Canadian Pacific's Q3 net income rises 45% versus a year ago to C$324M as revenues climb 6% to C$1.5B, a quarterly record; CEO says company well-positioned for a record 2013
Cindy Allen
CALGARY, Alberta
,
October 23, 2013
(press release)
–
Adjusted EPS, excluding a significant tax item, was C$1.88
Canadian Pacific Railway Limited (CP.TO) (CP) today announced record quarterly earnings and its lowest operating ratio in company history. Adjusted EPS of $1.88 grew 45 per cent over third-quarter 2012, while third-quarter operating ratio was 65.9 per cent, an 820 basis point improvement over third-quarter 2012. "By all standards, this was an outstanding quarter," said E. Hunter Harrison , Chief Executive Officer. "The company's focus on service execution while controlling costs is a testament to our team of dedicated, hardworking railroaders." "What we have proven this quarter is the ability to drive earnings growth and lower our operating ratio, even in a softer volume environment. That's the power of the CP plan," added Harrison. THIRD-QUARTER 2013 HIGHLIGHTS: "We enter the fourth quarter with momentum and are well positioned for what I believe will be a record 2013," said Harrison. "CP's transformational journey is clearly ahead of plan, yet far from complete; we will continue to make this franchise stronger, creating even more value for customers and shareholders." CP also announced today that its chief financial officer, Brian Grassby will be retiring from the company, however will remain a key part of the senior management team until year-end to lead a successful transition. A search process is currently underway and it is expected an announcement on a new chief financial officer will be made shortly. "Brian has played an important role over the past 16 months in CP's turnaround agenda," said Harrison. "On behalf of all our employees and the board, I'd like to thank Brian for his 12 years of dedicated service to the railway and wish him well in his retirement." Editor's Note Conference call access Webcast A replay of the conference call will be available by phone through November 20, 2013 at 416-849-0833 or toll free 1-855-859-2056, password 71215878. A webcast of the presentation and an audio file will be available at www.cpr.ca under "Invest In CP" tab. Non-GAAP Measures Income, excluding significant items, also referred to as Adjusted income, provides management with a measure of income that allows a multi-period assessment of long-term profitability and also allows management and other external users of our consolidated financial statements to compare profitability on a long-term basis with that of our peers. Diluted earnings per share, excluding significant items, also referred to as Adjusted EPS, provides the same information on a per share basis. Free cash is used by management to provide information with respect to the relationship between cash provided by operating activities and investment decisions and provides a comparable measure for period to period changes. For further information regarding non-GAAP measures, including reconciliation to the nearest GAAP measures, see our 2012 annual Management's Discussion and Analysis or the document Non-GAAP Measures on our web site at www.cpr.ca. Note on Forward-Looking Information By its nature, CP's forward-looking information involves numerous assumptions, inherent risks and uncertainties, including but not limited to the following factors: changes in business strategies; general North American and global economic, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes as well as security threats and governmental response to them, and technological changes. Other risks are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States . Reference should be made to "Management's Discussion and Analysis" in CP's annual and interim reports, Annual Information Form and Form 40-F. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise. About Canadian Pacific CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CANADIAN PACIFIC RAILWAY LIMITED 1 Basis of presentation These unaudited interim consolidated financial statements of Canadian Pacific Railway Limited ("CP", or "the Company") reflect management's estimates and assumptions that are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America ("GAAP"). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2012 consolidated financial statements. The accounting policies used are consistent with the accounting policies used in preparing the 2012 consolidated financial statements with the addition of disclosure on Restricted cash and cash equivalents in Note 4 to the Interim Consolidated Financial Statements. CP's operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons. In management's opinion, the unaudited interim consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year. 2 Accounting changes Accumulated other comprehensive income In February 2013 , the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to FASB ASC Topic 220. The update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012 . The disclosure requirements of this ASU for the three and nine months ended September 30, 2013 are presented in Note 3. 3 Changes in accumulated other comprehensive loss (AOCL) by component (1) Amounts are presented net of tax. 4 Restricted cash and cash equivalents During the second and third quarters of 2013, the Company entered into a series of committed and uncommitted bilateral letter of credit facility agreements with financial institutions to support its requirement to post letters of credit in the ordinary course of business. These agreements have varying expiries with the earliest expiry in August 2014. Under these agreements, the Company either is required to or has the option to post collateral in the form of cash or cash equivalents, equal at least to the face value of the letter of credit issued. Collateral includes highly liquid investments purchased three months or less from maturity and is stated at cost, which approximates market value. Depending on the agreement and the nature of the letter of credit, this collateral may be shown separately as "Restricted cash and cash equivalents" or included in "Investments" on the Consolidated Balance Sheets. At September 30, 2013 , under its bilateral facilities, the Company had letters of credit drawn of $376 million from a total available amount of $485 million . Prior to these bilateral agreements, letters of credit were drawn under the Company's $1.0 billion revolving credit facility. At September 30, 2013 , cash and cash equivalents of $346 million was pledged as collateral and recorded as $261 million in "Restricted cash and cash equivalents" and as $85 million in "Investments" on the Consolidated Balance Sheets. The Company can largely withdraw this collateral during any month. 