U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 40-F
[ ] |
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, 2004
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) | ||||||
(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
CT Corporation System, 111-8th Avenue, New York, New York 10011, (212) 894-8940
The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street
Wilmington, Delaware 19801, (302) 658-7581
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 | |
Common Shares of Canadian Pacific Railway Limited |
New York Stock Exchange | |
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: None
[ X ] Annual information form | [ X ] Audited annual financial statements |
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
At December 31, 2004, 158,779,413 Common Shares of Canadian Pacific Railway Limited were issued and outstanding. At December 31, 2004, 347,170,009 Ordinary Shares of Canadian Pacific Railway Company were issued and outstanding.
Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the Exchange Act). If Yes is marked, indicate the file number assigned to the Registrant in connection with such Rule.
YES ___ | NO X |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of 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.
YES X |
NO ___ |
PRIOR FILINGS MODIFIED AND SUPERSEDED
The Registrants Annual Report on Form 40-F for the year ended December 31, 2004, at the time of filing with the Securities and Exchange 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. 333-13846 (Canadian Pacific Railway Limited); and Form S-8 No. 333-13962 (Canadian Pacific Railway Limited). The documents (or portions thereof) identified under the heading Documents Filed as Part of This Report below as forming part of this Form 40-F are incorporated by reference into the Registration Statement on Form F-9 No. 333-114696 (Canadian Pacific Railway Company) as exhibits thereto.
CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENTS DISCUSSION AND ANALYSIS
A. Audited Annual Financial Statements
For consolidated audited financial statements, including the report of the auditors with respect thereto, see pages 42 through 88 of the Registrants 2004 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 25 Supplementary Data of the Notes to Consolidated Financial Statements on pages 80 through 88 of such 2004 Annual Report.
B. Managements Discussion and Analysis
For managements discussion and analysis, see pages 4 through 41 of the Registrants 2004 Annual Report incorporated by reference and included herein.
For the purposes of this Annual Report on Form 40-F, only pages 4 through 88 of the Registrants 2004 Annual Report referred to above shall be deemed filed, and the balance of such 2004 Annual Report, except as it may be otherwise specifically incorporated by reference in the Registrants 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, 2004, 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) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of December 31, 2004, to ensure that information required to be disclosed by the Registrants in reports that they file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
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 has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting.
2
CODE OF BUSINESS ETHICS
The Registrants Code of Business Ethics was last revised in late 2003 to ensure that it was in compliance with the corporate governance standards of the New York Stock Exchange (NYSE Standards). 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. 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.
CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
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.
CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES
The Registrants amended their Corporate Governance Principles and Guidelines in 2004. These principles and guidelines pertain to such matters as, but are not limited to: director qualification standards and responsibilities; 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 Environmental and Safety Committee; and the Pension Trust Fund Committee.
DIRECTOR INDEPENDENCE
The boards of the Registrants have adopted the criteria for director independence and unrelatedness: (a) prescribed by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated thereunder and Multilateral Instrument 52-110 for members of public company audit committees; and (b) set forth in the NYSE Standards, the Corporate Governance Guidelines of the Toronto Stock Exchange, as proposed to be amended in April and November 2002 (Proposed TSX Guidelines) and Multilateral Instrument 52-110 in respect of public company directors. The boards also conducted a comprehensive assessment of each of their members as against these criteria and determined that all current directors, except R.J. Ritchie, have no material relationship with the Registrants and are independent and unrelated. Mr. Ritchie is not independent or unrelated by virtue of the fact that he is the President and Chief Executive Officer of the Registrants.
3
EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS
The Corporate Governance and Nominating Committees of the boards of the Registrants are comprised of all the unrelated and independent directors on the boards and are required by their terms of reference to meet at least quarterly and at such other times as they deem appropriate. They are chaired by Mr. J.E. Newall. Interested parties may communicate directly with Mr. Newall by writing to him at the following address, and all communications received at this address will be forwarded to him:
Office of the Corporate Secretary
Canadian Pacific Railway
Suite 920, 401 9th Avenue, S.W.
Calgary, Alberta
Canada
T2P 4Z4
AUDIT COMMITTEE FINANCIAL EXPERTS
The following individuals comprise the entire 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:
Stephen E. Bachand
John E. Cleghorn
M. Paquin
Roger Phillips
Michael W. Wright
Each of the aforementioned directors, except Ms. Paquin, 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.
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 and accounting or related financial experience within the meaning of the Proposed TSX Guidelines. The boards have also adopted the definition of financial literacy contained in the practice notes of the Proposed TSX Guidelines and have determined that all members of the Audit Committees are financially literate within that definition and as required by Multilateral Instrument 52-110 and the NYSE Standards.
SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
John E. Cleghorn serves on two public company audit committees, in addition to the Audit Committees of the two Registrants. Each Registrants board has determined that no director who serves on more than two public company audit committees other than its own Audit Committee shall be eligible to serve as a member of the Audit Committee of that Registrant, unless that Registrants board determines that such simultaneous service would not impair the ability of such member to effectively serve on that Registrants Audit Committee.
4
The boards of the Registrants have determined that the service of Mr. Cleghorn on the audit committees of two public companies other than the two Registrants does not impair his ability to effectively serve on the Audit Committees of the Registrants, for the following reasons:
| Two of the public company audit committees on which Mr. Cleghorn serves 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; | |||
| The two public companies other than the Registrants on whose audit committees Mr. Cleghorn serves have a holding company/operating company relationship similar to that between the Registrants. Consequently, the workload involved in such audit committees is essentially equivalent to the workload of one public company audit committee; and | |||
| Mr. Cleghorn is a retired chief executive officer of a large public company and qualifies, and has been designated as, an audit committee financial expert for the Registrants. As a result, he no longer has any day-to-day executive or managerial responsibilities and, in addition, brings to his role on the Audit Committees of the Registrants considerable business experience and a highly-focused and effective approach to audit-related matters. |
PRINCIPAL ACCOUNTING FEES AND SERVICES INDEPENDENT AUDITORS
Fees payable to the Registrants independent auditor, PricewaterhouseCoopers, LLP for the years ended December 31, 2004, and December 31, 2003, totaled $1,898,000 and $1,501,000, respectively, as detailed in the following table:
Year ended December 31, 2004 | Year ended December 31, 2003 | |||||||||||
Audit Fees |
$ | 1,005,000 | $ | 855,000 | ||||||||
Audit-Related Fees |
$ | 543,000 | $ | 329,000 | ||||||||
Tax Fees |
$ | 350,000 | $ | 310,000 | ||||||||
All Other Fees |
$ | 0 | $ | 7,000 | ||||||||
TOTAL |
$ | 1,898,000 | $ | 1,501,000 | ||||||||
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 by PricewaterhouseCoopers LLP for the audit of the Registrants annual financial statements and services provided in connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees were for assurance and related services reasonably related to the performance of the audit or review of the annual statements and are not reported under Audit Fees above. These services consisted of: special attest services as required by various government entities; accounting consultations and special audits in connection with acquisitions; the audit of financial statements of certain subsidiaries and of various pension and benefits plans of the Registrants; assistance with prospectus filings; access fees for technical accounting database resources; and assistance with preparations for compliance with section 404 of the Sarbanes-Oxley Act of 2002.
5
Tax Fees
Tax fees were for tax compliance, tax advice and tax planning professional services. These services consisted of: tax compliance including the review of tax returns; assistance with questions regarding tax audits, the preparation of employee tax returns under the Registrants expatriate tax services program and assistance in completing routine tax schedules and calculations; 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 were for products and services other than those described under Audit Fees, Audit-Related Fees and Tax Fees above. In 2004, there were no services in the category, and in 2003, these services consisted of assistance in reviewing an agreement and proposed transaction.
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS
The Audit Committees have 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 renewed annually and the audit and non-audit services to be provided to the Registrants by their independent auditors, as well as the budgeted amounts for such services, are pre-approved at that time. A report of all such services performed or to be performed by the independent auditors pursuant to the policy must be submitted to the Audit Committees by the Vice-President and Comptroller at least quarterly. 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 Committees or their Chairman, who must report all such additional pre-approvals to the Audit Committees at their 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 Committees. Non-audit services that the Registrants independent auditors are prohibited from providing to the Registrants may not be pre-approved. In addition, prior to the granting of any pre-approval, the Audit Committees or their 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. Compliance with this policy is monitored by the Registrants Director, Internal Audit.
OFF-BALANCE SHEET ARRANGEMENTS
A description of the Registrants off-balance sheet arrangements is set forth on pages 29 and 30 of the Registrants 2004 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 30 of the Registrants 2004 Annual Report incorporated by reference and included herein.
6
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
A Form F-X signed by Canadian Pacific Railway Limited and its agent for service of process was filed with the Commission together with Canadian Pacific Railway Limiteds Annual Report on Form 40-F for the fiscal year ended December 31, 2000. A Form F-X signed by Canadian Pacific Railway Company and its agent for service of process was filed with the Commission on April 21, 2004.
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.
CANADIAN PACIFIC RAILWAY LIMITED CANADIAN PACIFIC RAILWAY COMPANY (Registrants) | |||
Signed Robert V. Horte | |||
Name: Robert V. Horte Title: Corporate Secretary Date: March 7, 2005 |
7
DOCUMENTS FILED AS PART OF THIS REPORT
1. | Annual Information Form of the Registrants for the year ended December 31, 2004. | |||
2. | Annual Report of the Registrants for the year ended December 31, 2004, including Managements Discussion and Analysis and Audited Consolidated Financial Statements of the Registrants as of December 31, 2004 and for each of the three years then ended1. |
EXHIBITS
A. | Consent of PricewaterhouseCoopers, Independent Accountants. | |||
B. | Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
C. | Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
1 | For the purposes of this Annual Report on Form 40-F, only pages 4 through 88 of the Registrants 2004 Annual Report referred to above shall be deemed filed, and the balance of such 2004 Annual Report, except as it may be otherwise specifically incorporated by reference in the Registrants 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. |
8
TABLE OF CONTENTS
3 | ||||
4 | ||||
5 | ||||
5 | ||||
6 | ||||
6 | ||||
7 | ||||
7 | ||||
8 | ||||
9 | ||||
10 | ||||
11 | ||||
11 | ||||
12 | ||||
14 | ||||
17 | ||||
17 | ||||
18 | ||||
21 | ||||
23 | ||||
23 | ||||
23 | ||||
23 | ||||
24 | ||||
26 | ||||
27 | ||||
27 | ||||
28 | ||||
30 | ||||
31 | ||||
33 | ||||
34 | ||||
34 | ||||
35 | ||||
36 | ||||
36 | ||||
37 | ||||
38 | ||||
39 | ||||
40 | ||||
41 |
* | In this Annual Information Form (AIF), all dollar amounts are in Canadian dollars unless otherwise noted. | |||||||
Consent of PricewaterhouseCoopers, Independent Accountants | ||||||||
Certification of CEO and CFO | ||||||||
Certification by CEO and CFO Pursuant to 18 U.S.C. Section 1350 |
2
CORPORATE STRUCTURE
Name, Address and Incorporation Information
Canadian Pacific Railway Limited (the Company or CPR) was incorporated on June 22, 2001, as 3913732 Canada Inc. pursuant to the Canada Business Corporations Act (the CBCA). On July 20, 2001, CPR 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) whereby it distributed to its common shareholders all of the shares of newly-formed corporations holding the assets of four of CPLs five primary operating divisions. The Arrangement was effected as an arrangement pursuant to section 192 of the CBCA. On September 26, 2001, the Arrangement was approved by the shareholders of CPL and Canadian Pacific Railway Company (CPRC), previously a wholly-owned subsidiary of CPL, was transferred to CPR effective October 1, 2001. The transfer was accomplished as part of a series of steps, pursuant to the terms of the Arrangement, whereby CPL transferred all of its outstanding shares of CPRC to a CPL subsidiary, 3921760 Canada Inc. (3921760). CPL then transferred all of its outstanding shares of 3921760 to CPR and CPR amalgamated with 3921760. In this Annual Information Form, unless the context requires otherwise, CPR and the Company refer to Canadian Pacific Railway Limited and, where applicable, its subsidiaries, including CPRC.
CPRs registered office, executive offices and principal place of business are located at Suite 500, 401 9th Avenue S.W., Calgary, Alberta T2P 4Z4.
3
INTERCORPORATE RELATIONSHIPS
Principal Subsidiaries
The table below sets out the Companys principal subsidiaries, including the jurisdiction of incorporation and the percentage of voting and non-voting securities currently owned directly or indirectly by the Company:
Percentage of | ||||||||||||
non-voting securities | ||||||||||||
Percentage of voting | beneficially owned, or | |||||||||||
Incorporated under the | securities held | over which control or | ||||||||||
Principal Subsidiary | laws of | directly or indirectly | direction is exercised | |||||||||
Canadian Pacific Railway Company |
Canada | 100% | Not applicable. | |||||||||
Soo Line Corporation (1) |
Minnesota | 100% | Not applicable. | |||||||||
Soo Line Railroad Company (2) |
Minnesota | 100% | Not applicable. | |||||||||
Delaware and Hudson Railway Company,
Inc. (2) |
Delaware | 100% | Not applicable. |
(1) Indirect wholly-owned subsidiary of Canadian Pacific Railway Company. |
(2) Wholly-owned subsidiary of Soo Line Corporation. |
4
GENERAL DEVELOPMENT OF THE BUSINESS
Development of CPR
CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the Parliament of Canada. CPRC is one of Canadas oldest corporations and was North Americas first transcontinental railway. From its inception over 120 years ago, CPRC has developed into a fully-integrated and technologically-advanced Class 1 railway (a railroad earning revenues of US$258.5 million annually) providing rail and intermodal freight transportation services over a 13,800-mile network serving the principal business centres of Canada, the U.S. Midwest and the U.S. Northeast.
Of the total mileage operated by CPR, approximately 6,850 miles are located in western Canada, 2,200 miles in eastern Canada, 3,250 miles in the U.S. Midwest and 1,500 miles in the U.S. Northeast. CPR owns 9,500 miles of track and an additional 4,300 miles of track are jointly owned, leased or operated under trackage rights.
CPRs business is based on funnelling traffic from network feeders and connectors, carrying railway traffic to and from the main rail lines, onto a 4,700-mile high-density, high-quality railway network. CPR has extended its network reach by establishing alliances and connections with other major Class 1 railways in North America, which allows CPR to provide competitive product offerings and access to markets across North America and, via the Port of Montreal, Quebec, and the Port of Vancouver, British Columbia (B.C.), to markets in Europe and the Pacific Rim, respectively.
CPRs network accesses the U.S. market directly through two wholly-owned subsidiaries: Soo Line Railroad Company (Soo Line), a Class 1 railway operating in the U.S. Midwest; and Delaware and Hudson Railway Company, Inc. (D&H), which operates between eastern Canada and major U.S. Northeast markets including New York City, New York; Philadelphia, Pennsylvania; and Washington, D.C.
Strategy
CPRs goals are to become the preferred business partner for rail-based transportation services in North America and to be at the forefront of the railway industry in operating profitability and return on capital employed. Its principal strategies to accomplish these goals include maximizing the strengths of its North American railway franchise by operating a low-cost scheduled railway, developing new products and services in cooperation with customers and partners, and extending the reach of the franchise through marketing and operating partnerships, as well as agreements and commercial arrangements with other railways and transport companies in North America. CPRs overall marketing and sales activities within each of its lines of business are focused on targeted growth, product efficiency and maximizing value from existing assets.
5
GENERAL DEVELOPMENT OF THE BUSINESS
Recent History
CPR focuses on franchise renewal, increasing network efficiency, asset maintenance efficiency and asset utilization, train operations productivity and labour productivity. The following table summarizes the effect of these strategies on a number of industry recognized performance indicators:
Year ended December 31 | ||||||||||||||||||||
Performance Indicators | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
Gross ton-miles (GTM) (millions)(1) |
236,451 | 221,884 | 209,596 | 212,928 | 211,946 | |||||||||||||||
Revenue ton-miles (RTM) (millions)(2) |
123,627 | 114,599 | 107,689 | 110,622 | 110,409 | |||||||||||||||
Train-miles (thousands)(3) |
41,344 | 40,470 | 38,299 | 38,162 | 39,120 | |||||||||||||||
Average number of active employees(4) |
16,056 | 16,126 | 16,116 | 16,987 | 17,965 | |||||||||||||||
Average train weights (tons)(5) |
5,719 | 5,483 | 5,473 | 5,580 | 5,418 | |||||||||||||||
Traffic
density (GTMs per mile of road operated, excluding track on which CPR has haulage rights (thousands)) |
17,113 | 16,023 | 15,107 | 15,326 | 15,183 | |||||||||||||||
Employee
productivity (GTMs per average active employee (thousands)) |
14,727 | 13,759 | 13,005 | 12,535 | 11,798 | |||||||||||||||
Fuel
efficiency (U.S. gallons of fuel per 1,000 GTMs) |
1.20 | 1.24 | 1.24 | 1.25 | 1.29 | |||||||||||||||
Locomotive utilization
(GTMs per active locomotive per day (thousands)) |
675 | 664 | 673 | 681 | 652 | |||||||||||||||
Total operating expenses, before other
specified items, per GTM (cents) (6)
(7) |
1.32 | 1.32 | 1.35 | 1.35 | 1.33 |
Notes: | ||
(1) | Gross Ton-Miles of freight measure the movement of total train weight over one mile in a year. The total train weight is comprised of the weight of the freight cars, their contents and inactive locomotives. | |
(2) | Revenue ton-miles of freight measure the movement of a revenue-producing ton of freight a distance of one mile. | |
(3) | Train-miles is a measure reflecting the distance traveled by the lead locomotive on each train operating over CPRs track. | |
(4) | Average number of active employees is the average number of actively employed workers for the period. The number of actively employed workers 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 CPR but are not currently working. This indicator is calculated by adding the monthly average employee counts for the year and dividing this total by 12. | |
(5) | Average train weight is the result of dividing GTMs by train miles. It represents the average total weight of all CPR trains operating over CPRs track and track on which CPR has running rights. | |
(6) | The item total operating expenses, before other specified items does not have a standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and, therefore, is unlikely to be comparable to similar measures of other companies. Other specified items are described under the heading Selected Consolidated Financial Information in this AIF and CPRs 2004 Managements Discussion and Analysis. | |
(7) | Expenses for all prior years presented were restated to reflect the implementation of a new accounting standard under Canadian GAAP for Asset Retirement Obligations. |
6
GENERAL DEVELOPMENT OF THE BUSINESS
Network Efficiency
CPR continues to increase the capacity of its core franchise through infrastructure-sharing and joint-service programs with other railways, strategic capital investment programs, and operating plan strategies. Combined with the continued improvement of CPRs locomotive fleet, these strategies enable CPR to achieve more predictable and fluid train operations between major terminals.
CPR has expanded its physical network with the following infrastructure-sharing and joint-service programs:
| CPR-CSX Transportation, Inc. (CSX) track connection at Detroit, Michigan reduces transit times and improves consistency of service between eastern Canada and the U.S. Midwest; | |||
| CPR- UP provides joint service from western Canada to the U.S. Pacific-Northwest, California and Arizona and to Texas/Mexico and Kansas/Missouri; and | |||
| CPR-Norfolk Southern Corporation joint intermodal service between the Port of New York/New Jersey and eastern Canada reduces transit times for import-export shippers. CPR constructed a new passing siding at Clarks Summit, Pennsylvania and granted Norfolk Southern Railway Company (NS) trackage rights between Sunbury, Pennsylvania and Mechanicville, New York in order to increase traffic and improve freight service to upstate New York, northern Pennsylvania and New England. |
In 2002 and 2003, CPR spent approximately $25 million to extend the length of 16 rail sidings throughout northern and eastern Ontario in order to increase operating efficiency and reduce costs. A siding is a limited length of track parallel to the main line and linked to it at both ends by switches, enabling trains running in either direction to pass each other. Longer sidings permit the use of longer and fewer trains. It also permits fewer locomotives to be used to move the same amount of freight in a given rail corridor. CPR has identified other corridor bottlenecks on its network and a plan is in place to provide appropriate capacity in order to increase train density and fluidity on all its major routes. Later in 2003, CPR sold a lower-density 12.6-km (7.8-mile) rail line in northern New Brunswick known as the Edmunston Spur to Canadian National Railway (CN). This line runs between Grand Falls and Cyr Junction, near St. Leonard, New Brunswick. CPR also sold a 32.5-mile rail line that runs from Madison to Watertown, Wisconsin to the Wisconsin & Southern Railroad.
In 2004, CPR entered into a three-railway agreement with CN and NS to provide a significantly shorter, more direct routing over D&H lines for NS-CN interline traffic moving between Eastern Canada and the Eastern U.S. Under the agreement:
| CN traffic destined for the Eastern U.S. will move in CPR trains on D&Hs line between Rouses Point, New York, and Saratoga Springs, New York, under a freight haulage arrangement between CPR and NS; | |||
| This CN traffic will then move in NS trains over D&Hs line between Saratoga Springs and the NS connection near Harrisburg, Pennsylvania, under trackage rights agreements between CPR and NS. |
The agreement generates one train per day of new business each direction, seven days a week on the D&H. This arrangement is expected to improve traffic density and generate additional revenue.
Franchise Renewal
Franchise renewal is an integral part of CPRs multi-year capital program. From 2002 to 2004 the Company has invested approximately $1.9 billion in its core assets. CPRs annual average capital spending is approximately 18% of revenues. However, funding of network maintenance programs may be increased to ensure plant, property, and equipment assets are well maintained.
CPRs annual program to modernize and upgrade its core strategic assets typically includes track and facilities (including rail yards and intermodal terminals); locomotives; information technology; and freight cars and other equipment investments. Over the three-year period from 2002 to 2004, CPR invested approximately $1.3 billion in track and facilities, about $217 million in locomotives, and approximately $457 million in information technology, growth initiatives, freight cars and other equipment.
7
GENERAL DEVELOPMENT OF THE BUSINESS
Locomotive Fleet Modernization
CPR has upgraded its locomotive fleet with the acquisition of high-adhesion alternating current (AC) locomotives, which are more fuel efficient and reliable and have superior haulage capacity relative to standard direct current (DC) locomotives. CPRs locomotive fleet now includes 582 AC locomotives, representing approximately 52% of CPRs road-freight locomotive fleet, and handling about 70% of CPRs workload. This investment has improved CPRs service reliability and has produced cost savings in fuel, equipment rents and maintenance. It has also allowed CPR to remove from service 810 older locomotives and enabled CPR to more efficiently utilize its repair and maintenance facilities.
Railcar Fleet Modernization
Starting in 1998, and continuing through 2004, CPR undertook a freight-car modernization program to fully leverage its rail network and locomotive fleet. The programs general aim included the following objectives:
1. | increase the productivity and standardization of each car fleet; | |||
2. | secure lower lease costs by reducing CPRs reliance on short-term leasing; and | |||
3. | improve customer satisfaction through the introduction of higher-capacity cars. |
In 2003, CPR introduced its Intermodal Fleet Renewal (IFR) initiative in order to increase the density of its intermodal trains and allow CPR to move more containers with fewer trains. In connection with the implementation of the IFR initiative, 5,500 new double-stack, 53- and 40-foot cars were introduced in 2003 and 2004.
Freight cars owned and long-term leased
2004 | 2003 | 2002 | ||||||||||
Covered Hoppers (1) |
26,200 | 25,100 | 23,200 | |||||||||
Open Tops |
5,400 | 4,600 | 5,500 | |||||||||
Box Cars |
6,100 | 7,000 | 7,800 | |||||||||
Gondolas |
2,900 | 2,500 | 2,500 | |||||||||
Flats |
3,000 | 2,700 | 2,000 | |||||||||
Automotive |
3,300 | 3,100 | 3,500 | |||||||||
Intermodal |
3,400 | 2,600 | 3,100 | |||||||||
Total |
50,300 | 47,600 | 47,600 | |||||||||
(1) | includes 9,000 government cars. |
CPRs covered hopper car fleet consists of a mixture of owned and leased cars. A portion of the fleet used for the export of grain is leased from the federal government of Canada, which has indicated a desire to sell or otherwise dispose of its cars. The potential impact of this on CPRs grain business cannot be ascertained until the governments decision is announced. However, CPR has advocated for a process, in the event of a disposition, that is market driven and open to all interested parties.
Strengthening Business Fundamentals
Yield Management
CPR believes that its customers, many of whom compete in global markets, demand competitively priced transportation service. In order to offer competitive prices to its customers, CPR has redesigned its train operations and terminal processes and is continually working at increasing productivity through cost-reduction programs and improving asset utilization through initiatives aimed at targeted growth, product efficiency and maximizing value from existing resources. CPR has a Price and Yield management team to standardize price and yield business processes across the Company.
8
GENERAL DEVELOPMENT OF THE BUSINESS
Train Operations Productivity
In 1999, CPR introduced a new operating plan to increase productivity, improve asset utilization and enhance service quality for customers. This means CPR is running longer, heavier trains more consistently to make connections and meet delivery commitments for less cost.
Commencing December 2003, CPR became the first railway in Canada to operate intermodal freight trains with mid-train remote-control (Locotrol) locomotives. These remote-control units enable CPR to run intermodal trains approaching three kilometres in length, which is particularly helpful in winter weather. CPR extended the area of its Locotrol operation to encompass Moose Jaw, Saskatchewan to Toronto, Ontario and extended the use of Locotrol from exclusively bulk train operation to intermodal and mixed-manifest trains.
Asset Maintenance Efficiency
CPR has improved the efficiency of its repair facilities primarily through outsourcing arrangements and by reducing the costs of maintenance. CPR has improved the reliability of its locomotive fleet by entering into warranty service agreements with suppliers pursuant to which suppliers have made strict performance commitments.
In May 2002, CPR closed its Frog Shop in Lethbridge, Alberta. The shop produced second-hand frogs (a track component that allows trains to cross from one adjacent track to another) for use on CPRs network. In January 2003, coinciding with the purchase of 46 new AC locomotives, CPR announced an expansion of its warranty service agreements in eastern Canada, pursuant to which diesel locomotive manufacturers manage the ongoing servicing of CPR locomotives using CPR employees.
Commencing in 2004, CPR became the first Canadian railway to use a programmable linear unloading system (PLUS) train, a high-speed and highly efficient system for spreading new ballast to maintain the integrity of track roadbed. Ballast, made up of cleaned crushed rock, is the solid foundation that ensures tracks are able to handle modern trains. PLUS reduces both the time required for ballast spreading and the disruption of train operations. CPR expects to achieve a 10% saving on ballast expense in 2005 as a result of using this system.
Information Technology
As a 24-hour-a-day, 7-day-a-week business, CPR relies heavily on its computer systems to schedule all components of its operations. Computer 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. CPR uses intricate automated traffic-forecasting systems, determines car routings and yard workloads using bypass and circuitry analysis software, and generates time-distance diagrams to examine track capacity.
CPR has substantially completed the implementation of a suite of new operating systems, collectively referred to as Service Excellence. This investment in information technology has assisted CPR in becoming a scheduled railway operation, by helping increase the productivity of CPRs asset base and improving customer service. The final step in the Service Excellence program was the implementation of the TYES software program in 2004, with rollout to a few remaining yards in Eastern Canada and the U.S. in 2005. The TYES application is a rail-yard management system that manages shipment connections from train-to-train.
CPR is currently investing in a new application called TRIEX that will improve the efficiency and customer-service capabilities in its intermodal business. CPR is developing TRIEX in co-operation with a U.S.-based software firm. The Company expects TRIEX will be installed in 2005. CPR is also updating its train-control system by moving it to a more current technological platform, thereby extending the life of this critical system by many years in line with the overall strategy of optimizing assets.
In late 2003, a transfer of assets to IBM Canada Ltd. was part of a seven-year, $200-million agreement reached with IBM to operate and enhance CPRs computer infrastructure. The transition of CPRs data centre to IBMs ownership and facility was completed in late 2004. CPR expects that this arrangement will reduce its costs over time and allow remaining information technology staff to focus on applications that improve efficiency and service.
9
GENERAL DEVELOPMENT OF THE BUSINESS
Integrated Operating Plan
In May 1999, CPR launched its scheduled railway Integrated Operating Plan (IOP). Under the IOP, trains are scheduled to run consistently and at times agreed upon by CPR and the customer, thereby ensuring connections at intermediate terminals are made and delivery commitments are met. A plan is established for each rail car covering its entire trip from point of origin to final destination. Cars with similar destinations are consolidated into blocks, thus reducing delays at intermediate locations by simplifying processes for employees, eliminating the duplication of work and helping to ensure fluid rail yards and terminals. These efficiencies help reduce transit times for shipments throughout CPRs network and increase car availability for customers. Since the implementation of the IOP, CPR has improved on-time performance of its premium intermodal train services and has increased terminal performance for its customers while delivering a significant reduction in the cost base of its operations.
CPR now operates a scheduled railway and strives to deliver high service quality to its customers and achieve a high level of efficiency through improved asset utilization. CPR is committed to further pursuing methods to improve the scheduling of trains with other railways and to develop systems designed to share advanced information, thereby improving service. In 2003, CPRs approach to scheduled-railway operations won the Franz Edelman Award for Achievement in Operations Research and the Management Sciences.
In 2004, CPR, consistent with its IOP philosophy, phased in a rail capacity allocation system to better manage growth in the import container business on Canadas west coast. CPR has experienced an increase in traffic volumes as a result of this new system and believes the implementation of this system moderates traffic flow and avoids the significant surges that create congestion in the supply chain. Under the new system, CPR allocates to each of the shipping lines it serves an annual import container volume through the Port of Vancouver gateway based on past volumes and growth projections. CPR supplies sufficient railcars to meet the allocated volume. Intermodal terminal operators commit to quick turnaround of railcars to maximize car availability.
