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Annual Report 2016

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ANNUAL REPORT 2016 PERFORMANCE 4 HIGHLIGHTS LETTER FROM OF CONTENTS TABLE 6 THE CEO NEXT-LEVEL 11 OPERATIONAL IMPROVEMENTS O U R N E T W O R K 13 REACH B E T T E R 14 EXECUTION A C R O S S O U R NETWORK I N T H E 24 COMMUNITY CP HAS 26 HEART LETTER FROM 28 THE CHAIRMAN 30 FORM 10-K EXECUTIVE 157 TEAM BOARD OF 157 DIRECTORS ANNUAL REPORT ANNUAL 1 2016 A TOP- PERFORMING NORTH AMERICAN RAILROAD ANNUAL REPORT ANNUAL 2 THE JOURNEY TO BECOME ONE OF NORTH AMERICA’S TOP RAILROADS STARTED IN 2012 WITH A PROVEN OPERATING MODEL AND A DISCIPLINED AND FOCUSED LEADERSHIP TEAM. EVERY YEAR SINCE, THAT MODEL HAS IMPROVED HOW WE OPERATE AND BENEFITED OUR SHAREHOLDERS. In 2016, a year burdened with stiff economic headwinds and a challenging volume environment, the strength of the model was tested and proven. By focusing on controlling what we could, we turned a challenging economic environment into a successful operating year—one that has us poised for 2017 and beyond. ANNUAL REPORT ANNUAL 3 2016 MAINTAINING OUR MOMENTUM When we set out to reinvent CP almost five years ago, it was to transform ourselves into a leader in an industry that plays a critical role for the North American economy. We were confident we could orchestrate a meaningful turnaround, starting with improved operating efficiencies and asset utilization to reduce costs while improving service. We set aggressive but achievable targets and prioritized returning value to the shareholder. We met many of these targets ahead of schedule. ADJUSTED OPERATING RATIO* 2012 $4.34 2013 $6.42 77.0% 2012 2014 $8.50 2015 $10.10 69.9% 2013 2016 $10.29 ADJUSTED DILUTED EARNINGS PER SHARE* 64.7% 2014 2012 $316 61.0 % 2015 2013 $774 2014 $969 58.6% 2016 2015 $1,381 FREE CASH* (MILLIONS) 2016 $1,007 ANNUAL REPORT ANNUAL * Adjusted diluted earnings per share, free cash and adjusted operating ratio are non-GAAP measures. For a full description and reconciliation, see our Form 10-K. 4 THE CONTINENT’S SAFEST RAILWAY 1.69 1.80 CP has been North America’s safest railway, based 1.26 1.33 on the Federal Railroad Administration’s (FRA) 0.97 train accident frequency, for more than a decade, and in 2016 we had our best year ever. Since 2012, our train accident frequency decreased 2012 2013 2014 2015 2016 more than 40 percent, proving that safety remains our top priority. FRA train accident frequency per 1,000,000 train-miles PERFORMANCE IN ANY ENVIRONMENT 2016 presented challenging economic conditions but we stayed on track with a disciplined focus on operations, delivering another year with record results. 2012 2013 2015 2014 2016 18.0 18.4 18.0 21.4 23.5 NETWORK SPEED (MILES PER HOUR) 7.5 7.1 8.7 7.2 6.7 TERMINAL DWELL (HOURS) 131 161 163 183 198 LOCOMOTIVE PRODUCTIVITY (GROSS TON-MILES/AVAILABLE HORSEPOWER) 16,907 14,977 14,385 12,899 11,698 WORKFORCE (END OF PERIOD) Operating highlights 2012 2013 2014 2015 2016 Revenue (millions) $5,695 $6,133 $6,620 $6,712 $6,232 Carloads (thousands) 2,669 2,688 2,684 2,628 2,525 Revenue ton-miles (millions) 135,032 144,249 149,849 145,257 135,952 POSITIONED We controlled costs while reconfiguring our network for better efficiency and capacity, ending 2016 with considerable embedded FOR GROWTH operating leverage. We are well-positioned to take advantage when demand strengthens, and to grow revenues and increase margins. REPORT ANNUAL 5 2016 LETTER FROM THE CEO Again, CP’s operating model continued to safeguard us against softness in the wider economy. ANNUAL REPORT ANNUAL 6 YOU MAY NOT BE ABLE TO PREDICT THE FUTURE, BUT YOU CAN PREPARE FOR IT. Reflecting on the past year, our team at CP has a lot to be proud of. For us, 2016 was a year that tested the resilience of our railroad. We came through stronger, solidifying the strength of the operating model and reaffirming that we’re on track for an even better future. While my tenure as Chief Executive Officer began earlier this year, I had the distinct advantage and good fortune to have worked alongside railroad legend E. Hunter Harrison for not just 2016 but for the last 20-plus years of my career. When I speak of 2016 achievements and the journey to get there, I do so with full credit to Hunter’s precision railroading model and his ability to see what’s possible and to inspire and lead a team to deliver those possibilities. That discipline, relentless commitment to improvement and ability to move others to greatness are true testaments to the strength of his leadership. My planned succession to the chief executive role started when I arrived at CP in 2013 and we laid out a path to not only return this iconic Canadian