CP reports Q2 2015 diluted earnings per share of C$2.36; adjusted EPS of $2.45

Revises full-year 2015 earnings outlook

CALGARY, July 21, 2015 /CNW/ - Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) today announced the highest-ever net income for the second quarter and the lowest operating ratio for the period in the company's history.

Net income rose to a record quarterly high of $390 million, or $2.36 per diluted share, an improvement of 12 percent. Adjusted earnings per share gained 16 percent to $2.45. Revenues were little changed at $1.65 billion.

"CP remains disciplined during this period of economic uncertainty in identifying opportunities to control costs and improve efficiency to offset near-term headwinds," said E. Hunter Harrison, CP's Chief Executive Officer. "CP's achievement on the bottom line came even as a sluggish North American recovery and stubborn global economic softness weighed on commodity prices, forcing producers to reduce output and cut shipments."

SECOND-QUARTER 2015 HIGHLIGHTS

  • Operating income climbed 10 percent to $646 million
  • OR fell to a second-quarter record 60.9 percent, a 420-basis-point improvement
  • Adjusted earnings per share advanced 16 percent to $2.45

"Even in the face of this economic slowdown, CP's commitment to providing the best service at the lowest cost will continue to serve us well moving forward," Harrison said. "The positive CP story is based on a business model that allows for flexibility - we are nimble, efficient, and able to respond to the ever-changing economic climate."

UPDATED FINANCIAL EXPECTATIONS FOR 2015

The company expects revenue growth to be 2-3 percent, operating ratio to be below 62 percent, and 2015 annual adjusted diluted EPS of $10.00 to $10.40.

Key assumptions for the updated full year 2015 financial expectations include:

  • Canadian to U.S. dollar average exchange rate of $1.25
  • An effective income tax rate (excluding discrete items) of 27.5 percent
  • Defined benefit pension expense of approximately $35 million, compared with 2014 pension income of $52 million
  • Capital expenditures of approximately $1.5 billion
  • Average On Highway Diesel ("OHD") price of U.S. $2.80-$2.90
  • Current share repurchase plan expected to be completed by calendar year-end

Further, CP will no longer be exempt from the regular SEC reporting requirements in 2016 because a majority of its board was comprised of U.S. citizens or residents as of June 30, 2015 (the relevant date for determining foreign private issuer status for U.S. SEC reporting purposes in 2016). This follows a determination that the resignation of Stephen Tobias from the board occurred on July 3, 2015.

Accordingly, CP plans to follow the regular SEC reporting requirements effective January 1, 2016, file an annual report on Form 10-K for the year ended December 31, 2015 and file regular periodic reports under both Canadian and U.S. law thereafter.

Non-GAAP Measures
For further information regarding non-GAAP measures, including reconciliations to the nearest GAAP measures, see the attached supplementary schedule Non-GAAP Measures.

Note on forward-looking information
This news release contains certain forward-looking information within the meaning of applicable securities laws relating, but not limited, to our operations, priorities and plans, anticipated financial performance, including our 2015 full-year guidance, business prospects, planned capital expenditures, programs and strategies. This forward-looking information also includes, but is not limited to, statements concerning expectations, beliefs, plans, goals, objectives, assumptions and statements about possible future events, conditions, and results of operations or performance. Forward-looking information may contain statements with words or headings such as "financial expectations", "key assumptions", "anticipate", "believe", "expect", "plan", "will", "outlook", "should" or similar words suggesting future outcomes. To the extent that CP has provided guidance using non-GAAP financial measures, the Company may not be able to provide a reconciliation to a GAAP measure, due to unknown variables and uncertainty related to future results.

Undue reliance should not be placed on forward-looking information as actual results may differ materially from the forward-looking information. Forward-looking information is not a guarantee of future performance. By its nature, CP's forward-looking information involves numerous assumptions, inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking information, including but not limited to the following factors: the key assumptions identified above; changes in business strategies; general North American and global economic, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive.

These and other factors are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. Reference should be made to "Management's Discussion and Analysis" in CP's annual and interim reports, Annual Information Form and Form 40-F. Readers are cautioned not to place undue reliance on forward-looking information. Forward-looking information is based on current expectations, estimates and projections and it is possible that predictions, forecasts, projections, and other forms of forward-looking information will not be achieved by CP. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

About Canadian Pacific
Canadian Pacific (TSX:CP)(NYSE: CP) is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. Visit cpr.ca to see the rail advantages of Canadian Pacific.

INTERIM CONSOLIDATED STATEMENTS OF INCOME 
(in millions of Canadian dollars, except per share data)
(unaudited)

           
        For the three months     For the six months  
        ended June 30     ended June 30  
        2015     2014     2015     2014  
Revenues                          
  Freight $ 1,610   $ 1,642   $ 3,240   $ 3,116  
  Non-freight   41     39     76     74  
Total revenues   1,651     1,681     3,316     3,190  
Operating expenses                          
  Compensation and benefits   308     342     686     687  
  Fuel   185     273     380     544  
  Materials   45     47     97     99  
  Equipment rents   46     40     88     81  
  Depreciation and amortization   145     137     291     278  
  Purchased services and other (Note 4)   276     255     516     491  
Total operating expenses   1,005     1,094     2,058     2,180  
                             
Operating income   646     587     1,258     1,010  
Less:                          
  Other income and charges (Note 5)   (5)     3     68     3  
  Net interest expense    84     69     169     139  
Income before income tax expense   567     515     1,021     868  
                               
Income tax expense (Note 6)   177     144     311     243  
Net income $ 390   $ 371   $ 710   $ 625  
                             
                             
Earnings per share (Note 7)                          
  Basic earnings per share $ 2.38   $ 2.13   $ 4.32   $ 3.57  
  Diluted earnings per share $ 2.36   $ 2.11   $ 4.28   $ 3.54  
                               
Weighted-average number of shares (in millions)
(Note 7)
                         
  Basic   163.7     174.4     164.3     174.9  
  Diluted   165.0     175.9     165.7     176.5  
                               
Dividends declared per share $ 0.3500   $ 0.3500   $ 0.7000   $ 0.7000  
                               
See Notes to Interim Consolidated Financial Statements.  
                           

