CANADIAN PACIFIC RAILWAY LTD/CN
10-Qs,10-Ks and 40-Fs
PROXIES
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Filed on March 16, 2017 |
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Filed on Feb. 29, 2016 |
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(Exact name of Registrant as specified in its charter)
| CANADA | 4011 |
98-0355078
(Canadian Pacific Railway Limited) 98-0001377 (Canadian Pacific Railway Company) |
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(Province or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial Classification
Code Number) |
(I.R.S. Employer Identification Number) |
Suite 500, Gulf Canada Square, 401-9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
(403) 319-7000
(403) 319-7000
(Address and telephone number of Registrant’s principal executive offices)
CT Corporation System, 111 Eighth Avenue, New York, New York 10011, (212) 894-8940
(Name, address (including zip code) and telephone number (including area code) of Agent for
Service of Registrant in the United States)
Service of Registrant in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
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Common Shares, without par value, of
Canadian Pacific Railway Limited |
New York Stock Exchange | |
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Common Share Purchase Rights of
Canadian Pacific Railway Limited |
New York Stock Exchange | |
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Perpetual 4% Consolidated Debenture Stock
of Canadian Pacific Railway Company |
New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Debt Securities
For annual reports, indicate by check mark the information filed with this form:
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x
Annual information form
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x Audited annual financial statements |
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report.
At December 31, 2009, 168,470,143 Common Shares of Canadian Pacific
Railway Limited (“CPRL”) were issued and outstanding. At December 31, 2009, 347,170,009 Ordinary Shares of
Canadian Pacific Railway Company (“CPRC”) were issued and outstanding. All of the ordinary shares of CPRC
are held by CPRL.
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
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YES
x
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NO o |
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (s.232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
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YES
x
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NO o |
2
PRIOR FILINGS MODIFIED AND SUPERSEDED
The Registrants’ Annual Report on Form 40-F for the year ended December 31, 2009, at the time
of filing with the Securities and Exchange Commission (the “Commission”), modifies and supersedes
all prior documents filed pursuant to Sections 13 and 15(d) of the Exchange Act for purposes of any
offers or sales of any securities after the date of such filing pursuant to any Registration
Statement under the Securities Act of 1933 of either Registrant which incorporates by reference
such Annual Report, including without limitation the following: Form S-8 No. 333‑13962 (Canadian
Pacific Railway Limited); Form S-8 No. 333-127943 (Canadian Pacific Railway Limited); and Form S-8
No. 333‑140955 (Canadian Pacific Railway Limited); and Form F-10 No. 333-159945 (Canadian Pacific Railway Limited).
In addition, this Annual Report on Form 40-F is incorporated by reference into or as an
exhibit to, as applicable, the Registration Statement on Form F-9 No. 333-159943 (Canadian Pacific
Railway Company).
ANNUAL INFORMATION FORM, CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS
AND MANAGEMENT’S DISCUSSION AND ANALYSIS
AND MANAGEMENT’S DISCUSSION AND ANALYSIS
A.
Annual Information Form
For the Annual Information Form of the Registrant for the year ended December 31, 2009 see
pages 1 through 41 of the Registrant’s 2009 Annual Information Form incorporated by reference and included herein.
B.
Audited Annual Financial Statements
For consolidated audited financial statements, including the report of the auditors with
respect thereto, see pages 51 through 106 of the Registrant’s 2009 Annual Report incorporated by
reference and included herein. For a reconciliation of important differences between Canadian and
United States generally accepted accounting principles, see
Note 31 — Reconciliation of Canadian
and United States generally accepted accounting principles on
pages 101 through 106 of such 2009 Annual
Report.
C.
Management’s Discussion and Analysis
For management’s discussion
and analysis, see pages 4 through 49 of the Registrant’s 2009
Annual Report incorporated by reference and included herein.
For the purposes of this Annual
Report on Form 40-F, only pages 4 through 106 of the
Registrant’s 2009 Annual Report referred to above shall be deemed filed, and the balance of such
2009 Annual Report, except as it may be otherwise specifically incorporated by reference in the
Registrant’s Annual Information Form, shall be deemed not filed with the Securities and Exchange
Commission as part of this Annual Report on Form 40-F under the Exchange Act.
DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2009, an evaluation was carried out under the supervision of and with the
participation of the Registrants’ management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Registrants’ disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and
procedures were effective as of December 31, 2009, to ensure that information required to be
disclosed by the Registrants in reports that they file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in the Commission
rules and forms and (ii) accumulated and communicated to the Registrants’ management, including
their Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
3
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
For management’s report on
internal control over financial reporting, see page 51 of the
Registrant’s 2009 Annual Report, incorporated by reference and included herein.
The effectiveness of the
Registrants’ internal control over financial reporting as of December 31, 2009 has been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in their report on page 52 of the Registrant’s 2009 Annual Report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the period covered by this Annual Report on Form 40-F, no changes occurred in the
Registrants’ internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Registrants’ internal control over financial reporting.
CODE OF ETHICS
A
. The Registrants’ Code of Business Ethics specifically addresses, among other things, conflicts
of interest, protection and proper use of corporate assets and opportunities, confidentiality of
corporate information, fair dealing with third parties, compliance with laws, rules and regulations
and reporting of illegal or unethical behavior. The Code applies to all directors, officers and
employees, both unionized and non-unionized, of the Registrants and their subsidiaries in Canada,
the U.S. and elsewhere, and forms part of the terms and conditions of employment of all such
individuals. All Directors have signed acknowledgements that they have read, understood and agree
to comply with the Code. The Registrant conducts mandatory on-line ethics training for officers
and non-union employees. As part of the on-line ethics training, officers and non-union employees
are required to acknowledge that they have read, understood and agree to comply with the Code.
Contractors engaged on behalf of the Registrants or their subsidiaries must undertake, as a
condition of their engagement, to adhere to principles and standards of business conduct consistent
with those set forth in the Code. The Code is available on the Registrants’ web site at
www.cpr.ca
and in print to any shareholder who requests it. All amendments to the Code, and all waivers of
the Code with respect to any director or executive officer of the Registrants, will be posted on
the Registrants’ web site and provided in print to any shareholder who requests them.
B.
In addition, the Registrants adopted a Code of Ethics for Chief Executive Officer and Senior
Financial Officers in 2003. This code applies to the Registrants’ President and Chief Executive
Officer, the Executive Vice-President and Chief Financial Officer and the Vice-President and
Comptroller. It is available on the Registrants’ web site at
www.cpr.ca
and in print to any
shareholder who requests it. All amendments to the code, and all waivers of the code with respect
to any of the officers covered by it, will be posted on the Registrants’ web site and provided in
print to any shareholder who requests them.
4
CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES
The Registrants last amended their Corporate Governance Principles and Guidelines in December
2008 to include discretionary term limits of between five and seven years of service as Board or
Board Committee Chair and to change the mandatory retirement age for directors from seventy (70) to
seventy-two (72). These principles and guidelines pertain to such matters as, but are not limited
to: director qualification standards and responsibilities; election of directors; access by
directors to management and independent advisors; director compensation; director orientation and
continuing education; management succession; and annual performance evaluations of the board,
including its committees and individual directors, and of the Chief Executive Officer. The
Corporate Governance Principles and Guidelines are available on the Registrants’ web site at
www.cpr.ca
and in print to any shareholder who requests them.
COMMITTEE TERMS OF REFERENCE
The terms of reference of each of the following committees of the Registrants are available on
the Registrants’ web site at
www.cpr.ca
and in print to any shareholder who requests them: the
Audit, Finance and Risk Management Committee; the Corporate Governance and Nominating Committee;
the Management Resources and Compensation Committee; the Health, Safety, Security and Environment
Committee; and the Pension Committee.
DIRECTOR INDEPENDENCE
The boards of the Registrants have adopted standards for director independence: (a) prescribed
by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated thereunder and National
Instrument 52-110 for members of public company audit committees; and (b) set forth in the NYSE
Listed Company Manual (the “NYSE Standards”), the Canadian corporate governance standards set forth
in National Instrument 58-101 and National Instrument 52-110 in respect of public company
directors. The boards also conducted a comprehensive assessment of each of their members as
against these standards and determined that all current directors, except F.J. Green, have no
material relationship with the Registrants and are independent. Mr. Green is not independent by
virtue of the fact that he is the Chief Executive Officer of the Registrants.
EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS
The independent directors met in executive sessions without management present at the
beginning and end of each meeting of the board of directors as well as at the beginning and end of
each committee meeting.
Interested parties may communicate directly with Mr. J.E. Cleghorn, the chair of the boards of
the Registrants, who presided at such executive sessions, by writing to him at the following
address, and all communications received at this address will be forwarded to him:
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Office of the Corporate Secretary
Canadian Pacific Railway Suite 920, 401 – 9 th Avenue S.W. Calgary, Alberta Canada, T2P 4Z4 |
5
AUDIT COMMITTEE FINANCIAL EXPERT
The following individuals comprise the current membership of the Registrants’ Audit, Finance
and Risk Management Committees (“Audit Committees”), which have been established in accordance with
Section 3(a)(58)(A) of the Exchange Act:
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Krystyna T. Hoeg
Richard C. Kelly John P. Manley Roger Phillips David W. Raisbeck Michael W. Wright |
Each of the aforementioned directors has been determined by the boards of the Registrants to
meet the audit committee financial expert criteria prescribed by the Securities and Exchange
Commission and has been designated as an audit committee financial expert for the Audit Committees
of the boards of both Registrants. Each of the aforementioned directors has also been determined
by the boards of the Registrants to be independent within the criteria referred to above under the
subheading “Director Independence” including the NYSE Standards.
FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS
The boards of the Registrants have determined that all members of the Audit Committees, have
“accounting or related financial management expertise” within the meaning of the NYSE Standards.
The boards have determined that all members of the Audit Committees are financially literate within
the definition contained in, and as required by, National Instrument 52-110 and the NYSE Standards.
SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
Each Registrant’s board has determined that no director who serves on more than two public
company audit committees in addition to its own Audit Committee shall be eligible to serve as a
member of the Audit Committee of that Registrant, unless that Registrant’s board determines that
such simultaneous service would not impair the ability of such member to effectively serve on that
Registrant’s Audit Committee. For purposes of calculating the aggregate number of public company
audit committees on which a director serves, each Registrant is counted as a separate public
company.
Effective May 2010, no member of the Audit Committees of the Registrants will serve on more
than two public company audit committees in addition to the Audit Committee of either Registrant.
During 2009, Krystyna T. Hoeg served on two public company audit committees, in addition to the
Audit Committees of the two Registrants. The boards of the Registrants have determined that the
service of Ms. Hoeg on the audit committees of two public companies in addition to the two
Registrants did not impair her ability to effectively serve on the Audit Committees of the
Registrants, for the following reasons:
| • | Two of the public company audit committees on which Ms. Hoeg served are the Audit Committees of the Registrants. As Canadian Pacific Railway Company is a wholly-owned subsidiary of Canadian Pacific Railway Limited, and the latter company carries on no business operations and has no assets or liabilities of more than nominal value beyond its 100% shareholding in Canadian Pacific Railway Company, the workload of the Audit Committees is essentially equivalent to the workload of one public company audit committee; and |
| • | Ms. Hoeg, is the former chief executive officer of a large public company and the former chief financial officer of a large public company and has been designated as an audit committee financial expert for the Registrants. As a result, she no longer has any day-to-day executive or managerial responsibilities and, in |
6
| addition, brings to her role on the Audit Committees of the Registrants considerable business experience and a highly-focused and effective approach to audit-related matters. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees payable to the Registrants’
independent auditors, PricewaterhouseCoopers LLP for the
years ended December 31, 2009, and December 31, 2008, totaled $3,396,200 and $3,195,200,
respectively, as detailed in the following table:
| Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||
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Audit Fees
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$ | 2,176,800 | $ | 2,044,700 | ||||
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Audit-Related Fees
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$ | 794,800 | $ | 808,600 | ||||
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Tax Fees
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$ | 424,600 | $ | 341,900 | ||||
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All Other Fees
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$ | 0 | $ | 0 | ||||
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TOTAL
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$ | 3,396,200 | $ | 3,195,200 | ||||
The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
Audit Fees
Audit fees were for professional services rendered for the audit of the Registrants’ annual
financial statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditor’s report on the
effectiveness of internal controls over financial reporting.
Audit-Related Fees
Audit-related fees were for attestation and related services reasonably related to the performance
of the audit or review of the annual financial statements, but which are not reported under “Audit
Fees” above. These services consisted of: the audit or review of financial statements of certain
subsidiaries and of various pension and benefits plans of the Registrants; special attestation
services as may be required by various government entities; access fees for technical accounting
database resources; and general advice and assistance related to accounting and/or disclosure
matters with respect to new and proposed Canadian, US and International accounting standards,
securities regulations, and/or laws.
Tax Fees
Tax fees were for professional services related to tax compliance, tax planning and tax advice.
These services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding corporate tax audits; tax planning and advisory services relating to common
forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax,
and valued added tax); and access fees for taxation database resources.
All Other Fees
Fees disclosed under this category would be for products and services other than those described
under “Audit Fees”, “Audit-Related Fees” and “Tax Fees” above. In both 2009 and 2008, there were
no services in this category.
7
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS
INDEPENDENT AUDITORS
The Audit Committee of each Registrant has adopted a written policy governing the pre-approval
of audit and non-audit services to be provided to the Registrants by their independent auditors.
The policy is reviewed annually and the audit and non-audit services to be provided by their
independent auditors, as well as the budgeted amounts for such services, are pre-approved at that
time. The Vice-President and Comptroller of the Registrants must submit to the Audit Committee
at least quarterly a report of all services performed or to be performed by the
independent auditors pursuant to the policy. Any additional audit or non-audit services to be
provided by the independent auditors either not included among the pre-approved services or
exceeding the budgeted amount for such pre-approved services by more than 10% must be individually
pre-approved by the Audit Committee or its Chairman, who must report all such additional
pre-approvals to the Audit Committee at its next meeting following the granting thereof. The
independent auditors’ annual audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. In addition, prior to the granting of any pre-approval, the
Audit Committee or its Chairman, as the case may be, must be satisfied that the performance of the
services in question will not compromise the independence of the independent auditors. The Chief
Internal Auditor for the Registrants monitors compliance with this policy.
OFF-BALANCE SHEET ARRANGEMENTS
A
description of the Registrants’ off-balance sheet arrangements
is set forth on page 36 of the
Registrants’ 2009 Annual Report incorporated by reference and included herein.
TABLE OF CONTRACTUAL COMMITMENTS
The table setting forth the Registrants’
contractual commitments is set forth on page 37 of the
Registrants’ 2009 Annual Report incorporated by reference and included herein.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A.
Undertaking
Each Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so
by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities.
B.
Consent to Service of Process
Each Registrant has previously filed a Form F-X in connection with the class of securities to
which the obligation to file this report arises. Any change to the name or address of the agent
for service of process of either Registrant shall be communicated promptly to the Commission by an
amendment to the Form F-X referencing the file number of such Registrant.
8
SIGNATURES
Pursuant to the requirements of the Exchange Act, each Registrant certifies that it meets all
of the requirements for filing on Form 40-F and has duly caused this Annual Report on Form 40-F to
be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary,
Province of Alberta, Canada.
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CANADIAN PACIFIC RAILWAY LIMITED CANADIAN PACIFIC RAILWAY COMPANY (Registrants) |
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| /s/ Karen L. Fleming | ||||
| Name: | Karen L. Fleming | |||
| Title: | Corporate Secretary | |||
| Date: | March 19, 2010 | |||
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| EXHIBITS | ||
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99.1
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Consent of PricewaterhouseCoopers, Independent Auditors. | |
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99.2
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Certification by the Chief Executive Officer of the Registrants filed pursuant to Rule 13a-14(a) of the Exchange Act. | |
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99.3
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Certification by Chief Financial Officer of the Registrants filed pursuant to Rule 13a-14(a) of the Exchange Act. | |
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99.4
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Certification by the Chief Executive Officer of the Registrants furnished pursuant to 18 U.S.C. Section 1350. | |
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99.5
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Certification by the Chief Financial Officer of the Registrants filed pursuant to 18 U.S.C. Section 1350. |
10
Annual Information Form 2009
Table of Contents
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SECTION 1: CORPORATE STRUCTURE
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1.1 NAME, ADDRESS AND INCORPORATION INFORMATION
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2 | |||
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SECTION 2: INTERCORPORATE RELATIONSHIPS
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2.1 PRINCIPAL SUBSIDIARIES
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3 | |||
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SECTION 3: GENERAL DEVELOPMENTS OF THE BUSINESS
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3.1 RECENT DEVELOPMENTS
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4 | |||
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SECTION 4: DESCRIPTION OF THE BUSINESS
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4.1 OUR BACKGROUND AND NETWORK
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5 | |||
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4.2 STRATEGY
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5 | |||
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4.3 PARTNERSHIPS, ALLIANCES AND NETWORK EFFICIENCY
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5 | |||
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4.4 NETWORK AND RIGHT-OF-WAY
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6 | |||
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4.5 QUARTERLY TRENDS
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9 | |||
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4.6 BUSINESS CATEGORIES
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9 | |||
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4.7 REVENUES
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9 | |||
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4.8 RAILWAY PERFORMANCE
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12 | |||
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4.9 FRANCHISE INVESTMENT
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14 | |||
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4.10 INTEGRATED OPERATING PLAN (“IOP”)
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14 | |||
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4.11 INFORMATION TECHNOLOGY
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15 | |||
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4.12 LABOUR PRODUCTIVITY AND EFFICIENCY
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16 | |||
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4.13 BUSINESS RISKS AND ENTERPRISE RISK MANAGEMENT
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16 | |||
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4.14 INDEMNIFICATIONS
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16 | |||
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4.15 SAFETY
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17 | |||
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4.16 ENVIRONMENTAL PROTECTION
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17 | |||
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4.17 INSURANCE
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18 | |||
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SECTION 5: DIVIDENDS
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5.1 DECLARED DIVIDENDS AND DIVIDEND POLICY
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19 | |||
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SECTION 6: CAPITAL STRUCTURE
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6.1 DESCRIPTION OF CAPITAL STRUCTURE
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20 | |||
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6.2 SECURITY RATINGS
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21 | |||
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SECTION 7: MARKET FOR SECURITIES
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7.1 STOCK EXCHANGE LISTINGS
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23 | |||
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7.2 TRADING PRICE AND VOLUME
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23 | |||
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SECTION 8: DIRECTORS AND OFFICERS
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8.1 DIRECTORS
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24 | |||
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8.2 CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS
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25 | |||
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8.3 SENIOR OFFICERS
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26 | |||
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8.4 SHAREHOLDINGS OF DIRECTORS AND OFFICERS
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28 | |||
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SECTION 9: LEGAL PROCEEDINGS
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29 | |||
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SECTION 10: TRANSFER AGENT
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10.1 TRANSFER AGENT
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30 | |||
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SECTION 11: INTERESTS OF EXPERTS
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31 | |||
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SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
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12.1 COMPOSITION OF THE AUDIT, FINANCE AND RISK MANAGEMENT
COMMITTEE AND RELEVANT EDUCATION AND EXPERIENCE
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32 | |||
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12.2 PRE-APPROVAL OF POLICIES AND PROCEDURES
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33 | |||
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12.3 AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE CHARTER
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33 | |||
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12.4 AUDIT AND NON-AUDIT FEES AND SERVICES
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38 | |||
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SECTION 13: FORWARD LOOKING INFORMATION
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40 | |||
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SECTION 14: ADDITIONAL INFORMATION
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14.1 ADDITIONAL COMPANY INFORMATION
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41 |
All dollar amounts in this Annual Information Form (“AIF”) are in Canadian dollars, unless
otherwise noted.
March 15, 2010
1
SECTION 1: CORPORATE STRUCTURE
In this AIF, “our”, “us”, “we”, “CP” and “the Company” refer to Canadian Pacific Railway
Limited (“CPRL”), CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or
more of CPRL’s subsidiaries, as the context may require.
1.1 Name, Address and Incorporation Information
Canadian Pacific Railway Limited was incorporated on June 22, 2001, as 3913732 Canada Inc. pursuant
to the
Canada Business Corporations Act
(“the CBCA”). On July 20, 2001, CP amended its Articles of
Incorporation to change its name to Canadian Pacific Railway Limited. On October 1, 2001, Canadian
Pacific Limited (“CPL”) completed an arrangement (“the Arrangement”) pursuant to section 192 of the
CBCA whereby it distributed to its common shareholders all of the shares of newly formed
corporations holding the assets of four of CPL’s five primary operating divisions. The transfer of
Canadian Pacific Railway Company (“CPRC”), previously a wholly owned subsidiary of CPL, to CPRL was
accomplished as part of a series of steps, pursuant to the terms of the Arrangement.
Our registered, executive and head office is located at Suite 500, 401 — 9th Avenue S.W., Calgary,
Alberta T2P 4Z4.
2
SECTION 2: INTERCORPORATE RELATIONSHIPS
2.1 Principal Subsidiaries
The table below sets out our principal subsidiaries, including the jurisdiction of incorporation
and the percentage of voting and non-voting securities we currently own directly or indirectly:
| Percentage of | ||||||||
| Non-Voting | ||||||||
| Securities | ||||||||
| Percentage of Voting | Beneficially Owned, | |||||||
| Securities Held | or over which | |||||||
| Incorporated under | Directly or | Control or Direction | ||||||
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Principal Subsidiary
(1)
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the Laws of | Indirectly | is Exercised | |||||
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Canadian Pacific Railway Company
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Canada | 100% | Not applicable | |||||
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Soo Line Corporation
(2)
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Minnesota | 100% | Not applicable | |||||
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Soo Line Railroad Company
(3)
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Minnesota | 100% | Not applicable | |||||
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Dakota Minnesota & Eastern Railroad Corporation
(4)
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Delaware | 100% | Not applicable | |||||
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Delaware and Hudson Railway Company, Inc.
(2)
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Delaware | 100% | Not applicable | |||||
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Mount Stephen Properties Inc.
(5)
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Canada | 100% | Not applicable | |||||
| (1) |
This table does not include all of our subsidiaries. The assets and revenues of unnamed subsidiaries did not exceed
10% of the total consolidated assets or total consolidated revenues of CP individually, or 20% of the total consolidated assets or total
consolidated revenues of CP in aggregate.
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| (2) | Indirect wholly owned subsidiary of Canadian Pacific Railway Company. | |
| (3) | Wholly owned subsidiary of Soo Line Corporation. | |
| (4) | Indirect wholly owned subsidiary of the Soo Line Corporation. | |
| (5) | Wholly owned subsidiary of Canadian Pacific Railway Company. |
Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”) was acquired in October 2007 subject
to approval by the US Surface Transportation Board (“STB”)
and is an indirect wholly owned subsidiary of the Soo
Line Corporation. The STB approved the application to acquire control on September 30, 2008. The
official effective date of the final decision was October 30, 2008.
3
SECTION 3: GENERAL DEVELOPMENT OF THE BUSINESS
3.1 Recent Developments
We continually seek to grow the value and scale of our core business through infrastructure-sharing
and joint-service programs with other railways, strategic capital investment programs, strategic
additions and operating plan strategies. Combined with the ongoing improvement of our locomotive
fleet, these strategies facilitate more predictable and fluid train operations between major
terminals.
In 2009, CP was focused on re-evaluating the structure of our business. We continue with cost
reduction strategies including “Execution Excellence for Efficiency” (or “E3”), which was the
beginning of our larger variable cost initiatives, our structural cost reduction initiative and the
application of lean management techniques to our core operation processes.
2009 was also a year to focus on strengthening our balance sheet which included issuing equity in
the first quarter of 2009. As well, we made a cash tender for outstanding debt and issued new debt
to lengthen our maturity profile, smooth our repayment profile and strengthen near term liquidity.
CP managed working capital and opportunistically selling non-core assets.
In the fourth quarter of 2009, CP terminated a contract with a lessee in order to cease
through-train operations over the CP owned rail branchline between Smiths Falls and Sudbury.
Improved train efficiencies now allow us to move this service over our main line rather than using
this bypass route. CP also made a voluntary prepayment to our defined benefit pension plan to
reduce the volatility of future pension funding requirements.
In the third quarter of 2009, the Company sold several significant properties including Windsor
Station in Montreal, Quebec and land in Western Canada for transit purposes. CP will continue to
occupy a portion of Windsor Station through a lease for a 10-year period after the sale.
Also in 2009, the Company completed a sale of a portion of its investment in the Detroit River
Tunnel Partnership (“DRTP”) to its existing partner, reducing the Company’s ownership from 50% to
16.5%. Effective April 1, 2009, the Company discontinued proportionate consolidation and is
accounting for its remaining investment in the DRTP under the equity method of accounting. Running
rights remain unchanged.
The Company assumed control of DM&E on October 30, 2008 following approval of its acquisition of
DM&E by the STB. The addition of DM&E extended CP’s reach and increased its rail network, added
new customers and expanded the service available to customers of both DM&E and CP. Freight
revenues from DM&E are derived principally from transporting grain, industrial products, and coal.
DM&E has the option, but not the obligation, to construct a railway line into the Powder River
Basin (“PRB”) located in Wyoming, the largest thermal coal producing region in the United States.
The decision to construct a railway line into the PRB will be made by the Company based on economic
viability and supported by certain key conditions being met. In 2009, we have integrated DM&E into
most of our major operating systems.
In late 2008, the product design and yield teams were grouped together in the “Strategy & Yield”
department, with the objective of further enhancing margins and service reliability. This combined
group will provide network capability in an effort to optimize demand, product offering, equipment
and track utilization. The development of this coordinated approach to yield and operations
planning is a key element of the larger Strategy & Yield mandate to coordinate CP’s strategy,
yield, product design, interline, business development and network capacity functions.
In mid 2008, CP commenced a review of opportunities to accelerate the realization of benefits
achievable from operating plan efficiency improvements. Known as “E3”, this initiative is intended
to identify opportunities to reduce costs and improve product reliability. Train productivity,
asset utilization, yard and terminal operations, maintenance and product reliability have been the
focus of this review.
During the first half of 2007, we announced our intention to assemble a rail corridor to access the
Alberta Industrial Heartland northeast of Edmonton that serves the Alberta oilsands development.
During 2008, the Company filed its application with the Canadian Transportation Agency to initiate
the regulatory permitting process for construction of the rail corridor.
4
SECTION 4: DESCRIPTION OF THE BUSINESS
4.1 Our Background and Network
CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the Parliament of Canada.
CPRC is one of Canada’s oldest corporations. From our inception 129 years ago, we have developed
into a fully integrated and technologically advanced Class I railway (a railroad earning a minimum
of US$401.4 million in revenues annually) providing rail and intermodal freight transportation
services over a 15,400-mile network serving the principal business centres of Canada, from
Montreal, Quebec, to Vancouver, B.C., and the US Midwest and Northeast regions.
We own approximately 10,700 miles of track. An additional 4,700 miles of track are owned jointly,
leased or operated under trackage rights. Of the total mileage operated, approximately 6,200 miles
are located in western Canada, 2,200 miles in eastern Canada, 5,800 miles in the US Midwest and
1,200 miles in the US Northeast. Our business is based on funnelling railway traffic from feeder
lines and connectors, including secondary and branch lines, onto our high-density mainline railway
network. We have extended our network reach by establishing alliances and connections with other
major Class I railways in North America, which allow us to provide competitive services and access
to markets across North America beyond our own rail network. We also provide service to markets in
Europe and the Pacific Rim through direct access to the Port of Montreal, Quebec, and the Port
Metro Vancouver in Vancouver, B.C., respectively.
Our network accesses the US market directly through three wholly owned subsidiaries: Soo Line
Railroad Company (“Soo Line”), a Class I railway operating in the US Midwest; DM&E, a wholly owned
subsidiary of the Soo Line, which operates in the US Midwest and the Delaware and Hudson Railway
Company, Inc. (“D&H”), which operates between eastern Canada and major US Northeast markets,
including New York City, New York; Philadelphia, Pennsylvania; and Washington, D.C.
4.2 Strategy
Our vision is to become the safest and most fluid railway in North America. Through the ingenuity
of our people, it is our objective to create long-term value for customers, shareholders and
employees. We seek to accomplish this objective through the following three-part strategy:
| • |
generating quality revenue growth by realizing the benefits of demand growth in our
bulk, intermodal and merchandise business lines with targeted infrastructure capacity
investments linked to global trade opportunities;
|
||
| • |
improving productivity by leveraging strategic marketing and operating partnerships,
executing a scheduled railway through our Integrated Operating Plan (“IOP”) and driving
more value from existing assets and resources by improving “fluidity”; and
|
||
| • |
continuing to develop a dedicated, professional and knowledgeable workforce that is
committed to safety and sustainable financial performance through steady improvement in
profitability, increased free cash flow and a competitive return on investment.
|
4.3 Partnerships, Alliances and Network Efficiency
Some customers’ goods may have to travel on more than one railway to reach their final destination.
The transfer of goods between railways can cause delays and service interruptions. Our rail
network connects to other North American rail carriers and, through partnerships, we continue to
co-develop processes and products designed to provide seamless and efficient scheduled train
service to these customers.
We continue to increase the capacity and efficiency of our core franchise through
infrastructure-sharing and joint-service programs with other railways and third parties, strategic
capital investment programs, and operating plan strategies. Combined with the continued
improvement of our locomotive and rail car fleets, these strategies enable us to achieve more
predictable and fluid train operations between major terminals.
Over the past few years Class I railway initiatives have included:
| • | a CP-Canadian National (“CN”) haulage agreement under which we transport CN freight over about 300 miles of CP track in Ontario between Thunder Bay and Franz; | ||
| • | CP-CN initiatives in the Port Metro Vancouver Terminal and B.C. Lower Mainland; | ||
| • | CP-CN directional running operations in the B.C. Fraser Canyon; | ||
| • |
A joint routing agreement with CN to establish a structured plan to direct flows of
interline traffic through the most efficient interchange locations and compliment similar
arrangements with other Class I’s Union Pacific Railroad (“UP”) & Burlington Northern Santa
Fe Railway (“BNSF”); and
|
||
| • |
CP has worked very closely with all the Class I and other carriers that serve Chicago
under the Chicago Region Environmental and Transportation Efficiency (“CREATE”) program.
Class I’s, Amtrak, Metra and switching carriers
|
5
SECTION 4: DESCRIPTION OF THE BUSINESS
| Indiana Harbor Belt Railroad (“IHB”) and Belt Railway of Chicago (“BRC”) have partnered up on CREATE to initiate operating and structural changes that will improve operating efficiency and fluidity in and around Chicago, creating the largest railroad hub in North America. |
We also develop mutually beneficial arrangements with smaller railways, including shortline and
regional carriers.
4.4 Network and Right-of-Way
Our 15,400-mile network extends from the Port Metro Vancouver on Canada’s Pacific Coast to the Port
of Montreal in eastern Canada, and to the US industrial centres of Chicago, Illinois; Newark, New
Jersey; Philadelphia, Pennsylvania; New York City and Buffalo, New York; Kansas City, Missouri; and
Minneapolis, Minnesota.
Our network is composed of four primary corridors (Western, Southern, Central, and Eastern) and
DM&E.
4.4.1 The Western Corridor: Vancouver-Moose Jaw
Overview
— The Western Corridor links Vancouver with Moose Jaw, which is the western Canadian
terminus of our Southern and Central corridors. With service through Calgary, the Western Corridor
is an important part of our routes between Vancouver and the US Midwest, and between Vancouver and
central and eastern Canada.
Products
— The Western Corridor is our primary route for bulk and resource products traffic from
western Canada to the Port Metro Vancouver for export. We also handle significant volumes of
international intermodal containers and domestic general merchandise traffic.
Feeder Lines
— We support our Western Corridor with three significant feeder lines: the “Coal
Route”, which links southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank
terminal at the Port Metro Vancouver; the “Calgary-Edmonton-Scotford Route”, which provides rail
access to central Alberta’s Industrial Heartland in addition to the petrochemical complex in
central Alberta; and the “Pacific CanAm Route”, which connects Calgary and Medicine Hat, Alberta,
with UP at Kingsgate, B.C.
Connections
— Our Western Corridor connects with UP at Kingsgate and with BNSF at Coutts, Alberta,
and at New Westminster and Huntingdon in B.C. This corridor also connects with CN at Red Deer,
Camrose, Calgary, Edmonton, Alberta; Kamloops, B.C.; and several locations in the Greater Vancouver
Area.
Yards and Repair Facilities
— We support rail operations on the Western Corridor with main rail
yards at Vancouver, Calgary, Edmonton and Moose Jaw. We also have major intermodal terminals at
Vancouver, Calgary and Edmonton, and locomotive and rail car repair facilities at Golden, B.C.,
Vancouver, Calgary and Moose Jaw.
6
SECTION 4: DESCRIPTION OF THE BUSINESS
4.4.2 The Southern Corridor: Moose Jaw-Chicago
Overview
— The Southern Corridor connects with the Western Corridor at Moose Jaw. By running
south to Chicago through the twin cities of Minneapolis and St. Paul in Minnesota, and through
Milwaukee, Wisconsin, we provide a direct, single-carrier route between western Canada and the US
Midwest.
Products
— Primary traffic categories transported on the Southern Corridor include
intermodal containers from the Port Metro Vancouver, fertilizers, chemicals, grain, coal,
automotive and other agricultural products.
Feeder Lines
— We have operating rights over the BNSF line between Minneapolis and the twin ports
of Duluth, Minnesota and Superior, Wisconsin. CP maintains its own yard facilities at the twin
ports that provide an outlet for grain from the US Midwest to the grain terminals at these ports,
and a strategic entry point for large dimensional shipments that can be routed via CP’s network to
locations such as Alberta’s Industrial Heartland to serve the growing needs of the oil sands and
energy industry.
Connections
— Our Southern Corridor connects with all major railways at Chicago. Outside of
Chicago, we have major connections with BNSF at Minneapolis and at Minot, North Dakota and with UP
at St. Paul. We connect with CN at Minneapolis, Milwaukee and Chicago. Our Southern Corridor also
links to several shortline railways that primarily serve grain and coal producing areas in the US.
Yards and Repair Facilities
— We support rail operations on the Southern Corridor with main rail
yards in Chicago, Milwaukee, St. Paul and Glenwood. We own 49% of the Indiana Harbor Belt Railroad
Company, a switching railway serving Greater Chicago and northwest Indiana, and have two major
intermodal terminals in Chicago and one in Minneapolis. In addition, we have a major locomotive
repair facility at St. Paul and car repair facilities at St. Paul and Chicago.
4.4.3 The Central Corridor: Moose Jaw-Montreal
Overview
— The Central Corridor extends from Moose Jaw through Winnipeg to its eastern terminus at
Montreal. Our Central Corridor provides shippers direct rail service from Toronto and Montreal to
Calgary and Vancouver via our Western Corridor. This is a key element of our transcontinental
intermodal and other services. The Central Corridor also provides access to the Port of Thunder
Bay, Ontario, Canada’s primary Great Lakes bulk terminal.
Products
— Major traffic categories transported in the Central Corridor include Canadian grain,
coal, forest and industrial and consumer products, intermodal containers, automotive products and
general merchandise.
Feeder Lines
— We support the Central Corridor with a main feeder line connecting Edmonton with
Winnipeg, through Saskatoon, Saskatchewan. This line is an important collector of Canadian grain
and fertilizer, and provides direct access to refining and upgrading facilities in Alberta’s
Industrial Heartland and at Lloydminster.
Connection
s — The Central Corridor connects with BNSF at Emerson, Manitoba, and with a number of
shortline railways. Connections are also made with the CN at a number of locations, including
Regina, Saskatoon, Winnipeg, Thunder Bay, Sudbury, Toronto and Montreal.
Yards and Repair Facilities
— We support our rail operations in the Central Corridor with major
rail yards at Saskatoon, Winnipeg, Toronto and Thunder Bay. Our largest intermodal facility is
located in the northern Toronto suburb of Vaughan and serves the Greater Toronto and southwestern
Ontario areas. We also operate intermodal terminals at Winnipeg, Saskatoon and Regina.
We have major locomotive repair facilities at Winnipeg, Montreal and Toronto and car repair
facilities at Winnipeg, Thunder Bay, Toronto and Montreal.
4.4.4 The Eastern Corridor: Montreal to Chicago/ New York
Overview
— The Eastern Corridor provides an important link between the major population centres of
eastern Canada, the US Midwest and the US Northeast. The corridor supports our market position at
the Port of Montreal by providing one of the shortest rail routes for European cargo destined to
the US Midwest. The Eastern Corridor consists of a route between Montreal
and Windsor, which we own and maintain, coupled with running rights between Windsor and Detroit, a
trackage rights arrangement on Norfolk Southern Corporation (“NS”) track between Detroit and
Chicago and a long-term rail car haulage contract with CSX Corporation (“CSX”) that links Detroit
with our lines in Chicago.
7
SECTION 4: DESCRIPTION OF THE BUSINESS
Products
— Major traffic categories transported in the Eastern Corridor include intermodal
containers, automotive, forest, and industrial and consumer products, as well as truck trailers
moving in drive-on/drive-off Expressway service between Montreal and Toronto.
Feeder Lines
— The Eastern Corridor connects with important feeder lines. Our route between
Montreal and Sunbury, Pennsylvania, in combination with trackage rights over other railways,
provides us with direct access to New York City and Albany, New York; Philadelphia, Pennsylvania;
Newark, New Jersey and Washington, D.C. The line between Guelph Junction, Ontario and Binghamton,
including haulage rights over NS lines, links industrial southern Ontario with key US connecting
rail carriers at Buffalo and with the Montreal-to-Sunbury line at Binghamton.
Connections
— The Eastern Corridor connects with all major railways at Chicago. We also have major
connections with NS at Detroit, Buffalo and at Harrisburg and Allentown in Pennsylvania, and with
CSX at Detroit, Buffalo, Albany, Philadelphia and Washington D.C. In addition, our eastern
corridor connects with CN at Montreal, Quebec and at Toronto, Windsor and London in Ontario.
Shortline connections exist with multiple players throughout the corridor including routes from
Montreal to Quebec City, and Montreal to St. John, New Brunswick.
Yards and Repair Facilities
— We support our Eastern Corridor with major rail yards and terminals
in Chicago, Toronto, Montreal and Binghamton. There are also intermodal facilities in Montreal and
Detroit. Terminals for our Expressway service are located in Montreal and at Milton and Agincourt
in the Greater Toronto area. We have locomotive and car repair facilities in Montreal and
Binghamton, in addition to car repair facilities in Chicago and locomotive and car repair
facilities in Toronto
4.4.5 The Dakota, Minnesota & Eastern Railroad Corporation
Overview
— DM&E is a Class II railroad with approximately 2,500 miles of track, including
approximately 500 miles of trackage rights, in the US Midwest and primary customers in
agri-products and merchandise. DM&E has connections to and traffic interchanges with all seven
Class I railroads and is proximate to the PRB located in Wyoming, the largest thermal coal
producing region in the United States.
Products
— Primary traffic categories transported on DM&E include industrial and consumer
products, grain, coal, fertilizers and forest products.
Feeder Lines
— The acquisition of DM&E provides a strategic end-to-end network fit extending CP’s
network reach and increasing operational efficiency. DM&E connects with the Southern Corridor at
Minneapolis, Winona, Minnesota and Chicago. The railway operates in eight states and has direct
access to Chicago, Minneapolis, Kansas City (Missouri), and to critical water ports.
Connections
— DM&E has the ability to interchange with all of the seven Class I railroads
operating in the United States. The east portion of the line provides additional access to Chicago
where as the south portion of the rail extends to Kansas City. DM&E is also located favourably to
the PRB.
Yards and Repair Facilities
— We support our rail operations of DM&E with major rail yards and
locomotive repair shops in Mason City, Iowa; Nahant, Iowa; and Huron, South Dakota.
4.4.6 Right-of-Way
Our rail network is standard gauge, which is used by all major railways in Canada, the US and
Mexico. Continuous welded rail is used on almost all of our mainline.
We use different train control systems on portions of our owned track, depending on the volume of
rail traffic. Remotely controlled centralized traffic control signals are used to authorize the
movement of trains where traffic is heaviest.
Where rail traffic is lighter, train movements are directed by written instructions transmitted
electronically and by radio from rail traffic controllers to train crews. In some specific areas
of intermediate traffic density, we use an automatic block signalling system in conjunction with
written instructions from rail traffic controllers.
8
SECTION 4: DESCRIPTION OF THE BUSINESS
4.5 Quarterly Trends
Quarterly fluctuations in trends caused by the 2009 global recession have and will continue to
cause our results and volumes to be inconsistent with the sensitivity and trends provided below.
Management believes that the changes in economic conditions in 2009 will continue to affect the
quarterly fluctuation in 2010; the timing of a return to the sensitivity and trends discussed will
depend on the recovery of the economy and our customers.
Volumes of and, therefore, revenues from certain goods are stronger during different periods of the
year. First-quarter revenues can be lower mainly due to winter weather conditions, closure of the
Great Lakes ports and reduced transportation of retail goods. Second- and third-quarter revenues
generally improve over the first quarter as fertilizer volumes are typically highest during the
second quarter and demand for construction-related goods is generally highest in the third quarter.
Revenues are typically strongest in the fourth quarter, primarily as a result of the
transportation of grain after the harvest, fall fertilizer programs and increased demand for retail
goods moved by rail. Operating income is also affected by seasonal fluctuations. Operating income
is typically lower in the first quarter dependent on winter conditions. Net income is also
influenced by seasonal fluctuations in customer demand and weather-related issues.
4.6 Business Categories
The following table compares the percentage of our total freight revenue derived from each of our
major business lines in 2009 compared with 2008:
|
Business Category
|
2009 | 2008 (1) | ||||||
|
Bulk
|
45 | % | 43 | % | ||||
|
Merchandise
|
28 | % | 28 | % | ||||
|
Intermodal
|
27 | % | 29 | % | ||||
(1) Figures include DM&E from October 30, 2008 to December 31, 2008.
4.7 Revenues
The following table summarizes our annual freight revenues since 2007:
|
Freight Revenues
|
Fiscal 2009 | Fiscal 2008 (1) | ||||||||||||||||||
|
(in $ millions, except for percentages)
|
Fiscal | Compared | Fiscal | Compared | Fiscal | |||||||||||||||
| 2009 | to Fiscal | 2008 (1) | to Fiscal | 2007 | ||||||||||||||||
|
Business Category
|
2008 (1) | 2007 | ||||||||||||||||||
|
Bulk
|
||||||||||||||||||||
|
Grain
|
1,129.9 | 16.5 | % | 970.0 | 3.3 | % | 938.9 | |||||||||||||
|
Coal
|
443.3 | (27.0 | )% | 607.5 | 5.9 | % | 573.6 | |||||||||||||
|
Sulphur and fertilizers
|
303.5 | (40.3 | )% | 508.6 | 1.3 | % | 502.0 | |||||||||||||
|
Total bulk
|
1,876.7 | (10.0 | )% | 2,086.1 | 3.6 | % | 2,014.5 | |||||||||||||
|
Merchandise
|
||||||||||||||||||||
|
Forest products
|
173.2 | (27.6 | )% | 239.3 | (13.2 | )% | 275.8 | |||||||||||||
|
Industrial and consumer products
|
766.6 | 0.1 | % | 766.1 | 22.0 | % | 627.9 | |||||||||||||
|
Automotive
|
228.8 | (29.3 | )% | 323.5 | 1.4 | % | 319.0 | |||||||||||||
|
Total merchandise
|
1,168.6 | (12.1 | )% | 1,328.9 | 8.7 | % | 1,222.7 | |||||||||||||
|
Intermodal
|
1,129.9 | (19.3 | )% | 1,399.8 | 6.2 | % | 1,318.0 | |||||||||||||
|
Total freight revenues
|
4,175.2 | (13.3 | )% | 4,814.8 | 5.7 | % | 4,555.2 | |||||||||||||
(1) Revenues include DM&E from October 30, 2008 to December 31, 2008.
4.7.1 Bulk
Our bulk business represented approximately 45% of total freight revenues in 2009.
4.7.1.1 Grain
Our grain business accounted for approximately 27% of total freight revenues in 2009.
9
SECTION 4: DESCRIPTION OF THE BUSINESS
Grain transported by CP consists of both whole grains, such as wheat, corn, soybeans and
canola, and processed products, such as canola meals, soybean oils and flour.
Our grain business is centred in two key agricultural areas: the Canadian prairies (Alberta,
Saskatchewan and Manitoba) and the states of North Dakota, Minnesota, Iowa and South Dakota.
Western Canadian grain is shipped primarily west to the Port Metro Vancouver and east to the Port
of Thunder Bay for export. Grain is also shipped to the US Midwest and to eastern Canada for
domestic consumption. US-originated export grain traffic is shipped to ports at Duluth and
Superior. In partnership with other railways, we also move grain to export terminals in the US
Pacific Northwest and the Gulf of Mexico. Grain destined for domestic consumption moves east via
Chicago to the US Northeast or is interchanged with other carriers to the US Southeast, Pacific
Northwest and California markets.
Railway revenues for the movement of export grain from western Canada are subject to legislative
provisions. These provisions apply to defined commodities and origin/destination pairings set out
in the
Canada Transportation Act
(“CTA”). The revenue formula included in the CTA is indexed
annually to reflect changes in the input costs associated with transporting grain destined for
export markets. For additional information, refer to Section 21.4.1 of our 2009 Management’s
Discussion and Analysis (“MD&A”), which is available on SEDAR at
www.sedar.com
in
Canada, on EDGAR at
www.sec.gov
in the US and on our website at
www.cpr.ca.
4.7.1.2 Coal
Our coal business represented approximately 11% of total freight revenues in 2009.
We handle mostly metallurgical coal destined for export through the Port Metro Vancouver for use in
the steel-making process in the Pacific Rim, Europe and South America.
Our Canadian coal traffic originates mainly from mines in southeastern B.C. They are considered to
be among the most productive, highest-quality metallurgical coal mines in the world. We move coal
west from these mines to port terminals for export to world markets, the US for midwest markets,
and east for consumption in steel-making mills along the Great Lakes.
In the US, we move primarily thermal coal from the PRB, which is interchanged to us from other
carriers, for use in power-generating plants. Our US coal business also includes petroleum coke
shipments to power-generating facilities.
4.7.1.3 Sulphur and Fertilizers
Sulphur and fertilizers business represented approximately 7% of total freight revenues in 2009.
Sulphur
Most sulphur is produced in Alberta as a by-product of processing sour natural gas, refining crude oil and upgrading bitumen produced in the Alberta oil sands. Sulphur is a raw material used primarily in the manufacturing of sulphuric acid, which is used most extensively in the production of phosphate fertilizers. Demand for elemental sulphur rises with demand for fertilizers. Sulphuric acid is also a key ingredient in industrial processes ranging from smelting and nickel leaching to paper production.
Most sulphur is produced in Alberta as a by-product of processing sour natural gas, refining crude oil and upgrading bitumen produced in the Alberta oil sands. Sulphur is a raw material used primarily in the manufacturing of sulphuric acid, which is used most extensively in the production of phosphate fertilizers. Demand for elemental sulphur rises with demand for fertilizers. Sulphuric acid is also a key ingredient in industrial processes ranging from smelting and nickel leaching to paper production.
Alberta’s oil and gas industry produces more than eight million tonnes of sulphur annually. We
transport approximately half of the sulphur that enters international markets from Canada and we
are the leading transporter of formed sulphur shipped from gas plants in southern Alberta to the
Port Metro Vancouver. The two largest shipping points in southern Alberta are Shantz and Waterton
and both are located on our rail lines. Currently, our export traffic is destined mainly to China
and Australia. In addition, we transport liquid sulphur from Scotford, Alberta, site of one of the
largest refineries in the Edmonton area, and from other origins to the southeastern and
northwestern US for use in the fertilizer industry.
Fertilizers
Fertilizers traffic consists primarily of potash and chemical fertilizers. Our potash traffic moves mainly from Saskatchewan to offshore markets through the ports of Vancouver, Thunder Bay and Portland, Oregon and to markets in the US. Chemical fertilizers are transported to markets in Canada and the US from key production areas in the Canadian prairies. Phosphate fertilizer is also transported from US and Canadian producers to markets in Canada and the northern US.
Fertilizers traffic consists primarily of potash and chemical fertilizers. Our potash traffic moves mainly from Saskatchewan to offshore markets through the ports of Vancouver, Thunder Bay and Portland, Oregon and to markets in the US. Chemical fertilizers are transported to markets in Canada and the US from key production areas in the Canadian prairies. Phosphate fertilizer is also transported from US and Canadian producers to markets in Canada and the northern US.
10
SECTION 4: DESCRIPTION OF THE BUSINESS
We provide transportation services from major potash and nitrogen production facilities in
western Canada and have efficient routes to the major US markets. We also have direct service to
key fertilizer distribution terminals, such as the barge facilities on the Mississippi River system
at Minneapolis-St. Paul, as well as access to Great Lakes vessels at Thunder Bay.
4.7.2 Merchandise
Our merchandise business represented approximately 28% of total freight revenues in 2009.
Merchandise products move in trains of mixed freight and in a variety of car types. Service
involves delivering products to many different customers and destinations. In addition to
traditional rail service, we move merchandise traffic through a network of truck-rail transload
facilities and provide logistics services.
4.7.2.1 Forest Products
Our forest products business represented approximately 4% of total freight revenues in 2009.
Forest products traffic includes wood pulp, paper, paperboard, newsprint, lumber, panel and
oriented strand board shipped from key producing areas in B.C., northern Alberta, northern
Saskatchewan, Ontario and Quebec to destinations throughout North America.
4.7.2.2 Industrial and Consumer Products
Our industrial and consumer products business represented approximately 18% of total freight
revenues in 2009.
Industrial and consumer products traffic include a wide array of commodities grouped under
chemicals, energy and plastics as well as mine, metals and aggregates.
Our industrial and consumer products traffic is widely dispersed throughout North America, with
large bases in Alberta, Ontario, Quebec and the US Midwest. The location of mines, steel mills and
aggregate facilities adjacent to our rail lines provides for the convenient shipment of a diverse
group of industrial products for a wide range of customers. We transport products to destinations
throughout North America, including to and from ports. We also participate in the movement of
products from the US to Canadian destinations, including chemicals originating in and around the
Gulf Coast and destined to points in eastern Canada.
4.7.2.3 Automotive
Our automotive business represented approximately 6% of total freight revenues in 2009.
Automotive traffic includes domestic, import and pre-owned vehicles as well as automotive parts.
We transport finished vehicles from US and Canadian assembly plants to the Canadian marketplace,
and to other markets throughout North America via major interchanges at Detroit, Chicago and
Buffalo. We also move imported vehicles to retail markets in Canada and the US Midwest. A
comprehensive network of automotive compounds is utilized to facilitate final delivery of vehicles
to dealers throughout Canada and in the US.
4.7.3 Intermodal
Our intermodal business accounted for approximately 27% of total freight revenues in 2009.
Domestic intermodal freight consists primarily of manufactured consumer products moving in
containers. International intermodal freight moves in marine containers to and from ports and
North American inland markets.
Domestic Intermodal
Our domestic intermodal segment covers a broad spectrum of industries including food, retail, less-than truckload shipping, trucking, forest products and various other consumer-related products. Key service factors in domestic intermodal include consistent on-time delivery, the ability to provide door-to-door service and the availability of value-added services. The majority of our domestic intermodal business originates in Canada where we market our services directly to retailers, providing complete door-to-door service and maintaining direct relationships with our customers. In the US, our service is delivered mainly through wholesalers.
Our domestic intermodal segment covers a broad spectrum of industries including food, retail, less-than truckload shipping, trucking, forest products and various other consumer-related products. Key service factors in domestic intermodal include consistent on-time delivery, the ability to provide door-to-door service and the availability of value-added services. The majority of our domestic intermodal business originates in Canada where we market our services directly to retailers, providing complete door-to-door service and maintaining direct relationships with our customers. In the US, our service is delivered mainly through wholesalers.
11
SECTION 4: DESCRIPTION OF THE BUSINESS
International Intermodal
Our international intermodal business consists primarily of containerized traffic moving between the ports in Vancouver, Montreal, New York and Philadelphia and inland points across Canada and the US.
Our international intermodal business consists primarily of containerized traffic moving between the ports in Vancouver, Montreal, New York and Philadelphia and inland points across Canada and the US.
We are a major carrier of containers moving via the ports in Montreal and Vancouver. Import traffic
from the Port Metro Vancouver is mainly long-haul business destined for eastern Canada and the US
Midwest and Northeast. Our trans-Pacific service offers the shortest route between the Port Metro
Vancouver and Chicago. We work closely with the Port of Montreal, a major year-round East Coast
gateway to Europe, to serve markets primarily in Canada and the US Midwest. Our US Northeast
service connects eastern Canada with the ports of Philadelphia and New York, offering a competitive
alternative to trucks.
Recent investments in terminals and track infrastructure as well as operating and service
initiatives have enhanced our strategic position for future growth.
4.7.4 Other Business
We earn additional revenues through the sale and lease of assets and other arrangements including
logistical services, contracts with passenger service operators and investments in joint rail
operations.
4.7.5 Significant Customers
In 2009, no one customer comprised more than 10% of total revenues and accounts receivable. For
the year ended and as at December 31, 2008 and 2007, one customer comprised 11.3% and 11.5% of
total revenues and 1.7% and 6.7% of total accounts receivable, respectively.
4.8 Railway Performance
We focus on safety, franchise investment, increasing network efficiency and improving asset
utilization, train operations productivity and labour productivity. The following table summarizes
the effect of these strategies based on industry-recognized performance indicators:
12
SECTION 4: DESCRIPTION OF THE BUSINESS
4.8.1 Performance Indicators
| Year Ended December 31 | ||||||||||||||||||||
|
Performance Indicators
(1)
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Consolidated Data Including DM&E
(2)
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Efficiency and other indicators
|
||||||||||||||||||||
|
Gross ton-miles (GTM) (millions)
(3)
|
209,475 | 239,705 | 246,322 | 236,405 | 242,100 | |||||||||||||||
|
Train miles (thousands)
|
34,757 | 41,420 | 42,804 | 42,310 | 43,054 | |||||||||||||||
|
US gallons of locomotive fuel per 1,000 GTMs — freight and
yard
(4)
|
1.19 | 1.22 | 1.21 | 1.20 | 1.18 | |||||||||||||||
|
Average number of active employees — expense
(5)
|
13,619 | 14,340 | 14,172 | 14,311 | 14,793 | |||||||||||||||
|
|
||||||||||||||||||||
|
CP Data excluding DM&E
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Efficiency and other indicators
|
||||||||||||||||||||
|
Car miles per car day
(6)
|
142.6 | 143.6 | 142.3 | 137.3 | 124.0 | |||||||||||||||
|
Average train speed (miles per hour)
(7)
|
25.5 | 24.0 | 23.2 | 24.8 | 22.0 | |||||||||||||||
|
Average terminal dwell (hours)
(8)
|
21.9 | 22.3 | 22.2 | 20.8 | 25.8 | |||||||||||||||
|
Safety indicators
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
FRA personal injuries per 200,000 employee-hours
(9)
|
1.85 | 1.51 | 2.09 | 2.00 | 2.38 | |||||||||||||||
|
FRA train accidents per million train-miles
(10)
|
1.49 | 1.93 | 2.05 | 1.56 | 2.26 | |||||||||||||||
|
|
||||||||||||||||||||
|
DM&E Data only
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
FRA personal injuries per 200,000 employee-hours
(9)
|
2.17 | 3.50 | — | — | — | |||||||||||||||
|
FRA train accidents per million train-miles
(10)
|
6.78 | 11.39 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
| (1) |
Certain prior period figures have been updated to reflect new information.
|
|
| (2) |
Consolidated data includes DM&E for
2009 and for the period from October 30 through
December 31, 2008.
|
|
| (3) |
GTMs of freight measure the movement of total train weight over a distance of one
mile. (Total train weight is comprised of the weight of the freight cars, their contents and
any inactive locomotives). An increase in GTMs indicates additional workload.
|
|
| (4) |
US gallons of locomotive fuel per 1,000 GTMs — freight and yard measures the
total fuel consumed in freight and yard operations for every 1,000 GTMs traveled. This is
calculated by dividing the total amount of fuel issued to our locomotives, excluding commuter
and non-freight activities, by the total freight-related GTMs. The result indicates how
efficiently we are using fuel.
|
|
| (5) |
The average number of actively employed workers during the period whose
compensation costs are included in Compensation and Benefits Expense on the Consolidated
Statement of Income. This includes employees who are taking vacation and statutory holidays
and other forms of short-term paid leave, and excludes individuals who have a continuing
employment relationship with us but are not currently working or who have not worked a minimum
number of hours. This definition also excludes employees working on capital projects.
|
|
| (6) |
Car miles per car day is calculated by dividing total car-miles for a period by the
total number of active cars. Total car-miles include the distance travelled by every car on a
revenue-producing train and a train used in or around our yards. A car-day is assumed to
equal one active car. An active car is a revenue-producing car that is generating costs to CP
on an hourly or mileage basis. Excluded from this count are i) cars that are not on the track
or are being stored; ii) cars that are in need of repair; iii) cars that are used to carry
materials for track repair; iv) cars owned by customers that are on the customer’s tracks; and
v) cars that are idle and waiting to be reclaimed by CP.
|
|
| (7) |
The average train speed measures average speed attained as a train travels between
terminals, calculated by dividing the total train miles traveled by the total hours operated.
This calculation does not include the travel time or the distance traveled by: i) trains used
in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing track. The
calculation also does not include the time trains spend waiting in terminals.
|
|
| (8) |
Average terminal dwell (hours) measures the average time a freight car resides at a
specified terminal location. The timing starts with a train arriving in the terminal, a
customer releasing the car to us, or a car arriving that is to be transferred to another
railway. The timing ends when the train leaves, a customer receives the car from us or the
freight car is transferred to another railway. Freight cars are excluded if: i) a train is
moving through the terminal without stopping; ii) they are being stored at the terminal; iii)
they are in need of repair; or iv) they are used in track repairs.
|
|
| (9) |
US Federal Railroad Administration (“FRA”) personal injuries per 200,000
employee-hours measures the number of personal injuries, multiplied by 200,000 and divided by
total employee-hours. Personal injuries are defined as injuries that require employees to
lose time away from work, modify their normal duties or obtain medical treatment beyond minor
first aid. Employee-hours are the total hours worked, excluding vacation and sick time, by
all employees, excluding contractors.
|
|
| (10) |
FRA train accidents per million train-miles measures the number of train accidents,
multiplied by 1,000,000 and divided by total train-miles. Train accidents included in this
metric meet or exceed the FRA reporting threshold of US$8,900 in the US or $11,000 in Canada
in damage.
|
13
SECTION 4: DESCRIPTION OF THE BUSINESS
4.9 Franchise Investment
Franchise investment is an integral part of our multi-year capital program and supports our growth
initiatives. Our annual capital program typically includes investments in track and facilities
(including rail yards and intermodal terminals); locomotives; information technology; and freight
cars and other equipment. On an accrual basis, we invested approximately $2.39 billion in our core
assets from 2007 to 2009, with annual capital spending over this period averaging approximately 17%
of revenues. This included approximately $1.81 billion invested in track and facilities, $0.14
billion in locomotives, $0.16 billion in information technology and $0.28 billion in freight cars
and other equipment.
4.9.1 Locomotive Fleet
Our locomotive fleet includes high-adhesion alternating current (“AC”) locomotives, which are more
fuel efficient and reliable and have superior hauling capacity compared with standard direct
current (“DC”) locomotives. Our locomotive fleet now includes 732 AC locomotives. While AC
locomotives represent approximately 61% of our road-freight locomotive fleet, they handle about 89%
of our workload. Our investment in AC locomotives has helped to improve service reliability and
generate cost savings in fuel, equipment rents and maintenance.
Following is a synopsis of our owned and leased locomotive fleet:
Number of Locomotives
(owned and long-term leased)
| Road Freight | Road | Yard | ||||||||||||||||||
|
Age in Years
|
AC | DC | Switcher | Switcher | Total | |||||||||||||||
|
0-5
|
234 | — | 2 | — | 236 | |||||||||||||||
|
6-10
|
184 | — | — | — | 184 | |||||||||||||||
|
11-15
|
314 | — | — | — | 314 | |||||||||||||||
|
16-20
|
— | 21 | — | — | 21 | |||||||||||||||
|
Over 20
|
— | 452 | 276 | 226 | 954 | |||||||||||||||
|
Total
|
732 | 473 | 278 | 226 | 1,709 | |||||||||||||||
4.9.2 Railcar Fleet
We own, lease or manage approximately 53,200 freight cars. Approximately 17,400 are owned by CP,
approximately 7,200 are hopper cars owned by Canadian federal and provincial government agencies
and approximately 11,700 are short-term lease and 16,900 are long-term leased. Short-term leases
on approximately 4,500 cars are scheduled to expire during 2010, and the leases on approximately
8,000 additional cars are scheduled to expire before the end of 2014.
Our covered hopper car fleet, used for transporting regulated grain, consists of owned, leased and
managed cars. A portion of the fleet used to transport export grain is leased from the Government
of Canada, with whom we completed an operating agreement in 2007.
4.10 Integrated Operating Plan (“IOP”)
Our IOP is the foundation for our scheduled railway operations, through which we strive to provide
quality service for customers and improve asset utilization to achieve high levels of efficiency.
The key principles upon which our IOP is built include moving freight cars across the network with
as few handlings as possible, creating balance in directional flow of trains in our corridors by
day of week, and minimizing the time that locomotives and freight cars are idle.
Under our IOP, trains are scheduled to run consistently at times agreed upon with our customers.
To accomplish this, we establish a plan for each rail car that covers its entire trip from point of
origin to final destination. Cars with similar destinations are consolidated into blocks. This
reduces delays at intermediate locations by simplifying processes for employees, eliminating the
duplication of work and helping to ensure traffic moves fluidly through rail yards and terminals.
These measures improve transit times for shipments throughout our network and increase car
availability for customers. Our IOP also increases efficiency by more effectively scheduling
employee shifts, locomotive maintenance, track repair, track renewal and material supply.
14
SECTION 4: DESCRIPTION OF THE BUSINESS
We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and
our new Train Area Marshalling software tool (“TrAM”) to safely operate longer and heavier trains.
This has reduced associated expenses, simplified the departure of shipments from points of origin
and provided lower-cost capacity for growth.
We are committed to continuously improve scheduled railway operations as a means to achieve
additional efficiencies that will enable further growth without the need to incur significant
capital expenditures to accommodate the growth. During 2009, execution of our IOP generated
productivity and efficiency improvements that reduced expenses in key areas, while improving
service reliability to support rate increases and grow market share. Areas of expense reduction
included labour, purchased services and equipment costs.
The “E3” review that commenced in mid-2008 is an initiative intended to accelerate benefits related
to IOP efficiency, to reduce costs and to improve reliability of CP’s product. Train productivity,
asset utilization, yard and terminal operations, maintenance and product reliability have been the
focus of this review.
In late 2008, the IOP and Yield teams were grouped together in the “Strategy & Yield” department.
This combined group is providing network capability in an effort to optimize demand, product
offering, equipment and track utilization.
4.11 Information Technology
As a 24-hour-a-day, 7-day-a-week business, CP relies heavily on information technology (“IT”)
systems to schedule and manage planning and operational components safely and efficiently. IT
applications map out complex interconnections of freight cars, locomotives, facilities, track and
train crews to meet more than 10,000 individual customer service commitments every day. Across the
network, CP’s suite of operating systems manage the overall movement of customers’ shipments and
provide railway employees with reliable data on shipment performance, transit times, connections
with other trains, train and yard capacities, and locomotive requirements. Within the yards,
individual shipments are matched to freight car blocks, which in turn are matched to trains that
are scheduled according to CP’s IOP.
MultiRail
Core to CP’s success has been the innovative and industry-leading use of a product design software
tool called MultiRail. MultiRail is a fully-integrated application that allows CP to refine and
evaluate our operating plan strategy. It creates and communicates a balanced plan to accommodate
shippers’ needs, operational considerations and asset utilization.
The Institute for Operations Research and the Management Sciences selected CP, in partnership with
Multimodal Applied Systems Inc., as the winner of the prestigious 2003 Franz Edelman Award. CP was
selected for its work on “Perfecting the Scheduled Railway: Model Driven Operating Plan
Development.”