5 Income taxes During the third quarter of 2013, legislation was enacted to increase the province of British Columbia's corporate income tax rate. As a result, the Company recalculated its deferred income taxes as at January 1, 2013 based on this change and recorded an income tax expense of $7 million in the third quarter of 2013. The effective income tax rate for the three and nine months ended September 30, 2013 was 28.6% and 27.1%, respectively (three and nine months ended September 30, 2012 - 26.6% and 27.6%, respectively). The changes in tax rates were primarily due to the impact of a change in the province of British Columbia's corporate income tax rate, which was partially offset by the benefit recognized for the 2012 U.S. federal track maintenance credit of $6 million enacted in the first quarter of 2013. 6 Earnings per share At September 30, 2013 , the number of shares outstanding was 175.2 million ( September 30, 2012 - 172.8 million). Basic earnings per share have been calculated using net income for the period divided by the weighted-average number of shares outstanding during the period. The number of shares used in earnings per share calculations is reconciled as follows: For the three and nine months ended September 30, 2013 , there were 8,800 options and 38,872 options, respectively, excluded from the computation of diluted earnings per share because their effects were not dilutive (three and nine months ended September 30, 2012 - no options and 208,667 options, respectively). 7 Financial instruments A. Fair values of financial instruments The Company categorizes its financial assets and liabilities measured at fair value in line with the fair value hierarchy established by GAAP that prioritizes, with respect to reliability, the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and have the highest priority. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and have lower priorities. When possible, the estimated fair value is based on quoted market prices and, if not available, estimates from third party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, foreign exchange and commodity) and volatility, depending on the type of derivative and nature of the underlying risk. The Company uses inputs and data used by willing market participants when valuing derivatives and considers its own credit default swap spread as well as those of its counterparties in its determination of fair value. The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of approximately $5,482 million and a carrying value of $4,768 million at September 30, 2013. At December 31, 2012 , long-term debt had a fair value of $5,688 million and a carrying value of $4,690 million . The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of interest and principal at estimated interest rates expected to be available to the Company at period end. All derivatives and long-term debt are classified as Level 2. B. Financial risk management Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, foreign exchange ("FX") rates, the price of fuel and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheet, commitments or forecasted transactions. At the time a derivative contract is entered into and at least quarterly thereafter, an assessment is made whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address. It is not the Company's intent to use financial derivatives or commodity instruments for trading or speculative purposes. Foreign exchange management Occasionally, the Company may enter into short-term FX forward contracts as part of its cash management strategy. Net investment hedge Foreign exchange forward contracts At September 30, 2013 , the Company had FX forward contracts to fix the exchange rate on US$100 million of principal outstanding on a capital lease due in January 2014 , US$175 million of its 6.50% Notes due in May 2018 , and US$100 million of its 7.25% Notes due in May 2019 , unchanged from December 31, 2012 and September 30, 2012 . These derivatives, which are accounted for as cash flow hedges, guarantee the amount of Canadian dollars that the Company will repay when these obligations mature. During the three and nine months ended September 30, 2013 , an unrealized foreign exchange loss of $6 million and an unrealized foreign exchange gain of $9 million , respectively (three and nine months ended September 30, 2012 - unrealized loss of $8 million and $7 million , respectively) was recorded in "Other income and charges" in relation to these derivatives. Gains recorded in "Other income and charges" were largely offset by unrealized losses on the underlying debt which the derivatives were designated to hedge. Similarly, losses were largely offset by unrealized gains on the underlying debt. At September 30, 2013 , the unrealized gain derived from these FX forwards was $17 million of which $3 million was included in "Other current assets" and $14 million in "Other assets" with the offset reflected as an unrealized gain of $6 million in "Accumulated other comprehensive loss" and as an unrealized gain of $11 million in "Retained earnings". At December 31, 2012 , the unrealized gain derived from these FX forwards was $8 million which was included in "Other assets" with the offset reflected as an unrealized gain of $6 million in "Accumulated other comprehensive loss" and as an unrealized gain of $2 million in "Retained earnings". At September 30, 2013 , the Company expected that, during the next twelve months, unrealized pre-tax losses of $2 million would be reclassified to "Other income and charges". 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 may not be completely recovered from shippers due to timing and volatility in the market. In the past, to address the residual portion of CP's fuel costs not mitigated by its fuel cost recovery programs, CP had a systematic hedge program. As a result of improving coverage from its fuel cost recovery programs, CP exited its hedging program during the first quarter of 2013. Energy futures At September 30, 2013 , the Company had no remaining diesel futures contracts. At December 31, 2012 , the unrealized loss on these contracts was negligible. 