company to its rightful place at the top of the railroad industry but to stake our claim on an even brighter future. As just the 17th leader of CP in its remarkable 136-year history, I’m proud to be standing shoulder to shoulder with the best railroaders in the business and privileged to be walking in the footsteps of visionaries who connected a nation. Our focus now—just as theirs was then—is on growth and making our own markets. With our operating model and this family of dedicated railroaders in place, it’s time to leverage the strength of this franchise like never before. In 2016, CP and our nearly 12,000-strong team of railroaders faced down a year in which stubbornly low commodity prices, tepid economic growth and a weather-delayed grain harvest tested the resilience and efficiency of our operating model. We produced a record-low annual operating ratio of 58.6 percent, an improvement of 140 basis points from a year earlier. We grew 2016 diluted earnings per share (EPS) by 27 percent to $10.63, and adjusted diluted EPS climbed 2 percent to $10.29, compared to the previous year. ANNUAL REPORT ANNUAL 7 2016 Our relentless focus on cost control and the three years. It gives me great pride to know the constant application of our foundational principles dollars raised today will have a tangible impact resulted in our 11th consecutive year as North on lives tomorrow and for decades to come. America’s safest railroad and in the creation My confidence in the future of both our industry of tremendous shareholder value. and CP comes from my experience with precision We made meaningful improvements to our service, railroading and my belief in the men and women including Trip Planning and enhancements to our of CP who led us to another record-setting year Dedicated Train Program. We improved network through their preparation and constant pursuit of performance, lengthening our trains on average excellence. We have in place a senior management by 4 percent, slashing average dwell time by team that is passionate about service, disciplined with costs, relentless on safety and committed to its shareholders. Our core principles endure, and we are WITH OUR OPERATING MODEL AND THIS poised for even greater things in 2017 and beyond. FAMILY OF DEDICATED RAILROADERS IN PLACE, IT’S TIME TO LEVERAGE THE STRENGTH OF THIS FRANCHISE LIKE Thank you, NEVER BEFORE. 7 percent and increasing average network speed Keith Creel by 10 percent, accelerating the network as a whole. President and Chief Executive Officer All while persistent commodity price pressure and sluggish economic growth weighed on demand for freight transportation services overall. CP’s commitment to improvement also—and crucially—extends to the communities within which we operate. In 2016, CP committed close to $4 million to heart health research, equipment and care through our community investment program CP Has Heart, bringing the amount donated to more than $9 million over the past ANNUAL REPORT ANNUAL 8 ANNUAL REPORT ANNUAL 9 20162016 ANNUAL REPORT ANNUAL 10 NEXT-LEVEL OPERATIONAL IMPROVEMENTS 2016 WAS ABOUT NEXT-LEVEL OPERATIONAL IMPROVEMENTS, FOCUSING ON PLANNING AND Intermodal EXECUTION, RIGHT DOWN TO THE SHIPMENT Intermodal traffic represented 22% of total freight revenue in 2016. LEVEL. WE WERE RELENTLESS IN PURSUING AND FINDING NEW WAYS TO OPERATE MORE EFFICIENTLY, REDUCE COSTS, ENHANCE SERVICE AND IMPROVE SAFETY. ANNUAL REPORT ANNUAL 11 2016 EDMONTON LLOYDMINSTER BRITISH COLUMBIA ALBERTA MANITOBA SASKATCHEWAN NOVA NEW ONTARIO QUEBEC SCOTIA SASKATOON BRUNSWICK CALGARY VANCOUVER ME HUNTINGDON QUEBEC CITY MOOSE JAW REGINA WINNIPEG KINGSGATE WA KEMNAY COUTTS ASSINIBOIA MONTREAL ESTEVAN BRACKEN ID MT BISBEE GATINEAU WHITETAIL THUNDER BAY SUDBURY BURLINGTON KRAMER MN VT ND DEVIL’S LAKE NY SAULT STE. MARIE NH NEW TOWN MI AYER DULUTH ALBANY MA RI WI TORONTO CT NEW LONDON MINNEAPOLIS/ MI BUFFALO SD ST. PAUL OR NEW YORK WY (THE BRONX, FRESH POND) TRACY DETROIT BETHLEHEM PA NJ PHILADELPHIA MILWAUKEE SHELDON MASON CITY CP MD DE NE CHICAGO OH CP TRACKAGE AND HAULAGE RIGHTS IA IL IN VA WV CO MO UT CA NV KS KANSAS CITY KY NC AZ TN SC NM OK AR GA TX AL MS LA FL ANNUAL REPORT ANNUAL 12 EDMONTON LLOYDMINSTER BRITISH COLUMBIA ALBERTA MANITOBA SASKATCHEWAN NOVA NEW ONTARIO QUEBEC SCOTIA SASKATOON BRUNSWICK CALGARY VANCOUVER ME HUNTINGDON QUEBEC CITY MOOSE JAW REGINA WINNIPEG KINGSGATE WA KEMNAY COUTTS ASSINIBOIA MONTREAL ESTEVAN BRACKEN ID MT BISBEE GATINEAU WHITETAIL THUNDER BAY SUDBURY BURLINGTON KRAMER MN VT ND DEVIL’S LAKE NY SAULT STE. MARIE NH NEW TOWN OUR MI AYER DULUTH ALBANY MA RI WI TORONTO CT NEW LONDON MINNEAPOLIS/ MI NETWORK BUFFALO SD ST.
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