CP has modeled the IOP within the MultiRail application using forward-looking traffic data. The
full integration of the design process with our operation control systems allows us to move from
the planning phase into the execution phase and to react quickly and efficiently to changing
business conditions and opportunities.
Train Area Marshalling (“TrAM”)
CP has also introduced TrAM, a comprehensive set of train marshalling rules and supporting computer
tools that have enabled CP to become the industry leader in the use of distributed power. CP is
utilizing this technology on as many trains as possible beyond its traditional use in bulk train
service alone. TrAM provides the science to position multiple remote locomotives in specific
locations within a train. By positioning remote locomotives, we keep in-train forces within
acceptable limits which optimizes safety and reduces unnecessary equipment wear when compared to
conventional head-end power only or trains with just one remote locomotive location. Multiple
remote distributed trains produce significantly lower lateral forces on the track, which represents
an opportunity to improve safety, dramatically extend rail-asset-life and reduce fuel consumption.
TrAM abilities have also allowed CP to take advantage of implementing its long train strategy which
during 2009 has enhanced the productivity of its transcontinental train services by allowing safe
operation of longer, heavier train designs.
15
SECTION 4: DESCRIPTION OF THE BUSINESS
Truck Rail Intermodal Excellence (“TRIEX”)
CP recently implemented the TRIEX system at all intermodal facilities. The system will further
improve intermodal service by providing customer self-service, proof of delivery and full shipment
tracking. TRIEX will also provide more sophisticated pricing options and simplify billing
processes.
Mycpr.ca
A multi-year program to revamp e-business applications is underway to provide customers with an
industry leading electronic commerce capability. The next phase will see the launch of a new
version of CP’s customer website, myCPR.ca. This new tool will allow customers to manage all
aspects of their shipments from initial price inquiries, car ordering, shipment tracking, invoice
viewing and payment.
Engineering Excellence
CP is making significant technology investments in Engineering Excellence to ensure continued
network safety and reliability. A new bridge inspection system allows employees to capture
inspection results electronically in the field, reducing the amount of time spent documenting
inspection results and increasing the quality of information gathered about the condition of each
asset. Engineering Excellence ensures timely maintenance, improved infrastructure renewal planning
and assured compliance to regulatory requirements.
Equipment Health Management System (“EHMS”)
The EHMS is a multi-year project that supports the railway industry’s Advanced Technology Safety
Initiative to reduce stress on railway infrastructure. The system allows freight car equipment
owners to monitor and maintain their fleet proactively. We recently added truck hunting detectors
and hot box detector information and alerting to our EHMS system.
4.12 Labour Productivity and Efficiency
CP believes employees contribute best when the organizational structure is lean and
accountabilities are clear. Companies only attain their full potential when they engage employees
intelligence and creativity in a structured manner that becomes part of the fabric of the company.
In the past few years CP has initiated a number of strategic organizational initiatives to achieve
these conditions. In 2009, we commenced a holistic review of our management structure. Its
implementation will see a leaner more defined CP.
Building on the successes of our “E3” variable cost reduction initiative, CP has commenced the
structured implementation of “lean process/kaizen” principles into the organization. This
continuous improvement, high employee engagement methodology is already providing new, actionable
efficiency and service insights.
To link employee performance and organizational outcomes, CP also uses performance based programs
designed to allow eligible unionized and non-unionized employees to share in the profits they help
generate.
4.13 Business Risks and Enterprise Risk Management
In the normal course of our operations, we are exposed to various business risks and uncertainties
that can have an effect on our financial condition. The risks and our enterprise risk management
are discussed in Section 21.0 Business Risks and Enterprise Risk Management of our 2009 MD&A, which
is available on SEDAR at
www.sedar.com
in Canada, on EDGAR at
www.sec.gov
in the US and on our website at
www.cpr.ca.
4.14 Indemnifications
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific
Railway Company Pension Trust Fund, we have undertaken to indemnify and save harmless the trustee,
to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs and
expenses arising out of the performance of the trustee’s obligations under the agreement, except as
a result of misconduct by the trustee. The indemnity includes liabilities, costs or expenses
relating to any legal reporting or notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise with respect to the assets of the
pension plans that are not part of the fund. The indemnity survives the termination or expiry of
the agreement with respect to claims and liabilities arising prior to the termination or expiry.
At December 31, 2009, we had not recorded a liability associated with this indemnification, as we
do not expect to make any payments pertaining to it.
16
SECTION 4: DESCRIPTION OF THE BUSINESS
Pursuant to our by-laws, we indemnify all our current and former directors and officers. In
addition to the indemnity provided by our by-laws, we also indemnify our directors and officers
pursuant to indemnity agreements. We carry a liability insurance policy for directors and
officers, subject to a maximum coverage limit and certain deductibles in cases where a director or
officer is reimbursed for any loss covered by the policy.
4.15 Safety
Safety is a key priority for our management and Board of Directors. Our two main safety indicators
— personal injuries and train accidents — follow strict US Federal Railroad Administration
(“FRA”) reporting guidelines.
The FRA personal injury rate per 200,000 employee-hours for CP, excluding DM&E was 1.85 in 2009, an
increase from 1.51 in 2008 and an improvement from 2.09 in 2007. The FRA train accident rate for
CP, excluding DM&E in 2009 was 1.49 accidents per million train-miles, compared with 1.93 in 2008
and 2.05 in 2007. CP strives to continually improve its safety performance through ten key
strategies and activities such as training and technology. 2009 represents CP’s second lowest
personal injury rate and our lowest train accident rate.
The FRA personal injury rate per 200,000 employee-hours for DM&E was 2.17 in 2009 compared with
3.50 in 2008. The FRA train accident rate for DM&E was 6.78 in 2009 and 11.39 in 2008.
Significant improvement has been realized driven by the implementation of the safety integration
plan.
Our Health, Safety, Security and Environment Committee provides ongoing focus, leadership,
commitment and support for efforts to improve the safety of our operations as well as the safety
and health of our employees. The committee is comprised of all of the most senior representatives
from our different operations departments and is a key component of safety governance at CP. Our
Safety Framework governs the safety management process, which involves more than 1,000 employees in
planning and implementing safety-related activities. This management process, combined with
planning that encompasses all operational functions, ensures a continuous and consistent focus on
safety.
4.16 Environmental Protection
We have implemented a comprehensive Environmental Management System, which uses the five elements
of the ISO 14001 standard — policy, planning, implementation and operation, checking and
corrective action, and management review — as described below.
4.16.1 Policy
We have adopted an Environmental Protection Policy and continue to develop and implement policies
and procedures to address specific environmental issues and reduce environmental risk. Each policy
is implemented with training for employees and a clear identification of roles and
responsibilities.
Our partnership in Responsible Care
Ò
is a key part of our commitment as we strive to be a
leader in railway and public safety. Responsible Care
Ò
, an initiative of the Chemistry
Industry Association of Canada and the American Chemistry Council (“ACC”) in the US, is an ethic
for the safe and environmentally sound management of chemicals throughout their life cycle.
Partnership in Responsible Care
Ò
involves a public commitment to continually improve the
industry’s environmental, health and safety performance. We successfully completed our first
Responsible Care
Ò
external verification in June 2002 and were granted “Responsible
Care
Ò
practice-in-place” status. We were successfully re-verified in 2005 and again in 2008.
Our next Chemistry Industry Association of Canada and ACC Responsible Care verification is
tentatively scheduled for June 2011.
4.16.2 Planning
We prepare an annual Corporate Environmental Plan and an Operations Environment Plan, which include
details of our environmental goals and targets as well as high-level strategies. These plans are
used by various departments to integrate key corporate environmental strategies into their business
plans.
4.16.3 Implementation and Operation
We have developed specific environmental programs to address areas such as air emissions,
wastewater, management of vegetation, chemicals and waste, storage tanks and fuelling facilities,
and environmental impact assessment. Our environmental specialists and consultants lead these
programs.
17
SECTION 4: DESCRIPTION OF THE BUSINESS
Our focus is on preventing spills and other incidents that have a negative impact on the
environment. As a precaution, we have established a Strategic Emergency Response Contractor
network and located spill equipment kits across Canada and the US to ensure a rapid and efficient
response in the event of an environmental incident. In addition, we regularly update and test
emergency preparedness and response plans.
4.16.4 Environmental Contamination
We continue to be responsible for remediation work on portions of the property in the State of
Minnesota and continue to retain liability accruals for remaining future anticipated costs. The
costs are expected to be incurred over approximately 10 years. The state’s voluntary investigation
and remediation program will oversee the work to ensure it is completed in accordance with
applicable standards. We currently estimate the remaining liability associated with these areas to
be US$25.5 million.
4.16.5 Checking and Corrective Action
Our environmental audit comprehensively, systematically and regularly assesses our facilities for
compliance with legal and regulatory requirements and conformance to our policies, which are based
on legal requirements and accepted industry standards. Audits are scheduled based on risk
assessment for each facility and are led by third-party environmental audit specialists supported
by our environmental staff.
Audits are followed by a formal Corrective Action Planning process that ensures findings are
addressed in a timely manner. Progress is monitored against completion targets and reported
quarterly to senior management.
In 2007, our audit program was expanded to include health and safety.
4.16.6 Management Review
Our Board of Directors’ Health, Safety, Security and Environment Committee conducts a semi-annual
comprehensive review of environmental issues. An Environmental Lead Team, which is comprised of
senior leaders of our Real Estate, Legal Services, Sales and Marketing, Finance, Operations, Supply
Services, and Safety and Environmental Services departments, meets quarterly to review
environmental matters.
4.16.7 Expenditures
We spent $47 million in 2009 for environmental management, including amounts spent for ongoing
operations, fuel conservation, capital upgrades and remediation.
4.17 Insurance
We maintain insurance policies to protect our assets and to protect against liabilities. Our
insurance policies include, but are not limited to, liability insurance, director and officer
liability insurance, automobile insurance and property insurance. The property insurance program
includes business interruption coverage, which would respond in the event of catastrophic damage to
our infrastructure. We believe our insurance is adequate to protect us from known and unknown
liabilities. However, in certain circumstances, certain losses may not be covered or completely
covered by insurance and we may suffer losses, which could be material.
18
SECTION 5: DIVIDENDS
5.1 Declared Dividends and Dividend Policy
Dividends declared by the Board of Directors in the last three years are as follows:
|
Dividend
Amount
|
Record Date | Payment Date | ||
|
$0.2250
|
March 30, 2007 | April 30, 2007 | ||
|
$0.2250
|
June 29, 2007 | July 30, 2007 | ||
|
$0.2250
|
September 28, 2007 | October 29, 2007 | ||
|
$0.2250
|
December 28, 2007 | January 28, 2008 | ||
|
$0.2475
|
March 28, 2008 | April 28, 2008 | ||
|
$0.2475
|
June 27, 2008 | July 28, 2008 | ||
|
$0.2475
|
September 26, 2008 | October 27, 2008 | ||
|
$0.2475
|
December 24, 2008 | January 26, 2009 | ||
|
$0.2475
|
March 27, 2009 | April 27, 2009 | ||
|
$0.2475
|
June 26, 2009 | July 27, 2009 | ||
|
$0.2475
|
September 25, 2009 | October 26, 2009 | ||
|
$0.2475
|
December 31, 2009 | January 25, 2010 | ||
|
$0.2475
|
March 26, 2010 | April 26, 2010 | ||
Our Board of Directors is expected to give consideration on a quarterly basis to the payment of
future dividends. The amount of any future quarterly dividends will be determined based on a
number of factors that may include the results of operations, financial condition, cash
requirements and future prospects of the Company. The Board of Directors is, however, under no
obligation to declare dividends and the declaration of dividends is wholly within their discretion.
Further, our Board of Directors may cease declaring dividends or may declare dividends in amounts
that are different from those previously declared. Restrictions in the credit or financing
agreements entered into by the Company or the provisions of applicable law may preclude the payment
of dividends in certain circumstances.
19
SECTION 6: CAPITAL STRUCTURE
6.1 Description of Capital Structure
The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of
First Preferred Shares and an unlimited number of Second Preferred Shares. At December 31, 2009,
no Preferred Shares had been issued.
| 1) |
The rights, privileges, restrictions and conditions attaching to the Common Shares are as
follows:
|
| a) |
Payment of Dividends
: The holders of the Common Shares will be entitled to
receive dividends if, as and when declared by CP’s Board of Directors out of the assets
of the Company properly applicable to the payment of dividends in such amounts and
payable in such manner as the Board may from time to time determine. Subject to the
rights of the holders of any other class of shares of the Company entitled to receive
dividends in priority to or rateably with the holders of the Common Shares, the Board
may in its sole discretion declare dividends on the Common Shares to the exclusion of
any other class of shares of the Company.
|
||
| b) |
Participation upon Liquidation, Dissolution or Winding Up
: In the event of the
liquidation, dissolution or winding up of the Company or other distribution of assets
of the Company among its shareholders for the purpose of winding up its affairs, the
holders of the Common Shares will, subject to the rights of the holders of any other
class of shares of the Company entitled to receive the assets of the Company upon such
a distribution in priority to or rateably with the holders of the Common Shares, be
entitled to participate rateably in any distribution of the assets of the Company.
|
||
| c) |
Voting Rights
: The holders of the Common Shares will be entitled to receive
notice of and to attend all annual and special meetings of the shareholders of the
Company and to one (1) vote in respect of each Common Share held at all such meetings,
except at separate meetings of or on separate votes by the holders of another class or
series of shares of the Company.
|
| 2) |
The rights, privileges, restrictions and conditions attaching to the First Preferred Shares
are as follows:
|
| a) |
Authority to Issue in One or More Series
: The First Preferred Shares may at any
time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of each series of First
Preferred Shares.
|
||
| b) |
Voting Rights
: The holders of the First Preferred Shares will not be entitled
to receive notice of or to attend any meeting of the shareholders of the Company and
will not be entitled to vote at any such meeting, except as may be required by law.
|
||
| c) |
Limitation on Issue
: The Board may not issue any First Preferred Shares if by
so doing the aggregate amount payable to holders of First Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000.
|
||
| d) |
Ranking of First Preferred Shares
: The First Preferred Shares will be entitled
to priority over the Second Preferred Shares and the Common Shares of the Company and
over any other shares ranking junior to the First Preferred Shares with respect to the
payment of dividends and the distribution of assets of the Company in the event of any
liquidation, dissolution or winding up of the Company or other distribution of the
assets of the Company among its shareholders for the purpose of winding up its affairs.
|
||
| e) |
Dividends Preferential:
Except with the consent in writing of the holders of
all outstanding First Preferred Shares, no dividend can be declared and paid on or set
apart for payment on the Second Preferred Shares or the Common Shares or on any other
shares ranking junior to the First Preferred Shares unless and until all dividends (if
any) up to and including any dividend payable for the last completed period for which
such dividend is payable on each series of First Preferred Shares outstanding has been
declared and paid or set apart for payment.
|
20
SECTION 6: CAPITAL STRUCTURE
| 3) |
The rights, privileges, restrictions and conditions attaching to the Second Preferred
Shares are as follows:
|
| a) |
Authority to Issue in One or More Series
: The Second Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of each series of
Second Preferred Shares.
|
||
| b) |
Voting Rights
: The holders of the Second Preferred Shares will not be entitled to
receive notice of or to attend any meetings of the shareholders of the Company and will
not be entitled to vote at any such meeting, except as may be required by law.
|
||
| c) |
Limitation on Issue
: The Board may not issue any Second Preferred Shares if by
so doing the aggregate amount payable to holders of Second Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000.
|
||
| d) |
Ranking of Second Preferred Shares
: The Second Preferred Shares will be
entitled to priority over the Common Shares of the Company and over any other shares
ranking junior to the Second Preferred Shares with respect to the payment of dividends
and the distribution of assets of the Company in the event of the liquidation,
dissolution or winding up of the Company or any other distribution of the assets of the
Company among its shareholders for the purpose of winding up of its affairs.
|
||
| e) | Dividends Preferential : Except with the consent in writing of the holders of all outstanding Second Preferred Shares, no dividend can be declared and paid on or set apart for payment on the Common Shares or on any other shares ranking junior to the Second Preferred Shares unless and until all dividends (if any) up to and including any dividend payable for the last completed period for which such dividend is payable on each series of Second Preferred Shares outstanding has been declared and paid or set apart for payment. |
6.2 Security Ratings
The Company’s debt securities are rated annually by three approved rating organizations — Moody’s
Investors Service, Inc., Standard & Poor’s Corporation and Dominion Bond Rating Service Limited.
Currently, our securities are rated as Investment Grade, shown in the table below:
| Long-Term | ||||
| Approved Rating | Debt | |||
| Organization | Rating | |||
|
Moody’s Investors Service
|
Baa3 | |||
|
Standard & Poor’s Corporation
|
BBB | |||
|
Dominion Bond Rating Service
|
BBB | |||
The Standard & Poor’s Corporation has a negative outlook, while the Moody’s Investors Service and
Dominion Bond Rating Service have a stable outlook.
Credit ratings are intended to provide investors with an independent measure of the credit quality
of an issue of securities and are indicators of the likelihood of payment and of the capacity and
willingness of a company to meet its financial commitment on an obligation in accordance with the
terms of the obligation. A description of the rating categories of each of the rating agencies in
the table above is set out below.
Credit ratings are not recommendations to purchase, hold or sell securities and do not address the
market price or suitability of a specific security for a particular investor and may be subject to
revision or withdrawal at any time by the rating agencies. Credit ratings may not reflect the
potential impact of all risks on the value of securities. In addition, real or anticipated changes
in the rating assigned to a security will generally affect the market value of that security.
There can be no assurance that a rating will
remain in effect for any given period of time or that a rating will not be revised or withdrawn
entirely by a rating agency in the future.
21
SECTION 6: CAPITAL STRUCTURE
The following table summarizes rating categories for respective rating agencies:
| Dominion | ||||||||
| Moody’s | Bond | |||||||
| Investors | Standard | Rating | ||||||
| Service | & Poor’s | Service | ||||||
|
Aaa
|
AAA | AAA |
|
High
Investment Grade |
||||
|
|
||||||||
|
Aa1
|
AA+ | AA(high) | ||||||
|
Aa2
|
AA | AA | ||||||
|
Aa3
|
AA- | AA(low) | ||||||
|
|
||||||||
|
A1
|
A+ | A(high) | ||||||
|
A2
|
A | A | ||||||
|
A3
|
A- | A(low) | ||||||
|
|
|
Investment
Grade |
||||||
|
Baa1
|
BBB+ | BBB(high) | ||||||
|
Baa2
|
BBB | BBB | ||||||
|
Baa3
|
BBB- | BBB(low) | ||||||
|
|
||||||||
|
Ba1
|
BB+ | BB(high) |
|
Below
Investment Grade |
||||
|
Ba2
|
BB | BB | ||||||
|
Ba3
|
BB- | BB(low) | ||||||
|
|
||||||||
|
B1
|
B+ | B(high) | ||||||
|
B2
|
B | B | ||||||
|
B3
|
B- | B(low) | ||||||
|
|
||||||||
|
Caa
|
CCC | CCC | ||||||
|
|
||||||||
|
Ca
|
CC | CC | ||||||
|
|
||||||||
|
C
|
C | C | ||||||
22
SECTION 7: MARKET FOR SECURITIES
7.1 Stock Exchange Listings
The Common Shares of CP are listed on the Toronto Stock Exchange and the New York Stock Exchange
under the symbol “CP”.
7.2 Trading Price and Volume
The following table provides the monthly trading information for our Common Shares on the Toronto
Stock Exchange during 2009:
| Opening | High | Low | Closing | Volume of | ||||||||||||||||
|
Month
|
Price per | Price per | Price per | Price per | Shares | |||||||||||||||
| Share ($) | Share ($) | Share ($) | Share ($) | Traded | ||||||||||||||||
|
January
|
41.18 | 46.09 | 35.65 | 37.22 | 17,888,292 | |||||||||||||||
|
February
|
36.75 | 40.73 | 33.85 | 36.00 | 18,381,125 | |||||||||||||||
|
March
|
35.50 | 40.77 | 32.36 | 37.52 | 18,480,834 | |||||||||||||||
|
April
|
36.89 | 44.49 | 36.80 | 42.70 | 17,272,564 | |||||||||||||||
|
May
|
42.94 | 46.69 | 40.05 | 44.40 | 12,159,714 | |||||||||||||||
|
June
|
44.97 | 48.41 | 42.50 | 46.38 | 13,671,593 | |||||||||||||||
|
July
|
46.18 | 48.90 | 38.35 | 47.90 | 19,086,785 | |||||||||||||||
|
August
|
48.95 | 55.96 | 48.76 | 52.42 | 10,938,822 | |||||||||||||||
|
September
|
51.95 | 54.48 | 49.37 | 50.10 | 12,911,527 | |||||||||||||||
|
October
|
50.23 | 50.84 | 45.41 | 46.90 | 11,792,086 | |||||||||||||||
|
November
|
46.56 | 53.22 | 46.43 | 50.97 | 8,003,124 | |||||||||||||||
|
December
|
52.74 | 58.17 | 51.50 | 56.79 | 8,507,339 | |||||||||||||||
The following table provides the monthly trading information for our Common Shares on the New York
Stock Exchange during 2009:
| Opening | High | Low | Closing | Volume of | ||||||||||||||||
|
Month
|
Price per | Price per | Price per | Price per | Shares | |||||||||||||||
| Share ($) | Share ($) | Share ($) | Share ($) | Traded | ||||||||||||||||
|
January
|
33.81 | 38.98 | 28.15 | 30.26 | 12,836,132 | |||||||||||||||
|
February
|
29.64 | 33.18 | 27.07 | 28.21 | 11,182,010 | |||||||||||||||
|
March
|
27.56 | 33.10 | 25.11 | 29.63 | 11,703,105 | |||||||||||||||
|
April
|
29.26 | 37.29 | 29.19 | 35.86 | 10,267,837 | |||||||||||||||
|
May
|
36.05 | 41.13 | 34.10 | 40.94 | 9,494,588 | |||||||||||||||
|
June
|
41.35 | 43.91 | 37.28 | 39.80 | 8,490,151 | |||||||||||||||
|
July
|
40.36 | 45.11 | 32.96 | 44.49 | 8,287,929 | |||||||||||||||
|
August
|
45.70 | 51.64 | 44.46 | 47.86 | 6,952,194 | |||||||||||||||
|
September
|
47.36 | 51.00 | 44.55 | 46.75 | 8,967,769 | |||||||||||||||
|
October
|
46.83 | 48.86 | 42.05 | 43.11 | 9,159,843 | |||||||||||||||
|
November
|
43.18 | 50.44 | 43.04 | 48.46 | 6,235,945 | |||||||||||||||
|
December
|
50.11 | 55.43 | 49.31 | 54.00 | 6,886,290 | |||||||||||||||
23
SECTION 8: DIRECTORS AND OFFICERS
Following are the names and municipalities of residence of the directors and officers of the
Company, their positions and principal occupations within the past five years, the period during
which each director has served as director of the Company, and the date on which each director’s
term of office expires.
8.1 Directors
|
Name and Municipality of Residence
|
Position Held and Principal Occupation within | Year of Annual Meeting | |||
| the Preceding Five Years (1) | at which Term of Office | ||||
| Expires (Director | |||||
| Since) | |||||
|
J.E. Cleghorn, O.C., F.C.A.
(3)
Toronto, Ontario, Canada |
Chairman, Canadian Pacific Railway Limited and Canadian Pacific Railway Company |
2010
(2001) |
|||
|
|
|||||
|
T.W. Faithfull
(3)(4)(5)
Oxford, Oxfordshire, England |
Retired President and Chief Executive Officer Shell Canada Limited (oil and gas company) |
2010
(2003) |
|||
|
|
|||||
|
F.J. Green
(4)
Calgary, Alberta, Canada |
President and Chief Executive Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited |
2010
(2006) |
|||
|
|
|||||
|
K.T. Hoeg, C.A.
(2)(6)
Toronto, Ontario, Canada |
Former President and Chief Executive Officer of Corby Distilleries Limited (spirits and wine) |
2010
(2007) |
|||
|
|
|||||
|
Richard C. Kelly
(2)(4)
Minneapolis, Minnesota, U.S.A. |
Chairman and Chief Executive
Officer
Xcel Energy Inc. (a utility supplier of electric power and natural gas) |
2010
(2008) |
|||
|
|
|||||
|
The Hon. J.P. Manley
(2)(3)(6)
Ottawa, Ontario, Canada |
President and Chief Executive Officer, Canadian Council of Chief Executives (non-profit public policy, consultation and advocacy organization) |
2010
(2006) |
|||
|
|
|||||
|
L.J. Morgan
(4)(5)
Bethesda, Maryland, U.S.A. |
Counsel, Covington & Burling LLP (law firm) |
2010
(2006) |
|||
|
|
|||||
|
M. Paquin
(4)(5)
Montreal, Quebec, Canada |
President and Chief Executive Officer, Logistec Corporation (international cargo-handling company) |
2010
(2001) |
|||
|
|
|||||
|
M.E.J. Phelps, O.C.
(3)(5)(6)
West Vancouver, B.C., Canada |
Chairman, Dornoch Capital Inc. (private investment company) |
2010
(2001) |
|||
|
|
|||||
|
R.
Phillips, O.C.,S.O.M., F.Inst.P.
(2)(3)(6)
Regina, Saskatchewan, Canada |
Retired President and Chief Executive Officer, IPSCO Inc. (steel manufacturing company) |
2010
(2001) |
|||
|
|
|||||
|
D.W. Raisbeck
(2)(6)
Sanibel, Florida, U.S.A. |
Retired Vice-Chairman, Cargill Inc. (producer and marketer of agricultural, financial and industrial products) |
2010
(2009) |
|||
|
|
|||||
|
H.T. Richardson, C.M., O.M.
(5)(6)
Winnipeg, Manitoba, Canada |
President and Chief Executive Officer, James Richardson & Sons, Limited (privately owned corporation) |
2010
(2006) |
|||
|
|
|||||
|
M.W. Wright
(2)(3)(4)
Longboat Key, Florida, U.S.A. |
Retired Chairman of the Board and Chief Executive Officer, SUPERVALU INC. (food distributor and grocery retailer) |
2010
(2001) |
|||
|
Notes:
|
||
| (1) |
J.E. Cleghorn was Chairman of the Board of SNC-Lavalin Group from May 2002 until May 2007.
F.J. Green was President and Chief Operating Officer, Canadian Pacific Railway Company and
Canadian Pacific Railway Limited from November 2005 until May 2006, Executive Vice-President
and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway
Limited from
|
24
SECTION 8: DIRECTORS AND OFFICERS
|
October 2004 until November 2005. K.T. Hoeg was President and Chief Executive Officer of Corby
Distilleries Limited from October 1996 to February 2007. The Hon. J.P. Manley was the counsel
for McCarthy Tetrault from July 2004 until October 2009 and President-Elect of the Canadian
Counsel of Chief Executives from October to December 2009. R.C. Kelly was President of Xcel
Energy Inc. from June 2005 to September 2009. D.W. Raisbeck was Vice-Chairman of Cargill Inc.
from 1999 to 2009.
|
||
| (2) |
Member of the Audit, Finance and Risk Management Committee.
|
|
| (3) |
Member of the Corporate Governance and Nominating Committee.
|
|
| (4) |
Member of the Health, Safety, Security and Environment Committee.
|
|
| (5) |
Member of the Management Resources and Compensation Committee.
|
|
| (6) |
Member of the Pension Committee.
|
8.2 Cease Trade Orders, Bankruptcies, Penalties or Sanctions
As a result of the announcement in May 2004 by Nortel Networks Corporation and Nortel Networks
Limited (collectively, the “Nortel Companies”) of the need to restate certain of their previously
reported financial results and the resulting delays in filing interim and annual financial
statements for certain periods by the required filing dates under Ontario securities laws, the
Ontario Securities Commission made a final order on May 31, 2004 prohibiting all trading by
directors, officers and certain current and former employees
including J.E. Cleghorn and J.P. Manley, both former directors. The Quebec and Alberta Securities commissions
issued similar orders. The cease trade order issued by the Ontario Securities Commission was
revoked on June 21, 2005. The Quebec and Alberta orders were revoked shortly thereafter. Mr.
Cleghorn and Mr. Manley were not subject to the Quebec and Alberta orders. Following the March 10,
2006 announcement by the Nortel Companies of the need to restate certain of their previously
reported financial results and the resulting delay in the filing of certain 2005 financial
statements by the required filing dates, the Ontario Securities Commission issued a final
management cease trade order on April 10, 2006 prohibiting all of the directors, officers and
certain current and former employees including Mr. Cleghorn and Mr. Manley from trading in the
securities of the Nortel Companies. The British Columbia and Quebec Securities commissions issued
similar orders. The Ontario Securities Commission lifted the cease trade order effective June 8,
2006 and the British Columbia and the Quebec Securities commissions also lifted their cease trade
orders shortly thereafter. Mr. Cleghorn and Mr. Manley were not subject to the British Columbia
and Quebec orders.
Mr. Manley was a director of the Nortel Companies when the Nortel Companies applied for and was
granted creditor protection under the Companies’ Creditors Arrangement Act on January 14, 2009.
Mr. R. Kelly was President and Chief Executive Officer of NRG Energy, Inc. (“NRG”), a former
subsidiary of Xcel Energy Inc. from June 6, 2002 to May 14, 2003, and a director of NRG from June
2000 to May 14, 2003. In May 2003, NRG and certain of NRG’s affiliates filed voluntary petitions
for reorganization under Chapter 11 of the US Bankruptcy Code to restructure their debt. NRG
emerged from bankruptcy on December 5, 2003.
25
SECTION 8: DIRECTORS AND OFFICERS
8.3 Senior Officers
As at March 15, 2010, the following were executive officers of CP:
|
Name and municipality of residence
|
Position held | Principal occupation within the | ||
| preceding five years | ||||
|
J. E. Cleghorn, O.C., F.C.A.
Toronto, Ontario, Canada |
Chairman | Chairman, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Chairman, SNC-Lavalin Group Inc. (international engineering and construction firm) | ||
|
|
||||
|
F. J. Green
Calgary, Alberta, Canada |
President and Chief Executive Officer | President and Chief Executive Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited | ||
|
|
||||
|
K. B. McQuade
Mesquite, Nevada, U.S.A. |
Executive Vice- President and Chief Financial Officer | Executive Vice-President and Chief Financial Officer Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Executive Vice-President and Chief Information Officer, Norfolk Southern Railroad | ||
|
|
||||
|
J. A. O’Hagan
Calgary, Alberta, Canada |
Senior Vice-President, Strategy and Yield | Senior Vice-President, Strategy and Yield, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President, Canadian Pacific Railway Limited and Vice-President, Strategy and External Affairs, Canadian Pacific Railway Company; Vice-President, Strategy Research and New Market Development, Assistant Vice-President, Strategy and Research, Canadian Pacific Railway Company | ||
|
|
||||
|
B. M. Winter
Calgary, Alberta, Canada |
Senior Vice-President, Operations | Senior Vice-President, Operations, Canadian Pacific Railway Limited and Senior Vice-President, Operations, Canadian Pacific Railway Company; Vice-President Operations, Canadian Pacific Railway Company; Vice-President Transportation and Field Operations, Canadian Pacific Railway Company | ||
|
|
||||
|
R. H. Foot
Calgary, Alberta, Canada |
Group Vice-President, Sales | Group Vice-President, Sales, Canadian Pacific Railway Company; Vice-President, Sales & Marketing, Merchandise, Canadian Pacific Railway Company | ||
26
SECTION 8: DIRECTORS AND OFFICERS
|
Name and municipality of residence
|
Position held | Principal occupation within the | ||
| preceding five years | ||||
|
J. Michael Franczak
Calgary, Alberta, Canada |
Group Vice-President, Operations | Vice-President Operations, Canadian Pacific Railway Company; Vice-President Transportation, Canadian Pacific Railway Company; Assistant Vice-President Transportation, Canadian Pacific Railway Company | ||
|
|
||||
|
J. R. Milloy
Calgary, Alberta, Canada |
Group Vice-President, Marketing & Yield | Group Vice-President, Marketing & Yield, Canadian Pacific Railway Company; Vice-President, Revenue & Yield Management, Canadian Pacific Railway Company; Vice-President Marketing & Yield, Canadian Pacific Railway Company; Assistant Vice-President Yield Management, Canadian Pacific Railway Company | ||
|
|
||||
|
R. A. Shields
Calgary, Alberta, Canada |
Group Vice-President, Human Resources and Industrial Relations | Group Vice-President, Human Resources and Industrial Relations, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President, Human Resources and Industrial Relations, Canadian Pacific Railway Limited and Canadian Pacific Railway Company | ||
|
|
||||
|
M. G. Allison
Calgary, Alberta, Canada |
Vice-President and Treasurer | Vice-President and Treasurer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Vice-President and Treasurer, Suncor Energy, Inc.; Vice-President Process Integration, Suncor Energy Inc.; Vice-President Business Services — Natural Gas & Renewable Energy — Suncor Energy Inc. | ||
|
|
||||
|
D. B. Campbell
Calgary, Alberta, Canada |
Vice-President, Finance | Vice-President, Finance, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President, Corporate Planning, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President Business Planning and Development, Canadian Pacific Railway Company | ||
|
|
||||
|
B. W. Grassby
Calgary, Alberta, Canada |
Vice-President and Comptroller | Vice-President and Comptroller, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Acting Chief Financial Officer and Vice-President and Comptroller, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Vice-President and Comptroller, Canadian Pacific Railway Company and Canadian Pacific Railway Limited | ||
|
|
||||
|
P. A. Guthrie, Q.C.
Municipal District of Rockyview, Alberta, Canada |
Vice-President, Law | Vice-President, Law, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Assistant Vice-President Legal Services, Canadian Pacific Railway Company | ||
27
SECTION 8: DIRECTORS AND OFFICERS
|
Name and municipality of residence
|
Position held | Principal occupation within the | ||
| preceding five years | ||||
|
K. L. Fleming
Calgary, Alberta, Canada |
Corporate Secretary | Corporate Secretary, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Associate Corporate Secretary, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Legal Counsel Labour & Employment Coordinator, Canadian Pacific Railway Company; Labour Coordinator, Canadian Pacific Railway Company | ||
8.4 Shareholdings of Directors and Officers
As at December 31, 2009, the directors and senior officers of CPRL owned or controlled a total of
131,320 shares representing approx. 0.08% of the outstanding shares at that date (168,470,143).
28
SECTION 9: LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the normal course of business.
Following are the only significant legal proceedings currently in progress.
9.1 Stoney Tribal Council v. Canada, EnCana and CP
On February 26, 1999, a Statement of Claim was issued in the Court of Queen’s Bench of Alberta,
Judicial Centre of Calgary. The Stoney Tribal Council filed an action against CP and others in the
amount of $150 million for alleged trespass and unlawful removal of oil and gas from reserve lands.
No steps have been taken in this action since pleadings were filed and we believe no provision is
required for this lawsuit.
29
SECTION 10: TRANSFER AGENTS AND REGISTRARS
10.1 Transfer Agent
Computershare Investor Services Inc., with transfer facilities in Montreal, Toronto, Calgary and
Vancouver, serves as transfer agent and registrar for CP’s Common Shares in Canada.
Computershare Trust Company NA, Denver, Colorado, serves as co-transfer agent and co-registrar for
CP’s Common Shares in the United States.
Requests for information should be directed to:
Computershare Trust Company of Canada
100 University Avenue, 9 th Floor
Toronto, Ontario Canada
M5J 2Y1
100 University Avenue, 9 th Floor
Toronto, Ontario Canada
M5J 2Y1
30
SECTION 11: INTERESTS OF EXPERTS
The Company’s independent auditors are PricewaterhouseCoopers LLP, Chartered Accountants.
PricewaterhouseCoopers LLP has issued an independent auditors’ report dated February 25, 2010, in
respect of the Company’s consolidated financial statements, as at December 31, 2009 and 2008 and
for each of the years in the three year period ended December 31, 2009. They have also prepared an
audit report on the effectiveness of internal control over financial reporting, at December 31,
2009. PricewaterhouseCoopers LLP has advised that they are independent with respect to CP within
the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of
Alberta and the rules of the US Securities and Exchange Commission.
31
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
12.1 Composition of the Audit, Finance and Risk Management Committee and Relevant Education and
Experience
The following individuals comprise the entire membership of the Audit, Finance and Risk Management
Committee (“the Committee”).
Krystyna T. Hoeg
- Ms. Hoeg is the former President and Chief Executive Officer of Corby
Distilleries Limited, a marketer and seller of spirits and wine, a position that she held from
October 1996 to February 2007. She is a director of Imperial Oil Limited, Sun Life Financial Inc.,
Shoppers Drug Mart Corporation, Cineplex Galaxy Income Fund, Ganong Bros. Limited and Samuel, Son &
Co., Limited. She is also on the Board of the Toronto East General Hospital. Ms. Hoeg is a
Chartered Accountant (1982) and holds a B.Sc. from McMaster University, and a B.Com. and an M.Sc.
from the University of Windsor.
Richard C. Kelly
- Mr. Kelly is Chairman and Chief Executive Officer of Xcel Energy Inc., a utility
supplier of electric power and natural gas service in eight Western and Midwestern States. He has
held that position since September 2009. From December 2005 to September 2009 he was Chairman of
the Board, President and Chief Executive Officer, from June to mid-December 2005 he served as
President and Chief Executive Officer, and previous to that he served as Chief Financial Officer.
Mr. Kelly is Vice-Chairman of Edison Electric Institute, Chairman of the Board of Trustees of the
Science Museum of Minnesota and a Board member of the Capital City Partnership, the Electric Power
Research Institute, the Nuclear Energy Institute Regis University and director on the Denver Metro
Chamber of Commerce. Mr. Kelly earned both an M.B.A. and a bachelor’s degree in accounting from
Regis University.
John P. Manley
- Mr. Manley is President and Chief Executive Officer of the Canadian Council of
Chief Executives. He has held that position since January 2010. From May 2004 to December 2009 he
was counsel at the law firm of McCarthy Tétrault LLP. He is a director of Canadian Imperial Bank
of Commerce, CAE Inc. and a director and Board Chair of Optosecurity Inc. (a private company). In
addition, Mr. Manley serves on the Boards of the University of Waterloo, MaRS Discovery District,
National Arts Center Foundation, CARE Canada, The Conference Board of Canada and the Institute for
Research on Public Policy. In October 2007 he was appointed by the Prime Minister to Chair the
Independent Panel on Canada’s role in Afghanistan. Mr. Manley was previously the Member of
Parliament for Ottawa South from November 1988 to June 2004. As a Member of Parliament, Mr. Manley
also held various positions in the Canadian Federal Government, including Deputy Prime Minister of
Canada from January 2002 to December 2003, Minister of Finance from June 2002 to December 2003,
Minister of Foreign Affairs from October 2000 to January 2002 and Minister of Industry prior
thereto. He graduated from Carleton University with a B.A. and from the University of Ottawa with
an LL.B. He was granted the designation C.Dir (Chartered Director) by McMaster University in
February 2006.
Roger Phillips
- Mr. Phillips is the Retired President and Chief Executive Officer of IPSCO Inc., a
steel manufacturing company. He held that position from February 1982 until his retirement in
December 2001. He is a director of Toronto Dominion Bank, Imperial Oil Limited and Cliffs Natural
Resources. Mr. Phillips is a Fellow of the Institute of Physics and a Member of the Canadian
Association of Physicists. He is also President of La Sauciere Investments Inc., a private
company. He was appointed an Officer of the Order of Canada in 1999 and was presented with the
Saskatchewan Order of Merit in 2002. He graduated from McGill University in Montreal with a B.Sc.
in Physics and Mathematics.
David W. Raisbeck
- Mr. Raisbeck is the Retired Vice-Chairman of Cargill Inc., a position he held
from 1999 to 2009. Mr. Raisbeck joined Cargill in 1971 and held various positions in the Company
including President of Cargill’s Trading Sector, 1993 to 1995; Executive Vice-President, 1995 to
1999 and Executive Supervisor of Human Resources, 1996 to 1999. He retired from Cargill management
in 2008 and from Cargill’s board of directors in 2009. Mr. Raisbeck is Chairman of the Board of
CarVal Asset Management and sits on the board of directors of Cardinal Health, Eastman Chemical,
and the Greater Minneapolis YMCA (Honorary). He is a governor of the Iowa State University
Foundation and is a member of the Dean’s Advisory Council for the school of business at Iowa State
University. He received a bachelor’s degree in industrial administration from Iowa State
University and completed the executive MBA program at the University of Southern California.
Michael
W. Wright (Chair)
- Mr. Wright is the Retired Chairman of the Board and Chief Executive
Officer of SUPERVALU INC., a food distributor and grocery retailer. He was Chairman and Chief
Executive Officer from June 1981 to June 2001 and Chairman until June 2002. He is a Past Chairman
of Food Distributors International and the Food Marketing Institute, and is a director of Honeywell
International, Inc., S.C. Johnson & Son, Inc. and Cargill Inc. He is a Trustee Emeritus of the
University of
Minnesota Foundation and the Board of Trustees of St. Thomas Academy. He graduated from the
University of Minnesota with a B.A. and from the University of Minnesota Law School with a J.D.
(Honours).
32
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
Each of the aforementioned committee members has been determined by the board to be independent and
financially literate within the meaning of National Instrument 52-110.
12.2 Pre-Approval of Policies and Procedures
The Committee has adopted a written policy governing the pre-approval of audit and non-audit
services to be provided to CP by our independent auditors. The policy is reviewed annually and the
audit and non-audit services to be provided by our independent auditors, as well as the budgeted
amounts for such services, are pre-approved at that time. Our Vice-President and Comptroller must
submit to the Committee at least quarterly a report of all services performed or to be
performed by our independent auditors pursuant to the policy. Any additional audit or non-audit
services to be provided by our independent auditors either not included among the pre-approved
services or exceeding the budgeted amount for such pre-approved services by more than 10% must be
individually pre-approved by the Committee or its Chairman, who must report all such additional
pre-approvals to the Committee at its next meeting following the granting thereof. Our independent
auditors’ annual audit services engagement terms and fees are subject to the specific pre-approval
of the Committee. In addition, prior to the granting of any pre-approval, the Committee or its
Chairman, as the case may be, must be satisfied that the performance of the services in question
will not compromise the independence of our independent auditors. Our Chief Internal Auditor
monitors compliance with this policy.
12.3 Audit, Finance and Risk Management Committee Charter
The term “Corporation” herein shall refer to each of Canadian Pacific Railway Limited (“CPRL”) and
Canadian Pacific Railway Company (“CPRC”), and the terms “Board”, “Directors”, “Board of Directors”
and “Committee” shall refer to the Board, Directors, Board of Directors, or Committee of CPRL or
CPRC, as applicable.
| A. |
Committee and Procedures
|
|
| 1. |
Purposes
|
The purposes of the Audit, Finance and Risk Management Committee (the “Committee”) of the Board
of Directors of the Corporation are to fulfill applicable public company audit committee legal
obligations and to assist the Board of Directors in fulfilling its oversight responsibilities
in relation to the disclosure of financial statements and information derived from financial
statements, and in relation to risk management matters including:
| • |
the review of the annual and interim financial statements of the Corporation;
|
||
| • |
the integrity and quality of the Corporation’s financial reporting and systems
of internal control, and risk management;
|
||
| • |
the Corporation’s compliance with legal and regulatory requirements;
|
||
| • |
the qualifications, independence, engagement, compensation and performance of
the Corporation’s external auditors; and
|
||
| • |
the performance of the Corporation’s internal audit function;
|
and to prepare, if required, an audit committee report for inclusion in the Corporation’s
annual management proxy circular, in accordance with applicable rules and regulations.
The Corporation’s external auditors shall report directly to the Committee.
| 2. |
Composition of Committee
|
The members of the Committee of each of CPRL and CPRC shall be identical and shall be Directors
of CPRL and CPRC, respectively. The Committee shall consist of not less than three and not
more than six Directors, none of whom is either an officer or employee of the Corporation or
any of its subsidiaries. Members of the Committee shall meet applicable requirements and
guidelines for audit committee service, including requirements and guidelines with respect to
being independent and unrelated to the Corporation and to having accounting or related
financial management expertise and financial literacy, set forth in applicable securities laws
or the rules of any stock exchange on which the Corporation’s securities are listed for
trading. No director who serves on the audit committee of more than two public companies other
than the Corporation shall be eligible to serve as a member of the Committee, unless the Board
of Directors has
determined that such simultaneous service would not impair the ability of such member to
effectively serve on the Committee. Determinations as to whether a particular Director
satisfies the requirements for membership on the Committee shall be affirmatively made by the
full Board.
33
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
| 3. |
Appointment of Committee Members
|
Members of the Committee shall be appointed from time to time by the Board and shall hold
office at the pleasure of the Board. Where a vacancy occurs at any time in the membership of
the Committee, it may be filled by the Board. The Board shall fill a vacancy whenever
necessary to maintain a Committee membership of at least three Directors.
| 4. |
Committee Chair
|
The Board shall appoint a Chair for the Committee from among the Committee members.
| 5. |
Absence of Committee Chair
|
If the Chair of the Committee is not present at any meeting of the Committee, one of the other
members of the Committee who is present at the meeting shall be chosen by the Committee to
preside at the meeting.
| 6. |
Secretary of Committee
|
The Committee shall appoint a Secretary who need not be a director of the Corporation.
| 7. |
Meetings
|
The Committee shall meet at regularly scheduled meetings at least once every quarter and shall
meet at such other times during each year as it deems appropriate. In addition, the Chair of
the Committee may call a special meeting of the Committee at any time.
| 8. |
Quorum
|
Three members of the Committee shall constitute a quorum.
| 9. |
Notice of Meetings
|
Notice of the time and place of every meeting shall be given in writing by any means of
transmitted or recorded communication, including facsimile, telex, telegram or other electronic
means that produces a written copy, to each member of the Committee at least 24 hours prior to
the time fixed for such meeting; provided however, that a member may in any manner waive a
notice of a meeting. Attendance of a member at a meeting constitutes a waiver of notice of the
meeting, except where a member attends a meeting for the express purpose of objecting to the
transaction of any business on the grounds that the meeting is not lawfully called.
| 10. |
Attendance of Others at Meetings
|
At the invitation of the Chair of the Committee, other individuals who are not members of the
Committee may attend any meeting of the Committee.
| 11. |
Procedure, Records and Reporting
|
Subject to any statute or the articles and by-laws of the Corporation, the Committee shall fix
its own procedures at meetings, keep records of its proceedings and report to the Board when
the Committee may deem appropriate (but not later than the next meeting of the Board). The
minutes of its meetings shall be tabled at the next meeting of the Board.
| 12. |
Delegation
|
The Committee may delegate from time to time to any person or committee of persons any of the
Committee’s responsibilities that lawfully may be delegated.
| 13. |
Report to Shareholders
|
The Committee shall prepare a report to shareholders or others concerning the Committee’s
activities in the discharge of its responsibilities, when and as required by applicable laws or
regulations.
| 14. |
Guidelines to Exercise of Responsibilities
|
The Board recognizes that meeting the responsibilities of the Committee in a dynamic business
environment requires a degree of flexibility. Accordingly, the procedures outlined in these
Terms of Reference are meant to serve as guidelines rather than inflexible rules, and the
Committee may adopt such different or additional procedures as it deems necessary from time to
time.
34
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
| 15. |
Use of Outside Legal, Accounting or Other Advisors; Appropriate Funding
|
The Committee may retain, at its discretion, outside legal, accounting or other advisors, at
the expense of the Corporation, to obtain advice and assistance in respect of any matters
relating to its duties, responsibilities and powers as provided for or imposed by these Terms
of Reference or otherwise by law.
The Committee shall be provided by the Corporation with appropriate funding, as determined by
the Committee, for payment of:
| (i) |
compensation of any outside advisers as contemplated by the immediately
preceding paragraph;
|
||
| (ii) |
compensation of any independent auditor engaged for the purpose of preparing or
issuing an audit report or performing other audit, review or attest services for the
Corporation; or
|
||
| (iii) |
ordinary administrative expenses that are necessary or appropriate in carrying
out the Committee’s duties.
|
All outside legal, accounting or other advisors retained to assist the Committee shall be
accountable ultimately to the Committee.
| 16. |
Remuneration of Committee Members
|
No member of the Committee shall receive from the Corporation or any of its affiliates any
compensation other than the fees to which he or she is entitled as a Director of the
Corporation or a member of a committee of the Board. Such fees may be paid in cash and/or
shares, options or other in-kind consideration ordinarily available to Directors.
B. Mandate
| 17. |
The Committee’s role is one of oversight. Management is responsible for preparing the
interim and annual financial statements of the Corporation and for maintaining a system of
risk assessment and internal controls to provide reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded and reported properly, for
maintaining disclosure controls and procedures to ensure that it is informed on a timely basis
of material developments and the Corporation complies with its public disclosure obligations,
and for ensuring compliance by the Corporation with legal and regulatory requirements. The
external auditors are responsible for auditing the Corporation’s financial statements. In
carrying out its oversight responsibilities, the Committee does not provide any professional
certification or special assurance as to the Corporation’s financial statements or the
external auditors’ work.
|
|
|
The Committee shall:
|
||
|
Audit Matters
|
|
External Auditors’ Report on Annual Audit
|
| a) |
obtain and review annually prior to the completion of the external auditors’ annual
audit of the year-end financial statements a report from the external auditors describing:
|
| (i) |
all critical accounting policies and practices to be used;
|
||
| (ii) |
all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with management, the
ramifications of the use of such alternative disclosures and treatments, and the
treatment preferred by the external auditors; and
|
||
| (iii) |
other material written communications between the external auditors and
management, such as any management letter or schedule of unadjusted differences;
|
|
Management’s and Internal Auditors’ Reports on External Audit Issues
|
| b) |
review any reports on the above or similar topics prepared by management or the
internal auditors and discuss with the external auditors any material issues raised in
such reports;
|
|
Annual Financial Reporting Documents and External Auditors’ Report
|
| c) |
meet to review with management, the internal auditors and the external auditors the
Corporation’s annual financial statements, the report of the external auditors thereon,
the related Management’s Discussion and Analysis, and the information derived from the
financial statements, as contained in the Annual Information Form and the Annual Report.
Such review will include obtaining assurance from the external auditors that the audit was
conducted in a manner consistent with applicable law and will include a review of:
|
| (i) |
all major issues regarding accounting principles and financial statement
presentations, including any significant changes in the Corporation’s selection or
application of accounting policies or principles;
|
35
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
| (ii) |
all significant financial reporting issues and judgments made in
connection with the preparation of the financial statements, including the effects
on the financial statements of alternative methods within generally accepted
accounting principles;
|
||
| (iii) |
the effect of regulatory and accounting issues, as well as off-balance
sheet structures, on the financial statements;
|
||
| (iv) |
all major issues as to the adequacy of the Corporation’s internal
controls and any special steps adopted in light of material control deficiencies;
and
|
||
| (v) |
the external auditors’ judgment about the quality, and not just the
acceptability, of the accounting principles applied in the Corporation’s financial
reporting;
|
| d) |
following such review with management and the external auditors, recommend to the
Board of Directors whether to approve the audited annual financial statements of the
Corporation and the related Management’s Discussion and Analysis, and report to the Board
on the review by the Committee of the information derived from the financial statements
contained in the Annual Information Form and Annual Report;
|
|
Interim Financial Statements and MD&A
|
| e) |
review with management, the internal auditors and the external auditors the
Corporation’s interim financial statements and its interim Management’s Discussion and
Analysis, and if thought fit, approve the interim financial statements and interim
Management’s Discussion and Analysis and the public release thereof by management;
|
|
Earnings Releases, Earnings Guidance
|
| f) |
review and discuss earnings press releases, including the use of “pro forma” or
“adjusted” information determined other than in accordance with generally accepted
accounting principles, and the disclosure by the Corporation of earnings guidance and
other financial information to the public including analysts and rating agencies, it being
understood that such discussions may, in the discretion of the Committee, be done
generally (i.e., by discussing the types of information to be disclosed and the type of
presentation to be made) and that the Committee need not discuss in advance each earnings
release or each instance in which the Corporation discloses earnings guidance or other
financial information; and be satisfied that adequate procedures are in place for the
review of such public disclosures and periodically assess the adequacy of those
procedures;
|
|
Material Litigation, Tax Assessments, Etc.
|
| g) |
review with management, the external auditors and, if necessary, legal counsel all
legal and regulatory matters and litigation, claims or contingencies, including tax
assessments, that could have a material effect upon the financial position of the
Corporation, and the manner in which these matters may be, or have been, disclosed in the
financial statements; and obtain reports from management and review with the Corporation’s
chief legal officer, or appropriate delegates, the Corporation’s compliance with legal and
regulatory requirements;
|
|
Oversight of External Auditors
|
| h) |
subject to applicable law relating to the appointment and removal of the external
auditors, be directly responsible for the appointment, retention, termination,
compensation and oversight of the external auditors; and be responsible for the resolution
of disagreements between management and the external auditors regarding financial
reporting;
|
|
Rotation of External Auditors’ Audit Partners
|
| i) |
review and evaluate the lead audit partner of the external auditors and assure the
regular rotation of the lead audit partner and the audit partner responsible for reviewing
the audit and other audit partners, as required by applicable law; and consider whether
there should be a regular rotation of the external audit firm itself;
|
|
External Auditors’ Internal Quality Control
|
| j) |
obtain and review, at least annually, and discuss with the external auditors a report
by the external auditors describing the external auditors’ internal quality-control
procedures, any material issues raised by the most recent internal quality-control review,
or peer review, of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, respecting one
or more independent audits carried out by the external auditors, and any steps taken to
deal with any such issues;
|
36
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
External Auditors’ Independence
|
| k) |
review and discuss at least annually with the external auditors all relationships
that the external auditors and their affiliates have with the Corporation and its
affiliates in order to assess the external auditors’ independence, including, without
limitation:
|
| (i) |
obtaining and reviewing, at least annually, a formal written statement
from the external auditors delineating all relationships that in the external
auditors’ professional judgment may reasonably be thought to bear on the
independence of the external auditors with respect to the Corporation,
|
||
| (ii) |
discussing with the external auditors any disclosed relationships or
services that may affect the objectivity and independence of the external auditors,
and
|
||
| (iii) |
recommending that the Board take appropriate action in response to the
external auditors’ report to satisfy itself as to the external auditors’
independence;
|
|
Policies Regarding Hiring of External Auditors’ Employees and Former Employees
|
| l) |
set clear policies for the hiring by the Corporation of partners, employees and
former partners and employees of the external auditors;
|
|
Pre-Approval of Audit and Non-Audit Services Provided by External Auditors
|
| m) |
be solely responsible for the pre-approval of all audit and non-audit services to be
provided to the Corporation and its subsidiary entities by the external auditors (subject
to any prohibitions provided in applicable law), and of the fees paid for these services;
provided however, that the Committee may delegate to an independent member or members of
the Committee authority to pre-approve such non-audit services, and such member(s) shall
report to the Committee at its next meeting following the granting any pre-approvals
granted pursuant to such delegated authority;
|
||
| n) |
review the external auditors’ annual audit plan (including scope, staffing, reliance
on internal controls and audit approach);
|
||
| o) |
review the external auditors’ engagement letter;
|
|
Oversight of Internal Audit
|
| p) |
oversee the internal audit function by reviewing senior management action with
respect to the appointment or dismissal of the Chief Internal Auditor; afford the Chief
Internal Auditor unrestricted access to the Committee; review the charter, activities,
organizational structure, and the skills and experience of the Internal Audit Department;
discuss with management and the external auditors the competence, performance and
cooperation of the internal auditors; and discuss with management the compensation of the
internal auditors;
|
| q) |
review and consider, as appropriate, any significant reports and recommendations
issued by the Corporation or by any external party relating to internal audit issues,
together with management’s response thereto;
|
|
Internal Controls and Financial Reporting Processes
|
| r) |
review with management, the internal auditors and the external auditors, the
Corporation’s financial reporting processes and its internal controls;
|
||
| s) |
review with the internal auditors the adequacy of internal controls and procedures
related to any corporate transactions in which directors or officers of the Corporation
have a personal interest, including the expense accounts of officers of the Corporation at
the level of Vice-President and above and officers’ use of corporate assets, and consider
the results of any reviews thereof by the internal or external auditors;
|
|
Complaints Processes
|
| t) |
establish procedures for:
|
| (i) |
the receipt, retention and treatment of complaints received by the
Corporation regarding accounting, internal accounting controls or auditing matters,
and
|
||
| (ii) |
the confidential, anonymous submission by employees of the Corporation of
concerns regarding questionable accounting or auditing matters,
|
|
and review periodically with management and the internal auditors these procedures and any
significant complaints received;
|
37
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
Separate Meetings with External Auditors, Internal Audit, Management
|
| u) |
meet separately with management, the external auditors and the internal auditors
periodically to discuss matters of mutual interest, including any audit problems or
difficulties and management’s response thereto, the responsibilities, budget and staffing
of the Internal Audit Department and any matter they recommend bringing to the attention
of the full Board;
|
|
Finance
|
| v) |
review all major financings, including financial statement information contained in
related prospectuses, information circulars, etc., of the Corporation and its subsidiaries
and annually review the Corporation’s financing plans and strategies;
|
||
| w) |
review management’s plans with respect to Treasury operations, including such items
as financial derivatives and hedging activities;
|
|
Risk Management
|
| x) |
discuss risk assessment and risk management policies and processes to be implemented
for the Corporation, review with management and the Corporation’s internal auditors the
effectiveness and efficiency of such policies and processes and their compliance with
other relevant policies of the Corporation, and make recommendations to the Board with
respect to any outcomes, findings and issues arising in connection therewith;
|
| y) |
review management’s program to obtain appropriate insurance to mitigate risks;
|
|
Terms of Reference and Performance Evaluation of Committee
|
| z) |
review and reassess the adequacy of these Terms of Reference at least annually, and
otherwise as it deems appropriate, and recommend changes to the Board. The Committee
shall also undertake an annual evaluation of the Committee’s performance.
|
|
Other
|
| aa) |
perform such other activities, consistent with these Terms of Reference, the
Corporation’s articles and by-laws and governing law, as the Committee or the Board deems
appropriate.
|
||
| bb) |
report regularly to the Board of Directors on the activities of the Committee.
|
12.4 Audit and Non-Audit Fees and Services
Fees payable to PricewaterhouseCoopers LLP for the years ended December 31, 2009, and December 31,
2008, totalled $3,396,200 and $3,195,200, respectively, as detailed in the following table:
| Year ended | Year ended | |||||||
| December 31, 2009 | December 31, 2008 | |||||||
|
Audit Fees
|
$ | 2,176,800 | $ | 2,044,700 | ||||
|
Audit-Related Fees
|
$ | 794,800 | $ | 808,600 | ||||
|
Tax Fees
|
$ | 424,600 | $ | 341,900 | ||||
|
All Other Fees
|
$ | — | $ | — | ||||
|
TOTAL
|
$ | 3,396,200 | $ | 3,195,200 | ||||
The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
12.4.1 Audit Fees
Audit fees were for professional services rendered for the audit of CP’s annual financial
statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors’ report on the
effectiveness of internal controls over financial reporting.
12.4.2 Audit-Related Fees
Audit-related fees were for attestation and related services reasonably related to the performance
of the audit or review of the annual financial statements, but which are not reported under “Audit
Fees” above. These services consisted of: the audit or review of financial statements of certain
subsidiaries and of various pension and benefits plans of CP; special attestation services as may
be required by various government entities; access fees for technical accounting database
resources; and
38
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
general advice and assistance related to accounting and/or disclosure matters with
respect to new and proposed Canadian, US and International accounting standards, securities
regulations, and/or laws.
12.4.3 Tax Fees
Tax fees were for professional services related to tax compliance, tax planning and tax advice.
These services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding corporate tax audits; tax planning and advisory services relating to common
forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax,
and valued added tax); and access fees for taxation database resources.
12.4.4 All Other Fees
Fees disclosed under this category would be for products and services other than those described
under “Audit Fees”, “Audit-Related Fees” and “Tax Fees” above. In both 2009 and 2008, there were
no services in this category.
39
SECTION 13: FORWARD LOOKING INFORMATION
This AIF contains certain forward-looking statements within
the meaning of the
Private Securities Litigation Reform Act of
1995
(US) and other relevant securities legislation relating
but not limited to expected improvements in operating efficiency and fluidity, the ability of information technology to
improve service and provide sophisticated billing options, the benefits of lean process/kaizen principles and the cost of
environmental remediation. Forward-looking information typically contains statements with words such as “anticipate”,
“believe”, “expect”, “plan” or similar words suggesting future outcomes.
Readers are cautioned to not place undue reliance on
forward-looking information because it is possible that actual results will be different from our forward-looking
information. In addition, except as required by law, we undertake no obligation to update publicly or otherwise revise
any forward-looking information, whether as a result of new information, future events or otherwise.
The forward-looking information in this document involves
numerous assumptions, inherent risks and uncertainties, including but not limited to the following factors: the ability to
implement cost-cutting and efficiency initiatives, the effectiveness of new information technology and estimates of
future costs.
40
SECTION
14: ADDITIONAL INFORMATION
14.1 Additional Company Information
Additional information about CP is available on SEDAR (System for Electronic Document Analysis and
Retrieval) at
www.sedar.com
in Canada, and on the US Securities and Exchange Commission’s
website (EDGAR) at
www.sec.gov
. The aforementioned information is issued and made
available in accordance with legal requirements and is not incorporated by reference into this AIF
except as specifically stated.
Additional information, including directors’ and officers’ remuneration and indebtedness, principal
holders of our securities and securities authorized for issuance under equity compensation plans,
where applicable, is contained in the information circular for our most recent annual meeting of
shareholders at which directors were elected.
Additional financial information is provided in our Consolidated Financial Statements and MD&A for
the most recently completed financial year.
This
information is also available on our website at
www.cpr.ca.
41
|
1
|
Chairman’s Message to Shareholders | |
|
2
|
Chief Executive Officer’s Letter to Shareholders | |
|
3
|
Management’s Discussion and Analysis | |
|
50
|
Financial Statements | |
|
107
|
Shareholder Information | |
|
109
|
Directors and Committees | |
|
110
|
Senior Officers of the Company |
CHAIRMAN’S
MESSAGE TO SHAREHOLDERS
Over the last year the Board of Directors was actively engaged
in overseeing the strategy of Canadian Pacific Railway during
uncertain economic times while continuing to apply and enhance
strong corporate governance practices.
We have a seasoned and independent Board of Directors who
continuously review the strategic direction of CP in order to
protect and enhance shareholder value. The successful financial
flexibility and cost reduction initiatives undertaken by
management leave CP well positioned to be resilient for the
future.
The Board of Directors is committed to ensuring that we have the
right mix of broad and diverse expertise to carry out our
responsibilities. During these challenging times, we recognize
the importance of sound business judgment, thoughtful analysis,
and strong personal integrity in the boardroom. In 2009, we were
pleased to welcome our newest director, Mr. David Raisbeck,
who is the retired Vice-Chairman of Cargill Inc. His knowledge
of the global commodity products that are central to CP’s
business, proven strategic vision, and risk management
experience enhance key competencies of the Board.
We remain proactive in adopting and applying best practices in
corporate governance and were honoured to receive the 2009
Governance Gavel award for Director Disclosure from the Canadian
Coalition for Good Governance. We take good governance seriously
and are committed to continuously improving clear and
comprehensive disclosure. Commencing in 2011, we will be
providing shareholders with the opportunity to participate in an
advisory vote on executive compensation, also known as “say
on pay”.
To assist us in fulfilling our role of safeguarding the
interests of shareholders, we continue our director education
program to continually expand our knowledge of CP and the
railway industry. Over the past year, we have received regular
reports and presentations on the changing regulatory and
business environment. We also engaged in an extensive tour of
the rail and port infrastructure located in the lower mainland
of British Columbia, Canada.
As Chairman, I would like to take this opportunity to extend the
Board’s appreciation to Fred Green, his management team,
and all employees of CP for their contributions to the success
of CP in a challenging year. Everyone at CP remains focused
on safe operations while continuing to enhance the stability and
strength of the franchise.