8 Stock-based compensation At September 30, 2013 , the Company had several stock-based compensation plans, including stock option plans, various cash settled liability plans, which are remeasured to fair value quarterly based on share price and vesting conditions, and an employee stock savings plan. These plans resulted in an expense of $9 million for the three months ended September 30, 2013 and an expense of $52 million for the nine months ended September 30, 2013 (three and nine months ended September 30, 2012 - expense of $12 million and $38 million , respectively). Regular options Pursuant to the employee plans, these regular options vest between 12 and 48 months after the grant date, and will expire after 10 years. Under the fair value method, the fair value at the grant date of the regular options issued in the nine months ended September 30, 2013 was $16 million , with a weighted-average fair value of $32.80 per option. The weighted-average fair value assumptions were approximately: Performance share unit ("PSU") plan Deferred share unit ("DSU") plan Restricted share unit ("RSU") plan 9 Pensions and other benefits In the three and nine months ended September 30, 2013 , the Company made contributions of $24 million and $76 million , respectively (2012 - $24 million and $74 million , respectively) to its defined benefit pension plans. The elements of net periodic benefit cost for defined benefit pension plans and other benefits recognized in the three and nine months ended September 30, 2013 , included the following components: CP reached agreements with all of the unions which it had been bargaining with in Canada in 2012. The new agreements introduced amendments to pension plans. Among other changes, the amendments established a cap on pension for each year of pensionable service, including a cap on some non-union employees' pensions. Under the amendments, plan participants will continue to earn additional pensionable years of service as normal, but with a dollar limit on the cap for each year earned. Plan amendments resulting from collective bargaining are accounted for in the periods the new agreements are ratified. The plan amendments resulting from the December 2012 arbitration award were contingent on CP making plan amendments for non-union employees, and consequently were accounted for in the period CP made such amendments. As a result of the plan amendments, the projected benefit obligation decreased by $135 million from December 31, 2012 , with a corresponding increase to Other comprehensive income. As a result, there has been a reduction of Accumulated other comprehensive loss through the amortization of prior service costs. The prior service costs are recognized in net periodic pension expense over the remaining terms of the applicable union agreements (averaging approximately two years), and over the expected average remaining service life of non-union employees. At the date of the plan amendments, CP has assessed the significance of such amendments to the consolidated financial statements and has determined that a remeasurement of plan assets and obligations as of the date of the above plan amendments was not warranted. 10 Commitments and contingencies In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damages to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at September 30, 2013 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. On July 6, 2013 , a train carrying crude oil operated by Montreal Maine and Atlantic Railway ("MM&A") derailed and exploded on a section of railway line owned by MM&A in Lac-Megantic, Quebec . Following this, the Minister of Sustainable Development, Environment, Wildlife and Parks of Quebec ("the Minister") issued an Order on July 29, 2013 directing named parties to recover the contaminants and to clean-up and decontaminate the site of the derailment. On August 14, 2013 , the Minister issued an Amended Order to add CP as a named party. On August 16, 2013 , CP was added as a responding party in a Second Amended Motion to Authorize the Bringing of a Class Action filed in the Superior Court of Quebec on behalf of a class of parties described as all persons and entities (natural persons, legal persons established for a private interest, partnerships or associations so long as they employed 50 persons or less during the 12 month period preceding the class action) residing in, owning or leasing property in, operating a business in and/or were physically present in Lac-Megantic seeking damages caused by the derailment. CP believes that it is not liable, either in fact or in law, as alleged in either proceeding. As such, in defense of the respective proceedings, CP has filed a Motion of Appeal with the Administrative Tribunal of Quebec in relation to the Amended Order as well as a Notice of Appearance in relation to the class action. At this early stage in the legal proceedings, it is too early to assess any potential liability and the quantum of potential loss is undeterminable. No accrual has been recognized as at September 30, 2013 . At September 30, 2013 , the Company had committed to total future capital expenditures amounting to $570 million and operating expenditures relating to supplier purchase obligations, such as locomotive maintenance and overhaul agreements, as well as agreements to purchase other goods and services amounting to approximately $1.5 billion for the years 2013-2031. Minimum payments under operating leases were estimated at $687 million in aggregate, with annual payments in each of the five years following 2013 of (in millions): 2014 - $117 ; 2015 - $98 ; 2016 - $80 ; 2017 - $62 ; and 2018 - $51 . Environmental remediation accruals cover site-specific remediation programs. Environmental remediation accruals are measured on an undiscounted basis and are recorded when the costs to remediate are probable and reasonably estimable. The accruals for environmental remediation represent CP's best estimate of its probable future obligation and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include CP's best estimate of all probable costs, CP's total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, are not expected to be material to CP's financial position, but may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable. The expense included in "Purchased services and other" for the three and nine months ended September 30, 2013 was $4 million and $5 million , respectively (three and nine months ended September 30, 2012 , $1 million and expense of $2 million , respectively). Provisions for environmental remediation costs are recorded in "Other long-term liabilities", except for the current portion which is recorded in "Accounts payable and accrued liabilities". The total amount provided at September 30, 2013 was $91 million ( December 31, 2012 - $89 million ). Payments are expected to be made over 10 years to 2023. During the three months ended March 31, 2013 , CP provided an interest free loan pursuant to a court order in the amount of $20 million to a corporation owned by a court appointed trustee to facilitate the acquisition of a building. The building will be held in trust until the resolution of legal proceedings with regard to CP's entitlement to an exercised purchase option of the building. If CP is successful in these proceedings, title to the building will transfer to CP with an additional payment of $20 million ; otherwise the loan will be repaid. 11 Significant customers During the third quarter of 2013, one customer comprised 10.0% of total revenue (third quarter of 2012 - 9.2%). No one customer comprised more than 10% of total revenue for the nine months ended September 30, 2013 or 2012.