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of Canadian dollars)
(unaudited)

             
      For the three months     For the six months
    ended June 30   ended June 30
      2015      2014      2015      2014 
                         
Net income $ 390   $ 371   $ 710   $ 625
                         
  Net gain (loss) on foreign currency translation adjustments,                      
     net of hedging activities   7     7     (30)     7
                         
  Change in derivatives designated as cash flow hedges   36     (1)     (33)     (2)
                         
  Change in pension and post-retirement defined benefit                       
     plans (Note 3)   66     31     138     62
                         
  Other comprehensive income before income tax recovery   109     37     75     67
                         
  Income tax (expense) recovery   (35)     (24)     11     (16)
                         
Other comprehensive income (Note 3)   74     13     86     51
                         
Comprehensive income  $ 464   $ 384   $ 796   $ 676
                         
See Notes to Interim Consolidated Financial Statements.                      
                       

INTERIM CONSOLIDATED BALANCE SHEETS AS AT,
(in millions of Canadian dollars)
(unaudited)

      June 30   December 31
      2015    2014 
Assets          
Current assets          
  Cash and cash equivalents  $         185    $ 226 
  Accounts receivable, net   686      702 
  Materials and supplies   174      177 
  Deferred income taxes   69      56 
  Other current assets   99      116 
        1,213      1,277 
               
Investments    134      112 
Properties   15,104      14,438 
Assets held for sale (Note 8)   198      182 
Goodwill and intangible assets    189      176 
Pension asset (Note 13)   469      304 
Other assets (Note 2)   83      117 
Total assets $ 17,390    $ 16,606 
               
Liabilities and shareholders' equity          
Current liabilities          
  Accounts payable and accrued liabilities $ 1,331    $ 1,277 
  Long-term debt maturing within one year (Note 9)   90      134 
        1,421      1,411 
               
Pension and other benefit liabilities (Note 13)   759      755 
Other long-term liabilities   362      432 
Long-term debt (Notes 2 and 9)   6,611      5,625 
Deferred income taxes   2,986      2,773 
Total liabilities   12,139      10,996 
               
Shareholders' equity          
  Share capital (Note 10)   2,151      2,185 
  Additional paid-in capital    40      36 
  Accumulated other comprehensive loss (Note 3)   (2,133)     (2,219)
  Retained earnings   5,193      5,608 
        5,251      5,610 
Total liabilities and shareholders' equity $ 17,390    $ 16,606 
               
Certain of the comparative figures have been reclassified to be consistent with the 2015 presentation (Note 2).
Contingencies (Note 14)
See Notes to Interim Consolidated Financial Statements.
               

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(unaudited)

    For the three months   For the six months
    ended June 30   ended June 30
      2015      2014      2015      2014 
Operating activities                      
  Net income $ 390    $ 371    $ 710    $ 625 
  Reconciliation of net income to cash provided by                      
  operating activities:                      
    Depreciation and amortization   145      137      291      278 
    Deferred income taxes (Note 6)   74      (15)     106      74 
    Pension funding in excess of expense (Note 13)   (20)     (33)     (30)     (65)
  Other operating activities, net     (38)     23      (15)     40 
  Change in non-cash working capital balances related to                       
  operations    34      162      78      (20)
Cash provided by operating activities   585      645      1,140      932 
                           
Investing activities                      
  Additions to properties   (355)     (298)     (618)     (522)
  Proceeds from the sale of west end of Dakota, Minnesota                      
  and Eastern Railroad   -     236          236 
  Proceeds from sale of properties and other assets (Note 4)       11      60      16 
  Change in restricted cash and cash equivalents used to                      
  collateralize letters of credit   -            
  Other (Note 4)   (7)     (1)     13     (1)
Cash used in investing activities   (354)     (45)     (545)     (262)
                           
Financing activities                      
  Dividends paid   (57)     (62)     (115)     (123)
  Issuance of CP common shares   11      22      27      36 
  Purchase of CP common shares (Note 10)   (543)     (447)     (1,072)     (532)
  Net issuance (repayment) of commercial paper (Note 9)   369      -     (224)     -
  Issuance of long-term debt, excl. commercial paper (Note 9)   -     -     810      -
  Repayment of long-term debt, excl. commercial paper (Note 9)   (9)     (11)     (67)     (154)
Cash used in financing activities   (229)     (498)     (641)     (773)
                           
Effect of foreign currency fluctuations on U.S. dollar-                      
denominated cash and cash equivalents   (1)     (12)         (4)
Cash position                      
  Increase (decrease) in cash and cash equivalents       90      (41)     (107)
  Cash and cash equivalents at beginning of period    184      279      226      476 
Cash and cash equivalents at end of period $ 185    $ 369    $ 185    $ 369 
Supplemental disclosures of cash flow information:                      
  Income taxes paid  $ 62    $ 30    $ 59    $ 39 
  Interest paid $ 94    $ 88    $ 161    $ 160 
                       
See Notes to Interim Consolidated Financial Statements.
 

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions of Canadian dollars, except common share amounts)
(unaudited)

                   
    Common
shares
(in
millions)
  Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
  Retained
earnings
Total
shareholders'
equity
Balance at January 1, 2015 166.1    $ 2,185  $ 36  $ (2,219) $ 5,608  $ 5,610 
Net income            710    710 
Other comprehensive income (Note 3)         86      86 
Dividends declared           (115)   (115)
Effect of stock-based compensation expense       10        10 
CP common shares repurchased (Note 10) (5.2)     (70)       (1,010)   (1,080)
Shares issued under stock option plans (Note 12) 0.4      36    (6)       30 
Balance at June 30, 2015 161.3    $ 2,151  $ 40  $ (2,133) $ 5,193  $ 5,251 
                           
                           
    Common
shares
(in
millions)
  Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders'
equity
Balance at January 1, 2014 175.4    $ 2,240  $ 34  $ (1,503) $ 6,326  $ 7,097 
Net income            625    625 
Other comprehensive income (Note 3)         51      51 
Dividends declared           (122)   (122)
Effect of stock-based compensation expense       11        11 
CP common shares repurchased (Note 10) (3.2)     (42)       (523)   (565)
Shares issued under stock option plans (Note 12) 0.6      50    (11)       39 
Balance at June 30, 2014 172.8    $ 2,248  $ 34  $ (1,452) $ 6,306  $ 7,136 
                           
See Notes to Interim Consolidated Financial Statements.          
                     

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(unaudited)

1 Basis of presentation
 
These unaudited interim consolidated financial statements of Canadian Pacific Railway Limited ("CP", or "the Company"), expressed in Canadian dollars, reflect management's estimates and assumptions that are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America ("GAAP"). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2014 annual consolidated financial statements. The accounting policies used are consistent with the accounting policies used in preparing the 2014 annual consolidated financial statements, except for the accounting change discussed in Note 2.
 
CP's operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons.
 
In management's opinion, the unaudited interim consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.
 
2  Accounting changes
 
Implemented in 2015
 
Simplifying the Presentation of Debt Issuance Costs
 
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Simplifying the Presentation of Debt Issuance Costs under FASB Accounting Standards Codification ("ASC") Topic 835. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. Early adoption of this ASU is permitted. The Company adopted the provisions of this ASU during the second quarter of 2015 and retrospectively adjusted the 2014 comparative periods to conform with current presentation.
 
Long-term debt issuance costs of $38 million have been presented as a reduction of the carrying value of "Long-term debt" as at June 30, 2015. The comparative period has been adjusted for the retrospective change in accounting principle with a reclassification of $34 million from "Other assets" against the carrying value of "Long-term debt" as at December 31, 2014. There was no impact on the income statement as a result of the adoption of the provisions of this ASU during the three and six months ended June 30, 2015 and comparative periods.