Sincerely,
John E. Cleghorn, O.C., FCA
Chairman of the Board
|
2009
ANNUAL REPORT |
1 | |
CHIEF EXECUTIVE
OFFICER’S LETTER TO SHAREHOLDERS
2009 was an extraordinary year and Canadian Pacific was equal to
the task. While we experienced unprecedented decreases in
traffic volumes, we met those challenges with a solid strategy
based on five key objectives:
| o | Managing our balance sheet to ensure financial flexibility; |
| o | Driving productivity improvements to reduce variable costs; |
| o | Reducing structural costs; |
| o | Sustaining price increases through consistent, reliable service; and |
| o | Creating and preserving growth options. |
In uncertain economic times, a strong balance sheet gives CP the
flexibility to seize opportunities as they arise. In 2009, we
completed a number of large financial transactions that
strengthened our balance sheet and improved near term liquidity.
These actions included issuing new equity, multiple debt tenders
and issuances, and the monetization of non strategic assets.
Additionally, we made prepayments in excess of $500 million
to our Canadian and US defined benefit pension plans. As we move
into 2010, CP is well positioned to manage in the ongoing
uncertain economic climate.
In 2009, adjusting our variable expenses to match our revenue
declines was critical and we successfully reduced operating
expenses by 17 percent in line with the decrease in revenue of
18 percent. We stored locomotives and railcars and implemented
technology that reduced locomotive fuel costs. We took the
unfortunate, but necessary, action of temporarily laying off up
to 2,700 employees during the periods of our worst volume
decreases.
We also made good progress on the longer term goal of lowering
our structural costs. We tested and are now running 10,000 foot
trains. We consolidated and rationalized certain mechanical
repair facilities, and we continue to adjust our management
structure.
Despite the significant downturn in the economy, we didn’t
lose sight of creating and preserving opportunities for growth.
In our industry, our investments can have a 10, 20, or
30 year horizon and we must balance near-term pressures
with a long-term horizon. The proposed intermodal facilities in
Regina, Edmonton, Les Cedres outside Montreal, and the Alberta
Industrial Heartland are examples of growth projects that we
continued to pursue, albeit in a paced fashion.
Our vision remains to be the safest, most fluid railway in North
America and in 2009, as we continued to make safety a top
priority, we saw a decline in the incident rate of 23 percent.
CP continues to recognize the importance of maintaining our
partnerships with the more than 1,100 communities through which
we operate. In 2009, we celebrated the
100
th
Anniversary of the completion of the Spiral Tunnels in the
Kicking Horse Pass in partnership with Parks Canada, the town of
Field, B.C. and the Burgess Shale Geoscience Foundation. We also
marked the
100
th
anniversary of the building of the Lethbridge Viaduct. Our
Holiday Train visited over 130 communities in six provinces and
seven states to raise food, money and awareness for local food
banks. This was the
11
th
year
that CP has taken the Holiday Train across the continent, and
despite the tough economic climate, CP recognized that now, more
than ever, the people in our communities need this program and
we remain committed to it.
Canadian Pacific was the official rail services supplier to the
Vancouver 2010 Olympic and Paralympic Winter Games which took
place very recently. Through CP’s sponsorship 28 employees
experienced carrying the Olympic torch, 46 CP volunteers
assisted VANOC
on-site
in
many different roles, and we were privileged to host key
stakeholders on the Royal Canadian Pacific that was located in
Vancouver during the Games. We are proud that our company was a
part of this world welcoming event.
In summary, 2009, while a very difficult year, has proved to be
a turning point for CP. The lessons learned in difficult times
will serve us well as we move into 2010 and beyond. With
continuing economic uncertainty, CP is firmly focused on
managing fixed and variable costs and ensuring we continue to
price for value. Maintaining our financial flexibility and
focusing on safe and efficient operations will position us well
for the future and the inevitable upturn in the economy. Though
we will continue to see change and improvement in our business,
delivering a consistent, quality service to our customers
remains a cornerstone of the CP franchise.
Sincerely,
Fred J. Green
President and Chief Executive Officer
|
2
|
2009
ANNUAL REPORT |
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
For the year ended December 31, 2009
For the year ended December 31, 2009
TABLE OF
CONTENTS
|
2009
ANNUAL REPORT |
3 | |
This Management’s Discussion and Analysis
(“MD&A”) supplements the Consolidated Financial
Statements and related notes for the year ended
December 31, 2009. Except where otherwise indicated, all
financial information reflected herein is expressed in Canadian
dollars. All information has been prepared in accordance with
Canadian generally accepted accounting principles
(“GAAP” or “Canadian GAAP”), except as
described in Section 6.0 Non-GAAP Earnings of this
MD&A.
February 25,
2010
In this MD&A, “our”, “us”,
“we”, “CP” and “the Company” refer
to Canadian Pacific Railway Limited (“CPRL”), CPRL and
its subsidiaries, CPRL and one or more of its subsidiaries, or
one or more of CPRL’s subsidiaries, as the context may
require. Other terms not defined in the body of this MD&A
are defined in Section 25.0 Glossary of Terms.
Unless otherwise indicated, all comparisons of results for the
fourth quarter of 2009 are against the results for the fourth
quarter of 2008. Unless otherwise indicated, all comparisons of
results for 2009 and 2008 are against the results for 2008 and
2007, respectively.
1.0 Business
Profile
CPRL is a holding company whose direct and indirect subsidiaries
operate railways in North America. The main operating subsidiary
of the Company, Canadian Pacific Railway Company
(“CPRC”), was incorporated in 1881. CPRC is one of
Canada’s oldest corporations. From its inception
129 years ago, CPRC has developed into a fully integrated
and technologically advanced Class I railway providing rail
and intermodal freight transportation services over a
15,400 mile network serving the principal business centres
of Canada, from Montreal, Quebec to Vancouver, British Columbia,
and the US Midwest and Northeast regions. Our railway feeds
directly into the US heartland from the East and West coasts.
Agreements with other carriers extend our market reach east of
Montreal in Canada, throughout the US and into Mexico. Through
our subsidiaries, we transport bulk commodities, merchandise
freight and intermodal traffic. CPRL also provides service to
markets in Europe and the Pacific Rim through direct access to
the Port of Montreal, Quebec and the Port Metro Vancouver in
Vancouver, British Columbia, respectively.
Bulk commodities include grain, coal, sulphur and fertilizers.
Merchandise freight consists of finished vehicles and automotive
parts, as well as forest and industrial and consumer products.
Intermodal traffic consists largely of high-value,
time-sensitive retail goods in overseas containers that can be
transported by train, ship and truck, and in domestic containers
and trailers that can be moved by train and truck.
CPRL’s network accesses the US market directly through
three wholly owned subsidiaries: Soo Line Railroad Company
(“Soo Line”), a Class I railway operating in the
US Midwest; Dakota, Minnesota and Eastern Railroad Corporation
(“DM&E”), a wholly owned subsidiary of the Soo
Line, which operates in the US Midwest and the Delaware and
Hudson Railway Company, Inc. (“D&H”), which
operates between eastern Canada and major US Northeast markets,
including New York City, New York; Philadelphia, Pennsylvania;
and Washington, D.C.
2.0
Strategy
Our vision is to become the safest and most fluid railway in
North America. Through the ingenuity of our people, it is our
objective to create long-term value for our customers,
shareholders and employees. We seek to accomplish this objective
through the following three-part strategy:
| o | generating quality revenue growth by realizing the benefits of demand growth in our bulk, intermodal and merchandise business lines with targeted infrastructure capacity investments linked to global trade opportunities; |
| o | improving productivity by leveraging strategic marketing and operating partnerships, executing a scheduled railway through our Integrated Operating Plan (“IOP”) and driving more value from existing assets and resources by improving “fluidity”; and |
| o | continuing to develop a dedicated, professional and knowledgeable workforce that is committed to safety and sustainable financial performance through steady improvement in profitability, increased free cash flow and a competitive return on investment. |
3.0 Additional
Information
Additional information, including our Consolidated Financial
Statements, MD&A, Annual Information Form, press releases
and other required filing documents, is available on SEDAR at
www.sedar.com
in Canada, on EDGAR at
www.sec.gov
in the US and on our website at
www.cpr.ca
. The
aforementioned documents are issued and made available in
accordance with legal requirements and are not incorporated by
reference into this MD&A.
4.0 Financial
Highlights
In 2009, CP adopted a new accounting standard and changed two
accounting policies that were all applied retrospectively. The
new accounting standard resulted in certain pre-operating period
costs being expensed (discussed further in Section 13.1.1
Goodwill and Intangible Assets). In addition, CP changed its
accounting policies with respect to the treatment of prior
service pension costs for unionized employees, amortizing these
costs over the contract period, and the recording of locomotive
overhauls which are now expensed, discussed further in
Section 13.1.3 Pension Prior Service Costs and
Section 13.1.4 Locomotive Overhauls. All three accounting
changes were applied retrospectively, as a result 2008 and 2007
financial information has been restated to conform to CP’s
current policies.
|
4
|
2009
ANNUAL REPORT |
|
Financial
Highlights
| 2009 | 2008 (1) | |||||||||||||||||||
| For the year ended December 31 (in millions, except percentages and per-share data) | 2008 (3) | DM&E (4) | Pro forma (5)(6) | 2007 (1)(2) | ||||||||||||||||
|
Revenues
|
$ | 4,303.2 | $ | 4,931.6 | $ | 295.6 | $ | 5,227.2 | $ | 4,707.6 | ||||||||||
|
Operating
income
(6)
|
900.1 | 1,041.7 | 86.2 | 1,127.9 | 1,160.8 | |||||||||||||||
|
Income, before FX on LTD and other specified
items
(6)
|
460.3 | 619.7 | – | 619.7 | 658.7 | |||||||||||||||
|
Net income
|
612.4 | 607.2 | – | 607.2 | 932.1 | |||||||||||||||
|
Basic earnings per share
|
3.68 | 3.95 | – | 3.95 | 6.05 | |||||||||||||||
|
Diluted earnings per share
|
3.67 | 3.91 | – | 3.91 | 5.99 | |||||||||||||||
|
Diluted earnings per share, before FX on LTD and other specified
items
(6)
|
2.76 | 3.99 | – | 3.99 | 4.23 | |||||||||||||||
|
Dividends declared per share
|
0.9900 | 0.9900 | 0.9000 | |||||||||||||||||
|
Free
cash
(6)
|
(90.1 | ) | 230.9 | 303.4 | ||||||||||||||||
|
Total assets at December 31
|
15,531.4 | 15,157.3 | 13,073.4 | |||||||||||||||||
|
Total long-term financial liabilities at December
31
(7)
|
4,203.9 | 4,844.5 | 4,267.1 | |||||||||||||||||
|
Operating ratio, before other specified
items
(6)
|
79.1 | % | 78.9 | % | 78.4 | % | 75.3 | % | ||||||||||||
|
|
|
(1)
Restated
for the adoption of Canadian Institute of Chartered Accountants
(“CICA”) accounting standard 3064 and accounting
policy changes related to pension prior service costs and
locomotive overhauls, discussed further in Section 13.1
2009 Accounting Changes.
(2)
The
2007 figures include equity income for DM&E (discussed
further in Section 18.0 Acquisition) from October 30,
2007 to December 31, 2007.
(3)
Revenues
and Operating income include DM&E (discussed further in
Section 18.0 Acquisition) from October 30, 2008 to
December 31, 2008.
(4)
DM&E
results for the period January 1, 2008 to October 29,
2008 which under GAAP was reported as one line in equity income
in DM&E.
(5)
Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for the year ended
December 31, 2008.
(6)
These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings. A reconciliation of income and diluted
earning per shares (“EPS”), before FX on LTD and other
specified items, to net income and diluted EPS, as presented in
the consolidated financial statements is provided in
Section 6.0 Non-GAAP Earnings. A reconciliation of
free cash to GAAP cash position is provided in Section 14.4
Free Cash.
(7)
Excludes
future taxes of the following amounts: $2,549.5 million,
$2,527.6 million and $1,619.7 million, and other
non-financial long-term liabilities of $689.0 million,
$706.5 million and $593.7 million for the years 2009,
2008 and 2007 respectively.
|
2009
ANNUAL REPORT |
5 | |
5.0 Operating
Results
CP’s results for the year ended December 31, 2009 are
compared to the year ended December 31, 2008 on a pro forma
basis. Pro forma basis is a non-GAAP measure which redistributes
the DM&E operating results for the period January 1,
2008 to October 29, 2008 originally reported on an equity
income basis of accounting to a
line-by-line
consolidation of revenues and expenses. Pro forma earnings have
no standard meanings prescribed by GAAP and are unlikely to be
comparable to similar measures of other companies (discussed
further in Section 6.0 Non-GAAP Earnings). The results
for the year ended December 31, 2008 as reported are
compared to the year ended December 31, 2007.
5.1 INCOME
Operating income, a non-GAAP measure (discussed further in
Section 6.0 Non-GAAP Earnings), in 2009 was
$900.1 million, down $141.6 million, or 13.6%, from
$1,041.7 million in 2008. On a pro forma basis, operating
income in 2009 was down $227.8 million, or 20.2%, from
$1,127.9 million in 2008.
The decrease in 2009 operating income was primarily due to the
global recession which resulted in lower traffic volumes and
reduced coal revenues as a result of regulatory rate proceedings
and reduced average length of haul on export coal.
This decrease was partially offset by:
| o | the favourable impact of foreign exchange (“FX”, discussed further in Section 25.0 Glossary of Terms); |
| o | overall compensation and benefits declined due to lower volumes, however, the success of variable cost reductions in response to lower volumes resulted in higher incentive compensation and gainshare to employees; |
| o | the net effect of fuel price declines; and |
| o | lower purchased services and other expenses. |
Operating income in 2008 was $1,041.7 million, down
$119.1 million, or 10.3%, from $1,160.8 million in
2007.
The decrease was primarily due to:
| o | the weakening economy in the second half of the year, which resulted in lower volumes; |
| o | the Canadian Transportation Agency (“Agency”) decision directing a downward adjustment of the railway maximum revenue entitlement for movement of regulated grain under the Canadian Transportation Act (“CTA”) which included a provision for repayment of revenues relating to grain rates (discussed further in Section 21.4.1 Regulatory Change); |
| o | increased purchased services and other expenses, due to higher casualty related expenses despite an improved safety performance; |
| o | higher fuel expenses driven by higher West Texas Intermediate (“WTI”) prices and widening refining margins, net of fuel recoveries; and |
| o | higher costs associated with difficult operating conditions, mainly driven by harsh weather conditions on our central and eastern network. |
This decrease was partially offset by:
| o | improved freight rates; |
| o | the consolidation of DM&E results from October 30, 2008 to December 31, 2008; prior to October 30, 2008 results of DM&E were recorded on an equity basis; and |
| o | the favourable impact of the change in FX. |
Net income for the year ended December 31, 2009 was
$612.4 million, an increase of $5.2 million, or 0.9%,
from $607.2 million in 2008. The increase in 2009 was
primarily due to:
| o | gains on the sale of a partnership interest and significant properties (discussed further in Section 10.2 Gain on Sales of Partnership Interest and Significant Properties); |
| o | the absence of the negative impact in 2008 on net income from the loss in fair value of our investment in Asset-backed Commercial Paper (“ABCP”) compared to a small gain recorded in 2009 with respect to the replacement of long-term floating rate notes (discussed further in Section 10.3.1 Change in Estimated Fair Value of Long-term Floating Rate Notes and Asset-backed Commercial Paper); and |
| o | income tax recoveries in 2009. |
The tax recoveries reflected a one time reduction in our future
income tax liability due to the Ontario government passing new
legislation and the resolution of a prior year income tax matter.
The increase was mainly offset by lower operating income and a
loss on termination of a lease (discussed further in
Section 10.1 Loss on Termination of Lease with Shortline
Railway).
Net income for the year ended December 31, 2008 was
$607.2 million, down $324.9 million, or 34.9%, from
$932.1 million in 2007. This decrease was primarily due to:
| o | lower FX gains (net of tax) on US dollar-denominated long-term debt (“LTD”); |
| o | income tax benefits recorded in 2007 due to legislation to reduce corporate income tax rates; |
| o | lower operating income; |
| o | loss in fair value of our investment in ABCP; and |
| o | higher interest expense that was primarily due to the funding required for our acquisition of DM&E (discussed further in Section 14.3 Financing Activities). |
The decreases in net income were partially offset by a full year
of earnings from our investment in DM&E and by lower income
tax expenses driven by lower operating income and lower tax
rates.
5.2 DILUTED
EARNINGS PER SHARE
Diluted earnings per share (“EPS”) was $3.67 in 2009,
a decrease of $0.24, or 6.1% from 2008. Diluted EPS, was $3.91
in 2008, a
|
6
|
2009
ANNUAL REPORT |
|
decrease of $2.08, or 34.7%, from 2007. The decrease in 2009 was
mainly due to the issuance of common shares in the first quarter
as other specified items and FX gains and losses on long-term
debt (“FX on LTD”) mainly offset the decrease in
operating income. The decrease in 2008 reflected lower net
income mainly due to income tax benefits recorded in 2007 as a
result of legislation to reduce corporate income tax rates,
lower FX gains (net of tax) on US dollar-denominated LTD and
lower operating income.
Diluted EPS, before FX on LTD and other specified items was
$2.76 in 2009, a decrease of $1.23 or 30.8%, from 2008. Diluted
EPS before FX on LTD and other specified items was $3.99 in
2008, a decrease of $0.24, or 5.7%, from 2007. The decrease in
2009 was mainly due to decreased operating income. The issuance
of common shares in the first quarter further reduced EPS. The
decrease in 2008 was mainly due to lower income before FX on LTD
and other specified items, mainly caused by lower operating
income. Diluted EPS before FX on LTD and other specified items
is discussed further in Section 6.0 Non-GAAP Earnings.
5.3 OPERATING
RATIO
The operating ratio provides the percentage of revenues used to
operate the railway, and is calculated as operating expenses
divided by revenues. A lower percentage normally indicates
higher efficiency in the operation of the railway.
Our operating ratio, before FX on LTD and other specified items
(discussed further in Section 6.2 Other Specified Items)
increased to 79.1% in 2009, compared with 78.9% in 2008 and
75.3% in 2007.
2009 operating ratio of 79.1% increased by 70 basis
points from 78.4% in 2008 on a pro forma basis. The increase in
2009 was primarily due to lower volumes which were partially
mitigated by cost management initiatives that reduced both
variable and structural costs and lower fuel prices.
Operating ratio in 2008 was 78.9% an increase when compared to
75.3% in 2007. This was due to the weakening economy in the
second half of the year which resulted in lower volumes
(discussed further in Section 7.0 Lines of Business) and
the net impact of fuel prices.
5.4 IMPACT
OF FOREIGN EXCHANGE ON EARNINGS
Fluctuations in FX affect our results because US
dollar-denominated revenues and expenses are translated into
Canadian dollars. US dollar-denominated revenues and expenses
increase when the Canadian dollar weakens in relation to the US
dollar.
In 2009 the Canadian dollar weakened against the US dollar on
average by approximately 9.4% compared to 2008 and strengthened
by approximately 2.8% in 2008 compared with 2007. The average FX
rate for converting US dollars to Canadian dollars increased to
$1.15 in 2009 from $1.05 in 2008 and decreased to $1.05 in 2008
from $1.08 in 2007.
6.0 Non-GAAP Earnings
We present non-GAAP earnings and cash flow information in this
MD&A to provide a basis for evaluating underlying earnings
and liquidity trends in our business that can be compared with
the results of our operations in prior periods. These non-GAAP
earnings exclude FX on LTD, which can be volatile and short
term, and other specified items (discussed further in
Section 6.2 Other Specified Items) that are not among our
normal ongoing revenues and operating expenses.
The adjoining table details a reconciliation of operating income
and income, before FX on LTD and other specified items, to net
income, as presented in the financial statements. Free cash is
calculated as cash provided by operating activities, less cash
used in investing activities and dividends paid, adjusted for
the acquisition of DM&E, changes in cash and cash
equivalent balances resulting from foreign exchange
fluctuations, and excluding changes in the accounts receivable
securitization program and the initial reclassification of cash
to investment in ABCP (discussed further in Section 10.3.1
Change in Estimated Fair Value of Long-term Floating Rate Notes
and Asset-backed Commercial Paper). The measure is used by
management to provide information with respect to investment and
financing decisions and provides a comparable measure for period
to period changes. Free cash is discussed further and is
reconciled to the increase in cash and cash equivalents as
presented in the financial statements in Section 14.4 Free
Cash.
Earnings measures that exclude FX on LTD and other specified
items; operating income; adjusted earnings before interest and
taxes (“adjusted EBIT”); diluted EPS, before FX on LTD
and other specified items; interest coverage ratio and free cash
as described in this MD&A have no standardized meanings and
are not defined by Canadian GAAP and, therefore, are unlikely to
be comparable to similar measures presented by other companies.
Operating income is calculated as revenues less operating
expenses and is a common measure of profitability used by
management. Income, before FX on LTD and other specified items
provides management with a measure of income that can help in a
multi-period assessment of long-term profitability and also
allows management and other external users of our consolidated
financial statements to compare our profitability on a long-term
basis with that of our peers. Diluted EPS, before FX on LTD and
other specified items is also referred to as adjusted diluted
EPS.
CP’s results for fourth-quarter and full year 2009 are
compared to fourth-quarter and full year 2008 on a pro forma
basis. Pro forma basis is a non-GAAP measure which redistributes
the DM&E operating results originally reported on an equity
income basis of accounting to a
line-by-line
consolidation of revenues and expenses. Doing so provides a
comparable measure for period to period changes until DM&E
results are fully consolidated with CP’s operations for
comparative periods (discussed further in Section 18.0
Acquisition).
Interest coverage ratio (discussed further in
Section 14.3.2 Interest Coverage Ratio) is a metric used in
assessing the Company’s debt servicing capabilities, but
does not have a comparable GAAP measure to which it can be
reconciled. This ratio provides an indicator of our debt
servicing capabilities, and how these have changed, period over
period and in comparison to our peers. Interest coverage ratio
reported quarterly is measured on a twelve-month rolling basis.
|
2009
ANNUAL REPORT |
7 | |
SUMMARIZED
STATEMENT OF CONSOLIDATED INCOME
| For the year ended December 31 | For the three months ended December 31 | |||||||||||||||||||||||||||||||||||
| (reconciliation of non-GAAP earnings to GAAP earnings) | 2009 | 2008 (1) | 2007 (1)(2) | 2009 | 2008 (1) | |||||||||||||||||||||||||||||||
| (in millions, except diluted EPS) | 2008 | DM&E (3) | Pro forma (4)(5) | 2008 | DM&E (3) | Pro forma (4)(5) | ||||||||||||||||||||||||||||||
|
Revenues
|
$ | 4,303.2 | $ | 4,931.6 | $ | 295.6 | $ | 5,227.2 | $ | 4,707.6 | $ | 1,121.9 | $ | 1,299.7 | $ | 34.4 | $ | 1,334.1 | ||||||||||||||||||
|
Operating expenses
|
3,403.1 | 3,889.9 | 209.4 | 4,099.3 | 3,546.8 | 852.9 | 1,012.5 | 17.3 | 1,029.8 | |||||||||||||||||||||||||||
|
Operating
income
(5)
|
900.1 | 1,041.7 | 86.2 | 1,127.9 | 1,160.8 | 269.0 | 287.2 | 17.1 | 304.3 | |||||||||||||||||||||||||||
|
Equity income in DM&E
|
– | 50.9 | (50.9 | ) | – | 11.2 | – | 10.4 | (10.4 | ) | – | |||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||
|
Other income and charges, before FX on LTD and other specified
items
(5)
|
31.0 | 22.7 | (0.4 | ) | 22.3 | 29.6 | 2.7 | 8.3 | – | 8.3 | ||||||||||||||||||||||||||
|
Adjusted
EBIT
(5)
|
869.1 | 1,069.9 | 35.7 | 1,105.6 | 1,142.4 | 266.3 | 289.3 | 6.7 | 296.0 | |||||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||
|
Net interest expense
|
273.1 | 261.1 | 1.9 | 263.0 | 204.3 | 62.8 | 73.8 | 0.1 | 73.9 | |||||||||||||||||||||||||||
|
Income tax expense, before income tax on FX on LTD and other
specified
items
(5)
|
135.7 | 189.1 | 33.8 | 222.9 | 268.7 | 44.6 | 49.7 | 6.6 | 56.3 | |||||||||||||||||||||||||||
|
Income, before FX gain (loss) on LTD and other specified
items
(5)
|
460.3 | 619.7 | – | 619.7 | 669.4 | 158.9 | 165.8 | – | 165.8 | |||||||||||||||||||||||||||
|
Foreign exchange gain (loss) on long-term debt
|
||||||||||||||||||||||||||||||||||||
|
FX on LTD – gain (loss)
|
5.8 | (16.3 | ) | – | (16.3 | ) | 169.8 | 3.1 | (3.9 | ) | – | (3.9 | ) | |||||||||||||||||||||||
|
Income tax recovery (expense)
|
(31.6 | ) | 38.6 | – | 38.6 | (44.3 | ) | (4.5 | ) | 26.2 | – | 26.2 | ||||||||||||||||||||||||
|
FX on LTD, net of tax – gain (loss)
|
(25.8 | ) | 22.3 | – | 22.3 | 125.5 | (1.4 | ) | 22.3 | – | 22.3 | |||||||||||||||||||||||||
|
Other specified items
|
||||||||||||||||||||||||||||||||||||
|
Loss on termination of lease with shortline railway
|
(54.5 | ) | – | – | – | – | (54.5 | ) | – | – | – | |||||||||||||||||||||||||
|
Income tax recovery (expense)
|
16.9 | – | – | – | – | 16.9 | – | – | – | |||||||||||||||||||||||||||
|
Loss on termination of lease with shortline railway, net of tax
|
(37.6 | ) | – | – | – | – | (37.6 | ) | – | – | – | |||||||||||||||||||||||||
|
Gain on sales of partnership interest and significant properties
|
160.3 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
|
Income tax recovery (expense)
|
(23.5 | ) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||
|
Gain on sales of partnership interest and significant
properties, net of tax
|
136.8 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
|
Gain/(loss) in fair value of long-term floating rate notes/ ABCP
|
6.3 | (49.4 | ) | – | (49.4 | ) | (21.5 | ) | – | – | – | – | ||||||||||||||||||||||||
|
Income tax recovery (expense)
|
(1.8 | ) | 14.6 | – | 14.6 | 6.5 | – | – | – | – | ||||||||||||||||||||||||||
|
Gain/(loss) in fair value of long-term floating rate notes/
ABCP, net of tax
|
4.5 | (34.8 | ) | – | (34.8 | ) | (15.0 | ) | – | – | – | – | ||||||||||||||||||||||||
|
Income tax benefits due to rate reduction and settlement related
to prior year
|
74.2 | – | – | – | 152.2 | 74.2 | – | – | – | |||||||||||||||||||||||||||
|
Net income
|
$ | 612.4 | $ | 607.2 | $ | – | $ | 607.2 | $ | 932.1 | $ | 194.1 | $ | 188.1 | $ | – | $ | 188.1 | ||||||||||||||||||
|
Diluted EPS, before FX on LTD and other specified
items
(5)
|
$ | 2.76 | $ | 3.99 | $ | – | $ | 3.99 | $ | 4.30 | $ | 0.94 | $ | 1.07 | $ | – | $ | 1.07 | ||||||||||||||||||
|
Diluted EPS, related to FX on LTD, net of
tax
(5)
|
(0.15 | ) | 0.14 | – | 0.14 | 0.81 | (0.01 | ) | 0.14 | – | 0.14 | |||||||||||||||||||||||||
|
Diluted EPS, related to other specified items, net of
tax
(5)
|
1.06 | (0.22 | ) | – | (0.22 | ) | 0.88 | 0.22 | – | – | – | |||||||||||||||||||||||||
|
Diluted EPS, as determined by GAAP
|
$ | 3.67 | $ | 3.91 | $ | – | $ | 3.91 | $ | 5.99 | $ | 1.15 | $ | 1.21 | $ | – | $ | 1.21 | ||||||||||||||||||
(1)
Restated
for the adoption of CICA accounting standard 3064 and accounting
policy changes related to pension prior service costs and
locomotive overhauls, discussed further in Section 13.1
2009 Accounting Changes.
(2)
The
2007 figures include equity income for DM&E (discussed
further in Section 18.0 Acquisition) from October 30,
2007 to December 31, 2007.
(3)
DM&E
results for the period January 1, 2008 to October 29,
2008 which under GAAP was reported as one line in equity income
in DM&E.
(4)
Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for the three months
ended and year ended December 31, 2008.
(5)
These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
|
8
|
2009
ANNUAL REPORT |
|
6.1 FOREIGN
EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT
FX on LTD arises mainly as a result of translating US
dollar-denominated debt into Canadian dollars. We calculate FX
on LTD using the difference in FX rates at the beginning and at
the end of each reporting period. The FX gains and losses are
mainly unrealized and can only be realized when net US
dollar-denominated LTD matures or is settled. Income, before FX
on LTD and other specified items, is disclosed in the table
above and excludes FX on LTD from our earnings in order to
eliminate the impact of volatile short-term exchange rate
fluctuations. A large portion of our US dollar-denominated debt
is designated as a hedge of our net investments in US
subsidiaries.
On a pre-tax basis, we recorded the following FX on LTD as the
Canadian dollar exchange rate changed at the end of each
reporting period:
| o | FX gain on LTD of $5.8 million in 2009, as the Canadian dollar strengthened to $1.0510 at December 31, 2009, relative to the US dollar; |
| o | FX loss on LTD of $16.3 million in 2008, as the Canadian dollar exchange rate weakened to $1.2180 at December 31, 2008 relative to the US dollar; and |
| o | FX gain on LTD of $169.8 million in 2007, as the Canadian dollar exchange rate strengthened to $0.9913 at December 31, 2007 relative to the US dollar from $1.1654 at the end of the previous year. |
Income tax recovery (expense) related to FX on LTD is discussed
further in Section 10.6 Income Taxes.
6.2 OTHER
SPECIFIED ITEMS
Other specified items are material transactions that may
include, but are not limited to, gains and losses on non-routine
sales of assets, unusual income tax adjustments, restructuring
and asset impairment charges and other items that do not typify
normal business activities.
In 2009, there were four other specified items included in net
income as follows:
| o | In the fourth quarter of 2009, we recorded a loss of $54.5 million ($37.6 million after tax) on the termination of a lease with a shortline railway (discussed further in Section 10.1 Loss on Termination of Lease with Shortline Railway). |
| o | Also in the fourth quarter, the company recorded a benefit of $74.2 million due to a rate reduction and a settlement related to a prior year income tax matter. |
| o | In the second and third quarters of 2009, we recorded gains of $160.3 million ($136.8 million after tax) on the sale of Windsor Station in Montreal, a land sale in Western Canada and a gain on the sale of a partnership interest in the Detroit River Tunnel Partnership (“DRTP”) (discussed further in Section 10.2 Gain on Sales of Partnership Interest and Significant Properties). |
| o | Also in the second and third quarters of 2009, the company recorded realized gains from settlement of and unrealized gains from the change in estimated fair value of long-term floating rate notes totalling $6.3 million ($4.5 million after tax) (discussed further in Section 10.3.1 Change in Estimated Fair Value of Long-term Floating Rate Notes and Asset-backed Commercial Paper). |
In the first and third quarters of 2008, we recorded charges
totalling $49.4 million ($34.8 million after tax) to
reflect the change in the estimated fair value of ABCP
(discussed further in Section 10.3.1 Change in Estimated
Fair Value of Long-term Floating Rate Notes and Asset-backed
Commercial Paper).
In 2007, there were three other specified items included in net
income, as follows:
| o | In the fourth quarter of 2007, the Government of Canada substantially enacted legislation to reduce corporate income tax rates starting in 2008. We recorded a future income tax benefit of $136.2 million to reflect the positive impact of these tax rate reductions on our future income tax balance. |
| o | In the third quarter of 2007, we recorded a charge of $21.5 million ($15.0 million after tax) to reflect the change in the estimated fair value of ABCP. |
| o | In the second quarter of 2007, the Government of Canada substantially enacted legislation to reduce corporate income tax rates starting in 2011. We recorded a future income tax benefit of $16.0 million to reflect the benefit of these tax rate reductions on our future income tax balance. |
7.0 Lines of
Business
7.1 VOLUMES
Changes in freight volumes generally contribute to corresponding
changes in freight revenues and certain variable expenses, such
as fuel, equipment rents and crew costs.
|
2009
ANNUAL REPORT |
9 | |
VOLUMES
| 2009 | 2008 | 2007 | ||||||||||||||
| For the year ended December 31 | As reported (1) | Pro forma (2) | ||||||||||||||
|
Carloads (in thousands)
|
||||||||||||||||
|
Grain
|
469.5 | 382.4 | 460.4 | 385.0 | ||||||||||||
|
Coal
|
305.1 | 281.0 | 317.7 | 269.1 | ||||||||||||
|
Sulphur and fertilizers
|
108.8 | 191.3 | 195.4 | 209.8 | ||||||||||||
|
Forest products
|
66.8 | 91.8 | 97.6 | 114.1 | ||||||||||||
|
Industrial and consumer products
|
345.9 | 340.9 | 425.5 | 313.3 | ||||||||||||
|
Automotive
|
103.7 | 141.3 | 142.0 | 168.5 | ||||||||||||
|
Intermodal
|
962.9 | 1,216.0 | 1,216.0 | 1,238.1 | ||||||||||||
|
Total Carloads
|
2,362.7 | 2,644.7 | 2,854.6 | 2,697.9 | ||||||||||||
|
Revenue
ton-miles
(in millions)
|
||||||||||||||||
|
Grain
|
34,838 | 29,376 | 32,019 | 30,690 | ||||||||||||
|
Coal
|
16,997 | 21,247 | 21,600 | 20,629 | ||||||||||||
|
Sulphur and fertilizers
|
9,362 | 19,757 | 19,956 | 21,259 | ||||||||||||
|
Forest products
|
4,470 | 5,677 | 5,927 | 7,559 | ||||||||||||
|
Industrial and consumer products
|
17,653 | 18,296 | 21,364 | 16,987 | ||||||||||||
|
Automotive
|
1,607 | 2,213 | 2,221 | 2,471 | ||||||||||||
|
Intermodal
|
23,425 | 27,966 | 27,966 | 29,757 | ||||||||||||
|
Total revenue
ton-miles
|
108,352 | 124,532 | 131,053 | 129,352 | ||||||||||||
(1)
The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2)
Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
Volumes in 2009, as measured by total carloads, decreased by
approximately 491,900, or 17.2%, and revenue
ton-miles
(“RTM”) decreased by 22,701 million, or 17.3%,
compared with pro forma 2008.
These decreases in carloads and RTMs in 2009 were driven by the
global recession which resulted in soft market conditions and
reduced customer demand lowering shipments in all but the grain
line of business which benefited from a larger than normal crop.
Coal volumes measured by carloads did not decline as much as
RTMs due to decreased average length of haul.
Volumes in 2008, as measured by total carloads, decreased by
53,200, or 2.0%, and RTMs decreased by 4,820 million, or
3.7%.
The decrease in carloads and RTMs in 2008 was mainly due to:
| o | sharply declining economic conditions in the second half of 2008; |
| o | continued weakness in forest products due to a slowdown in the US housing market; |
| o | declining auto sales leading to reduced shipments; and |
| o | customer production issues resulting in reduced shipments of potash and sulphur. |
This decrease was partially offset by the inclusion of DM&E
volumes from October 30, 2008 to December 31, 2008,
industrial product shipments, driven by economic growth in
western Canada, and strong global demand for metallurgical coal
resulting in increased shipments through the western corridor
earlier in the year.
7.2 REVENUES
Our revenues are primarily derived from transporting freight.
Other revenues are generated mainly from leasing of certain
assets, switching fees, routine land sales and income from
business partnerships.
|
10
|
2009
ANNUAL REPORT |
|
REVENUES
| 2009 | 2008 | 2007 | ||||||||||||||||||
|
As
|
||||||||||||||||||||
| For the year ended December 31 (in millions) | reported (1) | DM&E (2) | Pro forma (3)(4) | |||||||||||||||||
|
Grain
|
$ | 1,129.9 | $ | 970.0 | $ | 100.6 | $ | 1,070.6 | $ | 938.9 | ||||||||||
|
Coal
|
443.3 | 607.5 | 15.4 | 622.9 | 573.6 | |||||||||||||||
|
Sulphur and fertilizers
|
303.5 | 508.6 | 10.3 | 518.9 | 502.0 | |||||||||||||||
|
Forest products
|
173.2 | 239.3 | 9.7 | 249.0 | 275.8 | |||||||||||||||
|
Industrial and consumer products
|
766.6 | 766.1 | 153.7 | 919.8 | 627.9 | |||||||||||||||
|
Automotive
|
228.8 | 323.5 | 3.9 | 327.4 | 319.0 | |||||||||||||||
|
Intermodal
|
1,129.9 | 1,399.8 | – | 1,399.8 | 1,318.0 | |||||||||||||||
|
Total freight revenues
|
4,175.2 | 4,814.8 | 293.6 | 5,108.4 | 4,555.2 | |||||||||||||||
|
Other revenues
|
128.0 | 116.8 | 2.0 | 118.8 | 152.4 | |||||||||||||||
|
Total revenues
|
$ | 4,303.2 | $ | 4,931.6 | $ | 295.6 | $ | 5,227.2 | $ | 4,707.6 | ||||||||||
(1)
The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2)
DM&E
figures are for the period January 1, 2008 to
October 29, 2008.
(3)
Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
(4)
These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
In 2009, no one customer comprised more than 10% of total
revenues and accounts receivable. For the year ended and as at
December 31, 2008 and 2007, one customer comprised 11.3%
and 11.5% of total revenues and 1.7% and 6.7% of total accounts
receivable, respectively.
7.3 2009 TO
2008 COMPARATIVES
7.3.1 Freight
Revenues
Freight revenues are earned from transporting bulk, merchandise
and intermodal goods, and include fuel recoveries billed to our
customers. Freight revenues were $4,175.2 million in 2009,
a decrease of $639.6 million, or 13.3%, for the same period
in 2008 on a reported basis.
The revenue table above shows freight revenue on a pro forma
basis for 2008 inclusive of DM&E revenues. On a pro forma
basis, freight revenues decreased by $933.2 million, or
18.3% from $5,108.4 million in 2008.
The decrease in 2009 was driven primarily by:
| o | lower traffic volumes due to the global recession; |
| o | a decline in freight revenues due to fuel price changes; and |
| o | decreased rates and reduced average length of haul on export coal as a result of regulatory rate proceedings. |
The decrease was partially offset by the favourable impact of
the change in foreign exchange on US dollar-denominated revenues
and net increases in freight rates for all lines of business
other than coal.
Revenue variances below (Sections 7.3.1.1 to 7.3.4) are
compared to pro forma 2008 figures.
7.3.1.1 Fuel
Cost Recovery Program
A change in fuel prices or supply disruptions may adversely
impact the Company’s expenses and revenues. As such, CP
employs a fuel cost recovery program designed to mechanistically
respond to fluctuations in fuel prices and help mitigate the
financial impact of rising fuel prices. In January 2009, CP
continued to modify its fuel cost recovery program utilizing a
15 day average fuel index price to further reduce fuel
price volatility exposure.
7.3.1.2 Grain
Canadian grain products, consisting mainly of durum, spring
wheat, barley, canola, flax, rye and oats, are primarily
transported to ports for export and to Canadian and US markets
for domestic consumption. US grain products mainly include
durum, spring wheat, corn, soybeans and barley and are shipped
from the Midwestern US to other points in the Midwest, the
Pacific Northwest and northeastern US. Grain revenues in 2009
were $1,129.9 million, an increase of $59.3 million,
or 5.5% compared to 2008 pro forma of $1,070.6 million.
Grain revenues increased in 2009 primarily due to:
| o | an increase in Canadian grain export shipments driven by strong demand and an above average 2008/2009 crop year; |
| o | the favourable impact of the change in FX; and |
| o | a net increase in freight rates for US and commercial grain. |
The increase was partially offset by lower fuel surcharge
revenues due to the change in fuel price and a negative rate
decision in regulated grain.
|
2009
ANNUAL REPORT |
11 | |
7.3.1.3 Coal
Our Canadian coal business consists primarily of metallurgical
coal transported from southeastern British Columbia
(“BC”) to the ports of Vancouver, BC and Thunder Bay,
Ontario, and to the US Midwest. Our US coal business consists
primarily of the transportation of thermal coal and petroleum
coke within the US Midwest. Coal revenues in 2009 were
$443.3 million, a decrease of $179.6 million, or 28.8%
from pro forma 2008 of $622.9 million.
Coal revenues decreased in 2009 primarily due to:
| o | reduced coal shipments as a result of reduced market demand for metallurgical coal for the first three quarters of the year; |
| o | decreased rates as a result of regulatory rate proceedings and reduced average length of haul on export coal which reduced coal revenues by approximately $63 million; and |
| o | lower fuel surcharge revenues due to the change in fuel price. |
The decrease was partially offset by new short haul US coal
traffic, the favourable impact of the change in FX and increased
export coal volumes in the fourth quarter driven by offshore
steel demand.
7.3.1.4 Sulphur
and Fertilizers
Sulphur and fertilizers include potash, chemical fertilizers and
sulphur shipped mainly from western Canada to the ports of
Vancouver, BC, and Portland, Oregon, and to other Canadian and
US destinations. Sulphur and fertilizers revenues in 2009 were
$303.5 million, a decrease of $215.4 million, or 41.5%
from pro forma 2008 of $518.9 million.
Sulphur and fertilizers revenues decreased in 2009 primarily due
to:
| o | lower export potash shipments as a result of ongoing price negotiations between producers and major buyers; |
| o | lower domestic potash shipments as farmers deferred purchases; and |
| o | lower fuel surcharge revenues due to the change in fuel price. |
The decrease was partially offset by the favourable impact of
the change in FX and a net increase in freight rates.
7.3.1.5 Forest
Products
Forest products include lumber, wood pulp, paper products and
panel transported from key producing areas in western Canada,
Ontario and Quebec to various destinations in North America.
Forest product revenues in 2009 were $173.2 million, a
decrease of $75.8 million, or 30.4% from pro forma 2008 of
$249.0 million.
Forest product revenues decreased in 2009 primarily due to soft
market demand for lumber, panel and pulp products due to the
global recession resulting in mill shutdowns and production
curtailments as well as lower fuel surcharge revenues due to the
change in fuel price.
The decrease was partially offset by the favourable impact of
the change in FX and a net increase in freight rates.
7.3.1.6 Industrial
and Consumer Products
Industrial and consumer products include chemicals, plastics,
aggregates, steel, mine, ethanol, and other energy related
products (other than coal) shipped throughout North America.
Industrial and consumer products revenues in 2009 were
$766.6 million, a decrease of $153.2 million, or 16.7%
from pro forma 2008 of $919.8 million.
Industrial and consumer products revenues decreased in 2009
primarily due to reduced overall volumes primarily from our
steel, building products, chemical and plastics customers due to
the global recession and lower fuel surcharge revenues due to
the change in fuel price.
The decrease was partially offset by the favourable impact of
the change in FX, increased volumes in ethanol and other energy
related products and a net increase in freight rates.
7.3.1.7 Automotive
Automotive consists primarily of the transportation of domestic,
import and pre-owned vehicles as well as automotive parts from
North American assembly plants and from the Port Metro Vancouver
to destinations in Canada and the US. Automotive revenues in
2009 were $228.8 million, a decrease of $98.6 million,
or 30.1% from pro forma 2008 of $327.4 million.
The decrease in 2009 was primarily due to a significant
reduction of auto sales in the first three quarters of the year
resulting in plant shutdowns and lower shipments of finished
vehicles, and lower fuel surcharge revenues resulting from the
change in fuel price.
This decrease was partially offset by a net increase in freight
rates, the favourable impact of the change in FX and increased
volumes in the fourth quarter due to increased North American
vehicle sales.
7.3.1.8 Intermodal
Intermodal consists of domestic and international
(import-export) container traffic. Our domestic business
consists primarily of retail goods moving in containers between
eastern and western Canada and to and from the US. The
international business handles containers of mainly retail goods
between the ports of Vancouver, Montreal, New York/New Jersey
and Philadelphia and inland Canadian and US locations.
Intermodal revenues in 2009 were $1,129.9 million, a
decrease of $269.9 million, or 19.3% from pro forma 2008 of
$1,399.8 million.
The decrease in 2009 was primarily due to the global recession
which reduced import and export volumes as well as domestic
intermodal container shipments and lower fuel surcharge revenues
resulting from the change in fuel price.
The decrease was partially offset by a net increase in freight
rates and the favourable impact of the change in FX.
7.3.2 Other
Revenues
Other revenues are generated from leasing certain assets,
switching fees, routine land sales and income from business
partnerships.
|
12
|
2009
ANNUAL REPORT |
|
Other revenues in 2009 were $128.0 million, an increase of
$9.2 million, or 7.7% from pro forma 2008 of
$118.8 million.
The increase in 2009 was mainly due to higher routine land
sales, partially offset by decreases in switching due to lower
volumes and miscellaneous other revenues.
7.3.3 Freight
Revenue per Carload
FREIGHT REVENUE
PER CARLOAD
Freight revenue per carload is the amount of freight revenue
earned for every carload moved, calculated by dividing the
freight revenue for a commodity by the number of carload of the
commodity transported in the period.
Total freight revenue per carload in 2009 decreased by 1.3% due
to lower fuel price recoveries and negative rate decisions in
coal and regulated grain. This decrease was partially offset by
favourable changes in FX and higher net freight rates.
| 2008 | ||||||||||||||||
| For the year ended December 31 | 2009 | As reported (1) | Pro forma (2)(3) | 2007 | ||||||||||||
|
Grain
|
$ | 2,407 | $ | 2,537 | $ | 2,325 | $ | 2,439 | ||||||||
|
Coal
|
1,453 | 2,162 | 1,961 | 2,132 | ||||||||||||
|
Sulphur and fertilizers
|
2,790 | 2,659 | 2,656 | 2,393 | ||||||||||||
|
Forest products
|
2,593 | 2,607 | 2,551 | 2,417 | ||||||||||||
|
Industrial and consumer products
|
2,216 | 2,247 | 2,162 | 2,004 | ||||||||||||
|
Automotive
|
2,206 | 2,289 | 2,306 | 1,893 | ||||||||||||
|
Intermodal
|
1,173 | 1,151 | 1,151 | 1,065 | ||||||||||||
|
Freight revenue per carload
|
$ | 1,767 | $ | 1,821 | $ | 1,790 | $ | 1,688 | ||||||||
(1)
The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2)
Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
(3)
These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
7.3.4 Freight
Revenue per Revenue Ton Mile
FREIGHT REVENUE
PER REVENUE
TON-MILE
Freight revenue per RTM is the amount of freight revenue earned
for every RTM Moved, calculated by dividing the freight revenue
for a commodity by the number of RTMs of the commodity
transported in the period.
Freight revenue per RTM in 2009 decreased by 1.3% due to lower
fuel price recoveries and negative rate decisions in coal and
regulated grain. This decrease was partially offset by
favourable changes in FX and higher net freight rates.
| 2008 | ||||||||||||||||
| For the year ended December 31 (cents) | 2009 | As reported (1) | Pro forma (2)(3) | 2007 | ||||||||||||
|
Grain
|
3.24 | 3.30 | 3.34 | 3.06 | ||||||||||||
|
Coal
|
2.61 | 2.86 | 2.88 | 2.78 | ||||||||||||
|
Sulphur and fertilizers
|
3.24 | 2.57 | 2.60 | 2.36 | ||||||||||||
|
Forest products
|
3.87 | 4.22 | 4.20 | 3.65 | ||||||||||||
|
Industrial and consumer products
|
4.34 | 4.19 | 4.31 | 3.70 | ||||||||||||
|
Automotive
|
14.24 | 14.62 | 14.74 | 12.91 | ||||||||||||
|
Intermodal
|
4.82 | 5.01 | 5.01 | 4.43 | ||||||||||||
|
Freight revenue per revenue
ton-mile
|
3.85 | 3.87 | 3.90 | 3.52 | ||||||||||||
(1)
The
2008 figures include DM&E from October 30, 2008 to
December 31, 2008.
(2)
Pro
forma basis redistributes DM&E results on a line by line
consolidation for the full year 2008.
(3)
These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
|
2009
ANNUAL REPORT |
13 | |
7.4 2008 TO 2007
COMPARATIVES
Revenue variances below (Sections 7.4.1 to 7.4.4) compare
2008 figures as reported, with DM&E figures included on a
consolidated basis beginning October 30, 2008, to 2007
figures as reported.
7.4.1 Freight
Revenues
Freight revenues were $4,814.8 million in 2008, an increase
of $259.6 million, or 5.7%. Freight revenues for 2008
increased mainly due to:
| o | the inclusion of DM&E revenues from October 30, 2008 to December 31, 2008; |
| o | improvements in freight rates, which include our fuel recovery program; and |
| o | overall volume growth in industrial and consumer products and coal. |
The increase was partially offset by:
| o | the negative effect on volume of the global recession; |
| o | the Agency decision directing a downward adjustment of the railway maximum revenue entitlement for movement of regulated grain under the CTA which included a provision for repayment of revenues relating to grain rates (discussed further in Section 21.4.1 Regulatory Change); |
| o | weakness throughout the year in the market for forest products; and |
| o | the unfavourable impact of the change in FX. |
7.4.1.1 Grain
Grain revenues in 2008 were $970.0 million, an increase of
$31.1 million, or 3.3%.
Grain revenues increased in 2008 primarily due to the inclusion
of DM&E revenues from October 30, 2008 to
December 31, 2008, and increased freight rates.
This increase was partially offset by a provision for the Agency
decision directing a downward adjustment of the railway maximum
revenue entitlement for movement of regulated grain under the
CTA (discussed further in Section 21.4.1 Regulatory
Change). The increase was also offset by lower shipments due to
harvest delays in both the US and Canada for the 2007/2008 crop
year.
7.4.1.2 Coal
Coal revenues in 2008 were $607.5 million, an increase of
$33.9 million, or 5.9%.
Coal revenues increased in 2008 primarily due to:
| o | the strong global demand for metallurgical coal earlier in the year; |
| o | improvements in freight rates; and |
| o | the inclusion of DM&E revenues from October 30, 2008 to December 31, 2008. |
7.4.1.3 Sulphur
and Fertilizers
Sulphur and fertilizers revenues in 2008 were
$508.6 million, an increase of $6.6 million, or 1.3%.
Sulphur and fertilizers revenues increased in 2008 primarily due
to improvements in freight rates and the inclusion of DM&E
revenues from October 30, 2008 to December 31, 2008.
This increase was partially offset by decreased supply of
sulphur and potash due to customer production issues and by the
unfavourable impact of FX.
7.4.1.4 Forest
Products
Forest products revenues in 2008 were $239.3 million, a
decrease of $36.5 million, or 13.2%.
Forest products revenues declined in 2008 due to continued weak
market conditions and extended plant shut downs for certain
forest product customers which has led to reduced volumes. In
addition revenues declined by the unfavourable impact of FX.
This decrease was partially offset by improvements in freight
rates.
7.4.1.5 Industrial
and Consumer Products
Industrial and consumer products revenues in 2008 were
$766.1 million, an increase of $138.2 million, or
22.0%.
Industrial and consumer products revenues increased in 2008
primarily due to:
| o | the inclusion of DM&E revenues from October 30, 2008 to December 31, 2008; |
| o | continued economic growth in the early part of 2008; and |
| o | improvements in freight rates. |
The increase was partially offset by the unfavourable impact of
FX.
7.4.1.6 Automotive
Automotive revenues in 2008 were $323.5 million, an
increase of $4.5 million, or 1.4%.
The increase in 2008 was primarily due to improvements in
freight rates, partially offset by lower volumes due to soft
market conditions, particularly in the US, as well as the
unfavourable impact of the change in FX.
7.4.1.7 Intermodal
Intermodal revenues in 2008 were $1,399.8 million, an
increase of $81.8 million, or 6.2%.
The increase in intermodal revenues in 2008 was primarily due to
improvements in freight rates which were partially offset by the
unfavourable impact of the change in FX.
7.4.2 Other
Revenues
Other revenues in 2008 were $116.8 million, a decrease of
$35.6 million or 23.4%. The decrease in Other revenues in
2008 was primarily due to lower land sales.
|
14
|
2009
ANNUAL REPORT |
|
7.4.3 Freight
Revenue per Carload
In 2008, total freight revenue per carload improved by 7.9%.
This improvement is due to the increase in freight rates, which
includes fuel surcharge, was partially offset by the
unfavourable impact of mix and the change in FX.
7.4.4 Freight
Revenue per Revenue Ton Mile
Freight revenue per RTM in 2008 increased by 9.9% compared with
2007. This improvement is due to the increase in freight rates,
which includes fuel surcharge, was partially offset by the
unfavourable impact of mix and the change in FX.
8.0 Performance
Indicators
The indicators listed in this table are key measures of our
operating performance. Definitions of these performance
indicators are provided in Section 25.0 Glossary of Terms.
PERFORMANCE
INDICATORS
(1)
| For the year ended December 31 | 2009 | 2008 Pro forma (2) | 2007 (3) | |||||||||
|
Consolidated data including DM&E
|
||||||||||||
|
Efficiency and other indicators
|
||||||||||||
|
Gross
ton-miles
(“GTM”) of freight (millions)
|
209,475 | 250,991 | 246,322 | |||||||||
|
Train miles (thousands)
|
34,757 | 43,243 | 42,804 | |||||||||
|
US gallons of locomotive fuel consumed per 1,000
GTMs – freight and yard
|
1.19 | 1.22 | 1.21 | |||||||||
|
Average number of active employees – expense
|
13,619 | 15,107 | 14,172 | |||||||||
| 2009 | 2008 As reported | 2007 (3) | ||||||||||
|
CP data excluding DM&E
|
||||||||||||
|
Efficiency and other indicators
|
||||||||||||
|
Car miles per car day
|
142.6 | 143.6 | 142.3 | |||||||||
|
Average train speed (miles per hour)
|
25.5 | 24.0 | 23.2 | |||||||||
|
Average terminal dwell (hours)
|
21.9 | 22.3 | 22.2 | |||||||||
|
Safety indicators
|
||||||||||||
|
FRA personal injuries per
200,000 employee-hours
|
1.85 | 1.51 | 2.09 | |||||||||
|
FRA train accidents per million
train-miles
|
1.49 | 1.93 | 2.05 | |||||||||
|
DM&E data only
|
||||||||||||
|
Safety indicators
|
||||||||||||
|
FRA personal injuries per
200,000 employee-hours
|
2.17 | 3.50 | ||||||||||
|
FRA train accidents per million
train-miles
|
6.78 | 11.39 | ||||||||||
(1)
Certain
comparative period figures have been updated to reflect new
information.
(2)
Pro
forma basis includes DM&E results for the full year ended
December 31, 2008.
(3)
2007
performance indicators exclude DM&E.
8.1 EFFICIENCY
AND OTHER INDICATORS
2009 performance indicators’ variances for GTMs, train
miles, average number of active expense employees and US gallons
of locomotive fuel consumed are compared to 2008 on a pro forma
basis. 2008 performance indicator variances for the above
mentioned metrics are compared to 2007 as previously reported.
GTMs for 2009 were 209,475 million which decreased by 16.5%
compared with 250,991 million in the same period in 2008 on
a pro forma basis. The decrease in 2009 was mainly due to the
global recession which led to a decrease in traffic for all
lines of business excluding grain. Fluctuations in GTMs normally
drive fluctuations in certain variable costs, such as fuel and
train crew costs.
GTMs for 2008 were 239,705 million, as reported in 2008,
which decreased by 2.7% from 2007. The decrease in 2008 was
mainly due to a reduction in the volumes of automotive, forest
products, intermodal and sulphur and fertilizers, partially
offset by growth in industrial and consumer products, and coal.
Train miles decreased 19.6% in 2009 compared to pro forma 2008.
The decrease in 2009 was driven by management’s strategy of
consolidating and running longer heavier trains thereby reducing
train starts while balancing productivity and maintaining
reliable
|
2009
ANNUAL REPORT |
15 | |
service. This was further impacted by reduced volumes. As a
result, overall train miles were decreased. In 2008 train miles
on a non-pro forma basis decreased by 3.2% when compared to
2007. The 2008 decline was similarly driven by management’s
strategy of running longer heavier trains and lower volumes.
US gallons of locomotive fuel consumed per 1,000 GTMs in both
freight and yard activity decreased 2.5% in 2009 from pro forma
2008 and increased by 0.8% in 2008 on an as reported basis when
compared to 2007. The decrease in 2009 was primarily due to
on-going fuel-conservation programs which includes the
introduction of new fuel saving technology, operation of longer
trains and use of a higher proportion of fuel efficient
locomotives. The increase in 2008 was largely attributed to
difficult winter operating conditions. The increase was
partially offset by improved execution of our IOP and successful
fuel-conservation efforts.
The average number of active expense employees for 2009
decreased by 1,488, or 9.8%, compared with 2008 on a pro forma
basis. This decrease in 2009 was primarily due to temporary
employee layoffs and position reductions made in response to the
decline in traffic volumes that have accompanied the global
recession. The average number of active expense employees for
2008, as reported, increased by 168 or 1.2%, compared with 2007.
This increase was primarily due to the inclusion of the
DM&E starting in November 2008, which added 159 to the
average number of active expense employees. This increase was
partially offset by employee layoffs, primarily train crews, in
response to lower traffic volumes.
Car miles per car day decreased by 0.7% in 2009 to 142.6 and
increased 0.9% in 2008 to 143.6. The decrease in 2009 was mainly
due to lower volumes. The increase in 2008 was primarily due to
improved car ordering and tactical fleet management and the IOP
improvements.
Average train speed improved by 6.3% in 2009 and 3.4% in 2008.
The improvement in 2009 occurred due to the reduced need for
trains to pull onto sidings in order to allow another train to
pass from a combination of lower volumes and execution of our
long train strategy for fewer train starts. The improvement in
2008 was largely driven by continuous focus on the execution of
our IOP and by the reduction in the number of trains operating
on the network as a result of running longer trains and reduced
volumes.
Average terminal dwell, the average time a freight car resides
in a terminal, improved 1.8% in 2009 and increased 0.5% in 2008.
The improvement in 2009 reflected lower volumes and the
aggressive storage of surplus cars which reduced the number of
active cars online and therefore, the average time freight cars
spent in a terminal. The increase in 2008 was primarily due to
significant flood events in the US Midwest and subsequent
recovery in the third quarter of 2008 and difficult winter
conditions in the first quarter of 2008.
8.2 SAFETY
INDICATORS
Safety is a key priority for our management and Board of
Directors. Our two main safety indicators – personal
injuries and train accidents – follow strict US
Federal Railroad Administration (“FRA”) reporting
guidelines.
The FRA personal injury rate per
200,000 employee-hours
for CP, excluding DM&E was 1.85 in 2009, an increase from
1.51 in 2008 and an improvement from 2.09 in 2007. The FRA train
accident rate for CP, excluding DM&E in 2009 was 1.49
accidents per million
train-miles,
as compared with 1.93 in 2008 and 2.05 in 2007. CP strives to
continually improve its safety performance through ten key
strategies and activities such as training and technology. 2009
represents CP’s second lowest personal injury rate and our
record lowest train accident rate.
The FRA personal injury rate per
200,000 employee-hours
for the DM&E was 2.17 in 2009 compared with 3.50 in 2008.
The FRA train accident rate for the DM&E was 6.78 in 2009
and 11.39 in 2008. Significant improvement has been realized
driven by the implementation of our safety integration plan.
|
16
|
2009
ANNUAL REPORT |
|
9.0 Operating
Expenses
OPERATING
EXPENSES
| 2009 | 2008 (2) | 2007 (2)(5) | ||||||||||||||||||||||||||||||
|
Variance
|
||||||||||||||||||||||||||||||||
|
2009 to
|
Variance
|
|||||||||||||||||||||||||||||||
|
2008 pro
|
2008 to
|
|||||||||||||||||||||||||||||||
|
forma
(1)(4)
|
2007
|
|||||||||||||||||||||||||||||||
|
%
|
2008
|
Pro
|
%
|
|||||||||||||||||||||||||||||
| For the year ended December 31 (in millions) | Expense | Fav/(unfav) | Expense | DM&E (3) | forma (1)(4) | Fav/(unfav) | Expense | |||||||||||||||||||||||||
|
Compensation and benefits
|
$ | 1,275.2 | 6.9 | $ | 1,306.1 | $ | 63.1 | $ | 1,369.2 | (2.4 | ) | $ | 1,275.0 | |||||||||||||||||||
|
Fuel
|
580.2 | 45.1 | 1,005.8 | 51.5 | 1,057.3 | (34.7 | ) | 746.8 | ||||||||||||||||||||||||
|
Materials
|
215.1 | 19.5 | 252.3 | 14.9 | 267.2 | – | 252.2 | |||||||||||||||||||||||||
|
Equipment rents
|
184.8 | 5.3 | 182.2 | 12.9 | 195.1 | 12.2 | 207.5 | |||||||||||||||||||||||||
|
Depreciation and amortization
|
488.9 | (2.2 | ) | 442.5 | 35.8 | 478.3 | (3.5 | ) | 427.5 | |||||||||||||||||||||||
|
Purchased services and other
|
658.9 | 10.0 | 701.0 | 31.2 | 732.2 | (9.9 | ) | 637.8 | ||||||||||||||||||||||||
|
Total
|
$ | 3,403.1 | 17.0 | $ | 3,889.9 | $ | 209.4 | $ | 4,099.3 | (9.7 | ) | $ | 3,546.8 | |||||||||||||||||||
(1)
These
earnings measures have no standardized meanings as prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
(2)
Restated
for the adoption of CICA accounting standard 3064 and accounting
policy changes related to pension prior service costs and
locomotive overhauls, discussed further in Section 13.1 2009
Accounting Changes.
(3)
Includes
DM&E operating expenses for the period January 1, 2008
to October 29, 2008.
(4)
Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for full year 2008.
(5)
The
2007 figures include equity income for DM&E (discussed
further in Section 18.0 Acquisition) from October 30,
2007 to December 31, 2007.
Operating expenses were $3,403.1 million in 2009, a
decrease of $696.2 million, or 17.0%, from
$4,099.3 million on a pro forma basis.
Operating expenses for 2009 compared to 2008 on a pro forma
basis was lower primarily due to:
| o | decreased volumes; |
| o | cost management initiatives to align and size resources accordingly; |
| o | lower fuel prices; |
| o | lower costs from train accidents; and |
| o | fewer locomotive overhauls. |
The decrease in operating expenses was partially offset by the
unfavourable impact of the change in FX.
Operating expenses were $3,889.9 million in 2008, up
$343.1 million, or 9.7% from 2007. These expenses were
$3,546.8 million in 2007.
Operating expenses for 2008 compared to 2007 increased primarily
due to:
| o | higher fuel prices driven by higher WTI prices; |
| o | higher weather related expenses as well as casualty related expenses despite improved safety performance; |
| o | the consolidation of DM&E from October 30, 2008 to December 31, 2008; and |
| o | increased wage rates. |
The increase in operating expenses was partially offset by:
| o | lower variable expenses due to reduced volumes; |
| o | the favourable impact of the change in FX; and |
| o | lower incentive compensation. |
9.1 2009 TO 2008
COMPARATIVES
Expense variances below (Sections 9.1.1 to 9.1.6) are
compared to pro forma 2008 figures.
9.1.1
Compensation and Benefits
Compensation and benefits expense includes employee wages,
salaries and fringe benefits. Compensation and benefits expense
was $1,275.2 million in 2009, a decrease of
$94.0 million, or 6.9%, from $1,369.2 million on a pro
forma basis.
The decrease in 2009 was primarily due to:
| o | reductions in labour expenses achieved through temporary layoffs and employment reductions in response to reduced volumes; |
| o | lower training and recertification costs associated with fewer active employees; |
| o | lower pension and other post-employment benefits (“OPEB”) expense caused by a higher discount rate and a settlement of a post-retirement benefit liability with a US national multi-employer benefit plan; and |
|
2009
ANNUAL REPORT |
17 | |
| o | savings from reduced overtime hours worked as a result of cost management initiatives. |
The decrease was partially offset by increased employee
incentive compensation associated with a more normal bonus
accrual in 2009 and increased gainshare payments to union
employees, increased labour expenses due to wage rate increases
and the unfavourable impact of changes in FX for 2009.
