25 July 2006
Canadian Pacific Railway Produces Solid Second Quarter Results
Canadian Pacific Railway (TSX/NYSE: CP) announced that its second
quarter net income was $378 million, an increase of $254 million over the same period in 2005. This increase included a
$176 million reduction in future income tax expense and a favourable swing in foreign exchange on long-term debt of $58
million.
Q2 2006 Earnings Release and Financial Reports
"CPR faced down a tough second quarter where we saw a reduction of more than $70 million in coal and potash revenues associated
with world markets and still produced solid earnings growth," said Fred Green, CPR President and CEO. "We responded quickly
to the drop in volumes with focused initiatives which produced improved yield and reduced expenses. With the success of our balanced
scheduled railroad and our recent network capacity investments, we are well positioned for the second half of the year when bulk volumes
are expected to increase."
Summary of second-quarter 2006 compared with 2005
- Income before foreign exchange gains and losses on long-term debt and other specified items improved 14 percent to
$160 million;
- Diluted earnings per share before foreign exchange gains and losses on long-term debt and other specified items
improved 15 percent to $1.00;
- Operating ratio improved 40 basis points to 75.1 percent, a Q2 best for CPR;
- Operating expenses, excluding the impact of higher fuel prices, were down more than 2 percent.
In the second quarter, total revenues improved by 2 percent with growth in grain, intermodal, automotive, and industrial and consumer
products offsetting declines in two key business lines, coal and sulphur and fertilizers where revenues decreased by 28 and 10 percent
respectively. Other revenue improved by $9 million over the same period last year and included the sale of the Latta subdivision, which
was a part of planned land sales for 2006.
Operating expenses increased 2 percent, most of which was attributable to higher fuel prices. The increase in the cost of fuel was
largely recovered through a fuel surcharge program. These increases were partially offset by improvements in operations including the
implementation of the balanced scheduled railroad, reductions in management staff and co-production initiatives.
Summary of first half 2006 compared with 2005
- Net income was $489 million, an increase of $285 million over 2005;
- Income before foreign exchange gains and losses on long-term debt and other specified items was up 24 percent to
$278 million;
- Diluted earnings per share, excluding foreign exchange gains and losses on long-term debt and other specified items,
increased 24 percent to $1.74;
- Operating ratio improved 160 basis points to 77.2 percent;
- Revenues were up 6 percent which included double-digit increases in grain, industrial and consumer products,
automotive, and intermodal business lines;
- Operating expenses, excluding the impact of higher fuel prices, decreased slightly in 2006 over 2005.
2006 Outlook
CPR's outlook for diluted earnings per share in 2006 remains unchanged at a range of $3.60 to $3.85, excluding foreign exchange gains
and losses on long-term debt and other specified items, specifically the $176 million income tax benefit due to the rate
reduction in the second quarter. The outlook assumes oil prices averaging US$70 per barrel and an average exchange rate of $1.13 per
U.S. dollar (US$0.89). This is a revision to our previous assumptions which were oil prices averaging US$66 per barrel and an average
exchange rate of $1.14 per U.S. dollar (US$0.88). CPR expects to grow revenue in the range of 5 percent to 8 percent and expenses are
expected to increase by 3 percent to 6 percent in 2006. Capital investment is anticipated to be between $810 million and $825 million
in 2006 and free cash is expected to exceed $200 million for the year.
Foreign exchange gains and losses on long-term debt and other specified items
CPR had a foreign exchange gain on long-term debt of $53 million ($41 million after tax) in the second quarter of 2006,
compared with a loss of $17 million ($17 million after tax) in the same period of 2005. The second quarter of 2006 included a future
income tax benefit of $176 million as a result of a decrease in Canadian federal and provincial income tax rates. There were no other
specified items in the second quarter of 2005.
In the first half of 2006, CPR had a foreign exchange gain of $46 million ($34 million after tax), compared with a loss of $20 million
($21 million after tax) in the first half of 2005. Other than the future income tax benefit mentioned above, there were no additional
other specified items in the first half of 2006, and there were none in the same period of 2005.
Presentation of non-GAAP earnings
CPR presents non-GAAP earnings in this news release to provide a basis for evaluating underlying earnings trends in our
business that can be compared with prior periods' results of operations. These non-GAAP earnings exclude foreign currency
translation effects on long-term debt, which can be volatile and short term, and 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. In the second quarter and first half of 2006, there were
foreign exchange gains on long-term debt and one other specified item.
Earnings that exclude foreign exchange currency translation effects 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.
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