Future changes
 
Amendments to the Consolidation Analysis
 
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis under FASB ASC Topic 810. The amendments require reporting entities to evaluate whether they should consolidate certain legal entities under the revised consolidation model. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2015. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact on the consolidated financial statements the adoption of this ASU will have.
 
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
 
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) under FASB ASC Topic 820.  The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and certain disclosures related to those investments.  This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, and will be applied retrospectively.  The adoption of this ASU is not expected to have a material impact to the Company's financial statements.
 
3  Changes in accumulated other comprehensive loss ("AOCL") by component 
 

     
  For the three months ended June 30 For the six months ended June 30
(in millions of
Canadian dollars)
Foreign
currency net
of hedging
activities(1)
Derivatives
and other(1)
Pension and
post-
retirement
defined
benefit plans(1)
Total(1) Foreign
currency net
of hedging
activities(1)
Derivatives
and other(1)
Pension and
post-
retirement
defined
benefit plans(1)
Total(1)
Opening balance, 2015 $ 125 $ (103) $ (2,229) $ (2,207) $ 115 $ (52) $ (2,282) $ (2,219)
Other comprehensive income                
(loss) before reclassifications - 26  - 26  10  (26) (11)
                 
Amounts reclassified from                
accumulated other                
comprehensive income - - 48  48  - 96  97 
Net current-period other                
comprehensive income (loss) - 26  48  74  10  (25) 101  86 
Closing balance, 2015 $ 125 $ (77) $ (2,181) $ (2,133) $ 125 $ (77) $ (2,181) $ (2,133)
Opening balance, 2014 $ 122 $ (16) $ (1,571) $ (1,465) $ 105 $ (15) $ (1,593) $ (1,503)
Other comprehensive income                
(loss) before reclassifications (8) (10) - (18) - -
                 
Amounts reclassified from                
accumulated other                
comprehensive income (loss) - 23  31  - (3) 45  42 
Net current-period other                
comprehensive income (loss) (8) (2) 23  13  (3) 45  51 
Closing balance, 2014 $ 114 $ (18) $ (1,548) $ (1,452) $ 114 $ (18) $ (1,548) $ (1,452)
(1) Amounts are presented net of tax.
 

   
  Amounts in Pension and post-retirement defined benefit plans reclassified from Accumulated
  other comprehensive loss
         
    For the three months
ended June 30
  For the six months
ended June 30
  (in millions of Canadian dollars) 2015   2014   2015   2014
                         
  Amortization of prior service costs(a) $ (2)   $ (17)   $ (3)   $ (34)
  Recognition of net actuarial loss(a)   67     48     134     96
                         
  Total before income tax   65     31     131     62
  Income tax recovery   (17)     (8)     (35)     (17)
  Net of income tax $ 48   $ 23   $ 96   $ 45
                         
(a) Impacts Compensation and benefits on the Interim Consolidated Statements of Income.
   

4 Gain on settlement of legal proceedings related to the purchase and sale of a building
 
In 2013, CP provided an interest free loan pursuant to a court order to a corporation owned by a court appointed trustee ("the judicial trustee") to facilitate the acquisition of a building. The building was held in trust during the legal proceedings with regard to CP's entitlement to an exercised purchase option of the building ("purchase option"). As at December 31, 2014, the loan of $20 million and the purchase option with a carrying value of $8 million, were recorded as "Other assets" in the Company's Consolidated Balance Sheets.
 
In the first quarter of 2015, CP reached a settlement with a third party that, following the sale of the building to an arm's length third party, resulted in resolution of legal proceedings. CP received $59 million for the sale of the building which included repayment of the aforementioned loan to the judicial trustee. A gain of $31 million ($27 million after tax) was recorded as a credit within "Operating expenses".
 
5 Other income and charges  

    For the three months   For the six months
    ended June 30   ended June 30
  (in millions of Canadian dollars)   2015     2014     2015     2014
                         
  Foreign exchange loss (gain) on long-term debt $ (10)   $ -   $ 54   $ -
  Other foreign exchange losses (gains)   -     (1)     6     (4)
  Other   5     4     8     7
  Total other income and charges $ (5)   $ 3   $ 68   $ 3

6  Income taxes

    For the three months   For the six months
    ended June 30   ended June 30
  (in millions of Canadian dollars) 2015   2014   2015   2014
  Current income tax expense  $ 103   $ 159   $ 205   $ 169
  Deferred income tax expense (recovery)   74     (15)     106     74
  Income tax expense  $ 177   $ 144   $ 311   $ 243

During the three months ended June 30, 2015, legislation was enacted to increase the Alberta provincial corporate income tax rate. As a result of this change, the Company recorded an income tax expense of $23 million in the quarter related to the revaluation of its deferred income tax balances as at January 1, 2015.

The estimated 2015 annualized effective tax rate for the three and six months ended June 30, 2015, excluding discrete items (Foreign exchange loss on long-term debt included in "Other income and charges" and revaluation of deferred income tax balances as at January 1, 2015 due to the enacted Alberta provincial corporate income tax rate increase), is 27.5% (28.0% for the three and six months ended June 30, 2014).

The effective tax rate for the three and six months ended June 30, 2015, including discrete items, is 31.3% and 30.5%, respectively. 

The higher rates for the three and six months ended June 30, 2015 compared to the estimated 2015 annualized effective tax rate was the result of the income tax expense of $23 million in the second quarter related to the revaluation of deferred income tax balances as at January 1, 2015 due to the enacted Alberta provincial corporate income tax rate increase.

7  Earnings per share

At June 30, 2015, the number of shares outstanding was 161.3 million (June 30, 2014 - 172.8 million).

Basic earnings per share have been calculated using net income for the period divided by the weighted-average number of shares outstanding during the period.

The number of shares used in earnings per share calculations is reconciled as follows:

      For the three months     For the six months  
      ended June 30     ended June 30  
  (in millions)   2015    2014     2015   2014  
                       
  Weighted-average basic shares outstanding   163.7   174.4     164.3   174.9  
  Dilutive effect of stock options   1.3   1.5     1.4   1.6  
  Weighted-average diluted shares outstanding    165.0   175.9     165.7   176.5  

For the three and six months ended June 30, 2015, there were 175,068 options and 87,976 options, respectively, excluded from the computation of diluted earnings per share because their effects were not dilutive (three and six months ended June 30, 2014 - 124,093 and 120,930, respectively).

8  Assets held for sale

During the first quarter of 2015, the Company finalized a sales agreement with Norfolk Southern Corporation ("NS") for the portion of Delaware and Hudson Railway Company, Inc.'s line between Sunbury, Pennsylvania and Schenectady, New York. The assets expected to be sold to NS, for proceeds of approximately U.S. $215 million subject to closing adjustments, have been classified as "Assets held for sale" on the Company's Consolidated Balance Sheets at June 30, 2015 and December 31, 2014. The sale, which received approval by the U.S. Surface Transportation Board on May 15, 2015, is expected to close later in 2015.