9.1.2
Fuel
Fuel expense consists of fuel used by locomotives and includes
provincial, state and federal fuel taxes and the impact of our
hedging program. Fuel expense was $580.2 million in 2009, a
decrease of $477.1 million, or 45.1%, from
$1,057.3 million on a pro forma basis.
The decrease in 2009 was primarily due to lower fuel prices and
decreased consumption as a result of lower traffic volumes and
improved efficiencies from ongoing fuel-conservation programs,
operation of longer trains and the use of a higher proportion of
fuel efficient locomotives. The decrease was partially offset by
the unfavourable impact of the change in FX.
9.1.3
Materials
Materials expense includes the cost of material used for track,
locomotive, freight car, and building maintenance. Materials
expense was $215.1 million in 2009, a decrease of
$52.1 million, or 19.5% from $267.2 million on a pro
forma basis.
The decrease in 2009 was mainly due to lower locomotive overhaul
costs, lower freight car and locomotive maintenance as reduced
volumes resulted in a higher number of stored freight cars and
locomotives; and reduced vehicle and other fuel costs. This
decrease was partially offset by the unfavourable impact of the
change in FX.
9.1.4 Equipment
Rents
Equipment rents expense includes the cost to lease freight cars,
intermodal equipment and locomotives from other companies,
including railways. Equipment rents expense was
$184.8 million in 2009, a decrease of $10.3 million or
5.3% from $195.1 million on a pro forma basis.
The 2009 decrease was due to lower volumes which resulted in a
reduction in active cars online. This was achieved through the
turn back of leased equipment which reduced freight car leasing
costs, combined with a reduction in car hire payments as a
result of fewer foreign cars on line. The decrease was partially
offset by the unfavourable impact of the change in FX and lower
car hire receipts due to lower numbers of CP cars operating on
other railways.
9.1.5
Depreciation and Amortization
Depreciation and amortization expense represents the charge
associated with the use of track and roadway, buildings,
locomotives, freight cars and other depreciable assets.
Depreciation and amortization expense was $488.9 million in
2009, an increase of $10.6 million, or 2.2%, from
$478.3 million in 2008 on a pro forma basis.
The increase in 2009 was primarily due to unfavourable FX and
higher depreciable assets partially offset by favourable
depreciation rate changes, mainly in information systems and
locomotives, and retirements of properties.
9.1.6 Purchased
Services and Other
Purchased services and other expense encompasses a wide range of
costs, including expenses for joint facilities, personal
injuries and damage, environmental remediation, property and
other taxes, contractor and consulting fees, and insurance.
Purchased services and other expense was $658.9 million in
2009, a decrease of $73.3 million or 10.0% from
$732.2 million on a pro forma basis.
The decrease in 2009 was due to:
| o | lower costs from train accidents and personal injuries; |
| o | reduced locomotive maintenance and intermodal handling reflecting lower volumes; |
| o | lower bad debt expense; |
| o | reduced business travel expenses, realized through cost management initiatives; and |
| o | lower utility costs. |
The decrease was partially offset by the unfavourable impacts of
the change in FX.
9.2 2008 TO 2007
COMPARATIVES
Expense variances below (Sections 9.2.1 to 9.2.6) compare
2008 figures which have been restated for the adoption of CICA
accounting standard 3064 and accounting policy changes related
to pension prior service costs and locomotive overhauls
discussed further in Section 13.1 2009 Accounting Changes
to restated 2007 figures.
9.2.1
Compensation and Benefits
Compensation and benefits expense includes employee wages,
salaries and fringe benefits. Compensation and benefits expense
was $1,306.1 million in 2008, an increase of
$31.1 million, or 2.4%.
The increase in 2008 was primarily due to:
| o | increased wage rates; |
| o | the inclusion of DM&E expenses from October 30, 2008 to December 31, 2008; |
| o | lower settlement gains in 2008 on the release of certain post-retirement benefit liabilities due to the assumption of these obligations by a US national multi-employer benefit plan; and |
| o | the impact of reduced costs from restructuring initiatives in the fourth quarter of 2007. |
This increase was partially offset by:
| o | lower employee incentive compensation partially offset by losses on our total return swap (“TRS”) (discussed further in Section 16.7.1 Total Return Swap); |
| o | lower pension expenses; and |
| o | the favourable impact of the change in FX. |
|
18
|
2009
ANNUAL REPORT |
|
9.2.2
Fuel
Fuel expense consists of the cost of fuel used by locomotives
and includes provincial, state and federal fuel taxes and the
impact of our hedging program. Fuel expense was
$1,005.8 million in 2008, an increase of
$259.0 million or 34.7%.
The increase in 2008 was primarily due to higher WTI prices.
This increase was partially offset by decreased volumes in 2008.
This increase was partially mitigated by the favourable impact
of the change in FX. Fuel price increases were also mitigated by
our fuel recovery program (the benefits of which are reflected
in freight revenues).
9.2.3
Materials
Materials expense includes the cost of materials used for track,
locomotive, freight car, and building maintenance. Materials
expense was $252.3 million in 2008 virtually unchanged when
compared to 2007.
The 2008 increase was mainly due to higher input costs including
highway vehicle fuel and the consolidation of DM&E from
October 30, 2008 to December 31, 2008.
This increase was offset by:
| o | lower car repair and train servicing costs; |
| o | the favourable impact of the change in FX; and |
| o | recoveries from third parties. |
9.2.4 Equipment
Rents
Equipment rents expense includes the cost to lease freight cars,
intermodal equipment and locomotives from other companies,
including railways. Equipment rents expense was
$182.2 million in 2008, a decrease of $25.3 million or
12.2%.
The 2008 decrease was due to lower volumes, reducing the need to
lease freight cars and locomotives, higher recoveries for CP
freight cars and locomotives while in use by other railways as
well as the favourable impact of the change in FX. This
improvement was partially offset by higher costs from network
and supply chain disruptions and traffic imbalances.
9.2.5
Depreciation and Amortization
Depreciation and amortization expense represents the charge
associated with the use of track and roadway, buildings,
locomotives, freight cars and other depreciable assets.
Depreciation and amortization expense was $442.5 million in
2008, an increase of $15.0 million, or 3.5%, over 2007.
The increase in 2008 was primarily due to:
| o | additions to capital assets, especially to track; |
| o | accelerated depreciation of software; and |
| o | the consolidation of DM&E from October 30, 2008 to December 31, 2008 which includes amortization of fair values determined under purchase accounting. |
The increase was partially offset by asset retirements.
9.2.6 Purchased
Services and Other
Purchased services and other expense encompasses a wide range of
costs, including expenses for joint facilities, personal injury
and damage, environmental remediation, property and other taxes,
contractor and consulting fees, and insurance. Purchased
services and other expense was $701.0 million in 2008, an
increase of $63.2 million or 9.9%.
The increase in 2008 was mainly due to:
| o | casualty related expenses due to the higher cost of derailments despite an improved safety performance; |
| o | increased bad debt expense; |
| o | the consolidation of DM&E from October 30, 2008 to December 31, 2008; |
| o | increased consulting costs; |
| o | higher energy costs; and |
| o | higher locomotive overhaul costs. |
The increase was partially offset by the favourable impact of
the change in FX, and CP strike-related expenses in the second
quarter of 2007.
10.0 Other Income
Statement Items
10.1 LOSS ON
TERMINATION OF LEASE WITH SHORTLINE RAILWAY
During the fourth quarter of 2009, the Company made a payment of
approximately $73 million to terminate a contract with a
lessee in order to cease through-train operations over the CP
owned rail branchline between Smiths Falls, Ontario and Sudbury,
Ontario including a settlement of a $20.6 million existing
liability. The contract with the lessee provided for the
operation of a minimum number of CP freight trains over the
leased branchline. The loss on the transaction recognized in the
fourth quarter was $54.5 million ($37.6 million after
tax).
10.2 GAIN ON
SALES OF PARTNERSHIP INTEREST AND SIGNIFICANT
PROPERTIES
During the second quarter of 2009, the Company completed the
sale of a portion of its investment in the DRTP to its existing
partner, reducing the Company’s ownership from 50% to
16.5%. The sale was agreed to on March 31, 2009 but was
subject to regulatory approval, which was received during the
second quarter. The proceeds received in the second quarter from
the transaction were $110 million. Additional proceeds of
$22 million are contingent on achieving certain future
freight volumes through the tunnel, and have not been
recognized. The gain on this transaction was $81.2 million
($68.7 million after tax). Effective April 1, 2009,
the Company discontinued proportionate consolidation and is
accounting for its remaining investment in the DRTP under the
equity method of accounting.
|
2009
ANNUAL REPORT |
19 | |
During the third quarter of 2009, the Company completed two
significant real estate sales, resulting in gains of
$79.1 million ($68.1 million after tax).
The Company sold Windsor Station in Montreal, for proceeds of
$80.0 million, including the assumption of a mortgage of
$16 million due in 2011. CP will continue to occupy a
portion of Windsor Station through a lease for a 10 year
period after the sale. As a result, part of the transaction is
considered to be a sale-leaseback and consequently a gain of
$19.5 million related to this part of the transaction has
been deferred and is being amortized over the remainder of the
lease term.
The Company also sold land in Western Canada for transit
purposes for proceeds of $43.0 million.
10.3 OTHER INCOME
AND CHARGES
Other income and charges consists of amortization of the
discounted portion of certain long-term accruals, gains and
losses due to the impact of the change in FX on LTD and working
capital, various costs related to financing, gains and losses
associated with changes in the fair value of non-hedging
derivative instruments and other non-operating expenditures.
Other income and charges was an expense of $18.9 million in
2009, a decrease of $69.5 million or 78.6%, compared to
$88.4 million in 2008. Other income and charges in 2008 was
an expense of $88.4 million compared to income of
$118.7 million in 2007.
The decrease in 2009 was the result of realized and unrealized
gains associated with long-term floating rate notes (discussed
further in Section 10.3.1 Change in Estimated Fair Value of
Long-term Floating Rate Notes and Asset-backed Commercial Paper)
and the gain on FX on LTD (discussed further in Section 6.1
Foreign Exchange Gains and Losses on Long-term Debt). The
decrease was partially offset by the net loss recognized upon
the repurchase of debt, discussed below.
During the second quarter of 2009, the Company issued
US$350 million 7.25%
10-year
Notes for net proceeds of $408.2 million. The proceeds from
this offering contributed to the repurchase of debt with a
carrying amount of $555.3 million pursuant to a tender
offer for a total cost of $571.9 million. Upon repurchase
of the debt a net loss of $16.6 million was recognized
during the quarter in “Other income and charges”
(discussed further in Section 20.1.1 Tender Offer of Debt
Securities).
The increase in 2008 was primarily a result of the loss in FX on
LTD as compared to a gain in 2007 and the change in fair value
of Asset-backed Commercial Paper.
10.3.1 Change in
Estimated Fair Value of Long-term Floating Rate Notes and
Asset-backed Commercial Paper
At December 31, 2009, the Company held replacement
long-term floating rate notes, with a total settlement value of
$129.1 million, with a carrying value of
$69.3 million. At December 31, 2008, the Company held
the original ABCP issued by a number of trusts with an original
cost of $143.6 million, with a carrying value of
$72.7 million.
On January 12, 2009, a Canadian Court granted an order for
the implementation of a restructuring plan for the ABCP and the
restructuring was completed on January 21, 2009. As a
result, CP received new replacement long-term floating rate
notes with a total settlement value of $142.8 million.
During 2009, the Company received $0.2 million in partial
redemption of its Master Asset Vehicle (“MAV”) 2
Class A-1
notes and MAV 2 Class 7 Ineligible Assets (“IA”)
Tracking notes. These redemptions were close to the original
investment value of the redeemed notes. As well, the Company
received $12.3 million in partial redemption of its MAV 3
Class 9 Traditional Asset (“TA”) Tracking notes
and MAV 2 Class 8 IA Tracking notes representing 100% of
the original investment value of the redeemed notes.
Additionally, $1.2 million of MAV 2 Class 14 notes
were fully redeemed with no proceeds being received by CP. As a
result of the restructuring and the subsequent redemptions of
notes, at December 31, 2009 the Company held replacement
long-term floating rate notes with settlement values, as follows:
| o | $116.8 million MAV 2 notes with eligible assets represented by a combination of leveraged collateralized debt, synthetic assets and traditional securitized assets with expected repayments over approximately five to seven years: |
| o | Class A-1: $59.1 million | |
| o | Class A-2: $45.9 million | |
| o | Class B: $8.3 million | |
| o | Class C: $3.5 million |
| o | $12.1 million MAV 2 IA Tracking notes representing assets that have an exposure to US mortgages and sub-prime mortgages with expected repayments over approximately three and a half to 19 years: |
| o | Class 3: $0.5 million | |
| o | Class 6: $5.5 million | |
| o | Class 7: $3.4 million | |
| o | Class 8: $0.1 million | |
| o | Class 13: $2.6 million |
| o | $0.2 million MAV 3 Class 9 TA Tracking notes with expected repayments over approximately seven years. |
The MAV 2
Class A-1
notes have received an A rating by DBRS. However, on
August 11, 2009, the rating for the MAV 2
Class A-2
notes was downgraded from A to BBB (low) under a negative watch
by DBRS.
The valuation technique used by the Company to estimate the fair
value of its investment in long-term floating rate notes at
December 31, 2009 and ABCP at December 31, 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 above noted redemption
of notes and other minor changes in assumptions have resulted in
a gain of $6.3 million (2008 – loss of
$49.4 million, 2007 – loss of
$21.5 million). The interest rates and maturities of the
various long-term floating rate notes and ABCP, discount rates
and credit losses modelled at December 31:
|
20
|
2009
ANNUAL REPORT |
|
| 2009 | 2008 | |||
|
Probability weighted average coupon interest rate
|
Nil% | 2.2% | ||
|
Weighted average discount rate
|
7.9% | 9.1% | ||
|
Expected repayments of long-term floating rate notes
|
Three and a half to 19 years | Five to eight years, other than certain tracking notes to be paid down on restructuring | ||
|
Credit losses
|
MAV 2 eligible asset notes: nil to 100% | Notes expected to be rated (1) : nil to 25% | ||
| MAV 2 IA Tracking notes: 25% | Notes not expected to be rated (2) : 25 to 100% | |||
| MAV 3 Class 9 TA Tracking notes: nil% | ||||
(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 IA Tracking notes.
The probability weighted discounted cash flows resulted in an
estimated fair value of the Company’s long-term floating
rate notes of $69.3 million at December 31, 2009
(2008 – ABCP $72.7 million). The change in the
original cost and estimated fair value of the Company’s
long-term floating rate notes is as follows:
| (in millions of Canadian dollars) | Original cost | Estimated fair value | ||||||
|
As at January 1, 2008
|
$ | 143.6 | $ | 122.1 | ||||
|
Change in market assumptions
|
– | (49.4 | ) | |||||
|
As at December 31, 2008
|
143.6 | 72.7 | ||||||
|
Change due to restructuring, January 21, 2009
|
(0.8 | ) | – | |||||
|
Redemption of notes
|
(13.7 | ) | (8.0 | ) | ||||
|
Accretion
|
– | 2.9 | ||||||
|
Change in market assumptions
|
– | 1.7 | ||||||
|
As at December 31, 2009
|
$ | 129.1 | $ | 69.3 | ||||
Accretion and gains and losses resulting from the redemption of
notes and changes in market assumptions are reported in
“Other income and charges”.
Sensitivity analysis is presented below for key assumptions at
December 31, 2009:
|
Change in fair value of long-term
|
||||
| (in millions of Canadian dollars) | floating rate notes | |||
|
Coupon interest rate
|
||||
|
50 basis point increase
|
$ | 2.3 | ||
|
50 basis point decrease
|
Nil (1 | ) | ||
|
Discount rate
|
||||
|
50 basis point increase
|
$ | (2.1 | ) | |
|
50 basis point decrease
|
$ | 2.2 | ||
(1)
Notes
are currently not expected to receive any coupon interest.
Continuing uncertainties regarding the value of the assets which
underlie the long-term floating rate notes and the amount and
timing of cash flows could give rise to a further material
change in the value of the Company’s investment in
long-term floating rate notes which could impact the
Company’s near-term earnings.
10.4 EQUITY
INCOME IN DAKOTA, MINNESOTA & EASTERN RAILROAD
CORPORATION
Following Surface Transportation Board (“STB”)
approval on October 30, 2008, earnings of the DM&E are
fully consolidated with CP. As a result DM&E income in 2009
is consolidated on a line by line basis and the equity income in
DM&E is reported as $nil in 2009, compared to
$50.9 million and $11.2 million in 2008 and 2007,
respectively.
10.5 NET INTEREST
EXPENSE
Net interest expense includes interest on long-term debt and
capital leases, net of interest income. Net interest expense was
$273.1 million in 2009, an increase of $10.1 million,
or 3.8% on a pro forma
|
2009
ANNUAL REPORT |
21 | |
basis. The expense was $261.1 million in 2008 on a reported
basis, an increase of $56.8 million, or 27.8% from 2007.
The increase in 2009 was primarily due to:
| o | the unfavourable impact from the change in FX on US dollar-denominated interest expense; |
| o | interest on new debt issuances (discussed further in Section 14.3 Financing Activities); and |
| o | lower interest income due to lower rates on deposits. |
The increase was partly offset by the repurchase of debt as part
of the tender offer of debt securities (discussed further in
Section 20.1.1 Tender Offer of Debt Securities), lower
draws on the credit facility, reduced rates on variable debt,
repayment of the remaining DM&E bridge financing in
December 2008 (discussed further in Section 14.3 Financing
Activities) and increased capitalization of interest expense for
long-term capital projects in 2009.
The increase in 2008 was primarily due to:
| o | financing being in place for a full 12 months to fund the acquisition of DM&E (discussed further in Section 14.3 Financing Activities); |
| o | interest on new debt issued in May of 2008 (discussed further in Section 14.3 Financing Activities) to replace the majority of the bridge financing and permanently fund the acquisition of the DM&E; and |
| o | the issuance of US$450 million Notes in May of 2007. |
10.6 INCOME
TAXES
Income tax expense was $101.5 million in 2009, a decrease
of $34.4 million, or 25.3% from 2008 on a reported basis.
Income tax expense was $135.9 million in 2008, a decrease
of $18.4 million, or 11.9% from 2007. The decreases in 2009
and 2008 were due to lower earnings, and future tax benefits
related to provincial rate reductions in 2009 and 2007 and the
resolution of a prior year income tax matter in 2009.
The effective income tax rate for 2009 was 14.2%, compared with
18.3% and 14.2% for 2008 and 2007, respectively. The normalized
rates (income tax rate based on income adjusted for FX on LTD,
DM&E equity income (for 2007 only), and other specified
items) for 2009, 2008 on a pro forma basis and 2007 were 24.7%,
25.0% and 25.8%, respectively. The changes in the normalized tax
rates were primarily due to lower Canadian federal and
provincial corporate income tax rates and tax planning
initiatives.
We expect a normalized 2010 income tax rate of between 25% and
27%. The 2010 outlook on our normalized income tax rate is based
on certain assumptions about events and developments that may or
may not materialize or that may be offset entirely or partially
by other events and developments (discussed further in
Section 21.0 Business Risks and Enterprise Risk Management
and Section 22.4 Future Income Taxes). We expect to have an
increase in our cash tax payments in future years.
As part of a consolidated financing strategy, CP structures its
US dollar-denominated long-term debt in different tax
jurisdictions. As well, a portion of this debt is designated as
a net investment hedge against net investment in US
subsidiaries. As a result, the tax on foreign exchange gains and
losses on long-term debt in different tax jurisdictions can vary
significantly.
11.0 Quarterly
Financial Data
QUARTERLY
FINANCIAL DATA AS REPORTED
| 2009 | 2008 (1)(2) | |||||||||||||||||||||||||||||||
|
For the quarter ended
|
||||||||||||||||||||||||||||||||
| (in millions, except per share data) | Dec. 31 | Sept. 30 (1) | Jun. 30 (1) | Mar. 31 (1) | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | ||||||||||||||||||||||||
|
Total revenue
|
$ | 1,121.9 | $ | 1,088.2 | $ | 1,022.4 | $ | 1,070.7 | $ | 1,299.7 | $ | 1,264.7 | $ | 1,220.3 | $ | 1,146.9 | ||||||||||||||||
|
Operating
income
(3)
|
269.0 | 268.5 | 225.7 | 136.9 | 287.2 | 298.1 | 249.0 | 207.4 | ||||||||||||||||||||||||
|
Net income
|
194.1 | 201.0 | 157.2 | 60.1 | 188.1 | 169.3 | 152.8 | 97.0 | ||||||||||||||||||||||||
|
Income, before FX on LTD and other specified
items
(3)
|
158.9 | 149.8 | 99.9 | 51.7 | 165.8 | 183.0 | 148.3 | 122.6 | ||||||||||||||||||||||||
|
Basic earnings per share
|
$ | 1.15 | $ | 1.20 | $ | 0.94 | $ | 0.37 | $ | 1.22 | $ | 1.10 | $ | 0.99 | $ | 0.63 | ||||||||||||||||
|
Diluted earnings per share
|
1.15 | 1.19 | 0.93 | 0.37 | 1.21 | 1.09 | 0.99 | 0.63 | ||||||||||||||||||||||||
|
Diluted earnings per share, before FX on LTD and other specified
items
(3)
|
0.94 | 0.89 | 0.59 | 0.32 | 1.07 | 1.18 | 0.96 | 0.79 | ||||||||||||||||||||||||
(1)
Restated
for the adoption of CICA accounting standard 3064 and accounting
policy changes related to pension prior service costs and
locomotive overhauls, discussed further in Section 13.1
2009 Accounting Changes.
(2)
DM&E
figures are included on a consolidated basis beginning
October 30, 2008.
(3)
These
earnings measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings. A reconciliation of income and diluted
EPS, before FX on LTD and other specified items, to net income
and diluted EPS, as presented in the financial statements is
provided in Section 6.0 Non-GAAP Earnings.
|
22
|
2009
ANNUAL REPORT |
|
11.1 QUARTERLY
TRENDS
Quarterly fluctuations in trends caused by the 2009 global
recession have and will continue to cause our results and
volumes to be inconsistent with the sensitivity and trends
provided below. Management believes that the changes in economic
conditions in 2009 will continue to affect quarterly results in
2010; the timing of a return to the sensitivity and trends
discussed will depend on the recovery of the economy and our
customers.
Volumes of and, therefore, revenues from certain goods are
stronger during different periods of the year. First-quarter
revenues can be lower mainly due to winter weather conditions,
closure of the Great Lakes ports and reduced transportation of
retail goods. Second- and third-quarter revenues generally
improve over the first quarter as fertilizer volumes are
typically highest during the second quarter and demand for
construction-related goods is generally highest in the third
quarter. Revenues are typically strongest in the fourth quarter,
primarily as a result of the transportation of grain after the
harvest, fall fertilizer programs and increased demand for
retail goods moved by rail. Operating income (see
Section 6.0 Non-GAAP Earnings) is also affected by
seasonal fluctuations. Operating income is typically lower in
the first quarter due to higher operating costs associated with
winter conditions. Net income is also influenced by seasonal
fluctuations in customer demand and weather-related issues.
12.0 Fourth-Quarter
Summary
|
Q4 2009
|
||||||||||||||||||||
| 2009 | 2008 (1) |
to pro forma
|
||||||||||||||||||
|
DM&E
|
2008
(3)(4)
%
|
|||||||||||||||||||
|
prior to
|
Pro forma
|
favourable/
|
||||||||||||||||||
| (in millions) | Q4 2008 | consolidation (2) | Q4 (3)(4) | (unfavourable) | ||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Grain
|
$ | 291.9 | $ | 307.1 | $ | 12.8 | $ | 319.9 | (8.8 | ) | ||||||||||
|
Coal
|
112.1 | 139.5 | 1.8 | 141.3 | (20.7 | ) | ||||||||||||||
|
Sulphur and fertilizers
|
83.7 | 117.5 | 1.5 | 119.0 | (29.7 | ) | ||||||||||||||
|
Forest products
|
42.0 | 57.2 | 0.8 | 58.0 | (27.6 | ) | ||||||||||||||
|
Industrial and consumer products
|
201.3 | 216.0 | 17.0 | 233.0 | (13.6 | ) | ||||||||||||||
|
Automotive
|
67.7 | 81.6 | 0.2 | 81.8 | (17.2 | ) | ||||||||||||||
|
Intermodal
|
292.3 | 338.9 | – | 338.9 | (13.8 | ) | ||||||||||||||
|
Total freight revenues
|
1,091.0 | 1,257.8 | 34.1 | 1,291.9 | (15.6 | ) | ||||||||||||||
|
Other revenues
|
30.9 | 41.9 | 0.3 | 42.2 | (26.8 | ) | ||||||||||||||
|
Total revenues
|
1,121.9 | 1,299.7 | 34.4 | 1,334.1 | (15.9 | ) | ||||||||||||||
|
Operating expenses
|
||||||||||||||||||||
|
Compensation and benefits
|
311.8 | 350.2 | 6.8 | 357.0 | 12.7 | |||||||||||||||
|
Fuel
|
157.5 | 239.5 | 4.6 | 244.1 | 35.5 | |||||||||||||||
|
Materials
|
41.1 | 63.8 | 1.4 | 65.2 | 37.0 | |||||||||||||||
|
Equipment rents
|
45.0 | 45.8 | 1.3 | 47.1 | 4.5 | |||||||||||||||
|
Depreciation and amortization
|
121.3 | 113.7 | 4.2 | 117.9 | (2.9 | ) | ||||||||||||||
|
Purchased services and other
|
176.2 | 199.5 | (1.0 | ) | 198.5 | 11.2 | ||||||||||||||
|
Total expenses
|
852.9 | 1,012.5 | 17.3 | 1,029.8 | 17.2 | |||||||||||||||
|
Operating
income
(3)
|
$ | 269.0 | $ | 287.2 | $ | 17.1 | $ | 304.3 | (11.6 | ) | ||||||||||
(1)
Restated
for the adoption of CICA accounting standard 3064 and accounting
policy changes related to pension prior service costs and
locomotive overhauls, discussed further in Section 13.1
2009 Accounting Changes.
(2)
These
revenues, expenses and operating income include DM&E
results for October 1, 2008 to October 30, 2008.
(3)
These
earnings measures have no standardized meanings as prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to
similar measures of other companies. These earnings measures and
other specified items are described in Section 6.0
Non-GAAP Earnings.
(4)
Pro
forma basis redistributes DM&E equity income to a line by
line consolidation of DM&E results for the fourth quarter
of 2008.
12.1 OPERATING
RESULTS
Operating income (discussed further in Section 6.0
Non-GAAP Earnings) for the three-month period ended
December 31, 2009, was $269.0 million, a decrease of
$35.3 million, or 11.6%, from $304.3 million, on a pro
forma basis, from the same period in 2008.
|
2009
ANNUAL REPORT |
23 | |
The decrease in operating income was primarily due to:
| o | the global recession which resulted in lower traffic volumes; |
| o | the impact of negative rate decisions in coal and regulated grain; |
| o | the impact of the reduction in average length of haul in coal; |
| o | an unfavourable variance in fuel recovery as compared to the fourth-quarter 2008; and |
| o | the unfavourable impact of the change in FX. |
The decrease was partially offset by the favourable impact of a
number of cost initiatives and lower casualty-related and
pension expenses.
We reported net income of $194.1 million in the fourth
quarter of 2009, an increase of $6.0 million, or 3.2%, from
$188.1 million in 2008.
The increase in net income was mainly due to income tax
recoveries. This increase was partially offset by lower
operating income mostly due to lower volumes as a result of the
global recession as well as a loss on termination of a lease
(discussed further in Section 10.1 Loss on Termination of
Lease with Shortline Railway).
Diluted EPS was $1.15 in the fourth quarter of 2009, a decrease
of $0.06 from $1.21 in 2008. This was primarily due to the
issuance of 13.9 million common shares in the first quarter
of 2009. This was partially offset by higher net income.
In the fourth quarter of 2009, GTMs were approximately
55,198 million, a decrease of 6.1%, from
58,774 million in 2008 on a pro forma basis. RTMs were
approximately 28,874 million, a decrease of 5.4%, from
30,509 million in 2008 on a pro forma basis. The decrease
in GTMs and RTMs was primarily due to:
| o | the global recession; |
| o | reduced shipments of potash, sulphur and fertilizers caused partially by reduced demand; and |
| o | decreased demand for lumber and panel products caused by a continued slowdown in the US housing market. |
12.2
NON-GAAP EARNINGS
A discussion of non-GAAP earnings and a reconciliation of
income, before FX on LTD and other specified items, to net
income as presented in the consolidated financial statements for
the fourth quarters of 2009 and 2008, are included in
Section 6.0 Non-GAAP Earnings.
Income, before FX on LTD and other specified items, was
$158.9 million in the fourth quarter of 2009, a decrease of
$6.9 million from $165.8 million (discussed further in
Section 6.0 Non-GAAP Earnings). The decrease was
mainly driven by lower operating income. This was partially
offset by lower interest expense (discussed further in
Section 12.5 Other Income Statement Items) and income tax
expense before FX on LTD.
12.3 REVENUES
Total revenues were $1,121.9 million in fourth-quarter
2009, a decrease of $177.8 million from
$1,299.7 million as reported in 2008. On a pro forma basis
total revenues decreased $212.2 million from
$1,334.1 million.
This decrease was primarily driven by:
| o | lower overall volumes in all lines of business other than coal and automotive; |
| o | the unfavourable impact of the change in FX; |
| o | a decline in freight revenues due to fuel price changes; and |
| o | the impact of negative rate decisions in coal and regulated grain. |
This decrease was partially offset by a net increase in freight
rates and positive traffic mix.
Variances below (Sections 12.3.1 to 12.5) are compared to
pro forma 2008 figures.
12.3.1
Grain
Grain revenues in the fourth quarter of 2009 were
$291.9 million, a decrease of $28.0 million from
$319.9 million on a pro forma basis. This decrease was
primarily driven by:
| o | the unfavourable impact of the change in FX; |
| o | lower fuel surcharge revenues due to the change in fuel price; and |
| o | negative rate decision in regulated grain. |
This decrease was partially offset by increased commercial and
US Grain rates and an increase in length of haul.
12.3.2 Coal
Coal revenues were $112.1 million in fourth-quarter 2009, a
decrease of $29.2 million from $141.3 million on a pro
forma basis. The decrease in revenues was primarily due to
decreased rates as a result of regulatory rate proceedings and
reduced average length of haul on export coal which reduced coal
revenues by approximately $25 million and the unfavourable
impact of the change in FX.
This decrease was partially offset by increased export coal
shipments as a result of improved market demand for
metallurgical coal and new short haul US coal traffic.
12.3.3 Sulphur
and Fertilizers
Sulphur and fertilizers revenues were $83.7 million in the
fourth quarter of 2009, a decrease of $35.3 million from
$119.0 million on a pro forma basis. The decrease was
primarily due to:
| o | lower export potash shipments as a result of ongoing price negotiations between producers and major buyers; |
| o | lower domestic potash shipments as farmers deferred purchases; |
| o | lower fuel surcharge revenues due to the change in fuel price; and |
| o | the unfavourable impact of the change in FX. |
This decrease was partially offset by a net increase in freight
rates.
12.3.4 Forest
Products
Forest products revenues were $42.0 million in the fourth
quarter of 2009, a decrease of $16.0 million from
$58.0 million on a pro forma basis. The decrease was
primarily due to continued soft demand for lumber, panel and
pulp products; lower fuel surcharge
|
24
|
2009
ANNUAL REPORT |
|
revenues due to the change in fuel price and the unfavourable
impact of the change in FX. This decrease was partially offset
by a net increase in freight rates.
12.3.5 Industrial
and Consumer Products
Industrial and consumer products revenues were
$201.3 million in the fourth quarter of 2009, a decrease of
$31.7 million from $233.0 million on a pro forma
basis. The decrease was primarily due to lower volumes due to
economic conditions particularly for steel and aggregates, the
unfavourable impact of the change in FX and lower fuel surcharge
revenues due to the change in fuel price. This decrease was
partially offset by growth in ethanol and liquefied petroleum
gas (“LPG”) shipments and a net increase in freight
rates.
12.3.6 Automotive
Automotive revenues were $67.7 million in fourth-quarter
2009, a decrease of $14.1 million from $81.8 million
on a pro forma basis. This decrease was primarily due to the
unfavourable impact of the change in FX and lower fuel surcharge
revenues resulting from the change in fuel price. This decrease
was partially offset by a net increase in freight rates and
increased volumes due to increased North American vehicle sales.
12.3.7 Intermodal
Intermodal revenues declined in the fourth quarter of 2009 to
$292.3 million, a decrease of $46.6 million from
$338.9 million on a pro forma basis. The decrease was
primarily due to reduced volumes due to economic conditions,
lower fuel surcharge revenues resulting from the change in fuel
price and by the unfavourable impact of the change in FX.
12.3.8 Other
Revenues
Other revenues were $30.9 million in the fourth quarter of
2009, a decrease of $11.3 million from $42.2 million
on a pro forma basis. The decrease was primarily due to lower
revenues received from routine land sales, switching, leasing
and the unfavourable impact of the change in FX.
12.4 OPERATING
EXPENSES
Operating expenses in the fourth quarter of 2009 were
$852.9 million, a decrease of $159.6 million from
$1,012.5 million. On a pro forma basis, operating expenses
declined $176.9 million from $1,029.8 million.
This decrease was primarily due to reductions in fuel from lower
price and consumption, the favourable change in FX and reduced
labour expenses in response to lower volumes.
12.4.1 Compensation
and Benefits
Compensation and benefits expense in fourth-quarter 2009 was
$311.8 million, a decrease of $45.2 million from
$357.0 million on a pro forma basis. The decrease was
primarily driven by:
| o | reductions in the number of employees in response to reduced volumes; |
| o | savings from reduced overtime and increased use of accrued vacation as a result of cost management initiatives; |
| o | lower pension expense caused by a higher discount rate; and |
| o | the favourable impact of foreign exchange. |
The decrease was partially offset by increased unionized wage
rates.
12.4.2 Fuel
Fuel expense was $157.5 million in fourth-quarter 2009, a
decrease of $86.6 million from $244.1 million in 2008
on a pro forma basis. The decrease was primarily due to lower
fuel prices and decreased consumption as a result of lower
traffic volumes and improved efficiencies from ongoing
fuel-conservation programs, operation of longer trains and the
use of a higher proportion of fuel efficient locomotives.
12.4.3 Materials
Materials expense was $41.1 million in the fourth quarter
of 2009, a decrease of $24.1 million from
$65.2 million on a pro forma basis. The decrease was
primarily due to:
| o | fewer locomotive overhauls; |
| o | reduced freight car and locomotive repairs and train servicing due to lower volumes; |
| o | the favourable impact of the change in FX; |
| o | recoveries from third parties; and |
| o | lower vehicle and other fuel costs. |
12.4.4 Equipment
Rents
Equipment rents expense was $45.0 million in the fourth
quarter of 2009, a decrease of $2.1 million from
$47.1 million on a pro forma basis. The fourth quarter
decrease was due to the favourable impact of the change in FX
and lower volumes. Reduced freight car leasing costs, achieved
through the turn back of leased equipment and fleet reductions,
lowered the number of active cars on line. As well, fewer
foreign cars on line resulted in a reduction of car hire
payments. The favourable variance was partially offset by lower
car hire receipts as fewer CP-owned cars were operating on other
railways and lower demurrage and storage receipts due to reduced
activity.
12.4.5 Depreciation
and Amortization
Depreciation and amortization expense was $121.3 million in
fourth-quarter 2009, an increase of $3.4 million from
$117.9 million on a pro forma basis, largely due to
increased depreciation rates on software and the impact of
increased capital expenditures partially offset by the
favourable impact of the change in FX.
12.4.6 Purchased
Services and Other
Purchased services and other expense was $176.2 million in
fourth-quarter 2009, a decrease of $22.3 million from
$198.5 million on a pro forma basis. The decrease was
mainly due to:
| o | lower costs from train accidents and personal injuries; |
| o | reduced bad debt expense; and |
| o | the favourable impact of the change in FX. |
|
2009
ANNUAL REPORT |
25 | |
The decrease was partially offset by higher consulting costs.
12.5 OTHER
INCOME STATEMENT ITEMS
In the fourth quarter of 2009 there was a gain due to FX on LTD
of $3.1 million, as the Canadian dollar strengthened to
$1.0510 from $1.0707 at September 30, 2009. In the
fourth-quarter 2008, there was a loss due to FX on LTD of
$3.9 million as a result of a weakening of the Canadian
dollar against the US dollar.
Other income and charges, excluding FX on LTD, was an expense of
$2.7 million in the fourth quarter of 2009, a decrease of
$5.6 million from an $8.3 million expense in
fourth-quarter 2008.
As a result of the approval by the STB of our acquisition of the
DM&E on October 30, 2008, DM&E income in 2009 is
consolidated on a line by line basis and equity income in
DM&E is $nil in the fourth-quarter, compared to
$10.4 million in 2008. We reported DM&E equity income
from October 30, 2007 until October 29, 2008 and
subsequent to this, results were consolidated on a line by line
basis.
Net interest expense was $62.8 million in fourth-quarter
2009, a decrease of $11.0 million on a reported basis from
$73.8 million in the same period of 2008. The decrease was
primarily due to:
| o | the repurchase of debt as part of the Tender Offer of Debt Securities (discussed further in Section 20.1.1 Tender Offer of Debt Securities); |
| o | the favourable impact from the change in FX on US dollar-denominated interest expense; |
| o | lower draws on the credit facility; |
| o | increased capitalization of interest expense for long-term capital projects in 2009; and |
| o | interest in 2008 related to the remaining bridge financing for the DM&E repaid in December 2008. |
The decrease was offset in part by interest on new debt issuance
of US$350 million Notes in May 2009 and $400 million
Notes in November 2009 (discussed further in Section 14.3
Financing Activities).
12.6 LIQUIDITY
AND CAPITAL RESOURCES
During the fourth quarter of 2009, the company generated cash
and cash equivalents of $63.2 million. During the same
period of 2008 the Company generated $19.7 million of cash
and cash equivalents.
The increase in cash and cash equivalents during the fourth
quarter of 2009 compared to 2008 was primarily due to:
| o | cash provided by the issuance of $400 million 6.45% 30-year Notes and US$64.7 million of 5.57% Senior Secured Notes in 2009 compared to the repayment of the remaining bridge financing of $248.0 million originally used to finance the acquisition of DM&E and a greater reduction in short-term borrowings in 2008; |
| o | lower additions to properties in 2009; and |
| o | a greater improvement in working capital balances in 2009. |
This increase was largely offset by:
| o | a $500 million voluntary prepayment to the Canadian defined benefit pension plans (discussed further in Section 20.5 Pension Plan Deficit); |
| o | the cost of terminating a lease with a shortline railway (discussed further in Section 10.1 Loss on Termination of Lease with Shortline Railway); and |
| o | lower proceeds from the sale and refinancing of equipment in 2009. |
13.0 Changes in
Accounting Policy
13.1 2009
ACCOUNTING CHANGES
13.1.1 Goodwill
and Intangible Assets
In February 2008, the Canadian Institute of Chartered
Accountants (“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”.
Section 3064, which replaces Section 3062, establishes
standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and
of intangible assets by profit-oriented enterprises. Various
changes have been made to other sections of the CICA Handbook
for consistency purposes. The new Section was applicable to
financial statements relating to fiscal years beginning on or
after October 1, 2008. Accordingly, the Company adopted the
new standards for its fiscal year beginning January 1,
2009. The provisions of Section 3064 were adopted
retrospectively, with restatement of prior periods.
As a result of this adoption, the Company has retroactively
expensed certain expenditures related to pre-operating periods
of a facility, rather than recording them as assets in
“Prepaid pension costs and other assets” and “Net
properties”. The adoption of Section 3064 resulted in
a reduction to opening retained income of $6.9 million at
January 1, 2007, $7.4 million at January 1, 2008
and $10.4 million at January 1, 2009. For the year
ended December 31, 2008, the adoption of this section
resulted in an increase to “Purchased services and
other” expense of $5.0 million (2007 -
$0.8 million) and a decrease to “Income tax
expense” of $2.0 million (2007 –
$0.3 million). This change also resulted in a $0.02
decrease to previously reported basic and diluted earnings per
share for the year ended December 31, 2008
(2007 – $nil).
13.1.2 Credit
Risk and the Fair Value of Financial Assets and Financial
Liabilities
On January 20, 2009 the Emerging Issues Committee
(“EIC”) issued a new abstract EIC 173 “Credit
risk and the fair value of financial assets and financial
liabilities”. This abstract concludes that an entity’s
own credit risk and the credit risk of the counterparty should
be taken into account when determining the fair value of
financial assets and financial liabilities, including derivative
instruments.
This abstract applies to all financial assets and liabilities
measured at fair value in interim and annual financial
statements for periods ending on or after January 20, 2009.
The adoption of this abstract did not impact the Company’s
financial statements.
|
26
|
2009
ANNUAL REPORT |
|
13.1.3 Pension
Prior Service Costs
During 2009, CP changed its accounting policy for the treatment
of prior service pension costs for unionized employees. In
previous periods, CP had amortized these costs over the expected
average remaining service period for employees. CP now amortizes
these costs over the remaining contract term. The change in
policy was made to provide more relevant information by
amortizing the costs based on the contract term as CP generally
renegotiates union contracts on a routine and consistent basis
that is substantially shorter than the expected average
remaining service period. The change has been accounted for on a
retrospective basis. As a result of the change, the following
increases (decreases) to financial statement line items occurred:
| Year ended December 31 | As at December 31 |
As at January 1
|
||||||||||||||||||||||
| (in millions of Canadian dollars, except per share data) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Compensation and benefits
|
$ | 0.9 | $ | 0.1 | $ | (10.1 | ) | |||||||||||||||||
|
Income tax expense
|
1.2 | 0.3 | 7.3 | |||||||||||||||||||||
|
Net income
|
$ | (2.1 | ) | $ | (0.4 | ) | $ | 2.8 | ||||||||||||||||
|
Basic earnings per share
|
$ | (0.01 | ) | $ | – | $ | 0.02 | |||||||||||||||||
|
Diluted earnings per share
|
$ | (0.01 | ) | $ | – | $ | 0.02 | |||||||||||||||||
|
Prepaid pension costs and other assets
|
$ | (105.1 | ) | $ | (104.2 | ) | $ | (114.2 | ) | |||||||||||||||
|
Future income tax liability
|
(27.0 | ) | (28.2 | ) | (35.8 | ) | ||||||||||||||||||
|
Retained income
|
(78.1 | ) | (76.0 | ) | (78.4 | ) | ||||||||||||||||||
13.1.4 Locomotive
Overhauls
During 2009, CP changed its accounting policy for the treatment
of locomotive overhaul costs. In prior periods, CP had
capitalized such costs and depreciated them over the expected
economic life of the overhaul. These costs are now expensed to
better represent the nature of overhaul expenditures on
locomotives. This policy aligns the treatment of locomotive
costs with CP’s current operational practices, which have
changed over recent years and gradually shifted to be more in
the nature of a repair. The change has been accounted for on a
retrospective basis. This policy change resulted in minor
changes to the accounting process and underlying accounting
systems. As a result of the change, the following increases
(decreases) to financial statement line items occurred:
| Year ended December 31 | As at December 31 |
As at January 1
|
||||||||||||||||||||||
| (in millions of Canadian dollars, except per share data) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
|
Depreciation and amortization
|
$ | (43.5 | ) | $ | (48.8 | ) | $ | (44.5 | ) | |||||||||||||||
|
Compensation and benefits
|
0.1 | 0.5 | 0.9 | |||||||||||||||||||||
|
Materials
|
13.8 | 35.0 | 36.7 | |||||||||||||||||||||
|
Purchased services and other
|
29.3 | 23.8 | 19.6 | |||||||||||||||||||||
|
Total increases
|
43.2 | 59.3 | 57.2 | |||||||||||||||||||||
|
Total operating expenses
|
(0.3 | ) | 10.5 | 12.7 | ||||||||||||||||||||
|
Equity income in DM&E
|
– | (0.4 | ) | (1.1 | ) | |||||||||||||||||||
|
Income tax expense
|
1.3 | (2.6 | ) | 2.5 | ||||||||||||||||||||
|
Net income
|
$ | (1.0 | ) | $ | (8.3 | ) | $ | (16.3 | ) | |||||||||||||||
|
Basic earnings per share
|
$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.11 | ) | |||||||||||||||
|
Diluted earnings per share
|
$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.11 | ) | |||||||||||||||
|
Other comprehensive income
|
2.1 | (2.4 | ) | 1.4 | ||||||||||||||||||||
|
Comprehensive income
|
$ | 1.1 | $ | (10.7 | ) | $ | (14.9 | ) | ||||||||||||||||
|
Cash provided by operating activities
|
$ | (43.2 | ) | $ | (59.3 | ) | $ | (57.2 | ) | |||||||||||||||
|
Cash used in investing activities
|
$ | 43.2 | $ | 59.3 | $ | 57.2 | ||||||||||||||||||
|
Net properties
|
$ | (187.9 | ) | $ | (191.8 | ) | $ | (164.4 | ) | |||||||||||||||
|
Future income tax liability
|
(51.5 | ) | (54.3 | ) | (52.6 | ) | ||||||||||||||||||
|
Accumulated other comprehensive income
|
1.5 | (0.6 | ) | 0.4 | ||||||||||||||||||||
|
Retained income
|
(137.9 | ) | (136.9 | ) | (112.2 | ) | ||||||||||||||||||
|
2009
ANNUAL REPORT |
27 | |
13.1.5 Financial
Instruments – Disclosures
The CICA amended Section 3862 “Financial
Instruments – Disclosures”, to include additional
disclosures about fair value measurements and to enhance
liquidity risk disclosures associated with financial
instruments. This standard is effective for the annual period
ending December 31, 2009. The adoption of this standard did
not impact the amounts reported in the Company’s financial
statements, however, it did result in additional disclosure.
13.2 FUTURE
ACCOUNTING CHANGES
13.2.1 US
GAAP / International Financial Reporting Standards
(“IFRS”)
On February 13, 2008, the Accounting Standards Board of the
CICA confirmed that Canadian publicly accountable enterprises
are required to adopt IFRS, as issued by the International
Accounting Standards Board, effective January 1, 2011. In
June 2008, the Canadian Securities Administrators proposed that
Canadian public companies which are also Securities and Exchange
Commission (“SEC”) registrants, such as CP, could
retain the option, currently available to them, to prepare their
financial statements under US GAAP instead of IFRS. CP has
determined that, commencing on January 1, 2010, it will
adopt US GAAP for its financial reporting, which will be
consistent with current reporting of all other North American
Class I railways. As a result, CP will not be adopting IFRS
in 2011.
Our adoption of US GAAP is now complete and in effect for 2010.
Changes to our underlying accounting systems have been made and
the necessary accounting entries to record 2010 opening US GAAP
balances in our accounting records have been made. Additionally
we will be preparing US GAAP 2009 annual financial statements
and US GAAP MD&A to provide users of our financial
information with additional clarity as to our financial results
and financial position for the years ending 2009, 2008 and 2007
prepared retrospectively in accordance with US GAAP. We will
also be providing further US GAAP information on our website by
the end of March 2010.
Accounting staff at CP have also received externally delivered
US GAAP accounting training and training on required changes to
specific accounting systems.
Our first financial statements to be prepared using US GAAP will
be our first quarter 2010 interim statements. These statements
will include a reconciliation from US GAAP to Canadian GAAP. We
are currently finalizing the necessary disclosures which will be
required under US GAAP.
13.2.2 Business
combinations, consolidated financial statements and
non-controlling interests
In January 2009, the CICA issued three new standards.
Business combinations, Section 1582
This section replaces the former Section 1581
“Business combinations” and provides the Canadian
equivalent to IFRS 3 “Business Combinations” (January
2008). The new standard requires the acquiring entity in a
business combination to recognize most of the assets acquired
and liabilities assumed in the transaction at fair value
including contingent assets and liabilities; and recognize and
measure the goodwill acquired in the business combination or a
gain from a bargain purchase. Acquisition-related costs are to
be expensed.
Consolidated financial statements, Section 1601 and
Non-controlling interests, Section 1602
These two sections replace Section 1600 “Consolidated
financial statements”. Section 1601 “Consolidated
financial statements” carries forward guidance from
Section 1600 “Consolidated financial statements”
with the exception of non-controlling interests which are
addressed in a separate section. Section 1602
“Non-controlling interests” requires the Company to
report non-controlling interests within equity, separately from
the equity of the owners of the parent, and transactions between
an entity and non-controlling interests as equity transactions.
All three standards are effective January 1, 2011, however,
the Company will not adopt these standards given the decision to
report under US GAAP effective January 1, 2010.
14.0 Liquidity
and Capital Resources
We believe adequate amounts of cash and cash equivalents are
available in the normal course of business to provide for
ongoing operations, including the obligations identified in the
tables in Section 19.0 Contractual Commitments and
Section 20.4 Certain Other Financial Commitments. We are
not aware of any trends or expected fluctuations in our
liquidity that would create any deficiencies. Liquidity risk is
discussed in Section 21.3 Liquidity. The following
discussion of operating, investing and financing activities
describes our indicators of liquidity and capital resources.
14.1 OPERATING
ACTIVITIES
Cash provided by operating activities was $551.5 million in
2009, a decrease of $468.2 million from
$1,019.7 million in the same period of 2008. Cash provided
by operating activities in 2008 decreased $256.4 million
from $1,276.3 million in 2007.
The decrease in 2009 was primarily due to:
| o | a $500 million voluntary prepayment to the Canadian defined benefit pension plans (discussed further in Section 20.5 Pension Plan Deficit); |
| o | lower operating income (discussed further in Section 6.0 Non-GAAP Earnings); |
| o | the cost of terminating a lease with a shortline railway (discussed further in Section 10.1 Loss on Termination of Lease with Shortline Railway); and |
| o | the partial unwind of the Total Return Swap (“TRS”) (discussed further in Section 16.7.1 Total Return Swap). |
This decrease was offset in part by:
| o | the termination of our $120.0 million accounts receivable securitization program in 2008 (discussed further in Section 17.1 Sale of Accounts Receivable); |
| o | the favourable improvement in working capital balances; and |
| o | cash tax recoveries in 2009 compared to payments in 2008. |
|
28
|
2009
ANNUAL REPORT |
|
The decrease in 2008 was primarily due to the impact to working
capital from the termination of our accounts receivable
securitization program, lower earnings, higher income tax
payments and increased pension contributions.
14.2 INVESTING
ACTIVITIES
Cash used in investing activities was $458.7 million in
2009, a decrease of $338.0 million from 2008. Cash used in
investing activities was $796.7 million in 2008, a decrease
of $1,660.4 million from $2,457.1 million in 2007.
The decrease in 2009 was largely due to proceeds on the sales of
a partnership interest and significant properties (discussed
further in Section 10.2 Gain on Sales of Partnership
Interest and Significant Properties) and lower additions to
properties in 2009.
Cash used in investing activities was lower in 2008, primarily
due to the acquisition of DM&E in 2007 as well as the
reclassification of ABCP from Cash and cash equivalents to
Investments in 2007.
Additions to properties (“capital programs”) in 2010
are expected to be in the range of $680 million to
$730 million (Canadian GAAP basis). Planned capital
programs include approximately $585 million for the renewal
of rail, ballast, crossties, automated signal systems, buildings
and equipment and $115 million for information technology,
positive train control, efficiency and other opportunity capital
projects. The capital programs plan for 2010 reflects CP’s
change in accounting policy to expense locomotive overhauls
previously capitalized.
|
CAPITAL PROGRAMS
|
||||||||||||
| (in millions, except for miles and crossties) | 2009 | 2008 (1) | 2007 (1) | |||||||||
|
Additions to
properties
(2)
|
||||||||||||
|
Track and roadway
|
$ | 534.9 | $ | 680.4 | $ | 543.7 | ||||||
|
Buildings
|
(10.9 | ) | 14.9 | 19.9 | ||||||||
|
Rolling stock
|
105.3 | 107.8 | 161.1 | |||||||||
|
Information systems
|
44.5 | 64.5 | 51.3 | |||||||||
|
Other
|
60.3 | 73.0 | 84.6 | |||||||||
|
Total – accrued
|
734.1 | 940.6 | 860.6 | |||||||||
|
Less:
|
||||||||||||
|
Assets acquired through capital leases
|
0.8 | 79.5 | 12.1 | |||||||||
|
Other non-cash transactions
|
10.9 | 28.2 | 12.5 | |||||||||
|
Cash invested in additions to properties (as per Consolidated
Statement of Cash Flows)
|
$ | 722.4 | $ | 832.9 | $ | 836.0 | ||||||
|
Track installation capital
programs
(3)
|
||||||||||||
|
Track miles of rail laid (miles)
|
395 | 408 | 349 | |||||||||
|
Track miles of rail capacity expansion (miles)
|
1 | 31 | 18 | |||||||||
|
Crossties installed (thousands)
|
870 | 1,065 | 1,037 | |||||||||
(1)
Restated
for the adoption accounting policy changes related to locomotive
overhauls, discussed further in Section 13.1 2009
Accounting Changes.
(2)
The
figures include the results of the DM&E on a fully
consolidated basis for the periods after October 30, 2008.
(3)
The
2008 and 2007 figures exclude DM&E data.
We intend to finance capital expenditures with available cash
from operations but may partially finance these expenditures
with new debt, capital leases and temporary draws on our credit
facility and equity. Our decisions on funding equipment
acquisitions will be influenced by such factors as the need to
keep our capital structure within debt covenants and maintain
financial ratios that enable CP to manage its long-term
financing structure to maintain its investment grade rating, as
well as the amount of cash flow we believe can be generated from
operations and the prevailing capital market conditions.
14.3 FINANCING
ACTIVITIES
Cash provided by financing activities was $488.7 million in
2009 as compared to cash used in financing activities of
$511.5 million in 2008 and cash provided by financing
activities in 2007 of $1,453.5 million.
Cash provided by financing activities in 2009 was mainly due to
the issuance of:
| o | common shares for net cash proceeds of approximately $489 million (discussed further in Section 20.1.2 Issuance of Common Shares); |
| o | US$350 million of 7.25% 10-year Notes for net proceeds of $408.2 million; |
| o | $400 million 6.45% 30-year Notes for net proceeds of $397.8 million; and |
| o | US$64.7 million of 5.57% Senior Secured Notes for net proceeds of $66.7 million. |
|
2009
ANNUAL REPORT |
29 | |
These proceeds were partially offset by the tendering of debt
for a total cost of $571.9 million (discussed further in
Section 20.1.1 Tender Offer of Debt Securities), the
repayment of short-term borrowings and the payments of dividends.
Cash used in financing activities in 2008 was mainly due to the
repayment of the bridge financing originally used to finance the
acquisition of DM&E, dividends paid and the reduction in
short-term borrowings. These uses were largely offset by the
following debt issuances to permanently finance the acquisition
of DM&E and replace the bridge financing:
| o | US$400 million of 5.75% five-year Notes; |
| o | US$300 million of 6.50% 10-year Notes; and |
| o | $375 million of 6.25% 10-year Medium Term Notes. |
Cash provided by financing activities in 2007 was mainly due to:
| o | the US$1.27 billion bridge financing to fund the acquisition of DM&E; |
| o | the issuance of US$450 million of 5.95% 30-year notes, for net proceeds of $485.1 million; and |
| o | short-term borrowings of $229.7 million. |
These sources of financing were partially offset by the
repayment of two debt instruments, a $143.0 million secured
equipment loan and a $19.0 million obligation under a
capital lease, as well as by dividends paid and the purchase of
shares through the Company’s share repurchase program.
The Company has available, as sources of financing, unused
credit facilities of up to $745 million.
14.3.1 Debt
to Total Capitalization
During 2009, the Company changed one of its measures used to
monitor capital from net-debt to net-debt-plus-equity ratio to
debt to total capitalization to better align with a more common
convention.
At December 31, 2009, our debt to total capitalization
decreased to 40.1%, compared with 45.8% at December 31,
2008 and 45.6% at December 31, 2007.
The decrease in 2009 was primarily due to:
| o | the proceeds raised from CP’s equity issue (discussed further in Section 20.1.2 Issuance of Common Shares); |
| o | the tendering of debt (discussed further in Section 20.1.1 Tender Offer of Debt Securities); |
| o | an increase in equity driven by earnings; |
| o | the impact of the stronger Canadian dollar on US dollar-denominated debt at December 31, 2009, compared with December 31, 2008; and |
| o | the repayment of short-term borrowings. |
This was partially offset by the issuance of long-term debt.
The increase in 2008 was primarily due to the impact of the
weaker Canadian dollar on US dollar-denominated debt at
December 31, 2008, compared with December 31, 2007.
This was largely offset by an increase in equity driven by
earnings and the net repayment of short-term borrowings and
long-term debt.
Debt to total capitalization is the sum of long-term debt,
long-term debt maturing within one year and short-term
borrowing, divided by debt plus total shareholders’ equity
as presented on our Consolidated Balance Sheet.
14.3.2 Interest
Coverage Ratio
At December 31, 2009, our interest coverage ratio
(discussed further in Section 6.0 Non-GAAP Earnings)
decreased to 3.2, compared with 4.1 and 5.6 for the same period
in 2008 and 2007 respectively. This decrease in 2009 was
primarily due to a
year-over-year
reduction in adjusted EBIT (discussed further in
Section 6.0 Non-GAAP Earnings). The interest coverage ratio
for the period is below the management target of no less than
4.0; however, the Company believes this is a temporary
consequence of the global recession that occurred during the
period. The Company expects the ratio to improve above the
target as traffic volumes recover. The Company remains in
compliance with all external covenant requirements.
The decrease in 2008 was primarily due to higher interest
expense as a result of an increase in debt to fund the
acquisition of DM&E (discussed further in Section 14.3
Financing Activities).
Interest coverage ratio is measured, on a rolling twelve month
basis, as adjusted EBIT divided by net interest expense. This
ratio excludes changes in the estimated fair value of the
Company’s investment in long-term floating rate notes/ABCP,
the gain on sales of partnership interest and significant
properties and the loss on termination of a lease with a
shortline railway as these are not in the normal course of
business and foreign exchange gains and losses on long-term
debt, which can be volatile and short term. The interest
coverage ratio and adjusted EBIT are non-GAAP measures.
14.3.3 Security
Ratings
Our unsecured long-term debt securities are currently rated
“Baa3”, “BBB” and “BBB” by
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 Moody’s and DBRS ratings have a stable outlook.
Our ratings have remained unchanged throughout 2009 with the
exception of DBRS which improved from a negative to stable
outlook.
|
30
|
2009
ANNUAL REPORT |
|
14.4 FREE
CASH
CALCULATION OF
FREE CASH
| (reconciliation of free cash to GAAP cash position) | ||||||||||||
| For the year ended December 31 (in millions) | 2009 | 2008 (1)(2) | 2007 (2) | |||||||||
|
Cash provided by operating activities
|
$ | 551.5 | $ | 1,019.7 | $ | 1,276.3 | ||||||
|
Cash used in investing activities
|
(458.7 | ) | (796.7 | ) | (2,457.1 | ) | ||||||
|
Add back reclassification of
ABCP
(3)
|
– | – | 143.6 | |||||||||
|
Dividends paid
|
(162.9 | ) | (148.7 | ) | (133.1 | ) | ||||||
|
Add back investment in
DM&E
(4)
|
– | 8.6 | 1,492.6 | |||||||||
|
Termination of accounts receivable securitization
program
(5)
|
– | 120.0 | – | |||||||||
|
Foreign exchange effect on cash and cash
equivalents
(2)
|
(20.0 | ) | 28.0 | (18.9 | ) | |||||||
|
Free
cash
(6)
|
(90.1 | ) | 230.9 | 303.4 | ||||||||
|
Cash provided by (used in) financing activities, excluding
dividend payment
|
651.6 | (362.8 | ) | 1,586.6 | ||||||||
|
Reclassification of
ABCP
(3)
|
– | – | (143.6 | ) | ||||||||
|
Investment in
DM&E
(4)
|
– | (8.6 | ) | (1,492.6 | ) | |||||||
|
Accounts receivable securitization
program
(5)
|
– | (120.0 | ) | – | ||||||||
|
Increase/(decrease) in cash, as shown on the Consolidated
Statement of Cash Flows
|
561.5 | (260.5 | ) | 253.8 | ||||||||
|
Net cash and cash equivalents at beginning of year
|
117.6 | 378.1 | 124.3 | |||||||||
|
Net cash and cash equivalents at end of year
|
$ | 679.1 | $ | 117.6 | $ | 378.1 | ||||||
(1)
The
2008 figures include DM&E consolidated from
October 30, 2008 to December 31, 2008.
(2)
Certain
figures, previously reported for 2008 and 2007 have been
restated for changes in accounting policy as discussed in
Section 13.1 2009 Accounting Changes.
(3)
The
reclassification of ABCP is discussed further in
Section 10.3.1 Change in Estimated Fair Value of Long-term
Floating Rate Notes and Asset-backed Commercial Paper.
(4)
The
acquisition of DM&E in 2007 discussed further in
Section 18.0 Acquisition.
(5)
The
termination of accounts receivable securitization program is
discussed further in Section 17.1 Sale of Accounts
Receivable.
(6)
Free
cash has no standardized meaning prescribed by Canadian GAAP
and, therefore, is unlikely to be comparable to similar measures
of other companies. Free cash is discussed further in
Section 6.0 Non-GAAP Earnings.
Free cash is a non-GAAP measure that management considers to be
an indicator of liquidity. Free cash is calculated as cash
provided by operating activities, less cash used in investing
activities and dividends paid, adjusted for changes in cash and
cash equivalent balances resulting from foreign exchange
fluctuations and excludes the acquisition of DM&E, changes
in accounts receivable securitization program and the initial
reclassification of ABCP to investments. Free cash is adjusted
for the DM&E acquisition and the reclassification of ABCP
as these are 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.
There was negative free cash of $90.1 million in 2009,
compared with positive free cash of $230.9 million in 2008
and $303.4 million in 2007.
The decrease in 2009 was primarily due to:
| o | a $500 million voluntary prepayment to the Canadian defined benefit pension plans (discussed further in Section 20.5 Pension Plan Deficit); |
| o | lower operating income (discussed further in Section 6.0 Non-GAAP Earnings); |
| o | the cost of terminating a contract with a shortline railway (discussed further in Section 10.1 Loss on Termination of Lease with Shortline Railway); and |
| o | the unfavourable impact of foreign exchange fluctuations on US dollar-denominated cash. |
This decrease was offset in part by:
| o | proceeds on the sales of a partnership interest and significant properties; |
| o | lower capital additions; and |
| o | the favourable improvement in working capital balances and cash tax recoveries in 2009 compared to payments in 2008. |
The decrease in free cash in 2008 compared to 2007 was primarily
due to a decrease in cash generated by operating activities (as
discussed in Section 14.1 Operating Activities), partially
offset by the favourable impact of FX fluctuations on US
dollar-denominated cash.
|
2009
ANNUAL REPORT |
31 | |
15.0 Balance
Sheet
15.1 ASSETS
Assets totalled $15,531.4 million at December 31,
2009, compared with $15,157.3 million at December 31,
2008 and $13,073.4 million at December 31, 2007. The
increase in assets in 2009 was mainly due to cash provided by
the monetization of various assets and investments (discussed
further in Section 10.2 Gain on Sales of Partnership
Interest and Significant Properties), proceeds from the issuance
of common shares (discussed further in Section 20.1.2
Issuance of Common Shares) and certain debt issuances. Adequate
cash balances allowed CP to increase funding to the
Company’s defined benefit pension plan (discussed further
in Section 20.5 Pension Plan Deficit) as reflected in the
increase in prepaid pension costs and other assets.
The increase in assets in 2009 was partially offset by the
negative impact of a weaker US dollar and reduction of working
capital accounts which resulted from changes in business
practices and reduced activity as a result of the global
recession.
The increase in assets in 2008 reflects the consolidation of the
DM&E assets and the positive impact of a stronger US
dollar. Previously, DM&E assets, net of liabilities, were
recorded as investments.