Labour Productivity and Efficiency
CPR continually takes steps to improve the effectiveness of its organizational structure in order to increase its productivity and efficiency. Since 1996, the Company has centralized its management team to improve communication and decision-making, simplified the organizations management structure, and increased the responsibility given to management personnel. CPR regularly reviews its organizational processes, workforce needs and related organizational costs, with a focus on improving the productivity and efficiency of its workforce while reducing expenses. For example, CPR eliminated approximately 1,900 permanent positions in 2000 (representing approximately 10% of its workforce), including positions in management, administration, maintenance shops, train operations and track maintenance.
In 2001, CPR launched further cost-reduction initiatives, including the integration of the St. Lawrence & Hudson Railway Company Limited (previously a CPR subsidiary operating in eastern Canada), which resulted in the elimination of approximately 800 positions. In addition, approximately 600 positions were transferred to service suppliers, who improved utilization of CPR facilities through access to a larger customer base.
During 2002, CPR began new restructuring initiatives to reduce costs by eliminating an additional 85 positions. In the second quarter of 2003, CPR began a productivity program that planned to eliminate 820 positions by the end of 2005 through consolidation of administrative functions, applications of new information technology to improve the productivity of administrative functions and yard operations, and improvements in car and locomotive maintenance efficiency. The Company eliminated 656 positions under this program as of the end of 2004.
In order to stimulate and reward employee participation in CPRs efficiency initiatives, CPR has implemented a number of incentive-based compensation programs designed to allow eligible employees, both unionized and non-unionized, to share in the profits they help generate for CPR.
10
GENERAL DEVELOPMENT OF THE BUSINESS
North American Railway Franchise
CPR believes it is well positioned to achieve its goals because of its network and assets, its emphasis on customer service and its team of dedicated employees.
Network and Assets The competitive strengths of CPRs network and assets include the following:
| CPR offers access to U.S. markets through 11 major interchanges and agreements and commercial arrangements with other Class 1 railways; | |||
| CPR handles the largest volume of intermodal containers through the Port of Montreal, a major North American gateway for European trade; | |||
| CPR has competitive access to new, state-of-the-art facilities at the Port of Vancouver, a major shipping gateway to and from Pacific Rim markets; | |||
| CPR offers the shortest rail route from the Port of Vancouver to the Chicago, Illinois rail hub; | |||
| CPR has made significant investments in efficient AC locomotives; and | |||
| CPR has invested strategically in new computer operating systems, enabling CPR to operate more effectively and efficiently for the benefit of its customers while further enhancing its scheduled-railway operations. |
Customer-Oriented Initiatives CPR believes that its emphasis on customer service has differentiated the Company from its competitors and has allowed its customers to compete effectively in their respective markets, while permitting CPR to retain and enhance its customer base. Some of CPRs customer-oriented initiatives include the following:
| CPR has extended its rail lines directly to the new facilities of some of its key customers; | |||
| CPR has introduced services and acquired assets that are custom-designed for certain of its key customers; | |||
| CPRs service quality has helped to motivate several of its significant intermodal customers to locate large distribution centres adjacent to CPRs intermodal terminals (for example, Sears, Canadian Tire and Consolidated Fastfrate); and | |||
| CPR has achieved a strong market position across a diversified base of customers and products through its cross-functional approach. |
Dedicated Employees CPR considers its team of employees to be its most valued asset. Through results-sharing programs, CPRs employees receive financial incentives for helping CPR attain its goals.
Extending Franchise Reach
CPR aims to continue to increase revenue through initiatives designed to extend its business beyond the physical railway network, thereby providing the flexibility needed to capture market share from its competitors. CPR plans to extend its franchise reach by creating new markets and by concentrating on providing new products, expanded truck-rail transfer facilities and improved, value-added service through customer-relationship management.
New Product Offerings
CPR works with its customers to develop and introduce new products into the marketplace. For example, CPR introduced its Trans-Pacific initiative, a highly-efficient, freight-transportation service between the Port of Vancouver and Chicago for import-export intermodal containers. By working with the Port of Vancouver and various shipping lines to establish Vancouver, B.C., as the preferred port for North America-bound deliveries from the Pacific Rim, CPR has created a competitive route for the movement of containers into the Chicago market. CPR continues to secure long-term agreements with customers in this corridor including OOCL, COSCO, China Shipping, NYK, Columbus Lines and Lykes Lines Limited LLC, which are among, or are affiliated with, the worlds largest container shipping companies.
11
GENERAL DEVELOPMENT OF THE BUSINESS
Expanded Truck-Rail Transfer Facilities
CPR has also extended its franchise reach through the use of truck-rail transfer facilities, which
it uses to gain competitive access to key resource production areas not directly served by the CPR
network. This service will be provided through the Companys logistics and supply chain division,
Canadian Pacific Logistics Solutions (CPLS).
Customer Relationship Management
CPRs customer service team, located in Winnipeg, Manitoba; Calgary, Alberta; and Minneapolis, Minnesota, aims to provide value to customers through the use of technology, a formalized cross-functional approach to problem solving and the development of new opportunities for customers. CPRs customer service group also includes a damage-prevention team, which works with customers to ensure proper loading techniques are employed thereby enabling shipments to arrive in good condition.
CPR has put in place a Customer Relationship Management (CRM) program directed at understanding and anticipating the needs of its current and potential customers. This program has better positioned CPR to:
| understand customer needs and expectations; | |||
| deliver the expected product quality; | |||
| work with customers to generate new product ideas; | |||
| manage and improve the overall customer experience with CPR; and | |||
| continuously improve CPRs performance. |
CPR will continue to build on this success through strengthened customer relationships and an increased focus on sustainable growth opportunities.
Railway Partnerships and Alliances
In order for certain customers to transport their goods from their desired points of origin to their desired final destination points, goods may have to travel on more than one railway. Transfers of goods from railway to railway can cause delays and service interruptions. CPRs rail network connects to other North American rail carriers and CPR, in partnership continues to co-develop processes and products designed to provide seamless and efficient scheduled train service to these customers.
Recent Class 1 railway initiatives include:
| a joint CPR-UP service from western Canada to the U.S. Pacific-Northwest, California and Arizona via Kingsgate, B.C.; | |||
| a joint CPR-UP service from western Canada to the Texas/Mexico and Kansas/Missouri markets via Minneapolis; | |||
| a joint CPR-NS intermodal service between the Port of New York/New Jersey and eastern Canada; | |||
| CPR-NS trackage-rights agreement to handle NS traffic over CPRs D&H lines in the U.S. Northeast; and | |||
| a joint CPR-UP service from eastern Canada to the U.S. Gulf Coast and Mexico. |
CPR also works with smaller (short-line or non-Class 1) railways to develop partnerships that benefit both parties.
12
GENERAL DEVELOPMENT OF THE BUSINESS
In November 2004, CPR reached agreements with CN on three network initiatives that will improve railway transit times and asset utilization in B.C., Alberta and Ontario.
These agreements provide for:
| A slot-sharing arrangement allowing CPR to operate eight trains a week containing bulk commodities over CNs line between Edmonton, Alberta and CPRs network at Coho, B.C., near Kamloops, B.C., a distance of about 550 miles. Under the arrangement, trains are equipped with CPR locomotives and operated by CN crews. At Coho, CPR trains enter already-established directional running trackage that permits all westbound trains of both railways to operate through the B.C. Fraser Valley on CNs line and all eastbound trains to operate on CPRs line. | |||
| Directional running over about 100 miles of parallel CPR and CN track in Ontario between Waterfall, which is near Sudbury, and Parry Sound. The two railways have agreed to operate eastbound trains over CNs line and westbound trains over CPRs line, improving network fluidity in this corridor. Implementation is expected in the second half of 2005. | |||
| A haulage arrangement pursuant to which CPR will transport CN freight moving over about 300 miles of CPR track in Ontario between Thunder Bay and a junction with CN at Franz, Ontario using CPRs route north of Lake Superior. This arrangement is expected to be implemented in the second half of 2005. |
13
DESCRIPTION OF THE BUSINESS
Network and Right of Way
CPRs 13,800-mile network extends from the Port of Vancouver in Canadas west to the Port of Montreal in Canadas east, and to the U.S. industrial centres of Chicago; Newark, New Jersey, Philadelphia; Washington, D.C.; New York City and Buffalo, New York.
CPRs network is composed of four primary corridors: the Western, the Southern, the Central, and the Eastern corridors. These corridors are comprised of main lines, totalling approximately 4,700 miles, supported by feeder lines that carry traffic to and from the main lines.
The Western Corridor: Vancouver-Moose Jaw
Overview The Western Corridor links Vancouver with Moose Jaw, the western Canadian terminus of both CPRs Southern and Central corridors. With service through Calgary, this corridor provides the shortest rail route for most bulk products transported from western Canada to the Port of Vancouver. The Western Corridor is also an important part of CPRs highly-competitive service routes between Vancouver and the U.S. Midwest and between Vancouver and central and eastern Canada.
Products The Western Corridor is CPRs primary route for bulk and resource-products traffic from western Canada to the Port of Vancouver for export. CPR also handles significant volumes of import/export intermodal containers and domestic general merchandise traffic.
Feeder Lines CPR supports its Western Corridor with three significant feeder lines. The Coal Route links the southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank terminal at the Port of Vancouver. The Calgary-Edmonton Route provides rail access to central Albertas petrochemical industries, natural resources markets and Edmonton. The Pacific Can-Am Route connects Calgary and Medicine Hat, Alberta with the UP at Kingsgate, B.C.
Connections CPRs Western Corridor connects with UP at Kingsgate, B.C. The Western Corridor also connects with Burlington Northern and Santa Fe Railway (BNSF) at Coutts, Alberta, and at New Westminster and Huntingdon, B.C.
Yards and Repair Facilities CPR supports rail operations on the Western Corridor with major rail yards at Vancouver, Calgary, Edmonton and Moose Jaw. CPR also has significant intermodal terminals at Vancouver, Calgary and Edmonton, and locomotive and rail car repair facilities at Vancouver, Golden, Calgary and Moose Jaw.
14
DESCRIPTION OF THE BUSINESS
Other The Western Corridor includes the 9.8-mile Mount Macdonald tunnel, which reduces the ruling grade for loaded westbound trains to 1%, through the mountains of B.C.
The Southern Corridor: Moose Jaw-Chicago
Overview CPRs Southern Corridor connects with the Western Corridor at Moose Jaw. By running through the twin cities of Minneapolis and St. Paul, Minnesota and Milwaukee, Wisconsin, south to Chicago, CPR provides a direct, single-carrier route between western Canada and the U.S. Midwest.
Products Primary traffic categories served on the Southern Corridor include intermodal containers originated at the Port of Vancouver, Canadian fertilizers, chemicals, grain, coal, automotive and U.S. agricultural products.
Feeder Lines CPR supports the Southern Corridor with a significant feeder line connecting Glenwood, Minnesota and Winnipeg. This line is both a gathering network for U.S. grain and a route for Canadian fertilizers and merchandise traffic destined to the U.S.
CPR has operating rights over the BNSF line between Minneapolis and the twin ports of Duluth, Minnesota and Superior, Wisconsin (Duluth/Superior). This line provides an outlet for grain from the U.S. Midwest to the grain terminals at Duluth/Superior.
CPR has a route from Chicago to Louisville, Kentucky through a combination of operating rights and owned lines. CPR handles general merchandise traffic on this route, as well as a significant amount of coal traffic from mines in southern Indiana.
Connections CPRs Southern Corridor connects with all major railways at Chicago. Outside of Chicago, CPR has major connections with BNSF at Minneapolis and at Minot, North Dakota; with UP at St. Paul; and with CSX and NS at Louisville. CPR also links its Southern Corridor to several shortline railways that primarily serve grain and coal producing areas in the U.S.
Yards and Repair Facilities CPR supports rail operations on the Southern Corridor with major rail yards at Chicago, St. Paul and Glenwood. At Chicago, CPR also owns 49 % of the Indiana Harbor Belt Railroad Company, a switching railway serving Greater Chicago and northwest Indiana. CPR has two significant intermodal terminals at Chicago and one at Minneapolis. In addition, CPR has a major locomotive repair facility at St. Paul and car repair facilities at St. Paul and Chicago.
The Central Corridor: Moose Jaw-Toronto
Overview The Central Corridor extends from Moose Jaw, through Winnipeg to its eastern terminus at Toronto, Ontario. CPR complements the Central Corridor with a secondary route that is leased and operated by Ottawa Valley Railway that connects Sudbury and Smiths Falls, Ontario and expedites the movement of CPR traffic between Montreal and western Canada. CPRs Central Corridor provides shippers direct rail service from Toronto and Montreal to Calgary and Vancouver via CPRs Western Corridor. This is a key element of CPRs transcontinental intermodal and other competitive services. The Central Corridor also provides access to the Port of Thunder Bay, Ontario, Canadas primary Great Lakes bulk terminal.
Products Major traffic categories on the Central Corridor include Canadian grain, coal, forest and industrial products, intermodal containers, automotive products and general merchandise.
Feeder Lines CPR supports the Central Corridor with a significant feeder line connecting Edmonton with Winnipeg, through Saskatoon and Regina, Saskatchewan. This line is an important collector of Canadian grain and fertilizer.
Connections The Central Corridor connects with BNSF at Emerson, Manitoba, as well as a number of shortline railways.
Yards and Repair Facilities CPR supports its rail operations on the Central Corridor with major rail yards at Saskatoon, Winnipeg, Thunder Bay and Toronto. CPRs intermodal facility in the northern Toronto suburb of Vaughan is CPRs largest intermodal facility, and serves the Greater Toronto and southwestern Ontario area. CPR also operates intermodal terminals at Thunder Bay, Winnipeg, Saskatoon and Regina.
CPR has significant locomotive repair facilities at Winnipeg and Toronto and has car repair facilities at Winnipeg, Thunder Bay and Toronto.
15
DESCRIPTION OF THE BUSINESS
The Eastern Corridor
Overview The Eastern Corridor provides CPR with an important link between the major population centres of eastern Canada, the U.S. Midwest and the U.S. Northeast. The Eastern Corridor supports CPRs leading market position at the Port of Montreal by providing one of the shortest rail routes for European cargo destined to the U.S. Midwest. The Eastern Corridor consists of a route that is owned and maintained by CPR between Montreal and Detroit, coupled with a trackage rights arrangement (starting in 2005) with NS over the shortest rail route between Detroit and Chicago, and a long-term rail car haulage contract with CSX that links Detroit with CPR-owned infrastructure at Chicago.
Products Over the Eastern Corridor, CPR predominantly handles intermodal containers, automotive, forest and industrial products, as well as motor-carrier trailers on CPRs fast roll-on/roll-off Expressway service.
Feeder Lines The Eastern Corridor connects with a number of important feeder lines. The route between Montreal and Sunbury in combination with trackage rights over other railways, provides CPR direct access to New York City, New York; Albany, New York; Philadelphia, Newark, and Washington, D.C. The line between Guelph Junction, Ontario and Binghamton, New York, including haulage rights over the NS lines, links the southern Ontario industrial region with key U.S. 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 have major connections with NS at Detroit, Buffalo, and at Harrisburg and Allentown, Pennsylvania. CPR also has major connections with CSX located at Detroit, Buffalo, Albany, Washington D.C., and Philadelphia.
Yards and Repair Facilities In addition to yards and terminals at Toronto and Chicago, CPR supports its Eastern Corridor with major rail yards at Montreal and Binghamton. CPR also has intermodal facilities at Montreal and Detroit, as well as a second intermodal facility in Toronto dedicated to serving the Eastern Corridor. CPR has Expressway terminals at Montreal and Toronto (Milton and Agincourt). In addition to repair facilities in Toronto and Chicago, CPR has locomotive and car repair facilities in Montreal and Binghamton.
Other On June 30, 2004 CPR announced a restructuring of the D&H whereby D&H and NS will provide yard and haulage services for each other, which restructuring is expected to reduce D&Hs costs and provide new income. The changes resulting from the D&H-NS arrangement are discussed further under the heading Network Efficiency in this AIF. The first set of changes was implemented in November 2004, and the remainder of the changes are expected to be implemented by the second quarter of 2005. The expected 2005 changes are subject to approval by the U.S. Surface Transportation Board (STB).
Right of Way
CPRs rail network is standard gauge, which is used by all of the major railways in Canada, the U.S. and Mexico. Continuous welded rail is used on over 96% of CPRs mainline. Virtually all of the network and primary feeder trackage is 100-pound rail or heavier, suitable for movements of 286,000-pound cars, the North American rail industrys preferred car size.
CPR uses different train control systems on different portions of its owned track, depending on the volume of rail traffic. Centralized traffic control (CTC) signals are used to authorize the movement of trains where traffic is heaviest. Approximately 3,450 miles of the network are controlled with CTC signals.
Where rail traffic is lightest, train movements are directed by written instructions transmitted electronically and by radio from rail traffic controllers to train crews. In areas of intermediate traffic density, CPR uses an automatic block signalling system (ABS) in conjunction with the written instructions from rail traffic controllers. Approximately 700 miles of the network have ABS in place.
16
DESCRIPTION OF THE BUSINESS
Rolling Stock
The following table summarizes the locomotive fleet owned or leased by CPR, including the age distribution of the locomotive fleet:
Number of Locomotives
(owned and leased)
Road Freight | Road | Yard | ||||||||||||||||||
Age in Years | AC | DC | Switcher | Switcher | Total | |||||||||||||||
0-5 |
268 | | | | 268 | |||||||||||||||
6-10 |
314 | | | | 314 | |||||||||||||||
11-15 |
| 21 | | | 21 | |||||||||||||||
16-20 |
| 95 | 94 | 8 | 197 | |||||||||||||||
Over 20 |
| 426 | 175 | 252 | 853 | |||||||||||||||
Totals |
582 | 542 | 269 | 260 | 1,653 | |||||||||||||||
In addition to its locomotive fleet, CPR owns or leases approximately 50,300 freight cars, of which approximately 23,100 cars are owned by CPR and 9,000 of which are hopper cars owned by Canadian federal- or provincial-government agencies. Long-term leases on approximately 4,200 cars are scheduled to expire during 2005, and the leases on approximately 13,900 additional cars are scheduled to expire before the end of 2008.
Business Categories
CPR provides the shortest rail route for most bulk products transported from western Canada to the Port of Vancouver. CPR also provides highly competitive service routes between Vancouver and the U.S. Midwest and between Vancouver and the major population centres in central and eastern Canada. The CPR network provides a strategic link between the Port of Montreal and the U.S. Midwest. CPR also serves the major eastern population centres of Montreal, Toronto, Newark, New York City, Buffalo, Philadelphia and Washington, D.C.
The following table compares the percentage of CPRs total freight revenue derived from each of its major business lines in 2004 versus 2002. CPRs business balance has evolved to meet the needs of its customers and growth in the intermodal market.
Business Category | 2004 | 2002 | ||||||
Bulk |
44 | % | 43 | % | ||||
Merchandise |
28 | % | 32 | % | ||||
Intermodal |
28 | % | 25 | % |
17
DESCRIPTION OF THE BUSINESS
Freight
The following table summarizes CPRs freight revenues since 2002.
Fiscal | Fiscal | Fiscal | ||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
Freight Revenues | Growth | Growth | Growth | |||||||||||||||||||||
(in $ millions, except for | Rate as | Rate as | Rate as | |||||||||||||||||||||
percentages) | Compared | Compared | Compared | |||||||||||||||||||||
Fiscal | to Fiscal | Fiscal | to Fiscal | Fiscal | to Fiscal | |||||||||||||||||||
Business Category | 2004 | 2003 | 2003 | 2002 | 2002 | 2001 | ||||||||||||||||||
Bulk |
||||||||||||||||||||||||
Grain |
668 | 3.7 | % | 644 | 2.1 | % | 631 | (15.8 | )% | |||||||||||||||
Coal |
530 | 19.4 | % | 444 | 0.2 | % | 443 | (6.5 | )% | |||||||||||||||
Sulphur and
fertilizers |
460 | 10.0 | % | 418 | 4.2 | % | 401 | 5.2 | % | |||||||||||||||
Total bulk |
1,658 | 10.1 | % | 1,506 | 2.1 | % | 1,475 | (8.0 | )% | |||||||||||||||
Merchandise |
||||||||||||||||||||||||
Forest products |
322 | (2.1 | )% | 329 | (8.6 | )% | 360 | 1.7 | % | |||||||||||||||
Industrial
products |
430 | 7.5 | % | 400 | (5.2 | )% | 422 | (2.0 | )% | |||||||||||||||
Automotive |
289 | (4.9 | )% | 304 | (8.7 | )% | 333 | 9.5 | % | |||||||||||||||
Total merchandise |
1,041 | 0.8 | % | 1,033 | (7.4 | )% | 1,115 | 2.4 | % | |||||||||||||||
Intermodal |
1,030 | 9.6 | % | 940 | 6.6 | % | 882 | 9.7 | % | |||||||||||||||
Total freight revenues |
3,729 | 7.2 | % | 3,479 | 0.2 | % | 3,472 | (0.7 | )% | |||||||||||||||
Bulk
CPRs bulk business, comprised of grain, coal, sulphur and fertilizers, represented approximately 44% of total freight revenues in 2004. CPR provides bulk transportation services along the shortest routes from major production areas in British Columbia, Alberta and Saskatchewan to the Port of Vancouver.
Grain
CPRs grain business comprised approximately 18% of total freight revenues in 2004.
The grain moved by CPR consists of whole grains, primarily wheat, barley and canola, and processed products such as canola meal, vegetable oil and flour.
CPRs network provides grain producers throughout North America with access to domestic and export markets. CPR has direct access to the ports of Vancouver, Thunder Bay, Montreal, and Duluth/Superior. Through its relationships with other railways, CPR also provides access to major ports in both Canada and the U.S.
CPRs revenues from Canadian export grain movements are subject to the Canada Transportation Act, which includes a revenue formula. The revenue formula is indexed annually to reflect changes in the input costs associated with moving grain destined for export.
CPR has introduced a variety of products, including multi-car block incentives and car order fulfillment products, which encourage more efficient grain movements.
18
DESCRIPTION OF THE BUSINESS
Coal
CPRs coal businesses represented approximately 14% of total freight revenues in 2004. In Canada, CPR transports metallurgical coal from mines in southeastern B.C. to port terminals for export to world markets, particularly the Pacific Rim. The mines located on CPRs lines, some of the most efficient in North America, produce high-quality coal and have long-life reserves. The U.S. coal business handled by CPR consists mainly of thermal coal and petroleum coke, transported mainly within the U.S. Midwest.
Elk Valley Coal Corporation (EVCC)
Coal shipper Elk Valley Coal Corporation (EVCC), pursuant to the rules of the Canadian Transportation Agency (CTA), referred the matter of rates and services for the transportation by CPR of coal from EVCCs Elkview mine in southeastern B.C. to the Port of Vancouver to an independent arbitrator. Notwithstanding that CPR maintains that this matter is governed by a confidential contract, which CPR claims governs the movement of coal from all five of EVCCs mines in southeastern BC, the arbitrator ruled in CPRs favour. In a closely related matter, CPR has filed a statement of claim against EVCC in respect of all five mines for failure to pay applicable rail freight charges in accordance with the confidential contract. In January 2005, EVCC and CPR agreed to suspend all legal proceedings and entered into non-binding mediation in an attempt to resolve all disputes between the parties. The disputes are not expected to affect the continued shipment of coal by CPR from EVCCs mines. The outcome of this matter could have a material impact on CPRs revenues and financial position.
Sulphur and Fertilizers
Sulphur and fertilizers business represented approximately 12% of total freight revenues in 2004.
Sulphur
Sulphur is a by-product of the oil and gas industry, primarily used in the production of phosphate fertilizers. CPR provides rail transportation services from the key production facilities in Canada to the U.S. and offshore markets mainly China, Australia, and South Africa via the Port of Vancouver.
Fertilizers
The two main segments of the fertilizer business are potash and chemical fertilizers. CPRs potash business moves primarily from Saskatchewan to markets in the U.S. and offshore countries through the ports of Vancouver, Thunder Bay, and Portland, Oregon. Chemical fertilizers are transported to Canadian and northern U.S. markets from key production areas in the Canadian Prairie provinces. Phosphate fertilizer traffic is also received from U.S. railways. CPR has long-term, inflation-protected contracts covering most of its fertilizer business.
Merchandise
CPRs merchandise business represented approximately 28% of total freight revenues in 2004. Merchandise freight consists of finished vehicles and automotive parts, and forest and industrial products. Merchandise cargo moves in various car types on mixed trains accommodating a robust customer base across numerous traffic lanes. Significant volumes of merchandise traffic flows through a network of truck- rail transload facilities managed through CPLS. This division has the capability to offer logistics solutions to individual merchandise shippers.
Automotive
CPRs automotive business represented approximately 8% of total freight revenues in 2004. CPR transports vehicles to and from several automotive plants in Ontario and automotive facilities across the CPR network. Automotive business consists of the transportation of domestic and import vehicles, automotive parts and agricultural equipment from North American assembly plants and the Port of Vancouver to destinations in the Canadian and U.S. marketplace.
19
DESCRIPTION OF THE BUSINESS
Forest Products
CPRs forest products business represented approximately 9% of total freight revenues in 2004, transporting a variety of forest products including wood pulp, lumber, newsprint, paper, panel board and fibreboard. CPR mainly transports wood pulp from B.C. and eastern Canada, lumber from B.C. and Alberta and newsprint from eastern Canada, primarily destined for the U.S.
Industrial Products
CPRs industrial products business represented approximately 11% of freight revenues in 2004. The industrial products business line includes many input commodities, such as chemicals, plastics, minerals, aggregates, metals, steel and scrap and energy-related products. Traffic moves within the domestic North American market and to export markets in the Pacific Rim.
Intermodal
CPRs intermodal business accounted for approximately 28% of CPRs total freight revenues in fiscal 2004. This business line, which generally consists of high-value, time-sensitive shipments, has grown significantly in recent years. CPR also believes that the intermodal business has attractive, long-term growth prospects. To enhance competitiveness and prepare for continued growth, CPR has increased capacity at its intermodal terminals in Vancouver, Calgary, Chicago, Toronto and Montreal. CPR is also implementing new technology to provide better shipment tracking and an improved overall service product to its customers.
Import/Export Intermodal
The international segment mainly handles containers of consumer goods between the ports of Vancouver and Fraser Surrey, B.C., Montreal, New York and Philadelphia, and inland Canadian and U.S. destinations.
North American Intermodal
North American intermodal traffic, transporting mainly retail goods, moves between Toronto, Montreal, Chicago and several western Canadian cities. CPR has entered into co-location initiatives, under which major retailers have built regional distribution facilities adjacent to certain CPR intermodal terminals.
Expressway
CPRs Expressway provides high-quality rail services in the short-haul market. Expressway works in partnership with the trucking industry by carrying standard, non-reinforced trailers between major urban centres. A number of major motor carriers serving the automotive, resource, food and retail sectors use CPRs Expressway.
Canadian Pacific Logistics Solutions
CPLS, a division of CPR, provides supply-chain consulting, logistics management, and facility services, to rail and non-rail customers.
Other Business
CPR earns additional revenues through the sale or lease of its assets. These arrangements include infrastructure and operating agreements with government-sponsored commuter rail authorities, the sale of CPRs rights to lay fibre-optic cable along its track right-of-way and contracts with passenger-service operators. CPR also operates the Royal Canadian Pacific, a luxury train composed of CPRs historic business car fleet.
Economic Dependence
At December 31, 2004, one customer comprised 11.7% of total revenues and 12.4% of CPRs total accounts receivable. At December 31, 2003 and 2002, no customers revenues were greater than 10% of total freight revenues.
20
DESCRIPTION OF THE BUSINESS
Risk Factors
Competition
The freight transportation industry is highly competitive. CPR faces intense competition for freight transportation in Canada and the U.S., including competition from other railways and trucking companies. Competition is based mainly on price, quality of service and access to markets. Any improvement in the cost structure or service of CPRs competitors could increase this competition and materially adversely affect the Companys business or operating results.
In recent years there has been significant consolidation of the railway industry in North America. The resulting larger railway companies are able to offer services in larger market areas and compete with CPR in these markets. Competition from current and future competitors in the railway industry could create a risk for CPRs competitive position and may materially adversely affect the Companys business, financial condition or operating results.
Economic and Other Conditions
CPRs freight volumes and revenues are largely dependent upon the health of the North American and global economy and other factors affecting the volumes and patterns of international trade. CPR is also sensitive to factors such as weather, commodity pricing and global supply and demand, as well as factors affecting North Americas agricultural, mining, forest products, consumer products, import/export markets and automotive sectors. These factors are beyond the influence or control of the railway industry generally and CPR specifically.
Fuel Prices
The Company is particularly dependent upon fuel costs which constitute a significant portion of CPRs operating costs. Fuel prices and supplies are influenced significantly by international political and economic circumstances. If a fuel shortage were to arise from OPEC production curtailments, a disruption of oil imports or other factors, the resulting higher fuel prices could materially affect CPRs operating results. Specifically, an increase in the price of fuel would result in lower earnings and increased cash outflows. To manage this exposure to fluctuations in fuel prices, as part of CPRs hedge policy, the Company sells or purchases crude oil futures. To the extent that fuel costs decline below the levels specified in any such futures contracts, CPR will not receive the full benefit of these contracts.
Foreign Exchange Risk
Although CPR conducts its business and receives revenues primarily in Canadian dollars, a significant portion of CPRs revenues, expenses, assets and debt are denominated in U.S. dollars. Thus, the Companys results are affected by fluctuations in the exchange rate between these currencies. In addition, changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar) make the goods transported by the Company more or less competitive in the world marketplace and, in turn, positively or negatively affects the Companys revenues and expenses. To manage this exposure to fluctuations in exchange rates between Canadian and U.S. dollars on future revenue streams and certain U.S. dollar expenditures, CPR sells or purchases forward U.S. dollars at fixed rates in future periods. To the extent that exchange rates decline below the rate fixed by such futures contracts, the Company will not receive the full benefit of these contracts.