9  Debt

Issuance of long-term debt

During the first quarter of 2015, the Company issued U.S. $700 million 2.900% 10-year notes due February 1, 2025 for net proceeds of U.S. $694 million (CDN $873 million).  These notes pay interest semi-annually and are unsecured but carry a negative pledge.  In addition, the Company settled a notional U.S. $700 million of forward starting floating-to-fixed interest rate swap agreements ("forward starting swaps") for a payment of U.S. $50 million (CDN $63 million) cash (see Note 11).  This payment was included in the same line item as the related hedged item on the Consolidated Statements of Cash Flows.  Inclusive of the settlement of the forward starting swap, the annualized effective yield at issuance was 3.61%.

Commercial paper program

During the fourth quarter of 2014, the Company established a commercial paper program which enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1 billion in the form of unsecured promissory notes.  The commercial paper is backed by a U.S. $1 billion committed, revolving credit facility, which matures on September 26, 2016.  As at June 30, 2015, the Company had total commercial paper borrowings of U.S. $500 million (CDN $625 million), presented in "Long-term debt" on the Interim Consolidated Balance Sheets (December 31, 2014 - U.S. $675 million (CDN $783 million)) as the Company has the intent and ability to renew these borrowings on a long term basis.  The weighted-average interest rate on these borrowings was 0.48% (December 31, 2014 - 0.44%).

The Company presents issuances and repayments of commercial paper in the Interim Consolidated Statements of Cash Flows on a net basis, all of which have a maturity of less than 90 days.

Revolving credit facility

Effective June 15, 2015, CP amended its existing revolving credit facility agreement dated September 26, 2014.  The amended credit facility agreement requires the Company not to exceed a maximum debt to earnings before interest, tax, depreciation and amortization ratio.  The original revolving credit facility agreement stipulated that the Company not exceed a maximum debt to capitalization ratio.  As at June 30, 2015, the Company satisfied the thresholds stipulated in both the existing and amended financial covenant.

10  Shareholders' Equity

On March 16, 2015, the Company announced the renewal of its Board of Directors approved normal course issuer bid ("bid" or "NCIB"), commencing March 18, 2015 to March 17, 2016, to purchase up to 9.14 million of its outstanding Common shares for cancellation.

All purchases are made in accordance with the bid at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to retained earnings. The following table provides the activities under the share repurchase program:

    For the three months   For the six months
    ended June 30   ended June 30
      2015      2014      2015      2014 
                         
  Number of common shares repurchased   3,058,900      2,702,232      5,233,688      3,269,982 
  Weighted-average price per share(1) $ 193.10    $ 176.86    $ 206.40    $ 172.90 
  Amount of repurchase (in millions)(1) $ 590    $ 478    $ 1,080    $ 565 
                         
(1) Includes brokerage fees.                      
                         

11  Financial instruments

A.  Fair values of financial instruments

The Company categorizes its financial assets and liabilities measured at fair value in line with the fair value hierarchy established by GAAP that prioritizes, with respect to reliability, the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and give the highest priority to these inputs. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and give lower priority to these inputs.

When possible, the estimated fair value is based on quoted market prices and, if not available, estimates from third party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, foreign exchange ("FX"), and commodity) and volatility, depending on the type of derivative and nature of the underlying risk. The Company applied inputs and data used by willing market participants when valuing derivatives and considers its own credit default swap spread, as well as those of its counterparties, in its determination of fair value.

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of approximately $7,669 million at June 30, 2015 (December 31, 2014 - $6,939 million) and a carrying value of $6,701 million at June 30, 2015 (December 31, 2014 - $5,759 million). The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of interest and principal at estimated interest rates expected to be available to the Company at period end. All derivatives and long-term debt are classified as Level 2.

B.   Financial risk management

Derivative financial instruments

Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel, and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Interim Consolidated Balance Sheets, commitments, or forecasted transactions. At the time a derivative contract is entered into and at least quarterly thereafter, an assessment is made whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.

It is not the Company's intent to use financial derivatives or commodity instruments for trading or speculative purposes.

Foreign exchange management

The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in value of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.

Net investment hedge

The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majority of the Company's U.S. dollar denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on net income by offsetting long-term FX gains and losses on U.S. dollar denominated long-term debt and gains and losses on its net investment. The effective portion recognized in "Other comprehensive income" for the three and six months ended June 30, 2015 was an unrealized FX gain of $58 million and an unrealized FX loss of $298 million, respectively (three and six months ended June 30, 2014 - unrealized FX gain of $119 million and loss of $12 million, respectively).  There was no ineffectiveness during the three and six months ended June 30, 2015 and comparative periods.

Interest rate management

The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a result of changes in market interest rates.  In order to manage funding needs or capital structure goals, the Company enters into debt or capital lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by on-going market conditions.  Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.

To manage interest rate exposure, the Company accesses diverse sources of financing and manages borrowings in line with a targeted range of capital structure, debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles.  In anticipation of future debt issuances, the Company may enter into forward rate agreements, that are designated as cash flow hedges, to substantially lock in all or a portion of the effective future interest expense.  The Company may also enter into swap agreements, designated as fair value hedges, to manage the mix of fixed and floating rate debt.

Forward starting swaps

During the fourth quarter of 2014, the Company entered into forward starting swaps totalling a notional U.S. $1.4 billion to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes.

During the first three months of 2015, the Company settled a notional U.S. $700 million of forward starting swaps related to the U.S. $700 million 2.900% 10-year notes issued in the same period.  Inclusive of the settlement of the forward starting swap, the annualized effective yield at issuance was 3.61%.  The fair value of these derivative instruments was a loss of U.S. $50 million (CDN $63 million) at the time of settlement.  The effective portion of changes in fair value on the forward starting swaps of U.S. $48 million (CDN $60 million), was recorded in "Accumulated other comprehensive loss", and is amortized to "Net interest expense" until the underlying notes, which were hedged, are repaid.  A loss of $1 million and $2 million related to these previously settled derivatives has been reclassified to "Net interest expense" for the three and six months ended June 30, 2015, respectively.  The Company expects during the next 12 months, $6 million of losses will be reclassified to "Net interest expense".  The ineffective portion of U.S. $2 million (CDN $2 million), was recorded immediately in income as "Net interest expense" during the first three months of 2015.

As at June 30, 2015 the unrealized loss of $22 million derived from the remaining forward starting swaps was included in "Accounts payable and accrued liabilities" with the offset reflected in "Other comprehensive income" on the Interim Consolidated Statements of Comprehensive Income.

As at December 31, 2014, the unrealized loss derived from the forward starting swaps was $46 million of which $21 million was included in "Accounts payable and accrued liabilities" and $25 million in "Other long-term liabilities" with the offset reflected in "Other comprehensive income" on the Consolidated Statements of Comprehensive Income.