15.2 TOTAL
LIABILITIES
Our combined short-term and long-term liabilities were
$8,825.4 million at December 31, 2009 compared with
$9,387.9 million at December 31, 2008 and
$7,825.3 million at December 31, 2007. This decrease
in total liabilities in 2009 reflected the strengthening of the
Canadian dollar and its favourable impact on the US
dollar-denominated liabilities, as well as lower business
activities as a result of the global recession which reduced
accounts payable.
The increase in liabilities in 2008 reflects the consolidation
of DM&E’s liabilities, and the negative impact of a
stronger US dollar. The increase was partially offset by the net
effect of the repayment of bridge financing which was replaced
by the issuance of long-term notes.
15.3 EQUITY
At December 31, 2009, our Consolidated Balance Sheet
reflected $6,706.0 million in equity, compared with an
equity balance of $5,769.4 million at December 31,
2008 and $5,248.1 million at December 31, 2007. The
increase in equity in 2009 was primarily due to the issuance of
13.9 million common shares in February 2009 (discussed
further in Section 20.1.2 Issuance of Common Shares) and
net income, in excess of dividends. This increase was partially
offset by a reduction in Accumulated Other Comprehensive Income
(“AOCI”).
The increase in equity in 2008 was primarily due to net income,
in excess of dividends; growth in AOCI and the issuance of
Common Shares for stock options exercised.
15.4 SHARE
CAPITAL
CP is authorized to issue an unlimited number of Common Shares,
an unlimited number of First Preferred Shares and an unlimited
number of Second Preferred Shares. At February 25, 2010,
168,558,393 Common Shares and no Preferred Shares were issued
and outstanding.
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the US, of up to
13,900,000 CP common shares at a price of $36.75 Canadian per
share. The offering closed on February 11, 2009 at which
time CP issued 13,900,000 common shares, including 1,300,000
common shares issued under the provisions of an over-allotment
option available to the underwriters of the common share
offering, for gross proceeds of approximately $511 million
(proceeds net of fees and issue costs and including future taxes
are $495.2 million) (discussed further in
Section 20.1.2 Issuance of Common Shares).
In addition, CP has a Management Stock Option Incentive Plan
(“MSOIP”) under which key officers and employees are
granted options to purchase CP shares. Each option granted can
be exercised for one Common Share. At February 25, 2010,
8.1 million options were outstanding under our MSOIP and
Directors’ Stock Option Plan, and 1.1 million Common
Shares have been reserved for issuance of future options.
|
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2009
ANNUAL REPORT |
|
15.5 DIVIDENDS
Dividends declared by the Board of Directors in the last three
years are as follows:
| Dividend Amount | Record Date | Payment Date | ||||||
|
$0.2250
|
March 30, 2007 | April 30, 2007 | ||||||
|
$0.2250
|
June 29, 2007 | July 30, 2007 | ||||||
|
$0.2250
|
September 28, 2007 | October 29, 2007 | ||||||
|
$0.2250
|
December 28, 2007 | January 28, 2008 | ||||||
|
$0.2475
|
March 28, 2008 | April 28, 2008 | ||||||
|
$0.2475
|
June 27, 2008 | July 28, 2008 | ||||||
|
$0.2475
|
September 26, 2008 | October 27, 2008 | ||||||
|
$0.2475
|
December 24, 2008 | January 26, 2009 | ||||||
|
$0.2475
|
March 27, 2009 | April 27, 2009 | ||||||
|
$0.2475
|
June 26, 2009 | July 27, 2009 | ||||||
|
$0.2475
|
September 25, 2009 | October 26, 2009 | ||||||
|
$0.2475
|
December 31, 2009 | January 25, 2010 | ||||||
|
$0.2475
|
March 26, 2010 | April 26, 2010 | ||||||
16.0 Financial
Instruments
16.1 FAIR
VALUE OF FINANCIAL INSTRUMENTS
The Company categorizes its financial assets and liabilities
measured at fair value into one of three different levels
depending on the observability of the inputs employed in the
measurement.
| o | Level 1: This category includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| o | Level 2: This category includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Derivative instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market. Instruments valued using inputs in this category include non exchange traded derivatives such as over the counter financial forward contracts, as well as swaps for which observable inputs can be obtained for the entire duration of the derivative instrument. |
| o | Level 3: This category includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments’ fair value. Generally, Level 3 valuations are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available, or have no binding broker quote to support Level 2 classifications. |
When possible, the estimated fair value is based on quoted
market prices, and, if not available, estimates from third party
brokers. For non exchange traded derivatives classified in
Levels 2 and 3, the Company uses standard valuation
techniques to calculate fair value. These methods include
discounted mark to market for forwards, futures and swaps.
Primary inputs to these techniques include observable market
prices (interest, foreign exchange and commodity) and
volatility, depending on the type of derivative and nature of
the underlying risk. The Company uses inputs and data used by
willing market participants when valuing derivatives and
considers its own credit default swap spread as well as those of
its counterparties in its determination of fair value. Wherever
possible the Company uses observable inputs. A detailed analysis
of the techniques used to value the Company’s long-term
floating rate notes are discussed further in Section 10.3.1
Change in Estimated Fair Value of Long-term Floating Rate Notes
and Asset-backed Commercial Paper.
|
2009
ANNUAL REPORT |
33 | |
The following table presents the Company’s fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis, all of which are held for trading,
as at December 31, 2009.
| (in millions of Canadian dollars) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
|
Financial assets
|
||||||||||||||||||||||||
|
Current derivative assets
|
$ | – | $ | 2.5 | $ | – | $ | 2.5 | ||||||||||||||||
|
Long-term derivative assets
|
– | 0.2 | – | 0.2 | ||||||||||||||||||||
|
Investments
|
– | – | 69.3 | 69.3 | ||||||||||||||||||||
|
Financial liabilities
|
||||||||||||||||||||||||
|
Current derivative liabilities
|
– | 18.2 | – | 18.2 | ||||||||||||||||||||
16.1.1 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 $4,494.8 million at
December 31, 2009 (December 31, 2008 –
$4,729.8 million) and a fair value of approximately
$4,824.9 million at December 31, 2009
(December 31, 2008 – $4,198.9 million). The
fair value of publicly traded long-term debt is determined based
on market prices at December 31, 2009 and December 31,
2008, respectively.
16.2 DERIVATIVE
FINANCIAL INSTRUMENTS
Our policy with respect to using derivative financial
instruments is to selectively reduce volatility associated with
fluctuations in interest rates, FX rates, the price of fuel and
stock-based compensation expense management. Where derivatives
are designated as hedging instruments, we document the
relationship between the hedging instruments and their
associated hedged items, as well as the risk management
objective and strategy for the use of the hedging instruments.
This documentation includes linking the derivatives that are
designated as fair value or cash flow hedges to specific assets
or liabilities on our Consolidated Balance Sheet, commitments or
forecasted transactions. At the time a derivative contract is
entered into, and at least quarterly, we assess whether the
derivative item is effective in offsetting the changes in fair
value or cash flows of the hedged items. The derivative
qualifies for hedge accounting treatment if it is effective in
substantially mitigating the risk it was designed to address.
It is not our intent to use financial derivatives or commodity
instruments for trading or speculative purposes.
16.3 CREDIT
RISK
We are exposed to counterparty credit risk in the event of
non-performance by counterparties. In order to mitigate this
risk, limits are set by our Board of Directors for counterparty
transactions and we conduct regular monitoring of the credit
standing of the counterparties or their guarantors. We do not
anticipate any losses with respect to counterparty credit risk.
16.4 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.
16.4.1 Interest
Rate Swaps
In 2003 and 2004, we entered into
fixed-to-floating
interest rate swap agreements totalling US$200 million
which converted a portion of our US$400 million
6.250% Notes to floating-rate debt. We paid an average
floating rate that fluctuated quarterly based on LIBOR. These
swaps were set to expire in 2011 and were accounted for as a
fair value hedge.
During the second quarter of 2009, CP unwound its outstanding
interest rate swap agreements for a gain of $16.8 million.
The gain was deferred as a fair value adjustment to the
underlying debt that was hedged and will be amortized to
“Net interest expense” until such time that the
6.250% Notes are repaid.
Subsequent to the unwinding of this swap a portion of the
underlying 6.250% Notes were repurchased in the second
quarter and, as a result, a pro rata share of the fair value
adjustment amounting to a $6.5 million gain was recognized
immediately to “Other income and charges” as part of
the net loss on repurchase of debt (discussed further in
Section 20.1.1 – Tender Offer of Debt
Securities). For the remainder of 2009 the Company then
amortized $2.4 million of the deferred gain to “Net
interest expense”.
Accounting for these Notes at the floating interest rate, prior
to the unwind, decreased “Net interest expense” on our
Consolidated Statement of Income by $3.1 million in 2009
(2008 – $3.1 million).
At December 31, 2009, the Company had no outstanding
interest rate swaps. At December 31, 2008, an unrealized
gain, derived from the fair value of the swaps, of
$20.9 million was reflected in “Other” current
assets and “Prepaid pension costs and other assets”
with the offset reflected in “Long-term debt” on our
Consolidated Balance Sheet. The fair value was calculated
utilizing swap, currency and basis-spread curves from Bloomberg.
These swaps were fully effective.
|
34
|
2009
ANNUAL REPORT |
|
16.4.2 Interest
and Treasury Rate Locks
At December 31, 2009, the Company had net unamortized
losses related to interest rate locks settled in previous years
totalling $23.9 million, which are reflected in AOCI on the
Consolidated Balance Sheet.
This amount is composed of various unamortized gains and losses
related to specific debts. These unamortized gains and losses
are amortized to “Net interest expense” in the period
that interest coupon payments are made on the related debts. The
amortization of these gains and losses resulted in an increase
in “Net interest expense” and “Other
comprehensive income” of $3.5 million in 2009
(2008 – $3.3 million).
16.5 FOREIGN
EXCHANGE MANAGEMENT
We enter into foreign exchange risk management transactions
primarily to manage fluctuations in the exchange rate between
Canadian and US currencies. From time to time, we use foreign
exchange forward contracts as part of our foreign exchange risk
management strategy. We have designated a portion of our US
dollar-denominated long-term debt as a hedge of our net
investment in self-sustaining foreign subsidiaries.
16.5.1 Foreign
Exchange Forward on Long-term Debt
In 2007, the Company entered into a FX forward to fix the
exchange rate on US$400 million 6.250% Notes due 2011.
This derivative guaranteed the amount of Canadian dollars that
the Company will repay when its US$400 million
6.250% Notes mature in October 2011. During 2009, CP
unwound and settled US$330 million of the
US$400 million currency forward for total proceeds of
$34.1 million. The Company recorded a net foreign exchange
loss on long-term debt of $23.0 million in 2009
(2008 – unrealized gain of $73.0 million) in
“Other income and charges”. The amount recorded in
2009 was inclusive of both realized and unrealized losses.
At December 31, 2009, the unrealized gain on the remaining
currency forward of $0.2 million (December 31,
2008 – $57.3 million) was included in
“Prepaid pension costs and other assets”.
16.6 FUEL
PRICE MANAGEMENT
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.
The impact of variable fuel expense is mitigated substantially
through fuel cost 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, diesel and crack spreads. 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.
16.6.1 Energy
Futures
At December 31, 2009, the Company had diesel futures
contracts, which are accounted for as cash flow hedges, to
purchase approximately 13.5 million US gallons during the
period January 2010 to December 2010 at an average price of
US$1.96 per US gallon. This represents approximately 5% of
estimated fuel purchases for this period. At December 31,
2009, the unrealized gain on these futures contracts was
$2.5 million and was reflected in “Other” current
assets with the offset, net of tax, reflected in AOCI on our
Consolidated Balance Sheet. At December 31, 2008, the
unrealized loss on futures contracts was $4.5 million and
was reflected in “Accounts payable and accrued
liabilities” with the offset, net of tax, reflected in AOCI.
At December 31, 2009, the Company had no remaining crude
futures contracts; these having been replaced by our diesel
hedge program. In comparison, at December 31, 2008, the
unrealized gain on crude futures contracts was $3.2 million
and was reflected in “Other” current assets with the
offset, net of tax, reflected in AOCI on our Consolidated
Balance Sheet.
At December 31, 2009, the Company had no remaining FX
forward contracts (which were used in conjunction with the crude
purchases above). In comparison at December 31, 2008, the
unrealized loss on these forward contracts was $0.1 million
and was recognized in “Accounts payable and accrued
liabilities” with the offset, net of tax, reflected in AOCI
on our Consolidated Balance Sheet.
The impact of settled swaps increased “Fuel” expense
in 2009 by $1.2 million due to a combination of realized
losses of $0.8 million arising from settled commodity swaps
and $0.4 million arising from settled FX forward contracts.
The impact of settled swaps benefited “Fuel” expense
in 2008 by $4.3 million as a result of realized gains of
$6.1 million arising from settled swaps, partially offset
by realized losses of $1.8 million arising from settled FX
forward contracts. Included in the $0.8 million realized
losses on commodity swaps in 2009 were $0.2 million in
realized gains (2008 – realized losses
$9.7 million) from settled derivatives that were not
designated as hedges.
For every one cent increase in the price of a US gallon of
diesel, fuel expense before tax and hedging will increase by
approximately $3 million on an annual basis, assuming
current FX rates and fuel consumption levels. We have a fuel
risk mitigation program to moderate the impact of increases in
fuel prices, which includes these swaps and our fuel cost
recovery program.
|
2009
ANNUAL REPORT |
35 | |
16.7 STOCK-BASED
COMPENSATION EXPENSE MANAGEMENT
16.7.1 Total
Return Swap (“TRS”)
The Company entered into a TRS May 2006 to reduce the volatility
to the Company over time of three types of stock-based
compensation programs: tandem share appreciation rights
(“TSARs”), deferred share units (“DSUs”) and
restricted share units (“RSUs”). The TRS is a
derivative that provides price appreciation and dividends, in
return for a charge by the counterparty. The swaps were intended
to minimize volatility to “Compensation and benefits”
expense by providing a gain to substantially offset increased
compensation expense as the share price increased and a loss to
offset reduced compensation expense when the share price falls.
If stock-based compensation share units fall out of the money
after entering the program, the loss associated with the swap
would no longer be offset by any compensation expense
reductions, which would reduce the effectiveness of the swap.
Going forward the Company does not intend to expand its TRS
program.
“Compensation and benefits” expense on our
Consolidated Statement of Income included a net gain on these
swaps of $18.6 million in 2009 which was inclusive of both
realized losses and unrealized gains (unrealized loss of
$64.1 million in 2008). During 2009, in order to improve
the effectiveness of the TRS in mitigating the volatility of
stock-based compensation programs, CP unwound a portion of the
program for a total cost of $31.1 million. At
December 31, 2009, the unrealized loss on the remaining TRS
of $18.2 million was included in “Accounts payable and
accrued liabilities” on our Consolidated Balance Sheet
(December 31, 2008 – $67.9 million included
in “Other long-term liabilities”).
17.0 Off-Balance
Sheet Arrangements
17.1 SALE OF
ACCOUNTS RECEIVABLE
During the second quarter of 2008, our accounts receivable
securitization program was terminated and settled. Losses on the
securitization program of $2.7 million in 2008 and
$5.8 million in 2007 were included in “Other income
and charges” on our Consolidated Statement of Income.
Proceeds from collections reinvested in the accounts receivable
securitization program were $595.4 million for the year
ended 2008, compared with $1,478.9 million for 2007.
17.2 GUARANTEES
At December 31, 2009, the Company had residual value
guarantees on operating lease commitments of
$167.3 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. As at December 31, 2009, these accruals
amounted to $9.3 million.
18.0 Acquisition
18.1 DAKOTA,
MINNESOTA & EASTERN RAILROAD CORPORATION
Effective October 4, 2007, the Company acquired all of the
issued and outstanding shares of DM&E, a Class II
railroad operating in the US Midwest, for a purchase price of
approximately US$1.5 billion. DM&E’s freight
revenues are derived principally from transporting grain,
industrial products and coal. DM&E has the option, but not
the obligation, to construct a railway line into the Powder
River Basin (“PRB”) located in Wyoming, the largest
thermal coal producing region in the US. No decision will be
made by the Corporation on whether to construct a railway line
into the PRB until certain milestones have been met. Future
contingent payments of up to approximately US$1.1 billion,
plus certain interest and inflationary adjustments may become
payable up to December 31, 2025 upon the achievement of
certain milestones towards the completion of a track expansion
into the PRB and the achievement of certain associated traffic
volume targets. Any contingent payments that may become payable
would be recorded as an increase in the purchase price. The
acquisition has been financed with cash on hand and debt
(discussed further in Section 14.3 Financing Activities).
The purchase was subject to review and approval by the STB,
during which time the shares of DM&E were placed in a
voting trust. The STB approved the application to acquire
control effective October 30, 2008. Prior to
October 30, 2008, CP’s investment in the DM&E had
not been accounted for by CP on a consolidated basis and instead
the investment in the DM&E was accounted for as an equity
investment and reported as “Equity income in Dakota,
Minnesota & Eastern Railroad Corporation” on the
Consolidated Statement of Income.
|
36
|
2009
ANNUAL REPORT |
|
19.0 Contractual
Commitments
The accompanying table indicates our obligations and commitments
to make future payments for contracts, such as debt and capital
lease and commercial arrangements.
CONTRACTUAL
COMMITMENTS
| payments due by period (in millions) | Total | 2010 | 2011 & 2012 | 2013 & 2014 | 2015 & beyond | |||||||||||||||||||
|
Long-term debt
|
$ | 4,215.6 | $ | 381.6 | $ | 327.3 | $ | 192.5 | $ | 3,314.2 | ||||||||||||||
|
Capital lease obligations
|
331.7 | 10.5 | 23.4 | 156.9 | 140.9 | |||||||||||||||||||
|
Operating lease
obligation
(1)
|
930.1 | 148.1 | 242.7 | 178.7 | 360.6 | |||||||||||||||||||
|
Supplier purchased obligations
|
1,762.3 | 222.2 | 281.2 | 280.4 | 978.5 | |||||||||||||||||||
|
Other long-term liabilities reflected
on our Consolidated Balance Sheet (2) |
3,464.6 | 106.7 | 203.3 | 177.4 | 2,977.2 | |||||||||||||||||||
|
Total contractual obligations
|
$ | 10,704.3 | $ | 869.1 | $ | 1,077.9 | $ | 985.9 | $ | 7,771.4 | ||||||||||||||
(1)
Residual
value guarantees on certain leased equipment with a maximum
exposure of $167.3 million (discussed further in
Section 17.2 Guarantees) are not included in the minimum
payments shown above, as management believes that we will not be
required to make payments under these residual guarantees.
(2)
Includes
expected cash payments for restructuring, environmental
remediation, asset retirement obligations, post-retirement
benefits, workers’ compensation benefits, long-term
disability benefits, pension benefit payments for our
non-registered supplemental pension plans, future income tax
liabilities and certain other long-term liabilities. Projected
payments for post-retirement benefits, workers’
compensation benefits and long-term disability benefits include
the anticipated payments for years 2010 to 2019. Pension
contributions for our registered pension plans are not included
due to the volatility in calculating them. Pension payments are
discussed further in Section 20.5 Pension Plan Deficit.
Future income tax liabilities may vary according to changes in
tax rates, tax regulations and the operating results of the
Company. As the cash impact in any particular year cannot be
reasonably determined, all long-term future tax liabilities have
been reflected in the “2015 & beyond” category in
this table. Future income taxes are further discussed in
Section 22.4 Future Income Taxes.
20.0 Future
Trends and Commitments
20.1 AGREEMENTS
AND RECENT DEVELOPMENTS
20.1.1 Tender
Offer of Debt Securities
During the second quarter of 2009, the Company issued
US$350 million 7.25%
10-year
Notes for net proceeds of $408.2 million. The Notes are
unsecured, but carry a negative pledge. The proceeds from this
offering contributed to the repurchase of debt with a carrying
amount of $555.3 million pursuant to a tender offer for a
total cost of $571.9 million. Upon repurchase of the debt a
net loss of $16.6 million was recognized in “Other
income and charges”. The loss consisted largely of premiums
paid to bond holders to tender their debt and the write-off of
unamortized fees, partly offset by a fair value adjustment
(gain) recognized on the unwind of interest rate swaps
associated with the 6.250% Notes that were repurchased
(discussed further in Section 16.4.1 Interest Rate Swaps).
The following table summarizes the principal amount, carrying
amount and cost to redeem debt repurchased:
|
Principal
|
Carrying
|
|||||||||||||||
|
amount in
|
amount in
|
Cost to redeem
|
||||||||||||||
| (in millions) | USD | CDN | in CDN | |||||||||||||
|
6.250% Notes due October 15, 2011
|
$ | 154.3 | $ | 184.1 | $ | 184.6 | ||||||||||
|
5.75% Notes due May 15, 2013
|
298.6 | 342.7 | 359.1 | |||||||||||||
|
6.50% Notes due May 15, 2018
|
24.8 | (1) | 28.5 | 28.2 | ||||||||||||
|
Total debt tendered
|
$ | 477.7 | $ | 555.3 | $ | 571.9 | ||||||||||
(1)
Includes
US$2.7 million principal amount of debt repurchased prior
to commencement of the debt tender.
20.1.2 Issuance
of Common Shares
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the US, of up to
13,900,000 CP common shares at a price of $36.75 Canadian per
share. The offering closed on February 11, 2009 at which
time CP issued 13,900,000 common shares, for gross proceeds of
approximately $511 million (proceeds net of fees, issue
costs and including future taxes were approximately
$495.2 million).
This issuance of additional CP common shares represents an
approximate nine percent dilution to shareholders’ value.
20.2 STOCK
PRICE
The market value of our Common Shares measured at
December 31, 2009 increased by $15.81 per share on the
Toronto Stock Exchange in 2009 (from $40.98 on December 31,
2008 to $56.79 on December 31, 2009). The market value of
our Common Shares decreased by $23.24 per share in 2008. These
changes in share
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price were caused in part by the equity market’s reaction
to the economic downturn in 2008 and prospects of future
recovery in 2009.
20.3 ENVIRONMENTAL
Cash payments related to our environmental remediation program
(described in Section 22.1 Environmental Liabilities)
totalled $18.2 million in 2009, compared with
$12.6 million in 2008 and $14.0 million in 2007. Cash
payments for environmental initiatives are estimated to be
approximately $15 million in 2010, $18 million in
2011, $16 million in 2012 and a total of approximately
$72 million over the remaining years through 2019, which
will be paid in decreasing amounts. All payments will be funded
from general operations.
We continue to be responsible for remediation work on portions
of a property in the State of Minnesota and continue to retain
liability accruals for remaining future expected costs. The
costs are expected to be incurred over approximately
10 years. The state’s voluntary investigation and
remediation program will oversee the work to ensure it is
completed in accordance with applicable standards.
20.4 CERTAIN
OTHER FINANCIAL COMMITMENTS
In addition to the financial commitments mentioned previously in
Section 17.0 Off-Balance Sheet Arrangements and
Section 19.0 Contractual Commitments, we are party to
certain other financial commitments discussed below.
CERTAIN OTHER
FINANCIAL COMMITMENTS AT DECEMBER 31, 2009
| Amount of commitment per period | ||||||||||||||||||||||||
|
2011 &
|
2013 &
|
2015 &
|
||||||||||||||||||||||
| (in millions) | Total | 2010 | 2012 | 2014 | beyond | |||||||||||||||||||
|
Letters of credit
|
$ | 330.8 | $ | 330.8 | $ | – | $ | – | $ | – | ||||||||||||||
|
Capital commitments
|
233.4 | 178.1 | 53.8 | 1.5 | – | |||||||||||||||||||
|
Offset financial liability
|
214.1 | 214.1 | – | – | – | |||||||||||||||||||
|
Total commitments
|
$ | 778.3 | $ | 723.0 | $ | 53.8 | $ | 1.5 | $ | – | ||||||||||||||
20.4.1 Letters
of Credit
Letters of credit are obtained mainly to provide security to
third parties as part of various agreements, such as required by
our workers’ compensation and pension fund requirements. We
are liable for these contractual amounts in the case of
non-performance under these agreements. As a result, our
available line of credit is adjusted for contractual amounts
obtained through letters of credit currently included within our
revolving credit facility.
20.4.2 Capital
Commitments
We remain committed to maintaining our current high level of
plant quality and renewing our franchise. As part of this
commitment, we have entered contracts with suppliers to make
various capital purchases related to track programs, locomotive
acquisitions, freight cars, and land. Payments for these
commitments are due in 2010 through 2028. These expenditures are
expected to be financed by cash generated from operations or by
issuing new debt.
20.4.3 Offset
Financial Liability
We entered into a bank loan to finance the acquisition of
certain equipment. This loan is offset by a financial asset with
the same institution. At December 31, 2009, the loan had a
balance of $219.8 million, offset by a financial asset of
$214.1 million. The remainder is included in
“Long-term debt” on our Consolidated Balance Sheet.
20.5 PENSION
PLAN DEFICIT
We estimate that every 1.0 percentage point increase (or
decrease) in the discount rate attributable to changes in long
Government of Canada bond yields can cause our defined benefit
pension plans’ deficit to decrease (or increase) by
approximately $550 million, reflecting the changes to both
the pension obligations and the value of the pension funds’
debt securities. Similarly, for every 1.0 percentage point
the actual return on assets varies above (or below) the
estimated return for the year, the deficit would decrease (or
increase) by approximately $70 million. Adverse experience
with respect to these factors could eventually increase funding
and pension expense significantly, while favourable experience
with respect to these factors could eventually decrease funding
and pension expense significantly.
The plans’ investment policies provide for between 45% and
51% of the plans’ assets to be invested in public equity
securities. As a result, stock market performance is the key
driver in determining the pension funds’ asset performance.
Most of the plans’ remaining assets are invested in debt
securities which, as mentioned above, provide a partial offset
to the increase (or decrease) in our pension deficit caused by
decreases (or increases) in the discount rate.
The deficit will fluctuate according to future market conditions
and funding will be revised as necessary to reflect such
fluctuations. We will continue to make contributions to the
pension plans that, at a minimum, meet pension legislative
requirements.
We made contributions of $595.2 million to the defined
benefit pension plans in 2009, compared with $95.4 million
in 2008. Our 2009 contributions included voluntary prepayments
in December
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2009 of $500 million to our main Canadian plan and
$7.4 million to our US plans to reduce the volatility of
future pension funding requirements. We have significant
flexibility with respect to the rate at which we apply these
voluntary prepayments to reduce future years’ pension
contribution requirements.
We estimate our aggregate pension contributions in each of 2010
and 2011 to be in the range of $150 million to
$200 million. These estimates reflect the Company’s
current intentions with respect to the rate at which the Company
will apply its $500 million prepayment against 2010 and
2011 contribution requirements.
Future pension contributions will be highly dependent on our
actual experience with such variables as investment returns,
interest rate fluctuations and demographic changes, on the rate
at which the December 2009 voluntary prepayment is applied
against pension contribution requirements, and on any changes in
the regulatory environment.
20.6 RESTRUCTURING
Cash payments related to severance under all restructuring
initiatives totalled $27.0 million in 2009, compared with
$40.7 million in 2008 and $47.0 million in 2007. Cash
payments for restructuring initiatives are estimated to be
approximately $23 million in 2010, $18 million in
2011, $14 million in 2012, and a total of approximately
$34 million over the remaining years through 2025. These
amounts include residual payments to protected employees for
previous restructuring plans that have been completed.
21.0 Business
Risks and Enterprise Risk Management
In the normal course of our operations, we are exposed to
various business risks and uncertainties that can have an effect
on our financial condition. While some financial exposures are
reduced through insurance and hedging programs we have in place,
there are certain cases where the financial risks are not fully
insurable or are driven by external factors beyond our influence
or control.
As part of the preservation and delivery of value to our
shareholders, we have developed an integrated Enterprise Risk
Management (“ERM”) framework to support consistent
achievement of key business objectives through pro-active
management of risk. The objective of the program is to identify
events that result from risks, thereby requiring active
management. Each event identified is assessed based on the
potential impact and likelihood, taking account of financial,
environmental, reputation impacts, and existing management
control. Risk mitigation strategies are formulated to accept,
treat, transfer, or eliminate the exposure to the identified
events. Readers are cautioned that the following is not an
exhaustive list of all the risks we are exposed to, nor will our
mitigation strategies eliminate all risks listed.
21.1 TECK
COAL LIMITED
CP’s contract with Teck Coal Limited (“Teck”) for
the transportation of coal, expired March 31, 2009. Teck
filed for Final Offer Arbitration (“FOA”), a
regulatory proceeding, and arising from the FOAs, the rates for
transportation of Teck coal to March 2010 were established. As
part of the rate process, Teck also secured a rate for routing
some of the existing export coal traffic via an interchange with
another railway at Kamloops, BC. Traffic moving over the
Kamloops interchange will not exceed 3.5 million metric
tons between July 2009 and March 1, 2010. For CP, the
Kamloops traffic represents approximately 15% of historic annual
total Teck coal shipping volumes. The rate and routing outcomes
have an adverse impact on CP’s business.
The regulatory proceedings established rates that reduced
revenues for nine months of 2009 (discussed further in
Section 7.3.1.3 Coal) and will remain in effect for the
first quarter of 2010.
CP is currently in negotiations for a new contract as the
existing contract expires March 2010. The outcome of these
negotiations can not be predicted, including, but not limited
to, price, volumes of coal to be transported and term of the
contract.
21.2 COMPETITION
We face significant competition for freight transportation in
Canada and the US, including competition from other railways and
trucking and barge companies. Competition is based mainly on
price, quality of service and access to markets. Competition
with the trucking industry is generally based on freight rates,
flexibility of service and transit time performance. The cost
structure and service of our competitors could impact our
competition and have a materially adverse impact on our business
or operating results.
To mitigate competition risk, our strategies include:
| o | creating long-term value for customers, shareholders and employees by profitably growing within the reach of our rail franchise and through strategic additions to enhance access to markets and quality of service; |
| o | renewing and maintaining infrastructure to enable safe and fluid operations; |
| o | improving handling through IOP to reduce costs and enhance quality and reliability of service; and |
| o | exercising a disciplined yield approach to competitive contract renewals and bids. |
21.3 LIQUIDITY
CP has in place a revolving credit facility of
$945 million, with an accordion feature to
$1,150 million, of which $330 million was committed
for letters of credit and $615 million was available on
December 31, 2009. This facility is arranged with a core
group of 15 highly rated international financial institutions
and incorporates pre-agreed pricing. Arrangements with 14 of the
15 financial institutions extend through November 2012, with one
institution extending through November 2011. In addition, CP
also has available from a financial institution a credit
facility of $130 million, of which $130 million of
this facility was available on December 31, 2009. The
majority of this facility is available through the end of 2011.
Both facilities are available on next day terms and are subject
to a minimum debt to total capitalization ratio. Should the
Company’s senior unsecured debt not be rated at least
investment grade by Moody’s and S&P, the Company will
be further required to maintain a minimum fixed charge coverage
ratio. At December 31,
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2009, the Company satisfied the thresholds stipulated in both
financial covenants.
It is CP’s intention to manage its long-term financing
structure to maintain its investment grade rating.
Surplus cash is invested into a range of short dated money
market instruments meeting or exceeding the parameters of our
investment policy.
21.4 REGULATORY
AUTHORITIES
21.4.1 Regulatory
Change
Our railway operations are subject to extensive federal laws,
regulations and rules in both Canada and the US which directly
affect how we manage many aspects of our railway operation and
business activities. Our operations are primarily regulated by
the Canadian Transportation Agency (“the Agency”) and
Transport Canada in Canada and the FRA and Surface
Transportation Board (“the STB”) in the US. Various
other federal regulators directly and indirectly affect our
operations in areas such as health, safety, security and
environment and other matters, all of which may affect our
business or operating results.
The Canada Transportation Act (“CTA”) provides shipper
rate and service remedies, including Final Offer Arbitration
(“FOA”), competitive line rates and compulsory
inter-switching. In 2008, Parliament amended the CTA. The
amendments concern, but are not limited to, the grain revenue
cap, commuter and passenger access, FOA, and charges for
ancillary services and railway noise. No assurance can be given
as to the effect on CP of the amendments to the CTA or as to the
content, timing or effect on CP of any anticipated additional
legislation.
The FRA regulates safety-related aspects of our railway
operations in the US. State and local regulatory agencies may
also exercise limited jurisdiction over certain safety and
operational matters of local significance. In the US, the
Railway Safety Improvement Act became law on October 16,
2008. Among other things, this law requires the introduction of
Positive Train Control by 2015 (discussed further in
Section 21.4.3 Positive Train Control); limits freight rail
crews’ duty time; and requires development of a crew
fatigue management plan. Although it is too early to assess the
possible impact of this legislation on the Company, the
requirements imposed by this legislation could have an adverse
impact on the Company’s financial condition and results of
operations.
The STB regulates commercial aspects of CP’s railway
operations in the US. The STB is an economic regulatory agency
that Congress charged with the fundamental mandate of resolving
railroad rate and service disputes and reviewing proposed
railroad mergers. The STB serves as both an adjudicatory and a
regulatory body. The agency has jurisdiction over railroad rate
and service issues and rail restructuring transactions (mergers,
line sales, line construction, and line abandonments).
In 2007, the STB revised rules relating to railway rate cases to
address, among other things, concerns raised by small and medium
sized shippers that the previous rules resulted in costly and
lengthy proceedings. Few cases have been filed, and no case has
been filed against the Company, under the new rules. It is too
soon to assess the possible impact on CP of such new rules.
During 2009, the railroad industry in the US, shippers and
representatives of the Senate Commerce Committee met to discuss
possible changes to the legislation which governs the STB’s
mandate. The Senate Commerce Committee produced a draft Bill. To
date, the House of Representatives has not produced a related
Bill. It is too soon to determine if any Bill at all will be
enacted or if in the event any such Bill is enacted whether it
would have a material impact on the Company’s financial
condition and results of operations.
To mitigate statutory and regulatory impacts, we are actively
and extensively engaged throughout the different levels of
government and regulators, both directly and indirectly through
industry associations, including the Association of American
Railroads (“AAR”) and the Railway Association of
Canada (“RAC”).
21.4.2 Security
We are subject to statutory and regulatory directives in Canada
and the US that address security concerns. Because CP plays a
critical role in the North American transportation system, our
rail lines, facilities, and equipment, including rail cars
carrying hazardous materials, could be direct targets or
indirect casualties of terrorist attacks. Regulations by the
Department of Transportation and the Department of Homeland
Security include speed restrictions, chain of custody and
security measures which could cause service degradation and
higher costs for the transportation of hazardous materials,
especially toxic inhalation materials. New legislative changes
in Canada to the Transportation of Dangerous Goods Act are
expected to add new security regulatory requirements. In
addition, insurance premiums for some or all of our current
coverage could increase significantly, or certain coverage may
not be available to us in the future. While CP will continue to
work closely with Canadian and US government agencies, future
decisions by these agencies on security matters or decisions by
the industry in response to security threats to the North
American rail network could have a materially adverse effect on
our business or operating results.
As we strive to ensure our customers have unlimited access to
North American markets, we have taken the following steps to
provide enhanced security and reduce the risks associated with
the cross-border transportation of goods:
| o | to strengthen the overall supply chain and border security, we are a certified carrier in voluntary security programs, such as the Customs-Trade Partnership Against Terrorism and Partners in Protection; |
| o | to streamline clearances at the border, we have implemented several regulatory security frameworks that focus on the provision of advanced electronic cargo information and improved security technology at border crossings, including the implementation of Vehicle and Cargo Inspection System at five of our border crossings; |
| o | to strengthen railway security in North America, we signed a revised voluntary Memorandum of Understanding with Transport Canada and worked with the AAR to develop and put in place an extensive industry-wide security plan to address terrorism and |
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| security-driven efforts seeking to restrict the routings and operational handlings of certain hazardous materials; |
| o | to reduce toxic inhalation risk in high threat urban areas, we are working with the Transportation Security Administration; and |
| o | to comply with new US regulations for rail security of sensitive materials, we have implemented procedures to maintain positive chain of custody and we will be completing annual route assessments to select and use the route posing the least overall safety and security risk. |
21.4.3 Positive
Train Control
In the United States, the Rail Safety Improvement Act requires
Class I railroads to implement by December 31, 2015,
interoperable Positive Train Control (“PTC”) on main
track in the United States that has passenger rail traffic or
toxic inhalant hazard commodity traffic. The legislation defines
PTC as a system designed to prevent
train-to-train
collisions, over-speed derailments, incursions into established
work zone limits, and the movement of a train through a switch
left in the wrong position. The FRA is developing rules and
regulations for the implementation of PTC, and requires the
filing of PTC Implementation Plans by April 16, 2010, which
outline the Company’s solution for interoperability as well
as its consideration of relative risk in the deployment plan.
The Company is participating in industry and government working
groups to evaluate the scope of effort that will be required to
comply with these regulatory requirements, and to further the
development of an industry standard interoperable solution that
can be supplied in time to complete deployment. At this time CP
estimates the cost to implement the required PTC on its railway
in the United States to be up to US$250 million.
21.5 LABOUR
RELATIONS
Certain of our union agreements are currently under
renegotiation. We cannot guarantee these negotiations will be
resolved in a timely manner or on favourable terms. Work
stoppage may occur if the negotiations are not resolved, which
could materially impact business or operating results.
At December 31, 2009, approximately 75% of our workforce
was unionized and approximately 75% of our workforce was located
in Canada. Unionized employees are represented by a total of 37
bargaining units. Agreements are in place with five of seven
bargaining units that represent our employees in Canada and one
of 30 bargaining units that represent employees in our US
operations. For the status of negotiations please see below.
21.5.1
Canada
We are party to collective agreements with seven bargaining
units in our Canadian operations. Currently, collective
agreements are in effect with five of the seven bargaining
units. Of the agreements that are in place, one expires at the
end of 2010 (Canadian Auto Workers (“CAW”) –
representing car and locomotive repair employees), two expire at
the end of 2011 (Teamsters Canada Rail Conference
(“TCRC”) – representing running trades
employees and the TCRC-Rail Canada Traffic
Controllers – representing rail traffic controllers),
and two expire at the end of 2012 (Canadian Pacific Police
Association and the United Steelworkers – representing
clerical workers). Negotiations are currently ongoing with the
TCRC-Maintenance of Way Employees Division and the International
Brotherhood of Electrical Workers – representing
signals employees.
21.5.2
US
We are party to collective agreements with fourteen bargaining
units of our Soo Line subsidiary, thirteen bargaining units of
our D&H subsidiary, and two bargaining units of our
DM&E subsidiary, with a third bargaining unit certified to
represent signalmen in April 2009.
Soo Line agreements with all fourteen bargaining units
representing train service employees, car repair employees,
locomotive engineers, train dispatchers, yard supervisors,
clerks, machinists, boilermakers and blacksmiths, signal
maintainers, electricians, sheet metal workers, mechanical
labourers, track maintainers, and mechanical supervisors opened
for negotiation in January 2010. Soo Line has joined with the
other US Class I railroads in national bargaining for this
upcoming round of negotiations.
D&H has settled contracts for the last round of
negotiations with twelve of the thirteen bargaining units.
Effective January 2010, all agreements with locomotive
engineers, train service employees, car repair employees, signal
maintainers, yardmasters, electricians, machinists, mechanical
labourers, engineering supervisors and mechanical supervisors
are re-opened. Negotiations continue with the police. For the
2010 round of negotiations, D&H and its unions have
committed to stand by the outcome of wage, benefits, and rules
negotiations at the national table.
DM&E currently has an agreement in place with one
bargaining unit that extends to the end of 2013 with engineers
and conductors on DM&E. Negotiations continue with the
locomotive engineers and conductors on the former Iowa,
Chicago & Eastern Railroad, resuming in March 2010.
Negotiations on the first contract to cover signal and
communications workers continue in the first quarter of 2010.
21.6 ENVIRONMENTAL
LAWS AND REGULATIONS
Our operations and real estate assets are subject to extensive
federal, provincial, state and local environmental laws and
regulations governing emissions to the air, discharges to waters
and the handling, storage, transportation and disposal of waste
and other materials. If we are found to have violated such laws
or regulations it could materially affect our business or
operating results. In addition, in operating a railway, it is
possible that releases of hazardous materials during derailments
or other accidents may occur that could cause harm to human
health or to the environment. Costs of remediation, damages and
changes in regulations could materially affect our operating
results and reputation.
We have implemented a comprehensive Environmental Management
System, to facilitate the reduction of environmental risk.
CP’s annual Corporate and Operations Environmental Plans
state our current environmental goals, objectives and strategies.
Specific environmental programs are in place to address areas
such as air emissions, wastewater, management of vegetation,
chemicals and waste, storage tanks and fuelling facilities. We
also undertake environmental impact assessments. There is
continued focus on
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preventing spills and other incidents that have a negative
impact on the environment. There is an established Strategic
Emergency Response Contractor network and spill equipment kits
located across Canada and the US to ensure a rapid and efficient
response in the event of an environmental incident. In addition,
emergency preparedness and response plans are regularly updated
and tested.
We have developed an environmental audit program that
comprehensively, systematically and regularly assesses our
facilities for compliance with legal requirements and our
policies for conformance to accepted industry standards.
Included in this is a corrective action
follow-up
process and semi-annual review by the Health, Safety, Security
and Environment Committee established by the Board of Directors.
We focus on key strategies, identifying tactics and actions to
support commitments to the community. Our strategies include:
| o | protecting the environment; |
| o | ensuring compliance with applicable environmental laws and regulations; |
| o | promoting awareness and training; |
| o | managing emergencies through preparedness; and |
| o | encouraging involvement, consultation and dialogue with communities along our lines. |
21.7 CLIMATE
CHANGE
In both Canada and the United States the federal governments
have not designated railway transportation a large final emitter
with respect to greenhouse gas emissions (GHG). Also the railway
transportation industry is currently not regulated with respect
to GHG emissions, nor do we operate under a regulated cap of GHG
emissions. Growing support for climate change legislation is
likely to result in changes to the regulatory framework in
Canada and the United States. However, the timing and specific
nature of those changes are difficult to predict. Specific
instruments such as carbon taxes, and technical and fuel
standards have the ability to significantly affect the
Company’s capital and operating costs. Restrictions, caps
and/or
taxes
on the emissions of GHG could also affect the markets for, or
the volume of, the goods the company transports. The fuel
efficiency of railways creates a significant advantage over
trucking, which currently handles a majority of the market share
of ground transportation.
Potential physical risks associated with climate change include
damage to railway infrastructure due to extreme weather effects,
i.e. increased flooding, winter storms. Improvements to
infrastructure design and planning are used to mitigate the
potential risks posed by weather events. The Company maintains
flood plans, winter operating plans, avalanche risk management
program and geotechnical monitoring of slope stability.
21.8 FINANCIAL
RISKS
21.8.1 Pension
Funding Status Volatility
Our main Canadian defined benefit pension plan accounts for 97%
of CP’s pension obligation and can produce significant
volatility in pension funding requirements, given the pension
fund’s size, the differing drivers of the pension asset and
liability values, and Canadian statutory pension funding
requirements. Despite the fact that CP has made several changes
to the plan’s investment policy over the last several years
to reduce this volatility, including the reduction of the
plan’s public equity markets exposure, the recent and rapid
declines in the value of public equity securities, reduction in
the long term Government of Canada bond yields and other
economic changes have resulted in a significant pension funding
shortfall.
21.8.2 Fuel Cost
Volatility
Fuel expense constitutes a significant portion of CP’s
operating costs and can be influenced by a number of factors,
including, without limitation, worldwide oil demand,
international politics, weather, refinery capacity, unplanned
infrastructure failures, labour and political instability and
the ability of certain countries to comply with
agreed-upon
production quotas.
Our mitigation strategy includes a fuel cost recovery program
and from time to time derivative instruments (specific
instruments currently used are discussed further in
Section 16.6 Fuel Price Management). The fuel cost recovery
program reflects changes in fuel costs, which are included in
freight rates. Freight rates will increase when fuel prices rise
and will decrease when fuel costs decrease. While fluctuations
in fuel cost are mitigated, the risk cannot be completely
eliminated due to timing and the volatility in the market.
To address the residual portion of our fuel costs not mitigated
by our fuel recovery programs, CP started a systematic hedge
program in the second quarter of 2009. The goal of the program
is to hedge in increasing increments CP’s upcoming
12-month’s
fuel consumption with up to 12% hedged.
21.8.3 Foreign
Exchange Risk
Although we conduct our business primarily in Canada, a
significant portion of our revenues, expenses, assets and
liabilities including debt are denominated in US dollars.
Consequently, our results are affected by fluctuations in the
exchange rate between these currencies. The value of the
Canadian dollar is affected by a number of domestic and
international factors, including, without limitation, economic
performance, Canadian, US and international monetary policies
and US debt levels. Changes in the exchange rate between the
Canadian dollar and other currencies (including the US dollar)
make the goods transported by us more or less competitive in the
world marketplace and, in turn, positively or negatively affect
our revenues and expenses. To manage this exposure to
fluctuations in exchange rates between Canadian and US dollars,
we may sell or purchase US dollar forwards at fixed rates in
future periods. Foreign exchange management is discussed further
in Section 16.5 Foreign Exchange Management.
21.8.4 Interest
Rate Risk
In order to meet our capital structure requirements, we may
enter into long-term debt agreements. These debt agreements
expose us to increased interest costs on future fixed debt
instruments and existing variable rate debt instruments should
market rates increase. In addition, the present value of our
assets and liabilities will also vary with interest rate
changes. To manage our interest rate exposure, we may enter into
forward rate agreements such as treasury rate locks or
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bond forwards that lock in rates for a future date, thereby
protecting ourselves against interest rate increases. We may
also enter into swap agreements whereby one party agrees to pay
a fixed rate of interest while the other party pays a floating
rate. Contingent on the direction of interest rates, we may
incur higher costs depending on our contracted rate. Interest
rate management is discussed further in Section 16.4
Interest Rate Management.
21.9 GENERAL
AND OTHER RISKS
There are factors and developments that are beyond the influence
or control of the railway industry generally and CP specifically
which may have a material adverse effect on our business or
operating results. Our freight volumes and revenues are largely
dependent upon the performance of the North American and global
economies, which remains uncertain, and other factors affecting
the volumes and patterns of international trade. CP’s bulk
traffic is dominated by grain, metallurgical coal, fertilizers
and sulphur. Factors outside of CP’s control which affect
bulk traffic include: (i) with respect to grain volumes,
domestic production-related factors such as weather conditions,
acreage plantings, yields and insect populations, (ii) with
respect to coal volumes, global steel production,
(iii) with respect to fertilizer volumes, grain and other
crop markets, with both production levels and prices relevant,
and (iv) with respect to sulphur volumes, industrial
production and fertilizer production, both in North America and
abroad. The merchandise commodities transported by the Company
include those relating to the forestry, energy, industrial,
automotive and other consumer spending sectors. Factors outside
of CP’s control which affect this portion of CP’s
business include the general state of the North American
economy, with North American industrial production, business
investment and consumer spending being the general sources of
economic demand. Housing, auto production and energy development
are also specific sectors of importance. Factors outside of
CP’s control which affect the Company’s intermodal
traffic volumes include North American consumer spending and a
technological shift toward containerization in the
transportation industry that has expanded the range of goods
moving by this means.
Adverse changes to any of the factors outside of CP’s
control which affect CP’s bulk traffic, the merchandise
commodities transported by CP or CP’s intermodal traffic
volumes or adverse changes to fuel prices could have a material
adverse effect on CP’s business, financial condition,
results of operations and cash flows.
We are also sensitive to factors including, but not limited to,
natural disasters, security threats, commodity pricing, global
supply and demand, and supply chain efficiency. Other business
risks include: potential increase in maintenance and operational
costs, uncertainties of litigation, risks and liabilities
arising from derailments and technological changes.
22.0 Critical
Accounting Estimates
To prepare consolidated financial statements that conform with
Canadian GAAP, we are required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reported period. Using the
most current information available, we review our estimates on
an ongoing basis, including those related to environmental
liabilities; pensions and other benefits; property, plant and
equipment; future income taxes; legal and personal injury
liabilities; long-term floating rate notes and goodwill and
intangible assets.
The development, selection and disclosure of these estimates,
and this MD&A, have been reviewed by the Board of
Directors’ Audit, Finance and Risk Management Committee,
which is comprised entirely of independent directors.
22.1 ENVIRONMENTAL
LIABILITIES
We estimate the probable cost to be incurred in the remediation
of property contaminated by past railway use. We screen and
classify sites according to typical activities and scale of
operations conducted, and we develop remediation strategies for
each property based on the nature and extent of the
contamination, as well as the location of the property and
surrounding areas that may be adversely affected by the presence
of contaminants. We also consider available technologies,
treatment and disposal facilities and the acceptability of
site-specific plans based on the local regulatory environment.
Site-specific plans range from containment and risk management
of the contaminants through to the removal and treatment of the
contaminants and affected soils and ground water. The details of
the estimates reflect the environmental liability at each
property. We are committed to fully meeting our regulatory and
legal obligations with respect to environmental matters.
Liabilities for environmental remediation may change from time
to time as new information about previously untested sites
becomes known. The net liability may also vary as the courts
decide legal proceedings against outside parties responsible for
contamination. These potential charges, which cannot be
quantified at this time, are not expected to be material to our
financial position, but may materially affect income in the
period in which a charge is recognized. Increases to costs would
be reflected as increase to “Other long-term
liabilities” on our Consolidated Balance Sheet and to
“Purchased services and other” within operating
expenses on our Consolidated Statement of Income.
At December 31, 2009, the accrual for environmental
remediation on our Consolidated Balance Sheet amounted to
$121.3 million (2008 – $151.1 million), of
which the long-term portion amounting to $106.5 million
(2008 – $130.2 million) was included in
“Other long-term liabilities” and the short-term
portion amounting to $14.8 million (2008 –
$20.9 million) was included in “Accounts payable and
accrued liabilities”. Total payments were
$18.2 million in 2009 and $12.6 million in 2008. The
US dollar-denominated portion of the liability was affected by
the change in FX, resulting in a decrease in environmental
liabilities of $14.3 million in 2009 and an increase of
$12.1 million in 2008. In the fourth quarter of 2008, the
accrual for environmental remediation increased by
$43.5 million as a result of the purchase of the DM&E.
22.2 PENSIONS
AND OTHER BENEFITS
We have defined benefit and defined contribution pension plans.
Other benefits include post-retirement medical and life
insurance for pensioners, and some post-employment workers’
compensation and long-term disability benefits in Canada.
Workers’ compensation
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benefits are described in Section 22.5 Legal and Personal
Injury Liabilities. Pension and post-retirement benefits
liabilities are subject to various external influences and
uncertainties, as described in Section 20.5 Pension Plan
Deficit.
Pension costs are actuarially determined using the
projected-benefit method prorated over the credited service
periods of employees. This method incorporates our best
estimates of expected plan investment performance, salary
escalation and retirement ages of employees. The expected return
on fund assets is calculated using market-related asset values
developed from a five-year average of market values for the
fund’s public equity securities (with each prior
year’s market value adjusted to the current date for
assumed investment income during the intervening period) plus
the market value of the fund’s fixed income, real estate
and infrastructure securities, subject to the market-related
asset value not being greater than 120% of the market value nor
being less than 80% of the market value. The discount rate we
use to determine the benefit obligation is based on market
interest rates on high-quality corporate debt instruments with
matching cash flows. Unrecognized actuarial gains and losses in
excess of 10% of the greater of the benefit obligation and the
market-related value of plan assets are amortized over the
expected average remaining service period of active employees
expected to receive benefits under the plan (approximately
10 years). Prior service costs arising from collectively
bargained amendments to pension plan benefit provisions are
amortized over the term of the applicable union agreement
(discussed further in Section 13.1.3 Pension Prior Service
Costs). Prior service costs arising from all other sources are
amortized over the expected average remaining service period of
active employees who were expected to receive benefits under the
plan at the date of amendment. A transitional asset and
obligation, which arose from implementing the CICA Accounting
Standard Section 3461 “Employee Future Benefits”
effective January 1, 2000, are being amortized over the
expected average remaining service period of active employees
who were expected to receive benefits under the plan at
January 1, 2000 (approximately 13 years).
The obligations with respect to post-retirement benefits,
including health care and life insurance, are actuarially
determined and are accrued using the projected-benefit method
prorated over the credited service periods of employees. The
obligations with respect to post-employment benefits, including
some workers’ compensation and long-term disability
benefits in Canada, are the actuarial present value of benefits
payable to employees on disability.
Fluctuations in the post-retirement benefit obligation can
result from changes in the discount rate used. A
1.0 percentage point increase (decrease) in the discount
rate would decrease (increase) the liability by approximately
$40 million. We included post-retirement benefits accruals
of $234.4 million in “Other long-term
liabilities” and post-retirement benefits accruals of
$21.1 million in “Accounts payable and accrued
liabilities” on our December 31, 2009 Consolidated
Balance Sheet.
“Prepaid pension costs and other assets” on our
December 31, 2009 Consolidated Balance Sheet included
prepaid pension costs of $1,644.4 million. This accrued
benefit asset is increased mainly by amounts contributed to the
plans by the Company, partially offset by the amount of pension
expense for the year. Our Consolidated Balance Sheet also
included $0.2 million in “Accounts payable and accrued
liabilities” and $0.6 million in “Other long-term
liabilities” for pension obligations.
Pension and post-retirement benefits expenses were included in
“Compensation and benefits” on our December 31,
2009 Statement of Consolidated Income. Combined pension and
post-retirement benefits expenses (excluding self-insured
workers compensation and long-term disability benefits) were
$38.4 million in 2009, compared with $82.8 million in
2008.
Pension expense consists of defined benefit pension expense plus
defined contribution pension expense (equal to contributions).
Pension expense was $7.8 million in 2009, compared with
$45.0 million in 2008. Defined benefit pension expense was
$5.1 million in 2009, compared with $41.9 million in
2008. Defined contribution pension expense was $2.7 million
for 2009, compared with $3.1 million in 2008. We estimate
pension expense for 2010 to equal approximately
$52 million. Post-retirement benefits expense was
$30.6 million in 2009, compared with $37.8 million in
2008. Post-retirement benefit expense for 2010 is not expected
to differ materially from the 2009 expense.
22.3 PROPERTY,
PLANT AND EQUIPMENT
CP performs depreciation studies of each property group
approximately every two years to update deprecation rates. The
depreciation studies are based on statistical analysis of
historical retirements of properties in the group and
incorporate engineering estimates of changes in current
operations and of technological advance. We depreciate the cost
of properties, net of salvage, on a straight-line basis over the
estimated useful life of the property group. We follow the group
depreciation method under which a single depreciation rate is
applied to the total cost in a particular class of property,
despite differences in the same service life or salvage value of
individual properties within the same class. The estimates of
economic lives are uncertain and can vary due to technological
changes, and changes in residual values, in unusual weather
patterns, in the rate of wear. Under the group depreciation
method, retirements or disposals of properties in the normal
course of business are accounted for by charging the cost of the
property less any net salvage to accumulated depreciation.
Due to the capital intensive nature of the railway industry,
depreciation represents a significant part of our operating
expenses. The estimated useful lives of properties have a direct
impact on the amount of depreciation recorded as a component of
“Net properties” on our Consolidated Balance Sheet. At
December 31, 2009, accumulated depreciation was
$5,328.7 million. Depreciation expense related to
properties amounted to $488.9 million in 2009, compared
with $442.5 million in 2008.
Revisions to the estimated useful lives and net salvage
projections for properties constitute a change in accounting
estimate and we address these prospectively by amending
depreciation rates. It is anticipated that there will be changes
in the estimates of weighted average useful lives and net
salvage for each property group as assets are acquired, used and
retired. Substantial changes in either the useful lives of
properties or the salvage assumptions could result in
significant changes to depreciation expense. For example, if the
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estimated average life of road locomotives, our largest asset
group, increased (or decreased) by 5%, annual depreciation
expense would decrease (or increase) by approximately
$3 million.
We review the carrying amounts of our properties when
circumstances indicate that such carrying amounts may not be
recoverable based on future undiscounted cash flows. When such
properties are determined to be impaired, recorded asset values
are revised to the fair value and an impairment loss is
recognized.
Depreciation expense increased $10.6 million in 2009 from
pro forma 2008 primarily due to unfavourable FX and increased
capital expenditures partially offset by favourable depreciation
rate changes, mainly in information systems and locomotives and
retirements of properties.
22.4 FUTURE
INCOME TAXES
We account for future income taxes in accordance with the CICA
Accounting Standard Section 3465 “Income Taxes”,
which is based on the liability method. This method focuses on a
company’s balance sheet and the temporary differences
otherwise calculated from the comparison of book versus tax
values. It is assumed that such temporary differences will be
settled in the future income tax assets and liabilities at the
balance sheet date.
In determining future income taxes, we make estimates and
assumptions regarding future tax matters, including estimating
the timing of the realization and settlement of future income
tax assets (including the benefit of tax losses) and
liabilities. Future income taxes are calculated using the
current substantively enacted federal and provincial future
income tax rates, which may differ in future periods.
Future income tax expense totalling $153.2 million was
included in income tax for 2009 and $156.3 million was
included in income tax in 2008. The changes in future income tax
in 2009 were primarily due to lower taxable income and tax rate
changes implemented by provincial governments (discussed further
in Section 10.6 Income Taxes). The change in future tax
expense for 2008 was also due to a reduction in the impact of
tax rate changes recognized in prior years. At December 31,
2009, future income tax liabilities of $2,549.5 million
(2008 – $2,527.6 million) were recorded as a
long-term liability and comprised largely of temporary
differences related to accounting for properties. Future income
tax benefits of $128.1 million realizable within one year
were recorded as a current asset compared to $76.5 million
at December 31, 2008.
22.5 LEGAL
AND PERSONAL INJURY LIABILITIES
We are involved in litigation in Canada and the US related to
our business. Management is required to establish estimates of
potential liability arising from incidents, claims and pending
litigation, including personal injury claims and certain
occupation-related and property damage claims.
These estimates are determined on a
case-by-case
basis. They are based on an assessment of the actual damages
incurred, current legal advice with respect to settlements in
other similar cases. We employ experienced claims adjusters who
investigate and assess the validity of individual claims made
against us and estimate the damages incurred.
A provision for incidents, claims or litigation is recorded
based on the facts and circumstances known at the time. We
accrue for likely claims when the facts of an incident become
known and investigation results provide a reasonable basis for
estimating the liability. The lower end of the range is accrued
if the facts and circumstances permit only a range of reasonable
estimates and no single amount in that range is a better
estimate than any other. Additionally, for administrative
expediency, we keep a general provision for lesser-value injury
cases. Facts and circumstances related to asserted claims can
change, and a process is in place to monitor accruals for
changes in accounting estimates.
With respect to claims related to occupational health and safety
in the provinces of Quebec, Ontario, Manitoba and British
Columbia, estimates administered through the Workers’
Compensation Board (“WCB”) are actuarially determined.
In the provinces of Saskatchewan and Alberta, we are assessed
for an annual WCB contribution. As a result, this amount is not
subject to estimation by management.
Railway employees in the US are not covered by a workers’
compensation program, but are covered by US federal law for
railway employees. Although we manage in the US using a
case-by-case
comprehensive approach, for accrual purposes, a combination of
case-by-case
analysis and statistical analysis is utilized.
Provisions for incidents, claims and litigation charged to
income, which are included in “Purchased services and
other” on our Consolidated Statement of Income, amounted to
$54.5 million in 2009 and $79.7 million in 2008.
Accruals for incidents, claims and litigation, including WCB
accruals, totalled $147.1 million, net of insurance
recoveries, at December 31, 2009. The total accrual
included $88.0 million in “Other long-term
liabilities” and $75.1 million in “Accounts
payable and accrued liabilities”, offset by
$0.8 million in “Prepaid pension costs and other
assets” and $15.2 million in “Accounts
receivable”.
22.6 LONG-TERM
FLOATING RATE NOTES
At December 31, 2009, long-term floating rate notes
received in replacement of ABCP have been valued at their
estimated fair value (discussed further in Section 10.3.1
Change in Estimated Fair Value of Long-term Floating Rate Notes
and Asset-backed Commercial Paper). Long-term floating rate
notes, at their estimated fair value of $69.3 million, were
included in “Investments”. The reduction in the
estimated fair value during 2009 of $3.4 million reflects
the redemption:
| o | at par of certain of the Company’s investments in MAV 3 Class 9 TA Tracking notes and MAV 2 Class 8 IA Tracking notes; |
| o | at close to par of certain of the Company’s investment in MAV 2 Class A-1 notes and MAV 2 Class 7 IA Tracking notes; and |
| o | the full redemption of MAV 2 Class 14 notes with no proceeds being received by CP. |
These redemptions were offset by accretion and changes in market
assumptions. The change in the market assumptions in 2009
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resulted in an unrealized gain of $1.7 million
(2008 – $49.4 million charge against income).
Continuing uncertainties regarding the value of the assets which
underlie the long-term floating rate notes and the amount and
timing of cash flows could give rise to a further material
change in the value of the Company’s investment in
long-term floating rate notes which would impact the
Company’s near term earnings.
22.7 GOODWILL
AND INTANGIBLE ASSETS
As part of the acquisition of DM&E in 2007, CP recognized
goodwill of US$147 million on the allocation of the
purchase price, determined as the excess of the purchase price
over the fair value of the net assets acquired. Since the
acquisition the operations of DM&E have been integrated
with CP’s operations in the US, as a result the related
goodwill is now allocated to CP’s US reporting unit.
Goodwill is tested for impairment at least once per year as at
October 1st. The goodwill impairment test determines if the
fair value of the reporting unit continues to exceed its net
book value, or whether an impairment is required. The fair value
of the reporting unit is affected by projections of its
profitability including estimates of revenue growth which are
inherently uncertain. Given the downturn in the world economy in
2009, CP monitored the fair value of the related reporting unit
for potential impairment during the year. The annual test for
impairment, performed with the assistance of outside
consultants, determined that the fair value of CP’s US
reporting unit exceeded the carrying value by approximately 10%
and that no impairment would be required in 2009.
The impairment test was performed primarily using an income
approach based on discounted cash flows. In which discount rates
of 8.75% to 9.0% were used, based on the weighted average cost
of capital. A change in discount rates of 0.25% would change the
valuation by 5 to 6%. The valuation used revenue growth
projections ranging from 4.5 to 6.9% annually. A change in the
long term growth rate of 0.25% would change the valuation by 4
to 5%. These sensitivities indicate that a prolonged recession
or increased borrowing rates could result in an impairment to
the carrying value of goodwill in future periods. A secondary
approach used in the valuation was a market approach which
included a comparison of implied earnings multiples of CP US to
trading earnings multiples of comparable companies, adjusted for
the inherent minority discount. The derived value of CP US using
the income approach fell within the range of the observable
trading multiples. The income approach was chosen over the
market approach as it takes into consideration the particular
characteristics attributable to CP US.
The carrying value of CP’s goodwill changes from period to
period due to changes in the exchange rate. As at
December 31, 2009 goodwill was $154.9 million
(2008 – $179.6 million).
Intangible assets of $47.4 million (2008 –
$57.6 million), acquired in the acquisition of DM&E,
includes the amortized costs of an option to expand the track
network, favourable leases, customer relationships and interline
contracts. Intangible assets with determinable lives are
amortized on a straight-line basis over their estimated useful
lives. Intangible assets with indefinite lives are not amortized
but are assessed for impairment on an annual basis, or more
often if the events or circumstances warrant. If the carrying
value of the indefinite-lived intangible asset exceeds its fair
value, an impairment charge would be recognized immediately.
23.0 Systems,
Procedures and Controls
The Company’s Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
of
the US Securities Exchange Act of 1934 (as amended)) to ensure
that material information relating to the Company is made known
to them. The Chief Executive Officer and Chief Financial Officer
have a process to evaluate these disclosure controls and are
satisfied that they are effective for ensuring that such
material information is made known to them.
24.0 Forward-Looking
Information
This MD&A, especially but not limited to Section 24,
contains certain forward-looking statements within the meaning
of the
Private Securities Litigation Reform Act of 1995
(US) and other relevant securities legislation relating but
not limited to our operations, anticipated financial
performance, business prospects and strategies. Forward-looking
information typically contains statements with words such as
“anticipate”, “believe”, “expect”,
“plan” or similar words suggesting future outcomes.