Regulatory Bodies
CPRs railway operations in Canada are subject to regulations under the Canada Transportation Act and the Railway Safety Act and certain other statutes administered by the Canadian Transportation Agency and the Federal Minister of Transportation. U.S. railway operations are subject to regulation administered by the STB and the Federal Railroad Administration (FRA). Other federal, provincial, state and local regulations also govern the Companys railway operations, as well as a variety of health, safety, labour, environmental and other matters.
The Company is also subject to statutory and regulatory directives in the U.S. addressing homeland security concerns. Future decisions by the U.S. government on homeland security matters or decisions by the industry in response to security threats to the North American rail network could materially adversely affect CPRs business or operating results.
21
DESCRIPTION OF THE BUSINESS
Environmental Laws and Regulations
The Companys 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. CPR transports hazardous materials and periodically uses hazardous materials in its operations. Any allegations or findings to the effect that the Company has violated such laws or regulations could materially affect business or operating results.
In certain locations, CPR operates on properties that have been used for railways for over a century. As a result, historic releases of hazardous waste or materials may be discovered, requiring remediation of CPR properties or subjecting the Company to liability for damages, the cost of which may be material. Changing regulations and remedial approaches in Canada and the U.S. will ultimately impact the costs of remediation and overall environmental liability. The regulatory tendency towards increased protection of human health from specific chemicals may mean that sites that were previously remediated, or that did not require actions, could be subject to further scrutiny. There is a possibility that an accidental release of hazardous waste or materials on CPR properties could occur and the costs of remediation of properties affected by such accidental release may be material.
In the operation of a railway, it is possible that derailments or other accidents may occur that could cause harm to human health or to the environment. As a result, the Company may incur costs in the future to address any such harm, including costs relating to the performance of clean-ups, natural resource damages and compensatory or punitive damages relating to harm to individuals or property.
Labour Relations
Relations with CPR employees could deteriorate due to disputes related to, among other things, wage or benefit levels or the Companys response to changes in government regulation of workers and the workplace. CPRs operations rely heavily on its employees. Any labour shortage or stoppage caused by poor relations with employees, including those represented by unions, could adversely affect CPRs ability to provide services and the costs of providing such services, which could materially harm business or operating results and materially harm relationships with CPRs customers.
Certain of CPRs union agreements are currently under renegotiation, as discussed under the heading Labour Relations in this AIF. The Company has no guarantee that these negotiations will be resolved in a timely manner or on terms favourable to CPR.
Pension Plans
CPR maintains both defined benefit and defined contribution pension plans. With historic declines in equity markets and current low interest rates, the plans unfunded liabilities have increased significantly. Pension funding requirements are dependent upon various factors, including interest rate levels, asset returns, regulatory requirements for funding purposes and changes to pension plan benefits. In the absence of favourable changes to these factors, the Company may have to satisfy the under-funded amounts of its plans through cash contributions from time to time.
Indemnifications
Pursuant to a trust and custodial services agreement between the Company and 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 trustees 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, liabilities, etc., arising prior to the termination or expiry. At December 31, 2004, the Company had not recorded a liability associated with this indemnification, as the Company does not expect to make any payments pertaining to it.
Pursuant to the bylaws of CPR, all current and former directors and officers of the Company are indemnified by the Company. CPR carries a directors and officers liability insurance policy subject to a maximum coverage limit and certain deductibles in cases where a director or officer is reimbursed by CPR for any loss covered by the policy.
22
DESCRIPTION OF THE BUSINESS
Safety
CPRs Safety and Health Management Committee provides ongoing focus, leadership, commitment and support for efforts to improve the safety of CPRs operations, and the safety and health of CPR employees. Safety Framework, the Companys safety management process, involves more than 1,000 employees in planning and implementing safety-related activities. This safety management process, combined with a planning process that encompasses all operational functions, ensures a continuous and consistent focus on safety.
In 2004, FRA personal injuries per 200,000 employee hours (100 employee years in 2004) were 2.7, down 13% from 2003 and down 25% since 2002. FRA reportable train accidents per million train miles were 2.1 in 2004. This was a 17% increase compared to the previous two years, but was the same as the frequency achieved in 2001.
Competition
CPRs primary competitors for freight transportation in Canada and the U.S. include other railways and trucking companies. CPR is subject to competition for freight traffic from other Class 1 railways, particularly BNSF, CN, NS, CSX and UP. Competition is based mainly on price, service and accessibility to markets. Competition with the trucking industry is generally focused on freight rates, flexibility of service and transit time performance.
Border Security
In 2002, CPR became the first railway in North America to be approved under a new Canada Border Services Agency (CBSA) program to streamline clearance at the border for imports from the U.S. Under the Customs Self-Assessment (CSA) program, goods and shippers approved as low risk have a virtual fast lane into Canada on CPR. Eligible goods include finished vehicles, parts for vehicles, food products and other common items frequently imported from the U.S.
The CSA program reduces the cost of compliance with Canadas import regulations. Under the program, approved importers can file monthly summary customs reports on their shipments instead of a report on each shipment. Approved importers also benefit from improved efficiencies, as their goods can be delivered directly to their facilities without stopping for inspection at the border or waiting for customs clearance. CPR benefits from improved freight car velocity, as shipments for customers approved under CSA can move more easily across the U.S. border.
CPR is also a certified carrier with the U.S. Customs and Border Protections (CBP) Customs Trade Partnership Against Terrorism (C-TPAT) program and the CBSAs Partners in Protection (PIP) program. C-TPAT and PIP are partnership programs that seek to strengthen overall supply chain and border security.
Under the joint Declaration of Principles signed in April 2003, CPR committed to work with the CBSA and CBP to install Vehicle and Cargo Inspection Systems (VACIS) at five of CPRs border crossings. Rail VACIS systems use non-intrusive gamma ray technology to scan U.S.-bound rail shipments. Four of the VACIS systems are now fully operational and CPR is currently working with CBP and CBSA on the fifth installation in Windsor, Ontario, which is expected to be complete by third-quarter 2005. The joint government-industry initiative to enhance the security of U.S.-bound rail shipments ensures trade continues to flow between the two countries. These discussions were part of the larger process of implementing the Smart Border Declaration adopted by Canada and the U.S. in December 2001.
Labour Relations
As at December 31, 2004, approximately 79% of CPRs workforce is unionized, with approximately 80% of CPRs workforce located in Canada. Unionized employees are represented by a total of 36 bargaining agents. Seven bargaining agents represent CPR employees in Canada and the remaining 29 represent employees in CPRs U.S. operations.
Labour Relations Canada
Agreements are currently in place with four of the seven bargaining units in Canada. Of the collective agreements currently in effect, the two agreements with the Rail Canada Traffic Controllers (RCTC) and the Canadian Pacific Police Association (CPPA) expire at the end of 2005, and the two agreements with the United Steel Workers of America (USWA) and the Teamsters Canada Rail Conference Running Trade Employees (TCRC-RTE) expire at the end of 2006.
23
DESCRIPTION OF THE BUSINESS
A three-year collective agreement was ratified in January 2004 by members of the USWA. The agreement with the USWA, which represents clerical employees of CPR, extends to the end of 2006 and allows for wage increases for 2004, 2005 and 2006 of 3%, 2% and 2%, respectively.
Train crew employees have elected the TCRC-RTE as their bargaining agent, replacing the Canadian Council of Railway Operating Unions (CCROU). In January 2005, the TCRC-RTE ratified a four-year agreement in effect until the end of 2006. The agreement allows for wage increases for 2003, 2004, 2005 and 2006 of 2%, 3%, 2.5%, and 3% respectively. It includes benefit plan, pension and work-rule changes designed to contain costs and maximize value for employees.
Track maintenance employees have elected the Teamsters Canada Rail Conference Maintenance of Way Division (TCRC-MWD) as their bargaining agent, replacing the Brotherhood of Maintenance of Way Employees (BMWE). CPRs collective agreement with the BMWE expired on December 31, 2003. A Memorandum of Settlement secured on January 14, 2005 is currently being voted upon by employees.
CPRs collective agreement with the Canadian Auto Workers (CAW), which represent employees who maintain and repair locomotives and freight cars, expired on December 31, 2004. A Memorandum of Settlement for a three-year collective agreement extending to the end of 2007 was achieved on February 11, 2005, and is being voted upon by employees.
Negotiations commenced in September 2004 with the International Brotherhood of Electrical Workers (IBEW), which represents signal maintainers. CPRs collective agreement with the IBEW expired at the end of 2004. Negotiations are continuing.
The Company is preparing for negotiations with the Rail Canada Traffic Controllers and the Canadian Pacific Police Association that are scheduled to commence in September 2005.
Labour Relations U.S.
CPR is party to collective agreements with 29 bargaining units in the U.S., including 15 bargaining units representing employees of CPRs Soo Line and 14 bargaining units representing employees on CPRs D&H.
The U.S. Class 1 railroads negotiate collectively on a national basis and in the most recent bargaining round that began in December 1999, three of the 13 unions have not yet settled. As of December 31, 2004, a new round of bargaining opened for all 13 unions. Even though Soo Line and D&H elect to negotiate independent of the national bargaining, the content and duration of the national negotiations impact settlements on Soo Line and to a lesser extent on D&H.
Soo Line
Soo Line has renewed agreements with seven unions representing track maintainers, freight car repair employees, clerks, train dispatchers, signal repair employees, machinists and conductors. Tentative settlements have been reached with two other bargaining units, which represent electricians and communication workers, and yard supervisors. Negotiations are continuing with the six remaining bargaining units, which represent locomotive and car foremen, mechanical labourers, blacksmiths and boilermakers, sheet metal workers, police, and locomotive engineers. Negotiations with the Teamsters, representing locomotive engineers, are being assisted through mediation.
D&H
D&H has renewed agreements with five unions representing freight car repair employees, clerks, locomotive engineers, signal repair employees and mechanical supervisors. Negotiations are continuing with the remaining nine bargaining units, which represent track maintainers, conductors and trainpersons, engineering supervisors, machinists, yard supervisors, electricians, labourers, police, and pipefitters.
Environmental Protection
CPR has implemented a comprehensive Environmental Management System (EMS), which uses the ISO 14001 standard five elements policy, planning, implementation and operation, checking and corrective action, and management review as described briefly below.
24
DESCRIPTION OF THE BUSINESS
Policy
CPR has adopted an Environmental Protection Policy and continues to develop and implement policies and procedures to address specific issues and facilitate the reduction of environmental risk. Each policy is implemented with training for employees and a clear identification of roles and responsibilities.
CPR has been a Responsible CareÒ partner of the Canadian Chemical Producers Association since 1998. Responsible CareÒ is a chemical industry initiative that involves a public commitment to continually improve the industrys environmental, health and safety performance. CPR successfully completed its first Responsible CareÒ external verification in June 2002 and was granted Responsible CareÒ practice-in-place status. Re-verification is scheduled for 2005.
CPR has also been a partner of the American Chemistry Council since 1999. CPR is scheduled to be verified for the first time in the U.S. by 2006.
Planning
CPR prepares an annual Corporate Environmental Plan that details CPRs work plan for the coming year, including CPRs environmental goals and objectives, as well as high level strategies and tactics. Various departments throughout the Company use the plan to integrate key corporate environmental strategies into their own business plans.
Implementation and Operation
CPR has 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. CPR environmental specialists and/or consultants lead these programs.
CPR continues to focus on preventing spills and other incidents that have a negative impact on the environment. As a precaution, the Company has established a Strategic Emergency Response Contractor network and located spill equipment kits across Canada and the U.S. to ensure a rapid and efficient response in the event of an environmental incident. In addition, CPR regularly updates and tests emergency preparedness and response plans.
CPR has taken a proactive position to the remediation of historically impacted sites. In 1995, CPR recorded a provision of $144 million, before tax, to cover anticipated expenditures on environmental remediation programs. The Company re-evaluated its environmental liability needs in 1999 and as a result it increased expected remediation costs by $50 million, before tax. In 2004, CPR recorded a $101 million charge to recognize environmental liabilities previously unknown. Currently, the environmental accrual has been extended to 2014.
Environmental Contamination
In the fourth quarter of 2004, the Company recorded a $91-million charge for costs associated with investigation, characterization, remediation and other applicable actions related to environmental contamination at a property in Minnesota, which includes areas previously leased to third parties. CPR is participating in the State of Minnesotas voluntary investigation and clean-up program at the east side of the property. The property is the subject of ongoing fieldwork being undertaken in conjunction with the appropriate State of Minnesota authorities to determine the extent and magnitude of the contamination and the appropriate remediation plan. CPR now has sufficient information to reasonably estimate clean-up and other applicable costs for the entire property. CPR expects to file with the State of Minnesota in 2005 a response action plan for the east side of the property.
The charge was taken in the fourth quarter of 2004 because future liability increases for this property became probable and reasonably estimable, in accordance with applicable accounting standards, based on the present scientific and engineering knowledge about the property. The estimate may change as new information becomes available or new developments occur. The costs are expected to be incurred over approximately 10 years.
CPR has initiated litigation against two former lessees that it believes are responsible for a large portion of the contamination. Under applicable accounting rules, no recovery has been accrued since any recovery is dependent upon the outcome of the lawsuit, which is at present scheduled for trial in 2007.
25
DESCRIPTION OF THE BUSINESS
Checking and Corrective Action
CPRs environmental audit program comprehensively, systematically and regularly assesses CPRs facilities for compliance with legal requirements and conformance of CPRs policies to accepted industry standards. Audit scheduling is determined through risk assessment for each facility. Audits are led by third-party environmental audit specialists supported by CPR environmental staff.
Audits are followed by a formal Corrective Action Planning process to ensure that findings are addressed in a timely manner. Progress is monitored and reported quarterly to senior management against corporate targets for completion. In 2004, as in the past three years, CPR achieved these targets.
Management Review
CPRs Board of Directors has established an Environmental and Safety Committee that conducts a semi-annual comprehensive review of environmental issues. An Environmental Lead Team, which is comprised of senior leaders of Real Estate, Legal Services, Marketing and Sales, Finance, Operations, Supply Services and Environmental Services, meets quarterly to review environmental matters.
Expenditures
CPR spent approximately $37 million in 2004 for environmental management. Of this amount, $13 million was spent on ongoing operations, $2 million on capital program upgrades and $22 million under the remediation program. Disposal of significant derailment wastes amounted to an additional $1 million.
Regulation and Other Issues
CPRs rail operations in Canada are subject to regulation of service, rate setting, network rationalization and safety by the Canada Transportation Act, the Railway Safety Act and certain other statutes. The Companys U.S. rail operations are subject to regulations administered by the STB and the FRA.
Canadian Regulation
CPRs economic activities, including matters relating to rates, level of service obligations and line discontinuance, are subject to the provisions of the Canada Transportation Act.
The Canada Transportation Act contains shipper rate and service protections, including final-offer arbitration, competitive line rates, and compulsory interswitching (which allows a shipper to request a railway to move its traffic to the nearest competitive interchange point with another railway within a 30-kilometre radius for a regulated fee). However, to gain recourse to certain of these protections, shippers must establish that they would suffer substantial commercial harm if the relief sought were not granted. These shipper protections also extend to western Canadian grain transportation.
In 2000, the Minister of Transport (the Minister) initiated a review of the Canada Transportation Act to assess whether it provides Canadians with an efficient, flexible and affordable transportation system. The report of the panel appointed by the Minister to conduct the review was released on July 18, 2001. The report acknowledged there is a significant level of competition within the Canadian transportation industry, railways are entitled to adequate financial returns, and railways have improved their productivity and returned these improvements to customers. In addition, the panel recognized that the freight rail system works well for the vast majority of users in most markets.
On February 25, 2003, the federal government introduced a bill with miscellaneous changes to the Canada Transportation Act. The bill did not become legislation. It is not known whether the federal government will reintroduce the proposed changes in the current or any future Parliament.
Pursuant to the Canada Transportation Act, CPR is subject to prescribed limits on revenue from transporting western Canadian grain. Penalties may be imposed if these limits are exceeded. In 2004, CPR revenues for the movement of grain in western Canada exceeded the revenue cap by approximately $322,000 on revenues of approximately $310 million (or 0.1%). The penalty levied against CPR of approximately $16,000 has been paid to a grain research foundation for the benefit of the western grain industry.
26
DESCRIPTION OF THE BUSINESS
Canadas federally-regulated railways are also subject to the Railway Safety Act, which governs safety and operational aspects of the industry, as well as the Canadian Transportation Accident Investigation and Safety Board Act. CPR is also subject to legislation relating to the environment and the transportation of hazardous materials. Amendments to the Transportation of Dangerous Goods regulations were enacted in August 2002.
U.S. Regulation
There have been efforts in recent years to re-regulate certain aspects of the U.S. rail industry previously deregulated under the Staggers Rail Act of 1980. The rail industry opposes such re-regulation.
The STB regulates a variety of railway matters, including: service levels; certain freight car rental payments; certain rail traffic rates; the terms under which railways may gain access to each others facilities and traffic; mergers or acquisitions of railways and the abandonment, sale, and discontinuance of operations on rail lines.
In June 2001, the STB issued new regulations governing mergers and consolidation of Class 1 railways in the U.S. CPR believes these new regulations require applicants to demonstrate that a proposed transaction would be in the public interest and would enhance competition where necessary to offset any negative effects.
The FRA governs all safety-related aspects of railway operations within the U.S. and, therefore, has jurisdiction over CPR operations conducted within the U.S. State and local regulatory agencies may also exercise jurisdiction over certain safety and operational matters of local significance.
Insurance
CPR maintains insurance policies to protect its assets and to protect against liabilities. CPRs insurance policies include, but are not limited to, liability insurance, directors and officers 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 CPRs infrastructure. CPR believes that it has adequate insurance in place to protect the Company from known and unknown liabilities.
Related-party Transactions
In 2004, CPR provided no rail services to related parties.
CPR entered into agreements with former affiliate CP Ships Ltd. (CP Ships), a related party of CPR prior to completion of the Arrangement, for the transportation of CP Ships container rail traffic through the ports of Montreal and Vancouver. The agreements provide for the use of CPR rail services for all of CP Ships container rail traffic on specified routes to and from certain cities in Canada and the U.S. The agreements with CP Ships were to expire on January 31, 2004. However, the parties have entered into a new long-term agreement extending the arrangement to 2014. The terms of the new agreement do not differ materially from those contained in the agreements entered into prior to the completion of the Arrangement.
CPR has entered into an agreement with former affiliate Fording Inc. (Fording), a related party of CPR prior to completion of the Arrangement, for the transportation of all of the coal processed at Fordings mines in B.C. to the Port of Vancouver. The term of the Fording agreement expires on March 31, 2007.
27
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected financial and operating information for CPR for the years ended December 31, 2000 through 2004.
Summary Financial Data | 2004 | 2003(2) | 2002(2) | 2001(2) | 2000(2) | ||||||||||||||||||||||
INCOME STATEMENT DATA: | (in millions, except per share data) | ||||||||||||||||||||||||||
Revenues |
$ | 3,902.9 | $ | 3,660.7 | $ | 3,665.6 | $ | 3,698.6 | $ | 3,655.1 | |||||||||||||||||
Operating expenses, before other specified items(1) |
3,114.4 | 2,931.1 | 2,821.6 | 2,870.5 | 2,820.4 | ||||||||||||||||||||||
Operating income, before other specified items(1) |
788.5 | 729.6 | 844.0 | 828.1 | 834.7 | ||||||||||||||||||||||
Other charges, before spin-off bridge financing fees(1) |
36.1 | 33.5 | 21.8 | 26.4 | 21.0 | ||||||||||||||||||||||
Interest expense |
218.6 | 218.7 | 242.2 | 209.6 | 167.0 | ||||||||||||||||||||||
Income tax expense, before FX on LTD, income tax recovery and
income tax on other specified items(1)(3) |
172.4 | 147.3 | 181.2 | 223.3 | 242.4 | ||||||||||||||||||||||
Income, before other specified items and FX on LTD(1) |
$ | 361.4 | $ | 330.1 | $ | 398.8 | $ | 368.8 | $ | 404.3 | |||||||||||||||||
Foreign exchange gains (losses) on long-term debt (FX on
LTD)(3) (net of tax) |
94.4 | 224.4 | 16.7 | (48.2 | ) | (39.2 | ) | ||||||||||||||||||||
Other specified items: |
|||||||||||||||||||||||||||
Loss on transfer of assets to outsourcing firm |
| (28.9 | ) | | | | |||||||||||||||||||||
Restructuring, asset impairment and/or environmental charges |
(71.9 | ) | (215.1 | ) | | | | ||||||||||||||||||||
Spin-off related and incentive compensation charges |
| | | (24.5 | ) | | |||||||||||||||||||||
Bridge financing fees related to spin-off |
| | | (17.2 | ) | | |||||||||||||||||||||
Revaluation of future income taxes |
| 59.3 | | | | ||||||||||||||||||||||
Tax rate change effect on future income tax liability |
| (52.7 | ) | | | | |||||||||||||||||||||
Income tax recovery |
| | 72.0 | 64.0 | 131.7 | ||||||||||||||||||||||
Income tax on other specified items |
29.1 | 84.2 | | 18.1 | | ||||||||||||||||||||||
Net income(3) |
$ | 413.0 | $ | 401.3 | $ | 487.5 | $ | 361.0 | $ | 496.8 | |||||||||||||||||
Basic earnings per share, before other specified items and FX on
LTD(1)(2)(3) |
$ | 2.28 | $ | 2.08 | $ | 2.52 | $ | 2.33 | $ | 2.55 | |||||||||||||||||
Diluted earnings per share, before other specified items and FX
on LTD(1)(2)(3) |
$ | 2.27 | $ | 2.07 | $ | 2.50 | $ | 2.32 | $ | 2.55 | |||||||||||||||||
Basic earnings per share(3) |
$ | 2.60 | $ | 2.53 | $ | 3.08 | $ | 2.28 | $ | 3.14 | |||||||||||||||||
Diluted earnings per share(3) |
$ | 2.60 | $ | 2.52 | $ | 3.06 | $ | 2.27 | $ | 3.13 | |||||||||||||||||
Notes: | ||
(1) | Excludes other specified items which are described under the heading Other Specified Items in CPRs 2004 Managements Discussion and Analysis. It should be noted that CPRs operating results, before FX on LTD and other specified items, as described in this AIF, have no standardized meanings prescribed by Canadian generally accepted accounting principles (GAAP) and, therefore, are unlikely to be comparable to similar measures presented by other companies. | |
(2) | Certain expenses for the years 2000 to 2003 were restated to reflect the implementation of a new accounting standard under Canadian GAAP for Asset Retirement Obligations. Earnings per share figures were also restated for these years to conform to this new accounting standard. | |
(3) | Effective January 1, 2002, CPR was required to adopt retroactively, with restatement, the new Canadian Institute of Chartered Accountants accounting standard for the treatment of FX on LTD. Figures for 2001 and 2000 were restated to conform to this standard. | |
(4) | Return on capital employed (after taxes) is calculated as income, before other specified items and FX on LTD, less interest expense, divided by average net-debt-plus-equity, and multiplied by one minus CPRCs normalized tax rate for each respective period. | |
(5) | Net-debt to net-debt-plus-equity has been calculated by dividing total debt (being long-term debt, including long-term debt maturing within one year, plus advances from affiliates) by total capitalization (being total debt plus total shareholders equity). |
28
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Summary Financial Data | 2004 | 2003(2) | 2002(2) | 2001(2) | 2000(2) | ||||||||||||||||||||||
BALANCE
SHEET DATA: |
|||||||||||||||||||||||||||
Total assets(3) |
$ | 10,499.8 | $ | 9,956.7 | $ | 9,664.3 | $ | 9,675.5 | $ | 8,681.9 | |||||||||||||||||
Long-term debt, before current portion |
$ | 3,075.3 | $ | 3,348.9 | $ | 2,922.1 | $ | 3,709.0 | $ | 2,276.3 | |||||||||||||||||
Shareholders equity |
$ | 3,982.4 | $ | 3,654.6 | $ | 3,368.3 | $ | 2,962.8 | $ | 3,436.3 | |||||||||||||||||
FINANCIAL
RATIOS: |
|||||||||||||||||||||||||||
Operating ratio, before other specified items(1)(2) |
79.8 | % | 80.1 | % | 77.0 | % | 77.6 | % | 77.2 | % | |||||||||||||||||
Annual return on capital employed (after taxes), before other
specified items and FX on LTD(4) |
7.3 | % | 7.2 | % | 9.0 | % | 8.5 | % | 9.4 | % | |||||||||||||||||
Net-debt to net-debt-plus-equity(5) |
42.9 | % | 46.9 | % | 47.4 | % | 51.8 | % | 39.1 | % | |||||||||||||||||
Notes: | ||
(1) | Excludes other specified items which are described under the heading Other Specified Items in CPRs 2004 Managements Discussion and Analysis. It should be noted that CPRs operating results, before FX on LTD and other specified items, as described in this AIF, have no standardized meanings prescribed by Canadian generally accepted accounting principles (GAAP) and, therefore, are unlikely to be comparable to similar measures presented by other companies. | |
(2) | Certain expenses for the years 2000 to 2003 were restated to reflect the implementation of a new accounting standard under Canadian GAAP for Asset Retirement Obligations. Earnings per share figures were also restated for these years to conform to this new accounting standard. | |
(3) | Effective January 1, 2002, CPR was required to adopt retroactively, with restatement, the new Canadian Institute of Chartered Accountants accounting standard for the treatment of FX on LTD. Figures for 2001 and 2000 were restated to conform to this standard. | |
(4) | Return on capital employed (after taxes) is calculated as income, before other specified items and FX on LTD, less interest expense, divided by average net-debt-plus-equity, and multiplied by one minus CPRCs normalized tax rate for each respective period. | |
(5) | Net-debt to net-debt-plus-equity has been calculated by dividing total debt (being long-term debt, including long-term debt maturing within one year, plus advances from affiliates) by total capitalization (being total debt plus total shareholders equity). |
Reference is made to the factors affecting the comparability of the foregoing financial data
under the headings Summary of significant accounting policies and New accounting policies in
Notes 1 and 2, respectively, in the Notes to Consolidated Financial Statements included in the
Companys 2004 Annual Report.
29
DIVIDENDS
Declared Dividends and Dividend Policy
The details of dividends declared by the Board of Directors since the initial listing of CPRs Common Shares on the Toronto and New York stock exchanges in October 2001 are as follows:
Dividend Amount | Record Date | Payment Date | ||||||
$0.1275 |
December 27, 2001 | January 28, 2002 | ||||||
$0.1275 |
March 27, 2002 | April 29, 2002 | ||||||
$0.1275 |
June 27, 2002 | July 29, 2002 | ||||||
$0.1275 |
September 27, 2002 | October 28, 2002 | ||||||
$0.1275 |
December 27, 2002 | January 27, 2003 | ||||||
$0.1275 |
March 28, 2003 | April 28, 2003 | ||||||
$0.1275 |
June 27, 2003 | July 28, 2003 | ||||||
$0.1275 |
September 26, 2003 | October 27, 2003 | ||||||
$0.1275 |
December 24, 2003 | January 26, 2004 | ||||||
$0.1275 |
March 26, 2004 | April 26, 2004 | ||||||
$0.1275 |
June 25, 2004 | July 26, 2004 | ||||||
$0.1325 |
September 24, 2004 | October 25, 2004 | ||||||
$0.1325 |
December 31, 2004 | January 31, 2005 | ||||||
$0.1325 |
March 25, 2005 | April 25, 2005 | ||||||
The Board of Directors will 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 Company is, however, under no obligation to declare dividends and the declaration of dividends is wholly within the Board of Directors discretion. Further, the Board of Directors may cease declaring dividends or may declare dividends in amounts that are different from those previously declared. Lastly, 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.
30
CAPITAL STRUCTURE
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.
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 CPRs 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 of 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 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 distributions 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 may 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. |
31
CAPITAL STRUCTURE
3). | The rights, privileges, restrictions and conditions attaching to the Second Preferred Shares are as following: |
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 Share: 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). | Dividend Preferential: Except with the consent in writing of the holders of all outstanding Second Preferred Shares, no dividend may 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. |
32
CAPITAL STRUCTURE
Security Ratings
The Companys debt securities are rated annually by three approved rating organizations Moodys Investors Service, Standard & Poors and Dominion Bond Rating Service Limited. Currently CPRs securities are rated as Investment Grade, as shown in the chart below:
Approved Rating Organization | Long Term Debt | ||||
Moodys Investors Service
|
Baa2 | ||||
Standard & Poors
|
BBB | ||||
Dominion Bond Rating Service
|
BBB | ||||
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.
33
MARKET FOR SECURITIES
Stock Exchange Listings
The common shares of CPR are listed on the Toronto Stock Exchange and the New York Stock Exchange under the symbol CP.
Trading Price and Volume
The following chart provides the monthly trading information for CPR common shares on the Toronto Stock Exchange during 2004.
