27 January 2005
CPR Reports Solid
Performance in 2004; Demand Continues to Grow
Canadian Pacific Railway
(TSX/NYSE: CP) reported net income of $413 million or $2.60 per diluted share in 2004, compared with
$401 million or $2.52 per diluted share in 2003. Results in 2004 reflected a decline of $115 million
($130 million after tax) in foreign exchange gains on long-term debt, and a reduction of
$172 million in charges ($111 million after tax) for other specified items, which included a
$91 million charge ($55 million after tax) for environmental remediation and a $19 million reversal
($12 million after tax) related to labour restructuring.
Excluding the foreign exchange gains on long-term debt and other specified items, income
in 2004 increased 10 percent to $361 million or $2.27 per diluted share, compared with income in 2003
of $330 million or $2.07 per diluted share.
SUMMARY OF FULL-YEAR 2004 COMPARED WITH FULL-YEAR 2003
- Operating income of $789 million, an increase of 8 percent, excluding other specified items;
- Revenue up $242 million, with significant growth in five of seven business lines, despite a
$130 million reduction caused by the Canadian dollar's gain against the U.S. dollar;
- Operating expenses up $183 million, excluding other specified items;
- Operating ratio improved to 79.8 percent, from 80.1 percent, excluding other specified items.
CPR generated growth across the bulk commodities, a turnaround in industrial products and continued
expansion in containerized intermodal freight.
Rob Ritchie, President and Chief Executive Officer of CPR, said: "Our business model and
franchise proved their power and value in 2004. A critical element of our business model was CPR's
unrelenting focus on increasing asset velocity and fluidity across the network. As a result, we began
driving our productivity and efficiency indicators in the right direction at the same time as freight
volumes took off. Greater fluidity has become our single most compelling objective. As fluidity
continues to increase, productivity will increase and unit operating costs will come down, enabling
CPR to drive more of its growth to the bottom line."
CPR moved more freight in 2004 than in any prior fiscal year. Productivity increased dramatically,
with revenue tonnage growing 8 percent while train miles accumulated in moving the tonnage increased
by just one-quarter of that rate.
"These steady gains improved the value of CPR's service to customers, and we made the most of a
robust transportation market," Mr. Ritchie said.
Operating expenses in 2004 increased mainly due to higher fuel prices, increased freight volumes,
depreciation, temporary costs to train additional crews, and a return to a normal level of
performance-based incentive compensation, partly offset by a favourable impact from the
Canadian dollar's appreciation. CPR responded to unprecedented high fuel prices with an improved fuel
surcharge mechanism, in addition to its hedge program and fuel efficiency measures. These initiatives
enabled CPR to recover about two-thirds of its price-related fuel cost
increase.
SUMMARY OF FOURTH-QUARTER 2004 COMPARED WITH FOURTH-QUARTER 2003
- Net income of $129 million or $0.81 per diluted share, compared with $174 million or $1.09 per diluted
share;
- Income of $116 million or $0.73 per diluted share, compared with $114 million or $0.71 per
diluted share, excluding foreign exchange gains on long-term debt and other specified
items;
- Operating income of $233 million, compared with $222 million, excluding other specified
items;
- Revenue up $58 million, with increases in six of seven business lines;
- Operating expenses up $48 million, excluding other specified items. The increase was largely
due to higher fuel prices and performance-based incentive compensation;
- Operating ratio of 77.2 percent, compared with 76.9 percent, excluding other specified items.
OUTLOOK
CPR expects to grow revenue in the range of 6 percent to 8 percent in 2005. Diluted earnings per share, excluding foreign exchange gains and losses on long-term debt and other specified items, are expected to grow by 14 percent to 16 percent in 2005, assuming oil prices averaging US$48 per barrel and an average exchange rate of $1.25 per U.S. dollar (US$0.80). This outlook reflects conservative revenue recognition on western export coal contracts for the coal year beginning April 1, 2005, given uncertainties surrounding legal and regulatory proceedings involving Elk Valley Coal Corporation.