CP will discuss its results with the financial community in a conference call beginning at 11:00 a.m. Eastern time (9:00 a.m. Mountain time) on October 23, 2013 .
Toronto participants dial in number: (647) 427-7450
Operator assisted toll free dial in number: 1-888-231-8191
Callers should dial in 10 minutes prior to the call.
For those with Internet access we encourage you to listen via CP's website at www.cpr.ca. To access the webcast and the presentation material, click on "Invest In CP" tab.
We present non-GAAP measures and cash flow information 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 measures exclude significant items that are not among our normal ongoing revenues and operating expenses. They have no standardized meaning and are not defined by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.
This news release contains certain forward-looking statements relating but not limited to our operations, anticipated financial performance, planned capital expenditures, and business prospects. Undue reliance should not be placed on forward-looking information as actual results may differ materially.
Canadian Pacific (CP.TO)(CP) is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal , providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is a low-cost provider that is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. Visit cpr.ca to see the rail advantages of Canadian Pacific.
(in millions of Canadian dollars, except per share data)
(unaudited)
For the three months
For the nine months
ended September 30
ended September 30
2013
2012
2013
2012
Revenues
Freight
$
1,495
$
1,414
$
4,412
$
4,086
Other
39
37
114
107
Total revenues
1,534
1,451
4,526
4,193
Operating expenses
Compensation and benefits
331
371
1,075
1,128
Fuel
226
232
742
743
Materials
54
57
184
178
Equipment rents
44
52
134
158
Depreciation and amortization
139
137
421
399
Purchased services and other
216
226
664
698
Total operating expenses
1,010
1,075
3,220
3,304
Operating income
524
376
1,306
889
Less:
Other income and charges
-
2
11
34
Net interest expense
70
69
208
207
Income before income tax expense
454
305
1,087
648
Income tax expense (Note 5)
130
81
294
179
Net income
$
324
$
224
$
793
$
469
Earnings per share (Note 6)
Basic earnings per share
$
1.85
$
1.31
$
4.54
$
2.74
Diluted earnings per share
$
1.84
$
1.30
$
4.50
$
2.72
Weighted-average number of shares (millions)
Basic
175.1
172.2
174.8
171.3
Diluted
176.5
173.4
176.3
172.6
Dividends declared per share
$
0.3500
$
0.3500
$
1.0500
$
1.0000
See Notes to Interim Consolidated Financial Statements.
(in millions of Canadian dollars)
(unaudited)
For the three months
For the nine months
ended September 30
ended September 30
2013
2012
2013
2012
Net income
$
324
$
224
$
793
$
469
Net gain (loss) in foreign currency translation
adjustments, net of hedging activities
2
14
(1)
12
Change in derivatives designated as cash flow hedges
-
9
-
11
Change in defined benefit pension and post-retirement plans
50
53
299
161
Other comprehensive income before income taxes
52
76
298
184
Income tax expense on above items
(22)
(30)
(63)
(58)
Other comprehensive income (Note 3)
30
46
235
126
Comprehensive income
$
354
$
270
$
1,028
$
595
See Notes to Interim Consolidated Financial Statements.
(in millions of Canadian dollars)
(unaudited)
September 30
December 31
2013
2012
Assets
Current assets
Cash and cash equivalents
$
329
$
333
Restricted cash and cash equivalents (Note 4)
261
-
Accounts receivable, net
594
546
Materials and supplies
158
136
Deferred income taxes
294
254
Other current assets
73
60
1,709
1,329
Investments (Note 4)
177
83
Properties
13,493
13,013
Goodwill and intangible assets
166
161
Other assets
189
141
Total assets
$
15,734
$
14,727
Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities
$
1,074
$
1,176
Long-term debt maturing within one year
177
54
1,251
1,230
Pension and other benefit liabilities (Note 9)
1,036
1,366
Other long-term liabilities
329
306
Long-term debt
4,591
4,636
Deferred income taxes
2,499
2,092
Total liabilities
9,706
9,630
Shareholders' equity
Share capital
2,221
2,127
Additional paid-in capital
35
41
Accumulated other comprehensive loss (Note 3)
(2,533)
(2,768)
Retained earnings
6,305
5,697
6,028
5,097
Total liabilities and shareholders' equity
$
15,734
$
14,727
Commitments and contingencies (Note 10)
See Notes to Interim Consolidated Financial Statements.
