CP reports record low operating ratio for fourth quarter and full year amid challenging conditions

CALGARY, Jan. 18, 2017 /CNW/ - Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) today announced its lowest-ever fourth-quarter operating ratio ("OR") of 56.2 percent and a record-low full-year OR of 58.6 percent as focussed cost control helped offset softer than expected volumes.

Fourth-quarter revenues decreased 3 percent to C$1.64 billion from $1.69 billion, while diluted earnings per share ("EPS") increased 25 percent to $2.61 from $2.08 and adjusted diluted EPS rose 12 percent to $3.04 from $2.72.

"While the fourth quarter was weighed down by challenging operating conditions, including unexpected and extreme weather on the West Coast that compounded the impact of an already delayed grain harvest, it once again highlighted our resiliency and ability to operate efficiently under tough conditions," said E. Hunter Harrison, CP's Chief Executive Officer. "I am particularly proud of our people who worked tirelessly over the last three months of 2016 to deliver for our customers in a safe and efficient manner."

FULL-YEAR 2016 RESULTS

  • Revenues decreased 7 percent to $6.23 billion from $6.71 billion
  • OR fell to a record 58.6 percent, improving on the 2015 reported OR by 140 basis-points and the adjusted OR by 240 basis-points
  • Reported diluted EPS increased 27 percent to $10.63 from $8.40; adjusted diluted EPS rose 2 percent to $10.29 from $10.10
  • Free cash flow of $1 billion

"2016 featured stiff economic headwinds and a challenging volume environment, headlined by a precipitous decline in crude oil shipments and weakness in grain movements, particularly in the first half," Harrison said. "These are not excuses, but opportunities to showcase our operating ability and leadership. As we have shown over the last four years, the precision railroading model works in all economic conditions."

In 2017, CP will continue to find opportunities to enhance the productivity, fluidity and safety of its operations.

"With continued margin improvement and an anticipated increase in volumes, led by a stronger bulk outlook, we expect adjusted diluted EPS growth to be in the high single-digits," said Keith Creel, CP's President and Chief Operating Officer. "With our strong leadership team, plus the commitment and discipline shown by the thousands of men and women every day at CP, the franchise is well positioned for 2017 and beyond."

CP's expectations for adjusted diluted EPS growth in 2017 are based on adjusted diluted EPS of $10.29 in 2016. CP assumes that in 2017 the Canadian-to-U.S. dollar exchange rate will be in the range of $1.30 to $1.35, the average price of West Texas Intermediate (WTI) will be approximately US$45 to $55 per barrel. To further enhance safety and fluidity of the network, CP also plans to invest approximately $1.25 billion in capital programs in 2017, an increase of 6 percent over the $1.18 billion spent in 2016.

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.

Conference Call Access

Toronto participants dial in number: 1-647-427-7450

Operator assisted toll free dial in number: 1-888-231-8191

Callers should dial in 10 minutes prior to the call.

Webcast

We encourage you to access the webcast and presentation material in the Investors section of CP's website at http://www.cpr.ca/en/investors/earnings-releases

A replay of the fourth-quarter conference call will be available by phone through to February 15, 2017 at 416-849-0833 or toll free 1-855-859-2056, password 38021965.

Access to the webcast and audio file of the presentation will be made available at: http://www.cpr.ca/en/investors/earnings-releases

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 2017 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: 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 "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Information" in CP's annual and interim reports on Form 10-K and 10-Q. 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 Railway Limited (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 www.cpr.ca to see the rail advantages of CP.

CANADIAN PACIFIC RAILWAY LIMITED

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

For the three months ended December 31

For the year ended December 31

(in millions of Canadian dollars, except share and per share data)

2016

2015

2016

2015

Revenues

Freight

$

1,596

$

1,645

$

6,060

$

6,552

Non-freight

41

42

172

160

Total revenues

1,637

1,687

6,232

6,712

Operating expenses

Compensation and benefits

282

333

1,189

1,371

Fuel

173

166

567

708

Materials

47

40

180

184

Equipment rents

41

44

173

174

Depreciation and amortization

162

155

640

595

Purchased services and other (Note 3)

215

272

905

1,060

Gain on sale of Delaware & Hudson South

(68)

Total operating expenses

920

1,010

3,654

4,024

Operating income

717

677

2,578

2,688

Less:

Other income and charges (Note 4)

74

99

(45)