Readers are cautioned to not place undue reliance on
forward-looking information because it is possible that we will
not achieve predictions, forecasts, projections and other forms
of forward-looking information. In addition, except as required
by law, we undertake no obligation to update publicly or
otherwise revise any forward-looking information, whether as a
result of new information, future events or otherwise.
By its nature, our forward-looking information involves numerous
assumptions, inherent risks and uncertainties, including but not
limited to the following factors: changes in business
strategies; general North American and global economic and
business conditions; the availability and price of energy
commodities; the effects of competition and pricing pressures;
industry capacity; shifts in market demands; 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 liquidity of
investments; various events that could disrupt operations,
including severe weather conditions; security threats and
governmental response to them; and technological changes.
There are more specific factors that could cause actual results
to differ materially from those described in the forward-looking
statements contained in this MD&A. These more specific
factors are identified and discussed in Section 21.0
Business Risks and Enterprise Risk Management and elsewhere in
this MD&A.
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24.1 2009
FINANCIAL OUTLOOK
CP provided limited guidance for 2009 due to economic
uncertainty. Guidance was given for 2009 Capital expenditures
ranging from $800-$820 million on November 13, 2008.
The 2009 outlook assumed an average foreign exchange rate of
$1.25 per US dollar (US$0.80) as of January 27, 2009.
24.1.1
First-Quarter 2009 Guidance Updates
CP updated our guidance. Expectations for capital
expenditures were reduced by approximately $90 million and
were expected to range from $720 million to
$740 million for 2009. The assumed average foreign exchange
rate of $1.25 (US$0.80) remained unchanged.
24.1.2
Second-Quarter 2009 Guidance Updates
CP revised our expectations for the capital program in 2009 to
be in the range of $800 million to $820 million, an
increase from the previous outlook of $720 million to
$740 million. This increase was due to a buyout of
operating leases and it was anticipated that the increased cash
outlay will be offset by the proceeds from the sale of other
equipment in the latter half of 2009.
24.1.3 Variance
from 2009 Guidance
CP’s capital program for 2009 was $722.4 million as
measured by “Additions to properties” on the
Consolidated Statement of Cash Flows. The variance from guidance
previously provided was mainly due to the change in accounting
policy for locomotive overhauls which are now expensed
(discussed further in Section 13.1.4 Locomotive Overhauls)
and changes in the economic climate.
24.2 2010
FINANCIAL ASSUMPTIONS
Capital expenditures are currently estimated to range from
$680 million to $730 million on a Canadian GAAP basis.
CP expects its tax rate to be in the 25% to 27% range. The 2010
pension contributions are currently estimated to be between $150
and $200 million (discussed further in Section 20.5
Pension Plan Deficit). Undue reliance should not be placed on
these assumptions and other forward-looking information.
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25.0 Glossary of
Terms
“Average active employees –
expense” The average number of actively employed
workers during the period whose compensation costs are included
in Compensation and Benefits Expense on the Consolidated
Statement of Income. This includes employees who are taking
vacation and statutory holidays and other forms of short-term
paid leave, and excludes individuals who have a continuing
employment relationship with us but are not currently working or
who have not worked a minimum number of hours. This definition
also excludes employees working on capital projects.
“Average terminal dwell” The average time a
freight car resides at a specified terminal location. The
timing starts with a train arriving in the terminal, a customer
releasing the car to us, or a car arriving that is to be
transferred to another railway. The timing ends when the train
leaves, a customer receives the car from us or the freight car
is transferred to another railway. Freight cars are excluded if:
i) a train is moving through the terminal without stopping; ii)
they are being stored at the terminal; iii) they are in need of
repair; or iv) they are used in track repairs.
“Average train speed” The average speed attained
as a train travels between terminals, calculated by dividing the
total train miles traveled by the total hours operated. This
calculation does not include the travel time or the distance
traveled by: i) trains used in or around CP’s yards; ii)
passenger trains; and iii) trains used for repairing track. The
calculation also does not include the time trains spend waiting
in terminals.
“Car miles per car day” The total car-miles for a
period divided by the total number of active cars. Total
car-miles includes the distance travelled by every car on a
revenue-producing train and a train used in or around our yards.
A car-day is assumed to equal one active car-day. An active car
is a revenue-producing car that is generating costs to CP on an
hourly or mileage basis. Excluded from this count are i) cars
that are not on the track or are being stored; ii) cars that are
in need of repair; iii) cars that are used to carry materials
for track repair; iv) cars owned by customers that are on the
customer’s tracks; and v) cars that are idle and waiting to
be reclaimed by CP.
“Carloads” Revenue-generating shipments of
containers, trailers and freight cars.
“Casualty expenses” Includes costs associated
with personal injuries, freight and property damages, and
environmental mishaps.
“CP”, “the Company” CPRL, CPRL and its
subsidiaries, CPRL and one or more of its subsidiaries, or one
or more of CPRL’s subsidiaries.
“CPRL” Canadian Pacific Railway Limited.
“D&H” Delaware and Hudson Railway Company,
Inc., a wholly owned indirect US subsidiary of CPRL.
“DM&E” Dakota, Minnesota & Eastern
Railroad Corporation.
“Fluidity” Obtaining more value from our existing
assets and resources.
“Foreign Exchange” or “FX” The value of
the Canadian dollar relative to the US dollar (exclusive of any
impact on market demand).
“FRA” US Federal Railroad Administration, a
regulatory agency whose purpose is to promulgate and enforce
rail safety regulations; administer railroad assistance
programs; conduct research and development in support of
improved railroad safety and national rail transportation
policy; provide for the rehabilitation of Northeast Corridor
rail passenger service; and consolidate government support of
rail transportation activities.
“FRA personal injury rate per
200,000 employee-hours” The
number of personal injuries, multiplied by 200,000 and divided
by total employee-hours. Personal injuries are defined as
injuries that require employees to lose time away from work,
modify their normal duties or obtain medical treatment beyond
minor first aid. Employee-hours are the total hours worked,
excluding vacation and sick time, by all employees, excluding
contractors.
“FRA train accidents rate” The number of train
accidents, multiplied by 1,000,000 and divided by total
train-miles. Train accidents included in this metric meet or
exceed the FRA reporting threshold of US$8,900 in the US or
$11,000 in Canada in damage.
“Freight revenue per carload” The amount of
freight revenue earned for every carload moved, calculated by
dividing the freight revenue for a commodity by the number of
carloads of the commodity transported in the period.
“Freight revenue per RTM” The amount of freight
revenue earned for every RTM moved, calculated by dividing the
total freight revenue by the total RTMs in the period.
“GAAP” Canadian generally accepted accounting
principles.
“GTMs” or “gross
ton-miles” The
movement of total train weight over a distance of one mile.
Total train weight is comprised of the weight of the freight
cars, their contents and any inactive locomotives. An increase
in GTMs indicates additional workload.
“IOP” Integrated Operating Plan, the foundation
for our scheduled railway operations.
“LIBOR” London Interbank Offered Rate.
“Operating income” Calculated as revenues less
operating expenses and is a common measure of profitability used
by management.
“Operating ratio” The ratio of total operating
expenses to total revenues. A lower percentage normally
indicates higher efficiency.
“RTMs” or “revenue
ton-miles” The
movement of one revenue-producing ton of freight over a distance
of one mile.
“Soo Line” Soo Line Railroad Company, a wholly
owned indirect US subsidiary of CPRL.
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“STB” US Surface Transportation Board, a
regulatory agency with jurisdiction over railway rate and
service issues and rail restructuring, including mergers and
sales.
“US gallons of locomotive fuel consumed per 1,000
GTMs” The total fuel consumed in freight and yard
operations for every 1,000 GTMs traveled. This is calculated by
dividing the total amount of fuel issued to our locomotives,
excluding commuter and non-freight activities, by the total
freight-related GTMs. The result indicates how efficiently we
are using fuel.
“WCB” Workers’ Compensation Board, a mutual
insurance corporation providing workplace liability and
disability insurance in Canada.
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CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2009
December 31, 2009
Except where otherwise indicated, all financial information
reflected herein is expressed in Canadian dollars
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MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL REPORTING
The information in this report is the responsibility of
management. The consolidated financial statements have been
prepared by management in accordance with Canadian generally
accepted accounting principles (“GAAP”) and include
some amounts based on management’s best estimates and
careful judgment. The consolidated financial statements include
the accounts of Canadian Pacific Railway Limited, Canadian
Pacific Railway Company and all of its subsidiaries (the
“Company”). The financial information of the Company
included in the Company’s Annual Report is consistent with
that in the consolidated financial statements. The consolidated
financial statements have been approved by the Board of
Directors.
Our Board of Directors is responsible for reviewing and
approving the consolidated financial statements and for
overseeing management’s performance of its financial
reporting responsibilities. The Board of Directors carries out
its responsibility for the consolidated financial statements
principally through its Audit, Finance and Risk Management
Committee (the “Audit Committee”), consisting of six
members, all of whom are independent directors. The Audit
Committee reviews the consolidated financial statements with
management and the independent auditors prior to submission to
the Board for approval. The Audit Committee meets regularly with
management, internal auditors, and the independent auditors to
review accounting policies, and financial reporting. The Audit
Committee also reviews the recommendations of both the
independent and internal auditors for improvements to internal
controls, as well as the actions of management to implement such
recommendations. The internal and independent auditors have full
access to the Audit Committee, with or without the presence of
management.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. The internal control system was designed to provide
reasonable assurance to the Company’s management regarding
the preparation and presentation of the Consolidated Financial
Statements. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Management has assessed the effectiveness of the Company’s
internal controls over financial reporting in accordance with
the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in “Internal
Control-Integrated Framework”. Based on this assessment,
management determined that the Company’s internal control
over financial reporting was effective as at December 31,
2009.
The effectiveness of the Company’s internal control over
financial reporting as well as the Consolidated Financial
Statements as of December 31, 2009 have been audited by
PricewaterhouseCoopers LLP, independent auditors, as stated in
their report, which is included herein.
|
|
|
|
KATHRYN B. MCQUADE
Executive Vice-President and Chief Financial Officer February 25, 2010 |
FRED J. GREEN
Chief Executive Officer |
|
2009
ANNUAL REPORT |
51 | |
INDEPENDENT
AUDITORS’ REPORT
TO THE
SHAREHOLDERS OF
CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY LIMITED
We have completed integrated audits of Canadian Pacific Railway
Limited’s 2009, 2008 and 2007 consolidated financial
statements and of its internal control over financial reporting
as at December 31, 2009. Our opinions, based on our audits,
are presented below.
CONSOLIDATED
FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheet of
Canadian Pacific Railway Limited as at December 31, 2009
and December 31, 2008, and the related consolidated
statements of income, comprehensive income, cash flows and
changes in shareholders’ equity for each of the years in
the three year period ended December 31, 2009. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits of the Company’s financial
statements in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. A financial statement
audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as at December 31, 2009 and
December 31, 2008 and the results of its operations and its
cash flows for each of the years in the three year period ended
December 31, 2009 in accordance with Canadian generally
accepted accounting principles.
INTERNAL CONTROL
OVER FINANCIAL REPORTING
We have also audited Canadian Pacific Railway Limited’s
internal control over financial reporting as at
December 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such
other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
at December 31, 2009 based on criteria established in
Internal Control – Integrated Framework issued by the
COSO.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
February 25, 2010
|
52
|
2009
ANNUAL REPORT |
|
COMMENTS BY
AUDITORS FOR U.S. READERS ON CANADA – U.S. REPORTING
DIFFERENCES
In the United States, reporting standards for auditors require
the addition of an explanatory paragraph (following the opinion
paragraph) when there is a change in accounting principles that
has a material effect on the comparability of the Company’s
financial statements, such as the changes described in
note 2 to the consolidated financial statements. Our report
to the shareholders dated February 25, 2010 is expressed in
accordance with Canadian reporting standards, which do not
require a reference to such a change in accounting principles in
the Independent Auditors’ Report when the change is
adequately disclosed in the financial statements.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
February 25, 2010
|
2009
ANNUAL REPORT |
53 | |
CONSOLIDATED
STATEMENT OF INCOME
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| Year ended December 31 (in millions of Canadian dollars, except per share data) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Revenues
|
||||||||||||
|
Freight
|
$ | 4,175.2 | $ | 4,814.8 | $ | 4,555.2 | ||||||
|
Other
|
128.0 | 116.8 | 152.4 | |||||||||
| 4,303.2 | 4,931.6 | 4,707.6 | ||||||||||
|
Operating expenses
|
||||||||||||
|
Compensation and benefits
|
1,275.2 | 1,306.1 | 1,275.0 | |||||||||
|
Fuel
|
580.2 | 1,005.8 | 746.8 | |||||||||
|
Materials
|
215.1 | 252.3 | 252.2 | |||||||||
|
Equipment rents
|
184.8 | 182.2 | 207.5 | |||||||||
|
Depreciation and amortization
|
488.9 | 442.5 | 427.5 | |||||||||
|
Purchased services and other
|
658.9 | 701.0 | 637.8 | |||||||||
| 3,403.1 | 3,889.9 | 3,546.8 | ||||||||||
|
Revenues less operating expenses
|
900.1 | 1,041.7 | 1,160.8 | |||||||||
|
Gain on sales of partnership interest and significant properties
(Note 4)
|
160.3 | – | – | |||||||||
|
Equity income in Dakota, Minnesota & Eastern Railroad
Corporation (Note 15)
|
– | 50.9 | 11.2 | |||||||||
|
Less:
|
||||||||||||
|
Loss on termination of lease with shortline railway (Note 5)
|
54.5 | – | – | |||||||||
|
Other income and charges (Note 6)
|
18.9 | 88.4 | (118.7 | ) | ||||||||
|
Net interest expense (Note 7)
|
273.1 | 261.1 | 204.3 | |||||||||
|
Income before income tax expense
|
713.9 | 743.1 | 1,086.4 | |||||||||
|
Income tax expense (Note 8)
|
101.5 | 135.9 | 154.3 | |||||||||
|
Net income
|
$ | 612.4 | $ | 607.2 | $ | 932.1 | ||||||
|
Basic earnings per share (Note 9)
|
$ | 3.68 | $ | 3.95 | $ | 6.05 | ||||||
|
Diluted earnings per share (Note 9)
|
$ | 3.67 | $ | 3.91 | $ | 5.99 | ||||||
Certain of the comparative figures have been reclassified in
order to be consistent with the 2009 presentation.
See Notes to Consolidated Financial Statements.
|
54
|
2009
ANNUAL REPORT |
|
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| Year ended December 31 (in millions of Canadian dollars) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Comprehensive income
|
||||||||||||
|
Net income
|
$ | 612.4 | $ | 607.2 | $ | 932.1 | ||||||
|
Net (loss) gain in foreign currency translation adjustments, net
of hedging activities
|
(1.9 | ) | 7.6 | (6.0 | ) | |||||||
|
Change in derivatives designated as cash flow hedges
|
7.3 | (16.1 | ) | (36.8 | ) | |||||||
|
Other comprehensive income (loss) before income taxes
|
5.4 | (8.5 | ) | (42.8 | ) | |||||||
|
Income tax (expense) recovery
|
(33.6 | ) | 44.8 | 3.4 | ||||||||
|
Other comprehensive (loss) income (Note 10)
|
(28.2 | ) | 36.3 | (39.4 | ) | |||||||
|
Comprehensive income
|
$ | 584.2 | $ | 643.5 | $ | 892.7 | ||||||
See Notes to Consolidated Financial Statements.
|
2009
ANNUAL REPORT |
55 | |
CONSOLIDATED
BALANCE SHEET
|
2008
|
||||||||
|
Restated
|
||||||||
| As at December 31 (in millions of Canadian dollars) | 2009 | (Note 2) | ||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents (Note 11)
|
$ | 679.1 | $ | 117.6 | ||||
|
Accounts receivable (Note 12)
|
441.0 | 647.4 | ||||||
|
Materials and supplies
|
132.7 | 215.8 | ||||||
|
Future income taxes (Note 8)
|
128.1 | 76.5 | ||||||
|
Other
|
46.5 | 65.7 | ||||||
| 1,427.4 | 1,123.0 | |||||||
|
Investments (Note 13)
|
156.7 | 151.1 | ||||||
|
Net properties (Note 14)
|
11,967.8 | 12,384.6 | ||||||
|
Assets held for sale
|
– | 39.6 | ||||||
|
Goodwill and intangible assets (Note 17)
|
202.3 | 237.2 | ||||||
|
Prepaid pension costs and other assets (Note 16)
|
1,777.2 | 1,221.8 | ||||||
|
Total assets
|
$ | 15,531.4 | $ | 15,157.3 | ||||
|
Liabilities and shareholders’ equity
|
||||||||
|
Current liabilities
|
||||||||
|
Short-term borrowing
|
$ | – | $ | 150.1 | ||||
|
Accounts payable and accrued liabilities
|
917.3 | 1,034.9 | ||||||
|
Income and other taxes payable
|
31.9 | 42.2 | ||||||
|
Dividends payable
|
41.7 | 38.1 | ||||||
|
Long-term debt maturing within one year (Note 18)
|
392.1 | 44.0 | ||||||
| 1,383.0 | 1,309.3 | |||||||
|
Other long-term liabilities (Note 20)
|
790.2 | 865.2 | ||||||
|
Long-term debt (Note 18)
|
4,102.7 | 4,685.8 | ||||||
|
Future income taxes (Note 8)
|
2,549.5 | 2,527.6 | ||||||
|
Shareholders’ equity
|
||||||||
|
Share capital (Note 23)
|
1,746.4 | 1,220.8 | ||||||
|
Contributed surplus (Note 23)
|
33.5 | 40.2 | ||||||
|
Accumulated other comprehensive income (Note 10)
|
49.5 | 77.7 | ||||||
|
Retained income
|
4,876.6 | 4,430.7 | ||||||
| 6,706.0 | 5,769.4 | |||||||
|
Total liabilities and shareholders’ equity
|
$ | 15,531.4 | $ | 15,157.3 | ||||
Commitments and contingencies (Note 28)
Certain of the comparative figures have been reclassified in
order to be consistent with the 2009 presentation.
See Notes to Consolidated Financial Statements.
|
Approved on behalf of the Board:
|
|
|
||
| J.E. Cleghorn, Director, Chairman of the Board | M.W. Wright, Director, Chairman of the Audit, Finance and Risk Management Committee |
|
56
|
2009
ANNUAL REPORT |
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| Year ended December 31 (in millions of Canadian dollars) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 612.4 | $ | 607.2 | $ | 932.1 | ||||||
|
Reconciliation of net income to cash provided by
|
||||||||||||
|
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
488.9 | 442.5 | 427.5 | |||||||||
|
Future income taxes (Note 8)
|
153.2 | 156.3 | 48.3 | |||||||||
|
(Gain) loss in fair value of long-term floating rate notes/
asset-backed commercial paper (Note 19)
|
(6.3 | ) | 49.4 | 21.5 | ||||||||
|
Foreign exchange (gain) loss on long-term debt
|
(5.8 | ) | 16.3 | (169.8 | ) | |||||||
|
Amortization and accretion charges
|
9.5 | 10.1 | 12.1 | |||||||||
|
Equity income, net of cash received (Note 15)
|
0.5 | (50.8 | ) | (12.9 | ) | |||||||
|
Gain on sales of partnership interest and significant properties
(Note 4)
|
(160.3 | ) | – | – | ||||||||
|
Net loss on repurchase of debt (Note 18)
|
16.6 | – | – | |||||||||
|
Restructuring and environmental remediation payments
(Note 22)
|
(45.1 | ) | (53.4 | ) | (61.0 | ) | ||||||
|
Pension funding in excess of expense
|
(589.0 | ) | (53.2 | ) | (28.8 | ) | ||||||
|
Other operating activities, net
|
(25.8 | ) | 27.5 | 57.0 | ||||||||
|
Change in non-cash working capital balances related to
operations (Note 24)
|
102.7 | (132.2 | ) | 50.3 | ||||||||
|
Cash provided by operating activities
|
551.5 | 1,019.7 | 1,276.3 | |||||||||
|
Investing activities
|
||||||||||||
|
Additions to properties (Note 14)
|
(722.4 | ) | (832.9 | ) | (836.0 | ) | ||||||
|
Additions to assets held for sale and other
|
– | (222.5 | ) | (19.2 | ) | |||||||
|
Investment in Dakota, Minnesota & Eastern Railroad
Corporation (Note 15)
|
– | (8.6 | ) | (1,492.6 | ) | |||||||
|
Proceeds from sale of properties and other assets (Note 4)
|
243.8 | 257.6 | 34.3 | |||||||||
|
Redemption of long-term floating rate notes/ (investment in)
asset-backed commercial paper (Note 19)
|
12.5 | – | (143.6 | ) | ||||||||
|
Other, net
|
7.4 | 9.7 | – | |||||||||
|
Cash used in investing activities
|
(458.7 | ) | (796.7 | ) | (2,457.1 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Dividends paid
|
(162.9 | ) | (148.7 | ) | (133.1 | ) | ||||||
|
Issuance of CP Common Shares (Note 23)
|
513.5 | 19.7 | 30.4 | |||||||||
|
Purchase of CP Common Shares (Note 23)
|
– | – | (231.1 | ) | ||||||||
|
Net (decrease) increase in short-term borrowing
|
(150.1 | ) | (79.6 | ) | 229.7 | |||||||
|
Issuance of long-term debt (Note 18)
|
872.7 | 1,068.7 | 1,745.3 | |||||||||
|
Repayment of long-term debt (Note 18)
|
(618.6 | ) | (1,340.7 | ) | (187.7 | ) | ||||||
|
Settlement of treasury rate lock (Note 19)
|
– | (30.9 | ) | – | ||||||||
|
Settlement of foreign exchange forward on long-term debt
(Note 19)
|
34.1 | – | – | |||||||||
|
Cash provided by (used in) financing activities
|
488.7 | (511.5 | ) | 1,453.5 | ||||||||
|
Effect of foreign currency fluctuations on U.S.
dollar-denominated cash and cash equivalents
|
(20.0 | ) | 28.0 | (18.9 | ) | |||||||
|
Cash position
|
||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
561.5 | (260.5 | ) | 253.8 | ||||||||
|
Cash and cash equivalents at beginning of year
|
117.6 | 378.1 | 124.3 | |||||||||
|
Cash and cash equivalents at end of year
(Note 11)
|
$ | 679.1 | $ | 117.6 | $ | 378.1 | ||||||
Certain of the comparative figures have been reclassified in
order to be consistent with the 2009 presentation.
See Notes to Consolidated Financial Statements.
|
2009
ANNUAL REPORT |
57 | |
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
|
Accumulated
|
||||||||||||||||||||
|
other
|
Total
|
|||||||||||||||||||
|
Share
|
Contributed
|
comprehensive
|
Retained
|
Shareholders’
|
||||||||||||||||
| (in millions of Canadian dollars) | capital | surplus | income | income | equity | |||||||||||||||
|
Balance at December 31, 2006, as previously reported
|
$ | 1,175.7 | $ | 32.3 | $ | 80.4 | $ | 3,586.1 | $ | 4,874.5 | ||||||||||
|
Adjustment for change in accounting policies (Note 2)
|
0.4 | (197.5 | ) | (197.1 | ) | |||||||||||||||
|
Balance at December 31, 2006, as restated
|
1,175.7 | 32.3 | 80.8 | 3,388.6 | 4,677.4 | |||||||||||||||
|
Net income
|
932.1 | 932.1 | ||||||||||||||||||
|
Other comprehensive income (loss)
|
(39.4 | ) | (39.4 | ) | ||||||||||||||||
|
Dividends declared
|
(138.4 | ) | (138.4 | ) | ||||||||||||||||
|
Shares purchased (Note 23)
|
(24.5 | ) | (206.6 | ) | (231.1 | ) | ||||||||||||||
|
Stock compensation expense
|
11.3 | 11.3 | ||||||||||||||||||
|
Shares issued under stock option plans
|
37.4 | (1.2 | ) | 36.2 | ||||||||||||||||
|
Balance at December 31, 2007
|
1,188.6 | 42.4 | 41.4 | 3,975.7 | 5,248.1 | |||||||||||||||
|
Net income
|
607.2 | 607.2 | ||||||||||||||||||
|
Other comprehensive income (loss)
|
36.3 | 36.3 | ||||||||||||||||||
|
Dividends declared
|
(152.2 | ) | (152.2 | ) | ||||||||||||||||
|
Stock compensation expense
|
7.8 | 7.8 | ||||||||||||||||||
|
Shares issued under stock option plans
|
32.2 | (10.0 | ) | 22.2 | ||||||||||||||||
|
Balance at December 31, 2008
|
1,220.8 | 40.2 | 77.7 | 4,430.7 | 5,769.4 | |||||||||||||||
|
Net income
|
612.4 | 612.4 | ||||||||||||||||||
|
Other comprehensive income (loss)
|
(28.2 | ) | (28.2 | ) | ||||||||||||||||
|
Dividends declared
|
(166.5 | ) | (166.5 | ) | ||||||||||||||||
|
Shares issued (Note 23)
|
495.2 | 495.2 | ||||||||||||||||||
|
Stock compensation (recovery) expense
|
(1.6 | ) | (1.6 | ) | ||||||||||||||||
|
Shares issued under stock option plans
|
30.4 | (5.1 | ) | 25.3 | ||||||||||||||||
|
Balance at December 31, 2009
|
$ | 1,746.4 | $ | 33.5 | $ | 49.5 | $ | 4,876.6 | $ | 6,706.0 | ||||||||||
See Notes to Consolidated Financial Statements.
|
58
|
2009
ANNUAL REPORT |
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
December 31, 2009
1 Summary
of significant accounting policies
CANADIAN
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(“GAAP”)
These consolidated financial statements are expressed in
Canadian dollars and have been prepared in accordance with
Canadian GAAP.
PRINCIPLES OF
CONSOLIDATION
These consolidated financial statements include the accounts of
Canadian Pacific Railway Limited (“CPRL”) and all of
its subsidiaries and the proportionate share of the accounts of
a jointly controlled enterprise (collectively referred to as
“CP” or “the Company”). The Company’s
investments in which it has significant influence are accounted
for using the equity method.
USE OF
ESTIMATES
The preparation of these consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of revenues and
expenses during the period, the reported amounts of assets and
liabilities, and the disclosure of contingent assets and
liabilities at the date of the financial statements. Management
regularly reviews its estimates, including those related to
investments, restructuring and environmental liabilities,
pensions and other benefits, depreciable lives of properties and
intangible assets, future income tax assets and liabilities, as
well as legal and personal injury liabilities based upon
currently available information. Actual results could differ
from these estimates.
PRINCIPAL
SUBSIDIARIES
The following list sets out CPRL’s principal railway
operating subsidiaries, including the jurisdiction of
incorporation. All these subsidiaries are wholly owned, directly
or indirectly, by CPRL as of December 31, 2009.
|
Incorporated under
|
||
| Principal subsidiary | the laws of | |
|
Canadian Pacific Railway Company
|
Canada | |
|
Soo Line Railroad Company (“Soo Line”)
|
Minnesota | |
|
Delaware and Hudson Railway Company, Inc. (“D&H”)
|
Delaware | |
|
Dakota, Minnesota & Eastern Railroad Corporation
(“DM&E”)
|
Delaware | |
|
Mount Stephen Properties Inc. (“MSP”)
|
Canada | |
REVENUE
RECOGNITION
Railway freight revenues are recognized based on the percentage
of completed service method. The allocation of revenue between
reporting periods is based on the relative transit time in each
reporting period with expenses recognized as incurred. Other
revenue is recognized as service is performed or contractual
obligations are met. Volume rebates are accrued as a reduction
of freight revenues based on estimated volumes and contract
terms as freight service is provided.
CASH AND CASH
EQUIVALENTS
Cash and cash equivalents includes highly-liquid short-term
investments that are readily convertible to cash with original
maturities of three months or less.
FOREIGN CURRENCY
TRANSLATION
Assets and liabilities denominated in foreign currencies, other
than those held through self-sustaining foreign subsidiaries,
are translated into Canadian dollars at the year-end exchange
rate for monetary items and at the historical exchange rates for
non-monetary items. Foreign currency revenues and expenses are
translated at the exchange rate in effect on the dates of the
related transactions. Foreign currency gains and losses, other
than those arising from the translation of the Company’s
net investment in self-sustaining foreign subsidiaries, are
included in income.
|
2009
ANNUAL REPORT |
59 | |
The accounts of the Company’s self-sustaining foreign
subsidiaries are translated into Canadian dollars using the
year-end exchange rate for assets and liabilities and the
average exchange rates during the year for revenues and
expenses. Exchange gains and losses arising from translation of
these foreign subsidiaries’ accounts are included in
“Other comprehensive income (loss)”. A portion of the
U.S. dollar-denominated long-term debt has been designated
as a hedge of the net investment in self-sustaining foreign
subsidiaries. As a result, unrealized foreign exchange gains and
losses on a portion of the U.S. dollar-denominated
long-term debt are offset against foreign exchange gains and
losses arising from translation of self-sustaining foreign
subsidiaries’ accounts.
PENSIONS AND
OTHER BENEFITS
Pension costs are actuarially determined using the
projected-benefit method prorated over the credited service
periods of employees. This method incorporates management’s
best estimates of expected plan investment performance, salary
escalation and retirement ages of employees. The expected return
on fund assets is calculated using market-related asset values
developed from a five-year average of market values for the
fund’s public equity securities (with each prior
year’s market value adjusted to the current date for
assumed investment income during the intervening period) plus
the market value of the fund’s fixed income, real estate
and infrastructure securities, subject to the market-related
asset value not being greater than 120% of the market value nor
being less than 80% of the market value. The discount rate used
to determine the benefit obligation is based on market interest
rates on high-quality corporate debt instruments with matching
cash flows. Unrecognized actuarial gains and losses in excess of
10% of the greater of the benefit obligation and the
market-related value of plan assets are amortized over the
expected average remaining service period of active employees
expected to receive benefits under the plan (approximately
10 years). Prior service costs arising from collectively
bargained amendments to pension plan benefit provisions are
amortized over the term of the applicable union agreement (see
Note 2 for further detail). Prior service costs arising
from all other sources are amortized over the expected average
remaining service period of active employees who were expected
to receive benefits under the plan at the date of amendment.
Transitional assets and obligations, which arose from
implementing the CICA Accounting Standard Section 3461
“Employee Future Benefits” effective January 1,
2000, are being amortized over the expected average remaining
service period of active employees who were expected to receive
benefits under the plan at January 1, 2000 (13 years).
Benefits other than pensions, including post-retirement health
care and life insurance, and some workers’ compensation and
long-term disability benefits in Canada, are actuarially
determined and accrued on a basis similar to pension costs.
MATERIALS AND
SUPPLIES
Materials and supplies on hand are valued at the lower of
average cost and net realizable value.
PROPERTIES
Fixed asset additions and major renewals are recorded at cost,
including direct costs, attributable indirect costs and carrying
costs, less accumulated depreciation and any impairments. The
Company capitalizes development costs for major new computer
systems, including the related variable indirect costs. In
addition, CP capitalizes the cost of large refurbishments. When
there is a legal obligation associated with the retirement of
property, plant and equipment, a liability is initially
recognized at its fair value and a corresponding asset
retirement cost is added to the gross book value of the related
asset and amortized to expense over the estimated term to
retirement. The Company reviews the carrying amounts of its
properties whenever changes in circumstances indicate that such
carrying amounts may not be recoverable based on future
undiscounted cash flows. When such properties are determined to
be impaired, recorded asset values are revised to the fair value.
The Company follows group depreciation which groups assets which
are similar in nature and have similar economic lives. The
property groups are depreciated based on their expected economic
lives determined by studies of historical retirements of
properties in the group and engineering estimates of changes in
current operations and of technological advances. Actual use and
retirement of assets may vary from current estimates, which
would impact the amount of depreciation expense recognized in
future periods.
For the sale or retirement of larger groups of depreciable
assets that are unusual and were not considered in depreciation
studies, CP records a gain or loss for the difference between
net proceeds and net book value of the assets sold.
When depreciable property is retired or otherwise disposed of in
the normal course of business, the book value, less net salvage
proceeds, is charged to accumulated depreciation and if
different than the assumptions under the depreciation study
could potentially result in adjusted depreciation expense over a
period of years. However, when removal costs exceed the salvage
value on assets and the Company had no legal obligation to
remove, the net removal cost is charged to income in the period
in which the asset is removed and is not charged to accumulated
depreciation.
The Company constructs much of its new and replacement
properties. The Company divides maintenance expenditures between
additions to properties and operating expenses based on whether
the expenditures increase the output or service capacity, lower
the associated operating costs or extend the useful life of the
properties and whether the expenditures exceed minimum physical
and financial thresholds. Locomotive overhauls are expensed as
incurred
(Note 2)
.
|
60
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ANNUAL REPORT |
|
Depreciation is calculated on the straight-line basis at rates
based on the estimated service life, taking into consideration
the projected annual usage of depreciable property, except for
rail and other track material in the U.S., which is based on
expected usage.
Equipment under capital lease is included in properties and
depreciated over the period of expected use.
ASSETS HELD FOR
SALE
Assets to be disposed of are reported at the lower of the
carrying amount and fair value, less costs to sell, and are no
longer depreciated.
GOODWILL
Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets upon acquisition of a
business. Goodwill is assigned to the reporting units that are
expected to benefit from the business acquisition which after
the integration of operations with the railway network may be
different than the acquired business.
The carrying value of goodwill, which is not amortized, is
assessed for impairment annually in the fourth quarter of each
year, or more frequently as economic events dictate. The fair
value of the reporting unit is compared to its carrying value,
including goodwill. If the fair value of the reporting unit is
less than its carrying value goodwill is potentially impaired.
The impairment charge that would be recognized is the excess of
the carrying value of the goodwill over the fair value of the
goodwill, determined in the same manner as in a business
combination.
INTANGIBLE
ASSETS
Intangible assets with finite lives are amortized on a
straight-line basis over the estimated useful lives of the
respective assets. An option to expand the track network on
DM&E has an amortization period of 100 years.
Favourable leases, customer relationships and interline
contracts have amortization periods ranging from four to
20 years. When there is a change in the estimated useful
life of an intangible asset with a finite life, amortization is
adjusted prospectively.
Intangible assets subject to amortization are tested for
impairment whenever changes in circumstances warrant an analysis
of the recoverability of these assets. If an impairment exists,
the carrying value of these assets would be adjusted to fair
value and an impairment charge recorded in income.
FINANCIAL
INSTRUMENTS
Financial instruments are any contract that gives rise to a
financial asset of one party and a financial liability or equity
instrument of another party.
Financial instruments are recognized initially at fair value,
which is the amount of consideration that would be agreed upon
in an arm’s length transaction between willing parties.
Subsequent measurement depends on how the financial instrument
has been classified. Accounts receivable and investments,
classified as loans and receivables, are measured at amortized
cost using the effective interest rate method. Certain equity
investments, classified as available for sale, are recognized at
cost as fair value cannot be reliably established. Cash and cash
equivalents, long-term floating rate notes, and asset-backed
commercial paper (“ABCP”) are classified as held for
trading and are measured at fair value. Accounts payable,
accrued liabilities, short-term borrowings, dividends payable,
other long-term liabilities and long-term debt, classified as
financial liabilities, are also measured at amortized cost. The
Company combines transaction costs and premiums or discounts
directly attributable to the issuance of long-term debt with the
initial fair value of the debt and amortizes these amounts to
earnings using the effective interest method.
DERIVATIVE
FINANCIAL INSTRUMENTS
Derivative financial instruments may be used from time to time
by the Company to manage its exposure to risks relating to
foreign currency exchange rates, stock-based compensation,
interest rates and fuel prices. When CP utilizes derivative
instruments in hedging relationships, CP identifies, designates
and documents those hedging transactions and regularly tests the
transactions to demonstrate effectiveness in order to continue
hedge accounting.
All derivative instruments are classified as held for trading
and recorded at their fair value. Any change in the fair value
of derivatives not designated as hedges is recognized in the
period in which the change occurs in the Consolidated Statement
of Income in the line item to which the derivative instrument is
related. On the Consolidated Balance Sheet they are classified
in “Prepaid pension costs and other assets”,
“Other long-term liabilities”, “Other”
current assets or “Accounts payable and accrued
liabilities” as applicable. Gains and losses arising from
derivative instruments affect the following income statement
lines: “Revenues”, “Compensation and
benefits”, “Fuel”, “Other income and
charges”, and “Net interest expense”.
For fair value hedges, the periodic change in value is
recognized in income, on the same line as the changes in values
of the hedged items are also recorded. For a cash flow hedge,
the change in value of the effective portion is recognized in
“Other comprehensive income (loss)”. Any
|
2009
ANNUAL REPORT |
61 | |
ineffectiveness within an effective cash flow hedge is
recognized in income as it arises in the same income account as
the hedged item. Should a cash flow hedge relationship become
ineffective, previously unrealized gains and losses remain
within “Accumulated other comprehensive income” until
the hedged item is settled and, prospectively, future changes in
value of the derivative are recognized in income. The change in
value of the effective portion of a cash flow hedge remains in
“Accumulated other comprehensive income” until the
related hedged item settles, at which time amounts recognized in
“Accumulated other comprehensive income” are
reclassified to the same income or balance sheet account that
records the hedged item.
In the Consolidated Statement of Cash Flows, cash flows relating
to derivative instruments designated as hedges are included in
the same line as the related hedged item.
The Company from time to time enters into foreign exchange
forward contracts to hedge anticipated sales in
U.S. dollars, the related accounts receivable and future
capital acquisitions. Foreign exchange translation gains and
losses on foreign currency-denominated derivative financial
instruments used to hedge anticipated
U.S. dollar-denominated sales are recognized as an
adjustment of the revenues when the sale is recorded. Those used
to hedge future capital acquisitions are recognized as an
adjustment of the property amount when the acquisition is
recorded.
The Company also occasionally enters into foreign exchange
forward contracts as part of its short-term cash management
strategy. These contracts are not designated as hedges due to
their short-term nature and are carried on the Consolidated
Balance Sheet at fair value. Changes in fair value are
recognized in income in the period in which the change occurs.
The Company enters into interest rate swaps to manage the risk
related to interest rate fluctuations. These swap agreements
require the periodic exchange of payments without the exchange
of the principal amount on which the payments are based.
Interest expense on the debt is adjusted to include the payments
owing or receivable under the interest rate swaps.
The Company from time to time enters into bond forwards to fix
interest rates for anticipated issuances of debt. These
agreements are accounted for as cash flow hedges.
The Company has a fuel-hedging program under which CP acquires
crude oil and / or diesel future contracts for a
portion of its diesel fuel purchases to reduce the risk of price
volatility affecting future cash flows. In addition, foreign
exchange forward contracts may be used as part of the
fuel-hedging program to manage the foreign exchange variability
component of CP’s fuel price risk. These agreements are
accounted for as cash flow hedges. The gains or losses on the
hedge contracts are applied against the corresponding fuel
purchases in the period during which the hedging contracts
mature.
The Company has entered into derivatives called Total Return
Swaps (“TRS”) to mitigate fluctuations in tandem stock
appreciation rights (“TSAR”), deferred share units
(“DSU”), and restricted share units (“RSU”).
These are not designated as hedges and are recorded at market
value with the offsetting gain or loss reflected in
“Compensation and benefits”.
RESTRUCTURING
ACCRUAL AND ENVIRONMENTAL REMEDIATION
Restructuring liabilities are recorded at their present value.
The discount related to liabilities incurred in 2003 and
subsequent years is amortized to “Compensation and
benefits” and “Purchased services and other” over
the payment period. The discount related to liabilities incurred
prior to 2003 is amortized to “Other income and
charges” over the payment period. Environmental remediation
accruals, recorded on an undiscounted basis, cover site-specific
remediation programs. Provisions for labour restructuring and
environmental remediation costs are recorded in “Other
long-term liabilities”, except for the current portion,
which is recorded in “Accounts payable and accrued
liabilities”.
INCOME
TAXES
The Company follows the liability method of accounting for
income taxes. Future income tax assets and liabilities are
determined based on differences between the financial reporting
and tax bases of assets and liabilities using substantively
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The effect of a change in
income tax rates on future income tax assets and liabilities is
recognized in income in the period during which the change
occurs.
EARNINGS PER
SHARE
Basic earnings per share are calculated using the weighted
average number of Common Shares outstanding during the year.
Diluted earnings per share are calculated using the treasury
stock method for determining the dilutive effect of options.
STOCK-BASED
COMPENSATION
CP follows the fair value based approach to account for stock
options. Compensation expense and an increase in contributed
surplus are recognized for stock options over their vesting
period, or over the period from the grant date to the date
employees become eligible to retire when this is shorter than
the vesting period, based on their estimated fair values on the
grant date, as determined using the Black-Scholes option-pricing
model.
|
62
|
2009
ANNUAL REPORT |
|
With the granting of stock options, employees may be
simultaneously granted Share Appreciation Rights
(“SARs”), which provide the employee the choice to
either exercise the stock option for shares, or to exercise the
TSAR and thereby receive the intrinsic value of the stock option
in cash. Options with TSARs are awards that may call for
settlement in cash and, therefore, are recorded as liabilities.
Changes in this liability, which arise from fluctuation in the
market price of CP’s common shares are recorded in
compensation and benefits expense over the vesting period. If an
employee chooses to exercise the option, thereby cancelling the
TSAR, both the exercise price and the liability are settled to
“Share capital”.
Forfeitures and cancellations of options are accounted for when
they occur except for tandem options where forfeitures are
estimated on the grant date. Any consideration paid by employees
on exercise of stock options is credited to share capital when
the option is exercised and the recorded fair value of the
option is removed from contributed surplus and credited to share
capital.
Compensation expense is also recognized for TSARs, DSUs, PSUs
and RSUs, using the intrinsic method, and employee share
purchase plans, using the issue price, by amortizing the cost
over the vesting period. Once fully vested, the liability for
TSARs, DSUs, PSUs and RSUs are marked-to-market until exercised.
Forfeitures and cancellations of TSARs, DSUs, PSUs and RSUs are
accounted for when they occur.
2 Accounting
changes
PENSION PRIOR
SERVICE COSTS
During 2009, CP changed its accounting policy for the treatment
of prior service pension costs for unionized employees. In
previous periods, CP had amortized these costs over the expected
average remaining service period for employees. CP now amortizes
these costs over the remaining contract term. The change in
policy was made to provide more relevant information by
amortizing the costs based on the contract term as CP generally
renegotiates union contracts on a routine and consistent basis
that is substantially shorter than the expected average
remaining service period. The change has been accounted for on a
retrospective basis. As a result of the change the following
increases (decreases) to financial statement line items occurred:
| Year ended December 31 | As at December 31 | As at January 1 | |||||||||||||||||||||||
| (in millions of Canadian dollars, except per share data) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Compensation and benefits
|
$ | 0.9 | $ | 0.1 | $ | (10.1 | ) | ||||||||||||||||||
|
Income tax expense
|
1.2 | 0.3 | 7.3 | ||||||||||||||||||||||
|
Net income
|
$ | (2.1 | ) | $ | (0.4 | ) | $ | 2.8 | |||||||||||||||||
|
Basic earnings per share
|
$ | (0.01 | ) | $ | – | $ | 0.02 | ||||||||||||||||||
|
Diluted earnings per share
|
$ | (0.01 | ) | $ | – | $ | 0.02 | ||||||||||||||||||
|
Prepaid pension costs and other assets
|
$ | (105.1 | ) | $ | (104.2 | ) | $ | (114.2 | ) | ||||||||||||||||
|
Future income tax liability
|
(27.0 | ) | (28.2 | ) | (35.8 | ) | |||||||||||||||||||
|
Retained income
|
(78.1 | ) | (76.0 | ) | (78.4 | ) | |||||||||||||||||||
LOCOMOTIVE
OVERHAULS
During 2009, CP changed its accounting policy for the treatment
of locomotive overhaul costs. In prior periods, CP had
capitalized such costs and depreciated them over the expected
economic life of the overhaul. These costs are now expensed to
better represent the nature of overhaul expenditures on
locomotives. This policy aligns the treatment of locomotive
costs with CP’s current operational practices, which have
changed
|
2009
ANNUAL REPORT |
63 | |
over recent years and gradually shifted to be more in the nature
of a repair. The change has been accounted for on a
retrospective basis. As a result of the change, the following
increases (decreases) to financial statement line items occurred:
| Year ended December 31 | As at December 31 | As at January 1 | |||||||||||||||||||||||
| (in millions of Canadian dollars, except per share data) | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Depreciation and amortization
|
$ | (43.5 | ) | $ | (48.8 | ) | $ | (44.5 | ) | ||||||||||||||||
|
Compensation and benefits
|
0.1 | 0.5 | 0.9 | ||||||||||||||||||||||
|
Materials
|
13.8 | 35.0 | 36.7 | ||||||||||||||||||||||
|
Purchased services and other
|
29.3 | 23.8 | 19.6 | ||||||||||||||||||||||
|
Total increases
|
43.2 | 59.3 | 57.2 | ||||||||||||||||||||||
|
Total operating expenses
|
(0.3 | ) | 10.5 | 12.7 | |||||||||||||||||||||
|
Equity income in DM&E
|
— | (0.4 | ) | (1.1 | ) | ||||||||||||||||||||
|
Income tax expense
|
1.3 | (2.6 | ) | 2.5 | |||||||||||||||||||||
|
Net income
|
$ | (1.0 | ) | $ | (8.3 | ) | $ | (16.3 | ) | ||||||||||||||||
|
Basic earnings per share
|
$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||||||||||||||
|
Diluted earnings per share
|
$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||||||||||||||
|
Other comprehensive income
|
2.1 | (2.4 | ) | 1.4 | |||||||||||||||||||||
|
Comprehensive income
|
$ | 1.1 | $ | (10.7 | ) | $ | (14.9 | ) | |||||||||||||||||
|
Cash provided by operating activities
|
$ | (43.2 | ) | $ | (59.3 | ) | $ | (57.2 | ) | ||||||||||||||||
|
Cash used in investing activities
|
$ | 43.2 | $ | 59.3 | $ | 57.2 | |||||||||||||||||||
|
Net properties
|
$ | (187.9 | ) | $ | (191.8 | ) | $ | (164.4 | ) | ||||||||||||||||
|
Future income taxes liability
|
(51.5 | ) | (54.3 | ) | (52.6 | ) | |||||||||||||||||||
|
Accumulated other comprehensive income
|
1.5 | (0.6 | ) | 0.4 | |||||||||||||||||||||
|
Retained income
|
(137.9 | ) | (136.9 | ) | (112.2 | ) | |||||||||||||||||||
|
64
|
2009
ANNUAL REPORT |
|
GOODWILL AND
INTANGIBLE ASSETS
In February 2008, the Canadian Institute of Chartered
Accountants (“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”.
Section 3064, which replaces Section 3062, establishes
standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and
of intangible assets by profit-oriented enterprises. Various
changes have been made to other sections of the CICA Handbook
for consistency purposes. The new Section was applicable to
financial statements relating to fiscal years beginning on or
after October 1, 2008. Accordingly, the Company adopted the
new standards for its fiscal year beginning January 1,
2009. The provisions of Section 3064 were adopted
retrospectively, with restatement of prior periods.
As a result of this adoption, the Company has retroactively
expensed certain expenditures related to pre-operating periods
of a facility, rather than recording them as assets in
“Prepaid pension costs and other assets” and “Net
properties”. The adoption of Section 3064 resulted in
a reduction to opening retained income of $6.9 million at
January 1, 2007, $7.4 million at January 1, 2008
and $10.4 million at January 1, 2009. For the year
ended December 31, 2008, the adoption of this section
resulted in an increase to “Purchased services and
other” expense of $5.0 million (2007 –
$0.8 million), a decrease to “Income tax expense”
of $2.0 million (2007 – $0.3 million), and a
$0.02 (2007 – $nil) decrease to previously reported
basic and diluted earnings per share.
CREDIT RISK AND
THE FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL
LIABILITIES
On January 20, 2009 the Emerging Issues Committee
(“EIC”) issued a new abstract EIC 173 “Credit
risk and the fair value of financial assets and financial
liabilities”. This abstract concludes that an entity’s
own credit risk and the credit risk of the counterparty should
be taken into account when determining the fair value of
financial assets and financial liabilities, including derivative
instruments.
This abstract applies to all financial assets and liabilities
measured at fair value in interim and annual financial
statements for periods ending on or after January 20, 2009.
The adoption of this abstract did not impact the Company’s
financial statements.
FINANCIAL
INSTRUMENTS – DISCLOSURES
The CICA amended Section 3862 “Financial
Instruments – Disclosures”, to include additional
disclosures about fair value measurements and to enhance
liquidity risk disclosures associated with financial
instruments. This standard is effective for the annual period
ending December 31, 2009. The adoption of this standard did
not impact the amounts reported in the Company’s financial
statements as it relates to disclosure.
3 Future
accounting changes
U.S. GAAP /
INTERNATIONAL FINANCIAL REPORTING STANDARDS
(“IFRS”)
On February 13, 2008, the Canadian Accounting Standards
Board (“AcSB”) confirmed that publicly accountable
enterprises will be required to adopt IFRS in place of Canadian
GAAP for interim and annual reporting purposes for fiscal years
beginning on or after January 1, 2011, unless, as permitted
by Canadian securities regulations, registrants were to adopt
U.S. GAAP on or before this date. CP has determined that,
commencing on January 1, 2010, it will adopt U.S. GAAP
for its financial reporting, which will be consistent with the
reporting of other North American Class I railways. As a
result, CP will not be adopting IFRS in 2011.
BUSINESS
COMBINATIONS, CONSOLIDATED FINANCIAL STATEMENTS AND
NON-CONTROLLING INTERESTS
In January 2009, the CICA issued three new standards:
Business
combinations, Section 1582
This section which replaces the former Section 1581
“Business combinations” and provides the Canadian
equivalent to IFRS 3 “Business Combinations” (January
2008). The new standard requires the acquiring entity in a
business combination to recognize most of the assets acquired
and liabilities assumed in the transaction at fair value
including contingent assets and liabilities; and recognize and
measure the goodwill acquired in the business combination or a
gain from a bargain purchase. Acquisition-related costs are also
to be expensed.
Consolidated
financial statements, Section 1601 and Non-controlling
interests, Section 1602
These two sections replace Section 1600 “Consolidated
financial statements”. Section 1601 “Consolidated
financial statements” carries forward guidance from
Section 1600 “Consolidated financial statements”
with the exception of non-controlling interests which are
addressed in a separate section. Section 1602
“Non-controlling interests”, requires the Company to
report non-controlling interests within equity, separately from
the equity of the owners of the parent, and transactions between
an entity and non-controlling interests as equity transactions.
|
2009
ANNUAL REPORT |
65 | |
All three standards are effective January 1, 2011. The
Company will not adopt these standards given the decision to
report under U.S. GAAP effective January 1, 2010.
4 Gain
on sales of partnership interest and significant
properties
During 2009, the Company completed a sale of a portion of its
investment in the Detroit River Tunnel Partnership
(“DRTP”) to its existing partner, reducing the
Company’s ownership from 50% to 16.5%. The sale was agreed
to on March 31, 2009 but was subject to regulatory
approval, which was received during the second quarter. The
proceeds received in the second quarter from the transaction
were $110 million. Additional proceeds of $22 million
are contingent on achieving certain future freight volumes
through the tunnel, and have not been recognized. The gain on
this transaction was $81.2 million ($68.7 million
after tax). Effective April 1, 2009, the Company
discontinued proportionate consolidation and is accounting for
its remaining investment in the DRTP under the equity method of
accounting.
During 2009, the Company also completed two significant real
estate sales, including Windsor Station and land in Western
Canada, resulting in gains of $79.1 million
($68.1 million after tax).
The Company sold Windsor Station in Montreal, for proceeds of
$80.0 million, including the assumption of a mortgage of
$16 million due in 2011. CP will continue to occupy a
portion of Windsor Station through a lease for a
10-year
period after the sale. As a result, part of the transaction is
considered to be a sale-leaseback and consequently a gain of
$19.5 million related to this part of the transaction has
been deferred and is being amortized over the remainder of the
lease term.
The Company sold land in Western Canada for transit purposes for
proceeds of $43.0 million.
5 Loss
on termination of lease with shortline railway
During 2009, the Company made a payment of approximately
$73 million to terminate a contract with a lessee in order
to cease through-train operations over the CP owned rail
branchline between Smiths Falls, Ontario and Sudbury, Ontario
including a settlement of a $20.6 million existing
liability. The contract with the lessee provided for the
operation of a minimum number of CP freight trains over the
leased branchline. The loss on the transaction recognized in the
fourth quarter was $54.5 million ($37.6 million after
tax).
6 Other
income and charges
| (in millions of Canadian dollars) | 2009 | 2008 | 2007 | |||||||||
|
Accretion charges on accruals recorded at present value
|
$ | 8.7 | $ | 6.4 | $ | 8.1 | ||||||
|
Accretion income on long-term floating rate notes (Note 19)
|
(2.9 | ) | – | – | ||||||||
|
(Gain) loss in fair value of long-term floating rate notes/ ABCP
(Note 19)
|
(6.3 | ) | 49.4 | 21.5 | ||||||||
|
Net loss on repurchase of debt (Note 18)
|
16.6 | – | – | |||||||||
|
Other exchange (gains) losses
|
(0.4 | ) | 6.1 | 5.8 | ||||||||
|
Foreign exchange (gain) loss on long-term debt
|
(5.8 | ) | 16.3 | (169.8 | ) | |||||||
|
Other
|
9.0 | 10.2 | 15.7 | |||||||||
|
Total other income and charges
|
$ | 18.9 | $ | 88.4 | $ | (118.7 | ) | |||||
|
66
|
2009
ANNUAL REPORT |
|
7 Net
interest expense
| (in millions of Canadian dollars) | 2009 | 2008 | 2007 | |||||||||
|
Interest cost
|
$ | 293.4 | $ | 280.3 | $ | 221.1 | ||||||
|
Interest capitalized to net properties
|
(14.3 | ) | (9.9 | ) | (1.5 | ) | ||||||
|
Interest expense
|
279.1 | 270.4 | 219.6 | |||||||||
|
Interest income
|
(6.0 | ) | (9.3 | ) | (15.3 | ) | ||||||
|
Net interest expense
|
$ | 273.1 | $ | 261.1 | $ | 204.3 | ||||||
|
Gross cash interest payments
|
$ | 289.8 | $ | 269.6 | $ | 208.9 | ||||||
Interest expense includes interest on capital leases of
$27.3 million for the year ended December 31, 2009
(2008 – $20.9 million; 2007 –
$21.6 million).
8 Income
taxes
The following is a summary of the major components of the
Company’s income tax expense:
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| (in millions of Canadian dollars) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Canada (domestic)
|
||||||||||||
|
Current income tax (recovery) expense
|
$ | (51.0 | ) | $ | 14.0 | $ | 69.8 | |||||
|
Future income tax expense
|
||||||||||||
|
Origination and reversal of temporary differences
|
185.2 | 15.2 | 163.2 | |||||||||
|
Effect of tax rate decreases
|
(57.9 | ) | (14.9 | ) | (152.2 | ) | ||||||
|
Effect of hedge of net investment in self-sustaining foreign
subsidiaries
|
(31.4 | ) | 40.2 | (9.7 | ) | |||||||
|
Other
|
(8.1 | ) | – | (6.9 | ) | |||||||
|
Total future income tax expense (recovery)
|
87.8 | 40.5 | (5.6 | ) | ||||||||
|
Total income taxes (domestic)
|
$ | 36.8 | $ | 54.5 | $ | 64.2 | ||||||
|
Other (foreign)
|
||||||||||||
|
Current income tax (recovery) expense
|
$ | (0.7 | ) | $ | (34.4 | ) | $ | 36.2 | ||||
|
Future income tax expense
|
||||||||||||
|
Origination and reversal of temporary differences
|
74.6 | 129.9 | 64.2 | |||||||||
|
Other
|
(9.2 | ) | (14.1 | ) | (10.3 | ) | ||||||
|
Total future income tax expense
|
65.4 | 115.8 | 53.9 | |||||||||
|
Total income taxes (foreign)
|
$ | 64.7 | $ | 81.4 | $ | 90.1 | ||||||
|
Total
|
||||||||||||
|
Current income tax (recovery) expense
|
$ | (51.7 | ) | $ | (20.4 | ) | $ | 106.0 | ||||
|
Future income tax expense
|
153.2 | 156.3 | 48.3 | |||||||||
|
Total income taxes (domestic and foreign)
|
$ | 101.5 | $ | 135.9 | $ | 154.3 | ||||||
|
2009
ANNUAL REPORT |
67 | |
The provision for future income taxes arises from temporary
differences in the carrying values of assets and liabilities for
financial statement and income tax purposes and the effect of
loss carry forwards. The items comprising the future income tax
assets and liabilities are as follows:
|
2008
|
||||||||
|
Restated
|
||||||||
| (in millions of Canadian dollars) | 2009 | (Note 2) | ||||||
|
Future income tax assets
|
||||||||
|
Restructuring liability
|
$ | 21.4 | $ | 29.1 | ||||
|
Amount related to tax losses carried forward
|
224.2 | 92.3 | ||||||
|
Liabilities carrying value in excess of tax basis
|
56.0 | 124.2 | ||||||
|
Future environmental remediation costs
|
42.6 | 53.9 | ||||||
|
Other
|
82.4 | 88.3 | ||||||
|
Total future income tax assets
|
426.6 | 387.8 | ||||||
|
Future income tax liabilities
|
||||||||
|
Capital assets carrying value in excess of tax basis
|
2,387.7 | 2,503.4 | ||||||
|
Other long-term assets carrying value in excess of tax basis
|
438.6 | 299.1 | ||||||
|
Other
|
21.7 | 36.4 | ||||||
|
Total future income tax liabilities
|
2,848.0 | 2,838.9 | ||||||
|
Total net future income tax liabilities
|
2,421.4 | 2,451.1 | ||||||
|
Current future income tax assets
|
128.1 | 76.5 | ||||||
|
Long-term future income tax liabilities
|
$ | 2,549.5 | $ | 2,527.6 | ||||
The Company’s consolidated effective income tax rate
differs from the expected statutory tax rates. Expected income
tax expense at statutory rates is reconciled to income tax
expense as follows:
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| (in millions of Canadian dollars) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Expected income tax expense at Canadian statutory tax rates
|
$ | 219.3 | $ | 234.3 | $ | 332.5 | ||||||
|
Increase (decrease) in taxes resulting from:
|
||||||||||||
|
Items not subject to tax
|
(25.0 | ) | (61.6 | ) | (62.5 | ) | ||||||
|
Foreign tax rate differentials
|
(6.8 | ) | (0.2 | ) | 33.8 | |||||||
|
Effect of tax rate decreases
|
(57.9 | ) | (14.9 | ) | (152.2 | ) | ||||||
|
Other
|
(28.1 | ) | (21.7 | ) | 2.7 | |||||||
|
Income tax expense
|
$ | 101.5 | $ | 135.9 | $ | 154.3 | ||||||
The Company has no unrecognized capital losses at
December 31, 2009 and 2008.
In 2009, legislation was substantively enacted to reduce
provincial income tax rates. As a result of these changes, the
Company recorded a $57.9 million benefit in future tax
liability and income tax expense, related to the revaluation of
its future income tax balances as at December 31, 2008.
In 2008, legislation was substantively enacted to reduce
provincial income tax rates. As a result of these changes, the
Company recorded a $14.9 million benefit in future tax
liability and income tax expense, related to the revaluation of
its future income tax balances as at December 31, 2007.
|
68
|
2009
ANNUAL REPORT |
|
In 2007, legislation was enacted to reduce Canadian federal
corporate income tax rates over a period of several years. As a
result of these changes, the Company recorded a
$152.2 million benefit in future tax liability and income
tax expense, related to the revaluation of its future income tax
balances as at December 31, 2006.
Cash taxes recovered, net of payments in the year ended
December 31, 2009, were $38.9 million (2008 net
cash taxes paid $59.0 million; 2007 net cash taxes
paid $6.7 million). Cash taxes paid in the year ended
December 31, 2009, were $11.4 million
(2008 – $70.0 million; 2007 –
$18.8 million).
9 Earnings
per share
At December 31, 2009, the number of shares outstanding was
168.5 million (2008 – 153.8 million).
Basic earnings per share have been calculated using net income
for the year divided by the weighted average number of CPRL
shares outstanding during the year.
Diluted earnings per share have been calculated using the
treasury stock method, which assumes that any proceeds received
from the exercise of
in-the-money
options would be used to purchase Common Shares at the average
market price for the period. For purposes of this calculation,
at December 31, 2009, there were 1.6 million dilutive
options outstanding (2008 – 1.5 million;
2007 – 4.5 million). These option totals at
December 31, 2009 exclude 1.3 million options
(2008 – 1.0 million; 2007 –
2.4 million) for which there are TSARs outstanding
(Note 26)
, as these are not included in the dilution
calculation.
The number of shares used in the earnings per share calculations
is reconciled as follows:
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| (in millions) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Weighted average shares outstanding
|
166.3 | 153.7 | 154.0 | |||||||||
|
Dilutive effect of weighted average number of stock options
|
0.5 | 1.8 | 1.6 | |||||||||
|
Weighted average diluted shares outstanding
|
166.8 | 155.5 | 155.6 | |||||||||
|
(in dollars)
|
||||||||||||
|
Basic earnings per share
|
$ | 3.68 | $ | 3.95 | $ | 6.05 | ||||||
|
Diluted earnings per share
|
$ | 3.67 | $ | 3.91 | $ | 5.99 | ||||||
In 2009, the weighted-average number of options excluded from
the computation of diluted earnings per share because their
effect was not dilutive was 2,818,398 (2008 –
1,344,669; 2007 – 3,183).
10 Other
comprehensive (loss) income and accumulated other comprehensive
income
The components of “Accumulated other comprehensive
income” are as follows:
|
2008
|
||||||||
|
Restated
|
||||||||
| (in millions of Canadian dollars) | 2009 | (Note 2) | ||||||
|
Unrealized foreign exchange (loss) gain on translation of the
net investment in U.S. subsidiaries
|
$ | (186.2 | ) | $ | 60.0 | |||
|
Unrealized foreign exchange gain on translation of the U.S.
dollar-denominated long-term debt designated as a hedge of the
net investment in U.S. subsidiaries
|
252.3 | 39.3 | ||||||
|
Deferred loss on settled hedge instruments
|
(18.3 | ) | (20.6 | ) | ||||
|
Unrealized effective gains (losses) on cash flow hedges
|
1.7 | (1.0 | ) | |||||
|
Accumulated other comprehensive income
|
$ | 49.5 | $ | 77.7 | ||||
|
2009
ANNUAL REPORT |
69 | |
Components of “Other comprehensive income (loss)” and
the related tax effects are as follows:
|
2008
|
2007
|
|||||||||||
|
Restated
|
Restated
|
|||||||||||
| (in millions of Canadian dollars) | 2009 | (Note 2) | (Note 2) | |||||||||
|
Accumulated other comprehensive income – January 1
|
$ | 77.7 | $ | 41.4 | $ | 80.8 | ||||||
|
Other comprehensive (loss) income:
|
||||||||||||
|
Unrealized foreign exchange (loss) gain on:
|
||||||||||||
|
Translation of the net investment in U.S. subsidiaries
|
(246.4 | ) | 305.1 | (77.0 | ) | |||||||
|
Translation of the U.S. dollar-denominated long-term debt
designated as a hedge of the net investment in U.S. subsidiaries
(net of tax of $(31.4) million, $40.2 million, and
$(9.7) million, respectively)
|
213.1 | (257.3 | ) | 61.3 | ||||||||
|
Change in derivatives designated as cash flow hedges:
|
||||||||||||
|
Realized loss (gain) on cash flow hedges recognized in income
(net of tax of $(1.4) million, $3.2 million, and
$4.0 million, respectively)
|
3.4 | (7.8 | ) | (6.6 | ) | |||||||
|
Unrealized gain (loss) on cash flow hedges (net of tax of
$(0.8) million, $1.4 million, and $9.1 million,
respectively)
|
1.7 | (3.7 | ) | (17.1 | ) | |||||||
|
Other comprehensive (loss) income
|
(28.2 | ) | 36.3 | (39.4 | ) | |||||||
|
Accumulated other comprehensive income – December 31
|
$ | 49.5 | $ | 77.7 | $ | 41.4 | ||||||
During the next twelve months, the Company expects
$2.5 million ($1.7 million after tax) of unrealized
holding gains on derivative instruments to be realized and
recognized in the Consolidated Statement of Income. Derivative
instruments designated as cash flow hedges will mature during
the period ending December 2010.