Opening | High | Low | Closing | Number of | Volume of | |||||||||||||||||||||||||||
Price per | Price per | Price per | Price per | Trades | Shares | |||||||||||||||||||||||||||
Month | Share ($) | Share ($) | Share ($) | Share ($) | Performed | Traded | ||||||||||||||||||||||||||
January |
36.59 | 37.55 | 34.30 | 34.33 | 15,648 | 10,985,473 | ||||||||||||||||||||||||||
February |
34.79 | 35.22 | 30.77 | 31.50 | 22,091 | 15,210,160 | ||||||||||||||||||||||||||
March |
31.55 | 33.36 | 30.32 | 31.50 | 26,895 | 14,821,995 | ||||||||||||||||||||||||||
April |
31.86 | 32.95 | 30.41 | 30.50 | 23,444 | 14,312,109 | ||||||||||||||||||||||||||
May |
30.70 | 31.25 | 29.36 | 30.69 | 17,271 | 11,302,984 | ||||||||||||||||||||||||||
June |
30.50 | 33.10 | 30.11 | 32.75 | 19,510 | 15,047,047 | ||||||||||||||||||||||||||
July |
32.51 | 34.22 | 31.70 | 33.70 | 15,161 | 9,391,682 | ||||||||||||||||||||||||||
August |
34.15 | 34.19 | 31.60 | 33.37 | 13,339 | 6,565,897 | ||||||||||||||||||||||||||
September |
33.20 | 33.84 | 31.71 | 32.69 | 13,413 | 10,508,698 | ||||||||||||||||||||||||||
October |
32.45 | 34.80 | 32.45 | 34.41 | 15,490 | 13,840,085 | ||||||||||||||||||||||||||
November |
34.31 | 39.00 | 34.02 | 38.85 | 27,436 | 20,189,207 | ||||||||||||||||||||||||||
December |
39.05 | 41.55 | 36.76 | 41.10 | 28,708 | 20,577,814 | ||||||||||||||||||||||||||
The following chart provides the monthly trading information for CPR common shares on the New York Stock Exchange during 2004.
Opening | High | Low | Closing | Number of | Volume of | |||||||||||||||||||||||||||
Price per | Price per | Price per | Price per | Trades | Shares | |||||||||||||||||||||||||||
Month | Share ($) | Share ($) | Share ($) | Share ($) | Performed | Traded | ||||||||||||||||||||||||||
January |
28.30 | 29.13 | 25.82 | 25.95 | 4,488 | 1,478,700 | ||||||||||||||||||||||||||
February |
25.90 | 26.55 | 23.10 | 23.51 | 5,858 | 2,187,800 | ||||||||||||||||||||||||||
March |
23.73 | 25.23 | 22.65 | 24.18 | 6,707 | 2,449,500 | ||||||||||||||||||||||||||
April |
24.19 | 25.17 | 22.14 | 22.22 | 6,540 | 2,719,500 | ||||||||||||||||||||||||||
May |
22.25 | 22.85 | 21.40 | 22.39 | 6,206 | 2,463,100 | ||||||||||||||||||||||||||
June |
22.25 | 24.64 | 22.04 | 24.63 | 7,206 | 3,019,800 | ||||||||||||||||||||||||||
July |
24.64 | 25.81 | 24.25 | 25.47 | 7,073 | 2,662,500 | ||||||||||||||||||||||||||
August |
25.47 | 26.05 | 23.83 | 25.45 | 6,300 | 1,895,900 | ||||||||||||||||||||||||||
September |
25.40 | 26.25 | 24.67 | 25.78 | 4,505 | 1,185,200 | ||||||||||||||||||||||||||
October |
25.85 | 28.51 | 25.58 | 28.25 | 5,802 | 2,145,400 | ||||||||||||||||||||||||||
November |
28.15 | 32.85 | 28.05 | 32.74 | 7,437 | 2,883,900 | ||||||||||||||||||||||||||
December |
33.05 | 34.50 | 29.77 | 34.41 | 11,837 | 4,731,100 | ||||||||||||||||||||||||||
34
DIRECTORS AND OFFICERS
The 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 directors term of office expires.
Directors
Year of annual | ||||
meeting at which | ||||
term of office | ||||
Position held and principal occupation | expires (Director | |||
Name and municipality of residence | within the preceding five years(1) | since) | ||
S.E. Bachand (2)(3)(5) Ponte Vedra Beach, Florida, U.S.A. |
Retired President and Chief Executive Officer, Canadian Tire Corporation, Limited (hard goods retailer specializing in automotive, sports and leisure and home products) | 2005 (2001) |
||
J.E. Cleghorn, O.C., F.C.A. (2)(3)(6) Toronto, Ontario, Canada |
Chairman, SNC-Lavalin Group Inc., (international engineering and construction firm) | 2005 (2001) |
||
T.W. Faithfull (3)(4)(5) Oxford, England |
Retired President and Chief Executive Officer Shell Canada Limited (oil and gas company) | 2005 (2003) |
||
J.E. Newall, O.C. (3) Calgary, Alberta, Canada |
Chairman, Canadian Pacific Railway Limited, and NOVA Chemicals Corporation (chemicals company producing styrenics, olefins and polyolefin products) | 2005 (2001) |
||
Dr. J.R.
Nininger (3)(4)(5) Ottawa, Ontario, Canada |
Retired President and Chief Executive Officer, The Conference Board of Canada (private not-for-profit research group) | 2005 (2001) |
||
M.
Paquin (2)(3)(4) Montreal, Quebec, Canada |
President and Chief Executive Officer, Logistec Corporation (international cargo-handling company) | 2005 (2001) |
||
M.E.J. Phelps, O.C. (3)(4)(5) West Vancouver, B.C., Canada |
Chairman, Dornoch Capital Inc. (private investment company) | 2005 (2001) |
||
R.
Phillips, O.C. (2)(3)(6) Regina, Saskatchewan, Canada |
Retired President and Chief Executive Officer, IPSCO Inc. (steel manufacturing company) | 2005 (2001) |
||
R.J. Ritchie Calgary, Alberta, Canada |
President and Chief Executive Officer, Canadian Pacific Railway Limited | 2005 (2001) |
||
M. W. Wright (2)(3)(5) Longboat Key, Florida, U.S.A. |
Retired Chairman of the Board, SUPERVALU INC. (food distributor and grocery retailer) | 2005 (2001) |
Notes: | ||
(1) | S.E. Bachand was President and Chief Executive Officer of Canadian Tire Corporation, Limited from March 1993 to August 2000. J.E. Cleghorn was Chairman and Chief Executive Officer of the Royal Bank of Canada from January 1995 to July 2001. T.W. Faithfull was President and Chief Executive Officer of Shell Canada Limited from April 1999 until July 2003. Dr. J.R. Nininger was President and Chief Executive Officer of The Conference Board of Canada from September 1978 to August 2001. M.E.J. Phelps was Chairman and Chief Executive Officer of Westcoast Energy Inc. from June 1988 until March 2002. R. Phillips was President and Chief Executive Officer of IPSCO, Inc. from 1982 until December 2001. R.J Ritchie became President of Canadian Pacific Railway Company in July 1996 and continues to hold that position. M.W. Wright was Chairman and Chief Executive Officer of SUPERVALU INC. from June 1981 until June 2001 and Chairman until June 2002. | |
(2) | Member of the Audit, Finance and Risk Management Committee. | |
(3) | Member of the Corporate Governance and Nominating Committee. | |
(4) | Member of the Environmental and Safety Committee. | |
(5) | Member of the Management Resources and Compensation Committee. | |
(6) | Member of the Pension Trust Fund Committee. |
35
DIRECTORS AND OFFICERS
Cease Trade Orders
S.E. Bachand was a director of Krystal Bond Inc. when it was subject to a cease trade order on April 12, 2002 for failure to file financial statements. It has since ceased to operate as a going concern. J.E. Cleghorn, a director of Nortel Networks Corporation and Nortel Networks Limited is subject to a cease trade order issued in May 2004, for failure to file certain financial statements, by the Ontario Securities Commission against directors, officers and certain other current and former employees of Nortel Networks prohibiting trading in Nortel Networks securities.
Senior Officers
As at February 21, 2005, the following were executive officers of CPR:
Principal occupation within the | ||||
Name and municipality of residence | Position held | preceding five years | ||
J.E. Newall, O.C. Calgary, Alberta, Canada |
Chairman | Chairman, NOVA Chemicals Corporation (chemicals company producing styrenics, olefins and polyolefin products) | ||
R.J.
Ritchie Calgary, Alberta, Canada |
President and Chief Executive Officer | President and Chief Executive Officer, Canadian Pacific Railway Company | ||
M.T. Waites Municipal District of Rockyview Alberta, Canada |
Executive Vice-President and Chief Financial Officer | Executive Vice-President and Chief Financial Officer, Chief Executive Officer, U.S. Network, Canadian Pacific Railway Company; Executive Vice-President and Chief Financial Officer, Canadian Pacific Railway Company; Vice-President and Comptroller, Canadian Pacific Railway Company | ||
F. Green Calgary, Alberta, Canada |
Executive Vice-President and Chief Operating Officer | Executive Vice President and Chief Operating Officer, Canadian Pacific Railway Company; Executive Vice-President, Marketing and Operations, Canadian Pacific Railway Company; Senior Vice-President, Marketing, Canadian Pacific Railway Company; Vice-President, Marketing, Canadian Pacific Railway Company | ||
W.P. Bell Calgary, Alberta, Canada |
Vice-President, Investor Relations |
Vice-President, Investor
Relations, Canadian Pacific
Railway Company;
Vice-President, E-Business, Canadian Pacific Railway Company; Vice-President, Logistics Systems, Canadian Pacific Railway Company |
||
P. Clark Calgary, Alberta, Canada |
Vice-President, Communications and Public Affairs | Vice-President, Communications and Public Affairs, Canadian Pacific Railway Company | ||
J.J. Doolan Municipal District of Rockyview Alberta, Canada |
Vice-President and Treasurer | Vice-President and Treasurer, Canadian Pacific Railway Company; Assistant Treasurer, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; President, River Ridge Financial Management Ltd. (financial consulting and management company) | ||
B. Grassby Calgary, Alberta, Canada |
Vice-President and Comptroller | Vice-President and
Comptroller, Canadian Pacific
Railway Company;
Vice-President, Finance and
Secretary, Controller and
Assistant Secretary, CAE
Electronics Ltd. (hi-tech electronics company) |
36
DIRECTORS AND OFFICERS
Principal occupation within the | ||||
Name and municipality of residence | Position held | preceding five years | ||
P.A. Guthrie Municipal District of Rockyview Alberta, Canada |
Vice-President, Law | Vice-President, Law, Canadian Pacific Railway Company; Assistant Vice-President Legal Services and General Counsel, Canadian Pacific Railway Company; Chief Regulatory Counsel, Canadian Pacific Railway Company | ||
R.V. Horte Calgary, Alberta, Canada |
Corporate Secretary | Corporate Secretary, Canadian Pacific Railway Company; Senior Assistant Corporate Secretary, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Assistant Corporate Secretary, Canadian Pacific Railway Limited and Canadian Pacific Railway Company | ||
G.A. Feigel Calgary, Alberta, Canada |
Assistant Corporate Secretary |
Assistant Corporate Secretary, Canadian Pacific Railway Company; Assistant Corporate Secretary, Canadian Pacific Limited | ||
C.
Connolly Municipal District of Rockyview Alberta, Canada |
Assistant Treasurer | Assistant Treasurer, Capital Markets, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Director of Capital Markets, Treasury, Canadian Pacific Railway Company; Director of Finance, Information Services, Canadian Pacific Railway Company; Executive Assistant to the President & Chief Executive Officer, Canadian Pacific Railway Company |
Shareholdings of Directors and Officers
As at December 31, 2004, the directors and senior officers, as a group, beneficially owned, either directly or indirectly, or exercised control or direction over a total of 154,910 Common Shares of CPR, representing 0.10% of the outstanding Common Shares as of that date.
37
LEGAL PROCEEDINGS
CPR is normally involved in various claims and litigation arising in the normal course of its business. The following are the only significant legal proceedings currently in progress.
Stoney Tribal Council v. Canada, EnCana and CPR
The Stoney Tribal Council commenced a lawsuit on February 26, 1999, in Alberta Court of Queens Bench against CPR and the Government of Canada. The lawsuit claims $150 million in damages, primarily for alleged improper oil and gas extraction. The claim was later amended to add PanCanadian Energy Corporation (now EnCana Corporation) as a defendant. CPR believes that it has made adequate provision in its financial statements for this lawsuit.
Derailment Minot, North Dakota
On January 18, 2002, a CPR train derailed adjacent to a residential neighbourhood immediately west of Minot, North Dakota. Five derailed cars containing anhydrous ammonia ruptured and a vapour plume covered the derailment site and surrounding area. One fatality and a large number of personal injuries occurred. Immediately following the derailment CPR began a process of environmental remediation at a cost in excess of $8 million. In addition, CPR has settled over 20,000 claims from residents of the Minot area relating to the derailment. A number of lawsuits have been filed against various defendants, including CPR, in North Dakota and Minnesota, as well as a class action lawsuit which has not yet been certified. CPR is working closely with its insurers to defend these lawsuits. Three cases in Hennepin County (Minneapolis) have been set for trial beginning in October 2005, while five other cases have been set for trial in January 2006. CPR believes that it has made adequate provision in its financial statements for these lawsuits.
38
TRANSFER AGENTS AND REGISTRARS
CPR Registrar and Transfer Agent
Computershare Trust Company of Canada, with transfer facilities in Montreal, Toronto, Calgary and Vancouver, serves as transfer agent and registrar for CPRs common shares in Canada.
Computershare Trust Company of New York serves as co-transfer agent and co-registrar for CPRs common shares in New York.
Requests for information should be directed to:
Computershare Trust Company of Canada
Suite 700, 1500 University Street
Montreal, Quebec, Canada
H3A 3S8
39
INTERESTS OF EXPERTS
The Companys auditors, PricewaterhouseCoopers LLP, have prepared the Auditors Report to the shareholders of Canadian Pacific Railway Limited.
40
ADDITIONAL INFORMATION
Additional Company Information
Additional information about CPR is available on the Companys Website at www.cpr.ca, and on SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com in Canada and on the U.S. Securities Exchange Commissions Website (EDGAR) at www.sec.gov\edgar in the U.S.
Additional information, including directors and officers remuneration and indebtedness, principal holders of the Companys securities and securities authorized for issuance under equity compensation plans, where applicable, is contained in the Companys information circular for its most recent annual meeting of shareholders that involved the election of directors.
Additional financial information is provided in the Companys Consolidated Financial Statements and Managements Discussion and Analysis for its most recently completed financial year.
41
Suite 500 Gulf Canada Square
401 9th Avenue SW
Calgary Alberta T2P 4Z4
www.cpr.ca TSX/NYSE: CP
our company |
Canadian Pacific Railways 14,000-mile track network, ocean and Great Lakes port service, cross-border gateways and extensive connections with other railways provide shippers with access to fast-growing world markets and efficient reach into markets across North America, including major business centres in Mexico. |
CPR aspires to be the most fluid railway in North America and intends to translate gains in fluidity into operating leverage that will generate value for shareholders. |
Canadian Pacific Railway quickly expanded its inventory of co-operative arrangements with other railways in 2004 to generate greater fluidity and more capacity in key areas of its network and to increase traffic density and operating efficiencies on its track network in the northeastern United States. |
The new arrangements include directional running, which turns the parallel tracks of two railways into dedicated eastbound and westbound lanes, trackage rights, which give one railway authority to operate its own trains over another railways track, haulage services, under which one railway moves anothers trains, and enhanced freight interchange and improved access to terminals and service areas. |
A CPR locomotive pulls a Norfolk Southern Railway locomotive and freight over the Nicholson Viaduct near Scranton, Pa. CPR entered into a series of co-operative arrangements with Norfolk Southern in 2004. The new arrangements have increased traffic density and revenue and reduced costs on CPRs network in the northeastern U.S.
01 |
chairmans 2004 letter | 16 | performance indicators | 29 | off-balance sheet | 42 | managements responsibility | |||||||
to shareholders | 18 | operating expenses, | arrangements | for financial reporting | ||||||||||
02 |
presidents 2004 letter | before other specified items | 30 | contractual commitments | 43 | auditors report | ||||||||
to shareholders | 19 | other income statement items | 31 | foreign exchange | 44 | consolidated financial | ||||||||
04 |
business profile and strategy | 20 | fourth-quarter summary | 31 | future trends, commitments | statements | ||||||||
05 |
highlights summary | 23 | quarterly financial data | and risks | 48 | notes to consolidated | ||||||||
06 |
operating results | 23 | changes in accounting policy | 37 | critical accounting estimates | financial statements | ||||||||
09 |
non-gaap earnings | 24 | liquidity and capital resources | 40 | systems, procedures | 87 | five-year summary | |||||||
11 |
lines of business | 26 | balance sheet | and controls | 88 | shareholder information | ||||||||
16 |
revenue per carload | 27 | financial instruments | 40 | forward-looking information | 92 | glossary of terms |
CPRs five key business thrusts:
Safety CPR continued to be an industry leader in safe train operations in 2004.
Freight Revenue grew by 11 % in 2004, excluding the impact of translating U.S. dollar-denominated revenues into the stronger Canadian dollar.
Yield the minimum growth target was 1.5 %, with a stretch goal of 2 % in 2004. We surpassed our stretch goal.
Productivity revenue-producing freight tonnage compared with train-miles accumulated in moving the tonnage provides a strong indicator of productivity, asset utilization and fluidity. In 2004, CPR grew revenue tonnage by 8 % while train miles increased by just one-quarter of that rate.
Capacity Management co-production, alliances and interline service agreements, right-sizing train crews and locomotive power, and disciplined execution of our Integrated Operating Plan, CPRs scheduled railway model, had a positive impact on fluidity in 2004. Improved fluidity is creating more revenue-generating capacity on CPRs existing track network and enhancing service quality a benefit for shareholders and shippers.
|
chairmans 2004 letter to shareholders
J.E. NEWALL
Chairman of the Board
This is an exciting time for Canadian Pacific Railway. The company and, indeed, the railway industry are reclaiming their position as an engine of economic expansion.
In a year of strong demand for rail freight services, CPR was demonstrating how to:
| utilize every available ton of capacity in the existing rail infrastructure; | |||
| plan for potential expansion to deliver value to shareholders; and | |||
| take the lead in convincing disparate and sometimes dissenting parties to coalesce around the old-fashioned notion of working together for the greater good. |
To these ends, the focus of the 16,000 employees of CPR in both Canada and the United States shifted squarely in 2004 on increasing fluidity over the network, using asset velocity to create more capacity in tight areas as demand escalated. The results in terms of freight volumes certainly surpassed expectations.
Looking ahead, management has developed an infrastructure expansion plan that would potentially see capital invested incrementally, matched to areas of high-value growth. Most importantly, management set conditions for investing capital that will ensure there is a compelling value proposition for shareholders associated with any future expansion.
CPR also facilitated the bringing together of governments, shippers, ports, railways, truckers and ocean shipping lines for frank discussions about economic expansion and its dependence on transportation infrastructure. The result is an emerging common recognition that the most effective infrastructure planning needs to involve all the players in the supply chain, supported by public policy that creates the right climate for investment.
These achievements in 2004 will serve shareholders well. Ultimately, they will result in CPR being able to grow its business while minimizing the capital required to accommodate the growth.
The Boards performance and that of its Committees was also satisfying in 2004. Our achievements included:
| further strengthening financial controls and governance procedures; | |||
| advancing the companys strategic business plan; and | |||
| ensuring meaningful succession planning is in place across senior executive ranks. |
I am pleased that CPR was among the top three in The Globe and Mail newspapers 2004 rankings of best corporate governance practices by Canadian industrial companies.
CPRs balance sheet continued to strengthen and the companys net-debt to net-debt-plus-equity ratio improved to 43 % in 2004, from 52 % when CPR was spun off from Canadian Pacific Limited in 2001.
My message to shareholders this year would not be complete without recognizing the important contribution of Jacques Lamarre, President and Chief Executive Officer of SNC-Lavalin Group Inc., who left the CPR Board in 2004. Jacques service, which began with CPRs spin-off, provided valuable experience and insight at a critical time in the companys evolution.
In serving shareholders, the Board is conscious of CPRs long and colourful history one with a footprint in three centuries. Our focus is clearly on the future, and it should surprise no one that today, as world trade expands to unprecedented levels and as new economic giants emerge, CPR is more relevant than ever and stands ready to capitalize on the opportunities that lie ahead.
2004 Annual Report | 01 | ||||
|
presidents 2004 letter to shareholders
ROBERT J. RITCHIE
President and Chief Executive Officer
Canadian Pacific Railway demonstrated the power and value of its business model and franchise in 2004, moving decisively to make the most of a robust transportation market. Across our railway, employees everywhere were engaged in exploiting growing world trade, including an explosion in trade with China, and putting railway muscle behind economic expansion in North America.
Our people showed what they can achieve when opportunity and challenge surface together. The result was a CPR that was firing on all cylinders moving more freight than ever before and moving it increasingly faster as demand for freight service escalated steadily. Pricing reflected the growing value that shippers are placing on CPRs transportation service in a market made tight by rising demand in almost every area.
Growth in intermodal, which consists mainly of containerized consumer goods, outstripped every other line of business and this highly service-sensitive area surpassed $1 billion in revenue for the first time. The entire bulk sector was strong, led by revenue
growth in coal, sulphur and fertilizers. Industrial products revenue increased, reversing a three-year decline.
We earned these results by advancing our leading position as a low-cost bulk carrier, becoming an increasingly efficient and reliable intermodal service provider and offering an increasingly attractive alternative to trucks for merchandise freight. At the root of these improvements are investments CPR has made to build one of the most modern, reliable locomotive fleets in North America, provide customers higher capacity freight cars, increase track capacity and rebuild our IT foundation, together with innovation, ingenuity and discipline in train design and operations.
Greater fluidity emerged as the most compelling component of our business model and we generated strong results. During a year in which the North American rail industry had to cope with capacity strains, CPR was an industry leader in fluidity, as measured by train speed. Productivity also rose dramatically, with revenue tonnage growing 8 % while train-miles accumulated in moving the tonnage increased by just one-quarter of that rate.
The years headwinds came in the form of extremely high world oil prices and continued strength in the Canadian dollar against the U.S. dollar. CPR countered with an improved fuel surcharge mechanism in 2004 that adjusts rates more quickly as world
prices fluctuate, and continued to use long-term debt denominated in U.S. dollars as a natural hedge against the Canadian dollars rise.
CPR exceeded its freight revenue growth target for 2004, generating a 7 % increase. Freight revenue would have grown 11 % had it not been for the substantial appreciation in the Canadian dollar.
All told, the combination of high fuel prices and the stronger Canadian dollar took approximately $55 million out of operating income. Despite this impact, operating income, excluding other specified items (1), rose 8 % to $789 million in 2004, compared with $730 million in 2003. CPRs operating ratio, excluding other specified items (1), improved to 79.8 % in 2004, compared with 80.1 % in 2003.
Income and earnings per share grew 10 % to $361 million or $2.27 per diluted share, excluding foreign exchange gains on long-term debt and other specified items (1).
Across CPR, we are concentrating on execution, ensuring that all assets are being utilized to their fullest extent. This means maximizing train throughput in every track corridor, maximizing capacity on every train, keeping assets flowing with greater velocity and giving our people the tools and training to maximize their productivity.
Co-operative arrangements with other railways and disciplined execution of our Integrated Operating Plan are key
(1) Further information, including foreign exchange gains and losses on long-term debt and other specified items, is available on page 8.
02 | 2004 Annual Report |
||
|
strategies behind our fluidity drive. CPR entered into a series of co-operative arrangements in 2004, including track-sharing and access to terminals. These arrangements in western Canada, central Canada and the northeastern U.S. will reduce costs, improve service for shippers, increase capacity in areas where traffic density is high and increase traffic density in areas where capacity is underutilized. They have helped address the high demand on our western corridor, particularly in the Greater Vancouver area, and have dramatically improved the financial performance of our northeastern U.S. franchise.
CPR is also ready to lay down track to expand our network in high-growth corridors if conditions are right. We have designed a phased, multi-year expansion program at a cost of approximately $500 million, focused mainly on corridors between Moose Jaw, Saskatchewan, and Vancouver. Our program, with four discrete phases, would increase train capacity by one third. Importantly, the phased approach would enable CPR to meter the rate of expansion in lockstep with the rate of traffic growth to ensure the quickest possible payback on each incremental investment.
Currently, we are considering only the first phase, which would cost approximately $160 million. It would be completed in a single construction season and increase train capacity west of Moose Jaw by more than 10%. However, this cannot happen before the Canadian government provides a clear signal of regulatory stability a position supported by the majority of our customers.
Should expansion go ahead, it will be a compelling value proposition for our shareholders. Meanwhile, we are committed to getting the most out of our current network. As fluidity improves, subsequent expansion phases could be deferred, conserving capital for shareholders while still growing our business.
CPR entered 2005 on a very solid footing, with commodity and transportation markets strong and 600 new train crew personnel trained and ready to handle the growing demand. Our focus on fluidity will be relentless. We expect revenue growth of 6 % to 8 % in 2005 and we intend to drive more of this growth to the bottom line as productivity and efficiency continue to improve. We will grow strategically, targeting high-yield traffic against CPRs capacity. CPR will continue building on the innovative service design and operational improvements created in our bulk commodity and intermodal sectors. The best elements will be applied to the merchandise sector, where we will create a more efficient collection and delivery system to improve service and leverage more value in the marketplace.
Safety is and always will be our Number One priority. In 2004, CPR continued to be an industry leader in safe train operations and our employees achieved an all-time low in personal injuries. Sadly, these accomplishments were overshadowed by the loss in work-related incidents of three of our fellow employees, David Rutherford, Christopher Lewis and Gary Kinakin. These tragic events reinforce the importance of safety for our employees and their families.
In closing, I wish to recognize the support and guidance of our Chairman and Board of Directors and the accomplishments of our 16,000 talented employees. All of us share the excitement about CPRs prospects for the future. The Pacific in our companys name has never been more meaningful, nor more promising, as the world witnesses Chinas emergence as a trade powerhouse and Indias economy is experiencing strong growth. Our railway serves some of the worlds best farmland for growing grain. We serve the worlds main source of potash for fertilizer. We link major ports with the consuming public. We have been doing this for 120 years and we are poised to do it better than ever before.
2004 Annual Report | 03 | ||||
managements discussion and analysis
This Managements Discussion and Analysis (MD&A) supplements the Consolidated Financial Statements and related notes for the year ended December 31, 2004. 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).
business profile and strategy
BUSINESS PROFILE
STRATEGY
ADDITIONAL INFORMATION
04 | 2004 Annual Report |
||
|
highlights summary
2004 | 2003 | (1) | 2002 | (1) | ||||||||
Revenues |
$ | 3,902.9 | $ | 3,660.7 | $ | 3,665.6 | ||||||
Operating expenses |
3,114.4 | 2,931.1 | 2,821.6 | |||||||||
Operating income, before the following: |
788.5 | 729.6 | 844.0 | |||||||||
Special (recovery) charge for labour restructuring and asset impairment |
(19.0 | ) | 215.1 | | ||||||||
Loss on transfer of assets to outsourcing firm |
| 28.9 | | |||||||||
Special charge for environmental remediation |
90.9 | | | |||||||||
Operating income |
716.6 | 485.6 | 844.0 | |||||||||
Other charges |
36.1 | 33.5 | 21.8 | |||||||||
Foreign exchange gains on long-term debt (FX on LTD) |
(94.4 | ) | (209.5 | ) | (13.4 | ) | ||||||
Interest expense |
218.6 | 218.7 | 242.2 | |||||||||
Income tax expense |
143.3 | 41.6 | 105.9 | |||||||||
Net income |
$ | 413.0 | $ | 401.3 | $ | 487.5 | ||||||
Basic earnings per share |
$ | 2.60 | $ | 2.53 | $ | 3.08 | ||||||
Diluted earnings per share |
$ | 2.60 | $ | 2.52 | $ | 3.06 | ||||||
Total assets |
$ | 10,499.8 | $ | 9,956.7 | $ | 9,664.3 | ||||||
Total long-term financial liabilities |
$ | 5,229.2 | $ | 5,347.5 | $ | 4,798.2 | ||||||
Dividends paid (per share) |
$ | 0.515 | $ | 0.510 | $ | 0.510 | ||||||
(1) Certain prior period figures have been restated to conform with presentation adopted in 2004.
2004 Annual Report | 05 | ||||
operating results
CPRs net income for the year ended December 31, 2004, was $413.0 million, up $11.7 million from $401.3 million in 2003 and down $74.5 million from $487.5 million in 2002. The increase in net income in 2004 from that in 2003 was due to higher revenues (discussed further in this MD&A under the heading Revenues), partially offset by:
| increased costs for compensation and benefits, fuel, depreciation and amortization, and purchased services and other expenses (discussed further in this MD&A under the heading Operating Expenses, Before Other Specified Items); and | |||
| a decrease of $115.1 million in before-tax ($130 million after tax) foreign exchange gains on long- term debt (FX on LTD) in 2004, compared with FX on LTD in 2003. |
The increase in net income in 2004 was also due to:
| a special charge of $215.1 million before tax ($141.4 million after tax) for a restructuring initiative and an asset impairment charge taken in the second quarter of 2003; |
| a loss on the transfer of assets to an outsourcing firm of $28.9 million before tax ($18.4 million after tax) taken in the fourth quarter of 2003; and | |||
| a positive adjustment of $19.0 million before tax ($12.4 million after tax) taken in 2004 for the reversal of a portion of the special charge for restructuring taken in 2003. |
These charges were partially offset by adjustments to 2004 earnings for a special charge for environmental clean-up costs of $90.9 million before tax ($55.2 million after tax).
The above-mentioned items are discussed further under the subheading Other Specified Items in this MD&A.
Net income in 2003 decreased from that in 2002 mainly due to the special charge and the loss on transfer of assets taken in 2003, partially offset by an after-tax FX gain on LTD of $224.4 million in 2003, compared with an after-tax FX gain on LTD of $16.7 million in 2002. FX on LTD is discussed further under the subheading Foreign Exchange Gains (Losses) on Long-Term Debt.
