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Actionable news in CP: CANADIAN PACIFIC RAILWAY,

CP reports record Q1 results

OR falls to Q1 record 58.9 percent; double digit EPS growthCALGARY, April 20, 2016 /PRNewswire/ - Canadian Pacific Railway Limited (CP) CP, +2.80% today announced its lowest-ever first-quarter operating ratio of 58.9 percent and reported diluted earnings per share of $3.51 or $2.50 on an adjusted diluted earnings per share basis. CP's operating ratio improved by 430 basis points year-over-year and for a third straight quarter was below 60 percent. At 58.9 percent the OR is the lowest-ever when compared to adjusted operating ratios in previous quarters. [1]

Reported diluted earnings per share increased 83 percent to $3.51 from $1.92 and adjusted diluted earnings per share grew 11 percent to $2.50 from $2.26.

"The precision railroading model works in all economic environments," said E. Hunter Harrison, CP's Chief Executive Officer. "Despite weakness in the economy and volume headwinds, we focused on what we can control – our costs and our commitment to providing reliable service – and delivered a record performance."

FIRST-QUARTER HIGHLIGHTS

  • Revenues were down 4 percent to $1.59 billion from $1.67 billion
  • Operating income advanced 7 percent to $653 million from $612 million
  • Net income rose 69 percent to $540 million from $320 million, adjusted income was up 2 percent to $384 million from $375 million

"I am proud of what the team continues to produce quarter after quarter in these difficult times and we remain optimistic in our outlook given signs of stabilization within the Canadian economy and in key global markets," said Harrison. "As market conditions improve and volumes increase, our team of professional railroaders will be ready. Furthermore, we are confident in our plan to deliver shareholder value, which includes the announcement of a new share repurchase program that demonstrates our continued confidence over the long-term."

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.

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 CP's intention to commence a normal course issuer bid and potential future purchases of CP common shares under the normal course issuer bid. 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.

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 "Item 1A - Risk Factors" and "Item 7 - 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 (CP) CP, +2.80% 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.

_________________________

1 In Q3 2015, CP had a reported operating ratio of 55.9 percent as a result of the sale of the D&H South, an item excluded from CP's Q3 2015 adjusted operating ratio of 59.9 percent.

ITEM 1. FINANCIAL STATEMENTS








INTERIM CONSOLIDATED STATEMENTS OF INCOME




(unaudited)











For the three months

ended March 31

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



2016


2015

Revenues









Freight



$

1,548


$

1,630


Non-freight




43



35

Total revenues




1,591



1,665

Operating expenses









Compensation and benefits




329



378


Fuel




125



195


Materials




56



52


Equipment rents




45



42


Depreciation and amortization




162



146


Purchased services and other (Note 4)




221



240

Total operating expenses




938



1,053









Operating income




653



612

Less:









Other income and charges (Note 5)




(181)



73


Net interest expense




124



85

Income before income tax expense




710



454


Income tax expense (Note 6)




170



134

Net income



$

540


$

320









Earnings per share (Note 7)









Basic earnings per share



$

3.53


$

1.94


Diluted earnings per share



$

3.51


$

1.92









Weighted-average number of shares (millions) (Note 7)









Basic




153.0



164.9


Diluted




153.8



166.3









Dividends declared per share (Note 14)



$

0.3500


$

0.3500

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)











For the three months

ended March 31

(in millions of Canadian dollars)



2016


2015

Net income



$

540


$

320


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




37



(37)


Change in derivatives designated as cash flow hedges




(47)



(69)


Change in pension and post-retirement defined benefit plans




47



72

Other comprehensive income (loss) before income taxes




37



(34)

Income tax (expense) recovery on above items




(41)



46

Other comprehensive (loss) income (Note 3)




(4)



12

Comprehensive income



$

536


$

332

INTERIM CONSOLIDATED BALANCE SHEETS AS AT

(unaudited)


















March 31


December 31

(in millions of Canadian dollars)




2016


2015

Assets










Current assets











Cash and cash equivalents




$


571


$

650


Accounts receivable, net






629



645


Materials and supplies






181



188


Other current assets






69



54







1,450



1,537

Investments






148



152

Properties






16,013



16,273

Goodwill and intangible assets






196



211

Pension asset






1,489



1,401

Other assets






53



63

Total assets




$


19,349


$

19,637

Liabilities and shareholders' equity










Current liabilities











Accounts payable and accrued liabilities




$


1,143


$

1,417


Long-term debt maturing within one year






23



30







1,166



1,447

Pension and other benefit liabilities






750



758

Other long-term liabilities






291



318

Long-term debt






8,430



8,927

Deferred income taxes






3,422



3,391

Total liabilities






14,059



14,841

Shareholders' equity











Share capital






2,065



2,058


Additional paid-in capital






48



43


Accumulated other comprehensive loss (Note 3)






(1,481)



(1,477)


Retained earnings






4,658



4,172







5,290



4,796

Total liabilities and shareholders' equity




$


19,349


$

19,637

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS




(unaudited)