(in millions of Canadian dollars)
(unaudited)
For the three months
For the nine months
ended September 30
ended September 30
2013
2012
2013
2012
Operating activities
Net income
$
324
$
224
$
793
$
469
Reconciliation of net income to cash provided by
operating activities:
Depreciation and amortization
139
137
421
399
Deferred income taxes (Note 5)
110
68
260
162
Pension funding in excess of expense (Note 9)
(17)
(14)
(40)
(44)
Other operating activities, net
(21)
(58)
(40)
(81)
Change in non-cash working capital balances related to
operations
(31)
(25)
(103)
(46)
Cash provided by operating activities
504
332
1,291
859
Investing activities
Additions to properties
(298)
(287)
(802)
(812)
Proceeds from the sale of properties and other assets
11
76
38
138
Change in restricted cash and cash equivalents and
investments used to collateralize letters of credit (Note 4)
(247)
-
(346)
-
Other (Note 10)
(1)
-
(27)
(1)
Cash used in investing activities
(535)
(211)
(1,137)
(675)
Financing activities
Dividends paid
(62)
(60)
(183)
(162)
Issuance of common shares
6
81
69
136
Issuance of long-term debt
-
-
-
71
Repayment of long-term debt
(19)
(16)
(45)
(41)
Net decrease in short-term borrowing
-
-
-
(27)
Cash (used in) provided by financing activities
(75)
5
(159)
(23)
Effect of foreign currency fluctuations on U.S. dollar-
denominated cash and cash equivalents
(7)
(1)
1
(1)
Cash position
(Decrease) increase in cash and cash equivalents
(113)
125
(4)
160
Cash and cash equivalents at beginning of period
442
82
333
47
Cash and cash equivalents at end of period
$
329
$
207
$
329
$
207
Supplemental disclosures of cash flow information:
Income taxes paid (refunded)
$
16
$
(1)
$
27
$
(8)
Interest paid
$
58
$
60
$
209
$
194
See Notes to Interim Consolidated Financial Statements.
(in millions of Canadian dollars, except common share amounts)
(unaudited)
Common
Accumulated
shares
Additional
other
Total
(in
Share
paid-in
comprehensive
Retained
shareholders'
millions)
capital
capital
loss
earnings
equity
Balance at January 1, 2013
173.9
$
2,127
$
41
$
(2,768)
$
5,697
$
5,097
Net income
-
-
-
-
793
793
Other comprehensive income (Note 3)
-
-
-
235
-
235
Dividends declared
-
-
-
-
(185)
(185)
Effect of stock-based compensation expense
-
-
14
-
-
14
Shares issued under stock option plans
1.3
94
(20)
-
-
74
Balance at September 30, 2013
175.2
$
2,221
$
35
$
(2,533)
$
6,305
$
6,028
Common
Accumulated
shares
Additional
other
Total
(in
Share
paid-in
comprehensive
Retained
shareholders'
millions)
capital
capital
loss
earnings
equity
Balance at January 1, 2012
170.0
$
1,854
$
86
$
(2,736)
$
5,445
$
4,649
Net income
-
-
-
-
469
469
Other comprehensive income (Note 3)
-
-
-
126
-
126
Dividends declared
-
-
-
-
(172)
(172)
Effect of stock-based compensation expense
-
-
21
-
-
21
Shares issued under stock option plans
2.8
188
(50)
-
-
138
Balance at September 30, 2012
172.8
$
2,042
$
57
$
(2,610)
$
5,742
$
5,231
See Notes to Interim Consolidated Financial Statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(unaudited)
For the three months ended September 30
For the nine months ended September 30
(in millions of Canadian dollars)
Foreign
currency
net of
hedging
activities(1) Derivatives
and other(1) Pension
and post-
retirement
defined
benefit
plans(1)(2) Total(1)
Foreign
currency
net of
hedging
activities(1) Derivatives
and other(1) Pension
and post-
retirement
defined
benefit
plans(1)(2) Total(1)
Opening balance, 2013
$ 94
$ (14)
$ (2,643)
$ (2,563)
$ 74
$ (14)
$ (2,828)
$ (2,768)
Other comprehensive income
(loss) before reclassifications (7)
(7)
-
(14)
13
8
102
123
Amounts reclassified from
accumulated other
comprehensive (income) loss -
7
37
44
-
(8)
120
112
Net current-period other
comprehensive income (loss) (7)
-
37
30
13
-
222
235
Closing balance, 2013
$ 87
$ (14)
$ (2,606)
$ (2,533)
$ 87
$ (14)
$ (2,606)
$ (2,533)
Opening balance, 2012
$ 71
$ (18)
$ (2,709)
$ (2,656)
$ 72
$ (20)
$ (2,788)
$ (2,736)
Other comprehensive income
(loss) before reclassifications (1)
(1)
-
(2)
(2)
2
-
-
Amounts reclassified from
accumulated other
comprehensive loss -
8
40
48
-
7
119
126
Net current-period other
comprehensive income (loss) (1)
7
40
46
(2)
9
119
126
Closing balance, 2012
$ 70
$ (11)
$ (2,669)
$ (2,610)
$ 70
$ (11)
$ (2,669)
$ (2,610)
For the three months
ended September 30 For the nine months
ended September 30
2013
2012
2013
2012
Amortization of prior service costs(3)
$ (18)
$ -
$ (41)
$ 1
Recognition of net actuarial loss(3)
68
54
205
160
Total before income tax
50
54
164
161
Income tax benefit
(13)
(14)
(44)
(42)
Net of income tax
$ 37
$ 40
$ 120
$ 119
(2) Amounts reclassified from accumulated other comprehensive loss.