11 Cash
and cash equivalents
| (in millions of Canadian dollars) | 2009 | 2008 | ||||||
|
Cash
|
$ | 35.8 | $ | 11.3 | ||||
|
Short-term investments:
|
||||||||
|
Government guaranteed investments
|
628.6 | – | ||||||
|
Deposits with financial institutions
|
14.7 | 106.3 | ||||||
|
Total cash and cash equivalents
|
$ | 679.1 | $ | 117.6 | ||||
12 Accounts
receivable
| (in millions of Canadian dollars) | 2009 | 2008 | ||||||
|
Freight
|
$ | 316.8 | $ | 464.1 | ||||
|
Non-freight
|
155.2 | 215.1 | ||||||
| 472.0 | 679.2 | |||||||
|
Allowance for doubtful accounts
|
(31.0 | ) | (31.8 | ) | ||||
| $ | 441.0 | $ | 647.4 | |||||
|
70
|
2009
ANNUAL REPORT |
|
The Company maintains an allowance for doubtful accounts based
on expected collectibility of accounts receivable. Credit losses
are based on specific identification of uncollectible accounts,
the application of historical percentages by aging category and
an assessment of the current economic environment. At
December 31, 2009, allowances of $31.0 million
(2008 – $31.8 million) were recorded in
“Accounts receivable”. During 2009, $4.6 million
related to doubtful accounts (2008 –
$14.4 million) was expensed within “Purchased services
and other”.
During 2008, the Company’s accounts receivable
securitization program was terminated and settled. As a result,
the Company’s “Accounts receivable” increased by
$120.0 million and in the Consolidated Statement of Cash
Flows the “Change in non-cash working capital balances
related to operations” reflects an outflow of
$120.0 million.
13 Investments
| (in millions of Canadian dollars) | 2009 | 2008 | ||||||
|
Rail investments accounted for on an equity basis
|
$ | 56.1 | $ | 48.4 | ||||
|
Long-term floating rate notes / ABCP (Note 19)
|
69.3 | 72.7 | ||||||
|
Other investments
|
31.3 | 30.0 | ||||||
|
Total investments
|
$ | 156.7 | $ | 151.1 | ||||
During 2009, the Company completed a sale of a portion of its
investment in the DRTP to its existing partner, reducing the
Company’s ownership from 50% to 16.5%
(Note 4)
.
Effective April 1, 2009, the Company discontinued
proportionate consolidation and is accounting for its remaining
investment in the DRTP under the equity method of accounting.
In the prior year the Company accounted for its 50% investment
in DRTP on a proportionate consolidation basis. Summarized
financial information for the Company’s interest in the
DRTP is as follows:
|
2008
|
||||
|
Restated
|
||||
| (in millions of Canadian dollars) | (Note 2) | |||
|
Total assets
|
$ | 40.8 | ||
|
Total liabilities
|
2.9 | |||
|
Revenues
|
10.3 | |||
14 Net
properties
| 2008 | ||||||||||||||||||||||||||||
| 2009 |
Restated (note 2)
|
|||||||||||||||||||||||||||
|
Annual
|
Accumulated
|
Net book
|
Accumulated
|
Net book
|
||||||||||||||||||||||||
| (in millions of Canadian dollars) | rate | Cost | depreciation | value | Cost | depreciation | value | |||||||||||||||||||||
|
Track and roadway
|
2.9 | % | $ | 11,590.1 | $ | 3,197.5 | $ | 8,392.6 | $ | 11,862.4 | $ | 3,195.0 | $ | 8,667.4 | ||||||||||||||
|
Buildings
|
2.8 | % | 357.3 | 115.4 | 241.9 | 366.5 | 126.8 | 239.7 | ||||||||||||||||||||
|
Rolling stock
|
2.9 | % | 3,369.7 | 1,327.1 | 2,042.6 | 3,497.4 | 1,340.2 | 2,157.2 | ||||||||||||||||||||
|
Information
systems
(1)
|
8.2 | % | 639.7 | 276.2 | 363.5 | 609.9 | 240.0 | 369.9 | ||||||||||||||||||||
|
Other
|
4.7 | % | 1,339.7 | 412.5 | 927.2 | 1,418.0 | 467.6 | 950.4 | ||||||||||||||||||||
|
Total net properties
|
$ | 17,296.5 | $ | 5,328.7 | $ | 11,967.8 | $ | 17,754.2 | $ | 5,369.6 | $ | 12,384.6 | ||||||||||||||||
| (1) | Additions during 2009 were $42.9 million (2008 – $55.6 million; 2007 – $48.8 million) and depreciation expense was $47.5 million (2008 – $44.5 million; 2007 – $50.5 million). |
|
2009
ANNUAL REPORT |
71 | |
CAPITAL LEASES
INCLUDED IN PROPERTIES
| 2009 | 2008 | |||||||||||||||||||||||
|
Accumulated
|
Net book
|
Accumulated
|
Net book
|
|||||||||||||||||||||
| (in millions of Canadian dollars) | Cost | depreciation | value | Cost | depreciation | value | ||||||||||||||||||
|
Buildings
|
$ | 0.5 | $ | 0.1 | $ | 0.4 | $ | – | $ | – | $ | – | ||||||||||||
|
Rolling stock
|
536.2 | 139.3 | 396.9 | 604.3 | 152.6 | 451.7 | ||||||||||||||||||
|
Other
|
4.5 | 1.8 | 2.7 | 5.6 | 1.3 | 4.3 | ||||||||||||||||||
|
Total assets held under capital lease
|
$ | 541.2 | $ | 141.2 | $ | 400.0 | $ | 609.9 | $ | 153.9 | $ | 456.0 | ||||||||||||
During 2009, properties were acquired under the Company’s
capital program at an aggregate cost of $722.2 million
(2008 – $922.3 million; 2007 –
$850.9 million), $0.8 million of which were acquired
by means of capital leases (2008 – $79.5 million;
2007 – $12.1 million). Cash payments related to
capital purchases were $722.4 million in 2009
(2008 – $832.9 million; 2007 –
$836.0 million). At December 31, 2009,
$11.0 million (2008 – $9.4 million;
2007 – $2.1 million) remained in accounts payable
related to the above purchases.
15 Equity
income
DAKOTA, MINNESOTA & EASTERN RAILROAD CORPORATION
(“DM&E”)
DM&E was acquired on October 4, 2007 and is wholly
owned by the Company. The purchase was subject to review and
approval by the U.S. Surface Transportation Board
(“STB”), during which time the shares of DM&E
were placed in a voting trust. The STB approved the purchase
effective on October 30, 2008, at which time the Company
assumed control of the DM&E.
The Company accounted for its investment in DM&E using the
equity method until the acquisition was approved by the STB and
the Company assumed control. Equity income in DM&E for the
period of October 4, 2007 to December 31, 2007 of
$11.2 million and equity income in 2008 earned prior to STB
approval effective October 30, 2008 of $50.9 million,
are recorded in “Equity income in Dakota,
Minnesota & Eastern Railroad Corporation” on the
Consolidated Statement of Income. Subsequent to October 30,
2008 the results of DM&E are consolidated on a
line-by-line
basis.
DM&E was purchased for $1.5 billion resulting in
goodwill of US$147 million
(Note 17)
as at
October 4, 2007. Future contingent payments of up to
approximately US$1.1 billion consisting of
US$390 million which would become due if construction of
the Powder River Basin expansion project starts prior to
December 31, 2025 and up to approximately
US$740 million would become due upon the movement of
specified volumes over the Powder River Basin extension prior to
December 31, 2025. Certain interest and inflationary
adjustments would also become payable up to December 31,
2025 upon achievement of certain milestones. The contingent
payments would be accounted for as an increase in the purchase
price. Certain intangible assets acquired are subject to
amortization. Neither the amortization of intangible assets nor
goodwill are deductible for tax purposes.
OTHER EQUITY INVESTMENTS
CP’s investment in the DRTP generated income before tax of
$3.4 million in 2009 (2008 – $8.6 million;
2007 – $9.7 million). The equity loss from the
Company’s investment in the CNCP Niagara-Windsor
Partnership was $0.5 million in 2009 (2008 – loss
of $0.6 million; 2007 – income of
$0.2 million). CP’s investment in the Indiana Harbor
Belt Railroad Company generated equity income of
$2.2 million in 2009 (2008 – $5.6 million;
2007 – $4.1 million).
|
72
|
2009
ANNUAL REPORT |
|
16 Prepaid
pension costs and other assets
|
2008
|
||||||||
|
Restated
|
||||||||
| (in millions of Canadian dollars) | 2009 | (Note 2) | ||||||
|
Prepaid pension costs (Note 25)
|
$ | 1,644.4 | $ | 1,056.0 | ||||
|
Other
|
132.8 | 165.8 | ||||||
|
Total prepaid pension costs and other assets
|
$ | 1,777.2 | $ | 1,221.8 | ||||
Other includes various long-term assets such as loans
receivable, contributions to customers, and certain material and
supplies.
17 Goodwill
and intangible assets
| (in millions of Canadian dollars) | Goodwill | Intangible assets | ||||||
|
Balance at December 31, 2007
|
$ | – | $ | – | ||||
|
Additions (Note 15)
|
147.1 | 50.0 | ||||||
|
Amortization
|
– | (2.0 | ) | |||||
|
Foreign exchange impact
|
32.5 | 9.6 | ||||||
|
Balance at December 31, 2008
|
$ | 179.6 | $ | 57.6 | ||||
|
Amortization
|
– | (2.5 | ) | |||||
|
Foreign exchange impact
|
(24.7 | ) | (7.7 | ) | ||||
|
Balance at December 31, 2009
|
$ | 154.9 | $ | 47.4 | ||||
Intangible assets includes an option to expand the track
network, favourable leases, customer relationships and interline
contracts acquired in a business acquisition.
As part of the acquisition of DM&E in 2007, CP recognized
goodwill of US$147 million on the allocation of the
purchase price, determined as the excess of the purchase price
over the fair value of the net assets acquired. Since the
acquisition the operations of DM&E have been integrated
with CP’s U.S. operations, the related goodwill is now
allocated to CP’s U.S. reporting unit. Goodwill is
tested for impairment at least once per year as at
October 1st. The goodwill impairment test determines if the
fair value of the reporting unit continues to exceed its net
book value, or whether an impairment is required. The fair value
of the reporting unit is affected by projections of its
profitability including estimates of revenue growth, which are
inherently uncertain. Given the downturn in the world economy,
CP monitored the fair value of the related reporting unit for
potential impairment during the year. The annual test for
impairment determined that the fair value of CP’s U.S.
reporting unit exceeded the carrying value by approximately 10%.
Decreases to the profit projections, which could be caused by a
prolonged economic recession, or increases to the discount rate
used in the valuation could require an impairment in future
periods. The carrying value of CP’s goodwill changes from
period to period due to changes in the exchange rate. As at
December 31, 2009 goodwill was $154.9 million
(2008 – $179.6 million).
Intangible assets of $47.4 million includes the amortized
costs of an option to expand the track network, favourable
leases, customer relationships and interline contracts.
Intangible assets with determinable lives are amortized on a
straight-line basis over their estimated useful lives.
Intangible assets with indefinite lives are not amortized but
are assessed for impairment on an annual basis, or more often if
the events or circumstances warrant. If the carrying value of
the indefinite-lived intangible asset exceeds its fair value, an
impairment charge is recognized immediately. Annual amortization
over the period 2010 to 2014 are expected to be approximately
$2 million per year.
|
2009
ANNUAL REPORT |
73 | |
18 Long-term
debt
|
Currency
|
||||||||||||||||
|
in which
|
||||||||||||||||
| (in millions of Canadian dollars) | Maturity | payable | 2009 | 2008 | ||||||||||||
|
4.90% 7-year
Medium Term Notes (A)
|
June 2010 | CDN$ | $ | 350.0 | $ | 349.9 | ||||||||||
|
6.250% 10-year
Notes (A)
|
Oct. 2011 | US$ | 264.2 | 505.7 | ||||||||||||
|
5.75% 5-year
Notes (A)
|
May 2013 | US$ | 105.8 | 483.3 | ||||||||||||
|
6.50% 10-year
Notes (A)
|
May 2018 | US$ | 286.6 | 362.0 | ||||||||||||
|
6.25% 10-year
Medium Term Notes (A)
|
June 2018 | CDN$ | 371.1 | 370.7 | ||||||||||||
|
7.250% 10-year
Notes (A)
|
May 2019 | US$ | 363.2 | – | ||||||||||||
|
9.450% 30-year
Debentures (A)
|
Aug. 2021 | US$ | 258.8 | 301.2 | ||||||||||||
|
7.125% 30-year
Debentures (A)
|
Oct. 2031 | US$ | 362.0 | 420.8 | ||||||||||||
|
5.750% 30-year
Debentures (A)
|
Mar. 2033 | US$ | 250.6 | 292.4 | ||||||||||||
|
5.95% 30-year
Notes (A)
|
May 2037 | US$ | 459.4 | 534.3 | ||||||||||||
|
6.45% 30-year
Notes (A)
|
Nov. 2039 | CDN$ | 397.8 | – | ||||||||||||
|
Secured Equipment Loan (B)
|
Aug. 2015 | CDN$ | 136.1 | 139.3 | ||||||||||||
|
5.41% Senior Secured Notes (C)
|
Mar. 2024 | US$ | 131.1 | 156.7 | ||||||||||||
|
6.91% Secured Equipment Notes (D)
|
Oct. 2024 | CDN$ | 198.4 | 205.9 | ||||||||||||
|
5.57% Senior Secured Notes (E)
|
Dec. 2024 | US$ | 66.9 | – | ||||||||||||
|
7.49% Equipment Trust Certificates (F)
|
Jan. 2021 | US$ | 111.7 | 133.3 | ||||||||||||
|
Bank loan payable on demand (5.883%) (G)
|
June 2010 | CDN$ | 5.7 | 5.4 | ||||||||||||
|
Other Long Term Loans (4.00% – 5.65%)
|
2010-2015 | US$ | 5.3 | 5.4 | ||||||||||||
|
Obligations under capital leases (5.20% – 9.38%) (H)
|
2010-2026 | US$ | 319.7 | 406.4 | ||||||||||||
|
Obligations under capital leases (5.64% – 5.65%) (H)
|
2013-2031 | CDN$ | 12.0 | 12.8 | ||||||||||||
| 4,456.4 | 4,685.5 | |||||||||||||||
|
Perpetual 4% Consolidated Debenture Stock (I)
|
US$ | 32.0 | 37.2 | |||||||||||||
|
Perpetual 4% Consolidated Debenture Stock (I)
|
GB£ | 6.4 | 7.1 | |||||||||||||
| 4,494.8 | 4,729.8 | |||||||||||||||
|
Less: Long-term debt maturing within one year
|
392.1 | 44.0 | ||||||||||||||
| $ | 4,102.7 | $ | 4,685.8 | |||||||||||||
At December 31, 2009, the gross amount of long-term debt
denominated in U.S. dollars was US$2,911.2 million
(2008 – US$3,009.8 million).
Annual maturities and principal repayments requirements,
excluding those pertaining to capital leases, for each of the
five years following 2009 are (in millions): 2010 –
$381.6; 2011 – $289.2; 2012 – $38.1;
2013 – $148.3; 2014 – $44.2.
A. These debentures and notes pay interest semi-annually
and are unsecured, but carry a negative pledge.
During May 2009, the Company issued US$350 million 7.25%
10-year
Notes for net proceeds of CDN$408.2 million. The proceeds
from this offering contributed to the repurchase of debt with a
carrying amount of $555.3 million pursuant to a tender
offer for a total cost of $571.9 million. Upon repurchase
of the debt a net loss of $16.6 million was recognized to
“Other income and charges”. The loss consisted largely
of premiums paid to bond holders to tender their debt, and the
write-off of unamortized fees, partly offset by a fair value
adjustment
|
74
|
2009
ANNUAL REPORT |
|
(gain) recognized on the unwind of interest rate swaps
associated with the 6.250% Notes that were repurchased
(Note 19)
. The following table summarizes the
principal amount, carrying amount and cost to redeem repurchased
debt:
|
Principal
|
Carrying
|
Cost to
|
||||||||||||||||||
|
amount
|
amount
|
redeem
|
||||||||||||||||||
| (in millions) | Maturity | in USD | in CDN | in CDN | ||||||||||||||||
|
6.250% Notes
|
2011 | $ | 154.3 | $ | 184.1 | $ | 184.6 | |||||||||||||
|
5.75% Notes
|
2013 | 298.6 | 342.7 | 359.1 | ||||||||||||||||
|
6.50% Notes
|
2018 | 24.8 | * | 28.5 | 28.2 | |||||||||||||||
|
Total debt tendered
|
$ | 477.7 | $ | 555.3 | $ | 571.9 | ||||||||||||||
| * | Includes US$2.7 million principal amount of debt repurchased prior to commencement of the debt tender. |
During November 2009, the Company issued $400 million 6.45%
30-year
Notes. Net proceeds from this offering were $397.8 million.
The proceeds from this offering were used for general corporate
purposes.
During 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
Medium Term Notes. Net proceeds from these offerings were
CDN$1,068.7 million. The proceeds from these offerings were
used to partially repay the temporary bridge financing used to
acquire the DM&E.
B. The Secured Equipment Loan is collateralized by specific
locomotive units with a carrying value of $130.7 million at
December 31, 2009. The floating interest rate is calculated
based on a six-month average Canadian Dollar Offered Rate
(calculated based on an average of Bankers’ Acceptance
rates) plus 53 basis points (2009 – 1.82%;
2008 – 4.28%). The Company makes blended payments of
principal and interest semi-annually. Final repayment of the
remaining principal balance of $53.2 million is due in
August 2015.
C. The 5.41% Senior Secured Notes are collateralized
by specific locomotive units with a carrying value of
$172.9 million at December 31, 2009. The Company pays
equal blended semi-annual payments of principal and interest.
Final repayment of the remaining principal of US
$49.4 million is due in March 2024.
D. The 6.91% Secured Equipment Notes are full recourse
obligations of the Company collateralized by a first charge on
specific locomotive units with a carrying value of
$171.5 million at December 31, 2009. The Company pays
equal blended semi-annual payments of principal and interest up
to and including October 2024.
E. During December 2009, the Company issued
US$64.7 million of 5.57% Senior Secured Notes for net
proceeds of CDN$66.7 million. The Notes are secured by
specific locomotive units and other rolling stock with a
combined carrying value of $76.4 million at
December 31, 2009. The Company pays equal blended
semi-annual payments of principal and interest up to and
including December 2024. Final repayment of the remaining
principal of US$33.0 million is due in December 2024.
F. The 7.49% Equipment Trust Certificates are
collateralized by specific locomotive units with a carrying
value of $119.7 million at December 31, 2009. The
Company makes semi-annual payments that vary in amount and are
interest-only payments or blended principal and interest
payments. Final repayment of the remaining principal of
US$10.9 million is due in January 2021.
G. The bank loan payable on demand matures June 2010 and
carries an interest rate of 5.883%. The amount of the loan was
$219.8 million at December 31, 2009 (2008 –
$207.2 million). The Company has offset against this loan a
financial asset of $214.1 million (2008 –
$201.8 million) with the same financial institution.
|
2009
ANNUAL REPORT |
75 | |
H. At December 31, 2009, capital lease obligations
included in long-term debt were as follows:
| (in millions of Canadian dollars) | Year | Capital leases | ||||||
|
Minimum lease payments in:
|
||||||||
| 2010 | $ | 33.4 | ||||||
| 2011 | 33.4 | |||||||
| 2012 | 33.8 | |||||||
| 2013 | 31.9 | |||||||
| 2014 | 177.1 | |||||||
| Thereafter | 213.1 | |||||||
|
Total minimum lease payments
|
522.7 | |||||||
|
Less: Imputed interest
|
(191.0 | ) | ||||||
|
Present value of minimum lease payments
|
331.7 | |||||||
|
Less: Current portion
|
(10.5 | ) | ||||||
|
Long-term portion of capital lease obligations
|
$ | 321.2 | ||||||
The carrying value of the assets collateralizing the capital
lease obligations was $400.0 million at December 31,
2009.
I. The Consolidated Debenture Stock, authorized by an Act
of Parliament of 1889, constitutes a first charge upon and over
the whole of the undertaking, railways, works, rolling stock,
plant, property and effects of the Company, with certain
exceptions.
19 Financial
instruments
The Company uses the following methods and assumptions to
estimate initial and subsequent fair values of each class of
financial instrument for recognition and/or disclosure as
follows:
Loans and
receivables
Accounts receivable – The carrying amounts approximate
fair value because of the short maturity of these instruments.
Investments – The fair value of long-term receivables
is determined using discounted cash flow analysis and observable
market based inputs.
Financial
liabilities
Accounts payable and accrued liabilities, short-term borrowings
and dividends payable – The carrying amounts
approximate fair value because of the short maturity of these
instruments.
Other long-term liabilities – The fair value of
contractual amounts payable over a period greater than one year
are valued at an amount equal to the discounted future cash flow
using a discount rate that reflects market prices to settle
liabilities with similar terms and maturities.
Long-term debt – The fair value of publicly traded
long-term debt is determined based on market prices. 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.
Available for
sale
Investments – Certain equity investments, which do not
represent control or significant influence and which are
accounted for on a cost basis, have a carrying value that equals
cost as fair value cannot be reliably established. There are no
quoted prices in an active market for these investments.
Held for
trading
Derivative instruments are classified as held for trading and
measured at fair value determined by using quoted market prices
for similar instruments. Changes in fair values of such
derivatives are recognized in net income as they arise.
Cash and cash equivalents – The carrying amount is
equal to fair value because of the short maturity of these
instruments.
|
76
|
2009
ANNUAL REPORT |
|
Investments – Long-term floating rate
notes / ABCP are 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.
Fair value of
financial instruments
The Company categorizes its financial assets and liabilities
measured at fair value into one of three different levels
depending on the observability of the inputs employed in the
measurement.
| o | Level 1: This category includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| o | Level 2: This category includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Derivative instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market. Instruments valued using inputs in this category include non exchange traded derivatives such as over the counter financial forward contracts, as well as swaps for which observable inputs can be obtained for the entire duration of the derivative instrument. |
| o | Level 3: This category includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments’ fair value. Generally, Level 3 valuations are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available, or have no binding broker quote to support Level 2 classifications. |
When possible, the estimated fair value is based on quoted
market prices, and, if not available, estimates from third party
brokers. For non exchange traded derivatives classified in
Levels 2 and 3, the Company uses standard valuation
techniques to calculate fair value. These methods include
discounted mark to market for forwards, futures and swaps.
Primary inputs to these techniques include observable market
prices (interest, foreign exchange and commodity) and
volatility, depending on the type of derivative and nature of
the underlying risk. The Company uses inputs and data used by
willing market participants when valuing derivatives and
considers its own credit default swap spread as well as those of
its counterparties in its determination of fair value. Wherever
possible the Company uses observable inputs. A detailed analysis
of the techniques used to value the Company’s long-term
floating rate notes is discussed further below.
The following table presents the Company’s fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis, all of which are held for trading,
as at December 31, 2009.
| (in millions of Canadian dollars) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Financial assets
|
||||||||||||||||
|
Current derivative assets
|
$ | – | $ | 2.5 | $ | – | $ | 2.5 | ||||||||
|
Long-term derivative assets
|
– | 0.2 | – | 0.2 | ||||||||||||
|
Investments
|
– | – | 69.3 | 69.3 | ||||||||||||
|
Financial liabilities
|
||||||||||||||||
|
Current derivative liabilities
|
– | 18.2 | – | 18.2 | ||||||||||||
LONG-TERM
FLOATING RATE NOTES/ABCP
At December 31, 2009, the Company held replacement
long-term floating rate notes, with a total settlement value of
$129.1 million and a carrying value of $69.3 million.
At December 31, 2008, the Company held the original ABCP
issued by a number of trusts with an original cost of
$143.6 million and a carrying value of $72.7 million.
On January 12, 2009, a Canadian Court granted an order for
the implementation of a restructuring plan for the ABCP and the
restructuring was completed on January 21, 2009. As a
result, CP received new replacement long-term floating rate
notes with a total settlement value of $142.8 million.
During 2009, the Company received $0.2 million in partial
redemption of its Master Asset Vehicle (“MAV”) 2
Class A-1
notes and MAV 2 Class 7 Ineligible Assets (“IA”)
Tracking notes. These redemptions were close to the original
investment value of the redeemed notes. As well, the Company
received $12.3 million in partial redemption of its MAV 3
Class 9 Traditional Asset (“TA”) Tracking notes
and MAV 2 Class 8 IA Tracking notes representing 100% of
the original investment value of the redeemed notes.
Additionally, $1.2 million of MAV 2 Class 14 notes
|
2009
ANNUAL REPORT |
77 | |
were fully redeemed with no proceeds being received by CP. As a
result of the restructuring and the subsequent redemptions of
notes, at December 31, 2009 the Company held replacement
long-term floating rate notes with settlement values, as follows:
| o | $116.8 million MAV 2 notes with eligible assets represented by a combination of leveraged collateralized debt, synthetic assets and traditional securitized assets with expected repayments over approximately five to seven years: |
| o | Class A-1: $59.1 million | |
| o | Class A-2: $45.9 million | |
| o | Class B: $8.3 million | |
| o | Class C: $3.5 million |
| o | $12.1 million MAV 2 IA Tracking notes representing assets that have an exposure to US mortgages and sub-prime mortgages with expected repayments over approximately three and a half to 19 years: |
| o | Class 3: $0.5 million | |
| o | Class 6: $5.5 million | |
| o | Class 7: $3.4 million | |
| o | Class 8: $0.1 million | |
| o | Class 13: $2.6 million |
| o | $0.2 million MAV 3 Class 9 TA Tracking notes with expected repayments over approximately seven years. |
The MAV 2
Class A-1
notes have received an A rating by DBRS. However, on
August 11, 2009, the rating for the MAV 2
Class A-2
notes was downgraded from A to BBB (low) under a negative watch
by DBRS.
The valuation technique used by the Company to estimate the fair
value of its investment in long-term floating rate notes at
December 31, 2009 and ABCP at December 31, 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. This valuation technique is
categorized as Level 3 within the fair value hierarchy. The
above noted redemption of notes and other minor changes in
assumptions have resulted in a gain of $6.3 million
(2008 – loss of $49.4 million, 2007 –
loss of $21.5 million). The interest rates and maturities
of the various long-term floating rate notes and ABCP, discount
rates and credit losses modelled at December 31, 2009 and
2008 are:
| 2009 | 2008 | |||
|
Probability weighted average coupon interest rate
|
Nil% | 2.2% | ||
|
Weighted average discount rate
|
7.9% | 9.1% | ||
|
Expected repayments of long-term floating rate notes
|
Three and a half to 19 years |
Five to eight years, other than certain
tracking notes to be paid down on restructuring |
||
|
Credit losses
|
MAV 2 eligible asset notes: nil to 100% | Notes expected to be rated (1) : nil to 25% | ||
| MAV 2 IA Tracking notes: 25% | Notes not expected to be rated (2) : 25 to 100% | |||
| MAV 3 Class 9 TA Tracking notes: nil% | ||||
(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 IA Tracking notes.
|
78
|
2009
ANNUAL REPORT |
|
The probability weighted discounted cash flows resulted in an
estimated fair value of the Company’s long-term floating
rate notes of $69.3 million at December 31, 2009
(2008 — ABCP $72.7 million). The change in the
original cost and estimated fair value of the Company’s
long-term floating rate notes is as follows (representing a
roll-forward of assets measured at fair value using Level 3
inputs):
|
Original
|
Estimated
|
|||||||
| (in millions of Canadian dollars) | cost | fair value | ||||||
|
As at January 1, 2008
|
$ | 143.6 | $ | 122.1 | ||||
|
Change in market assumptions
|
– | (49.4 | ) | |||||
|
As at December 31, 2008
|
143.6 | 72.7 | ||||||
|
Change due to restructuring, January 21, 2009
|
(0.8 | ) | – | |||||
|
Redemption of notes
|
(13.7 | ) | (8.0 | ) | ||||
|
Accretion
|
– | 2.9 | ||||||
|
Change in market assumptions
|
– | 1.7 | ||||||
|
As at December 31, 2009
|
$ | 129.1 | $ | 69.3 | ||||
Accretion and gains and losses resulting from the redemption of
notes and changes in market assumptions are reported in
“Other income and charges”.
Sensitivity analysis is presented below for key assumptions at
December 31, 2009:
|
Change in fair value of
|
||||
| (in millions of Canadian dollars) | long-term floating rate notes | |||
|
Coupon interest rate
|
||||
|
50 basis point increase
|
$ | 2.3 | ||
|
50 basis point decrease
|
Nil | (1) | ||
|
Discount rate
|
||||
|
50 basis point increase
|
$ | (2.1 | ) | |
|
50 basis point decrease
|
$ | 2.2 | ||
| (1) | Notes are currently not expected to receive any coupon interest. |
Continuing uncertainties regarding the value of the assets which
underlie the long-term floating rate notes and the amount and
timing of cash flows could give rise to a further material
change in the value of the Company’s investment in
long-term floating rate notes which could impact the
Company’s near-term earnings.
|
2009
ANNUAL REPORT |
79 | |
Carrying value
and fair value of financial instruments
The table below reconciles carrying value positions of the
Company’s financial instruments with Consolidated Balance
Sheet categories:
| 2008 Restated (Note 2) | ||||||||||||||||||||||||
| 2009 | ||||||||||||||||||||||||
|
Carrying Value of
|
Carrying Value of
|
Carrying Value of
|
Carrying Value of
|
|||||||||||||||||||||
|
Financial Assets /
|
Other Assets /
|
Balance Sheet
|
Financial Assets /
|
Other Assets /
|
Balance Sheet
|
|||||||||||||||||||
| (in millions of Canadian dollars) | Liabilities | Liabilities | Amount | Liabilities | Liabilities | Amount | ||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 679.1 | $ | – | $ | 679.1 | $ | 117.6 | $ | – | $ | 117.6 | ||||||||||||
|
Accounts receivable
|
||||||||||||||||||||||||
|
Trade accounts receivable
|
419.6 | – | 638.7 | – | ||||||||||||||||||||
|
Other
|
– | 21.4 | – | 8.7 | ||||||||||||||||||||
| 419.6 | 21.4 | 441.0 | 638.7 | 8.7 | 647.4 | |||||||||||||||||||
|
Other
|
||||||||||||||||||||||||
|
Derivatives
|
2.5 | – | 10.4 | – | ||||||||||||||||||||
|
Other
|
– | 44.0 | – | 55.3 | ||||||||||||||||||||
| 2.5 | 44.0 | 46.5 | 10.4 | 55.3 | 65.7 | |||||||||||||||||||
|
Investments
|
||||||||||||||||||||||||
|
Equity investments at cost
|
15.8 | – | 18.3 | – | ||||||||||||||||||||
|
Long-term receivables at amortized cost
|
15.8 | – | 10.8 | – | ||||||||||||||||||||
|
Long-term floating rate notes / ABCP
|
69.3 | – | 72.7 | – | ||||||||||||||||||||
|
Other
|
– | 55.8 | – | 49.3 | ||||||||||||||||||||
| 100.9 | 55.8 | 156.7 | 101.8 | 49.3 | 151.1 | |||||||||||||||||||
|
Prepaid pension costs and other assets
|
||||||||||||||||||||||||
|
Derivatives
|
0.2 | – | 71.0 | – | ||||||||||||||||||||
|
Other
|
– | 1,777.0 | – | 1,150.8 | ||||||||||||||||||||
| 0.2 | 1,777.0 | 1,777.2 | 71.0 | 1,150.8 | 1,221.8 | |||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Short-term borrowings
|
$ | – | $ | – | $ | – | $ | 150.1 | $ | – | $ | 150.1 | ||||||||||||
|
Accounts payable and accrued liabilities
|
||||||||||||||||||||||||
|
Accounts payable and accrued liabilities
|
750.5 | – | 899.0 | – | ||||||||||||||||||||
|
Derivatives
|
18.2 | – | 4.6 | – | ||||||||||||||||||||
|
Other
|
– | 148.6 | – | 131.3 | ||||||||||||||||||||
| 768.7 | 148.6 | 917.3 | 903.6 | 131.3 | 1,034.9 | |||||||||||||||||||
|
Dividends payable
|
41.7 | – | 41.7 | 38.1 | – | 38.1 | ||||||||||||||||||
|
Long-term debt maturing within one year
|
392.1 | – | 392.1 | 44.0 | – | 44.0 | ||||||||||||||||||
|
Other long-term liabilities
|
||||||||||||||||||||||||
|
Derivatives
|
– | – | 67.9 | – | ||||||||||||||||||||
|
Other long-term liabilities
|
101.2 | – | 90.8 | – | ||||||||||||||||||||
|
Other
|
– | 689.0 | – | 706.5 | ||||||||||||||||||||
| 101.2 | 689.0 | 790.2 | 158.7 | 706.5 | 865.2 | |||||||||||||||||||
|
Long-term debt
|
4,102.7 | – | 4,102.7 | 4,685.8 | – | 4,685.8 | ||||||||||||||||||
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 $4,494.8 million at
December 31, 2009 (December 31, 2008 –
$4,729.8 million) and a fair value of approximately
$4,824.9 million at December 31, 2009
(December 31, 2008 – $4,198.9 million). The
fair value of publicly traded long-term debt is determined based
on market prices at December 31, 2009 and December 31,
2008, respectively.
|
80
|
2009
ANNUAL REPORT |
|
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, commodity price 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:
| o | Maintaining sound financial condition as an ongoing entity; |
| o | Optimizing earnings per share and cash flow; |
| o | Financing operations of the group of CP companies at the optimal cost of capital; and |
| o | Ensuring liquidity to all Canadian and U.S. operations. |
In order to satisfy the objectives above, the Company has
adopted the following strategies:
| o | Prepare multi-year planning and budget documents at prevailing market rates to ensure clear, corporate alignment to performance management and achievement of targets; |
| o | Measure the extent of operating risk within the business; |
| o | 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 |
| o | Utilize financial instruments, including derivatives, to manage the remaining residual risk to levels that fall within the risk tolerance of the Company. |
The Board of Directors has delegated FRM oversight to the Audit,
Finance and Financial Risk Management Committee (“Audit
Committee”). The Audit Committee reviews with management
FRM policies and processes to be implemented across the Company,
as well as the effectiveness and efficiency of such policies and
processes.
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 long-term floating rate notes are discussed in more detail
above.
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:
| o | 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 |
| o | Translation of U.S. dollar-denominated debt and other financial instruments – 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. Other U.S. dollar denominated financial instruments 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 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
|
2009
ANNUAL REPORT |
81 | |
the effect of mitigating volatility on net income by offsetting
long-term FX gains and losses on long-term debt. In addition,
the Company may enter into FX forward contracts 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 annual impact to net income and
other comprehensive income (“OCI”) of long-term debt,
including FX forward contracts on long-term debt, had the
exchange rate increased or decreased by one cent. The impact on
other U.S. dollar denominated financial instruments is not
considered to be material.
|
Year ended
|
Year ended
|
|||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Impact to Other
|
Impact to Other
|
|||||||||||||||
|
Impact to
|
comprehensive
|
Impact to
|
comprehensive
|
|||||||||||||
| (in millions of Canadian dollars) | Net income | income | Net income | income | ||||||||||||
|
1 cent strengthening in Canadian dollar
|
$ | (1.9 | ) | $ | (2.0 | ) | $ | (2.3 | ) | $ | (2.1 | ) | ||||
|
1 cent weakening in Canadian dollar
|
1.9 | 2.0 | 2.3 | 2.1 | ||||||||||||
Note: All variables excluding FX are held constant. With a 1
cent strengthening in the Canadian dollar, net income would be
increased by $12.7 million (2008 –
$12.0 million) and OCI would be decreased by
$12.7 million (2008 – $12.0 million) if the
net investment hedge was not included in the above table. With a
1 cent weakening in the Canadian dollar, the opposite would
occur.
FOREIGN EXCHANGE
FORWARD CONTRACTS
In 2007, the Company entered into a FX forward contract to fix
the exchange rate on US$400 million 6.250% Notes due
2011. This derivative guaranteed the amount of Canadian dollars
that the Company will repay when its US$400 million
6.250% Notes mature in October 2011. During 2009, CP
unwound and settled US$330 million of the
US$400 million currency forward for total proceeds of
$34.1 million. The Company recorded a net foreign exchange
loss on long-term debt of $23.0 million in 2009
(2008 — unrealized gain of $73.0 million) in
“Other income and charges”. The amount recorded in
2009 was inclusive of both realized and unrealized losses.
At December 31, 2009, the unrealized gain on the remaining
FX forward of $0.2 million (December 31,
2008 — $57.3 million) was included in
“Prepaid pension costs and other assets”.
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, with the exception of long-term floating rate
notes and ABCP, for all financial assets and liabilities:
| As at December 31, 2009 | As at December 31, 2008 | |||||||||||||||
|
At floating
|
At fixed
|
At floating
|
At fixed
|
|||||||||||||
| (in millions of Canadian dollars) | interest rates | interest rates | interest rates | interest rates | ||||||||||||
|
Financial assets
|
||||||||||||||||
|
Cash and short-term investments
|
$ | 679.1 | $ | – | $ | 117.6 | $ | – | ||||||||
|
Financial liabilities
|
||||||||||||||||
|
Short-term borrowings
|
– | – | 150.1 | – | ||||||||||||
|
Long-term
debt
(1)
|
136.1 | 4,358.7 | 384.4 | 4,345.4 | ||||||||||||
| (1) | Includes impact of interest rate swaps. |
|
82
|
2009
ANNUAL REPORT |
|
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 annual impact to net income had
interest rates increased or decreased by 50 basis points.
As a result of the cash position at December 31, 2009 as
rates increase, net income will also increase.
| Year ended December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Impact to
|
Impact to
|
|||||||
| (in millions of Canadian dollars) | net income | net income | ||||||
|
50 basis point increase in rates
|
$ | 1.9 | $ | (1.4 | ) | |||
|
50 basis point decrease in rates
|
(0.9 | ) | 1.4 | |||||
Note: All variables excluding interest rates are held constant.
INTEREST RATE
SWAPS
In 2003 and 2004, the Company entered into fixed-to-floating
interest rate swap agreements totalling US$200 million
which converted a portion of our US$400 million
6.25% Notes to floating-rate debt. The Company paid an
average floating rate that fluctuated quarterly based on LIBOR.
These swaps were set to expire in 2011 and were accounted for as
a fair value hedge.
During the second quarter of 2009, CP unwound its outstanding
interest rate swap agreements for a gain of $16.8 million.
The gain was deferred as a fair value adjustment to the
underlying debt that was hedged and will be amortized to
“Net interest expense” until such time that the
6.250% Notes are repaid.
Subsequent to the unwinding of this swap a portion of the
underlying 6.250% Notes were repurchased in the second
quarter and, as a result, a pro rata share of the fair value
adjustment amounting to a $6.5 million gain was recognized
immediately to “Other income and charges” as part of
the net loss on repurchase of debt
(Note 18)
. For
the remainder of 2009 the Company then amortized
$2.4 million of the deferred gain to “Net interest
expense”.
Accounting for these Notes at the floating interest rate, prior
to the unwind, decreased “Net interest expense” on the
Company’s Consolidated Statement of Income by
$3.1 million in 2009 (2008 – $3.1 million).
INTEREST AND
TREASURY RATE LOCKS
At December 31, 2009, the Company had no outstanding
interest rate swaps. At December 31, 2008, an unrealized
gain, derived from the fair value of the swaps, of
$20.9 million was reflected in “Other” current
assets and “Prepaid pension costs and other assets”
with the offset reflected in “Long-term debt” on our
Consolidated Balance Sheet. The fair value was calculated
utilizing swap, currency and basis-spread curves from Bloomberg.
These swaps were fully effective.
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 $1.1 million due to
ineffectiveness were recognized and recorded in net income
during 2008. Effective hedge losses of $28.7 million were
deferred in “Accumulated other comprehensive income”
and will be amortized in earnings over 30 years 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 CP’s 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 DSUs, RSUs, PSUs and TSARs.
As the share price appreciates, these instruments are marked to
market increasing compensation expense.
|
2009
ANNUAL REPORT |
83 | |
STOCK-BASED
COMPENSATION EXPENSE MANAGEMENT
The Company entered into a TRS in May 2006 to reduce the
volatility to the Company over time on three types of
stock-based compensation programs: TSARs, DSUs and RSUs. The TRS
is a derivative that provides price appreciation and dividends,
in return for a charge by the counterparty. The swaps were
intended to minimize volatility to “Compensation and
benefits” expense by providing a gain to substantially
offset increased compensation expense as the share price
increased and a loss to offset reduced compensation expense when
the share price falls. If stock-based compensation share units
fall out of the money after entering the program, the loss
associated with the swap would no longer be offset by any
compensation expense reductions, which would reduce the
effectiveness of the swap. Going forward the Company does not
intend to expand its TRS program.
The table below depicts the annual impact to net income as a
result of the TRS had the share price increased or decreased $1
from the closing share price on December 31, 2009 of $56.79.
| Year ended December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Impact to
|
Impact to
|
|||||||
| (in millions of Canadian dollars) | Net income | Net income | ||||||
|
$1 increase in share price
|
$ | 1.1 | $ | 1.8 | ||||
|
$1 decrease in share price
|
(1.1 | ) | (1.8 | ) | ||||
Note: All variables excluding share price are held constant.
“Compensation and benefits” expense on the
Company’s Consolidated Statement of Income included a net
gain on these swaps of $18.6 million in 2009 which was
inclusive of both realized losses and unrealized gains
(unrealized loss of $64.1 million in 2008). During 2009, in
order to improve the effectiveness of the TRS in mitigating the
volatility of stock-based compensation programs, CP unwound a
portion of the program for a total cost of $31.1 million.
At December 31, 2009, the unrealized loss on the remaining
TRS of $18.2 million was included in “Accounts payable
and accrued liabilities” on our Consolidated Balance Sheet
(December 31, 2008 – $67.9 million included
in “Other long-term liabilities”).
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 cost 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, diesel and crack spreads. 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.
|
84
|
2009
ANNUAL REPORT |
|
The table below depicts the annual impact to net income
(excluding recoveries through freight pricing mechanisms) and
OCI as a result of the Company’s ultra low sulphur diesel
forward contracts had the price changed by $0.01 from the
closing price on December 31, 2009 of US$2.08 per US gallon
(December 31, 2008 – $1.42 per US gallon):
| Year ended December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Impact to Other
|
Impact to Other
|
|||||||
| (in millions of Canadian dollars) | comprehensive income | comprehensive income | ||||||
|
$0.01 increase in price per US gallon
|
$ | 0.1 | $ | 0.1 | ||||
|
$0.01 decrease in price per US gallon
|
(0.1 | ) | (0.1 | ) | ||||
Note: All variables excluding the price of US Gulf Coast ultra
low sulphur diesel per barrel are held constant.
At December 31, 2009, the Company had diesel futures
contracts, which are accounted for as cash flow hedges, to
purchase approximately 13.5 million US gallons during the
period January 2010 to December 2010 at an average price of
US$1.96 per US gallon. This represents approximately 5% of
estimated fuel purchases for this period. At December 31,
2009, the unrealized gain on these futures contracts was
$2.5 million and was reflected in “Other” current
assets with the offset, net of tax, reflected in
“Accumulated other comprehensive income” on our
Consolidated Balance Sheet. At December 31, 2008, the
unrealized loss on futures contracts was $4.5 million and
was reflected in “Accounts payable and accrued
liabilities” with the offset, net of tax, reflected in
“Accumulated other comprehensive income”.
At December 31, 2009, the Company had no remaining crude
futures contracts; these having been replaced by our diesel
hedge program. In comparison, at December 31, 2008, the
unrealized gain on crude futures contracts was $3.2 million
and was reflected in “Other” current assets with the
offset, net of tax, reflected in “Accumulated other
comprehensive income” on our Consolidated Balance Sheet.
At December 31, 2009, the Company had no remaining FX
forward contracts (which were used in conjunction with the crude
purchases above). In comparison at December 31, 2008, the
unrealized loss on these forward contracts was $0.1 million
and was recognized in “Accounts payable and accrued
liabilities” with the offset, net of tax, reflected in
“Accumulated other comprehensive income” on our
Consolidated Balance Sheet.
The impact of settled swaps increased “Fuel” expense
in 2009 by $1.2 million due to a combination of realized
losses of $0.8 million arising from settled commodity swaps
and $0.4 million arising from settled FX forward contracts.
The impact of settled swaps benefited “Fuel” expense
in 2008 by $4.3 million as a result of realized gains of
$6.1 million arising from settled swaps, partially offset
by realized losses of $1.8 million arising from settled FX
forward contracts. Included in the $0.8 million realized
losses on commodity swaps in 2009 were $0.2 million in
realized gains (2008 – realized losses
$9.7 million) from settled derivatives that were not
designated as hedges.
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 long-term floating rate notes is discussed in more detail
above.
CREDIT RISK
MANAGEMENT
The railway industry predominantly serves financially
established customers and 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
|
2009
ANNUAL REPORT |
85 | |
areas be reached, appropriate precautions are taken to improve
collectibility. Pursuant to their respective terms, accounts
receivable, net of allowances, are aged as follows at
December 31:
| (in millions of Canadian dollars) | 2009 | 2008 | ||||||
|
Up to date
|
$ | 330.1 | $ | 394.8 | ||||
|
Under 30 days past due
|
59.8 | 163.0 | ||||||
|
30-60 days
past due
|
11.7 | 33.7 | ||||||
|
61-90 days
past due
|
4.2 | 17.5 | ||||||
|
Over 91 days past due
|
13.8 | 29.7 | ||||||
|
Trade accounts receivable
|
$ | 419.6 | $ | 638.7 | ||||
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 long-term floating
rate notes, the Company does not anticipate non-performance that
would materially impact the Company’s financial statements.
With the exception of long-term floating rate notes, the Company
believes there are no significant concentrations of credit risk.
The maximum exposure to credit risk includes the Company’s
financial asset values reported in the table which, reconciles
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 29.
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,
S&P, and DBRS respectively. The S&P rating has a
negative outlook, while the Moody’s and DBRS ratings have a
stable outlook. It is CP’s intention to manage it’s
long-term financing structure to maintain it’s investment
grade rating.
CP has in place a revolving credit facility of
$945 million, with an accordion feature to
$1,150 million, of which $330 million was committed
for letters of credit and $615 million was available on
December 31, 2009. This facility is arranged with a core
group of 15 highly rated international financial institutions
and incorporates pre-agreed pricing. Arrangements with 14 of the
15 financial institutions extend through November 2012, with one
institution extending through November 2011. In addition, CP
also has available from a financial institution a credit
facility of $130 million, of which $130 million of
this facility was available on December 31, 2009. The
majority of this facility is available through the end of 2011.
Both facilities are available on next day terms and are subject
to a minimum debt to total capitalization ratio. Should the
Company’s senior unsecured debt not be rated at least
investment grade by Moody’s and S&P, the Company will
be further required to maintain a minimum fixed charge coverage
ratio. At December 31, 2009, the Company satisfied the
thresholds stipulated in both financial covenants.
Surplus cash is invested in a range of short dated money market
instruments meeting or exceeding the parameters of the
Company’s investment policy.
|
86
|
2009
ANNUAL REPORT |
|
The table below reflects the contractual maturity of the
Company’s undiscounted cash flows for its financial
liabilities and derivatives:
| As at December 31, 2009 | ||||||||||||||||
| (in millions of Canadian dollars) | 2010 | 2011 – 2013 | 2014+ | Total | ||||||||||||
|
Financial liabilities
|
||||||||||||||||
|
Accounts payable and accrued liabilities
|
$ | 750.5 | $ | – | $ | – | $ | 750.5 | ||||||||
|
Dividends payable
|
41.7 | – | – | 41.7 | ||||||||||||
|
Other long-term liabilities
|
– | 55.5 | 45.7 | 101.2 | ||||||||||||
|
Total return swap
|
18.2 | – | – | 18.2 | ||||||||||||
|
Long-term
debt
(1)
|
670.3 | 1,272.8 | 6,556.5 | 8,499.6 | ||||||||||||
| (1) | Includes contractual interest payments related to debt obligations. Interest rates on variable rate debt are based on prevailing rates at December 31, 2009. |
20 Other
long-term liabilities
| (in millions of Canadian dollars) | 2009 | 2008 | ||||||
|
Accrued employee benefits, net of current portion
|
$ | 234.4 | $ | 226.9 | ||||
|
Provision for environmental remediation, net of current
portion
(1)
|
106.5 | 130.2 | ||||||
|
Deferred workers’ compensation and personal injury
accruals, net of current portion
|
88.0 | 104.5 | ||||||
|
Provision for restructuring, net of current
portion
(2)
(Note 22)
|
57.5 | 74.9 | ||||||
|
Deferred income credits
|
38.0 | 39.0 | ||||||
|
Deferred revenue on rights-of-way license agreements, net of
current portion
|
40.6 | 45.4 | ||||||
|
Stock-based compensation liabilities, net of current portion
|
36.8 | 11.7 | ||||||
|
Asset retirement obligations (Note 21)
|
26.6 | 31.9 | ||||||
|
Deferred gain on sale leaseback
|
44.3 | 26.7 | ||||||
|
Total return swap, net of current portion (Note 19)
|
– | 67.9 | ||||||
|
Long-term payable to shortline (Note 5)
|
– | 20.6 | ||||||
|
Other, net of current portion
|
117.5 | 85.5 | ||||||
|
Total other long-term liabilities
|
$ | 790.2 | $ | 865.2 | ||||
| (1) | As at December 31, 2009, the aggregate provision for environmental remediation, including the current portion was $121.3 million (2008 – $151.1 million). | |
| (2) | As at December 31, 2009, the aggregate provision for restructuring, including the current portion was $77.0 million (2008 – $100.1 million). |
The deferred revenue on rights-of-way license agreements, and
deferred gain on sale leaseback are being amortized to income on
a straight-line basis over the related lease terms. Deferred
income credits are being amortized over the life of the related
asset.
|
2009
ANNUAL REPORT |
87 | |
21 Asset
retirement obligations
Asset retirement obligations (“ARO”) are recorded in
“Other long-term liabilities”. The liabilities are
discounted at 6.25%. Accretion expense is included in
“Depreciation and amortization” on the Consolidated
Statement of Income.
| (in millions of Canadian dollars) | 2009 | 2008 | ||||||
|
Opening balance, January 1
|
$ | 31.9 | $ | 29.1 | ||||
|
Liabilities incurred
|
0.3 | 3.7 | ||||||
|
Accretion
|
1.8 | 1.9 | ||||||
|
Liabilities settled
|
(5.9 | ) | (2.2 | ) | ||||
|
Revision to estimated cash flows
|
(1.5 | ) | (0.6 | ) | ||||
|
Closing balance, December 31
|
$ | 26.6 | $ | 31.9 | ||||
Upon the ultimate retirement of grain-dependent branch lines,
the Company has to pay a fee, levied under the
Canada
Transportation Act
, of $30,000 per mile of abandoned track.
The undiscounted amount of the liability was $46.0 million
at December 31, 2009 (2008 – $48.2 million),
which, when present valued, was $24.5 million at
December 31, 2009 (2008 – $26.6 million). The
payments are expected to be made in the 2010 – 2044 period.
The Company also has a liability on a joint facility that will
have to be settled upon retirement based on a proportion of use
during the life of the asset. The estimate of the obligation at
December 31, 2009, was $17.3 million (2008 –
$16.7 million), which, when present valued, was
$1.8 million at December 31, 2009 (2008 –
$1.6 million). For purposes of estimating this liability,
the payment related to the retirement of the joint facility is
anticipated to be made in 35 years.
22 Restructuring
accrual
At December 31, 2009, the provision for restructuring was
$77.0 million (2008 – $100.1 million). The
restructuring provision was primarily for labour liabilities.
Payments are expected to continue in diminishing amounts until
2025.
Set out below is a reconciliation of CP’s liabilities
associated with its restructuring accrual:
| (in millions of Canadian dollars) | 2009 | 2008 | 2007 | |||||||||
|
Opening balance, January 1
|
$ | 100.1 | $ | 130.0 | $ | 188.8 | ||||||
|
Accrued (reduced)
|
1.2 | 1.9 | (13.0 | ) | ||||||||
|
Payments
|
(27.0 | ) | (40.7 | ) | (47.0 | ) | ||||||
|
Amortization of
discount
(1)
|
5.9 | 4.3 | 6.1 | |||||||||
|
Foreign exchange impact
|
(3.2 | ) | 4.6 | (4.9 | ) | |||||||
|
Closing balance, December 31
|
$ | 77.0 | $ | 100.1 | $ | 130.0 | ||||||
(1)
Amortization
of discount is charged to income as “Compensation and
benefits” (2009 – $2.3 million; 2008 –
$2.5 million; 2007 – $3.3 million), and
“Other income and charges” (2009 –
$3.6 million; 2008 – $1.8 million; 2007 –
$2.8 million), as applicable.
|
88
|
2009
ANNUAL REPORT |
|
23 Shareholders’
equity
AUTHORIZED AND
ISSUED SHARE CAPITAL
The Company’s Articles of Incorporation authorize for
issuance an unlimited number of Common Shares and an unlimited
number of First Preferred Shares and Second Preferred Shares. At
December 31, 2009, no Preferred Shares had been issued.
An analysis of Common Share balances is as follows:
|
2009
|
2008
|
|||||||
| (in millions) | Number | Number | ||||||
|
Share capital, January 1
|
153.8 | 153.3 | ||||||
|
Shares issued
|
13.9 | – | ||||||
|
Shares issued under stock option plans
|
0.8 | 0.5 | ||||||
|
Share capital, December 31
|
168.5 | 153.8 | ||||||
On February 3, 2009, CP filed a final prospectus offering
for sale to the public, primarily in Canada and the U.S., up to
13,900,000 CP common shares at a price of $36.75 Canadian per
share. The offering closed on February 11, 2009, at which
time CP issued 13,900,000 common shares, including 1,300,000
common shares issued under the provisions of an over-allotment
option available to the underwriters of the common share
offering, for gross proceeds of approximately $511 million
(proceeds net of fees and issue costs and including future taxes
are $495.2 million).
The change in the “Share capital” balance includes
$0.6 million (2008 – $2.6 million) related to the
cancellation of the TSARs liability on exercise of tandem stock
options, and $5.1 million (2008 – $10.0 million)
of stock-based compensation transferred from “Contributed
surplus”.
In March 2007, the Company completed the filing for a new normal
course issuer bid (“2007 NCIB”) to cover the period of
March 28, 2007 to March 27, 2008 to purchase, for
cancellation, up to 5.0 million of its outstanding Common
Shares. Effective April 30, 2007, the 2007 NCIB was amended
to purchase, for cancellation, up to 15.3 million of its
outstanding Common Shares. Of the 15.3 million shares
authorized under the 2007 NCIB, 2.7 million shares were
purchased at an average price per share of $73.64. As of
December 31, 2008, the 2007 NCIB had expired.
In addition, pursuant to a notice of intention to make an exempt
issuer bid filed on March 23, 2007, the Company purchased,
for cancellation, 0.3 million shares through a private
agreement with an arm’s length third party on
March 29, 2007 at an average price of $63.12.
24 Change
in non-cash working capital balances related to
operations
| (in millions of Canadian dollars) | 2009 | 2008 | 2007 | |||||||||
|
Source (use) of cash:
|
||||||||||||
|
Accounts receivable
|
$ | 206.4 | $ | (47.9 | ) | $ | 54.8 | |||||
|
Materials and supplies
|
75.5 | (23.4 | ) | (28.7 | ) | |||||||
|
Other
|
18.5 | (21.2 | ) | 15.8 | ||||||||
|
Accounts payable and accrued liabilities
|
(163.3 | ) | (6.2 | ) | (45.5 | ) | ||||||
|
Income and other taxes payable
|
(34.4 | ) | (33.5 | ) | 53.9 | |||||||
|
Change in non-cash working capital
|
$ | 102.7 | $ | (132.2 | ) | $ | 50.3 | |||||
25 Pensions
and other benefits
The Company has both defined benefit (“DB”) and
defined contribution (“DC”) pension plans.
The DB plans provide for pensions based principally on years of
service and compensation rates near retirement. Pensions for
Canadian pensioners are partially indexed to inflation. Annual
employer contributions to the DB plans, which are actuarially
determined, are made on the basis of being not less than the
minimum amounts required by federal pension supervisory
authorities.
|
2009
ANNUAL REPORT |
89 | |
Other benefits include post-retirement health and life insurance
for pensioners, and post-employment long-term disability and
workers’ compensation benefits, which are based on
Company-specific claims.
At December 31, the elements of net benefit cost for DB
pension plans and other benefits recognized in the year included
the following components:
| Pensions | ||||||||||||||||||||||||
|
2008
|
2007
|
Other benefits | ||||||||||||||||||||||
|
Restated
|
Restated
|
|||||||||||||||||||||||
| (in millions of Canadian dollars) |
2009
|
(Note 2) | (Note 2) |
2009
|
2008
|
2007
|
||||||||||||||||||
|
Current service cost (benefits earned by employees in the year)
|
$ | 67.1 | $ | 97.6 | $ | 97.6 | $ | 14.3 | $ | 16.1 | $ | 16.8 | ||||||||||||
|
Interest cost on benefit obligation
|
482.2 | 445.8 | 420.0 | 29.1 | 27.0 | 26.7 | ||||||||||||||||||
|
Actual (return) loss on fund assets
|
(723.0 | ) | 1,210.4 | (275.9 | ) | (0.3 | ) | (0.3 | ) | (1.2 | ) | |||||||||||||
|
Actuarial (gain) loss
|
847.1 | (1) | (1,176.9 | ) (2) | (1.4 | ) | 57.5 | (1) | (63.4 | ) (2) | (1.1 | ) | ||||||||||||
|
Plan amendments
|
– | 42.0 | 22.5 | – | – | – | ||||||||||||||||||
|
Settlement gain
|
– | – | – | (8.0 | ) (3) | (4.8 | ) (3) | (10.7 | ) (3) | |||||||||||||||
|
Elements of employee future benefit
cost, before adjustments to recognize the long-term nature of employee future benefit costs |
673.4 | 618.9 | 262.8 | 92.6 | (25.4 | ) | 30.5 | |||||||||||||||||
|
Adjustments to recognize the long-
term nature of employee future benefit costs: |
||||||||||||||||||||||||
|
Amortization of transitional
(asset) obligation |
(16.2 | ) | (16.2 | ) | (16.2 | ) | 12.4 | 12.4 | 12.4 | |||||||||||||||
|
Difference between expected
return and actual return on fund assets |
165.7 | (1,794.3 | ) | (278.3 | ) | (0.6 | ) | (0.4 | ) | 0.6 | ||||||||||||||
|
Difference between actuarial
loss/gain recognized and actual actuarial loss/gain on benefit obligation |
(839.7 | ) | 1,254.9 | 99.9 | (57.0 | ) | 68.3 | 6.8 | ||||||||||||||||
|
Difference between amortization
of prior service costs and actual plan amendments |
21.9 | (21.4 | ) | (15.9 | ) | (0.2 | ) | (0.1 | ) | (0.2 | ) | |||||||||||||
|
Net benefit cost
|
$ | 5.1 | $ | 41.9 | $ | 52.3 | $ | 47.2 | $ | 54.8 | $ | 50.1 | ||||||||||||
(1)
Actuarial
loss for 2009 was largely the result of an increase in the
discount rate.
(2)
Actuarial
gain for 2008 was largely the result of a decrease in the
discount rate.
(3)
Settlement
gains from certain post-retirement benefit obligations being
assumed by a U.S. national multi-employer benefit plan.
|
90
|
2009
ANNUAL REPORT |
|
Information about the Company’s DB pension plans and other
benefits, in aggregate, is as follows:
|
Pensions
|
||||||||||||||||
|
2008
|
Other benefits
|
|||||||||||||||
|
Restated
|
||||||||||||||||
| (in millions of Canadian dollars) |
2009
|
(Note 2) |
2009
|
2008
|
||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at January 1
|
$ | 7,068.3 | $ | 8,025.8 | $ | 438.0 | $ | 491.7 | ||||||||
|
Current service cost
|
67.1 | 97.6 | 14.3 | 16.1 | ||||||||||||
|
Interest cost
|
482.2 | 445.8 | 29.1 | 27.0 | ||||||||||||
|
Employee contributions
|
48.4 | 57.1 | 0.3 | 0.2 | ||||||||||||
|
Benefits paid
|
(457.5 | ) | (452.8 | ) | (39.5 | ) | (35.2 | ) | ||||||||
|
Foreign currency changes
|
(22.8 | ) | 29.7 | (5.1 | ) | 8.6 | ||||||||||
|
Actuarial loss (gain)
|
847.1 | (1,176.9 | ) | 57.5 | (63.4 | ) | ||||||||||
|
Plan amendments and other
|
– | 42.0 | – | – | ||||||||||||
|
Release due to settlement
|
– | – | (10.5 | ) | (7.0 | ) | ||||||||||
|
Benefit obligation at December 31
|
$ | 8,032.8 | $ | 7,068.3 | $ | 484.1 | $ | 438.0 | ||||||||
|
Change in fund assets:
|
||||||||||||||||
|
Fair value of fund assets at January 1
|
$ | 6,118.5 | $ | 7,610.5 | $ | 12.1 | $ | 12.5 | ||||||||
|
Actual return (loss) on fund assets
|
723.0 | (1,210.4 | ) | 0.3 | 0.3 | |||||||||||
|
Employer contributions
|
595.2 | 95.4 | 38.3 | 34.2 | ||||||||||||
|
Employee contributions
|
48.4 | 57.1 | 0.3 | 0.2 | ||||||||||||
|
Benefits paid
|
(457.5 | ) | (452.8 | ) | (39.5 | ) | (35.2 | ) | ||||||||
|
Foreign currency changes
|
(13.8 | ) | 18.7 | – | 0.1 | |||||||||||
|
Fair value of fund assets at December 31
|
$ | 7,013.8 | $ | 6,118.5 | $ | 11.5 | $ | 12.1 | ||||||||
|
Funded status – plan deficit:
|
$ | (1,019.0 | ) | $ | (949.8 | ) | $ | (472.6 | ) | $ | (425.9 | ) | ||||
|
Unamortized prior service cost
|
28.0 | 50.0 | (0.4 | ) | (0.7 | ) | ||||||||||
|
Unamortized net transitional (asset) obligation
|
(47.9 | ) | (64.1 | ) | 36.9 | 49.3 | ||||||||||
|
Unamortized experience losses:
|
||||||||||||||||
|
Deferred investment losses due to use of market-related
value to determine net benefit cost
|
837.2 | 1,204.0 | – | – | ||||||||||||
|
Unamortized net actuarial loss
|
1,845.3 | (1) | 814.8 | (1) | 86.7 | 33.8 | ||||||||||
|
Accrued benefit asset (liability) on the Consolidated Balance
Sheet
|
$ | 1,643.6 | $ | 1,054.9 | $ | (349.4 | ) | $ | (343.5 | ) | ||||||
(1)
The
aggregate amount by which each pension plan’s unamortized
net actuarial loss exceeds the plan’s 10% corridor (10% of
the greater of the benefit obligation and the market-related
asset value) was equal to $1,042.4 million at
December 31, 2009 (2008 – $68.7 million). Any
such excess is amortized, commencing in the following year, over
the expected average remaining service period of active
employees expected to receive benefits under the plan
(December 31, 2009 – 10 years; December 31,
2008 – 10 years). In 2009, $7.4 million was
amortized and included in the net benefit cost for pensions
(2008 – $78.0 million).
|
2009
ANNUAL REPORT |
91 | |
The accrued benefit asset (liability) is included on the
Company’s Consolidated Balance Sheet as follows:
|
Pensions
|
||||||||||||||||
|
2008
|
Other benefits
|
|||||||||||||||
|
Restated
|
||||||||||||||||
| (in millions of Canadian dollars) |
2009
|
(Note 2) |
2009
|
2008
|
||||||||||||
|
Prepaid pension costs and other assets
|
$ | 1,644.4 | $ | 1,056.0 | $ | – | $ | – | ||||||||
|
Accounts payable and accrued liabilities
|
(0.2 | ) | (0.3 | ) | (40.6 | ) | (39.1 | ) | ||||||||
|
Other long-term liabilities
|
(0.6 | ) | (0.8 | ) | (308.8 | ) | (304.4 | ) | ||||||||
|
Accrued benefit asset (liability) on the Consolidated Balance
Sheet
|
$ | 1,643.6 | $ | 1,054.9 | $ | (349.4 | ) | $ | (343.5 | ) | ||||||
The measurement date used to determine the plan assets and the
accrued benefit obligation is December 31. The most recent
actuarial valuation for pension funding purposes for the
Company’s main Canadian pension plan was performed as at
January 1, 2008. The Company expects to file a new
valuation as at January 1, 2010 with the regulator.