For the three months

ended March 31

(in millions of Canadian dollars)



2016


2015

Operating activities










Net income



$


540


$


320

Reconciliation of net income to cash provided by operating activities:











Depreciation and amortization





162




146


Deferred income taxes (Note 6)





93




32


Pension funding in excess of expense (Note 11)





(42)




(10)

Foreign exchange (gain) loss on long-term debt (Note 5)





(181)




64

Other operating activities, net





(66)




(41)

Change in non-cash working capital balances related to operations





(288)




44

Cash provided by operating activities





218




555

Investing activities










Additions to properties





(278)




(263)

Proceeds from sale of properties and other assets (Note 4)





60




52

Other








20

Cash used in investing activities





(218)




(191)

Financing activities










Dividends paid





(54)




(58)

Issuance of CP Common Shares





5




16

Purchase of CP Common Shares (Note 8)








(529)

Issuance of long-term debt, excluding commercial paper








810

Repayment of long-term debt, excluding commercial paper





(11)




(58)

Net repayment of commercial paper








(593)

Other





(2)




Cash used in financing activities





(62)




(412)











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





(17)




6

Cash position










Decrease in cash and cash equivalents





(79)




(42)

Cash and cash equivalents at beginning of period





650




226

Cash and cash equivalents at end of period



$


571


$


184











Supplemental disclosures of cash flow information:










Income taxes paid (refunded)



$


192


$


(3)

Interest paid



$


155


$


67

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







540


540


Other comprehensive loss (Note 3)






(4)



(4)


Dividends declared







(54)


(54)


Effect of stock-based compensation expense





6




6


Shares issued under stock option plan




7


(1)




6

Balance at March 31, 2016


153.0


$

2,065

$

48

$

(1,481)

$

4,658

$

5,290

Balance at January 1, 2015


166.1


$

2,185

$

36

$

(2,219)

$

5,608

$

5,610


Net income







320


320


Other comprehensive income (Note 3)






12



12


Dividends declared







(57)


(57)


Effect of stock-based compensation expense





6




6


CP Common Shares repurchased (Note 8)


(2.3)



(29)




(461)


(490)


Shares issued under stock option plan


0.2



21


(4)




17

Balance at March 31, 2015


164.0


$

2,177

$

38

$

(2,207)

$

5,410

$

5,418

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS March 31, 2016 (unaudited)

1 Basis of presentation

These unaudited interim consolidated financial statements of Canadian Pacific Railway Limited ("CP", or "the Company"), expressed in Canadian dollars, reflect management's estimates and assumptions that are necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America ("GAAP"). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2015 annual consolidated financial statements and notes included in CP's 2015 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 2015 annual consolidated financial statements, except for the newly adopted accounting policy 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 statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

2 Accounting Changes

Implemented in 2016

Amendments to the Consolidation Analysis

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-02, Amendments to the Consolidation Analysis under FASB Accounting Standards Codification ("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.

Future changes

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. The new FASB ASC Topic 842 Leases supersedes the lease recognition and measurement requirements in Topic 840 Leases. This new standard requires recognition of right-of-use assets and lease liabilities by lessees for those leases classified as finance and operating leases with a maximum term exceeding 12 months. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning on or after December 15, 2018. Entities are required to use a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact adoption of this ASU will have on the consolidated financial statements.

Revenue from Contracts with Customers

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations under FASB ASC Topic 606. The amendments clarify the principal versus agent guidance in determining whether to recognize revenue on a gross or net basis. The amendments are effective for public entities for annual reporting periods beginning on or after December 15, 2017, including interim periods within that reporting period. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact adoption of this ASU will have on the consolidated financial statements.

Compensation - Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, under ASC Topic 718. The amendments clarify the guidance relating to treatment of excess tax benefits and deficiencies, acceptable forfeiture rate policies, and treatment of cash paid by an employer when directly withholding shares for tax-withholding purposes and the requirement to treat such cash flows as a financing activity. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning on or after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact adoption of this ASU will have on the consolidated financial statements.

3 Changes in accumulated other comprehensive loss ("AOCL") by component


For the three months ended March 31

(in millions of Canadian dollars)

Foreign currency

net of hedging

activities(1)

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Derivatives and
other(1)

Pension and
post-retirement
defined benefit
plans(1)



Total(1)

Opening balance, January 1, 2016

$

129

$

(102)

$

(1,504)

$


(1,477)

Other comprehensive (loss) income before reclassifications


(4)


(36)




(40)

Amounts reclassified from accumulated other comprehensive loss



2


34



36

Net current-period other comprehensive (loss) income


(4)


(34)


34



(4)

Closing balance, March 31, 2016

$

125

$

(136)

$

(1,470)

$


(1,481)

Opening balance, January 1, 2015

$

115

$

(52)

$

(2,282)

$


(2,219)

Other comprehensive income (loss) before reclassifications


10


(52)


5



(37)

Amounts reclassified from accumulated other comprehensive loss



1


48



49

Net current-period other comprehensive income (loss)


10


(51)


53



12

Closing balance, March 31, 2015

$

125

$

(103)

$

(2,229)

$


(2,207)

(1) Amounts are presented net of tax.