(3) Impacts Compensation and benefits on the Consolidated Statements of Income.
For the three months
For the nine months
ended September 30
ended September 30
(in millions of Canadian dollars)
2013
2012
2013
2012
Current income tax expense
$
20
$
13
$
34
$
17
Deferred income tax expense
110
68
260
162
Income tax expense
$
130
$
81
$
294
$
179
For the three months
For the nine months
ended September 30
ended September 30
(in millions)
2013
2012
2013
2012
Weighted-average shares outstanding
175.1
172.2
174.8
171.3
Dilutive effect of stock options
1.4
1.2
1.5
1.3
Weighted-average diluted shares outstanding
176.5
173.4
176.3
172.6
The Company conducts business transactions and owns assets in both Canada and the United States . As a result, the Company is exposed to fluctuations in value of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company may enter into foreign exchange risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.
The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majority of the Company's U.S. dollar denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on net income by offsetting long-term FX gains and losses on U.S. dollar denominated long-term debt and gains and losses on its net investment. The effective portion recognized in "Other comprehensive income" for the three and nine months ended September 30, 2013 was an unrealized foreign exchange gain of $65 million and a loss of $112 million , respectively (three and nine months ended September 30, 2012 - unrealized foreign exchange gain of $112 million and $106 million , respectively). There was no ineffectiveness during the three and nine months ended September 30, 2013 , and comparative periods.
The Company may enter into FX forward contracts to lock-in the amount of Canadian dollars it has to pay on its U.S. denominated debt maturities.
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. Fuel expense constitutes a large portion of the Company's operating costs and 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 local and world markets for crude oil and distillate fuels, which can be affected by supply disruptions and geopolitical events.
During the first quarter ended March 31, 2013 , the Company settled its remaining diesel futures contracts, accounted for as cash flow hedges, to purchase 20 million U.S. gallons during the period January to December 2013 for a realized gain and proceeds of $2 million . In the three and nine months ended September 30, 2013 , a reduction to "Fuel" expense was recorded totalling $1 million and $2 million , respectively, as a result of the recognition in income of this previously realized gain. At September 30, 2013 , there was a negligible realized gain remaining in "Accumulated other comprehensive loss" to be amortized to "Fuel" expense in 2013 as the related diesel is purchased. During the three and nine months ended September 30, 2012 , the impact of settled swaps decreased "Fuel" expense by $1 million and $1 million respectively, as a result of realized gains on diesel swaps.
In the nine months ended September 30, 2013 , under CP's stock option plans, the Company issued 497,330 regular options at the weighted-average price of $118.55 per share, based on the closing price on the grant date.
For the nine
months
ended September
30, 2013
Grant price
$
118.55
Expected option life (years)(1)
6.25
Risk-free interest rate(2)
1.55
%
Expected stock price volatility(3)
30
%
Expected annual dividends per share(4)
$
1.40
Expected forfeiture rate(5)
1.33
%
(1) Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour, or when available, specific expectations regarding future exercise behaviour, were used to estimate the expected life of the option.
(2) Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant.
(3) Based on the historical stock price volatility of the Company's stock over a period commensurate with the expected term of the option.
(4) Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option.
(5) The Company estimated forfeitures based on past experience. This rate is monitored on a periodic basis.
In the nine months ended September 30, 2013 , the Company issued 186,978 PSUs with a grant date fair value of $21 million . These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company's Common Shares. PSUs vest and are settled in cash, or in CP common shares, at the discretion of the Chief Executive Officer, approximately three years after the grant date, contingent upon CP's performance (performance factor). The fair value of PSUs is measured, both on the grant date and each subsequent quarter until settlement, using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the performance and market conditions stipulated in the grant.
In the nine months ended September 30, 2013 , the Company granted 71,723 DSUs with a grant date fair value of $8 million . DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated. An expense to income for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.
In the nine months ended September 30, 2013 , $9 million in RSUs were paid out.