335

Net interest expense

116

122

471

394

Income before income tax expense

527

456

2,152

1,959

Income tax expense

143

137

553

607

Net income

$

384

$

319

$

1,599

$

1,352

Earnings per share

Basic earnings per share

$

2.63

$

2.09

$

10.69

$

8.47

Diluted earnings per share

$

2.61

$

2.08

$

10.63

$

8.40

Weighted-average number of shares (millions)

Basic

146.3

153.0

149.6

159.7

Diluted

147.3

154.0

150.5

161.0

Dividends declared per share

$

0.5000

$

0.3500

$

1.8500

$

1.4000

See notes to interim consolidated financial information.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

For the three months ended December 31

For the year ended December 31

(in millions of Canadian dollars)

2016

2015

2016

2015

Net income

$

384

$

319

$

1,599

$

1,352

Net (loss) gain in foreign currency translation adjustments, net of hedging activities

(15)

(23)

18

(86)

Change in derivatives designated as cash flow hedges

73

9

(2)

(69)

Change in pension and post-retirement defined benefit plans

(571)

856

(434)

1,059

Other comprehensive (loss) income before income taxes

(513)

842

(418)

904

Income tax recovery (expense) on above items

147

(206)

96

(162)

Other comprehensive (loss) income

(366)

636

(322)

742

Comprehensive income

$

18

$

955

$

1,277

$

2,094

See notes to interim consolidated financial information.

INTERIM CONSOLIDATED BALANCE SHEETS AS AT

(unaudited)

(in millions of Canadian dollars)

December 31 2016

December 31 2015

Assets

Current assets

Cash and cash equivalents

$

164

$

650

Accounts receivable, net

591

645

Materials and supplies

184

188

Other current assets

70

54

1,009

1,537

Investments

194

152

Properties

16,689

16,273

Goodwill and intangible assets

202

211

Pension asset

1,070

1,401

Other assets

57

63

Total assets

$

19,221

$

19,637

Liabilities and shareholders' equity

Current liabilities

Accounts payable and accrued liabilities

$

1,322

$

1,417

Long-term debt maturing within one year

25

30

1,347

1,447

Pension and other benefit liabilities

734

758

Other long-term liabilities

284

318

Long-term debt

8,659

8,927

Deferred income taxes

3,571

3,391

Total liabilities

14,595

14,841

Shareholders' equity

Share capital

2,002

2,058

Additional paid-in capital

52

43

Accumulated other comprehensive loss

(1,799)

(1,477)

Retained earnings

4,371

4,172

4,626

4,796

Total liabilities and shareholders' equity

$

19,221

$

19,637

See notes to interim consolidated financial information.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

For the three months ended December 31

For the year ended December 31

(in millions of Canadian dollars)

2016

2015

2016

2015

Operating activities

Net income

$

384

$

319

$

1,599

$

1,352

Reconciliation of net income to cash provided by operating activities:

Depreciation and amortization

162

155

640

595

Deferred income taxes

87

128

320

234

Pension funding in excess of expense

(33)

(9)

(138)

(49)

Foreign exchange loss (gain) on long-term debt (Note 4)

74

115

(79)

297

Other operating activities, net

(68)

(123)

(198)

(245)

Change in non-cash working capital balances related to operations

162

38

(55)

275

Cash provided by operating activities

768

623

2,089

2,459

Investing activities

Additions to properties

(280)

(455)

(1,182)

(1,522)

Proceeds from the sale of Delaware & Hudson South

281

Proceeds from sale of properties and other assets

29

41

116

114

Other

(1)

(1)

(3)

4

Cash used in investing activities

(252)

(415)

(1,069)

(1,123)

Financing activities

Dividends paid

(73)

(54)

(255)

(226)

Issuance of CP common shares

7

11

21

43

Purchase of CP common shares

(10)

(192)

(1,210)

(2,787)

Issuance of long-term debt, excluding commercial paper

3,411

Repayment of long-term debt, excluding commercial paper

(8)

(6)

(38)

(505)

Net repayment of commercial paper

(374)

(8)

(893)

Other

(3)

Cash used in financing activities

(458)

(241)

(1,493)

(957)

Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents

3

22

(13)

45

Cash position

Increase (decrease) in cash and cash equivalents

61

(11)

(486)

424

Cash and cash equivalents at beginning of period

103

661

650

226

Cash and cash equivalents at end of period

$

164

$

650

$

164

$

650

Supplemental disclosures of cash flow information:

Income taxes paid

$

48

$

69

$

322

$

176

Interest paid

$

93

$

94

$

488

$

336

See notes to interim consolidated financial information.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)

(in millions of Canadian dollars, except common share amounts)

Common shares (in millions)

Share capital

Additional paid-in capital

Accumulated other comprehensive loss

Retained earnings

Total shareholders' equity

Balance at January 1, 2016

153.0

$

2,058

$

43

$

(1,477)

$

4,172

$

4,796

Net income

1,599

1,599

Other comprehensive loss

(322)

(322)

Dividends declared ($1.8500 per share)

(274)

(274)

Effect of stock-based compensation expense

14

14

CP common shares repurchased

(6.9)

(84)

(1,126)

(1,210)

Shares issued under stock option plan

0.2

28

(5)

23

Balance at December 31, 2016

146.3

$

2,002

$

52

$

(1,799)

$

4,371

$

4,626

Balance at January 1, 2015

166.1

$

2,185

$

36

$

(2,219)

$

5,608

$

5,610

Net income

1,352

1,352

Other comprehensive income

742

742

Dividends declared ($1.4000 per share)

(221)

(221)

Effect of stock-based compensation expense

17

17

CP common shares repurchased

(13.7)

(181)

(2,567)

(2,748)

Shares issued under stock option plan

0.6

54

(10)

44

Balance at December 31, 2015

153.0

$

2,058

$

43

$

(1,477)

$

4,172

$

4,796

See notes to interim consolidated financial information.

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION December 31, 2016 (unaudited)

1 Basis of presentation

This unaudited interim consolidated financial information of Canadian Pacific Railway Limited ("CP" or "the Company"), expressed in Canadian dollars, reflects management's estimates and assumptions that are necessary for 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 financial statements and should be read in conjunction with the 2015 annual consolidated financial statements and 2016 consolidated interim financial statements. The accounting policies used are consistent with the accounting policies used in preparing the 2015 annual consolidated financial statements, except for the accounting changes 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 information includes all adjustments (consisting of normal and recurring adjustments) necessary to present such information.

2 Accounting changes

Implemented in 2016

Early Adoption of Restricted Cash

In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-18, Restricted Cash a consensus of the FASB Emerging Issues Task Force under FASB Accounting Standards Codification ("ASC") Topic 230 Statement of Cash Flows. The amendments required the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Restricted cash will therefore be included in beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The updated standard does not provide a definition of restricted cash and restricted cash equivalents. This ASU is effective retrospectively for public entities for fiscal years and interim periods within those years, beginning on or after December 15, 2017. Early adoption of this ASU is permitted. The Company adopted the provisions of this ASU during the fourth quarter of 2016. As a result of the adoption of ASU 2016-18, no changes to disclosure or financial statement presentation were required for the 2015 comparative period.

Amendments to the Consolidation Analysis

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis under FASB ASC Topic 810 Consolidation. The amendments required 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, eliminated the presumption that a general partner should consolidate a limited partnership and affected the consolidation analysis of reporting entities involved with VIEs, particularly those that have fee arrangements and related party relationships. This ASU was effective for public entities for fiscal years, and interim periods within those years, beginning on or after December 15, 2015. Entities had the option of using either a full retrospective or a modified retrospective approach to adopt this ASU. The Company evaluated all arrangements that might give rise to a VIE and all existing VIEs; no changes to disclosure or financial statement presentation were required as a result of this evaluation.

3 Gain on sale of properties

During the fourth quarter of 2016, the Company completed the sale of its Obico rail yard, for gross proceeds of $38 million. The Company recorded a gain on sale of $37 million before tax ($33 million after tax) within "Purchased services and other" in the interim consolidated statement of income.

