48 12.7 - Automotive 15.68 12.61 3.07 24.3 - Intermodal 5.25 4.41
0.84 19.0 Freight Revenue per RTM 4.04 3.53 0.51 14.4 Carloads
(thousands) - Grain 87.7 100.9 (13.2) (13.1) - Coal 70.3 70.7 (0.4)
(0.6) - Sulphur and fertilizers 45.4 47.6 (2.2) (4.6) - Forest
products 23.9 28.1 (4.2) (14.9) - Industrial and consumer products
84.3 78.0 6.3 8.1 - Automotive 34.5 38.6 (4.1) (10.6) - Intermodal
324.6 323.5 1.1 0.3 ------------------------------------- Total
Carloads 670.7 687.4 (16.7) (2.4)
------------------------------------- Freight Revenue per Carload -
Grain $ 2,594 $ 2,357 $ 237 10.1 - Coal 2,212 2,103 109 5.2 -
Sulphur and fertilizers 2,698 2,393 305 12.7 - Forest products
2,749 2,420 329 13.6 - Industrial and consumer products 2,342 2,042
300 14.7 - Automotive 2,409 1,850 559 30.2 - Intermodal 1,195 1,077
118 11.0 Freight Revenue per Carload $ 1,848 $ 1,669 $ 179 10.7
Year-to-date --------------------------------------------------
2008 2007 Variance %
-------------------------------------------------- Commodity Data
-------------- Freight Revenues (millions) - Grain $ 662.9 $ 681.4
$ (18.5) (2.7) - Coal 468.0 442.4 25.6 5.8 - Sulphur and
fertilizers 391.1 380.8 10.3 2.7 - Forest products 182.1 214.3
(32.2) (15.0) - Industrial and consumer products 550.1 470.0 80.1
17.0 - Automotive 241.9 242.0 (0.1) (0.0) - Intermodal 1,060.9
981.7 79.2 8.1 ------------------------------------- Total Freight
Revenues $ 3,557.0 $ 3,412.6 $ 144.4 4.2
------------------------------------- Millions of Revenue Ton-Miles
(RTM) - Grain 20,764 22,407 (1,643) (7.3) - Coal 16,659 15,817 842
5.3 - Sulphur and fertilizers 15,704 16,057 (353) (2.2) - Forest
products 4,421 5,886 (1,465) (24.9) - Industrial and consumer
products 13,791 12,538 1,253 10.0 - Automotive 1,723 1,850 (127)
(6.9) - Intermodal 21,645 22,257 (612) (2.7)
------------------------------------- Total RTMs 94,707 96,812
(2,105) (2.2) ------------------------------------- Freight Revenue
per RTM (cents) - Grain 3.19 3.04 0.15 4.9 - Coal 2.81 2.80 0.01
0.4 - Sulphur and fertilizers 2.49 2.37 0.12 5.1 - Forest products
4.12 3.64 0.48 13.2 - Industrial and consumer products 3.99 3.75
0.24 6.4 - Automotive 14.04 13.08 0.96 7.3 - Intermodal 4.90 4.41
0.49 11.1 Freight Revenue per RTM 3.76 3.52 0.24 6.8 Carloads
(thousands) - Grain 267.7 281.4 (13.7) (4.9) - Coal 212.3 204.2 8.1
4.0 - Sulphur and fertilizers 151.1 159.1 (8.0) (5.0) - Forest
products 71.5 88.1 (16.6) (18.8) - Industrial and consumer products
251.6 232.9 18.7 8.0 - Automotive 110.9 126.7 (15.8) (12.5) -
Intermodal 936.4 923.0 13.4 1.5
------------------------------------- Total Carloads 2,001.5
2,015.4 (13.9) (0.7) ------------------------------------- Freight
Revenue per Carload - Grain $ 2,476 $ 2,421 $ 55 2.3 - Coal 2,204
2,167 37 1.7 - Sulphur and fertilizers 2,588 2,393 195 8.1 - Forest
products 2,547 2,432 115 4.7 - Industrial and consumer products
2,186 2,018 168 8.3 - Automotive 2,181 1,910 271 14.2 - Intermodal
1,133 1,064 69 6.5 Freight Revenue per Carload $ 1,777 $ 1,693 $ 84
5.0 Third Quarter
-------------------------------------------------- 2008 2007
Variance % --------------------------------------------------
Operations and Productivity -------------- Freight gross ton-miles