For the three months
ended September 30
Pensions
Other benefits
(in millions of Canadian dollars)
2013
2012
2013
2012
Current service cost (benefits
earned by employees in the
period)
$
34
$
33
$
4
$
5
Interest cost on benefit obligation
111
113
5
6
Expected return on fund assets
(186)
(188)
-
-
Recognized net actuarial loss (gain)
66
52
(2)
1
Amortization of prior service costs
(18)
-
-
-
Net periodic benefit cost
$
7
$
10
$
7
$
12
For the nine months
ended September 30
Pensions
Other benefits
(in millions of Canadian dollars)
2013
2012
2013
2012
Current service cost (benefits
earned by employees in the
period)
$
102
$
99
$
12
$
14
Interest cost on benefit obligation
334
339
16
18
Expected return on fund assets
(559)
(564)
-
-
Recognized net actuarial loss
200
156
1
5
Amortization of prior service costs
(41)
-
-
-
Net periodic benefit cost
$
36
$
30
$
29
$
37
Summary of Rail Data
Third Quarter
Year-to-date
2013
2012
Fav/(Unfav)
%
Financial (millions, except per share data)
2013
2012
Fav/(Unfav)
%
Revenues
$
1,495
$
1,414
$
81
6
Freight revenue
$
4,412
$
4,086
$
326
8
39
37
2
5
Other revenue
114
107
7
7
1,534
1,451
83
6
Total revenues
4,526
4,193
333
8
Operating expenses
331
371
40
11
Compensation and benefits
1,075
1,128
53
5
226
232
6
3
Fuel
742
743
1
-
54
57
3
5
Materials
184
178
(6)
(3)
44
52
8
15
Equipment rents
134
158
24
15
139
137
(2)
(1)
Depreciation and amortization
421
399
(22)
(6)
216
226
10
4
Purchased services and other
664
698
34
5
1,010
1,075
65
6
Total operating expenses
3,220
3,304
84
3
524
376
148
39
Operating income
1,306
889
417
47
Less:
-
2
2
100
Other income and charges
11
34
23
68
70
69
(1)
(1)
Net interest expense
208
207
(1)
-
454
305
149
49
Income before income tax expense
1,087
648
439
68
130
81
(49)
(60)
Income tax expense
294
179
(115)
(64)
$
324
$
224
$
100
45
Net income
$
793
$
469
$
324
69
65.9
74.1
8.2
820
bps
Operating ratio (%)
71.1
78.8
7.7
770
bps
$
1.85
$
1.31
$
0.54
41
Basic earnings per share
$
4.54
$
2.74
$
1.80
66
$
1.84
$
1.30
$
0.54
42
Diluted earnings per share
$
4.50
$
2.72
$
1.78
65
Shares Outstanding
Weighted average number of shares
175.1
172.2
2.9
2
outstanding (millions)
174.8
171.3
3.5
2
Weighted average number of diluted shares
176.5
173.4
3.1
2
outstanding (millions)
176.3
172.6
3.7
2
Foreign Exchange
Average foreign exchange rate
0.96
1.00
0.04
4
(US$/Canadian$)
0.98
1.00
0.02
2
Average foreign exchange rate
1.04
1.00
0.04
4
(Canadian$/US$)
1.02
1.00
0.02
2
Third Quarter
Year-to-date
2013
2012
Fav/(Unfav)
%
2013
2012
Fav/(Unfav)
%
Commodity Data
Freight Revenues (millions)
$
319
$
296
$
23
8
- Grain
$
915
$
817
$
98
12
177
161
16
10
- Coal
470
446
24
5
129
111
18
16
- Fertilizers and sulphur
444
387
57
15
384
329
55
17
- Industrial and consumer products
1,135
933
202
22
95
105
(10)
(10)
- Automotive
298
326
(28)
(9)
51
49
2
4
- Forest products
157
147
10
7
340
363
(23)
(6)
- Intermodal
993
1,030
(37)
(4)
$
1,495
$
1,414
$
81
6
Total Freight Revenues
$
4,412
$
4,086
$
326
8
Millions of Revenue Ton-Miles (RTM)
7,864
8,142
(278)
(3)
- Grain
23,977
23,454
523
2
6,440
6,032
408
7
- Coal
17,396
16,566
830
5
3,762
3,561
201
6
- Fertilizers and sulphur
14,320
13,220
1,100
8
8,937
8,066
871
11
- Industrial and consumer products
27,887
22,122
5,765
26
533
604
(71)
(12)
- Automotive
1,766
1,921
(155)
(8)
1,093
1,200
(107)
(9)
- Forest products
3,583
3,584
(1)
-
6,055
6,528
(473)
(7)
- Intermodal
17,909
18,636
(727)
(4)
34,684
34,133
551
2
Total RTMs
106,838
99,503
7,335
7
Freight Revenue per RTM (cents)
4.06
3.64
0.42
12
- Grain
3.81
3.48
0.33
9
2.76
2.67
0.09
3
- Coal
2.70
2.69
0.01
-
3.45
3.12
0.33
11
- Fertilizers and sulphur
3.10
2.93
0.17
6
4.29
4.08
0.21
5
- Industrial and consumer products
4.07