The Company had operating income in 2004 of $716.6 million, an increase of $231.0 million from $485.6 million in 2003 and a decrease of $127.4 million from $844.0 million in 2002. The increase in 2004, compared with 2003, was mainly due to:
| higher revenues resulting from increased freight volumes and rates in 2004; | |||
| the special charge and the loss on transfer of assets taken in 2003; and | |||
| the reversal in 2004 of a portion of the 2003 restructuring special charge. |
These increases were partially offset by:
| the special charge for environmental costs taken in 2004; | |||
| increased costs in 2004 for compensation and benefits, fuel, depreciation and amortization, and purchased services and other expenses; and | |||
| the net effect of Foreign Exchange on U.S. dollar-denominated revenues and expenses. |
06 | 2004 Annual Report |
||
The decline in 2003, compared with 2002, was mainly due to the net effect of Foreign Exchange on U.S. dollar-denominated revenues and expenses, the restructuring special charge and the loss on transfer of assets, lower grain volumes in the first half of 2003 due to drought on the Canadian prairies, higher fuel prices and increased costs as a result of service disruptions in the first quarter of 2003 caused by severe winter weather conditions and derailments.
Diluted earnings per share (EPS) in 2004 was $2.60, an increase of $0.08 from $2.52 in 2003 and a decrease of $0.46 from $3.06 in 2002. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options, as calculated using the Treasury Stock Method. This method assumes options that have an exercise price below their market price are exercised and the proceeds are used to purchase common shares at the average market price during the period.
The Companys operating ratio was 79.8 % in 2004, compared with 80.1 % in 2003 and 77.0 % in 2002. The operating ratio, which excludes other specified items, provides the percentage of revenues used to operate the railway.
EFFECT OF FOREIGN EXCHANGE ON CPRS EARNINGS
On average, a $0.01 increase in the Canadian dollar reduces annual operating income by approximately $3 million. As a result, Foreign Exchange fluctuations had a substantial impact on CPRs operating income in 2004 and 2003. From time to time, the Company uses foreign exchange forward contracts in respect of hedging the effects of Foreign Exchange transaction gains and losses and other economic effects on the Companys business. In addition, a portion of the U.S. dollar-denominated long-term debt has been designated as a hedge of the Companys net investment in self-sustaining foreign subsidiaries. CPRs hedging instruments are discussed further under the heading Financial Instruments in this MD&A. The effect of Foreign Exchange on CPRs results is further discussed under the heading Foreign Exchange in this MD&A.
The Company has assumed that the average foreign exchange rate for converting U.S. dollars to Canadian dollars will be $1.25 in 2005. This assumption has been built into all forecasts discussed in this MD&A.
2004 Annual Report | 07 | ||||
decrease in earnings due to foreign exchange (1)
For the year ended December 31 (in millions, except foreign exchange rate) | 2004 | 2003 | ||||||
Average annual foreign exchange rate |
$ | 1.30 | $ | 1.41 | ||||
Freight revenues |
||||||||
Grain |
$ | 25 | $ | 38 | ||||
Coal |
8 | 12 | ||||||
Sulphur and fertilizers |
14 | 17 | ||||||
Forest products |
17 | 25 | ||||||
Industrial products |
21 | 32 | ||||||
Automotive |
16 | 25 | ||||||
Intermodal |
26 | 37 | ||||||
Other revenues |
3 | 6 | ||||||
Total revenues |
130 | 192 | ||||||
Operating expenses |
||||||||
Compensation and benefits |
28 | 36 | ||||||
Fuel |
24 | 29 | ||||||
Materials |
3 | 5 | ||||||
Equipment rents |
16 | 23 | ||||||
Depreciation and amortization |
5 | 8 | ||||||
Purchased services and other |
23 | 36 | ||||||
Total operating expenses |
99 | 137 | ||||||
Operating income |
31 | 55 | ||||||
Other expenses |
||||||||
Other charges |
3 | 1 | ||||||
Interest expense |
13 | 22 | ||||||
Income tax expense, before FX on LTD and other specified items |
3 | 10 | ||||||
Income, before FX on LTD and other specified items |
$ | 12 | $ | 22 | ||||
08 | 2004 Annual Report |
||
non-gaap earnings
CPR presents non-GAAP earnings to provide a basis for evaluating underlying earnings trends that can be compared with results in the prior periods. Non-GAAP earnings exclude foreign currency translation effects on long-term debt, which can be volatile and
short term, as well as other specified items that are not among CPRs normal ongoing revenues and operating expenses. A reconciliation of income, before FX on LTD and other specified items, to net income, as presented in the financial statements, is detailed in the table below.
It should be noted that CPRs earnings, before FX on LTD and other specified items, 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.
summarized statement of consolidated income
For the year ended December 31 (in millions) (unaudited) | 2004 | 2003 (1) | 2002 (1) | |||||||||
Revenues |
$ | 3,902.9 | $ | 3,660.7 | $ | 3,665.6 | ||||||
Operating expenses, before other specified items (2) |
3,114.4 | 2,931.1 | 2,821.6 | |||||||||
Operating income, before other specified items (2) |
788.5 | 729.6 | 844.0 | |||||||||
Other charges |
36.1 | 33.5 | 21.8 | |||||||||
Interest expense |
218.6 | 218.7 | 242.2 | |||||||||
Income tax expense, before income tax on FX on LTD
and other specified items (2) |
172.4 | 147.3 | 181.2 | |||||||||
Income, before FX on LTD and other specified items (2) |
361.4 | 330.1 | 398.8 | |||||||||
Foreign exchange gains on long-term debt |
||||||||||||
FX on LTD gain |
94.4 | 209.5 | 13.4 | |||||||||
Income tax on FX on LTD |
| 14.9 | 3.3 | |||||||||
FX on LTD (net of tax) |
94.4 | 224.4 | 16.7 | |||||||||
Other specified items |
||||||||||||
Special recovery (charge) for labour restructuring and asset
impairment |
19.0 | (215.1 | ) | | ||||||||
Loss on transfer of assets to outsourcing firm |
| (28.9 | ) | | ||||||||
Special charge for environmental remediation |
(90.9 | ) | | | ||||||||
Income tax on special charges |
29.1 | 84.2 | | |||||||||
Special charges and loss on transfer of assets (net of tax) |
(42.8 | ) | (159.8 | ) | | |||||||
Revaluation of future income taxes |
| 59.3 | | |||||||||
Effect of increase in tax rates |
| (52.7 | ) | | ||||||||
Income tax recovery |
| | 72.0 | |||||||||
Net income |
$ | 413.0 | $ | 401.3 | $ | 487.5 | ||||||
2004 Annual Report | 09 | ||||
NON-GAAP RESULTS
partially offset by the negative effect of Foreign Exchange on U.S. dollar-denominated revenues and expenses, an increase in volume-related expenses and in labour costs due to inflation, incentive compensation, training and benefits, and costs and lost revenues associated with an avalanche in the first quarter of 2004. The Company
transported higher freight volumes in 2003, compared with 2002. However, additional income generated by this growth was more than offset by the negative effect of Foreign Exchange on U.S. dollar-denominated revenues and expenses, severe winter weather conditions, derailments and persistently high fuel prices.
non-gaap performance indicators
For the year ended December 31 (unaudited) | 2004 | 2003 (1) | 2002 (1) | |||||||||
Diluted EPS, as determined by GAAP |
$ | 2.60 | $ | 2.52 | $ | 3.06 | ||||||
Diluted EPS, related to FX on LTD net of tax |
(0.59 | ) | (1.41 | ) | (0.11 | ) | ||||||
Diluted EPS, related to other specified items net of tax |
0.26 | 0.96 | (0.45 | ) | ||||||||
Diluted EPS, before FX on LTD and other specified items (2) |
$ | 2.27 | $ | 2.07 | $ | 2.50 | ||||||
Diluted EPS, before FX on LTD and other specified items, was $2.27 in 2004, an increase of $0.20 from $2.07 in 2003 and a decrease of $0.23 from $2.50 in 2002. Diluted EPS, before FX on LTD and other specified items, is calculated by dividing income, before FX on LTD and other specified items, by the weighted average number of shares outstanding, adjusted for outstanding stock options using the Treasury Stock Method, as described on page 7.
FOREIGN EXCHANGE GAINS (LOSSES) ON LONG-TERM DEBT
can only be realized when net U.S. dollar-denominated long-term debt matures or is settled. Income, before FX on LTD and other specified items, as calculated on page 9, excludes FX on LTD from CPRs earnings in order to eliminate the impact of volatile short-term exchange rate fluctuations.
Foreign exchange gains on long-term debt were $94.4 million before tax in 2004, $209.5 million before tax in 2003 and $13.4 million before tax in 2002. The changes were due to the effect of Foreign Exchange, net of hedging, on U.S. dollar-denominated long-term debt. For every $0.01 the Canadian dollar strengthens relative to the U.S. dollar, the conversion of U.S. dollar-denominated long-term debt to Canadian dollars creates a pre-tax foreign exchange gain of approximately $9 million to $10 million.
OTHER SPECIFIED ITEMS
Other specified items included a special charge of $55.2 million after tax ($90.9 million before tax) taken in the fourth quarter of 2004 to reflect the estimated costs required to clean up environmental contamination at a property in Minnesota. This charge is discussed further in this MD&A in the section Future Trends, Commitments and Risks, under the sub-heading Environmental.
10 | 2004 Annual Report |
||
In the fourth quarter of 2004, net income included a positive adjustment of $12.4 million after tax ($19.0 million before tax) to reflect a reversal of a portion of the labour liability included in the special charge taken in the second quarter of 2003. The labour liability included in the special charge was for original estimates of labour liabilities to be incurred to restructure CPRs northeastern U.S. operations. In 2004, CPR achieved a successful new arrangement with Norfolk Southern Railway for operations in the region. The arrangement, which received the first stage of regulatory approval in the fourth quarter of 2004, is delivering efficiency improvements. As a result, the Company did not incur the expected labour restructuring costs and the liability associated with restructuring CPRs northeastern U.S. operations was reversed.
In the second quarter of 2003, a special charge of $141.4 million after tax ($215.1 million before tax) was taken to reflect the costs associated with a restructuring initiative that is expected to eliminate 820 jobs by the end of 2005 and to adjust the value of certain under-performing assets to fair value.
In the fourth quarter of 2003, CPR transferred assets to IBM Canada Ltd. (IBM) as part of a seven-year, $200-million agreement reached with IBM to operate and enhance CPRs computing infrastructure. The arrangement will reduce CPRs costs over time and allow remaining information technology staff to focus on applications that improve efficiency and service. The Company recognized a loss of $18.4 million after tax ($28.9 million before tax) on the transfer of these assets. This loss is included in other specified items in 2003.
In December 2003, the Government of Ontario repealed previously announced future income tax rate reductions. The Companys future income taxes, which were previously based on these reduced rates, have been adjusted upwards by $52.7 million to reflect the change.
Following a revaluation in 2003 of various other components that determine its future income tax liability, the Company reduced the estimate of its future income tax liability by $59.3 million.
In 2002, there was one other specified item of $72 million resulting from a favourable income tax ruling relating to prior years.
lines of business
VOLUMES
2004 Annual Report | 11 | ||||
VOLUMES
For the year ended December 31 | 2004 | 2003 | 2002 | |||||||||
Carloads (in thousands) |
||||||||||||
Grain |
321.2 | 308.7 | 291.1 | |||||||||
Coal |
395.2 | 359.6 | 351.8 | |||||||||
Sulphur and fertilizers |
211.8 | 189.0 | 174.4 | |||||||||
Forest products |
160.3 | 164.2 | 174.2 | |||||||||
Industrial products |
286.3 | 263.4 | 271.9 | |||||||||
Automotive |
171.7 | 177.2 | 178.1 | |||||||||
Intermodal |
||||||||||||
Intermodal |
1,119.6 | 1,041.9 | 971.2 | |||||||||
Food and consumer |
32.7 | 35.2 | 34.6 | |||||||||
Total Intermodal |
1,152.3 | 1,077.1 | 1,005.8 | |||||||||
Total carloads |
2,698.8 | 2,539.2 | 2,447.3 | |||||||||
Revenue ton-miles (in millions) |
||||||||||||
Grain |
23,805 | 23,040 | 20,808 | |||||||||
Coal |
25,241 | 22,155 | 21,904 | |||||||||
Sulphur and fertilizers |
20,418 | 18,186 | 15,737 | |||||||||
Forest products |
10,557 | 10,789 | 11,014 | |||||||||
Industrial products |
14,196 | 13,229 | 12,801 | |||||||||
Automotive |
2,291 | 2,564 | 2,932 | |||||||||
Intermodal |
||||||||||||
Intermodal |
25,749 | 23,132 | 21,029 | |||||||||
Food and consumer |
1,370 | 1,504 | 1,464 | |||||||||
Total Intermodal |
27,119 | 24,636 | 22,493 | |||||||||
Total revenue ton-miles |
123,627 | 114,599 | 107,689 | |||||||||
REVENUES
CPR maintains competitive freight rates and reviews its rates on a
regular basis, adjusting them for market conditions as warranted. Current strong demand in the transportation market has resulted in favourable pricing conditions for CPR.
Total revenues, which consist of freight and other revenues, were $3,902.9 million in 2004, an increase of $242.2 million from $3,660.7 million in 2003, and an increase of $237.3 million from $3,665.6 million in 2002. Increases were achieved
through strong volume growth and freight rate improvements in 2004, compared with 2003, which more than offset the approximately $130-million negative impact of Foreign Exchange on U.S. dollar-denominated revenues. Strong volume growth was achieved in 2003, compared with 2002. However, corresponding growth in freight revenues was significantly offset by a negative Foreign Exchange impact of approximately $192 million.
12 | 2004 Annual Report |
||
REVENUES
For the year ended December 31 (in millions) | 2004 | 2003 | 2002 | |||||||||
Grain |
$ | 668.2 | $ | 644.4 | $ | 631.4 | ||||||
Coal |
530.3 | 444.0 | 442.5 | |||||||||
Sulphur and fertilizers |
460.0 | 417.4 | 401.3 | |||||||||
Forest products |
322.0 | 328.8 | 360.3 | |||||||||
Industrial products |
430.2 | 400.4 | 422.1 | |||||||||
Automotive |
288.5 | 304.2 | 332.4 | |||||||||
Intermodal |
||||||||||||
Intermodal |
978.4 | 880.6 | 818.8 | |||||||||
Food and consumer |
51.2 | 59.5 | 63.1 | |||||||||
Total Intermodal |
1,029.6 | 940.1 | 881.9 | |||||||||
Total freight revenues |
$ | 3,728.8 | $ | 3,479.3 | $ | 3,471.9 | ||||||
Other revenues |
||||||||||||
Other intermodal |
56.3 | 45.8 | 36.6 | |||||||||
Non-freight and switching |
117.8 | 135.6 | 157.1 | |||||||||
Total other revenues |
174.1 | 181.4 | 193.7 | |||||||||
Total revenues |
$ | 3,902.9 | $ | 3,660.7 | $ | 3,665.6 | ||||||
FREIGHT REVENUES
improved grain crops as shipments began to recover from the drought-induced decline experienced throughout 2002 and in the first half of 2003.
In response to rapidly rising fuel prices, the Company has revised its method of calculating the surcharge applied to help recover fuel costs. A new fuel surcharge program provides customers with surcharges that are more closely tied to current fuel prices and enables CPR to adjust its rates more quickly as fuel prices fluctuate. In 2004, the increase in fuel surcharge, included in freight revenues, recovered approximately two-thirds of CPRs fuel price increase (including the effects of hedging).
At December 31, 2004, one customer comprised 11.7 % of total revenues and 12.4 % of CPRs total accounts receivable. At December 31, 2003 and 2002, no customers revenues were greater than 10 % of total revenues.
Grain
2004 Annual Report | 13 | ||||
increase was partially offset by the effect of Foreign Exchange. Furthermore, total grain revenues were reduced by penalties paid for delays in grain shipments. U.S. and Canadian grain shipments also benefited in 2003, compared with 2002, from a larger crop production and favourable market conditions in the second half of 2003. This growth was partially offset by a reduction in revenues as a result of the effect of Foreign Exchange, the effect of the drought in the first half of 2003 and the repercussions from a Port of Vancouver labour disruption in the fourth quarter of 2002 that carried into the first quarter of 2003.
Coal
The Company is currently in dispute with its main coal customer, Elk Valley Coal Corporation (EVCC). CPR has included a reasonable accrual in its coal revenues for amounts that may be owing to CPR as a result of this dispute. The EVCC dispute is discussed further in this MD&A under the heading Future Trends, Commitments and Risks.
Sulphur and Fertilizers
Forest Products
in the first half of 2004. These factors were partially offset by a shift to rail transportation from truck in the newsprint market in the second half of 2004, and increased freight rates. Revenues were lower in 2003 than in 2002 mainly as a result of the effect of Foreign Exchange and declines in the markets for wood pulp and newsprint.
Industrial Products
Automotive
14 | 2004 Annual Report |
||
2003, due to the effect of Foreign Exchange, a decline in consumer demand for certain vehicle models in 2004 and the loss of certain business to a competing railway. This decrease was partially offset by a power outage that affected CPRs customers in eastern Canada and the northeastern U.S., resulting in reduced automotive shipments and revenues in the third quarter of 2003. Revenues in 2003 were lower than in 2002 due to the effect of Foreign Exchange, the power outage and a decline in consumer demand.
Intermodal
higher demand in the retail market and rate increase initiatives. Domestic revenue growth in 2003, compared with 2002, was due largely to the success of CPRs co-location initiative, under which major retailers have built regional distribution facilities adjacent to certain CPR intermodal terminals. Increases in all intermodal revenues in 2004 and in 2003 were partially offset by the effect of Foreign Exchange.
CPRs food and consumer group has historically been reported as part of the intermodal business line. However, as a result of changes in CPRs market, management believes it would be more appropriate to include this group with the industrial products business line. As a result, the food and consumer reporting will transition to industrial products from the intermodal business line. The food and consumer portfolio consists of miscellaneous products, including sugar, meat by-products, railway equipment and building materials moving primarily from western Canada to various destinations in the United States.
Expectations for 2005
OTHER REVENUES
Other intermodal revenues are derived mainly from container storage and terminal service fees. Other intermodal revenues in 2004 were $56.3 million, an increase of $10.5 million from $45.8 million in 2003, and an increase of $19.7 million from $36.6 million in 2002. The increases in 2003 and 2004 reflect higher intermodal volumes resulting in higher container storage and terminal service fees.
Non-freight and switching revenues are comprised of leasing of certain assets, switching fees, land sales and income from business partnerships. These revenues in 2004 were $117.8 million, a decrease of $17.8 million from $135.6 million in 2003, and a decrease of $39.3 million from $157.1 million in 2002. Other non-freight and switching revenues were lower in 2004, compared with 2003, mainly due to lower land and leasing revenues and lower equity income from business partnerships.
Other revenues in 2003 were lower than in 2002 due to the effect of Foreign Exchange, lower switching fees and reduced income from business partnerships. In addition, there were favourable adjustments in 2002 as a result of a gain on a property sale from a previous period, partially offset by increased land sales and container storage fees.
2004 Annual Report | 15 | ||||
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 carloads
of the commodity transported in the period. Total freight revenue per carload was $1,382 in 2004, an increase of $12 from $1,370 in 2003 and a decrease of $37 from $1,419 in 2002. The increase in 2004, compared with 2003, was due to higher freight
rates, which more than offset the effect of Foreign Exchange. In 2003, compared with 2002, revenue per carload decreased as the effect of Foreign Exchange more than offset freight rate increases.
freight revenue per carload
For the year ended December 31 ($) (unaudited) | 2004 | 2003 | 2002 | |||||||||
Total freight revenue per carload |
1,382 | 1,370 | 1,419 | |||||||||
Grain |
2,080 | 2,087 | 2,169 | |||||||||
Coal |
1,342 | 1,235 | 1,258 | |||||||||
Sulphur and fertilizers |
2,172 | 2,208 | 2,301 | |||||||||
Forest products |
2,009 | 2,002 | 2,068 | |||||||||
Industrial products |
1,503 | 1,520 | 1,552 | |||||||||
Automotive |
1,680 | 1,717 | 1,866 | |||||||||
Intermodal (including Food and consumer) |
894 | 873 | 877 | |||||||||
performance indicators
The Company believes that the indicators listed in this table are the most accurate measures of its business performance.
For the year ended December 31 (unaudited) | 2004 | 2003 (1) | 2002 (1) | |||||||||
Productivity indicators |
||||||||||||
Gross ton-miles of freight (millions) |
236,451 | 221,884 | 209,596 | |||||||||
Train-miles (thousands) |
41,344 | 40,470 | 38,299 | |||||||||
Average train weights (tons) |
5,719 | 5,483 | 5,473 | |||||||||
Efficiency and other indicators |
||||||||||||
U.S. gallons of fuel per 1,000 GTMs |
1.20 | 1.24 | 1.24 | |||||||||
Average number of active employees |
16,056 | 16,126 | 16,116 | |||||||||
Miles of road operated at end of period |
13,817 | 13,848 | 13,874 | |||||||||
Freight revenue per RTM (cents) |
3.02 | 3.04 | 3.22 | |||||||||
Safety indicators |
||||||||||||
FRA personal injuries per 200,000 employee-hours |
2.7 | 3.1 | 3.6 | |||||||||
FRA train accidents per million train-miles |
2.1 | 1.8 | 1.8 | |||||||||
16 | 2004 Annual Report |
||
PRODUCTIVITY INDICATORS
| Train-miles is a measure reflecting the distance traveled by the lead locomotive on each train operating over CPRs track. An increase in gross ton-miles (GTM) without a corresponding increase in train-miles indicates higher efficiency. | |||
| Average train weight is the result of dividing GTMs by train-miles. It represents the average total weight of all CPR trains operating over CPRs track and track on which CPR has running rights. |
Fluctuations in these indicators normally drive corresponding fluctuations in certain variable costs such as fuel and crew costs.
EFFICIENCY AND OTHER INDICATORS
| U.S. gallons of fuel per 1,000 GTMs represents the total fuel consumed in freight and yard operations for every 1,000 GTMs traveled. This metric is calculated by dividing the total amount of fuel issued to CPR locomotives, excluding commuter and non-freight activities, by the total freight-related GTMs. The result indicates how efficiently the Company is using fuel. This indicator improved 3 % in 2004 from 2003 as a result of productivity initiatives and improved operating conditions. This statistic was unchanged in 2003 from 2002, as harsh operating conditions in the first quarter of 2003 were offset by the acquisition of new, more fuel-efficient locomotives and more efficient utilization of locomotives. |
| Average number of active employees is the average number of actively employed workers for the period. The number of actively employed workers 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 CPR but are not currently working. This indicator is calculated by adding the monthly average employee counts and dividing this total by the number of months in the period. CPRs average number of active employees decreased 0.4 % in 2004, compared with 2003, as reductions made under restructuring initiatives were offset by hiring to handle business growth. CPRs average number of active employees rose 0.1 % in 2003, compared with 2002, as hiring to handle business growth offset job reductions made under restructuring initiatives. | |||
| Miles of road operated is the total length of all rail lines over which CPR operates, excluding track on which it has haulage rights. An increase in GTMs without a corresponding increase in miles of road operated indicates higher utilization of assets. | |||
| Freight revenue per RTM is the amount of freight revenue earned for every RTM moved, calculated by dividing the total freight revenue by the total RTMs in the period. This indicator decreased slightly in 2004, compared with 2003, mainly due to the effect of Foreign Exchange, partially offset by initiatives for rate increases. This indicator decreased in 2003, compared with 2002, mainly due to changes in the mix of commodities moved and the effect of Foreign Exchange, partially offset by an increase in rates. |
SAFETY INDICATORS
| FRA personal injuries per 200,000 employee-hours is 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. CPRs continued reduction in personal injuries is the result of ongoing focused safety management processes, which involve more than 1,000 employees in planning and implementing safety-related activities. | |||
| FRA train accidents per million train-miles is calculated as 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$6,700. This metric increased 17 % in 2004, compared with each of the two previous years. The increase occurred during the first two quarters of 2004, and in particular, during the colder than average weather experienced early in the year. |
2004 Annual Report | 17 | ||||
operating expenses, before other specified items (1)
For the year ended December 31 | 2004 | 2003 (2) | 2002 (2) | |||||||||||||||||||||
(in millions) | Expense | % of revenue | Expense | % of revenue | Expense | % of revenue | ||||||||||||||||||
Compensation and benefits |
$ | 1,259.6 | 32.3 | $ | 1,163.9 | 31.8 | $ | 1,143.4 | 31.2 | |||||||||||||||
Fuel |
440.0 | 11.3 | 393.6 | 10.8 | 358.3 | 9.8 | ||||||||||||||||||
Materials |
178.5 | 4.6 | 179.2 | 4.9 | 168.7 | 4.6 | ||||||||||||||||||
Equipment rents |
218.5 | 5.6 | 238.5 | 6.5 | 255.4 | 7.0 | ||||||||||||||||||
Depreciation and amortization |
407.1 | 10.4 | 372.3 | 10.2 | 340.2 | 9.3 | ||||||||||||||||||
Purchased services and other |
610.7 | 15.6 | 583.6 | 15.9 | 555.6 | 15.1 | ||||||||||||||||||
Total |
$ | 3,114.4 | 79.8 | $ | 2,931.1 | 80.1 | $ | 2,821.6 | 77.0 | |||||||||||||||
Operating expenses, before other specified items, were $3,114.4 million in 2004, an increase of $183.3 million from $2,931.1 million in 2003, and an increase of $292.8 million from $2,821.6 million in 2002. In 2004, compared with 2003, operating expenses increased due largely to inflation, higher fuel, depreciation and compensation and benefits costs, and higher costs associated with business growth, partially offset by an approximately $99-million Foreign Exchange impact. In 2003, compared with 2002, Foreign Exchange had a favourable impact of approximately $137 million on operating expenses, which was offset by inflation, higher depreciation and fuel prices, higher costs associated with business growth, and service disruptions in the first quarter of 2003 caused by severe winter weather conditions and derailments.
COMPENSATION AND BENEFITS
2003, and an increase of $116.2 million from $1,143.4 million in 2002. Performance-based incentive compensation expenses increased in 2004, compared with 2003 when these expenses were abnormally low. Expenses also increased in 2004 as a result of higher costs associated with inflation, pension expense, training costs for new train crew employees, selective hiring to handle increased freight volumes as well as favourable expense adjustments during the first quarter of 2003, partially offset by lower expenses resulting from restructuring initiatives. Expenses in 2003 increased over 2002 as higher costs associated with inflation, severe winter conditions, pension expense and selective hiring to handle increased freight volumes were partially offset by lower variable incentive compensation costs, restructuring initiatives, expense adjustments during the first quarter of 2003 and the positive impact of Foreign Exchange.
FUEL
hedging program. In 2004, fuel expense was $440.0 million, an increase of $46.4 million from $393.6 million in 2003, and an increase of $81.7 million from $358.3 million in 2002. Fuel expense increased in 2004, compared with 2003, due to higher crude oil prices and volumes, partially offset by the effect of Foreign Exchange on U.S. dollar-denominated fuel expenses, more efficient fuel consumption, favourable refining margins and positive inventory adjustments. Fuel expense in 2003 was higher than in 2002 as a result of significantly higher fuel prices and greater consumption associated with increased freight volumes and severe winter operating conditions. These increases were partially offset by CPRs fuel-hedging program and the positive effect of Foreign Exchange.
MATERIALS
18 | 2004 Annual Report |
||
with 2003, was due to lower material usage for track maintenance, reduced computer hardware and software expenses beginning in January 2004 as a result of a new outsourcing agreement with IBM, and the effect of Foreign Exchange, offset by higher fuel costs for vehicles and increased locomotive repair and servicing materials. Expenses increased in 2003 over 2002 due to increased materials required for repairs, derailment costs and favourable adjustments made in 2002, partially offset by the effect of Foreign Exchange.
EQUIPMENT RENTS
DEPRECIATION AND AMORTIZATION
PURCHASED SERVICES AND OTHER
personal injuries. Expenses increased in 2003 over 2002 due to higher insurance premiums, derailment costs, volume-related expenses and favourable adjustments made in 2002.
EXPECTATIONS FOR 2005
other income statement items
OTHER CHARGES
2004 Annual Report | 19 | ||||
income. Other charges were $36.1 million in 2004, an increase of $2.6 million from $33.5 million in 2003, and an increase of $14.3 million from $21.8 million in 2002. The increase in 2004, compared with 2003, was due to changes in the fair value of derivative instruments that were not eligible for hedge accounting under the Canadian Institute of Chartered Accountants (CICA) Accounting Guideline 13 (AcG 13), discussed under the heading Changes in Accounting Policy in this MD&A, and the effect of Foreign Exchange on working capital accounts. The increase in 2003, compared with 2002, was due to a benefit in 2002 from interest income on a tax recovery and interest paid in 2003 on an income tax settlement.
INTEREST EXPENSE
this MD&A) resulted in lower cost savings and, therefore, an increase to 2004 interest expense. The decrease in 2003 from 2002 was due to the replacement of higher-cost debt with lower-cost debt and the positive impact of Foreign Exchange and interest rate swaps. The decrease was partially offset by interest on the $350-million 4.9 % Medium Term Notes.
INCOME TAXES
The effective income tax rate for 2004 was 25.9 %, compared with 9.4 % for 2003 and 17.9 % for 2002. The normalized rates (income tax rate based on income adjusted for FX on LTD and other specified items) for 2004, 2003 and 2002 were 32.3 %, 30.9 % and 31.2 %, respectively.