4 Other income and charges

For the three months ended December 31

For the year ended December 31

(in millions of Canadian dollars)

2016

2015

2016

2015

Foreign exchange loss (gain) on long-term debt

$

74

$

115

$

(79)

$

297

Other foreign exchange gains

(20)

(5)

(24)

Early redemption premium on notes

47

Legal settlement

25

Other

4

14

15

Total other income and charges

$

74

$

99

$

(45)

$

335

Summary of Rail Data

Fourth Quarter

Year

Financial (millions, except per share data)

2016

2015

Change

%

2016

2015

Change

%

Revenues

Freight

$

1,596

$

1,645

$

(49)

(3)

$

6,060

$

6,552

$

(492)

(8)

Non-freight

41

42

(1)

(2)

172

160

12

8

Total revenues

1,637

1,687

(50)

(3)

6,232

6,712

(480)

(7)

Operating expenses

Compensation and benefits

282

333

(51)

(15)

1,189

1,371

(182)

(13)

Fuel

173

166

7

4

567

708

(141)

(20)

Materials

47

40

7

18

180

184

(4)

(2)

Equipment rents

41

44

(3)

(7)

173

174

(1)

(1)

Depreciation and amortization

162

155

7

5

640

595

45

8

Purchased services and other

215

272

(57)

(21)

905

1,060

(155)

(15)

Gain on sale of Delaware & Hudson South

(68)

68

(100)

Total operating expenses

920

1,010

(90)

(9)

3,654

4,024

(370)

(9)

Operating income

717

677

40

6

2,578

2,688

(110)

(4)

Less:

Other income and charges

74

99

(25)

(25)

(45)

335

(380)

(113)

Net interest expense

116

122

(6)

(5)

471

394

77

20

Income before income tax expense

527

456

71

16

2,152

1,959

193

10

Income tax expense

143

137

6

4

553

607

(54)

(9)

Net income

$

384

$

319

$

65

20

$

1,599

$

1,352

$

247

18

Operating ratio (%)

56.2

59.8

(3.6)

(360) bps

58.6

60.0

(1.4)

(140) bps

Basic earnings per share

$

2.63

$

2.09

$

0.54

26

$

10.69

$

8.47

$

2.22

26

Diluted earnings per share

$

2.61

$

2.08

$

0.53

25

$

10.63

$

8.40

$

2.23

27

Shares Outstanding

Weighted average number of shares outstanding (millions)

146.3

153.0

(6.7)

(4)

149.6

159.7

(10.1)

(6)

Weighted average number of diluted shares outstanding (millions)

147.3

154.0

(6.7)

(4)

150.5

161.0

(10.5)

(7)

Foreign Exchange

Average foreign exchange rate (US$/Canadian$)

0.75

0.75

0.75

0.78

(0.03)

(4)

Average foreign exchange rate (Canadian$/US$)

1.33

1.34

(0.01)

(1)

1.33

1.28

0.05

4

Summary of Rail Data (Page 2)

Fourth Quarter

Year

2016

2015

Change

%

FX Adjusted

%(1)

2016

2015

Change

%

FX Adjusted

%(1)

Commodity Data

Freight Revenues (millions)

- Canadian Grain

$

285

$

296

$

(11)

(4)

(4)

$

962

$

1,068

$

(106)

(10)

(11)

- U.S. Grain

154

131

23

18

18

518

522

(4)

(1)

(5)

- Coal

152

149

3

2

2

606

639

(33)

(5)

(6)

- Potash

96

78

18

23

23

338

359

(21)

(6)

(8)

- Fertilizers and sulphur

66

72

(6)

(8)

(8)

284

272

12

4

2

- Forest products

63

65

(2)

(3)

(3)

275

249

26

10

7

- Chemicals and plastics

184

187

(3)

(2)

(2)

714

709

5

1

(3)

- Crude

30

105

(75)

(71)

(71)

138

393

(255)

(65)

(66)

- Metals, minerals, and consumer products

149

151

(2)

(1)

(1)

564

643

(79)

(12)

(15)

- Automotive

80

89

(9)

(10)

(10)

350

349

1

(3)

- Domestic intermodal

187

182

5

3

3

721

757

(36)

(5)

(5)

- International intermodal

150

140

10

7

7

590

592

(2)

(2)

Total Freight Revenues

$

1,596

$

1,645

$

(49)

(3)

(3)

$

6,060

$

6,552

$

(492)

(8)

(10)

Freight Revenue per Revenue Ton-Miles (RTM) (cents)

- Canadian Grain

3.89

3.80

0.09

2

3.70

3.89

(0.19)

(5)

- U.S. Grain

4.83

4.71

0.12

3

4.75

4.91

(0.16)

(3)

- Coal

2.70

2.85

(0.15)

(5)

2.73

2.88

(0.15)

(5)

- Potash

2.49

2.32

0.17

7

2.38

2.37

0.01

- Fertilizers and sulphur

6.68

7.00

(0.32)

(5)