Interest rate swaps

During the fourth quarter of 2014, the Company entered into floating-to-fixed interest rate swap agreements totalling U.S. $600 million to hedge the variability in cash flow associated with fluctuations in interest rates on commercial paper issuances.  As at June 30, 2015, floating-to-fixed interest rate swap agreements totalling U.S. $350 million are outstanding.  These swaps expire in 2015 and are accounted for as a cash flow hedge.  The effective portion of changes in fair value of the swaps is recorded in "Accumulated other comprehensive loss", net of tax.  Subsequent to the commercial paper issuance, the amounts recorded in "Accumulated other comprehensive loss" are reclassified to "Net interest expense".

A negligible realized gain was reclassified from "Accumulated other comprehensive loss" to "Net interest expense" related to settled derivatives in the three and six months ended June 30, 2015.

At June 30, 2015, a negligible unrealized loss from the outstanding derivatives was recorded in "Accounts payable and accrued liabilities" on the Interim Consolidated Balance Sheets with the offset reflected in "Other comprehensive income" on the Interim Consolidated Statements of Comprehensive Income.

At December 31, 2014, the unrealized gain recorded in "Other current assets" on the Consolidated Balance Sheets was not significant.  The offset was reflected in "Other comprehensive income" on the Consolidated Statements of Comprehensive Income.

12  Stock-based compensation

At June 30, 2015, the Company had several stock-based compensation plans, including stock option plans, various cash settled liability plans and an employee stock savings plan. These plans resulted in a recovery of $5 million and expense of $24 million for the three and six months ended June 30, 2015, respectively (three and six months ended June 30, 2014 an expense of $39 million and $61 million, respectively).

Regular options
In the six months ended June 30, 2015, under CP's stock option plans, the Company issued 315,724 regular options at the weighted-average price of $218.93 per share, based on the closing price on the grant date.

Pursuant to the employee plans, these regular options may be exercised upon vesting, which is between 12 and 48 months after the grant date, and will expire after 10 years.

Under the fair value method, the fair value of the regular options at the grant date was $16 million. The weighted-average fair value assumptions were approximately:

           
    For the six months  
    ended June 30, 2015  
           
  Grant price $ 218.93     
  Expected option life (years)(1)   5.25     
  Risk-free interest rate(2)   1.09  %  
  Expected stock price volatility(3)   25.83  %  
  Expected annual dividends per share (4) $ 1.40     
  Expected forfeiture rate(5)   1.20  %  
  Weighted-average grant date fair value per regular options        
  granted during the period $ 49.76    
   
(1) Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour, or when available, specific expectations regarding future exercise behaviour, were used to estimate the expected life of the option.
(2) Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant.
(3) Based on the historical stock price volatility of the Company's stock over a period commensurate with the expected term of the option.
(4) Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option.
(5) The Company estimated forfeitures based on past experience. This rate is monitored on a periodic basis.
   

Performance share unit ("PSU") plan
In the six months ended June 30, 2015, the Company issued 137,222 PSUs with a grant date fair value of approximately $29 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company's Common Shares. PSUs vest and are settled in cash, or in CP common shares approximately three years after the grant date, contingent upon CP's performance ("performance factor"). The fair value of PSUs is measured, both on the grant date and each subsequent quarter until settlement, using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the performance factor and market conditions stipulated in the grant.

Deferred share unit ("DSU") plan
In the six months ended June 30, 2015, the Company granted 15,652 DSUs with a grant date fair value of approximately $3 million. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated. An expense to income for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.

13  Pensions and other benefits

In the three and six months ended June 30, 2015, the Company made contributions of $20 million and $41 million, respectively (three and six months ended June 30, 2014 - $20 million and $39 million, respectively) to its defined benefit pension plans. The net periodic benefit cost for defined benefit pension plans and other benefits, including the recognition of an $11 million gain related to legacy pension plans, in the three and six months ended June 30, 2015 included the following components:

           
        For the three months
ended June 30
 
      Pensions   Other benefits  
  (in millions of Canadian dollars)   2015   2014   2015   2014  
  Current service cost (benefits                          
      earned by employees in the period)   $ 32    $ 26    $   $  
  Interest cost on benefit obligation     116      119           
  Expected return on fund assets     (212)     (189)          
  Recognized net actuarial loss     66      48           
  Amortization of prior service costs     (2)     (17)          
  Net periodic benefit (recovery) cost   $   $ (13)   $   $ 10   

     
    For the six months
ended June 30
    Pensions     Other benefits
  (in millions of Canadian dollars) 2015   2014   2015   2014
  Current service cost (benefits                      
    earned by employees in the period) $ 64   $ 53   $ 6   $ 7
  Interest cost on benefit obligation   231     238     10     12
  Expected return on fund assets   (413)     (378)     -     -
  Recognized net actuarial loss   132     95     2     1
  Amortization of prior service costs   (3)     (34)     -     -
  Net periodic benefit (recovery) cost $ 11   $ (26)   $ 18   $ 20

14  Contingencies

In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at June 30, 2015 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company's financial position or results of operations.

Legal proceedings related to Lac-Mégantic rail accident

On July 6, 2013, a train carrying crude oil operated by Montreal Maine and Atlantic Railway ("MM&A") derailed and exploded in Lac-Mégantic, Quebec on a section of railway line owned by MM&A.  The previous day CP had interchanged the train to MM&A, and after that interchange MM&A exercised exclusive control over the train.

Following this incident, the Minister of Sustainable Development, Environment, Wildlife and Parks of Quebec issued an order directing certain named parties to recover the contaminants and to clean up and decontaminate the derailment site.  CP was added as a named party on August 14, 2013.  CP is a party to an administrative appeal with respect to this order.  No hearing date on the merits of CP's appeal has been scheduled.

A class action lawsuit has also been filed in the Superior Court of Quebec on behalf of a class of persons and entities residing in, owning or leasing property in, operating a business in or physically present in Lac-Mégantic.  The lawsuit seeks damages caused by the derailment including for wrongful deaths, personal injuries, and property damages.  CP was added as a defendant on August 16, 2013.  On May 8, 2015, the Superior Court of Quebec authorized the institution of the Class Action as against CP and the shipper, Western Petroleum, and its parent, World Fuel Services.

In the wake of the derailment and ensuing litigation, MM&A filed for bankruptcy in Canada and the United States.  In an Adversary Proceeding filed by the MM&A U.S. bankruptcy trustee against CP, Irving Oil and the World Fuel entities, CP has been accused of failing to ensure that World Fuel or Irving Oil properly classified the oil lading and of not refusing to ship the oil in DOT-111 tank cars. In response to CP's motion to withdraw the bankruptcy court reference, the trustee maintained that Canadian law rather than U.S. law controlled, and the court found that if the federal regulations governed the case was not complex enough to warrant withdrawal.  Because the trustee maintained that conduct subject to Canadian regulation prevailed CP moved to dismiss for want of personal jurisdiction.  That motion will be heard on August 18, 2015.