In December 2003, the Government of Ontario repealed previously announced future income tax rate reductions. The Companys future income tax liability, which was previously based on these reduced rates, was increased by $52.7 million to reflect the change. This adjustment is also discussed in the section Non-GAAP Earnings, under the sub-heading Other Specified Items.
Following a revaluation in 2003 of various components used to determine its future income tax liability, the Company reduced the estimate of its future income tax liability by $59.3 million. This adjustment is also
discussed in the section Non-GAAP Earnings, under the sub-heading Other Specified Items.
In 2002, the Company reported an income tax recovery of approximately $72.0 million stemming from a favourable tax decision by the Federal Court of Appeal. This decision resulted in an effective tax rate of 17.9 %, compared with a normalized income tax rate of approximately 31.2 %. This adjustment is also discussed in the section Non-GAAP Earnings, under the sub-heading Other Specified Items.
EXPECTATIONS FOR 2005
In recent years, CPR has been using certain tax loss carryforwards to offset taxable income. The Company anticipates that these loss carryforwards will be exhausted by 2007 and CPR will have an increase in tax payments during that year.
fourth-quarter summary
OPERATING RESULTS
20 | 2004 Annual Report |
||
freight, compared with 58,887 million GTMs and 30,792 million RTMs in the fourth quarter of 2003. The increases were largely responsible for a 7 % rise in freight revenues in the fourth quarter of 2004, compared with the same period in 2003. There was also an increase in related variable expenses in the fourth quarter of 2004, compared with fourth-quarter 2003.
The Company reported net income of $129.3 million in the fourth quarter of 2004, a decrease of $44.7 million from $174.0 million in the same period of 2003. The decrease was mainly due to a special charge of $55.2 million after tax ($90.9 million before tax) taken in the fourth quarter of 2004 to reflect clean-up costs for environmental contamination at a property in Minnesota (discussed further under the heading Future Trends, Commitments and Risks in this MD&A) and an FX gain on LTD. The FX gain on LTD in the fourth quarter of 2004 was $55.8 million after tax, compared with $72.0 million after tax in the same period in 2003. The decrease was partially offset by a $12.4-million after-tax reversal ($19.0 million before tax) of part of a restructuring charge taken in the second quarter of 2003, and a loss on the transfer of assets to an outsourcing firm of $18.4 million after tax ($28.9 million before tax) in the fourth quarter of 2003 (discussed further under the sub-heading Other Specified Items in this MD&A).
Operating income for the three-month period ended December 31, 2004, was $161.1 million, a decrease of $32.2 million from $193.3 million in the same period of 2003. The decrease was mainly due to the special charge for environmental clean-up costs. This decrease was partially offset by higher
freight volumes, resulting in increased revenues in 2004 (discussed under the sub-heading Revenues below), partially offset by a corresponding increase in volume-related expenses. The decrease was also partially offset by the reversal of part of the restructuring charge taken in the second quarter of 2003, and the loss on the transfer of assets to an outsourcing firm in the fourth quarter of 2003.
Diluted EPS was $0.81 in the fourth quarter of 2004, a decrease of $0.28 from $1.09 in the same period of 2003.
NON-GAAP EARNINGS
REVENUES
Grain
Coal
world demand for metallurgical coal, and a positive rate adjustment in the fourth quarter of 2004 as a result of a settlement for eastbound Canadian coal shipments.
Sulphur and Fertilizers
Forest Products
Industrial Products
Automotive
Intermodal
2004 Annual Report | 21 | ||||
$246.4 million in the same period of 2003. In the import/export business, growth was mainly due to increased volumes in the export sector at the ports of Vancouver and Montreal as a result of improved world economic conditions and a general trend toward containerized traffic. Growth in the domestic market was due to greater demand in retail businesses. Revenues in the import/export and domestic businesses also increased due to higher freight rates.
OPERATING EXPENSES, BEFORE OTHER SPECIFIED ITEMS
Compensation and Benefits
Fuel
Materials
Equipment Rents
Depreciation and Amortization
Purchased Services and Other
associated with derailments, mishaps and personal injury claims, and the positive effect of Foreign Exchange.
OTHER INCOME STATEMENT ITEMS
LIQUIDITY AND CAPITAL RESOURCES
22 | 2004 Annual Report |
||
quarterly financial data
For the quarter ended | ||||||||||||||||||||||||||||||||
(in millions, except per share data) | 2004 | 2003 (1) | ||||||||||||||||||||||||||||||
(unaudited) | Dec. 31 | Sept. 30 | June 30 | Mar. 31 | Dec. 31 | Sept. 30 | June 30 | Mar. 31 | ||||||||||||||||||||||||
Total revenue |
$ | 1,021.9 | $ | 989.7 | $ | 1,004.7 | $ | 886.6 | $ | 963.5 | $ | 904.3 | $ | 914.1 | $ | 878.8 | ||||||||||||||||
Operating income (loss) |
$ | 161.1 | $ | 218.9 | $ | 220.6 | $ | 116.0 | $ | 193.3 | $ | 203.6 | $ | (29.2 | ) | $ | 117.9 | |||||||||||||||
Net income |
$ | 129.3 | $ | 176.5 | $ | 83.7 | $ | 23.5 | $ | 174.0 | $ | 91.3 | $ | 34.1 | $ | 101.9 | ||||||||||||||||
Basic earnings per share |
$ | 0.81 | $ | 1.11 | $ | 0.53 | $ | 0.15 | $ | 1.10 | $ | 0.57 | $ | 0.22 | $ | 0.64 | ||||||||||||||||
Diluted earnings per share |
$ | 0.81 | $ | 1.11 | $ | 0.53 | $ | 0.15 | $ | 1.09 | $ | 0.57 | $ | 0.22 | $ | 0.64 | ||||||||||||||||
QUARTERLY TRENDS
Operating income is also affected by seasonal fluctuations. Operating income is typically lowest in the first quarter due to higher operating costs as a result of winter weather.
Operating and net income in the fourth quarter of 2004 were negatively affected by a special charge for environmental clean-up costs associated with a property in Minnesota but were positively impacted by a
reversal of a portion of a special charge for restructuring that was originally recorded in the second quarter of 2003.
A special charge for restructuring and asset impairment recorded in the second quarter of 2003 and a loss on transfer of assets related to an outsourcing agreement with IBM in the fourth quarter of 2003 negatively affected operating and net income for that year.
Net income is influenced by seasonal fluctuations, including weather-related costs, as well as FX on LTD, the special charges and the loss on transfer of assets.
changes in accounting policy
2004 ACCOUNTING CHANGES
Hedging Transactions
accounting. It also establishes conditions for applying, and the discontinuance of, hedge accounting and hedge effectiveness testing requirements. Under the new guideline, the Company is required to document its hedging transactions and explicitly demonstrate that hedges are effective in order to continue hedge accounting for positions hedged with derivatives. Any derivative financial instruments that fail to meet the hedging criteria are accounted for in accordance with Emerging Issues Committee Abstract 128 Accounting for Trading, Speculative or Non-Hedging Derivative Financial Instruments (EIC-128). These instruments are recorded on the Consolidated Balance Sheet at fair value and changes in fair value are recognized in income in the period in which the change occurs.
In connection with the implementation of AcG 13, the Company considered its hedging relationships at January 1, 2004, and determined that its cross-currency interest rate swap agreements, with a notional amount of $105 million at December 31, 2003, no longer qualified for hedge accounting for Canadian GAAP purposes. These swap agreements are discussed further under the heading Financial Instruments.
2004 Annual Report | 23 | ||||
Beginning January 1, 2004, derivative instruments that do not qualify as hedges and those not designated as hedges are being carried on the Consolidated Balance Sheet at fair value and will result in gains and losses being recorded on the Statement of Consolidated Income. In 2004, a $1.5-million pre-tax gain was reported in Other Charges on the Statement of Consolidated Income.
Further discussion of CPRs derivative instruments is provided under the heading Financial Instruments.
Asset Retirement Obligations
The effect on CPRs earnings from adopting this standard is discussed under the sub-heading Property, Plant and Equipment.
Stock-based Compensation
In 2004, Compensation and Benefits expense on the Statement of Consolidated Income increased $5.8 million as a result of adopting this standard.
liquidity and capital resources
CPR believes that adequate amounts of cash and cash equivalents are available in both the short term and the long term to provide for ongoing operations, including the obligations identified in the tables under the heading Contractual Commitments and the sub-heading Financial Commitments. CPR is not aware of any trends or expected fluctuations in its liquidity that would create any deficiencies. The following discussion of operating, investing and financing activities describes CPRs indicators of liquidity and capital resources.
OPERATING ACTIVITIES
payments in 2004. The decrease in 2003 from 2002 was mainly due to the additional pension funding payment of $300.0 million and lower net income in 2003.
There are no specific or unusual requirements relating to CPRs working capital. In addition, there are no unusual restrictions on any subsidiarys ability to transfer funds to CPR.
INVESTING ACTIVITIES
Capital spending in 2005 is projected to be approximately $760 million, mainly for track infrastructure renewal and locomotive acquisitions and overhauls. The Companys capital spending outlook is based on certain assumptions about events and developments that may not materialize or that may be offset entirely or partially by other events and developments. CPRs 2005 capital spending outlook assumes that capital additions will increase in 2005 from 2004 as a result of increased track-related investments, which are partly due to growing freight volumes.
24 | 2004 Annual Report |
||
CPR intends to finance capital expenditures from free cash flow, but may finance some equipment with new debt, if required.
FINANCING ACTIVITIES
CPR completed one Senior Secured Notes offering in the first quarter of 2004 5.41 % US$145 million issued March 2004, maturing March 2024, to fund the acquisition of locomotives.
CPR completed two unsecured debt offerings in 2003 5.75 % US$250-million Debentures issued March 2003, maturing March 2033, and 4.9 % $350-million Medium Term Notes issued July 2003, maturing June 2010. The former was to refinance CPRs 6.875 % US$250-million Notes that matured in April 2003. The latter was to take
advantage of the low interest rate environment and provide funds for general operating purposes.
CPR has available, as sources of financing, credit facilities of up to $545.0 million. CPR believes it can raise capital, within limits, in excess of these amounts, if required, while maintaining its credit quality in international debt markets. CPRs unsecured long-term debt securities are rated Baa2, BBB and BBB by Moodys Investors Service, Inc., Standard and Poors Corporation and Dominion Bond Rating Service, respectively.
CPR filed a US$750-million base shelf prospectus with the U.S. Securities and Exchange Commission in May 2004 to provide the financial flexibility to offer debt securities for sale. The Company plans to issue Medium Term Notes in the first half of 2005, primarily to finance the purchase of additional locomotives.
At December 31, 2004, CPRs net-debt to net-debt-plus-equity ratio improved to 42.9 %, compared with 46.9 % and 47.4 % at December 31, 2003 and 2002, respectively. The improvement in 2004, compared with 2003, was due primarily to the increase in equity from 2004 earnings and increased cash balances. The improvement in 2003, compared with 2002, was due primarily to the increase in equity from 2003 earnings, offset by decreased cash balances and a net increase in debt. Net debt is the sum of long-term debt, long-term debt maturing within one year and short-term borrowing, less cash and short-term investments. This is divided by the sum of net debt
plus total shareholders equity as presented on CPRs Consolidated Balance Sheet.
Management is committed to maintaining its net-debt to net-debt-plus-equity ratio at an acceptable level and intends to continue to manage the Companys capital employed so that it retains solid investment-grade credit.
FREE CASH
The Company generated positive free cash after dividends of $38.2 million in 2004, compared with negative free cash of $475.4 million in 2003 and positive free cash of $131.7 million in 2002. The increase in free cash in 2004, compared with 2003, was due largely to an increase in cash generated by operating activities (as discussed previously) and decreased capital expenditures in 2004. Negative free cash in 2003 resulted mainly from an extra pension funding payment of $300.0 million in the fourth quarter of 2003 and lower net income and increased capital expenditures in 2003, compared with 2002.
CPR expects to generate free cash of $50 million to $100 million for the 2005 fiscal year, achieved mainly with higher earnings and lower restructuring payments, partially offset by an increase in capital expenditures.
2004 Annual Report | 25 | ||||
The Companys capital spending outlook is based on certain assumptions about events and developments that may not materialize or that may be offset entirely or partially by other events and developments. CPRs free cash
outlook relies on the assumptions established for earnings and capital expenditures, which were discussed previously in this MD&A under the sub-heading Revenues, and
under the headings Operating Expenses, Before Other Specified Items, Other Income Statement Items and Liquidity and Capital Resources.
CALCULATION OF FREE CASH
(reconciliation of free cash to GAAP cash position)
For the year ended December 31 (in millions) (unaudited) | 2004 | 2003 (1) | 2002 (1) | |||||||||
Cash provided by operating activities |
$ | 786.0 | $ | 305.7 | $ | 763.5 | ||||||
Cash used in investing activities |
(666.1 | ) | (700.3 | ) | (551.0 | ) | ||||||
Dividends paid on Common Shares |
(81.7 | ) | (80.8 | ) | (80.8 | ) | ||||||
Free cash (2) |
38.2 | (475.4 | ) | 131.7 | ||||||||
Cash provided by (used in) financing activities, before
dividend payment |
180.1 | 325.2 | (403.7 | ) | ||||||||
Increase (decrease) in cash, as shown
on the Statement of Consolidated Cash Flows |
218.3 | (150.2 | ) | (272.0 | ) | |||||||
Net cash at beginning of period |
134.7 | 284.9 | 556.9 | |||||||||
Net cash at end of period |
$ | 353.0 | $ | 134.7 | $ | 284.9 | ||||||
balance sheet
Assets totalled $10,499.8 million at December 31, 2004, compared with $9,956.7 million at December 31, 2003, and $9,664.3 million at December 31, 2002. The increase in 2004, compared with 2003, was mainly due to capital additions, most of which were locomotives and track replacement programs, and a larger cash balance from debt issuance in the first quarter of 2004. The increase in assets in 2003, compared with 2002, was mainly due to capital additions for locomotives and track replacement programs, and a larger pension asset from additional funding during 2003.
CPRs combined short-term and long-term liabilities were $6,517.4 million at December 31, 2004, compared with total liabilities of $6,302.1 million
at December 31, 2003, and $6,296.0 million at December 31, 2002. The increases were mainly due to higher accrued payroll liabilities, most of which were for a more normal level of incentive compensation, and larger future income tax balances resulting from tax rate increases by the Province of Ontario. Trade accounts payable also increased, mainly for amounts owing to other railways for transporting CPR customers freight.
At December 31, 2004, the Companys Consolidated Balance Sheet reflected $3,982.4 million in equity, compared with equity balances of $3,654.6 million and $3,368.3 million at December 31, 2003 and 2002, respectively. The majority of the increases were due to CPRs growth in retained income in 2004 and 2003.
SHARE CAPITAL
CPR also has a Management Stock Option Incentive Plan (MSOIP) under which key officers and employees are granted options to purchase CPR shares. Each option granted can be exercised for one Common Share. CPR has authorized a maximum of 11.0 million Common Shares for issuance under the MSOIP. At December 31, 2004, 7.6 million of these options were outstanding.
26 | 2004 Annual Report |
||
On July 21, 2003, CPRs Board of Directors suspended the Companys Directors Stock Option Plan (DSOP), under which members of the Board of Directors were granted options to purchase CPR shares. The DSOP allowed each option granted to be exercised for one Common Share. The maximum number of Common Shares approved for issuance under the DSOP was 500,000. Outstanding options granted prior to suspension of the DSOP remain in effect with no amendments. At December 31, 2004, 160,000 of these options remained in effect. The DSOP was suspended as a result of a review by external
compensation consultants of the Companys compensation philosophy for its Board of Directors.
DIVIDENDS
and the declaration of dividends is wholly within the Board of Directors discretion. Further, the 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.
The details of dividends declared by the Board of Directors since the initial listing of CPRs Common Shares on the Toronto and New York stock exchanges in October 2001 are as follows:
Dividend amount | Record date | Payment date | ||
$0.1275
|
December 27, 2001 | January 28, 2002 | ||
$0.1275
|
March 27, 2002 | April 29, 2002 | ||
$0.1275
|
June 27, 2002 | July 29, 2002 | ||
$0.1275
|
September 27, 2002 | October 28, 2002 | ||
$0.1275
|
December 27, 2002 | January 27, 2003 | ||
$0.1275
|
March 28, 2003 | April 28, 2003 | ||
$0.1275
|
June 27, 2003 | July 28, 2003 | ||
$0.1275
|
September 26, 2003 | October 27, 2003 | ||
$0.1275
|
December 24, 2003 | January 26, 2004 | ||
$0.1275
|
March 26, 2004 | April 26, 2004 | ||
$0.1275
|
June 25, 2004 | July 26, 2004 | ||
$0.1325
|
September 24, 2004 | October 25, 2004 | ||
$0.1325
|
December 31, 2004 | January 31, 2005 | ||
$0.1325
|
March 25, 2005 | April 25, 2005 | ||
financial instruments
The Companys policy with respect to hedging of risk exposure is to selectively reduce volatility associated with fluctuations in interest and foreign exchange rates and in the price of diesel fuel. CPRs policy is to prohibit the utilization of derivative financial and commodity instruments for trading or speculative purposes.
INTEREST RATE MANAGEMENT
rate swaps, bond forwards and interest rate locks as part of its interest rate risk management strategy.
Interest Rate Swaps
2004 Annual Report | 27 | ||||
quarterly based on the London Interbank Offered Rate (LIBOR). These swaps expire in 2011 and are accounted for as a fair value hedge. Savings from these swaps reduced Interest Expense on the Statement of Consolidated Income by $6.7 million in 2004. An unrealized gain of $8.8 million from these interest rate swaps was calculated based on their fair value at December 31, 2004. The fair value of these swaps has not been recorded on the Consolidated Balance Sheet. Swap, currency and basis-spread curves from Reuters were utilized to establish the fair market value of the swaps. Values may vary marginally due to either the terms of the contract or minor variations in the time of day when the data was collected.
Concurrent with the issuance of its 4.9 % $350-million Medium Term Notes in 2003, CPR entered into cross-currency, fixed-to-floating interest rate swap agreements for the purpose of converting $105 million of fixed-rate debt to US$77.3 million of floating-rate U.S. dollar-denominated debt. Beginning January 1, 2004, management determined that these agreements no longer qualified for hedge accounting treatment under a new Canadian GAAP pronouncement, AcG 13, which is discussed further under the heading Changes in Accounting Policy in this MD&A. The Companys unrealized gain from these swaps is being amortized over the life of the debt. At December 31, 2004, Deferred Liabilities on the Consolidated Balance Sheet included $1.8 million for this deferred gain. Amortization of this gain reduced Other Charges on the Statement of Consolidated Income by $0.4 million in 2004. Other Charges also included the additional costs or savings that arose when the swaps
were settled. The Company recorded savings of $1.5 million from these agreements in 2004. In July 2004, the Company terminated these agreements and a loss of $2.2 million from this settlement was included in Other Charges.
Interest Rate Locks
In 2003, CPR entered into six treasury rate locks totalling US$124 million to fix the benchmark interest rate on the 5.41 % US$145-million Senior Secured Notes offering, maturing in 2024. Upon termination of these locks in the first quarter of 2004, CPR realized a loss of $2.0 million, which is being deferred and amortized over the 20-year life of the existing financing. At December 31, 2004, Other Assets and Deferred Charges on the Consolidated Balance Sheet included an unamortized loss of $1.9 million from these agreements. Interest Expense on the 2004 Statement of Consolidated Income included $0.1 million for amortization of this loss.
At December 31, 2004, Other Assets and Deferred Charges on the Consolidated Balance Sheet included an unamortized loss of $18.3 million from interest rate locks settled in 2003 on $200 million of long-term debt. The total loss is being amortized over seven years, which is the term of the underlying debt. Interest Expense on the 2004 Statement of Consolidated Income included $3.3 million for amortization of this loss.
At December 31, 2004, Deferred Liabilities on the Consolidated Balance Sheet included an unamortized gain of $8.9 million from interest rate locks settled in 2003 on US$250 million of long-term debt. The total gain is being amortized over 30 years, which is the term of the underlying debt. Interest Expense on the 2004 Statement of Consolidated Income included $0.3 million for amortization of this gain.
FOREIGN EXCHANGE MANAGEMENT
Foreign Exchange Forward Contracts
28 | 2004 Annual Report |
||
outstanding to be settled in 2005 and 2006. The unrealized gain on these forward contracts, calculated using the trading value of the U.S. dollar on the New York Stock Exchange, was $0.2 million at December 31, 2004. No realized or unrealized gains or losses for these forwards were included in CPRs financial statements at December 31, 2004.
CPR also purchased forward contracts to manage some of its exposure to fluctuations related to certain short-term commitments in U.S. dollars due to changes in exchange rates between Canadian and U.S. dollars. These forward contracts were not designated as hedges. The contracts settled in the second quarter of 2004. Other Charges on the 2004 Statement of Consolidated Income were reduced by $1.8 million as a result of realized gains from these contracts.
Cash Hedge
FUEL PRICE MANAGEMENT
of fuel. The Company generally enters into commodity swap purchase contracts. These contracts are marked-to-market every reporting period and the related unrealized gains or losses on these swaps are deferred until the related fuel purchases are realized.
An unrealized gain of $32.0 million was calculated based on the fair value of the swaps, which was derived from the price of West Texas Intermediate (WTI), as quoted by recognized dealers or as developed based upon the present value of expected future cash flows discounted at the applicable U.S. Treasury Rate, LIBOR or swap spread. No unrealized gains or losses have been included in the Companys financial statements in 2004.
Fuel purchases and commodity swap contracts have an element of foreign exchange variability. The Company uses from time to time foreign exchange forward contracts to manage this element of fuel-price risk. The Company enters into purchase contracts of U.S. dollars because the Canadian dollar cost of fuel increases if the U.S. dollar appreciates relative to the Canadian dollar. Gains and losses on the crude oil swaps, coupled with foreign exchange forward contracts, offset increases and decreases in the cash cost of fuel.
An unrealized loss of $8.8 million related to forward purchases of U.S. dollars was calculated based on the fair value of these forwards at December 31, 2004. Forward curves from Reuters were utilized to establish the fair value. The unrealized loss has not been recorded in the Companys financial statements in 2004.
Fuel expense was reduced by $36.5 million in 2004 as a result of realized gains and losses arising from settled swaps and collars. No amounts
for the foreign exchange forwards have been included in the Companys financial statements for 2004, as none of the contracts has been realized.
For every US$1 increase in the price of WTI, fuel expense, before hedging, will increase by approximately $8 million, assuming current foreign exchange rates and fuel consumption levels. The Company has fuel hedges for approximately 31 % of its fuel purchases in 2005, representing unrealized gains of $17.9 million at December 31, 2004.
off-balance sheet arrangements
SALE OF ACCOUNTS RECEIVABLE
2004 Annual Report | 29 | ||||
has a retained interest of approximately 15 % of receivables sold, which is recorded in Accounts Receivable on CPRs Consolidated Balance Sheet. The Company cannot enter into an agreement with a third party with respect to its retained interest.
Receivables funded under the securitization program may not include delinquent, defaulted or written-off receivables, nor receivables that do not meet certain obligor-specific criteria, including concentrations in excess of prescribed limits. The Company maintains an adequate allowance for doubtful accounts based on expected collectibility of accounts receivable. Credit losses are based on specific identification of uncollectible accounts and the application of historical percentages by aging category. At December 31, 2004, allowances of $3.6 million (2003 $5.6 million) were
recorded in Accounts Receivable. In 2004, $2.8 million (2003 $1.1 million) of accounts receivable were written off to Freight Revenues.
The Company has retained the responsibility for servicing, administering and collecting freight receivables sold. However, even though the Company acts as collector of all of the securitized receivables, it has no claim against the trusts co-ownership interest in the securitized receivables. No servicing asset or liability has been recorded, as the benefits CPR receives for servicing the receivables approximate the related costs. Proceeds from collections reinvested in the accounts receivable securitization program were $382.4 million in 2004.
The securitization program is subject to standard reporting and credit-rating requirements for CPR and includes a
provision of a monthly portfolio report that the pool of eligible receivables satisfies pre-established criteria that are reviewed and approved by Dominion Bond Rating Services and are standard for agreements of this nature. Failure to comply with these provisions would trigger termination of the program. In the event the program is terminated prior to maturity, CPR expects to have sufficient liquidity remaining in its revolving credit facility to meet its payment obligations. The Company complied with all termination tests in 2004.
contractual commitments
The following table indicates CPRs known contractual obligations and commitments to make future payments for contracts such as debt, capital lease arrangements and commercial commitments:
Payments due by period | ||||||||||||||||||||
Less than | 1 3 | 3 5 | After | |||||||||||||||||
At December 31, 2004 (in millions) | Total | 1 year | years | years | 5 years | |||||||||||||||
Long-term debt |
$ | 3,014.9 | $ | 271.0 | $ | 185.8 | $ | 39.0 | $ | 2,519.1 | ||||||||||
Capital lease obligations |
336.1 | 4.7 | 14.5 | 17.2 | 299.7 | |||||||||||||||
Operating lease obligations (1) |
633.8 | 146.7 | 215.9 | 112.4 | 158.8 | |||||||||||||||
Supplier purchase obligations |
603.1 | 94.8 | 158.9 | 119.9 | 229.5 | |||||||||||||||
Other long-term liabilities reflected on the
Companys Consolidated Balance Sheet (2) |
953.6 | 120.2 | 227.8 | 231.1 | 374.5 | |||||||||||||||
Total contractual obligations |
$ | 5,541.5 | $ | 637.4 | $ | 802.9 | $ | 519.6 | $ | 3,581.6 | ||||||||||
30 | 2004 Annual Report |
||
foreign exchange
The Canadian dollar strengthened against the U.S. dollar by approximately 8 % year-over-year in 2004, compared with 2003. The impact of this foreign exchange rate fluctuation on the Companys financial results is reflected on the Statement of Consolidated Income and the Consolidated Balance Sheet, net of the hedge discussed above.
TRANSLATION OF THE
COMPANYS
ACCOUNTS, EXCLUDING FOREIGN SUBSIDIARIES
U.S. dollar-denominated Consolidated Balance Sheet accounts are translated into Canadian dollars at the period-end exchange rate for monetary items such as working capital, long-term debt and cash, and at historical exchange rates for non-monetary items. Unrealized gains and losses arising from the translation of the monetary items are included in
income immediately in Other Charges, and as Foreign Exchange Gains (Losses) on Long-Term Debt for U.S. dollar-denominated long-term debt.
TRANSLATION OF FOREIGN SUBSIDIARIES ACCOUNTS
future trends, commitments and risks
CAPACITY CHALLENGES
highly disciplined scheduled operating practices to increase productivity and efficiency. CPR is also employing a capacity allocation system for the rapidly expanding import container business on the Canadian West Coast and has entered into joint railway agreements that will improve capacity and service levels in the Vancouver area. CPR is considering a phased infrastructure expansion program that would increase network capacity in increments, beginning with the corridor west of Moose Jaw, Saskatchewan. The phased approach would enable CPR to expand with the rate of traffic growth, helping CPR derive maximum value from its investment, or to delay or reduce the scope of the phases as capacity improves on the existing network. However, network expansion will only begin should several preconditions be met, including the sustainability of traffic growth, improved margins and regulatory stability.
COMPANY GROWTH AND FLEXIBILITY
In 2005, CPR will continue its focus on revenue growth and cost reduction as well as improved utilization of its asset base. Targeted initiatives and price improvements are expected to drive revenue growth, including growth from value-added services provided by Canadian Pacific Logistics Solutions, CPRs logistics and supply chain division.
2004 Annual Report | 31 | ||||
CPR anticipates continued revenue gains in bulk commodities, assuming global demand remains strong.
CPRs traffic volumes and revenues are largely dependent upon the health and growth of the North American and global economies, exchange rates, and other factors affecting the volume and patterns of international trade. CPRs future grain transportation revenues may be negatively affected if there is a recurrence of drought conditions that existed in its grain collection areas in 2001, 2002 and the first half of 2003. CPR will attempt to mitigate the effects of any downward pressure on transportation revenues primarily through cost-containment measures.
Continuing cost-containment programs are vital to CPR achieving its financial performance targets. CPR plans to eliminate approximately 175 job positions in 2005 as a result of previously announced initiatives designed to achieve cost reductions through consolidation and rationalization of administrative functions, redesign of yard processes and more efficient maintenance of freight car and locomotive fleets. CPR will continue to selectively hire in specific areas of the business, as required by growth or changes in traffic patterns.
Improved asset utilization is expected to result from further railcar modernization and from recent investments in information technology. Overall, the rail industry is continuing to leverage information technology to facilitate its dealings with suppliers and shippers. CPRs ongoing strategy is to apply information technology to improve its competitive position.
CPRs covered hopper car fleet consists of a mixture of owned and leased cars. A portion of the fleet used for the export of grain is leased from the Government of Canada, which has indicated a desire to sell or otherwise dispose of its cars. The potential impact of this on CPRs grain business cannot be ascertained until the governments decision is announced. However, in the event of a disposition, CPR has advocated a process that is market-driven and open to all interested parties.
CRUDE OIL PRICES
BORDER SECURITY
CPR works closely with Canadian and U.S. customs officials and with other railways to ensure the safe and secure movement of goods between Canada and the U.S. The Company implemented several regulatory security frameworks in 2004 that focused on the provision of advanced electronic cargo information. CPR is fully automated with both CBSA and CBP and provides the requisite shipment information electronically, well in advance of border arrival.