Actuarial assumptions used were approximately:
| (percentage) | 2009 | 2008 | 2007 | |||||||||
|
Benefit obligation at December 31:
|
||||||||||||
|
Discount rate
|
5.90 | 7.00 | 5.60 | |||||||||
|
Projected future salary increases
|
3.00 | 3.00 | 3.00 | |||||||||
|
Health care cost trend rate
|
8.50 | (1) | 9.00 | (1) | 9.50 | (1) | ||||||
|
Benefit cost for year ended December 31:
|
||||||||||||
|
Discount rate
|
7.00 | 5.60 | 5.40 | |||||||||
|
Expected rate of return on fund assets
|
7.75 | 8.00 | 8.00 | |||||||||
|
Projected future salary increases
|
3.00 | 3.00 | 3.00 | |||||||||
|
Health care cost trend rate
|
9.00 | (1) | 9.50 | (1) | 10.00 | (1) | ||||||
| (1) | The health care cost trend rate is projected to decrease by 0.5% per year from a 10.0% rate in 2006 and 2007 to approximately 5.0% per year in 2017. |
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage-point change in the assumed health care cost
trend rate would have the following effects:
|
One percentage
|
One percentage
|
|||||||
| Favourable (unfavourable) (in millions of Canadian dollars) | point increase | point decrease | ||||||
|
Effect on the total of service and interest costs
|
$ | (1.1 | ) | $ | 1.0 | |||
|
Effect on post-retirement benefit obligation
|
$ | (11.7 | ) | $ | 11.2 | |||
PLAN
ASSETS
The Company’s pension plan asset allocation, and the
current weighted average policy range for each major asset
class, were as follows:
| Percentage of plan assets at December 31 | ||||||||||||
| Asset allocation (percentage) | Current policy range | 2009 | 2008 | |||||||||
|
Equity securities
|
45 – 51 | 45.9 | 41.6 | |||||||||
|
Debt securities
|
37 – 43 | 42.3 | 45.2 | |||||||||
|
Real estate and infrastructure
|
8 – 16 | 11.8 | 13.2 | |||||||||
|
Total
|
100.0 | 100.0 | ||||||||||
The Company’s investment strategy is to achieve a long-term
(five to ten year period) real rate of return of 5.25%, net of
all fees and expenses. The Company’s best estimate of
long-term inflation of 2.5% yields a long-term nominal target of
7.75%, net of all fees and expenses. In identifying the asset
allocation ranges, consideration was given to the long-term
nature of the underlying plan liabilities, the solvency and
|
92
|
2009
ANNUAL REPORT |
|
going-concern financial position of the plan, long-term return
expectations and the risks associated with key asset classes as
well as the relationships of returns on key asset classes with
each other, inflation and interest rates. When advantageous and
with due consideration, derivative instruments may be utilized,
provided the total value of the underlying asset represented by
financial derivatives, excluding currency forwards, is limited
to 20% of the market value of the fund.
At December 31, 2009, fund assets consisted primarily of
listed stocks and bonds, including 82,800 of the Company’s
Common Shares (2008 – 63,800) at a market value of
$4.7 million (2008 – $2.6 million), 6.91% Secured
Equipment Notes issued by the Company at a par value of
$3.7 million (2008 – $3.8 million) and a market
value of $4.0 million (2008 – $4.1 million), and
6.45% Unsecured Notes issued by the Company at a par value of
$3.5 million (2008 – $nil) and a market value of
$3.5 million (2008 – $nil).
CASH
FLOWS
In 2009, the Company contributed $597.9 million to its
pension plans (2008 – $98.5 million; 2007 –
$89.6 million), including $2.7 million to the defined
contribution plan (2008 – $3.1 million; 2007 –
$3.2 million), $587.3 million to the Canadian
registered and U.S. qualified defined benefit pension plans
(2008 – $86.9 million; 2007 –
$79.7 million), and $7.9 million to the Canadian
non-registered supplemental pension plans (2008 –
$8.5 million; 2007 – $6.7 million). The
contributions to the Canadian registered defined benefit pension
plan included a voluntary prepayment of $500 million in
December 2009 and the contributions to the U.S. qualified
defined benefit pension plans included a voluntary prepayment of
$7.4 million in December 2009. These prepayments were made
in order to reduce the volatility of future pension funding
requirements. In addition, the Company made payments directly to
employees, their beneficiaries or estates or to third-party
benefit administrators of $38.3 million (2008 –
$34.2 million; 2007 – $34.9 million) with respect
to other benefits.
DEFINED
CONTRIBUTION PLAN
Canadian non-unionized employees have the option to participate
in the DC plan. The DC plan provides a pension based on total
employee and employer contributions plus investment income
earned on those contributions. Employee contributions are based
on a percentage of salary. The Company matches employee
contributions to a maximum percentage each year. In 2009, the
net cost of this plan, which generally equals the
employer’s required contribution, was $2.7 million
(2008 – $3.1 million; 2007 – $3.2 million).
26 Stock-based
compensation
At December 31, 2009, the Company had several stock-based
compensation plans, including stock option plans, various cash
settled liability plans and an employee stock savings plan.
These plans resulted in an expense in 2009 of $53.0 million
(2008 – recovery of $23.7 million; 2007 – expense
of $33.7 million).
| A. | STOCK OPTION PLANS |
Regular options and TSARs
With the granting of regular options, employees may be
simultaneously granted TSARs equivalent to the number of regular
options granted (stock options granted prior to January 2009
were simultaneously granted TSARs equivalent to one-half the
regular options granted). A TSAR entitles the holder to receive
payment of an amount equal to the excess of the market value of
a Common Share at the exercise date of the TSAR over the related
option exercise price. On an ongoing basis, a liability for
TSARs is accrued on the incremental change in the market value
of the underlying stock and charged to income over the vesting
period until exercised. TSARs may be exercised no earlier than
two years and no later than 10 years after the grant date.
Where an option granted is a tandem award, the holder can choose
to exercise an option or a TSAR of equal intrinsic value.
Performance options
Performance options vest after 48 months, unless certain
performance targets are achieved, in which case vesting is
accelerated, and will expire five years after the grant date
(“performance-accelerated options”). Beginning in
2007, performance options granted will only vest when certain
performance targets are achieved and will not vest if the
performance targets are not achieved within a specific time
frame. These options will expire five years and three months
after the grant date (“performance-contingent
options”).
|
2009
ANNUAL REPORT |
93 | |
Summary of
regular and performance options
The following tables summarize the Company’s fixed stock
option plans (that do not have a TSAR attached to them) as of
December 31:
| 2008 | ||||||||||||||||||
| 2009 | ||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Number of
|
average
|
Number of
|
average
|
|||||||||||||||
| options | exercise price | options | exercise price | |||||||||||||||
|
Outstanding, January 1
|
4,842,946 | $ | 50.74 | 4,428,761 | $ | 44.58 | ||||||||||||
|
New options granted
|
350 | 37.60 | 942,850 | 71.41 | ||||||||||||||
|
Exercised
|
(652,175 | ) | 34.91 | (492,440 | ) | 33.89 | ||||||||||||
|
Forfeited
|
(96,825 | ) | 74.20 | (36,225 | ) | 63.67 | ||||||||||||
|
Outstanding, December 31
|
4,094,296 | $ | 52.71 | 4,842,946 | $ | 50.74 | ||||||||||||
|
Exercisable at December 31
|
2,605,383 | $ | 44.07 | 2,817,808 | $ | 39.72 | ||||||||||||
| 2009 | ||||||||||||||||||||
| 2009 | ||||||||||||||||||||
|
Options outstanding
|
Options exercisable
|
|||||||||||||||||||
|
Weighted
|
||||||||||||||||||||
|
average
|
Weighted
|
Weighted
|
||||||||||||||||||
|
Number of
|
years to
|
average
|
Number of
|
average
|
||||||||||||||||
| Range of exercise prices | options | expiration | exercise price | options | exercise price | |||||||||||||||
|
$14.61 – $18.06
|
17,375 | 0.2 | $ | 15.35 | 17,375 | $ | 15.35 | |||||||||||||
|
$27.62 – $40.47
|
1,084,096 | 3.0 | 31.10 | 1,078,746 | 31.05 | |||||||||||||||
|
$42.05 – $62.56
|
2,106,625 | 4.3 | 56.20 | 1,506,562 | 53.68 | |||||||||||||||
|
$63.45 – $74.89
|
886,200 | 5.5 | 71.58 | 2,700 | 67.54 | |||||||||||||||
|
Total
|
4,094,296 | 4.2 | $ | 52.71 | 2,605,383 | $ | 44.07 | |||||||||||||
In 2009, the expense recovery for stock options (regular and
performance) was $1.1 million (2008 – expense of
$7.4 million; 2007 – expense of $10.7 million).
Under the fair value method, the fair value of options at the
grant date was $nil for options issued in 2009 (2008 –
$14.2 million; 2007 – $11.3 million). The
weighted average fair value assumptions were approximately:
| 2009 | 2008 | 2007 | ||||||||||
|
Expected option life (years)
|
5.00 | 4.39 | 4.00 | |||||||||
|
Risk-free interest rate
|
2.35 | % | 3.53 | % | 3.90 | % | ||||||
|
Expected stock price volatility
|
23 | % | 23 | % | 22 | % | ||||||
|
Expected annual dividends per share
|
$ | 0.99 | $ | 0.99 | $ | 0.90 | ||||||
|
Weighted average fair value of options granted during the year
|
$ | 6.52 | $ | 15.07 | $ | 12.97 | ||||||
At December 31, 2009, there were 1,831,361 (2008 –
2,334,861; 2007 – 3,602,761) Common Shares available for
the granting of future options under the stock option plans, out
of the 15,578,642 (2008 – 15,578,642; 2007 –
15,578,642) Common Shares currently authorized.
|
94
|
2009
ANNUAL REPORT |
|
Summary of
TSARs
The following tables summarize information related to the
Company’s TSARs as at December 31:
| 2008 | ||||||||||||||||||
| 2009 | ||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Number of
|
average
|
Number of
|
average
|
|||||||||||||||
| TSARs | exercise price | TSARs | exercise price | |||||||||||||||
|
Outstanding, January 1
|
2,828,197 | $ | 47.42 | 2,552,347 | $ | 42.83 | ||||||||||||
|
New TSARs granted
|
765,850 | 36.76 | 433,750 | 71.07 | ||||||||||||||
|
Exercised as TSARs
|
(94,050 | ) | 27.06 | (52,450 | ) | 35.10 | ||||||||||||
|
Exercised as Options
|
(70,775 | ) | 25.95 | (85,425 | ) | 34.85 | ||||||||||||
|
Forfeited
|
(71,825 | ) | 51.73 | (20,025 | ) | 60.63 | ||||||||||||
|
Outstanding, December 31
|
3,357,397 | $ | 45.92 | 2,828,197 | $ | 47.42 | ||||||||||||
|
Exercisable at December 31
|
1,981,810 | $ | 42.52 | 1,740,235 | $ | 36.49 | ||||||||||||
| 2009 | ||||||||||||||||||||
| 2009 | ||||||||||||||||||||
|
TSARs outstanding
|
TSARs exercisable
|
|||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||
|
average
|
average
|
average
|
||||||||||||||||||
|
Number of
|
years to
|
exercise
|
Number of
|
exercise
|
||||||||||||||||
| Range of exercise prices | TSARs | expiration | price | TSARs | price | |||||||||||||||
|
$14.61 – $18.06
|
20,725 | 0.2 | $ | 15.23 | 20,725 | $ | 15.23 | |||||||||||||
|
$27.62 – $40.47
|
1,655,727 | 5.9 | 33.54 | 907,477 | 31.25 | |||||||||||||||
|
$42.05 – $62.56
|
1,272,945 | 6.1 | 54.33 | 1,050,908 | 52.72 | |||||||||||||||
|
$63.45 – $74.89
|
408,000 | 8.0 | 71.49 | 2,700 | 67.54 | |||||||||||||||
|
Total
|
3,357,397 | 6.2 | $ | 45.92 | 1,981,810 | $ | 42.52 | |||||||||||||
In 2009, the expense for TSARs was $28.6 million (2008
– recovery of $35.3 million; 2007 – expense of
$8.7 million).
B. OTHER SHARE-BASED PLANS
Performance share unit plan
During 2009, the Company granted 404,580 PSUs. These units
attract dividend equivalents in the form of additional units
based on the dividends paid on the Company’s Common Shares.
PSUs vest and are settled in cash approximately three years
after the grant date contingent upon CP’s performance
(performance factor). The expense related to the PSUs is accrued
based on the price of Common Shares at the end of the period and
the anticipated performance factor, over the vesting period.
The following table summarizes information related to the PSUs
as of December 31:
| 2009 | 2008 | |||||||
|
Outstanding, January 1
|
24,245 | 23,855 | ||||||
|
Granted
|
404,580 | – | ||||||
|
Units, in lieu of dividends
|
7,312 | 390 | ||||||
|
Forfeited
|
(13,603 | ) | – | |||||
|
Outstanding, December 31
|
422,534 | 24,245 | ||||||
In 2009, the expense recognized for PSUs was $10.2 million
(2008 – expense recovery was $0.7 million, 2007 –
expense of $0.7 million).
Deferred share unit plan
The Company established the DSU plan as a means to compensate
and assist in attaining share ownership targets set for certain
key employees and Directors. A DSU entitles the holder to
receive, upon redemption, a cash payment equivalent to the
market value of a Common Share at
|
2009
ANNUAL REPORT |
95 | |
the redemption date. DSUs vest over various periods of up to
36 months and are only redeemable for a specified period
after employment is terminated.
Key employees may choose to receive DSUs in lieu of cash
payments for certain incentive programs. In addition, when
acquiring Common Shares to meet share ownership targets, key
employees may be granted a matching number of DSUs up to 33% of
the shares and DSUs acquired during the first six months after
becoming eligible under the plan and, thereafter, up to 25%. Key
employees have five years to meet their ownership targets.
An expense for DSUs is recognized over the vesting period for
both the initial subscription price and the change in value
between reporting periods.
The following table summarizes information related to the DSUs
as of December 31:
| 2009 | 2008 | |||||||
|
Outstanding, January 1
|
292,982 | 284,968 | ||||||
|
Granted
|
55,273 | 43,651 | ||||||
|
Units, in lieu of dividends
|
7,093 | 4,813 | ||||||
|
Redeemed
|
(9,505 | ) | (40,450 | ) | ||||
|
Outstanding, December 31
|
345,843 | 292,982 | ||||||
In 2009, the expense for DSUs was $7.5 million (2008 –
expense recovery of $5.4 million; 2007 – expense of
$4.1 million).
Restricted share unit plan
The Company issued 405 RSUs in 2009 (2008 – 276; 2007
– 16,921). The RSUs are subject to time vesting. They will
vest on May 31, 2010, and will be cashed out based on the
average closing price for the 10 days prior to May 31,
2010. An expense to income for RSUs is recognized over the
vesting period.
In 2009, the expense for RSUs was $0.5 million (2008 –
$0.2 million; 2007 – $0.2 million).
Summary of share
based liabilities paid
The following table summarizes the total share based liabilities
paid for each of the years ended December 31:
| (in millions of Canadian dollars) | 2009 | 2008 | 2007 | |||||||||
|
Plan
|
||||||||||||
|
TSARs
|
$ | 2.6 | $ | 1.6 | $ | 5.4 | ||||||
|
DSUs
|
0.3 | 2.4 | 6.5 | |||||||||
|
Total
|
$ | 2.9 | $ | 4.0 | $ | 11.9 | ||||||
| C. | EMPLOYEE SHARE PURCHASE PLAN |
The Company has an employee share purchase plan whereby both
employee and Company contributions are used to purchase shares
on the open market for employees. The Company’s
contributions are expensed over the one-year vesting period.
Under the plan the Company matches $1 for every $3 contributed
by employees up to a maximum employee contribution of 6% of
annual salary. On April 1, 2009, the Company suspended this
match to employee ESPP contributions.
At December 31, 2009, there were 13,261 participants (2008
– 12,923; 2007 – 12,181) in the plan. The total number
of shares purchased in 2009 on behalf of participants, including
the Company contribution, was 883,737 (2008 – 969,921; 2007
– 745,374). In 2009, the Company’s contributions
totalled $3.3 million (2008 – $11.6 million; 2007
– $10.4 million) and the related expense was
$7.0 million (2008 – $9.8 million; 2007 –
$8.9 million).
|
96
|
2009
ANNUAL REPORT |
|
27 Capital
disclosures
The Company’s objectives when managing its capital are:
| o | to maintain a flexible capital structure which optimizes the cost of capital at acceptable risk while providing an appropriate return to its shareholders; |
| o | to manage capital in a manner which balances the interests of equity and debt holders; |
| o | to manage capital in a manner that will maintain compliance with its financial covenants; |
| o | to manage its long-term financing structure to maintain its investment grade rating; and |
| o | 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:
| o | shareholders’ equity; |
| o | long-term debt, including the current portion thereof; and |
| o | short-term borrowing. |
The Company manages its capital structure and makes adjustments
to it in accordance with the aforementioned objectives, as well
as in light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain
or adjust its capital structure, the Company may, among other
things, adjust the amount of dividends paid to shareholders,
purchase shares for cancellation pursuant to normal course
issuer bids, issue new shares, issue new debt,
and/or
issue
new debt to replace existing debt with different characteristics.
The Company monitors capital using a number of key financial
metrics, including:
| o | debt to total capitalization; and |
| o | interest-coverage ratio. |
The calculations for the aforementioned key financial metrics
are as follows:
DEBT TO TOTAL
CAPITALIZATION
Debt is the sum of long-term debt, long-term debt maturing
within one year and short-term borrowing. This sum is divided by
debt plus total shareholders’ equity as presented on our
Consolidated Balance Sheet.
INTEREST-COVERAGE
RATIO
Interest coverage ratio is measured as adjusted EBIT divided by
net interest expense. Adjusted EBIT excludes changes in the
estimated fair value of the Company’s investment in
long-term floating rate notes/ABCP, the gains on sales of
partnership interest and significant properties and the loss on
termination of a lease with a shortline railway as these are not
in the normal course of business and foreign exchange gains and
losses on long-term debt, which can be volatile and short term.
The interest coverage ratio and adjusted EBIT are non-GAAP
measures and do not have standardized meanings prescribed by
GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies.
|
2009
ANNUAL REPORT |
97 | |
The following table illustrates the financial metrics and their
corresponding guidelines currently in place:
|
December 31,
|
December 31,
|
|||||||||||||||
|
December 31,
|
2008
|
2007
|
||||||||||||||
| (in millions of Canadian dollars) | Guidelines |
2009
|
Restated (Note 2) | Restated (Note 2) | ||||||||||||
|
Long-term debt
|
$ | 4,102.7 | $ | 4,685.8 | $ | 4,146.2 | ||||||||||
|
Long-term debt maturing within one year
|
392.1 | 44.0 | 31.0 | |||||||||||||
|
Short-term borrowing
|
– | 150.1 | 229.7 | |||||||||||||
|
Debt
|
$ | 4,494.8 | $ | 4,879.9 | $ | 4,406.9 | ||||||||||
|
Shareholders’ equity
|
$ | 6,706.0 | $ | 5,769.4 | $ | 5,248.1 | ||||||||||
|
Debt
|
4,494.8 | 4,879.9 | 4,406.9 | |||||||||||||
|
Debt plus equity
|
$ | 11,200.8 | $ | 10,649.3 | $ | 9,655.0 | ||||||||||
|
Revenues less operating expenses
|
$ | 900.1 | $ | 1,041.7 | $ | 1,160.8 | ||||||||||
|
Less:
|
||||||||||||||||
|
Other income and charges
|
18.9 | 88.4 | (118.7 | ) | ||||||||||||
|
Plus:
|
||||||||||||||||
|
(Gain) loss in long-term floating rate notes/ABCP
|
(6.3 | ) | 49.4 | 21.5 | ||||||||||||
|
Foreign exchange (gain) loss on long-term debt
|
(5.8 | ) | 16.3 | (169.8 | ) | |||||||||||
|
Equity income in DM&E
|
– | 50.9 | 11.2 | |||||||||||||
|
Adjusted
EBIT
(1)
|
$ | 869.1 | $ | 1,069.9 | $ | 1,142.4 | ||||||||||
|
Debt
|
$ | 4,494.8 | $ | 4,879.9 | $ | 4,406.9 | ||||||||||
|
Debt plus equity
|
$ | 11,200.8 | $ | 10,649.3 | $ | 9,655.0 | ||||||||||
|
Debt to total capitalization
|
No more than 50.0% | 40.1 | % | 45.8 | % | 45.6 | % | |||||||||
|
Adjusted
EBIT
(1)
|
$ | 869.1 | $ | 1,069.9 | $ | 1,142.4 | ||||||||||
|
Net interest expense
|
$ | 273.1 | $ | 261.1 | $ | 204.3 | ||||||||||
|
Interest-coverage
ratio
(1)
|
No less than 4.0 | 3.2 | 4.1 | 5.6 | ||||||||||||
| (1) | These earnings measures have no standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. |
The Company remains in compliance with all external financial
covenants.
The Company’s financial objectives and strategy as
described above have remained substantially unchanged over the
last two fiscal years. The objectives are reviewed on an annual
basis and financial metrics and their management targets are
monitored on a quarterly basis. In 2009, the Company changed one
of its measures used to monitor capital from net-debt to
net-debt-plus-equity ratio to debt to total capitalization. The
interest coverage ratio has decreased during the year ending
December 31, 2009 due to a reduction in
year-over-year
earnings. The interest coverage ratio for the period is below
the management target provided in the above table, due to lower
volumes as a result of the global recession that occurred during
the period.
In addition, CP issued 13,900,000 common shares generating net
cash proceeds of $488.9 million and monetized certain
assets to reduce indebtedness and to further strengthen its
balance sheet and financial position due to ongoing uncertainty
around the timing of the economic recovery.
The Company is also subject to a financial covenant of funded
debt to total capitalization in the revolver loan agreement.
Performance to this financial covenant is well within permitted
limits.
28 Commitments
and contingencies
In the normal course of its operations, the Company becomes
involved in various legal actions, including claims relating to
injuries and damage to property. The Company maintains
provisions it considers to be adequate for such actions. While
the final outcome with respect to actions
|
98
|
2009
ANNUAL REPORT |
|
outstanding or pending at December 31, 2009, cannot be
predicted with certainty, it is the opinion of management that
their resolution will not have a material adverse effect on the
Company’s financial position or results of operations.
At December 31, 2009, the Company had committed to total
future capital expenditures amounting to $233.4 million and
operating expenditures amounting to $1,762.3 million for
the years
2010-2028.
Minimum payments under operating leases were estimated at
$930.1 million in aggregate, with annual payments in each
of the five years following 2009 of (in millions): 2010 –
$148.1; 2011 – $128.1; 2012 – $114.6; 2013 –
$100.0; 2014 – $78.7.
29 Guarantees
In the normal course of operating the railway, the Company
enters into contractual arrangements that involve providing
certain guarantees, which extend over the term of the contracts.
These guarantees include, but are not limited to:
| o | residual value guarantees on operating lease commitments of $167.3 million at December 31, 2009; |
| o | guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in the operation of the railway through operating leases, rental agreements, easements, trackage and interline agreements; and |
| o | indemnifications of certain tax-related payments incurred by lessors and lenders. |
The maximum amount that could be payable under these guarantees,
excluding residual value guarantees, cannot be reasonably
estimated due to the nature of certain of these guarantees. All
or a portion of amounts paid under guarantees to other parties
in the event of the occurrence of specified events could be
recoverable from other parties or through insurance. The Company
has accrued for all guarantees that it expects to pay. At
December 31, 2009, these accruals amounted to
$9.3 million (2008 – $9.6 million).
INDEMNIFICATIONS
Pursuant to a trust and custodial services agreement with the
trustee of the Canadian Pacific Railway Company Pension
Trust Fund, the Company has undertaken to indemnify and
save harmless the trustee, to the extent not paid by the fund,
from any and all taxes, claims, liabilities, damages, costs and
expenses arising out of the performance of the trustee’s
obligations under the agreement, except as a result of
misconduct by the trustee. The indemnity includes liabilities,
costs or expenses relating to any legal reporting or
notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise
with respect to the assets of the pension plans that are not
part of the fund. The indemnity survives the termination or
expiry of the agreement with respect to claims and liabilities
arising prior to the termination or expiry. At December 31,
2009, the Company had not recorded a liability associated with
this indemnification, as it does not expect to make any payments
pertaining to it.
Pursuant to the Company’s by-laws, the Company indemnifies
all current and former directors and officers. In addition to
the indemnity provided for in the by-laws, the Company also
indemnifies its directors and officers pursuant to indemnity
agreements. The Company carries a liability insurance policy for
directors and officers, subject to a maximum coverage limit and
certain deductibles in cases where a director or officer is
reimbursed for any loss covered by the policy.
30 Segmented
information
OPERATING
SEGMENT
The Company operates in only one operating segment: rail
transportation. Operating results by geographic areas, railway
corridors or other lower level components or units of operation
are not reviewed by the Company’s chief operating decision
maker to make decisions about the allocation of resources to, or
the assessment of performance of, such geographic areas,
corridors, components or units of operation.
In 2009, no one customer comprised more than 10% of total
revenues and accounts receivable. For the years ended and as at
December 31, 2008 and 2007, one customer comprised 11.3%
and 11.5% of total revenues and 1.7% and 6.7% of total accounts
receivable, respectively.
|
2009
ANNUAL REPORT |
99 | |
GEOGRAPHIC
INFORMATION
| (in millions of Canadian dollars) | Canada | United States | Total | |||||||||
|
2009
|
||||||||||||
|
Revenues
|
$ | 3,075.9 | $ | 1,227.3 | $ | 4,303.2 | ||||||
|
Net properties
|
$ | 8,080.7 | $ | 3,887.1 | $ | 11,967.8 | ||||||
|
2008 (Restated Note 2)
|
||||||||||||
|
Revenues
|
$ | 3,814.6 | $ | 1,117.0 | $ | 4,931.6 | ||||||
|
Net properties
|
$ | 7,954.4 | $ | 4,430.2 | $ | 12,384.6 | ||||||
|
2007 (Restated Note 2)
|
||||||||||||
|
Revenues
|
$ | 3,716.4 | $ | 991.2 | $ | 4,707.6 | ||||||
|
Net Properties
|
$ | 7,582.2 | $ | 1,535.5 | $ | 9,117.7 | ||||||
CP’s principal subsidiaries present unconsolidated
financial statements in accordance with generally accepted
accounting practices for railways as prescribed in the
regulations of the Canadian Transportation Agency and the
Surface Transportation Board in the United States. As part of
the Company’s consolidation process, CP’s
subsidiaries’ unconsolidated accounts have been adjusted
from these regulatory accounting bases to Canadian GAAP.
The condensed income statement and balance sheet information,
which follows, includes the Canadian operations prepared in
accordance with the Uniform Classification of Accounts issued by
the Canadian Transportation Agency. The changes required to
consolidate the Company’s operations are identified as
consolidating entries.
CONSOLIDATING
INFORMATION – 2009
|
Other
|
Consolidating
|
|||||||||||||||||||||
| (in millions of Canadian dollars) | Canada | United States | countries | entries | Total | |||||||||||||||||
|
Revenues
|
$ | 3,072.1 | $ | 1,227.3 | $ | – | $ | 3.8 | $ | 4,303.2 | ||||||||||||
|
Operating expenses
|
2,479.6 | 960.4 | – | (36.9 | ) | 3,403.1 | ||||||||||||||||
|
Revenues less operating expenses
|
592.5 | 266.9 | – | 40.7 | 900.1 | |||||||||||||||||
|
Net interest expense, other income and charges, gain on sales of
partnership interest and significant properties and loss on
termination of lease with shortline railway
|
(35.6 | ) | 88.2 | 136.4 | (2.8 | ) | 186.2 | |||||||||||||||
|
Income tax expense
|
60.0 | 62.0 | 1.5 | (22.0 | ) | 101.5 | ||||||||||||||||
|
Net income (loss)
|
$ | 568.1 | $ | 116.7 | $ | (137.9 | ) | $ | 65.5 | $ | 612.4 | |||||||||||
|
Current assets
|
$ | 1,183.8 | $ | 472.5 | $ | 29.1 | $ | (258.0 | ) | $ | 1,427.4 | |||||||||||
|
Net properties
|
6,096.0 | 3,828.8 | – | 2,043.0 | 11,967.8 | |||||||||||||||||
|
Other long-term assets
|
3,140.0 | 241.0 | 1,364.8 | (2,609.6 | ) | 2,136.2 | ||||||||||||||||
|
Total assets
|
$ | 10,419.8 | $ | 4,542.3 | $ | 1,393.9 | $ | (824.6 | ) | $ | 15,531.4 | |||||||||||
|
Current liabilities
|
$ | 1,162.6 | $ | 228.4 | $ | 2.0 | $ | (10.0 | ) | $ | 1,383.0 | |||||||||||
|
Long-term liabilities
|
5,710.1 | 2,160.5 | (0.3 | ) | (427.9 | ) | 7,442.4 | |||||||||||||||
|
Shareholders’ equity
|
3,547.1 | 2,153.4 | 1,392.2 | (386.7 | ) | 6,706.0 | ||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 10,419.8 | $ | 4,542.3 | $ | 1,393.9 | $ | (824.6 | ) | $ | 15,531.4 | |||||||||||
|
100
|
2009
ANNUAL REPORT |
|
31 Reconciliation
of Canadian and United States generally accepted accounting
principles
The consolidated financial statements of the Company have been
prepared in accordance with Canadian GAAP. The material
differences between Canadian and U.S. GAAP relating to
measurement and recognition are explained below, along with
their effect on the Company’s Consolidated Statement of
Income and Consolidated Balance Sheet. Certain additional
disclosures required under U.S. GAAP have not been
provided, as permitted by the United States Securities and
Exchange Commission.
(a) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
AND OTHER FINANCIAL INSTRUMENTS:
The measurement and recognition rules for derivative instruments
and hedging under Canadian GAAP, as described in CICA accounting
standards Section 3855 “Financial Instruments,
Recognition and Measurement”, Section 3861
“Financial Instruments, Presentation and Disclosure”,
Section 3865 “Hedging”, Section 1530
“Comprehensive Income” and Section 3251
“Equity”, are largely harmonized with U.S. GAAP.
However, under Canadian GAAP, only the ineffective portion of a
net investment hedge that represents an over hedge is recognized
in income, whereas under U.S. GAAP, any ineffective portion
is recognized in income immediately. As well, transaction costs
have been added to the fair value of the “Long-term
debt” under Canadian GAAP whereas under U.S. GAAP such
costs are recorded separately within “Other assets”.
(b) PENSIONS AND POST-RETIREMENT BENEFITS:
Under U.S. GAAP, the Company is required to recognize the
over or under funded status of defined benefit pension and other
post-retirement plans on the balance sheet. The over or under
funded status is measured as the difference between the fair
value of the plan assets and the benefit obligation, being the
projected obligation for pension plans and the accumulated
benefit obligation for other post-retirement plans. In addition,
any previously unrecognized actuarial gains and losses and prior
service costs and credits that arise during the period will be
recognized as a component of OCI, net of tax. No similar
requirement currently exists under Canadian GAAP.
(c) POST-EMPLOYMENT BENEFITS:
Post-employment benefits are covered by the CICA recommendations
for accounting for employee future benefits. Consistent with
accounting for post-retirement benefits, the policy permits
amortization of actuarial gains and losses only if they fall
outside of the corridor. Under U.S. GAAP such gains and
losses on post-employment benefits that do not vest or
accumulate are included immediately in income.
(d) TERMINATION AND SEVERANCE BENEFITS:
Termination and severance benefits are covered by the CICA
Section 3461 and the CICA Emerging Issues Committee
Abstract 134 “Accounting for Severance and Termination
Benefits” (“EIC 134”). Upon transition to the
CICA Section 3461 effective January 1, 2000, a net
transitional asset was created and was being amortized to
income. This net transitional asset was fully amortized during
2009. Under U.S. GAAP, the expected benefits were not
accrued and are expensed when paid.
(e) STOCK-BASED COMPENSATION:
U.S. GAAP requires the use of an option-pricing model to
fair value, at the grant date, share-based awards issued to
employees, including stock options, TSARs, PSUs, RSUs, and DSUs.
TSARs, PSUs, RSUs, and DSUs are subsequently re-measured at fair
value at each reporting period. Under Canadian GAAP, liability
awards, such as TSARs, PSUs, RSUs and DSUs, are accounted for
using the intrinsic method. U.S. GAAP also requires that CP
accounts for forfeitures on an estimated basis. Under Canadian
GAAP, CP has elected to account for forfeitures on an actual
basis as they occur.
Under U.S. GAAP, compensation expense must be recorded if
the intrinsic value of stock options is not exactly the same
immediately before and after an equity restructuring. As a
result of the Canadian Pacific Limited (“CPL”)
corporate reorganization in 2001, CPL underwent an equity
restructuring, which resulted in replacement options in CP stock
having a different intrinsic value after the restructuring than
prior to it. Canadian GAAP did not require the revaluation of
these options. The Company adopted on a prospective basis
effective January 2003 the CICA Section 3870
“Stock-based Compensation and Other Stock-based
Payments”, which requires companies to account for stock
options at their fair value. Concurrently, the Company elected
to also account for stock options at their fair value under
U.S. GAAP.
(f) INTERNAL USE SOFTWARE:
Under U.S. GAAP certain costs, including preliminary
project phase costs, are to be expensed as incurred. These costs
are capitalized under Canadian GAAP if they meet specific
criteria in CICA Section 3064.
(g) CAPITALIZATION OF INTEREST:
Under Canadian GAAP, the Company expenses interest related to
capital projects undertaken during the year unless specific debt
is attributed to a capital program. U.S. GAAP requires
interest costs to be capitalized for all qualifying capital
programs. Differences in GAAP result in additional
capitalization of interest under U.S. GAAP and subsequent
related depreciation.
|
2009
ANNUAL REPORT |
101 | |
(h) COMPREHENSIVE INCOME:
U.S. GAAP requires disclosure of the change in equity from
transactions and other events related to non-owner sources
during the period. In 2009 and the comparative periods
presented, the differences in OCI under U.S. GAAP arose
from the accounting for foreign currency translation related to
long-term debt designated as a hedge of the net investment in
foreign subsidiaries and changes in the unfunded pension
liability.
(i) JOINT VENTURE:
The CICA Section 3055 “Interest in Joint
Ventures” requires the proportionate consolidation method
to be applied to the recognition of interests in joint ventures
in consolidated financial statements. Until April 1, 2009,
the Company accounted for its joint-venture interest in the DRTP
using the proportionate consolidation method. During the second
quarter of 2009, the Company completed a sale of a portion of
its investment in the DRTP to its existing partner, reducing the
Company’s ownership from 50% to 16.5% and thereby ceased to
have joint control. Effective April 1, 2009, the Company
discontinued proportionate consolidation and accounts for its
remaining investment in the DRTP under the equity method of
accounting, as the Company continues to exert significant
influence. U.S. GAAP requires the equity method of
accounting to be applied to interests in joint ventures. This
had no effect on net income as it represents a classification
difference within the Consolidated Statement of Income and
Consolidated Balance Sheet. Equity income from DRTP in 2009 was
$3.4 million (2008 – $8.6 million;
2007 – $9.7 million).
(j) OFFSETTING CONTRACTS:
U.S. GAAP does not allow netting of assets and liabilities
among three parties. In 2003, the Company and one of its
subsidiaries entered into a contract with a financial
institution, which resulted in a payable by its subsidiary and a
receivable by the Company. Under Canadian GAAP, offsetting
amounts with the same party and with a legal right to offset are
netted against each other.
(k) CAPITAL LEASES:
U.S. GAAP prescribes certain recognition criteria for a
capital lease. As a result certain leases, which the Company has
recorded as capital leases under Canadian GAAP, do not meet the
criteria for capital leases and are recorded as operating
leases. These relate to equipment leases, previously recorded as
operating leases under Canadian and U.S. GAAP, which were
renewed within the last 25 percent of the equipment’s
useful life. Under U.S. GAAP, these continue to be
operating leases.
(l) STATEMENT OF CASH FLOWS:
There are no material differences in the Consolidated Statement
of Cash Flows under U.S. GAAP.
(m) INVESTMENT TAX CREDITS:
Under U.S. GAAP investment tax credits are credited against
income tax expense whereas under Canadian GAAP these tax credits
are offset against the related operating expense.
FUTURE ACCOUNTING
CHANGES
Consolidations
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued
Amendments to Consolidation of
Variable Interest Entities.
It retains the scope of the
previous guidance with the addition of entities previously
considered qualifying special-purpose entities. In addition, it
replaces the previous quantitative approach for determining
whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest
entity with a qualitative analysis approach. The Statement is
further amended to require ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest
entity and requires enhanced disclosures about an
enterprise’s involvement in a variable interest entity. The
Statement is effective at the beginning of the first annual
reporting period after November 15, 2009. We do not expect
the adoption of this Statement to have a material impact on our
results of operations or financial position.
Accounting for
Transfers of Financial Assets
The FASB has released additional guidance with respect to the
accounting and disclosure of transfers of financial assets such
as securitized accounts receivable. Although CP currently does
not have an accounts receivable securitization program, the
guidance, which includes revisions to the derecognition criteria
in a transfer and the treatment of qualifying special purpose
entities, is currently being assessed to determine if the
changes in disclosure requirements would impact CP’s prior
periods. The new guidance is effective for CP from
January 1, 2010.
Fair Value
Measurements and Disclosure
In January 2010, the FASB amended the disclosure requirements
related to fair value measurements. The update provides for new
disclosures regarding transfers in and out of Level 1 and
Level 2 financial asset and liability categories and
expanded disclosure in the Level 3 reconciliation. The
update also provides clarification that the level of
disaggregation should be at the class level and that disclosures
about inputs and valuation techniques are required for both
recurring and nonrecurring fair value measurements that fall in
either Level 2 or Level 3.
|
102
|
2009
ANNUAL REPORT |
|
New disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the expanded
disclosures in the Level 3 reconciliation, which are
effective for fiscal years beginning after December 15,
2010. The adoption of this update will not impact the amounts
reported in the Company’s financial statements as it
relates to disclosure.
COMPARATIVE
INCOME STATEMENT
Consolidated net income and other comprehensive (loss) income is
reconciled from Canadian to U.S. GAAP in the following manner:
|
2008
|
2007
|
|||||||||||
| (in millions of Canadian dollars, except per share data) |
2009
|
Restated (Note 2) | Restated (Note 2) | |||||||||
|
Net income – Canadian GAAP
|
$ | 612.4 | $ | 607.2 | $ | 932.1 | ||||||
|
Increased (decreased) by:
|
||||||||||||
|
Pension costs
(b)
|
(17.0 | ) | 13.3 | 15.9 | ||||||||
|
Post-retirement benefits costs
(b)
|
9.8 | 9.6 | 9.4 | |||||||||
|
Post-employment benefits costs
(c)
|
(30.3 | ) | 11.0 | 7.2 | ||||||||
|
Termination and severance benefits
(d)
|
(1.5 | ) | (8.7 | ) | (8.8 | ) | ||||||
|
Internal use software – additions
(f)
|
(3.8 | ) | (18.1 | ) | (12.0 | ) | ||||||
|
Internal use software – depreciation
(f)
|
7.4 | 9.2 | 8.0 | |||||||||
|
Stock-based compensation
(e)
|
(14.7 | ) | 6.9 | (1.7 | ) | |||||||
|
Loss on ineffective portion of hedges
(a)
|
(2.2 | ) | 10.5 | (0.4 | ) | |||||||
|
Capitalized interest – additions
(g)
|
4.9 | 21.0 | 14.0 | |||||||||
|
Capitalized interest – depreciation
(g)
|
(12.3 | ) | (5.3 | ) | (4.5 | ) | ||||||
|
Capital lease – equipment rents
(k)
|
(1.3 | ) | (1.3 | ) | (0.7 | ) | ||||||
|
Capital lease – depreciation
(k)
|
0.9 | 0.9 | 0.4 | |||||||||
|
Capital lease – interest
(k)
|
0.6 | 0.5 | 0.3 | |||||||||
|
Future/deferred income tax expense related to above differences
|
2.5 | (21.1 | ) | (46.0 | ) | |||||||
|
Net income – U.S. GAAP
|
$ | 555.4 | $ | 635.6 | $ | 913.2 | ||||||
|
Other comprehensive (loss) income – Canadian
GAAP
|
(28.2 | ) | 36.3 | (39.4 | ) | |||||||
|
Increased (decreased) by:
|
||||||||||||
|
Unrealized foreign exchange gain (loss) on designated net
investment hedge
(a)
|
2.2 | (10.5 | ) | 0.4 | ||||||||
|
Unfunded pension and post-retirement liability adjustment
(b)
|
(661.1 | ) | (543.4 | ) | (206.8 | ) | ||||||
|
Future/deferred income tax recovery related to other
comprehensive loss
|
165.2 | 148.6 | 48.1 | |||||||||
|
Other comprehensive loss – U.S. GAAP
|
$ | (521.9 | ) | $ | (369.0 | ) | $ | (197.7 | ) | |||
|
Earnings per share – U.S. GAAP
|
||||||||||||
|
Basic earnings per share
|
$ | 3.34 | $ | 4.14 | $ | 5.93 | ||||||
|
Diluted earnings per share
|
$ | 3.33 | $ | 4.09 | $ | 5.87 | ||||||
A summary of comprehensive income resulting from Canadian and
U.S. GAAP differences is as follows:
|
2008
|
2007
|
|||||||||||
| (in millions of Canadian dollars) |
2009
|
Restated (Note 2) | Restated (Note 2) | |||||||||
|
Comprehensive income
|
||||||||||||
|
Canadian GAAP
|
$ | 584.2 | $ | 643.5 | $ | 892.7 | ||||||
|
U.S. GAAP
|
$ | 33.5 | $ | 266.6 | $ | 715.5 | ||||||
|
2009
ANNUAL REPORT |
103 | |
CONSOLIDATED
BALANCE SHEET
Had the Consolidated Balance Sheet been prepared under U.S.
GAAP, the differences would have been as follows
(higher/(lower)):
|
2008
|
||||||||
| (in millions of Canadian dollars) |
2009
|
Restated (Note 2) | ||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
||||||||
|
Investment in joint ventures
(i)
|
$ | – | $ | (0.1 | ) | |||
|
Accounts receivable
|
||||||||
|
Receivable from bank
(j)
|
214.1 | – | ||||||
|
Long-term assets
|
||||||||
|
Investments
|
||||||||
|
Investment in joint ventures
(i)
|
– | 51.2 | ||||||
|
Net properties
|
||||||||
|
Capitalized interest
(g)
|
168.3 | 175.7 | ||||||
|
Internal use software
(f)
|
(59.9 | ) | (64.1 | ) | ||||
|
Investment in joint ventures
(i)
|
– | (36.0 | ) | |||||
|
Capital leases
(k)
|
(8.7 | ) | (9.6 | ) | ||||
|
Prepaid pension costs and other assets
|
||||||||
|
Pension
(b)
|
(1,644.4 | ) | (1,056.0 | ) | ||||
|
Long-term receivable from bank
(j)
|
– | 201.8 | ||||||
|
Transaction costs on long-term debt
(a)
|
43.6 | 43.9 | ||||||
|
Investment in joint ventures
(i)
|
– | (15.7 | ) | |||||
|
Internal use software
(f)
|
(0.6 | ) | – | |||||
|
Total assets
|
$ | (1,287.6 | ) | $ | (708.9 | ) | ||
|
104
|
2009
ANNUAL REPORT |
|
CONSOLIDATED
BALANCE SHEET
(CONTINUED)
|
2008
|
||||||||
| (in millions of Canadian dollars) |
2009
|
Restated (Note 2) | ||||||
|
Liabilities and shareholders’ equity
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable and accrued liabilities
|
||||||||
|
Investment in joint ventures
(i)
|
$ | – | $ | (0.3 | ) | |||
|
Stock-based compensation
(e)
|
9.8 | – | ||||||
|
Long-term debt maturing within one year
|
||||||||
|
Capital leases
(k)
|
(0.9 | ) | (0.8 | ) | ||||
|
Bank loan
(j)
|
214.1 | – | ||||||
|
Long-term liabilities
|
||||||||
|
Other long-term liabilities
|
||||||||
|
Termination and severance benefits
(b)
|
– | (1.5 | ) | |||||
|
Post-employment benefit liability
|
24.6 | (5.8 | ) | |||||
|
Under funded status of defined benefit pension and other
post-retirement plans
|
1,116.8 | 1,036.9 | ||||||
|
Investment in joint ventures
(i)
|
– | (0.5 | ) | |||||
|
Stock-based compensation
(e)
|
2.2 | (2.5 | ) | |||||
|
Long-term debt
|
||||||||
|
Bank loan
(j)
|
– | 201.8 | ||||||
|
Capital leases
(k)
|
(8.1 | ) | (8.9 | ) | ||||
|
Transaction costs on long-term debt
(a)
|
43.6 | 43.9 | ||||||
|
Future/deferred income taxes
|
(704.5 | ) | (536.6 | ) | ||||
|
Total liabilities
|
697.6 | 725.7 | ||||||
|
Shareholders’ equity
|
||||||||
|
Share capital
|
||||||||
|
Stock-based compensation
(e)
|
24.7 | 21.5 | ||||||
|
Contributed surplus
|
||||||||
|
Stock-based compensation
(e)
|
(2.7 | ) | 0.4 | |||||
|
Retained income
|
(211.4 | ) | (154.4 | ) | ||||
|
Accumulated other comprehensive income
|
||||||||
|
Funding status of defined benefit pension and other
post-retirement plans
(b)
|
(1,792.8 | ) | (1,297.2 | ) | ||||
|
Unrealized foreign exchange (gain) loss on designated net
investment hedge
(a)
|
(3.0 | ) | (4.9 | ) | ||||
|
Total liabilities and shareholders’ equity
|
$ | (1,287.6 | ) | $ | (708.9 | ) | ||
|
2009
ANNUAL REPORT |
105 | |
FIVE-YEAR
SUMMARY
| (in millions of Canadian dollars) | 2009 | 2008 (1)(3) | 2007 (1)(2) | 2006 (1) | 2005 (1) | |||||||||||||||
|
Income Statement
|
||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Freight
|
||||||||||||||||||||
|
Grain
|
$ | 1,129.9 | $ | 970.0 | $ | 938.9 | $ | 904.6 | $ | 754.5 | ||||||||||
|
Coal
|
443.3 | 607.5 | 573.6 | 592.0 | 728.8 | |||||||||||||||
|
Sulphur and fertilizers
|
303.5 | 508.6 | 502.0 | 439.3 | 447.1 | |||||||||||||||
|
Forest products
|
173.2 | 239.3 | 275.8 | 316.4 | 333.9 | |||||||||||||||
|
Industrial and consumer products
|
766.6 | 766.1 | 627.9 | 603.8 | 542.9 | |||||||||||||||
|
Automotive
|
228.8 | 323.5 | 319.0 | 314.4 | 298.0 | |||||||||||||||
|
Intermodal
|
1,129.9 | 1,399.8 | 1,318.0 | 1,256.8 | 1,161.1 | |||||||||||||||
| 4,175.2 | 4,814.8 | 4,555.2 | 4,427.3 | 4,266.3 | ||||||||||||||||
|
Other revenues
|
128.0 | 116.8 | 152.4 | 155.9 | 125.3 | |||||||||||||||
|
Total revenues
|
4,303.2 | 4,931.6 | 4,707.6 | 4,583.2 | 4,391.6 | |||||||||||||||
|
Operating expenses
|
||||||||||||||||||||
|
Compensation and benefits
|
1,275.2 | 1,306.1 | 1,275.0 | 1,348.1 | 1,339.3 | |||||||||||||||
|
Fuel
|
580.2 | 1,005.8 | 746.8 | 650.5 | 588.0 | |||||||||||||||
|
Materials
|
215.1 | 252.3 | 252.2 | 254.6 | 223.3 | |||||||||||||||
|
Equipment rents
|
184.8 | 182.2 | 207.5 | 181.2 | 210.0 | |||||||||||||||
|
Depreciation and amortization
|
488.9 | 442.5 | 427.5 | 426.9 | 414.8 | |||||||||||||||
|
Purchased services and other
|
658.9 | 701.0 | 637.8 | 638.7 | 637.0 | |||||||||||||||
|
Total operating expenses
|
3,403.1 | 3,889.9 | 3,546.8 | 3,500.0 | 3,412.4 | |||||||||||||||
|
Operating
income
(6)
|
900.1 | 1,041.7 | 1,160.8 | 1,083.2 | 979.2 | |||||||||||||||
|
Equity income (net of income tax) in Dakota,
Minnesota & Eastern Railroad Corporation (DM&E)
|
— | 50.9 | 11.2 | — | — | |||||||||||||||
|
Less:
|
||||||||||||||||||||
|
Other income and charges, before foreign exchange gains and
losses on long-term debt and other specified
items
(4)(5)(6)
|
31.0 | 22.7 | 29.6 | 27.8 | 18.1 | |||||||||||||||
|
Net interest expense
|
273.1 | 261.1 | 204.3 | 194.5 | 204.2 | |||||||||||||||
|
Income tax expense, before income tax on foreign exchange gains
and losses on
long-term
debt and income tax on other specified
items
(4)(5)(6)
|
135.7 | 189.1 | 268.7 | 264.6 | 243.7 | |||||||||||||||
|
Income, before foreign exchange gains and losses on long-term
debt and other specified
items
(4)(5)(6)
|
460.3 | 619.7 | 669.4 | 596.3 | 513.2 | |||||||||||||||
|
Foreign exchange gain (loss) on long-term debt (net of income
tax)
(5)
|
(25.8 | ) | 22.3 | 125.5 | (7.2 | ) | 22.3 | |||||||||||||
|
Other specified items (net of income
tax)
(4)(6)
|
177.9 | (34.8 | ) | 137.2 | 166.2 | (7.7 | ) | |||||||||||||
|
Net income
|
$ | 612.4 | $ | 607.2 | $ | 932.1 | $ | 755.3 | $ | 527.8 | ||||||||||
| (1) | Certain comparative period figures have been restated for the adoption of CICA accounting standard 3064 and accounting policy changes related to pension prior service costs and locomotive overhauls. |
| (2) | The 2007 figures include equity income for DM&E from October 30, 2007 to December 31, 2007. |
| (3) | The 2008 figures include the results of the DM&E on an equity accounting basis through October 29, 2008 and on a fully consolidated basis after that date. |
| (4) | Before other specified items as follows: For 2009, a $54.5 million loss on termination of lease with a shortline railway ($37.6 million after tax), a gain of $160.3 million on sales of partnership interest and significant properties ($136.8 million after tax), a $6.3 million gain in fair value of long-term floating rate notes ($4.5 million after tax), and income tax benefits of $74.2 million due to Provincial income tax rate reductions and a settlement related to a prior year; for 2008, a $49.4 million loss in fair value of Canadian third party asset-backed commercial paper ($34.8 million after tax); for 2007, a $152.2 million income tax benefit was recorded due to Federal income tax rate reductions which was offset by a $21.5 million loss in fair value of Canadian third party asset-backed commercial paper ($15.0 million after tax); for 2006, a $166.2 million income tax benefit was recorded due to Federal and Provincial income tax rate reductions; for 2005, a $33.9 million ($20.6 million after tax) reduction to environmental remediation and a $44.2 million ($28.3 million after tax) special charge for labour restructuring. |
| (5) | Before foreign exchange gain (loss) on long-term debt as follows: For 2009, a $5.8 million ($25.8 million loss after tax) foreign exchange gain on long-term debt; for 2008, a $16.3 million ($22.3 million gain after tax) foreign exchange loss on long-term debt; for 2007, a $169.8 million ($125.5 million after tax) foreign exchange gain on long-term debt; for 2006, a $0.1 million ($7.2 million after tax) foreign exchange loss on long-term debt, for 2005, a $44.7 million ($22.3 million after tax) foreign exchange gain on long-term debt. |
| (6) | These are earnings measures that are not in accordance with GAAP and may not be comparable to similar measures of other companies. CP’s results, before foreign exchange gains and losses on long-term debt and other specified items as defined in this summary, are presented to provide the reader with information that is readily comparable to prior years’ results. By excluding foreign exchange gains and losses on long-term debt, the impact of volatile short-term exchange rate fluctuations, which can only be realized when long-term debt matures or is settled, is largely eliminated. By also excluding other specified items, the results better reflect ongoing operations at CP. |
|
106
|
2009
ANNUAL REPORT |
|
SHAREHOLDER
INFORMATION
COMMON SHARE
MARKET PRICES
| 2009 | 2008 | |||||||||||||||
| Toronto Stock Exchange (Canadian dollars) | High | Low | High | Low | ||||||||||||
|
First Quarter
|
46.09 | 32.36 | 74.74 | 57.30 | ||||||||||||
|
Second Quarter
|
48.41 | 36.80 | 75.00 | 63.98 | ||||||||||||
|
Third Quarter
|
55.96 | 38.35 | 68.75 | 53.80 | ||||||||||||
|
Fourth Quarter
|
58.17 | 45.41 | 57.86 | 34.24 | ||||||||||||
|
Year
|
58.17 | 32.36 | 75.00 | 34.24 | ||||||||||||
|
New York Stock Exchange
(U.S. dollars)
|
High | Low | High | Low | ||||||||||||
|
First Quarter
|
38.98 | 25.11 | 76.18 | 55.39 | ||||||||||||
|
Second Quarter
|
43.91 | 29.19 | 76.14 | 62.84 | ||||||||||||
|
Third Quarter
|
51.64 | 32.96 | 68.33 | 51.75 | ||||||||||||
|
Fourth Quarter
|
55.43 | 42.05 | 53.70 | 26.64 | ||||||||||||
|
Year
|
55.43 | 25.11 | 76.18 | 26.64 | ||||||||||||
|
Number of registered shareholders at year end:
|
17,437 | |||||||||||||||
|
Closing market prices at year end:
|
||||||||||||||||
|
Toronto Stock Exchange:
|
CDN$ | 56.79 | ||||||||||||||
|
New York Stock Exchange:
|
US$ | 54.00 | ||||||||||||||
SHAREHOLDER
ADMINISTRATION
Common Shares
Computershare Investor Services Inc., with transfer facilities
in Montreal, Toronto, Calgary and Vancouver, serves as transfer
agent and registrar for the Common Shares in Canada.
Computershare Trust Company NA, Denver, Colorado, serves as
co-transfer agent and co-registrar for the Common Shares in the
United States.
For information concerning dividends
,
lost share
certificates, estate transfers or for change in share
registration or address, please contact the transfer agent and
registrar by telephone at 1-877-427-7245 toll free North America
or International
(514) 982-7555,
visit their website at www.computershare.com/cp ; or write to:
Computershare Investor Services
Inc.
100 University Avenue, 9th Floor
Toronto, Ontario Canada M5J 2Y1
INFORMATION
REGARDING DIRECT REGISTRATION
The Direct Registration System, or DRS, allows registered
holders to hold securities in “book entry” form
without having a physical certificate issued as evidence of
ownership. Instead, securities are held in the name of the
registered holder and registered electronically on the
issuer’s records maintained by the issuer’s transfer
agent. If you are a registered holder of shares and wish to hold
your shares using the DRS, please contact the transfer agent at
the phone number or address shown above, or for more information
about direct registration, log on to Computershare’s
website at www.computershare.com/investorcentrecanada and click
on “Questions and Answers”.
4% CONSOLIDATED
DEBENTURE STOCK
Inquiries with respect to Canadian Pacific Railway
Company’s 4% Consolidated Debenture Stock should be
directed as follows:
For stock denominated in U.S. currency – The Bank
of New York Mellon at
(212) 815-2719
or by
e-mail
at lesley.daley@bnymellon.com and;
For stock denominated in pounds Sterling – BNY
Trust Company of Canada at
(416) 933-8504
or by
e-mail
at marcia.redway@bnymellon.com.
|
2009
ANNUAL REPORT |
107 | |
MARKET FOR
SECURITIES
The Common Shares of Canadian Pacific Railway Limited are listed
on the Toronto and New York stock exchanges. The Debenture Stock
of Canadian Pacific Railway Company is listed on the London
Stock Exchange (UK pounds sterling) and on the New York Stock
Exchange (U.S. currency).
TRADING
SYMBOL
Common Shares – CP
DUPLICATE ANNUAL
REPORTS
While every effort is made to avoid duplication, some Canadian
Pacific Railway Limited registered shareholders may receive
multiple copies of shareholder information mailings such as this
Annual Report. Registered shareholders who wish to consolidate
any duplicate accounts which are registered in the same name are
requested to write to Computershare Investor Services Inc.
DIRECT DEPOSIT OF
DIVIDENDS
Registered shareholders are offered the option of having their
Canadian and U.S. dollar dividends directly deposited into
their personal bank accounts in Canada and the United States on
the dividend payment dates. Shareholders may obtain a direct
deposit enrolment form from Computershare Investor Services Inc.
CORPORATE
GOVERNANCE
Canadian Pacific’s Board of Directors and its management
are committed to a high standard of corporate governance. They
believe effective corporate governance calls for the
establishment of processes and structures that contribute to the
sound direction and management of the Corporation’s
business, with a view to enhancing shareholder value.
A detailed description of CP’s approach to corporate
governance is contained in its Management Proxy Circular issued
in connection with the 2010 Annual and Special Meeting of
Shareholders.
GOVERNANCE
STANDARDS
Any significant differences between the Corporation’s
corporate governance practices and those set forth in the
corporate governance listing standards (“Listing
Standards”) of the New York Stock Exchange
(“NYSE”) are set forth on Canadian Pacific Railway
Limited’s website www.cpr.ca under “Governance”.
CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION
The certifications (the “302 Certifications”) of the
Chief Executive Officer and the Executive Vice-President and
Chief Financial Officer of each of Canadian Pacific Railway
Limited and Canadian Pacific Railway Company required by
Section 302 of the
Sarbanes-Oxley Act of 2002
and
the rules promulgated by the Securities and Exchange Commission
(“SEC”) thereunder, have been filed with the SEC as an
exhibit to the Annual Report of Canadian Pacific Railway Limited
and Canadian Pacific Railway Company on
Form 40-F.
The 302 Certifications have also been filed in fulfillment of
the requirements of National Instrument
52-109.
2010 ANNUAL AND
SPECIAL MEETING
The Annual and Special Meeting of Shareholders will be held on
Friday, May 21, 2010, at The Fairmont Palliser Hotel
located at 133 – 9th Avenue SW, Calgary, Alberta, at
9:00 a.m. Mountain Time.
SHAREHOLDER
SERVICES
Shareholders having inquiries or wishing to obtain copies of the
Corporation’s Annual Information Form may contact
Shareholder Services at
1-866-861-4289
or
(403) 319-7538,
or by
e-mail
at shareholder@cpr.ca, or by writing to:
Shareholder Services, Office of the Corporate Secretary,
Canadian Pacific, Suite 920, Gulf Canada Square,401- 9th
Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
INVESTOR
INFORMATION
Financial information is available under the Investor Section on
CP’s Web site at www.cpr.ca.
COMMUNICATIONS
AND PUBLIC AFFAIRS
Contact Communications and Public Affairs, Canadian Pacific,
Suite 500, Gulf Canada Square, 401- 9th Avenue S.W.,
Calgary, Alberta, Canada, T2P 4Z4
|
108
|
2009
ANNUAL REPORT |
|
DIRECTORS &
COMMITTEES
John E. Cleghorn, O.C.,
F.C.A.
(2)
Chairman
Canadian Pacific Railway Limited
Toronto, Ontario
Tim W.
Faithfull
(2)(3)*(4
)
Retired President and Chief
Executive Officer
Shell Canada Limited
Oxford, Oxfordshire, England
Frederic J.
Green
(3)
President and Chief Executive
Officer
Canadian Pacific Railway Limited
Calgary, Alberta
Krystyna T. Hoeg,
C.A.
(1)(5
)
Former President and Chief
Executive Officer
Corby Distilleries Limited
Toronto, Ontario
Richard C.
Kelly
(1)(3)
Chairman and Chief Executive
Officer
Xcel Energy, Inc.
Minneapolis, Minnesota
The Honourable John P.
Manley
(1)(2)(5)*
President and Chief Executive
Officer
Canadian Council of Chief
Executives
Ottawa, Ontario
Linda J.
Morgan
(3)(4)
Counsel
Covington & Burling LLP
Bethesda, Maryland
Madeleine
Paquin
(3)(4)
President and Chief Executive
Officer
Logistec Corporation
Montreal, Quebec
Michael E.J. Phelps,
O.C.
(2)(4)*(5)
Chairman
Dornoch Capital Inc.
West Vancouver, British Columbia
Roger Phillips, O.C., S.O.M.,
F.Inst.P.
(1)(2)*(5)
Retired President and Chief
Executive Officer
IPSCO Inc.
Regina, Saskatchewan
David W.
Raisbeck
(1)(5)
Retired Vice-Chairman
Cargill Inc.
Sanibel, Florida
Hartley T. Richardson, C.M.,
O.M.
(4)(5)
President and Chief Executive
Officer
James Richardson & Sons,
Limited
Winnipeg, Manitoba
Michael W.
Wright
(1)*(2)(3)
Retired Chairman of the Board and
Chief Executive Officer
SUPERVALU INC.
Longboat Key, Florida
(1)
Audit,
Finance and Risk Management Committee
(2)
Corporate
Governance and Nominating Committee
(3)
Health,
Safety, Security and Environment Committee
(4)
Management
Resources and Compensation Committee
(5)
Pension
Committee
*
denotes
chairman of the committee
|
2009
ANNUAL REPORT |
109 | |
SENIOR OFFICERS
OF THE COMPANY
John E. Cleghorn, O.C.,
F.C.A.
Chairman of the Board
Toronto, Ontario
Frederic J.
Green
(1)
President and Chief Executive
Officer
Calgary, Alberta
Kathryn B.
McQuade
(1)
Executive Vice-President and Chief
Financial Officer
Mesquite, Nevada
Jane A.
O’Hagan
(1)
Senior Vice-President, Strategy
and Yield
Calgary, Alberta
Brock M.
Winter
(1)
Senior Vice-President, Operations
Calgary, Alberta
Raymond H.
Foot
(1)
Group Vice-President, Sales
Calgary, Alberta
J. Michael
Franczak
(1)
Group Vice-President, Operations
Calgary, Alberta
J. Robert
Milloy
(1)
Group Vice-President, Marketing
and Yield
Calgary, Alberta
R. Andrew
Shields
(1)
Group Vice-President, Human
Resources and
Industrial Relations
Calgary, Alberta
Marlowe G. Allison
Vice-President and Treasurer
Calgary, Alberta
Donald B.
Campbell
(1)
Vice-President, Finance
Calgary, Alberta
Brian W.
Grassby
(1)
Vice-President and Comptroller
Calgary, Alberta
Paul A. Guthrie,
Q.C.
(1)
Vice-President, Law
Municipal District of Rocky View,
Alberta
Karen L. Fleming
Senior Counsel and Corporate
Secretary
Calgary, Alberta
(1)
Executive
Committee of Canadian Pacific Railway Company
|
110
|
2009
ANNUAL REPORT |
|
TABLE OF CONTENTS