6.87

6.71

0.16

2

- Forest products

5.86

6.24

(0.38)

(6)

5.86

5.92

(0.06)

(1)

- Chemicals and plastics

4.92

5.49

(0.57)

(10)

4.99

5.21

(0.22)

(4)

- Crude

3.07

2.80

0.27

10

2.93

2.96

(0.03)

(1)

- Metals, minerals and consumer products

6.59

7.15

(0.56)

(8)

6.77

7.13

(0.36)

(5)

- Automotive

22.31

21.71

0.60

3

21.02

19.97

1.05

5

- Domestic intermodal

6.10

6.17

(0.07)

(1)

6.01

6.27

(0.26)

(4)

- International intermodal

4.74

4.78

(0.04)

(1)

4.59

4.96

(0.37)

(7)

Total Freight Revenue per RTM

4.48

4.47

0.01

4.46

4.51

(0.05)

(1)

Freight Revenue per Carload

- Canadian Grain

$

3,758

$

3,707

$

51

1

$

3,559

$

3,750

$

(191)

(5)

- U.S. Grain

3,488

3,266

222

7

3,202

3,326

(124)

(4)

- Coal

1,932

1,920

12

1

1,984

1,978

6

- Potash

2,973

2,849

124

4

2,904

2,887

17

1

- Fertilizers and sulphur

4,593

4,604

(11)

4,769

4,410

359

8

- Forest products

4,158

4,227

(69)

(2)

4,157

4,026

131

3

- Chemicals and plastics

3,292

3,596

(304)

(8)

3,368

3,483

(115)

(3)

- Crude

3,361

4,184

(823)

(20)

3,646

4,309

(663)

(15)

- Metals, minerals and consumer products

2,964

3,005

(41)

(1)

2,888

2,963

(75)

(3)

- Automotive

3,006

2,698

308

11

2,825

2,659

166

6

- Domestic intermodal

1,696

1,822

(126)

(7)

1,688

1,831

(143)

(8)

- International intermodal

1,103

1,058

45

4

1,074

1,061

13

1

Total Freight Revenue per Carload

$

2,462

$

2,534

$

(72)

(3)

$

2,400

$

2,493

$

(93)

(4)

(1) This earnings measure has no standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. This measure is defined and reconciled in Non-GAAP Measures of this Earnings Release.

Summary of Rail Data (Page 3)

Fourth Quarter

Year

2016

2015

Change

%

2016

2015

Change

%

Millions of RTM

- Canadian Grain

7,309

7,776

(467)

(6)

25,994

27,442

(1,448)

(5)

- U.S. Grain

3,179

2,770

409

15

10,898

10,625

273

3

- Coal

5,631

5,250

381

7

22,171

22,164

7

- Potash

3,842

3,359

483

14

14,175

15,117

(942)

(6)

- Fertilizers and sulphur

996

1,021

(25)

(2)

4,140

4,044

96

2

- Forest products

1,072

1,038

34

3

4,691

4,201

490

12

- Chemicals and plastics

3,737

3,391

346

10

14,294

13,611

683

5

- Crude

989

3,749

(2,760)

(74)

4,727

13,280

(8,553)

(64)

- Metals, minerals and consumer products

2,271

2,114

157

7

8,338

9,020

(682)

(8)

- Automotive

362

411

(49)

(12)

1,667

1,750

(83)

(5)

- Domestic intermodal

3,060

2,958

102

3

11,992

12,072

(80)

(1)

- International intermodal

3,163

2,938

225

8

12,865

11,931

934

8

Total RTMs

35,611

36,775

(1,164)

(3)

135,952

145,257

(9,305)

(6)

Carloads (thousands)

- Canadian Grain

75

80

(5)

(6)

270

285

(15)

(5)

- U.S. Grain

44

40

4

10

162

157

5

3

- Coal

78

78

305

323

(18)

(6)

- Potash

32

27

5

19

116

124

(8)

(6)

- Fertilizers and sulphur

15

16

(1)

(6)

60

62

(2)

(3)

- Forest products

15

16

(1)

(6)

66

62

4

6

- Chemicals and plastics

56

51

5

10

212

203

9

4

- Crude

9

25

(16)

(64)

38

91

(53)

(58)

- Metals, minerals and consumer products

51

50

1

2

196

217

(21)

(10)

- Automotive

27

33

(6)

(18)

124

131

(7)

(5)