Under the joint Declaration of Principles signed in April 2003, CPR committed to work with CBSA and CBP to install a new Vehicle and Cargo Inspection System (VACIS) at five of CPRs border crossings. Rail VACIS systems use non-intrusive gamma ray technology to scan U.S.-bound rail shipments. Four of the VACIS systems are now fully operational and CPR is currently working with CBP and CBSA on the fifth installation, located in Windsor, Ontario, which is expected to be complete by the third quarter of 2005. The Government of Canada and CPR have each committed up to $4.1 million to secure the rail corridor between the Windsor VACIS facility and the U.S. border. This joint government-industry initiative is expected to enhance the security of
32 | 2004 Annual Report |
||
U.S.-bound rail shipments while helping to ensure uninterrupted access to the U.S. market for CPR customers.
LABOUR RELATIONS
The Teamsters Canada Rail Conference, Maintenance of Way Employees Division (TCRC-MWD) was certified in July 2004 as bargaining agent for employees who maintain CPRs track. The Companys collective agreement with the former bargaining agent expired on December 31, 2003. A Memorandum of Settlement for a three-year collective agreement extending to the end of 2006 was achieved with the TCRC-MWD on January 14, 2005, and is currently being voted upon by employees.
CPRs collective agreement with the Canadian Auto Workers (CAW), which represent employees who maintain and repair locomotives and freight cars, expired on December 31, 2004. A Memorandum of Settlement for a three-year collective agreement extending to the end of 2007 was achieved on February 11, 2005, and is being voted upon by employees.
Negotiations commenced in September 2004 with the International Brotherhood of Electrical Workers (IBEW), which represents signal maintainers. CPRs collective agreement
with the IBEW expired at the end of 2004. Negotiations are continuing.
The Company is preparing for negotiations with the Rail Canada Traffic Controllers and the Canadian Pacific Police Association that are scheduled to commence in September 2005.
In the U.S., CPR is party to collective agreements with 29 bargaining units: 15 on its Soo Line Railroad (Soo Line) subsidiary and 14 on its Delaware and Hudson Railway (D&H) subsidiary.
Soo Line has renewed agreements with seven unions representing track maintainers, freight car repair employees, clerks, train dispatchers, signal repair employees, machinists and conductors. Tentative settlements have been reached with two other bargaining units, which represent electricians and communication workers, and yard supervisors. Negotiations are continuing with the six remaining bargaining units, which represent locomotive and car foremen, mechanical labourers, blacksmiths and boilermakers, sheet metal workers, police, and locomotive engineers. Negotiations with the Teamsters, representing locomotive engineers, are being assisted through mediation.
D&H has renewed agreements with five unions representing freight car repair employees, clerks, locomotive engineers, signal repair employees and mechanical supervisors. Negotiations are continuing with the remaining nine bargaining units, which represent track maintainers, conductors and trainpersons, engineering supervisors, machinists, yard supervisors, electricians, labourers, police, and pipefitters.
ENVIRONMENTAL
CPR has 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. In addition, CPR continues to focus on preventing spills and other incidents that have a negative impact on the environment. As a precaution, the Company has established a Strategic Emergency Response Contractor network and located spill equipment kits across Canada and the U.S. to ensure a rapid and efficient response in the event of an environmental incident. CPR also regularly updates and tests emergency preparedness and response plans.
CPR has developed an environmental audit program that comprehensively, systematically and regularly assesses CPRs facilities for compliance with legal requirements and conformance of CPRs policies to accepted industry standards. Audits are followed by a formal Corrective Action Planning process to ensure findings are addressed in a timely manner. In addition, CPRs Board of Directors has established an Environmental and
2004 Annual Report | 33 | ||||
Safety Committee, which conducts a semi-annual comprehensive review of environmental issues.
In the fourth quarter of 2004, the Company recorded a $90.9-million charge for costs associated with investigation, characterization, remediation and other applicable actions related to environmental contamination at a property in Minnesota, which includes areas previously leased to third parties. CPR is participating in the State of Minnesotas voluntary investigation and clean-up program at the east side of the property. The property is the subject of ongoing fieldwork being undertaken in conjunction with the appropriate State of Minnesota authorities to determine the extent and magnitude of the contamination and the appropriate remediation plan. CPR now has sufficient information to reasonably estimate clean-up and other applicable costs for the entire property. CPR expects to file with the State of Minnesota in 2005 a response action plan for the east side of the property.
The charge was taken in the fourth quarter of 2004 because future liability increases for this property became probable and subject to reasonable estimation, in accordance with applicable accounting standards, based on the present scientific and engineering knowledge about the property. The estimate may change as new information becomes available or new developments occur. The costs are expected to be incurred over approximately 10 years.
CPR has initiated litigation against two former lessees that it believes are responsible for a large portion of the contamination. Under applicable accounting rules, no recovery has
been accrued since any recovery is dependent upon the outcome of the lawsuit, which at present is scheduled for trial in 2007.
AGREEMENTS AND CONTRACT NEGOTIATIONS
implementation of the agreements and the trackage rights between Detroit and Chicago will improve the profitability of CPRs operations in the northeastern U.S., and reduce costs and significantly improve service in the Detroit-Chicago corridor. These savings are expected to be realized beginning in 2005.
Coal shipper Elk Valley Coal Corporation (EVCC), pursuant to the rules of the Canadian Transportation Agency (CTA), referred the matter of rates and services for the transportation by CPR of coal from EVCCs Elkview mine in southeastern B.C. to the Port of Vancouver to an independent arbitrator. Notwithstanding that CPR maintains that this matter is governed by a confidential contract, which CPR claims governs the movement of coal from all five of EVCCs mines in southeastern B.C., the arbitrator ruled in CPRs favour. In a closely related matter, CPR has filed a statement of claim against EVCC in respect of all five mines for failure to pay applicable rail freight charges in accordance with the confidential contract. In January 2005, EVCC and CPR agreed to suspend all legal proceedings and entered into non-binding mediation in an attempt to resolve all disputes between the parties. The disputes are not expected to affect the continued shipment of coal by CPR from EVCCs mines. The outcome of this matter could have a material impact on CPRs revenues and financial position.
PENSION PLAN DEFICIT
34 | 2004 Annual Report |
||
pension obligation is discounted using a discount rate that is a blended interest rate of high-quality corporate debt instruments. The discount rate is one of the factors that can influence a plans deficit. Other factors include the actual return earned on the assets and rates used, based on managements best estimates, for future salary increases and inflation. For example, every 1.0 percentage point the actual discount rate varies above (or below) the estimated discount rate can cause the deficit to decrease (or increase) by approximately $600 million, after reflecting the expected loss (gain) on the value of the pension funds debt securities with respect to corresponding changes in long-term interest rates. Similarly, every 1.0 percentage point the actual return on assets varies above (or below) the estimated return for the year can cause the deficit to decrease (or increase) by approximately $60 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.
Between 51 % and 57 % of the plans assets are invested in 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 CPRs 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. The Company will continue to make contributions towards this deficit that, as a minimum, meet requirements as prescribed by Canadian pension supervisory authorities.
The Company made contributions of $175.7 million to the defined benefit pension plans in 2004. The 2004 contribution amount reflected the Companys decision to treat the voluntary extra contribution of $300.0 million made in December 2003 as a prepayment of contributions for 2004, 2005 and 2006.
The last actuarial valuation of CPRs main pension plan was completed as at January 1, 2004. The Company is currently undergoing an updated actuarial valuation of this plan as at January 1, 2005 (which will be completed by June 2005) and also expects to undergo an updated actuarial valuation as at January 1, 2006. The Company expects its pension contributions in 2005 and 2006 to be approximately $300 million for the two years combined, with at least $60 million of this total contributed in 2005. In deriving these amounts, the Company took into account the estimated impact of both of these valuations, along with other factors. The actual amount required to be contributed in 2005 and 2006 will also depend on CPRs actual experience in 2005 with such variables as investment returns, interest rate fluctuations and demographic changes.
FINANCIAL COMMITMENTS
Certain Other Financial Commitments
Amount of commitment per period | ||||||||||||||||||||
2006 | 2008 | 2010 | ||||||||||||||||||
At December 31, 2004 (in millions) | Total | 2005 | & 2007 | & 2009 | & beyond | |||||||||||||||
Letters of credit |
$ | 314.9 | $ | 314.9 | $ | | $ | | $ | | ||||||||||
Surety bonds |
22.1 | 22.1 | | | | |||||||||||||||
Capital commitments (1) |
577.3 | 307.2 | 68.2 | 72.1 | 129.8 | |||||||||||||||
Offset financial liability |
159.6 | 159.6 | | | | |||||||||||||||
Total commitments |
$ | 1,073.9 | $ | 803.8 | $ | 68.2 | $ | 72.1 | $ | 129.8 | ||||||||||
2004 Annual Report | 35 | ||||
Letters of Credit and Surety Bonds
Capital Commitments
Offset Financial Liability
RESTRUCTURING
Productivity improvements stemming from these job eliminations are expected to reduce compensation and benefits expense by approximately $58 million in 2005 and $67 million annually in future years, compared with 2002, which was the last full year prior to the start of the restructuring program. Job reductions associated with the restructuring program contributed $36 million in savings in 2004 (compared with $35 million in anticipated savings in 2004), including $11 million in the fourth quarter.
Cash payments for the elimination of these positions are expected to be $13 million in 2005, $9 million in 2006 and a total of $19 million in the remaining years to 2010. CPR expects to fund these payments from general operations.
The restructuring liabilities also include residual payments to protected employees for previous restructuring plans that are substantially complete.
These payments are expected to continue in decreasing amounts until 2025 and will be funded from CPRs general operations.
CPR had cash payments related to severance under all restructuring initiatives and to CPRs environmental remediation program, described in this MD&A under the sub-heading Critical Accounting Estimates, totalling $88.8 million in 2004, compared with $107.0 million in 2003 and $119.3 million in 2002. Payments in 2005 are estimated to be $80 million to $90 million.
The total accrued restructuring and environmental liability included in CPRs Consolidated Balance Sheet at December 31, 2004, was $448.7 million, of which $95.0 million was included in Accounts Payable and $353.7 million was included in Deferred Liabilities.
The total liability included restructuring liabilities of $275.8 million at December 31, 2004, compared with $367.4 million at December 31, 2003.
Labour liabilities totalling $269.7 million were included in total restructuring liabilities of $275.8 million at December 31, 2004. Labour liabilities totalling $358.2 million were included in total restructuring liabilities of $367.4 million at December 31, 2003.
In 2004, payments made for all restructuring liabilities amounted to $65.5 million, compared with payments of $86.8 million in 2003.
36 | 2004 Annual Report |
||
Payments in 2004 relating to the labour liabilities were $62.2 million, compared with $78.4 million in 2003.
Also included in the restructuring liabilities were accruals for costs associated with the rental of properties no longer being used by the Company. Cash payments for these liabilities are anticipated to be $1.2 million in 2005. In 2004, payments relating to these liabilities were $2.8 million.
critical accounting estimates
To prepare financial statements that conform with Canadian GAAP, management is 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Using the most current information available, management reviews its estimates on an ongoing basis, including those related to environmental liabilities, pensions and other benefits, property, plant and equipment, future income taxes, and legal and personal injury liabilities.
The development, selection and disclosure of these estimates, as well as this MD&A, have been reviewed by the Board of Directors Audit, Finance and Risk Management Committee, which is comprised entirely of independent directors.
ENVIRONMENTAL LIABILITIES
classified according to typical activities and scale of operations conducted, and remediation strategies are developed 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. Management also considers 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. CPR is committed to fully meeting its 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 the Companys financial position, but may materially affect income in the period in which the charge is recognized. Increased costs would be reflected as increases to Deferred Liabilities on CPRs Consolidated Balance Sheet and to Purchased Services and Other on CPRs Statement of Consolidated Income. Favourable court settlements would increase Accounts Receivable on
CPRs Consolidated Balance Sheet and decrease operating expenses.
In 2004, environmental liabilities were increased by $101.0 million, largely due to a $90.9-million charge for a property in Minnesota, as discussed under the heading Future Trends, Commitments and Risks in this MD&A. In 2003, the liabilities increased by $5.5 million as the accruals were adjusted for various sites in the multi-year soil remediation program.
At December 31, 2004, the accrual for environmental remediation on CPRs Consolidated Balance Sheet amounted to $172.9 million, of which the long-term portion amounting to $149.9 million was included in Deferred Liabilities and the short-term portion amounting to $23.0 million was included in Accounts Payable and Accrued Liabilities. Costs incurred under CPRs environmental remediation program are charged against the accrual. Total payments were $23.3 million in 2004. The U.S. dollar-denominated portion of the liability was affected by Foreign Exchange, resulting in an increase in environmental liabilities of $0.4 million in 2004.
PENSIONS AND OTHER BENEFITS
2004 Annual Report | 37 | ||||
uncertainties, as described under the sub-heading Pension Plan Deficit.
Pension costs are actuarially determined using the projected-benefit method prorated over the credited service periods of employees. This method incorporates managements best estimate 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 funds equity securities (with each prior years market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the funds fixed income and real estate securities. 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 12 years). Prior service costs arising from plan amendments 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 arising from implementing the CICA Accounting Standard Section 3461 Employee Future Benefits, effective January 1, 2000, is 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).
Other Assets and Deferred Charges on CPRs December 31, 2004, Consolidated Balance Sheet included prepaid pension costs of $838.3 million. This accrued benefit asset is increased by amounts contributed to the plans by the Company, offset by the amount of pension expense for the year, with the major influence being the amount of the contributions. CPRs Consolidated Balance Sheet also included $4.5 million in Accounts Receivable for prepaid pension costs, and $0.3 million in Accounts Payable and Accrued Liabilities and $1.9 million in Deferred Liabilities for pension obligations.
The obligations with respect to post-retirement benefits, including health care, workers compensation in Canada and life insurance, are actuarially determined and accrued using the projected-benefit method prorated over the credited service periods of employees. Fluctuations in the post-retirement benefit obligation are caused by changes in the discount rate used. A 1.0 percentage point increase (decrease) in the discount rate would decrease (increase) the liability by approximately $50 million. Post-retirement benefits accruals of $147.3 million were included in Deferred Liabilities, and post-retirement benefits accruals of $3.7 million were included in Accounts Payable and Accrued Liabilities on CPRs December 31, 2004, Consolidated Balance Sheet.
Pension and post-retirement benefits expenses (excluding workers compensation benefits) were included in Compensation and Benefits on CPRs December 31, 2004, Statement of Consolidated Income. In 2004, pension expense was $28.0 million, consisting of defined benefit pension expense of $25.1 million plus defined contribution pension expense (equal to contributions) of $2.9 million. Post-retirement benefits expense in 2004 was $40.8 million, resulting in combined pension and post-retirement benefits expenses of $68.8 million for the year.
PROPERTY, PLANT AND EQUIPMENT
Depreciation represents a significant part of the Companys operating expenses. The estimated useful lives of properties have a direct impact on the amount of depreciation expense charged by the Company and the amount of accumulated depreciation recorded as a component of Net Properties on CPRs December 31, 2004, Consolidated Balance Sheet. Depreciation expense relating to properties amounted to $407.1 million in 2004. At December 31, 2004, accumulated depreciation was $4,482.6 million.
Revisions to the estimated useful lives and net salvage projections for properties constitute a change in accounting estimate and are dealt with prospectively by amending
38 | 2004 Annual Report |
||
depreciation rates. It is anticipated that there will be changes in the weighted average useful life and salvage estimates for each property group as assets are acquired, used and retired. Significant changes in either the useful lives of properties or the salvage assumptions could result in material changes to depreciation expense. For example, if the estimated average life of road locomotives, the Companys largest asset group, increased (or decreased) by 5 %, annual depreciation expense would decrease (or increase) by approximately $3 million.
CPR undertakes regular depreciation studies to establish the estimated useful life of each property group and is currently undergoing a depreciation review of certain track-related properties in 2004 that could result in changes to the estimated useful lives and salvage rates of these assets. Estimated service lives and salvage rates are based on historical retirement records whenever feasible. In cases where there are new asset types or there is insufficient retirement experience, the depreciation lives and salvage parameters are based on engineering or other expert opinions in the field. In 2004, depreciation expense increased $23 million due to rate revisions for track-related assets.
In the first quarter of 2004, the Company adopted the CICA accounting standard for Asset Retirement Obligations, discussed previously in CPRs first-quarter 2004 MD&A. This standard does not allow the Companys previous practice of
recognizing removal costs in excess of salvage proceeds over the life of the asset when the removal of the asset is not a legal obligation. Adopting this standard retroactively resulted in a decrease in depreciation expense of $9.0 million in 2004 and $9.2 million in 2003.
FUTURE INCOME TAXES
In determining its future income taxes, the Company makes 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 $131.5 million was included in income taxes for 2004. At December 31, 2004, future income tax liabilities of $1,386.1 million were recorded as
a long-term liability, comprised largely of temporary differences related to accounting for properties. Future income tax benefits of $70.2 million realizable within one year were recorded as a current asset. The Company believes that its future income tax provisions are adequate.
As discussed in the section Other Income Statement Items, under the sub-heading Income Taxes, future income tax expense and liability were adjusted in 2003 by an increase of $52.7 million to reflect the new Government of Ontario income tax rates, and by a decrease of $59.3 million as a result of the revaluation of several components of the future income tax liability.
LEGAL AND PERSONAL INJURY LIABILITIES
These estimates are determined on a case-by-case basis. They are based on CPRs assessment of the actual damages incurred, current legal advice with respect to the expected outcome of the legal action, and actuarially determined assessments with respect to settlements in other similar cases. CPR employs experienced claims adjusters who investigate and assess the validity of individual claims made against the Company and estimate the damages incurred.
2004 Annual Report | 39 | ||||
A provision for incidents, claims or litigation is recorded, based on the facts and circumstances known at the time. CPR accrues 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, the Company keeps 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, CPR is assessed for an annual WCB contribution. As a result, this amount is not subject to estimation by management.
Railway employees in the U.S. are not covered by a workers compensation program. CPR manages workers compensation claims in the U.S. using a case-by-case comprehensive approach, rather than the statistical-estimate approach used by many Class 1 railways. The case-by-case approach is an appropriate method with the relatively lower case load due to CPRs smaller U.S. employee base.
Provisions for incidents, claims and litigation charged to income are included in Purchased Services and Other on CPRs Consolidated Statement of Income and amounted to $53.6 million in 2004.
Accruals for incidents, claims and litigation, including WCB accruals, totalled $159.9 million, net of insurance recoveries, at December 31, 2004. The total accrual included $111.9 million in Deferred Liabilities and $85.6 million in Accounts Payable and Accrued Liabilities, offset by $30.0 million in Other Assets and Deferred Charges and $7.6 million in Accounts Receivable.
systems, procedures and controls
Management is responsible for establishing appropriate information systems, procedures and controls to ensure that all financial information disclosed externally, including this MD&A, and used internally by management is complete and reliable. These procedures include a review of the financial statements and associated information, including this MD&A, by the Audit, Finance and Risk Management Committee of the Board of Directors. The Companys Chief Executive Officer and Chief Financial Officer have a process to evaluate the applicable systems, procedures and controls and are satisfied they are adequate for ensuring that complete and reliable financial information is produced.
forward-looking information
This MD&A contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (United States) relating but not limited to CPRs 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 predictions, forecasts, projections and other forms of forward-looking information will not be achieved by CPR. In addition, CPR undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.
By its nature, CPRs forward-looking information involves numerous assumptions, inherent risks and uncertainties, including but not limited to the following factors: changes in business strategies; general global economic and business conditions; the availability and price of energy commodities; the effects of competition and pricing pressures; industry overcapacity; shifts in market demands; changes in laws and regulations; potential increases in maintenance and operating costs; uncertainties of litigation; labour disputes; timing of completion of
40 | 2004 Annual Report |
||
capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions on the financial position of pension plans; various events that could disrupt operations, including severe weather conditions; and technological changes.
The performance of the North American and global economies remains uncertain. Grain production and yield in Canada improved in the most recent crop year, after a period of significant drought-induced decline. However, factors over which CPR has no control, such as weather conditions and insect populations, affect crop production and yield in CPRs grain collection areas. Fuel prices also remain uncertain, as they are influenced by many factors, including, without limitation, worldwide oil demand, international politics, labour and political instability in major oil-producing countries and the ability of these countries to comply with agreed-upon production quotas. The Company intends to continue its fuel
hedging and fuel surcharge programs to attempt to offset the effects of high crude oil prices.
The sustainability of recent increases in the value of the Canadian dollar relative to the U.S. dollar is unpredictable, as the value of the Canadian dollar is affected by a number of domestic and international factors, including, without limitation, economic performance, Canadian and international monetary policies and U.S. debt levels.
There is also continuing uncertainty with respect to security issues involving the transportation of goods in populous areas of the U.S. and Canada and the protection of North Americas rail infrastructure, including the movement of goods across the Canada-U.S. border.
New rules governing railway mergers were established by the STB in 2001. The new rules have broadened the scope of competition-enhancing conditions that the STB may impose
in connection with railway mergers and will likely result in increased scrutiny by the STB of proposed railway mergers.
In Canada, draft legislation prepared following the federal governments 2001 review of the Canada Transportation Act did not proceed when Parliament terminated its session in late 2003. The federal government did not reintroduce the draft legislation in 2004. The legislative review did affirm the importance of market forces in achieving a viable, sustainable rail industry.
In addition to the foregoing general factors, there are more specific factors that could cause actual results to differ from those described in the forward-looking statements contained in this MD&A. These more specific factors are identified and discussed in the Future Trends, Commitments and Risks section and elsewhere in this MD&A with the particular forward-looking statement in question.
2004 Annual Report | 41 | ||||
managements responsibility for financial reporting |
The information in this Annual Report is the responsibility of management. The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles and include some amounts based on managements best estimates and careful judgment.
Management maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are
authorized, recorded and reported properly. The internal audit department reviews these accounting controls on an ongoing basis and reports its findings and recommendations to management and the Audit, Finance and Risk Management Committee of the Board of Directors.
The Board of Directors carries out its responsibility for the consolidated financial statements principally through its Audit, Finance and Risk Management Committee, consisting
of five members, all of whom are outside directors. This Committee reviews the consolidated financial statements with management and the independent auditors prior to submission to the Board for approval It 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.
MICHAEL T. WAITES
|
ROBERT J. RITCHIE | |
Executive Vice-President
|
President and Chief Executive Officer | |
and Chief Financial Officer |
||
February 21, 2005 |
42 | 2004 Annual Report |
||
|
auditors report
TO THE SHAREHOLDERS OF
CANADIAN PACIFIC RAILWAY LIMITED
We conducted our audits in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of Canadian Pacific Railway Limited as at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in accordance with generally accepted accounting principles in Canada.
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
PRICEWATERHOUSECOOPERS LLP
|
PRICEWATERHOUSECOOPERS LLP | |
Chartered Accountants
|
Chartered Accountants | |
Calgary, Alberta
|
Calgary, Alberta | |
February 11, 2005
|
February 11, 2005 |
2004 Annual Report | 43 | ||||
statement of consolidated income
2004 | 2003 | 2002 | ||||||||||
(Restated | (Restated | |||||||||||
Year ended December 31 (in millions, except per share data) | see Note 2) | see Note 2) | ||||||||||
Revenues |
||||||||||||
Freight |
$ | 3,728.8 | $ | 3,479.3 | $ | 3,471.9 | ||||||
Other |
174.1 | 181.4 | 193.7 | |||||||||
3,902.9 | 3,660.7 | 3,665.6 | ||||||||||
Operating expenses |
||||||||||||
Compensation and benefits |
1,259.6 | 1,163.9 | 1,143.4 | |||||||||
Fuel |
440.0 | 393.6 | 358.3 | |||||||||
Materials |
178.5 | 179.2 | 168.7 | |||||||||
Equipment rents |
218.5 | 238.5 | 255.4 | |||||||||
Depreciation and amortization |
407.1 | 372.3 | 340.2 | |||||||||
Purchased services and other |
610.7 | 583.6 | 555.6 | |||||||||
3,114.4 | 2,931.1 | 2,821.6 | ||||||||||
Operating income, before the following: |
788.5 | 729.6 | 844.0 | |||||||||
Special charge for environmental remediation (Note 3) |
90.9 | | | |||||||||
Special charge for labour restructuring and asset impairment (Note 4) |
(19.0 | ) | 215.1 | | ||||||||
Loss on transfer of assets to outsourcing firm (Note 12) |
| 28.9 | | |||||||||
Operating income |
716.6 | 485.6 | 844.0 | |||||||||
Other charges (Note 5) |
36.1 | 33.5 | 21.8 | |||||||||
Foreign exchange gain on long-term debt |
(94.4 | ) | (209.5 | ) | (13.4 | ) | ||||||
Interest expense (Note 6) |
218.6 | 218.7 | 242.2 | |||||||||
Income tax expense (Note 7) |
143.3 | 41.6 | 105.9 | |||||||||
Net income |
$ | 413.0 | $ | 401.3 | $ | 487.5 | ||||||
Basic earnings per share (Note 8) |
$ | 2.60 | $ | 2.53 | $ | 3.08 | ||||||
Diluted earnings per share (Note 8) |
$ | 2.60 | $ | 2.52 | $ | 3.06 | ||||||
44 | 2004 Annual Report |
||
consolidated balance sheet
2004 | 2003 | |||||||
(Restated | ||||||||
Year ended December 31 (in millions) | see Note 2) | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and short-term investments |
$ | 353.0 | $ | 134.7 | ||||
Accounts receivable (Note 9) |
434.7 | 395.7 | ||||||
Materials and supplies |
134.1 | 106.4 | ||||||
Future income taxes (Note 7) |
70.2 | 87.4 | ||||||
992.0 | 724.2 | |||||||
Investments (Note 11) |
96.0 | 105.6 | ||||||
Net properties (Note 12) |
8,393.5 | 8,219.6 | ||||||
Other assets and deferred charges (Note 13) |
1,018.3 | 907.3 | ||||||
Total assets |
$ | 10,499.8 | $ | 9,956.7 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 975.3 | $ | 907.0 | ||||
Income and other taxes payable |
16.2 | 13.5 | ||||||
Dividends payable |
21.0 | 20.2 | ||||||
Long-term debt maturing within one year (Note 14) |
275.7 | 13.9 | ||||||
1,288.2 | 954.6 | |||||||
Deferred liabilities (Note 16) |
767.8 | 702.8 | ||||||
Long-term debt (Note 14) |
3,075.3 | 3,348.9 | ||||||
Future income taxes (Note 7) |
1,386.1 | 1,295.8 | ||||||
Shareholders equity (Note 19) |
||||||||
Share capital |
1,120.6 | 1,118.1 | ||||||
Contributed surplus |
300.4 | 294.6 | ||||||
Foreign currency translation adjustments |
77.0 | 88.0 | ||||||
Retained income |
2,484.4 | 2,153.9 | ||||||
3,982.4 | 3,654.6 | |||||||
Total liabilities and shareholders equity |
$ | 10,499.8 | $ | 9,956.7 | ||||
Approved on behalf of the Board:
|
J.E. Newall, Director | R. Phillips, Director |
2004 Annual Report | 45 | ||||
statement of consolidated cash flows
2004 | 2003 | 2002 | ||||||||||
(Restated | (Restated | |||||||||||
Year ended December 31 (in millions) | see Note 2) | see Note 2) | ||||||||||
Operating activities |
||||||||||||
Net income |
$ | 413.0 | $ | 401.3 | $ | 487.5 | ||||||
Add (deduct) items not affecting cash |
||||||||||||
Depreciation and amortization |
407.1 | 372.3 | 340.2 | |||||||||
Future income taxes (Note 7) |
131.5 | 31.8 | 95.0 | |||||||||
Environmental remediation charge (Note 3) |
90.9 | | | |||||||||
Restructuring and impairment charge (Note 4) |
(19.0 | ) | 215.1 | | ||||||||
Foreign exchange gain on long-term debt |
(94.4 | ) | (209.5 | ) | (13.4 | ) | ||||||
Amortization of deferred charges |
24.7 | 20.3 | 19.3 | |||||||||
Other |
| | (0.8 | ) | ||||||||
Restructuring payments |
(88.8 | ) | (107.0 | ) | (119.3 | ) | ||||||
Other operating activities, net (Note 20) |
(112.2 | ) | (365.0 | ) | (45.0 | ) | ||||||
Change in non-cash working capital balances related to
operations (Note 10) |
33.2 | (53.6 | ) | | ||||||||
Cash provided by operating activities |
786.0 | 305.7 | 763.5 | |||||||||
Investing activities |
||||||||||||
Additions to properties (Note 12) |
(673.8 | ) | (686.6 | ) | (558.5 | ) | ||||||
Other investments |
(2.5 | ) | (21.9 | ) | 4.0 | |||||||
Net proceeds from disposal of transportation properties |
10.2 | 8.2 | 3.5 | |||||||||
Cash used in investing activities |
(666.1 | ) | (700.3 | ) | (551.0 | ) | ||||||
Financing activities |
||||||||||||
Dividends paid |
(81.7 | ) | (80.8 | ) | (80.8 | ) | ||||||
Issuance of shares |
2.5 | 2.0 | 2.0 | |||||||||
Issuance of long-term debt |
193.7 | 699.8 | | |||||||||
Repayment of long-term debt |
(16.1 | ) | (376.6 | ) | (405.7 | ) | ||||||
Cash provided by (used in) financing activities |
98.4 | 244.4 | (484.5 | ) | ||||||||
Cash position |
||||||||||||
Increase (decrease) in net cash |
218.3 | (150.2 | ) | (272.0 | ) | |||||||
Net cash at beginning of year |
134.7 | 284.9 | 556.9 | |||||||||
Net cash at end of year |
$ | 353.0 | $ | 134.7 | $ | 284.9 | ||||||
Net cash is defined as: |
||||||||||||
Cash and short-term investments |
$ | 353.0 | $ | 134.7 | $ | 284.9 | ||||||
46 | 2004 Annual Report |
||
statement of consolidated retained income
Year ended December 31 (in millions) | 2004 | 2003 | 2002 | |||||||||
Balance, January 1, as previously reported |
$ | 2,174.8 | $ | 1,856.9 | $ | 1,441.7 | ||||||
Adjustment for change in accounting policy (Note 2) |
(20.9 | ) | (23.5 | ) | (15.0 | ) | ||||||
Balance, January 1, as restated |
$ | 2,153.9 | $ | 1,833.4 | $ | 1,426.7 | ||||||
Net income for the year |
413.0 | 401.3 | 487.5 | |||||||||
Dividends |
(82.5 | ) | (80.8 | ) | (80.8 | ) | ||||||
Balance, December 31 |
$ | 2,484.4 | $ | 2,153.9 | $ | 1,833.4 | ||||||
2004 Annual Report | 47 | ||||
notes to consolidated
financial
statements
December 31, 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
These consolidated financial statements are expressed in Canadian dollars, except where otherwise indicated. The preparation of these financial statements in conformity with Canadian 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. On an ongoing basis, management reviews its estimates, including those related to environmental liabilities, pensions and other benefits, depreciable lives of properties, 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.