On March 31, 2015, the Canadian Monitor in the MM&A bankruptcy filed a Plan of Arrangement under the Companies' Creditors Arrangement Act ("CCAA") whereby the Monitor sought court approval of the Plan. On July 13, 2015, the Quebec Superior court approved MM&A's Plan of arrangement. Subject to this judgement becoming a final judgement and subject to approval by the U.S. Court, the plan will provide for the distribution of a fund of approximately $430 million amongst those who claimed loss or damage as a result of the derailment and will release those parties which contributed to the fund for any further liability. Moreover, the Plan of arrangement provides for broadly worded third-party releases and channeling injunctions. CP has not contributed to the fund.

In addition, CP has received two damage to cargo notices of claims from the shipper of the oil on the derailed train, Western Petroleum.  Western Petroleum has submitted U.S. and Canadian notices of claims for the same damages and, under the Carmack Amendment (the U.S. damage to cargo statute), seeks to recover for all injuries associated with, and indemnification for all claims arising from, the derailment.  Both jurisdictions permit a shipper to recover the value of damaged lading against any carrier in the delivery chain, subject to limitations in the carrier's tariffs.  CP's tariffs significantly restrict shipper damage claim rights.  Western Fuels is part of the World Fuels group, and those entities recently settled with the trustee.  In connection with that settlement, Western Petroleum assigned all Carmack claims to the trustee.  So far the trustee has not pursued Carmack claims against CP, but both the World Fuels group and the trustee have maintained that Carmack liability extends beyond lading losses to cover all damages incurred by the World Fuels group or Irving Oil associated with the derailment.

At this early stage in the legal proceedings, any potential liability and the quantum of potential loss cannot be determined.  Nevertheless, CP denies liability for MM&A's derailment and will vigorously defend itself in the proceedings described above and in any proceeding that may be commenced in the future.

Environmental liabilities

Environmental remediation accruals, recorded on an undiscounted basis unless a reliably determinable estimate as to an amount and timing of costs can be established, cover site-specific remediation programs.

The accruals for environmental remediation represent CP's best estimate of its probable future obligation and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include CP's best estimate of all probable costs, CP's total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, are not expected to be material to CP's financial position, but may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable.

The expense included in "Purchased services and other" for the three and six months ended June 30, 2015 was $3 million and $6 million, respectively (three and six months ended June 30, 2014 - $nil and $1 million, respectively).  Provisions for environmental remediation costs are recorded in "Other long-term liabilities", except for the current portion which is recorded in "Accounts payable and accrued liabilities".  The total amount provided at June 30, 2015 was $94 million (December 31, 2014 - $91 million).  Payments are expected to be made over 10 years to 2025.


Summary of Rail Data
                               
Second Quarter           Year-to-date
  2015      2014    Change %   Financial (millions, except per share data)     2015      2014    Change %
                               
                      Revenues                      
$ 1,610    $ 1,642    $ (32) (2)     Freight revenues   $ 3,240    $ 3,116    $ 124 
  41      39          Non-freight revenues     76      74     
  1,651      1,681      (30) (2)   Total revenues     3,316      3,190      126 
                                               
                                               
                      Operating expenses                      
  308      342      (34) (10)     Compensation and benefits     686      687      (1)
  185      273      (88) (32)     Fuel     380      544      (164) (30)
  45      47      (2) (4)     Materials     97      99      (2) (2)
  46      40      15      Equipment rents     88      81     
  145      137          Depreciation and amortization     291      278      13 
  276      255      21      Purchased services and other     516      491      25 
  1,005      1,094      (89) (8)   Total operating expenses     2,058      2,180      (122) (6)
                                               
                                               
  646      587      59  10    Operating income     1,258      1,010      248  25 
                                               
                      Less:                      
                                               
  (5)         (8) (267)     Other income and charges     68          65  2,167 
  84      69      15  22      Net interest expense     169      139      30  22 
                                               
                                               
  567      515      52  10    Income before income tax expense     1,021      868      153  18 
                                               
  177      144      33  23      Income tax expense     311      243      68  28 
                                               
                                               
$ 390    $ 371    $ 19    Net income   $ 710    $ 625    $ 85  14 
                                               
                                               
  60.9      65.1      (4.2) (420) bps   Operating ratio (%)     62.1      68.3      (6.2) (620) bps
                                               
                                               
$ 2.38    $ 2.13    $ 0.25  12      Basic earnings per share   $ 4.32    $ 3.57    $ 0.75  21 
                                               
                                               
$ 2.36    $ 2.11    $ 0.25  12      Diluted earnings per share   $ 4.28    $ 3.54    $ 0.74  21 
                                               
                      Shares Outstanding                      
                                               
                        Weighted average number of shares                      
  163.7      174.4      (10.7) (6)     outstanding (millions)     164.3      174.9      (10.6) (6)
                                               
                        Weighted average number of diluted shares                      
  165.0      175.9      (10.9) (6)     outstanding (millions)     165.7      176.5      (10.8) (6)
                                               
                      Foreign Exchange                      
                                               
                        Average foreign exchange rate                      
  0.81      0.91      (0.10) (11)     (US$/Canadian$)     0.81      0.91      (0.10) (11)
                                               
                        Average foreign exchange rate                      
  1.23      1.10      0.13  12      (Canadian$/US$)     1.23      1.10      0.13  12 
 
 
 
Summary of Rail Data
                                                 
  Second Quarter               Year-to-date
  2015    2014   Change   %           2015    2014   Change   %
                                                 
                      Commodity Data                      
                                                 
                        Freight Revenues (millions)                      
$ 255    $ 252   $         - Canadian Grain   $ 511    $ 473   $ 38   
  106      115     (9)   (8)       - U.S. Grain     243      221     22    10 
  167      165             - Coal     327      313     14   
  106      101             - Potash     199      181     18    10 
  67      64             - Fertilizers and sulphur     138      118     20    17 
  61      52       17        - Forest products     118      100     18    18 
  171      155     16    10        - Chemicals and plastics     349      302     47    16 
  81      114     (33)   (29)       - Crude     179      218     (39)   (18)
  160      170     (10)   (6)       - Metals, minerals, and consumer products     319      331     (12)   (4)
  91      104     (13)   (13)       - Automotive     173      192     (19)   (10)
  192      200     (8)   (4)       - Domestic intermodal     386      377      
  153      150             - International intermodal     298      290      
                                                 
$ 1,610    $ 1,642   $ (32)   (2)     Total Freight Revenues   $ 3,240    $ 3,116   $ 124   
                                                 