- Domestic intermodal

110

100

10

10

427

414

13

3

- International intermodal

136

133

3

2

549

559

(10)

(2)

Total Carloads

648

649

(1)

2,525

2,628

(103)

(4)

Fourth Quarter

Year

2016

2015

Change

%

FX Adjusted %(1)

2016

2015

Change

%

FX Adjusted %(1)

Operating Expenses (millions)

Compensation and benefits

$

282

$

333

$

(51)

(15)

(15)

$

1,189

$

1,371

$

(182)

(13)

(14)

Fuel

173

166

7

4

4

567

708

(141)

(20)

(23)

Materials

47

40

7

18

18

180

184

(4)

(2)

(3)

Equipment rents

41

44

(3)

(7)

(7)

173

174

(1)

(1)

(3)

Depreciation and amortization

162

155

7

5

5

640

595

45

8

7

Purchased services and other

215

272

(57)

(21)

(21)

905

1,060

(155)

(15)

(16)

Gain on sale of Delaware & Hudson South

(68)

68

(100)

(100)

Total Operating Expenses

$

920

$

1,010

$

(90)

(9)

(9)

$

3,654

$

4,024

$

(370)

(9)

(11)

(1) This earnings measure has no standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. This measure is defined and reconciled in Non-GAAP Measures of this Earnings Release.

Summary of Rail Data (Page 4)

Fourth Quarter

Year

2016

2015 (1)

Change

%

2016(1)

2015 (1)

Change

%

Operations Performance

Gross ton-miles ("GTMs") (millions)

62,233

66,117

(3,884)

(6)

242,694

263,344

(20,650)

(8)

Train miles (thousands)

7,748

8,390

(642)

(8)

30,373

34,064

(3,691)

(11)

Average train weight - excluding local traffic (tons)

8,588

8,505

83

1

8,614

8,314

300

4

Average train length - excluding local traffic (feet)

7,100

7,036

64

1

7,217

6,935

282

4

Average terminal dwell (hours)

6.4

6.6

(0.2)

(3)

6.7

7.2

(0.5)

(7)

Average train speed (mph)(2)

22.9

22.8

0.1

23.5

21.4

2.1

10

Fuel efficiency(3)

0.996

0.996

0.980

0.999

(0.019)

(2)

U.S. gallons of locomotive fuel consumed (millions)(4)

61.6

65.8

(4.2)

(6)

236.2

261.7

(25.5)

(10)

Average fuel price (U.S. dollars per U.S. gallon)

2.01

1.91

0.10

5

1.80

2.13

(0.33)

(15)

Total employees (average)(5)

11,803

13,163

(1,360)

(10)

12,082

13,858

(1,776)

(13)

Total employees (end of period)(5)

11,653

12,817

(1,164)

(9)

11,653

12,817

(1,164)

(9)

Workforce (end of period)(6)

11,698

12,899

(1,201)

(9)

11,698

12,899

(1,201)

(9)

Safety

FRA personal injuries per 200,000 employee-hours

1.90

1.99

(0.09)

(5)

1.64

1.84

(0.20)

(11)

FRA train accidents per million train miles

1.19

1.41

(0.22)

(16)

0.97

1.33

(0.36)

(27)

(1) Certain figures have been revised to conform with current presentation or have been updated to reflect new information.

(2) The reporting definition for average train speed measures the line-haul movement from origin to destination including terminal dwell hours, and excluding foreign railroad and customer delays.

(3) Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs – freight and yard.

(4) Includes gallons of fuel consumed from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities.

(5) An employee is defined as an individual currently engaged in full-time or part-time employment with CP.

(6) Workforce is defined as total employees plus 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 the Company's 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 information to compare profitability on a long-term basis, including assessing future profitability, with that of the Company's peers.

These non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures is not intended to be considered in isolation from, as a substitute for, or as superior to, the financial information presented in accordance with GAAP.

Adjusted Performance Measures The Company uses Adjusted income, Adjusted diluted earnings per share, Adjusted operating income and Adjusted operating ratio to evaluate the Company's operating performance and for planning and forecasting future business operations and future profitability. These non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance, allocation of resources and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets and certain items outside the control of management. These items may not be non-recurring. However, excluding these significant items from GAAP results allows for a consistent understanding of the Company's consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results. Accordingly, these non-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information.