The Company consolidates variable interest entities (VIE) when it is the primary beneficiary, as described in the Canadian Institute of Chartered Accountants (CICA) Accounting Guideline 15 Consolidation of Variable Interest Entities (AcG 15). At December 31, 2004, CPR was the primary beneficiary of one VIE, which holds rail cars and meets the criteria for consolidation (see Note 2).
Principal Subsidiaries
Percentage of voting securities | ||||||
Principal subsidiary | Incorporated under the laws of | held directly or indirectly by the Company | ||||
Canadian Pacific Railway Company
|
Canada | 100% | ||||
Soo Line Railroad Company (Soo Line)
|
Minnesota | 100% | ||||
Delaware and Hudson Railway Company, Inc. (D&H)
|
Delaware | 100% | ||||
Revenue Recognition
Cash and Short-term Investments
Foreign Currency Translation
48 | 2004 Annual Report |
||
The accounts of the Companys foreign subsidiaries are translated into Canadian dollars using the year-end exchange rate for assets and liabilities and the average exchange rates in effect for the year for revenues and expenses. Exchange gains and losses arising from translation of foreign subsidiaries accounts are included in Shareholders Equity as foreign currency translation adjustments (see Note 19). 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. 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
Benefits other than pensions, including health care, workers compensation in Canada and life insurance, are actuarially determined and accrued on a basis similar to pension costs.
Materials and Supplies
Properties
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 directly on usage. Usage is based on volumes of traffic.
2004 Annual Report | 49 | ||||
Assets to be disposed of would be presented separately on the Consolidated Balance Sheet. They would be reported at the lower of the carrying amount or fair value, less costs to sell, and would no longer be depreciated. At December 31, 2004, there were no material items to be disposed of.
Equipment under capital lease is included in properties and depreciated over the period of expected use.
Estimated service life used for principal categories of properties is as follows:
Assets | Years | |||
Diesel locomotives
|
28 to 32 | |||
Freight cars
|
23 to 47 | |||
Ties
|
35 to 45 | |||
Rails in first position
|
21 to 30 | |||
in other than first position
|
54 | |||
Computer system development costs
|
5 to 15 | |||
Derivative Financial and Commodity Instruments
The Company from time to time enters into forward exchange contracts to hedge anticipated sales in U.S. dollars, the related accounts receivable as well as 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 from time to time enters into forward exchange 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 has a fuel-hedging program under which CPR acquires future crude oil contracts for a percentage of its diesel fuel purchases to reduce the risk of price volatility affecting future cash flows. In addition, forward foreign exchange contracts are used as part of the fuel-hedging program to manage the foreign exchange variability component of CPRs fuel price risk. The gains or losses on the hedge contracts are applied against the corresponding fuel purchases in the period during which the hedging contracts mature.
50 | 2004 Annual Report |
||
Restructuring Accrual and Environmental Remediation
Income Taxes
Earnings Per Share
Stock-based Compensation
Any consideration paid by employees on exercise of stock options is credited to share capital when the option is exercised and the fair value of the option is removed from contributed surplus and credited to share capital. Compensation expense is also recognized for stock appreciation rights (SAR), deferred share units (DSU) and employee share purchase plans by amortizing the cost over the vesting period, with the liability for SARs and DSUs marked-to-market until exercised.
2. NEW ACCOUNTING POLICIES
Hedging Transactions
In connection with the implementation of AcG 13, the Company considered its hedging relationships at January 1, 2004, and determined that its cross-currency interest rate swap agreements, with a notional amount of CDN$105 million at December 31, 2003, no longer qualified for hedge accounting for GAAP purposes. At January 1, 2004, an unrealized gain of $2.2 million was recorded in Deferred Liabilities on the Consolidated Balance Sheet and is being recognized in income currently and in the future over the term of the originally designated hedged item.
2004 Annual Report | 51 | ||||
Beginning January 1, 2004, derivative instruments that do not qualify as hedges and those not designated as hedges are being carried on the Consolidated Balance Sheet at fair value and will result in gains and losses being recorded on the Statement of Consolidated Income. The earnings impact of these non-hedging derivative instruments was a $1.5-million pre-tax gain, which was reported as Gain on non-hedging derivative instruments in Other Charges (see Note 5).
Asset Retirement Obligations
The result of this restatement was to reduce retained earnings on January 1, 2002, by $15.0 million and future income tax liabilities by $3.9 million, and increase properties by $14.4 million, deferred liabilities by $27.9 million and foreign currency translation adjustments by $5.4 million. The restatement decreased net income by $8.5 million for the year ended December 31, 2002, and increased net income by $2.6 million for the year ended December 31, 2003. The restatement reduced basic and fully diluted earnings per share by $0.05 for the year ended December 31, 2002, and increased basic earnings per share by $0.02 and fully diluted earnings per share by $0.01 for the year ended December 31, 2003.
Variable Interest Entities
Stock-based Compensation
Guarantees
52 | 2004 Annual Report |
||
Impairment of Long-lived Assets
Severance and Termination Benefits
3. SPECIAL CHARGE FOR ENVIRONMENTAL REMEDIATION
4. SPECIAL CHARGE FOR LABOUR RESTRUCTURING AND ASSET IMPAIRMENT
In the fourth quarter of 2004, CPR recorded a reversal of a special charge of $19.0 million (US$16.0 million) related to the $21.8-million accrual for the labour restructuring on the D&H taken in 2003, as noted above. A successful new arrangement with another rail carrier received partial regulatory approval during the fourth quarter 2004. As a result, the labour liability accrued in 2003 was reversed.
2004 Annual Report | 53 | ||||
5. OTHER CHARGES
(in millions) | 2004 | 2003 | 2002 | |||||||||
Amortization of discount on accruals recorded at present value |
$ | 19.1 | $ | 20.3 | $ | 19.3 | ||||||
Other exchange losses (gains) |
11.7 | 0.4 | (1.6 | ) | ||||||||
Loss on sale of accounts receivable (Note 9) |
2.9 | 4.1 | 3.5 | |||||||||
Gain on non-hedging derivative instruments |
(1.5 | ) | | | ||||||||
Other |
3.9 | 8.7 | 0.6 | |||||||||
Total other charges |
$ | 36.1 | $ | 33.5 | $ | 21.8 | ||||||
Included in Other above in 2002 are charges related to the early redemption of CPRs 8.85% Debentures specifically, a call premium of $17.5 million and accelerated amortization of deferred financing charges of $2.5 million, which are offset by $27.0 million of interest income on an income tax settlement related to prior years (see Note 7).
6. INTEREST EXPENSE
(in millions) | 2004 | 2003 | 2002 | |||||||||
Interest expense |
$ | 223.9 | $ | 226.4 | $ | 254.2 | ||||||
Interest income |
(5.3 | ) | (7.7 | ) | (12.0 | ) | ||||||
Total interest expense |
$ | 218.6 | $ | 218.7 | $ | 242.2 | ||||||
Gross cash interest payments |
$ | 219.0 | $ | 228.7 | $ | 245.5 | ||||||
54 | 2004 Annual Report |
||
7. INCOME TAXES
2004 | 2003 | 2002 | ||||||||||
(Restated | (Restated | |||||||||||
(in millions) | see Note 2) | see Note 2) | ||||||||||
Canada (domestic) |
||||||||||||
Current income tax expense |
$ | 10.6 | $ | 9.2 | $ | 9.9 | ||||||
Future income tax expense |
||||||||||||
Origination and reversal of temporary differences |
162.4 | 144.4 | 144.2 | |||||||||
Effect of tax rate increases |
| 51.6 | | |||||||||
Recognition of previously unrecorded tax losses |
(29.1 | ) | (59.1 | ) | (8.8 | ) | ||||||
Effect of hedge of net investment in self-sustaining foreign subsidiaries |
(8.7 | ) | (34.6 | ) | | |||||||
Other |
(14.5 | ) | (58.2 | ) | (80.8 | ) | ||||||
Total future income tax expense |
110.1 | 44.1 | 54.6 | |||||||||
Total income taxes (domestic) |
$ | 120.7 | $ | 53.3 | $ | 64.5 | ||||||
Other (foreign) |
||||||||||||
Current income tax expense |
$ | 1.2 | $ | 0.6 | $ | 1.0 | ||||||
Future income tax expense |
||||||||||||
Origination and reversal of temporary differences |
23.2 | 10.4 | 55.9 | |||||||||
Recognition of previously unrecorded tax losses |
| (22.7 | ) | (15.5 | ) | |||||||
Other |
(1.8 | ) | | | ||||||||
Total future income tax expense |
21.4 | (12.3 | ) | 40.4 | ||||||||
Total income taxes (foreign) |
$ | 22.6 | $ | (11.7 | ) | $ | 41.4 | |||||
Total |
||||||||||||
Current income tax expense |
$ | 11.8 | $ | 9.8 | $ | 10.9 | ||||||
Future income tax expense |
131.5 | 31.8 | 95.0 | |||||||||
Total income taxes (domestic and foreign) |
$ | 143.3 | $ | 41.6 | $ | 105.9 | ||||||
2004 Annual Report | 55 | ||||
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. The temporary differences comprising the future income tax assets and liabilities are as follows:
2004 | 2003 | |||||||
(Restated | ||||||||
(in millions) | see Note 2) | |||||||
Future income tax assets |
||||||||
Restructuring liability |
$ | 101.2 | $ | 158.2 | ||||
Amount related to tax losses carried forward |
164.6 | 286.2 | ||||||
Capital assets tax basis in excess of carrying value |
| 3.8 | ||||||
Liabilities carrying value in excess of tax basis |
38.0 | 67.3 | ||||||
Future environmental remediation costs |
65.0 | 14.4 | ||||||
Other |
30.8 | 39.6 | ||||||
Total future income tax assets |
399.6 | 569.5 | ||||||
Future income tax liabilities |
||||||||
Capital assets carrying value in excess of tax basis |
1,379.7 | 1,465.8 | ||||||
Other long-term assets carrying value in excess of tax basis |
303.7 | 255.4 | ||||||
Other |
32.1 | 56.7 | ||||||
Total future income tax liabilities |
1,715.5 | 1,777.9 | ||||||
Net future income tax liabilities |
1,315.9 | 1,208.4 | ||||||
Net current future income tax assets |
70.2 | 87.4 | ||||||
Net long-term future income tax liabilities |
$ | 1,386.1 | $ | 1,295.8 | ||||
The Companys 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:
2004 | 2003 | 2002 | ||||||||||
(Restated | (Restated | |||||||||||
(in millions) | see Note 2) | see Note 2) | ||||||||||
Expected income tax expense at Canadian statutory tax rates |
$ | 202.4 | $ | 168.0 | $ | 222.7 | ||||||
Increase (decrease) in taxes resulting from: |
||||||||||||
Large corporations tax |
5.9 | 11.1 | 10.0 | |||||||||
Gains not subject to tax |
(31.8 | ) | (50.5 | ) | (19.4 | ) | ||||||
Foreign tax rate differentials |
6.8 | 19.2 | 1.8 | |||||||||
Effect of tax rate increases |
| 51.6 | | |||||||||
Recognition of previously unrecorded tax losses |
(29.1 | ) | (81.8 | ) | (24.3 | ) | ||||||
Other |
(10.9 | ) | (76.0 | ) | (84.9 | ) | ||||||
Income tax expense |
$ | 143.3 | $ | 41.6 | $ | 105.9 | ||||||
56 | 2004 Annual Report |
||
The Company has $333.7 million of capital losses (2003 $488.0 million) available indefinitely for Canadian tax purposes for which no future income tax asset has been recognized.
In determining its future income taxes, the Company makes estimates and assumptions regarding future tax matters. During 2003, the Company revalued various components of its future income tax liability and reduced the estimate of its future income tax liability by $59.3 million. The Company believes that its future income tax provision is adequate.
During 2002, as a result of a favourable decision by the Federal Court of Appeal (the Queen v. Canadian Pacific Limited (legally renamed Canadian Pacific Railway Company in 1996)), the Company reported a recovery of income taxes of approximately $72.0 million.
8. EARNINGS PER SHARE
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 gives effect to the dilutive value of outstanding options. After the spin-off of CPR from Canadian Pacific Limited (CPL) in October 2001, CPL stock options held by CPL employees were exchanged for CPR replacement options. At December 31, 2004, there were 0.4 million replacement options outstanding (2003 0.5 million replacement options; 2002 0.7 million replacement options). Since the spin-off, CPR has issued new stock options to CPR employees. At December 31, 2004, there were 5.6 million new options outstanding (2003 4.5 million; 2002 3.5 million). These new option totals exclude 1.7 million options at December 31, 2004, (2003 1.2 million; 2002 0.6 million) for which there are tandem SARs outstanding, as these are not included in the dilution calculation (see Note 21).
The number of shares used in the earnings per share calculations is reconciled as follows:
(in millions) | 2004 | 2003 | 2002 | |||||||||
Weighted average shares outstanding |
158.7 | 158.5 | 158.5 | |||||||||
Dilutive effect of stock options |
0.4 | 0.6 | 0.8 | |||||||||
Weighted average diluted shares outstanding |
159.1 | 159.1 | 159.3 | |||||||||
2004 | 2003 | 2002 | ||||||||||
(Restated | (Restated | |||||||||||
(in dollars) | see Note 2) | see Note 2) | ||||||||||
Basic earnings per share |
$ | 2.60 | $ | 2.53 | $ | 3.08 | ||||||
Diluted earnings per share |
$ | 2.60 | $ | 2.52 | $ | 3.06 | ||||||
In 2004, options exercisable for 634,639 Common Shares (2003 306,426) were excluded from the computation of diluted earnings per share because their effects were not dilutive.
2004 Annual Report | 57 | ||||
9. SALE OF ACCOUNTS RECEIVABLE
Receivables funded under the securitization program may not include delinquent, defaulted or written-off receivables, nor receivables that do not meet certain obligor-specific criteria, including concentrations in excess of prescribed limits. The Company maintains an adequate allowance for doubtful accounts based on expected collectibility of accounts receivable. Credit losses are based on specific identification of uncollectible accounts and the application of historical percentages by aging category. At December 31, 2004, allowances of $3.6 million (2003 $5.6 million) were recorded in Accounts Receivable. During 2004, $2.8 million (2003 $1.1 million) of accounts receivable were written off to Freight Revenues.
The Company has retained the responsibility for servicing, administering and collecting freight receivables sold. However, even though the Company acts as collector of all of the securitized receivables, it has no claim against the trusts co-ownership interest in the securitized receivables. No servicing asset or liability has been recorded as the benefits CPR receives for servicing the receivables approximate the related costs. Proceeds from collections reinvested in the accounts receivable securitization program were $382.4 million in 2004.
The securitization program is subject to standard reporting and credit-rating requirements for CPR. The reporting includes provision of a monthly portfolio report that the pool of eligible receivables satisfies pre-established criteria that are reviewed and approved by Dominion Bond Rating Services and are standard for agreements of this nature. Failure to comply with these provisions would trigger termination of the program.
58 | 2004 Annual Report |
||
10. CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS
(in millions) | 2004 | 2003 | 2002 | |||||||||
(Use) source of cash: |
||||||||||||
Accounts receivable |
$ | (39.0 | ) | $ | 45.2 | $ | 21.1 | |||||
Materials and supplies |
(35.5 | ) | 2.5 | (6.6 | ) | |||||||
Accounts payable and accrued liabilities |
112.3 | (76.3 | ) | (17.4 | ) | |||||||
Income and other taxes payable |
(4.6 | ) | (25.0 | ) | 2.9 | |||||||
Change in non-cash working capital |
$ | 33.2 | $ | (53.6 | ) | $ | | |||||
11. INVESTMENTS
(in millions) | 2004 | 2003 | ||||||
Rail investments accounted for on an equity basis |
$ | 74.7 | $ | 77.6 | ||||
Other investments accounted for on a cost basis |
21.3 | 28.0 | ||||||
Total investments |
$ | 96.0 | $ | 105.6 | ||||
Equity income from CPRs investment in the Detroit River Tunnel Partnership was $6.2 million in 2004 (2003 $14.6 million). The equity loss from the Companys investment in the CNCP Niagara-Windsor Partnership was $0.9 million in 2004 (2003 $nil). CPRs investment in the Indiana Harbour Belt Railroad Company generated equity income of $2.5 million in 2004 (2003 $2.4 million).
2004 Annual Report | 59 | ||||
12. NET PROPERTIES
Accumulated | Net book | |||||||||||
(in millions) | Cost | depreciation | value | |||||||||
2004 |
||||||||||||
Track and roadway |
$ | 7,667.1 | $ | 2,482.7 | $ | 5,184.4 | ||||||
Buildings |
319.7 | 128.4 | 191.3 | |||||||||
Rolling stock |
3,323.2 | 1,319.8 | 2,003.4 | |||||||||
Other |
1,566.1 | 551.7 | 1,014.4 | |||||||||
Total net properties |
$ | 12,876.1 | $ | 4,482.6 | $ | 8,393.5 | ||||||
2003 (Restated see Note 2) |
||||||||||||
Track and roadway |
$ | 7,325.7 | $ | 2,321.0 | $ | 5,004.7 | ||||||
Buildings |
314.6 | 108.1 | 206.5 | |||||||||
Rolling stock |
3,270.4 | 1,277.5 | 1,992.9 | |||||||||
Other |
1,535.9 | 520.4 | 1,015.5 | |||||||||
Total net properties |
$ | 12,446.6 | $ | 4,227.0 | $ | 8,219.6 | ||||||
Included in the Other category at December 31, 2004, are software development costs of $596.5 million (2003 $582.9 million) and accumulated depreciation of $202.8 million (2003 $164.7 million). Additions during 2004 were $30.3 million (2003 $31.7 million) and depreciation expense was $53.6 million (2003 $55.3 million).
At December 31, 2004, net properties included $396.9 million (2003 $387.9 million) of assets held under capital lease at cost and related accumulated depreciation of $83.5 million (2003 $70.1 million).
During the year, capital assets were acquired under the Companys capital program at an aggregate cost of $686.3 million (2003 $699.0 million), none of which were acquired by means of capital leases (2003 $nil). At April 1, 2003, the Company consolidated $193.5 million in net properties of a VIE for which it is the primary beneficiary (see Note 2). Cash payments related to capital purchases were $673.8 million in 2004 (2003 $686.6 million). At December 31, 2004, $0.2 million (2003 $12.4 million) remained in accounts payable related to the above purchases.
Included in the special charge recorded in the second quarter of 2003 was a $102.7-million write-down to fair market value of the assets of the D&H, including a $21.8-million (US$16.0 million) accrual for the impact of labour restructuring (see Note 4).
In the fourth quarter of 2003, CPR and IBM Canada Ltd. (IBM) entered into a seven-year agreement for IBM to operate and enhance the Companys computing infrastructure. CPR incurred a loss of $28.9 million on the transfer of computer assets to IBM at the start of the arrangement.
13. OTHER ASSETS AND DEFERRED CHARGES
(in millions) | 2004 | 2003 | ||||||
Prepaid pension costs |
$ | 838.3 | $ | 693.9 | ||||
Other |
180.0 | 213.4 | ||||||
Total other assets and deferred charges |
$ | 1,018.3 | $ | 907.3 | ||||
60 | 2004 Annual Report |
||
14. LONG-TERM DEBT
(in millions) | Currency in which payable | 2004 | 2003 | |||||||||
6.250 % Notes due 2011 |
US$ | $ | 480.8 | $ | 518.6 | |||||||
7.125 % Debentures due 2031 |
US$ | 420.7 | 453.8 | |||||||||
9.450 % Debentures due 2021 |
US$ | 300.5 | 324.1 | |||||||||
5.750 % Debentures due 2033 |
US$ | 300.5 | 324.1 | |||||||||
7.20 % Medium Term Notes due 2005 |
CDN$ | 250.0 | 250.0 | |||||||||
4.90 % Medium Term Notes due 2010 |
CDN$ | 350.0 | 350.0 | |||||||||
5.41 % Senior Secured Notes due 2024 |
US$ | 172.6 | | |||||||||
6.91 % Secured Equipment Notes due 2005 2024 |
CDN$ | 235.0 | 235.0 | |||||||||
7.49 % Equipment Trust Certificates due 2005 2021 |
US$ | 144.2 | 155.6 | |||||||||
Secured Equipment Loan due 2005 2007 |
US$ | 153.4 | 168.6 | |||||||||
Secured
Equipment Loan due 2005 2015 |
CDN$ | 156.2 | 158.4 | |||||||||
Obligations under capital leases due 2005 2022 (6.85% 7.65 % ) |
US$ | 335.3 | 365.6 | |||||||||
Obligations under capital leases due 2006 (7.88% 10.93 % ) |
CDN$ | 0.9 | 1.4 | |||||||||
Bank loan payable on demand due 2010 (5.883 %) |
CDN$ | 4.3 | 4.0 | |||||||||
Other |
US$ | 0.4 | 0.6 | |||||||||
3,304.8 | 3,309.8 | |||||||||||
Perpetual 4 % Consolidated Debenture Stock |
US$ | 36.8 | 40.2 | |||||||||
Perpetual 4 % Consolidated Debenture Stock |
GBP£ | 9.4 | 12.8 | |||||||||
3,351.0 | 3,362.8 | |||||||||||
Less: Long-term debt maturing within one year |
275.7 | 13.9 | ||||||||||
$ | 3,075.3 | $ | 3,348.9 | |||||||||
At December 31, 2004, long-term debt denominated in U.S. dollars was CDN$2,345.2 million (2003 CDN$2,351.2 million).
Interest on each of the following instruments is paid semi-annually: 6.250 % Notes and 7.125 % Debentures on April 15 and October 15; 9.450 % Debentures on February 1 and August 1; and 5.750 % Debentures on March 15 and September 15 of each year. All of these Notes and Debentures are unsecured but carry a negative pledge.
The 5.41 % Senior Secured Notes due 2024 are secured by specific locomotive units with a carrying value at December 31, 2004, of $204.9 million. Equal blended semi-annual payments of principal and interest are made on March 3 and September 3 of each year, up to and including September 3, 2023. Final payment of the remaining interest and principal will be made on March 3, 2024.
The 7.20 % Medium Term Notes due 2005 are unsecured but carry a negative pledge. Interest is paid semi-annually in arrears on June 28 and December 28 of each year.
The 4.90 % Medium Term Notes due 2010 are unsecured but carry a negative pledge. Interest is paid semi-annually in arrears on June 15 and December 15 of each year.
2004 Annual Report | 61 | ||||
The 6.91 % Secured Equipment Notes are full recourse obligations of the Company secured by a first charge on specific locomotive units with a carrying value at December 31, 2004, of $212.3 million. The Company made semi-annual payments of interest in the amount of $8.1 million on April 1 and October 1 of each year, up to and including October 1, 2004. Thereafter, the Company will pay on April 1 and October 1 of each year, commencing April 1, 2005, up to and including October 1, 2024, equal blended semi-annual payments of principal and interest of $10.9 million.
The 7.49 % Equipment Trust Certificates are secured by specific locomotive units with a carrying value at December 31, 2004, of $160.8 million. Semi-annual interest payments of US$4.5 million are made on January 15 and July 15 of each year, up to and including January 15, 2005. Thereafter, semi-annual payments will vary in amount and will be interest-only payments or blended principal and interest payments. Final payment of principal is due January 15, 2021.
The Secured Equipment Loan due 2005-2007 is secured by specific units of rolling stock with a carrying value at December 31, 2004, of $195.5 million. The interest rate is floating and is calculated based on a blend of one-month and three-month average LIBOR plus a spread (2004 1.99 %; 2003 1.95 %). The Company makes blended payments of principal and interest quarterly on February 20, May 20, August 20 and November 20 of each year.
The Secured Equipment Loan due 2005-2015 is secured by specific locomotive units with a carrying value at December 31, 2004, of $173.9 million. The interest rate is floating and is calculated based on a six-month average CDOR (calculated based on an average of Bankers Acceptance rates) plus 53 basis points (2004 3.22 %; 2003 3.56 %). The Company makes blended payments of principal and interest semi-annually on February 1 and August 1 of each year.
The bank loan payable on demand matures in 2010 and carries an interest rate of 5.883 %. The amount of the loan at December 31, 2004, was $163.8 million (2003 $154.5 million). The Company has offset against this loan a financial asset of $159.6 million (2003 $150.5 million) with the same financial institution.
The Consolidated Debenture Stock, created 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.
Annual maturities and sinking fund requirements, excluding those pertaining to capital leases, for each of the five years following 2004 are (in millions): 2005 $271.0; 2006 $19.4; 2007 $166.4; 2008 $19.0; 2009 $20.0.
62 | 2004 Annual Report |
||
At December 31, 2004, capital lease obligations included in long-term debt were as follows:
(in millions) | Year | Capital leases | ||||||
Minimum lease payments in: |
2005 | $ | 28.5 | |||||
2006 | 29.7 | |||||||
2007 | 30.9 | |||||||
2008 | 30.9 | |||||||
2009 | 32.3 | |||||||
Thereafter | 445.4 | |||||||
Total minimum lease payments |
597.7 | |||||||
Less: Imputed interest |
261.5 | |||||||
Present value of minimum lease payments |
336.2 | |||||||
Less: Current portion |
4.7 | |||||||
Long-term portion of capital lease obligations |
$ | 331.5 | ||||||
The carrying value of the assets securing the capital lease obligations was $313.4 million at December 31, 2004.
15. FINANCIAL INSTRUMENTS
Foreign Exchange Forward Contracts
In 2004, CPR designated US$70.0 million of short-term investments as a hedge of the Companys firm commitment to purchase 41 locomotives in January 2005, which is accounted for as a fair value hedge. At December 31, 2004, the unrealized loss on this hedge was CDN$1.1 million.
Commodity Contracts
2004 Annual Report | 63 | ||||
Interest Rate Contracts
At December 31, 2004, the Company had outstanding interest rate swap agreements, accounted for as a fair value hedge, for a nominal amount of US$200.0 million (2003 US$150.0 million). The swap agreements converted a portion of the Companys fixed-interest-rate liability into a variable-rate liability for the 6.250 % Notes. At December 31, 2004, the unrealized gain on these interest rate swap agreements was CDN$8.8 million (2003 CDN$8.4 million).
The following table discloses the terms of the swap agreements at December 31, 2004:
Expiration |
October 15, 2011 | |||
Notional amount of principal (in CDN$ millions) |
$ | 240.4 | ||
Fixed receiving rate |
6.250 | % | ||
Variable paying rate (1) |
3.2 | % | ||
In 2004, the Company entered into agreements that have established the borrowing rate on US$200.0 million of long-term debt, expected to be issued in the first half of 2005. Unrealized gains on this arrangement, which is accounted for as a cash flow hedge, were CDN$1.8 million at December 31, 2004. The unrealized gains are expected to be amortized over the life of related debt issuance.
During 2004, the Company recorded losses of CDN$2.0 million on six treasury rate locks totalling US$124.0 million to fix the benchmark rate on the 5.41 % US$145.0-million Senior Secured Notes offering issued in March 2004. These losses are amortized over the 20-year life of the existing financing.
During 2003, the Company recorded a $23.3-million loss paid to settle interest rate locks on CDN$200.0 million of long-term debt. The interest rate locks were accounted for as a cash flow hedge and are being amortized over the seven-year life of the 4.90 % Medium Term Notes. In addition, the Company recorded a $9.4-million gain on settlement of interest rate locks on US$214.0 million of long-term debt. These interest rate locks were accounted for as a cash flow hedge and are being amortized over the 30-year life of the 5.750 % Debentures.
Credit Risk Management
64 | 2004 Annual Report |
||
Interest Rate Exposure and Fair Values
2004 | Fixed interest rate maturing in | |||||||||||||||||||||||
At floating | 2006 | 2010 | Total carrying | |||||||||||||||||||||
(in millions) | interest rates | 2005 | to 2009 | and after | value | Fair value | ||||||||||||||||||
Financial assets |
||||||||||||||||||||||||
Cash and short-term investments |
$ | 353.0 | $ | | $ | | $ | | $ | 353.0 | $ | 353.0 | ||||||||||||
Financial liabilities |
||||||||||||||||||||||||
6.250 % Notes |
| | | 480.8 | 480.8 | 530.0 | ||||||||||||||||||
7.125 % Debentures |
| | | 420.7 | 420.7 | 501.7 | ||||||||||||||||||
9.450 % Debentures |
| | | 300.5 | 300.5 | 419.9 | ||||||||||||||||||
5.750 % Debentures |
| | | 300.5 | 300.5 | 306.5 | ||||||||||||||||||
7.20 % Medium Term Notes due 2005 |
| 250.0 | | | 250.0 | 255.3 | ||||||||||||||||||
4.90 % Medium Term Notes due 2010 |
| | |