4.22
(0.15)
(4)
17.70
17.38
0.32
2
- Automotive
16.83
16.97
(0.14)
(1)
4.66
4.08
0.58
14
- Forest products
4.38
4.10
0.28
7
5.61
5.56
0.05
1
- Intermodal
5.54
5.53
0.01
-
4.31
4.14
0.17
4
Total Freight Revenue per RTM
4.13
4.11
0.02
-
Carloads (thousands)
106
110
(4)
(4)
- Grain
317
311
6
2
90
89
1
1
- Coal
246
249
(3)
(1)
41
38
3
8
- Fertilizers and sulphur
144
134
10
7
129
122
7
6
- Industrial and consumer products
386
350
36
10
35
39
(4)
(10)
- Automotive
108
123
(15)
(12)
15
17
(2)
(12)
- Forest products
51
51
-
-
259
272
(13)
(5)
- Intermodal
750
771
(21)
(3)
675
687
(12)
(2)
Total Carloads
2,002
1,989
13
1
Freight Revenue per Carload
$
3,020
$
2,691
$
329
12
- Grain
$
2,888
$
2,627
$
261
10
1,952
1,809
143
8
- Coal
1,912
1,791
121
7
3,217
2,921
296
10
- Fertilizers and sulphur
3,088
2,888
200
7
2,977
2,697
280
10
- Industrial and consumer products
2,940
2,666
274
10
2,747
2,692
55
2
- Automotive
2,745
2,650
95
4
3,145
2,882
263
9
- Forest products
3,095
2,882
213
7
1,311
1,335
(24)
(2)
- Intermodal
1,324
1,336
(12)
(1)
$
2,214
$
2,058
$
156
8
Total Freight Revenue per Carload
$
2,204
$
2,054
$
150
7
Third Quarter
Year-to-date
2013
2012 (1)
Fav/(Unfav)
%
2013
2012 (1)
Fav/(Unfav)
%
Operations Performance
8,837
10,201
1,364
13
Train miles (thousands)
28,476
30,224
1,748
6
7,817
6,723
1,094
16
Average train weight - excluding local traffic (tons)
7,485
6,608
877
13
6,746
6,021
725
12
Average train length - excluding local traffic (feet)(2)
6,485
5,910
575
10
7.2
7.4
0.2
3
Average terminal dwell (hours) (3)
6.9
7.6
0.7
9
18.7
18.3
0.4
2
Average train speed (mph)(4)
18.4
18.2
0.2
1
211.1
205.4
5.7
3
Car miles per car day
218.5
202.6
15.9
8
217.7
184.3
33.4
18
Locomotive productivity (daily average GTMs/active HP)(5)
213.6
174.4
39.2
22
1.02
1.09
0.07
6
Fuel efficiency (U.S. gallon of fuel consumed/1,000 GTMs)
1.07
1.15
0.08
7
64.7
69.4
4.7
7
U.S. gallons of locomotive fuel consumed (millions)(6)
210.3
214.8
4.5
2
3.34
3.35
0.01
-
Average fuel price (U.S. dollars per U.S. gallon)
3.45
3.45
-
-
14,974
17,572
2,598
15
Total employees (average)(7)(8)
15,122
17,190
2,068
12
14,766
17,175
2,409
14
Total employees (end of period)(7)
14,766
17,175
2,409
14
15,318
18,587
3,269
18
Workforce (end of period)(9)
15,318
18,587
3,269
18
Safety
1.89
1.58
(0.31)
(20)
FRA personal injuries per 200,000 employee-hours
1.68
1.39
(0.29)
(21)
1.78
1.98
0.20
10
FRA train accidents per million train-miles
1.90
1.66
(0.24)
(14)
(1)
Certain prior period figures have been revised to conform with current presentation or have been updated to reflect new information.
(2)
Incorporates a new reporting methodology where average train length is the sum of each car and locomotive's equipment length multiplied by the distance travelled, divided by train miles. Local trains are excluded from this measure.
(3)
Incorporates a new reporting definition where average terminal dwell measures the average time a freight car resides within terminal boundaries.
(4)
Incorporates a new reporting definition where average train speed measures the line-haul movement from origin to destination including terminal dwell hours.
(5)
Gross ton-miles ("GTMs"); horse power ("HP").
(6)
Includes gallons of fuel consumed from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities.
(7)
An employee is defined as an individual, including trainees, who has worked more than 40 hours in a standard biweekly pay period. This excludes part time employees, contractors, and consultants.
(8)
2012 Year-to-date average number of employees has been adjusted for the strike.
(9)
Workforce is defined as total employees plus part time employees, contractors, and consultants.
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