Significant items that impacted reported fourth-quarter 2016 and 2015 earnings include:

2016:

  • $74 million non-cash loss ($64 million after deferred tax) due to foreign exchange ("FX") translation on U.S. dollar denominated long-term debt which unfavourably impacted diluted earnings per share ("Diluted EPS") by 43 cents; and

2015:

  • $115 million non-cash loss ($100 million after deferred tax) due to FX translation on U.S. dollar denominated long-term debt which unfavourably impacted Diluted EPS by 64 cents.

In addition to the fourth quarter significant items discussed above, other items that impacted full year 2016 and 2015 earnings include:

2016:

  • in the third quarter, a $25 million expense ($18 million after current tax) related to a legal settlement which unfavourably impacted Diluted EPS by 12 cents;
  • during the first nine months of the year, a net non-cash gain of $153 million ($132 million after deferred tax) due to FX translation of the Company's U.S. dollar-denominated debt as follows:
    • in the third quarter, a $46 million loss ($40 million after deferred tax) which unfavourably impacted Diluted EPS by 27 cents;
    • in the second quarter, a $18 million gain ($16 million after deferred tax) which favourably impacted Diluted EPS by 10 cents; and
    • in the first quarter, a $181 million gain ($156 million after deferred tax) which favourably impacted Diluted EPS by $1.01;

    2015:

    • in the third quarter, a $68 million gain ($42 million after current tax) related to the sale of Delaware and Hudson Railway south of Schenectady ("D&H South") which favourably impacted Diluted EPS by 26 cents;
    • in the third quarter, a $47 million charge ($35 million after deferred tax) related to the early redemption premium on notes which unfavourably impacted Diluted EPS by 22 cents;
    • in the second quarter, 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; and
    • during the first nine months of the year, a net non-cash loss of $182 million ($157 million after deferred tax) due to FX translation of the Company's U.S. dollar-denominated debt as follows:
      • in the third quarter, a $128 million loss ($111 million after deferred tax) which unfavourably impacted Diluted EPS by 69 cents;
      • in the second quarter, a $10 million gain ($9 million after deferred tax) which favourably impacted Diluted EPS by 5 cents; and
      • in the first quarter, a $64 million loss ($55 million after deferred tax) which unfavourably impacted Diluted EPS by 34 cents.

      Reconciliation of Non-GAAP performance measures to GAAP performance measures The following tables reconcile Adjusted income, Adjusted diluted earnings per share, Adjusted operating income and Adjusted operating ratio to Net income, Diluted earnings per share, Operating income and Operating ratio, respectively.

      For the three months

      For the year

      Net income

      ended December 31

      ended December 31

      (in millions of Canadian dollars)

      2016

      2015

      2016

      2015

      Adjusted income

      $

      448

      $

      419

      $

      1,549

      $

      1,625

      Add significant items, pretax:

      Legal settlement charge

      (25)

      Gain on sale of D&H South

      68

      Impact of FX translation on U.S. dollar-denominated debt

      (74)

      (115)

      79

      (297)

      Early redemption premium on notes

      (47)

      Income tax rate change

      (23)

      Tax effect of adjustments(1)

      10

      15

      (4)

      26

      Net income as reported

      $

      384

      $

      319

      $

      1,599

      $

      1,352

      (1) Tax effect of adjustments was calculated as the pretax effect of the adjustments multiplied by the effective tax rate for each of the above items for the periods presented.

      For the three months

      For the year

      Diluted earnings per share

      ended December 31

      ended December 31

      2016

      2015

      2016

      2015

      Adjusted diluted earnings per share

      $

      3.04

      $

      2.72

      $

      10.29

      $

      10.10

      Add significant items, pretax:

      Legal settlement charge

      (0.17)

      Gain on sale of D&H South

      0.42

      Impact of FX translation on U.S. dollar-denominated debt

      (0.50)

      (0.74)

      0.53

      (1.84)

      Early redemption premium on notes

      (0.30)

      Income tax rate change

      (0.14)

      Tax effect of adjustments(1)

      0.07

      0.10

      (0.02)

      0.16

      Diluted earnings per share as reported

      $

      2.61

      $

      2.08

      $

      10.63

      $

      8.40

      (1) Tax effect of adjustments was calculated as the pretax effect of the adjustments multiplied by the effective tax rate for each of the above items for the periods presented.