                        Millions of Revenue Ton-Miles (RTM)                      
  6,622      7,074     (452)   (6)       - Canadian Grain     13,027      12,920      107   
  2,184      2,679     (495)   (18)       - U.S. Grain     5,128      5,218      (90)   (2)
  5,894      5,941     (47)   (1)       - Coal     11,598      11,382     216   
  4,514      4,114     400    10        - Potash     8,189      7,407     782    11 
  935      1,130     (195)   (17)       - Fertilizers and sulphur     2,050      2,204     (154)   (7)
  1,061      1,003     58          - Forest products     2,080      1,923     157   
  3,423      3,326     97          - Chemicals and plastics     6,993      6,532     461   
  2,796      3,816     (1,020)   (27)       - Crude     5,828      7,174     (1,346)   (19)
  2,172      2,698     (526)   (19)       - Metals, minerals, and consumer products      4,455      5,411     (956)   (18)
  496      597     (101)   (17)       - Automotive     915      1,111     (196)   (18)
  3,063      3,003     60          - Domestic intermodal     6,087      5,637     450   
  3,121      3,048     73          - International intermodal     5,994      5,885     109   
                                                 
  36,281      38,429     (2,148)   (6)     Total RTMs     72,344      72,804     (460)   (1)
                                                 
                        Freight Revenue per RTM (cents)                      
  3.86      3.56     0.30          - Canadian Grain     3.92      3.66     0.26   
  4.85      4.31     0.54    13        - U.S. Grain     4.74      4.24     0.50    12 
  2.83      2.79     0.04          - Coal     2.82      2.75     0.07   
  2.34      2.46     (0.12)   (5)       - Potash     2.43      2.44     (0.01)  
  7.12      5.61     1.51    27        - Fertilizers and sulphur     6.73      5.35     1.38    26 
  5.73      5.20     0.53    10        - Forest products     5.69      5.19     0.50    10 
  4.99      4.67     0.32          - Chemicals and plastics     4.99      4.63     0.36   
  2.92      2.99     (0.07)   (2)       - Crude     3.09      3.04     0.05   
  7.37      6.27     1.10    18        - Metals, minerals, and consumer products      7.15      6.11     1.04    17 
  18.37      17.37     1.00          - Automotive     18.89      17.31     1.58   
  6.26      6.66     (0.40)   (6)       - Domestic intermodal     6.35      6.69     (0.34)   (5)
  4.90      4.94     (0.04)   (1)       - International intermodal     4.97      4.93     0.04   
                                                 
  4.44      4.27     0.17        Total Freight Revenue per RTM     4.48      4.28     0.20   
                                                 
 
 
 
Summary of Rail Data
                                                 
  Second Quarter           Year-to-date
2015    2014   Change   %           2015    2014   Change   %
                                                 
                        Carloads (thousands)                      
  72      78     (6)   (8)       - Canadian Grain     133      140     (7)   (5)
  33      44     (11)   (25)       - U.S. Grain     73      83     (10)   (12)
  84      82             - Coal     166      160      
  37      33       12        - Potash     68      61       11 
  15      16     (1)   (6)       - Fertilizers and sulphur     32      31      
  15      15             - Forest products     30      29      
  51      49             - Chemicals and plastics     102      94      
  19      25     (6)   (24)       - Crude     41      49     (8)   (16)
  54      60     (6)   (10)       - Metals, minerals, and consumer products     109      116     (7)   (6)
  36      37     (1)   (3)       - Automotive     66      67     (1)   (1)
  106      110     (4)   (4)       - Domestic intermodal     209      207      
  146      140             - International intermodal     281      270     11   
                                                 
  668      689     (21)   (3)     Total Carloads     1,310      1,307      
                                                 
                        Freight Revenue per Carload                      
$ 3,546    $ 3,219   $ 327    10        - Canadian Grain   $ 3,852    $ 3,374   $ 478    14 
  3,187      2,645     542    20        - U.S. Grain     3,308      2,675     633    24 
  1,996      2,027     (31)   (2)       - Coal     1,968      1,963      
  2,854      3,046     (192)   (6)       - Potash     2,933      2,983     (50)   (2)
  4,508      3,925     583    15        - Fertilizers and sulphur     4,381      3,770     611    16 
  3,902      3,502     400    11        - Forest products     3,880      3,452     428    12 
  3,354      3,185     169          - Chemicals and plastics     3,427      3,213     214   
  4,294      4,524     (230)   (5)       - Crude     4,404      4,452     (48)   (1)
  2,946      2,810     136          - Metals, minerals, and consumer products     2,911      2,839     72   
  2,541      2,798     (257)   (9)       - Automotive     2,610      2,850     (240)   (8)
  1,812      1,822     (10)   (1)       - Domestic intermodal     1,852      1,825     27   
  1,047      1,074     (27)   (3)       - International intermodal     1,058      1,074     (16)   (1)
                                                 
$ 2,409    $ 2,383   $ 26          Total Freight Revenue per Carload   $ 2,473    $ 2,384   $ 89   
 
 
 
Summary of Rail Data
                                                 
                                                 
Second Quarter           Year-to-date
2015    2014 (1)   Change   %         2015   2014 (1)   Change   %
                                                 
                        Operations Performance                      
                                                 
  66,435      70,756     (4,321)   (6)     Freight gross ton-miles (millions)     131,620      132,853     (1,233)   (1)
  36,281      38,429     (2,148)   (6)     Revenue ton-miles (millions)     72,344      72,804     (460)   (1)
  8,649      9,297     (648)   (7)     Train miles (thousands)     17,133      18,066     (933)   (5)
  8,261      8,149     112        Average train weight - excluding local traffic (tons)     8,227      7,895     332   
  6,991      6,790     201        Average train length - excluding local traffic (feet)     6,884      6,541     343   
  6.7      8.6     (1.9)   (22)     Average terminal dwell (hours)     8.6      9.4     (0.8)   (9)
  21.7      18.0     3.7    21      Average network train speed (mph)     20.5      17.1     3.4    20 
  0.996      1.004     (0.008)    (1)      Fuel efficiency(2)     1.023      1.055     (0.032)   (3)
  65.5      70.3     (4.8)   (7)     U.S. gallons of locomotive fuel consumed (millions)(3)     133.4      138.7     (5.3)   (4)
  2.30      3.53     (1.23)   (35)     Average fuel price (U.S. dollars per U.S. gallon)     2.31      3.58     (1.27)   (35)
                                               
  14,150      14,787     (637)   (4)     Total employees (average)(4)     14,119      14,516     (397)   (3)
  14,069      14,736     (667)   (5)     Total employees (end of period)(4)     14,069      14,736     (667)   (5)
  14,128      14,960     (832)   (6)     Workforce (end of period)(5)     14,128      14,960     (832)   (6)
                                               
                         Safety                      
                                               
  1.44     1.74     (0.30)   (17)     FRA personal injuries per 200,000 employee-hours     1.74      1.67     0.07   
  1.04     1.15     (0.11)   (10)     FRA train accidents per million train-miles     1.25      1.14     0.11    10 

(1)    Certain prior period figures have been revised to conform with current presentation or have been updated to reflect new information.
(2)    Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs - freight and yard.
(3)    Includes gallons of fuel consumed from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities.
(4)    An employee is defined as an individual, including trainees, who has worked more than 40 hours in a standard biweekly pay period.  This excludes part time
employees, contractors, and consultants.
(5)    Workforce is defined as total employees plus part time employees, contractors, and consultants.
   