RESTATEMENT OF COMPARATIVE FIGURES FOR 2003
Comparative figures for prior periods have been restated for retroactively applied accounting
changes. The changes relate to the implementation of new accounting rules under Canadian Generally
Accepted Accounting Principles (GAAP) for asset retirement obligations introduced in the first quarter
of 2004. The impact of this change is an increase of $3 million in net income or $0.01 in diluted EPS
previously reported for 2003 and a decrease of $1 million in net income or $0.01 in diluted EPS
previously reported for the fourth quarter of 2003. Notes 2 and 9 to the financial statements further
describe the impact of this accounting change.
FOREIGN EXCHANGE GAINS ON long-term DEBT AND OTHER SPECIFIED ITEMS
Results for full-year 2004 included a foreign exchange gain on long-term
debt of $94 million ($94 million after tax), compared with a gain of $210 million ($224 million after
tax) in 2003. Results for the fourth quarter of 2004 included a foreign exchange gain on
long-term debt of $57 million ($56 million after tax), compared with a gain of
$44 million ($72 million after tax) in the same period of 2003.
Other specified items in 2004 were related to special charges taken in the fourth quarter that totaled
$72 million ($43 million after tax). These included an environmental charge of $91 million
($55 million after tax), partially offset by a reversal of part of a labour restructuring provision
of $19 million ($12 million after tax). The environmental charge is for investigation,
characterization, remediation and other applicable actions related to environmental contamination at
a property in Minnesota, which includes areas previously leased to third parties. CPR is participating
in the State of Minnesota's voluntary investigation and clean-up program at the east side
of the property. The property is the subject of ongoing fieldwork being undertaken in conjunction with
the appropriate state authorities to determine the extent and magnitude of the contamination and the
appropriate remediation plan. CPR now has sufficient information to reasonably estimate
clean-up costs for the entire property. CPR expects to file with the state in the first
quarter of 2005 a response action plan for the east side of the property. CPR has initiated litigation
against two former lessees that it believes are responsible for a large portion of the contamination.
The reversal of the labour liability relates to a charge taken in 2003 to restructure CPR's
northeastern U.S. operations. In 2004, CPR achieved a successful new arrangement with Norfolk Southern
Railway for operations in the region, which is delivering efficiency improvements. The arrangement
received regulatory approval in the fourth quarter of 2004. As a result, the restructuring did not
incur the expected labour restructuring costs and the labour liability was reversed.
Other specified items in 2003 included a special charge in the second quarter of $215 million ($141
million after tax) for a program to eliminate 820 job positions over the 2003-2005
period, a write-down to fair value of under-performing assets, and the
restructuring of CPR's northeastern U.S. network. In addition, CPR recorded in the fourth quarter a
$29 million loss ($18 million after tax) on the transfer of assets to IBM Canada under an outsourcing
agreement, a $59 million favourable adjustment for a revaluation of future income tax, and an
unfavourable impact of $53 million from an increase in future income taxes as Ontario repealed
previously legislated income tax reductions.
PRESENTATION OF NON-GAAP EARNINGS
CPR presents non-GAAP earnings to provide a basis for evaluating underlying earnings
trends that can be compared with the prior period's results. Non-GAAP earnings exclude
foreign currency translation effects on long-term debt, which can be volatile and short
term, as well as other specified items, which are not among CPR's normal ongoing revenues and
operating expenses. The impact of volatile short-term rate fluctuations on
foreign-denominated debt is only realized when long-term debt matures or
is settled. A reconciliation of income, excluding foreign exchange gains and losses on
long-term debt and other specified items, to net income as presented in the financial
statements is detailed in the attached Summary of Rail Data.
It should be noted that CPR's earnings, excluding foreign exchange gains and losses on
long-term debt and other specified items, as described in this news release, have no
standardized meanings and are not defined by Canadian generally accepted accounting principles and,
therefore, are unlikely to be comparable to similar measures presented by other companies.
Note On Forward-Looking Statements
This news release contains forward-looking information. Actual future results may differ
materially. The risks, uncertainties and other factors that could influence actual results are
described in CPR's annual report and annual information form, and may be updated in CPR's
consolidated interim financial statements and interim Management's Discussion and Analysis, which are
filed with securities regulators from time to time. However, CPR undertakes no obligation to update
publicly or otherwise revise any forward-looking information, whether as a result of new
information, future events, or otherwise. Financial results in this news release are reported in
Canadian dollars.
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