Annual Report 2008
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Annual Report 2008 1 Chief Executive’s Letter to Shareholders 2 Management Discussion and Analysis 51 Financial Statements 110 Shareholder Information 112 Directors and Committees 113 Senior Officers of the Company CHIEF EXECUTIVE OFFICER’S LETTER TO SHAREHOLDERS February 23, 2009 The world faced unprecedented economic volatility in 2008. At While we are operating more efficiently, we continue to make safe Canadian Pacific, we felt the effects of a fluctuating Canadian dollar, operations our top priority. We made notable improvements in the extreme movement in fuel prices, drastic changes in both equity and full-year safety statistics on our railway. Our employee injury credit markets and reduced traffic volumes as our customers frequency was down 31% and train operation incidents declined adjusted to changing trade levels. While these factors are expected 10%. While these are excellent results, I am most proud that 2008 to pressure our business through 2009, I expect that our sound was a fatality-free year. Throughout 2008, every CP employee truly business strategy will produce positive long-term results and position embraced our vision to be the safest, most fluid railway in North us to take advantage of opportunities when the global economy America by making safety a top priority. recovers. CP recognizes how important it is that we maintain our partnerships In January 2009, CP announced an equity offering in which we with the more than 1,500 communities through which we operate. entered into an agreement with a syndicate of underwriters who 2008 marked a number of community investment milestones. Our agreed to purchase 13.9 million common shares of CP. This offering 10th anniversary Holiday Train visited over 125 communities in six provides CP with gross proceeds of approximately $510.8 million provinces and seven states to raise food, money and awareness for which may be used to reduce indebtedness, contribute to funding of local food banks. Our ongoing sponsorship of the Vancouver 2010 capital projects and for general corporate purposes. This transaction Winter Games will help move Games equipment, sponsor materials strengthens our balance sheet and provides us with increased and supplies to Vancouver through our innovative logistics and financial flexibility in today’s uncertain economy. transportation solutions. We also partnered with the province of B.C. to celebrate its 150th anniversary with the CP Spirit of BC 150 I am confident that our efforts to preserve future growth options, Rail Tour, which visited 33 communities and was headed by CP’s focus on cost management and strengthening our balance sheet will 2816 Empress Steam locomotive. help us weather the global economic storm and emerge even Although investing in our employees and the communities through stronger. which we operate must be balanced with aggressively capitalizing on cost control opportunities, our values include being good We completed the acquisition of the Dakota, Minnesota & Eastern neighbours and we will continue to fulfill our community responsibil- Railroad (DM&E) with the approval from the U.S. Surface Transpor- ities in these challenging economic times. tation Board in October of 2008. This strong regional railroad is delivering results that exceed our original investment case. It has With continuing economic uncertainty through 2009, CP is firmly expanded our capacity and extends our network reach and access to focused on managing fixed and variable costs, ensuring we continue key ports and rail interchanges. to price for value, delivering consistent, quality service to our customers and maximizing our strategic flexibility. Maintaining our We saw early signs of the softening economy in the first half of financial flexibility and focusing on safe and efficient operations will 2008 and we moved quickly to accelerate a number of efficiency position us well for the future and the inevitable upturn in the efforts throughout our organization. Our early actions are already economy. delivering sustainable savings and we will elevate our focus on our fixed cost structure in 2009 to realize additional efficiencies. We have also acted to ensure future growth opportunities, despite Sincerely, the changes in the economic landscape. We secured land and permits in the Montreal and Edmonton areas for intermodal growth. We also secured rights-of-way and permits in Woodstock, Ontario to service Toyota, and in the Alberta Industrial Heartland for access to future oil sands upgrader growth. The completion of our western corridor expansion provides capacity for many years of efficient Fred J. Green growth and our co-production agreements on critical lines running President and Chief Executive into Vancouver from Kamloops were aligned and extended. Officer 2008 ANNUAL 1 REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS February 23, 2009 TABLE OF CONTENTS 1.0 Business Profile 3 13.0 Changes in Accounting Policy 25 13.1 2008 Accounting Changes 25 2.0 Strategy 3 13.2 Future Accounting Changes 25 3.0 Additional Information 3 14.0 Liquidity