Non-GAAP Measures - Unaudited

The Company presents non-GAAP measures and cash flow information to provide a basis for evaluating underlying earnings and liquidity trends in its business that can be compared with the results of operations in prior periods.  In addition, these non-GAAP measures facilitate a multi-period assessment of long-term profitability allowing management and other external users of the Company's consolidated financial statements to compare profitability on a long-term basis with that of the Company's peers.

These non-GAAP measures exclude foreign currency translation effects on long-term debt, which can be volatile and short term, and other significant items that are not among the Company's normal ongoing revenues and operating expenses.  They have no standardized meaning and are not defined by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.

Adjusted Performance Measures
Income, excluding significant items, also referred to as Adjusted earnings, provides management with a measure of income on an ongoing basis.

Diluted earnings per share ("EPS"), excluding significant items, also referred to as Adjusted EPS, provides the same information on a per share basis.

Significant items
Significant items are material transactions that may include, but are not limited to, restructuring and asset impairment charges, gains and losses on non-routine sales of assets and other items that are neither normal course business activities or among our normal ongoing revenues and operating expenses.

Items that impacted reported second-quarter 2015 earnings include:

  • a $10 million gain ($9 million after-tax) due to foreign exchange translation on U.S dollar-denominated debt which favourably impacted Diluted EPS by 5 cents
  • an income tax expense of $23 million as a result of the change in the Alberta provincial corporate income tax rate which unfavourably impacted Diluted EPS by 14 cents

There were no significant items in the second quarter of 2014.

Items that impacted reported six months ended 2015 and 2014 earnings, in addition to those discussed above, include:

2015:

  • in the first quarter, a $64 million charge ($55 million after-tax) due to foreign exchange translation on U.S dollar-denominated debt which unfavourably impacted Diluted EPS by 34 cents

2014:

  • in the first quarter, a $4 million recovery ($3 million after-tax) for experience gains from the Company's 2012 labour restructuring initiative which favourably impacted Diluted EPS by 2 cents

Reconciliation of Non-GAAP measures to GAAP measures
The following tables reconcile Adjusted earnings and Adjusted EPS to Net income and Diluted earnings per share, respectively.


    For the three months   For the six months
Income   ended June 30   ended June 30
(in millions of Canadian dollars)   2015      2014     2015      2014
Income, excluding significant items $ 404    $ 371   $ 779    $ 622
Add significant items, net of tax:                      
  Labour restructuring               3
  Impact of foreign exchange translation on U.S. dollar-denominated debt           (46)     -
  Income tax rate change   (23)         (23)     -
Net income as reported $ 390    $ 371    $ 710    $ 625
                         
    For the three months   For the six months
Diluted earnings per share   ended June 30   ended June 30
    2015      2014      2015      2014 
Diluted earnings per share, excluding significant items $ 2.45    $ 2.11    $ 4.70    $ 3.52 
Add significant items:                      
  Labour restructuring   -     -     -     0.02 
  Impact of foreign exchange translation on U.S. dollar-denominated debt   0.05      -     (0.28)     -
  Income tax rate change   (0.14)     -     (0.14)     -
Diluted earnings per share as reported $ 2.36    $ 2.11    $ 4.28    $ 3.54 

Free Cash
Free cash is a non-GAAP measure that management considers to be an indicator of liquidity.  The measure is used by management to provide information with respect to the relationship between cash provided by operating activities and investment decisions and provides a comparable measure for period to period changes.  Free cash is calculated as cash provided by operating activities, less cash used in investing activities, excluding changes in restricted cash and cash equivalents  and investment balances used to collateralize letters of credit, and dividends paid, adjusted for changes in cash and cash equivalents balances resulting from foreign exchange ("FX") fluctuations.

Reconciliation of Free Cash to GAAP cash position(1) For the three months   For the six months
  ended June 30   ended June 30
(in millions of Canadian dollars)   2015      2014      2015      2014 
Cash provided by operating activities $ 585    $ 645    $ 1,140    $ 932 
Cash used in investing activities   (354)     (45)     (545)     (262)
Change in restricted cash and cash equivalents used to                      
collateralize letters of credit       (7)         (9)
Dividends paid   (57)     (62)     (115)     (123)
Effect of foreign exchange fluctuations on U.S. dollar-denominated                      
cash and cash equivalents   (1)     (12)         (4)
Free cash(1)   173      519      485      534 
Cash used in financing activities, excluding dividend payment   (172)     (436)     (526)     (650)
Change in restricted cash and cash equivalents used to                      
collateralize letters of credit              
Decrease in cash and cash equivalents, as                      
shown on the Interim Consolidated Statements of Cash Flows       90      (41)     (107)
Cash and cash equivalents at beginning of period   184      279      226      476 
Cash and cash equivalents at end of period $ 185    $ 369    $ 185    $ 369 
(1) Free cash and cash equivalents provided by financing activities, excluding dividend payment have no standardized
meaning prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other
companies.

 

Foreign Exchange Adjusted Variance
Foreign exchange adjusted variance ("FX adj. variance") allows certain financial results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance.  Financial results at a constant currency are obtained by translating the previous period results in U.S. dollars at the foreign exchange rate of the comparable period of the current year.  Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.

  For the three months ended June 30   For the six months ended June 30
(in millions of         Variance Adjusted FX Adj.           Variance Adjusted FX Adj.
Canadian dollars)   2015    2014  due to FX 2014(1) %(1)     2015    2014  due to FX 2014(1) %(1)
Freight revenues $ 1,610 $ 1,642 $ 104 $ 1,746 (8%)   $ 3,240 $ 3,116 $ 206 $ 3,322 (2%)
Non-freight revenues   41   39   -   39 5%     76   74   -   74 3%
Total revenues   1,651   1,681   104   1,785 (8%)     3,316   3,190   206   3,396 (2%)
Total operating                                      
expenses   1,005   1,094   58   1,152 (13%)     2,058   2,180   124   2,304 (11%)
Operating income $ 646 $ 587 $ 46 $ 633 2%   $ 1,258 $ 1,010 $ 82 $ 1,092 15%
(1) These earnings measures have no standardized meaning prescribed by GAAP and, therefore, are unlikely
to be comparable to similar measures presented by other companies.
   

 

 

 

SOURCE Canadian Pacific

For further information:

Contacts:
Media
Martin Cej
Tel: 403-319-7298
martin_cej@cpr.ca
24/7 Media Pager: 855-242-3674

Investment Community
Nadeem Velani
Tel: 403-319-3591
email: investor@cpr.ca


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890