Amounts in Pension and post-retirement defined benefit plans reclassified from AOCL







For the three months ended
March 31

(in millions of Canadian dollars)






2016


2015

Amortization of prior service costs(a)






$


(2)


$


(1)

Recognition of net actuarial loss(a)








49




67

Total before income tax








47




66

Income tax recovery








(13)




(18)

Net of income tax






$


34


$


48

4 Gain on sale of properties

Gain on sale of Arbutus Corridor

In March 2016, the Company announced the sale of CP's Arbutus Corridor (the "Arbutus Corridor") to the City of Vancouver for gross proceeds of $55 million. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor. The Company recorded a gain on sale of $50 million before tax ($43 million after tax) from the transaction during the first quarter of 2016.

Gain on settlement of legal proceedings related to the purchase and sale of a building

In 2013, CP provided an interest free loan pursuant to a court order to a corporation owned by a court appointed trustee ("the judicial trustee") to facilitate the acquisition of a building. The building was held in trust during the legal proceedings with regard to CP's entitlement to an exercised purchase option of the building ("purchase option"). As at December 31, 2014, the loan of $20 million and the purchase option with a carrying value of $8 million, were recorded as "Other assets" in the Company's Consolidated Balance Sheets.

In the first quarter of 2015, CP reached a settlement with a third party that, following the sale of the building to an arm's length third party, resulted in resolution of legal proceedings. CP received $59 million for the sale of the building which included repayment of the aforementioned loan to the judicial trustee and recorded a gain of $31 million ($27 million after tax).

5 Other income and charges





For the three months ended
March 31

(in millions of Canadian dollars)




2016


2015

Foreign exchange (gain) loss on long-term debt




$


(181)


$



64

Other foreign exchange (gains) losses






(7)





6

Other






7





3

Total other income and charges




$


(181)


$



73

6 Income taxes







For the three months ended
March 31

(in millions of Canadian dollars)






2016


2015

Current income tax expense






$


77


$


102

Deferred income tax expense








93




32

Income tax expense






$


170


$


134

The estimated 2016 annual effective tax rate for the first quarter, excluding the discrete item related to the foreign exchange gain of $181 million on the Company's U.S. dollar-denominated debt, is 27.5%, similar to the estimate of 27.5% for the same period in 2015.

The effective tax rate in the first quarter, including discrete item, is 23.9%, compared to 29.5% for the same period in 2015.

7 Earnings per share

At March 31, 2016, the number of shares outstanding was 153.0 million (March 31, 2015 - 164.0 million).

Basic earnings per share have been calculated using net income for the period divided by the weighted-average number of shares outstanding during the period.

The number of shares used in earnings per share calculations is reconciled as follows:





For the three months ended
March 31

(in millions)




2016



2015

Weighted-average basic shares outstanding




153.0



164.9

Dilutive effect of stock options




0.8



1.4

Weighted-average diluted shares outstanding




153.8



166.3

For the three months ended March 31, 2016, 445,991 options were excluded from the computation of diluted earnings per share because their effects were not dilutive (three months ended March 31, 2015 - 883 options).

8 Shareholders' equity

On March 11, 2014, the Company announced a new share repurchase program to implement a normal course issuer bid ("NCIB") to purchase, for cancellation, up to 5.3 million Common Shares before March 16, 2015. On September 29, 2014, the Company announced the amendment of the bid to increase the maximum number of its Common Shares that may be purchased from 5.3 million to 12.7 million of its outstanding Common Shares. The Company completed the purchase of 10.5 million Common Shares in 2014. An additional 2.2 million Common Shares were purchased for $490 million in the first quarter of 2015 prior to the March 16, 2015 expiry date of the program.

On March 16, 2015, the Company announced the renewal of its NCIB, commencing March 18, 2015, to purchase up to 9.14 million of its outstanding Common Shares for cancellation before March 17, 2016. On August 31, 2015, the Company amended the NCIB to increase the maximum number of its Common Shares that may be purchased from 9.14 million to 11.9 million of its outstanding Common Shares. As at December 31, 2015, the Company had purchased 11.3 million Common Shares for $2,258 million under this current NCIB program. There were no additional purchases in the three months ended March 31, 2016.

All purchases are made in accordance with the bid at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange ("TSX"), with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to retained earnings. The following table provides activities under the share repurchase program:





For the three months ended
March 31





2016


2015

Number of Common Shares repurchased(1)









2,174,788

Weighted-average price per share(2)




$




$

225.12

Amount of repurchase (in millions)(2)




$




$

490

On April 20, 2016, the Company announced it intends to implement a new NCIB to repurchase, for cancellation, up to 6.91 million of its Common Shares, subject to TSX acceptance.

9 Financial instruments

A. Fair values of...


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