(GTM)(millions) 59,866 62,177 (2,311) (3.7) Revenue ton-miles
(RTM)(millions) 30,686 32,549 (1,863) (5.7) Average number of
active employees 16,329 16,136 193 1.2 Number of employees at end
of period 16,189 16,037 152 0.9 FRA personal injuries per 200,000
employee-hours(1) 1.75 2.08 (0.33) (15.9) FRA train accidents per
million train-miles(1) 1.48 2.39 (0.91) (38.1) Total operating
expenses per RTM(cents) 3.13 2.66 0.47 17.7 Total operating
expenses per GTM(cents) 1.61 1.39 0.22 15.8 Compensation and
benefits expense per GTM(cents) 0.52 0.50 0.02 4.0 GTMs per average
active employee(000) 3,666 3,853 (187) (4.9) Miles of road operated
at end of period(2) 13,007 13,260 (253) (1.9) Average train speed -
AAR definition(mph) 23.9 23.8 0.1 0.4 Terminal dwell time - AAR
definition(hours) 21.3 20.1 1.2 6.0 Car miles per car day 145.2
147.4 (2.2) (1.5) Average daily total cars on-line - AAR
definition(000) 86.1 81.3 4.8 5.9 Average daily active cars
on-line(000)(1) 53.3 55.7 (2.4) (4.3) U.S. gallons of locomotive
fuel per 1,000 GTMs - freight & yard (1) 1.13 1.16 (0.03) (2.6)
U.S. gallons of locomotive fuel consumed - total (millions)(3) 67.1
71.9 (4.8) (6.7) Average foreign exchange rate(US$/Canadian$) 0.966
0.941 0.025 2.7 Average foreign exchange rate(Canadian$/US$) 1.035
1.063 (0.028) (2.6) Year-to-date
-------------------------------------------------- 2008 2007
Variance % --------------------------------------------------
Operations and Productivity -------------- Freight gross ton-miles
(GTM)(millions) 182,124 184,218 (2,094) (1.1) Revenue ton-miles
(RTM)(millions) 94,707 96,812 (2,105) (2.2) Average number of
active employees 15,875 15,633 242 1.5 Number of employees at end
of period 16,189 16,037 152 0.9 FRA personal injuries per 200,000
employee-hours(1) 1.44 1.98 (0.54) (27.3) FRA train accidents per
million train-miles(1) 1.77 2.17 (0.40) (18.4) Total operating
expenses per RTM(cents) 3.04 2.75 0.29 10.5 Total operating
expenses per GTM(cents) 1.58 1.44 0.14 9.7 Compensation and
benefits expense per GTM(cents) 0.52 0.53 (0.01) (1.9) GTMs per
average active employee(000) 11,472 11,784 (312) (2.6) Miles of
road operated at end of period(2) 13,007 13,260 (253) (1.9) Average
train speed - AAR definition(mph) 23.8 23.5 0.3 1.3 Terminal dwell
time - AAR definition(hours) 22.3 21.9 0.4 1.8 Car miles per car
day 143.5 143.1 0.4 0.3 Average daily total cars on-line - AAR
definition(000) 84.3 81.4 2.9 3.6 Average daily active cars
on-line(000)(1) 55.4 57.9 (2.5) (4.3) U.S. gallons of locomotive
fuel per 1,000 GTMs - freight & yard 1.20 1.20 - - U.S. gallons
of locomotive fuel consumed - total (millions)(3) 217.0 221.0 (4.0)
(1.8) Average foreign exchange rate(US$/Canadian$) 0.988 0.897
0.091 10.1 Average foreign exchange rate(Canadian$/US$) 1.012 1.115
(0.103) (9.2) (1) Certain prior period figures have been revised to
conform with current presentation or have been updated to reflect
new information. (2) Excludes track on which CP has haulage rights.
(3) 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, email: ;
Investment Community: Janet Weiss, Assistant Vice-President,
Investor Relations, Tel.: (403) 319-3591, email:
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