and Capital Resources 26 4.0 Financial Highlights 4 14.1 Operating Activities 27 14.2 Investing Activities 27 5.0 Operating Results 5 14.3 Financing Activities 27 5.1 Income 5 14.4 Free Cash 28 5.2 Diluted Earnings per Share 5 5.3 Operating Ratio 6 15.0 Balance Sheet 29 5.4 Return on Capital Employed 6 16.0 Financial Instruments 31 5.5 Impact of Foreign Exchange on Earnings 6 17.0 Off-Balance Sheet Arrangements 34 6.0 Non-GAAP Earnings 8 18.0 Acquisition 34 7.0 Lines of Business 10 7.1 Volumes 10 19.0 Contractual Commitments 35 7.2 Revenues 11 7.2.1 Freight Revenues 12 20.0 Future Trends and Commitments 35 7.2.2 Other Revenues 14 21.0 Business Risks and Enterprise Risk Management 38 7.2.3 Freight Revenue per Carload 14 21.1 Teck Coal Limited 39 8.0 Performance Indicators 15 21.2 Competition 39 8.1 Safety Indicators 15 21.3 Liquidity 39 8.2 Efficiency and Other Indicators 15 21.4 Environmental Laws and Regulations 39 21.5 Regulatory Authorities 40 9.0 Operating Expenses, Before Other Specified Items 16 21.6 Labour Relations 41 21.7 Network Capacity and Volume 41 10.0 Other Income Statement Items 18 21.8 Financial Risks 42 11.0 Quarterly Financial Data 21 21.9 General and Other Risks 42 12.0 Fourth-Quarter Summary 22 22.0 Critical Accounting Estimates 43 12.1 Breakout of DM&E from Q4 2008 Operating Results 22 23.0 Systems, Procedures and Controls 45 12.2 Operating Results 22 12.3 Non-GAAP Earnings 23 24.0 Forward-Looking Information 46 12.4 Revenues 23 12.5 Operating Expenses 24 25.0 Glossary of Terms 49 12.6 Other Income Statement Items 25 12.7 Liquidity and Capital Resources 25 2008 2 ANNUAL REPORT This Management’s Discussion and Analysis (“MD&A”) supple- provides service to markets in Europe and the Pacific Rim through ments the Consolidated Financial Statements and related notes direct access to the Port of Montreal, Quebec, and the Port of for the year ended December 31, 2008. Except where otherwise Vancouver, British Columbia, respectively. indicated, all financial information reflected herein is expressed in Canadian dollars. All information has been prepared in accordance CPRL’s network accesses the US market directly through three with Canadian generally accepted accounting principles (“GAAP”), wholly-owned subsidiaries: Soo Line Railroad Company (“Soo Line”), except as described in Section 6.0 of this MD&A. a Class I railway operating in the US Midwest; the Delaware and Hudson Railway Company (“D&H”), which operates between eastern In this MD&A, “our”, “us”, “we”, “CP” and “the Company” Canada and major US Northeast markets, including New York City, refer to Canadian Pacific Railway Limited (“CPRL”), CPRL and its New York; Philadelphia, Pennsylvania; and Washington, DC; and subsidiaries, CPRL and one or more of its subsidiaries, or one or Dakota, Minnesota and Eastern Railroad Corporation (“DM&E”, more of CPRL’s subsidiaries, as the context may require. Other discussed further in Section 18.0 Acquisition), which operates in the terms not defined in the body of this MD&A are defined in US Midwest. Section 25.0 Glossary of Terms. Unless otherwise indicated, all comparisons of results for the 2.0 Strategy fourth quarter of 2008 and 2007 are against the results for the fourth quarter of 2007 and 2006, respectively. Unless otherwise Our vision is to become the safest and most fluid railway in North indicated, all comparisons of results for 2008 and 2007 are America. Through the ingenuity of our people, it is our objective to against the results for 2007 and 2006, respectively. create long-term value for our customers, shareholders and employ- ees by profitably growing to expand within the reach of our rail 1.0 Business Profile franchise and through strategic additions. We seek to accomplish this objective through the following three-part strategy: CPRL is a holding company whose direct and indirect subsidiaries ▫ generating quality revenue growth by realizing the benefits of operate railways in North America. The Company’s vision is to demand growth in our bulk, intermodal and merchandise business become the safest and most fluid railway in North America. lines with targeted infrastructure capacity investments linked to The main operating subsidiary of the Company, Canadian Pacific global trade opportunities; Railway Company (“CPRC”), was incorporated in 1881. CPRC is ▫ one of Canada’s oldest corporations and was North America’s first improving productivity by leveraging strategic marketing and transcontinental railway. From its inception 128 years ago, CPRC operating partnerships, executing a scheduled railway through our has developed into a fully integrated and technologically advanced Integrated Operating Plan (“IOP”) and driving more value from Class I railway providing rail and intermodal freight transportation existing assets and resources by improving “fluidity”; and services over a 15,500 mile network serving the principal business ▫ continuing to develop a dedicated, professional and knowledge- centres of Canada, from Montreal, Quebec, to Vancouver, British able workforce that is committed to safety and sustainable Columbia, and the US Midwest and Northeast regions.