      For the three months

      For the year

      Operating income

      ended December 31

      ended December 31

      (in millions of Canadian dollars)

      2016

      2015

      2016

      2015

      Adjusted operating income

      $

      717

      $

      677

      $

      2,578

      $

      2,620

      Add significant item:

      Gain on sale of D&H South

      68

      Operating income as reported

      $

      717

      $

      677

      $

      2,578

      $

      2,688

      For the three months

      For the year

      Operating ratio

      ended December 31

      ended December 31

      2016

      2015

      2016

      2015

      Adjusted operating ratio

      56.2%

      59.8%

      58.6%

      61.0%

      Add significant item:

      Gain on sale of D&H South

      —%

      —%

      —%

      (1.0)%

      Operating ratio as reported

      56.2%

      59.8%

      58.6%

      60.0%

      Free Cash Free cash is calculated as Cash provided by operating activities, less Cash used in investing activities, adjusted for changes in cash and cash equivalents balances resulting from FX fluctuations. Free cash is a measure that management considers to be an indicator of liquidity. Free cash is useful to investors and other external users of the consolidated financial information as it assists with the evaluation of the Company's ability to generate cash from its operations without incurring additional external financing. Positive Free cash indicates the amount of cash available for reinvestment in the business, or cash that can be returned to investors through dividends, stock repurchase programs, debt retirements or a combination of these. Conversely, negative Free cash indicates the amount of cash that must be raised from investors through new debt or equity issues, reduction in available cash balances or a combination of these. Free cash should be considered in addition to, rather than as a substitute for, Cash provided by operating activities.

      Reconciliation of Cash provided by operating activities to Free cash

      For the three months

      For the year

      ended December 31

      ended December 31

      (in millions of Canadian dollars)

      2016

      2015(1)

      2016

      2015(1)

      Cash provided by operating activities

      $

      768

      $

      623

      $

      2,089

      $

      2,459

      Cash used in investing activities

      (252)

      (415)

      (1,069)

      (1,123)

      Effect of foreign currency fluctuations on U.S. dollar- denominated cash and cash equivalents

      3

      22

      (13)

      45

      Free cash

      $

      519

      $

      230

      $

      1,007

      $

      1,381

      (1) The definition of Free cash has been revised to exclude the deduction of dividends paid.

      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 constant currency are obtained by translating the comparable period of the prior year results denominated in U.S. dollars at the foreign exchange rates of the current period. Measures at constant currency are considered non-GAAP measures and do not have any standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.

      For the three months ended December 31

      For the year ended December 31

      (in millions of

      Canadian dollars)

      Reported

      2016

      Reported

      2015

      Variance

      due to FX

      Adjusted

      2015

      FX Adj. %

      Reported

      2016

      Reported

      2015

      Variance

      due to FX

      Adjusted

      2015

      FX Adj. %

      Freight revenues

      $

      1,596

      $

      1,645

      $

      $

      1,645

      (3)%

      $

      6,060

      $

      6,552

      $

      145

      $

      6,697

      (10)%

      Non-freight revenues

      41

      42

      42

      (2)%

      172

      160

      1

      161

      7%

      Total revenues

      1,637

      1,687

      1,687

      (3)%

      6,232

      6,712

      146

      6,858

      (9)%

      Compensation and benefits

      282

      333

      333

      (15)%

      1,189

      1,371

      18

      1,389

      (14)%

      Fuel

      173

      166

      166

      4%

      567

      708

      25

      733

      (23)%

      Materials

      47

      40

      40

      18%

      180

      184

      2

      186

      (3)%

      Equipment rents

      41

      44

      44

      (7)%

      173

      174

      5

      179

      (3)%

      Depreciation and amortization

      162

      155

      155

      5%

      640

      595

      5

      600

      7%

      Purchased services and other

      215

      272

      272

      (21)%

      905

      1,060

      21

      1,081

      (16)%

      Gain on sale of D&H South

      —%

      (68)

      1

      (67)

      (100)%

      Total operating expenses

      920

      1,010

      1,010

      (9)%

      3,654

      4,024

      77

      4,101

      (11)%

      Operating income

      $

      717

      $

      677

      $

      $

      677

      6%

      $

      2,578

      $

      2,688

      $

      69

      $

      2,757

      (6)%

      SOURCE Canadian Pacific

      For further information: Media: Martin Cej, 403-512-5730, Martin_Cej@cpr.ca; Investment Community: Maeghan Albiston, 403-319-3591, investor@cpr.ca

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