CP

Business Context and Reporting Period

Company: Canadian Pacific Railway Limited (CP)

Filing Type: Form 6-K (Report of Foreign Issuer)

Reporting Period: First Quarter ended March 31, 2012

Filing Date: April 20, 2012

CP operates a transcontinental railway in Canada and the United States, providing freight transportation, logistics, and supply chain expertise. The company reported record operating performance metrics driven by the successful execution of its Multi-Year Plan, which focuses on volume growth, network capacity expansion, and cost control.

Key Financial Metrics

Key Operational Metrics:

• Freight Revenues: $1,340 million (up 18% YoY).
• Revenue Ton-Miles (RTMs): 32,811 million (up 11% YoY).
• Carloads: 656,000 (up 8% YoY).
• Average Fuel Price: $3.50 per U.S. gallon (up 12% YoY).
• Operating Expenses: $1,102 million (up 5% YoY).

Material Changes vs. Prior Period

The significant increase in net income and operating income was primarily driven by:

• Volume Growth: Higher traffic volumes across most commodity lines, particularly Grain (+24%), Coal (+29%), Industrial and Consumer Products (+29%), and Automotive (+31%).
• Operational Efficiency: Record improvements in operating metrics, including a 27% reduction in terminal dwell time and a 51% increase in car miles per car day. This drove a 1,050 basis point improvement in the operating ratio.
• Revenue Mix: Higher freight rates and increased fuel surcharge revenues due to rising fuel prices.
• Cost Management: Despite a 12% increase in average fuel prices, fuel efficiency improved by 6%, and winter operating conditions were better than the prior year, reducing variable costs.

Offsetting Factors: Higher income tax expense ($50M vs $12M), increased interest expense due to new debt issuances, and higher stock-based compensation expenses.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expressed confidence in continuing to deliver improvements in operating metrics and financial performance.
• Multi-Year Plan Targets: The company aims to achieve an operating ratio of 70% to 72% for 2014 and 68.5% to 70.5% for 2016.
• Capital Expenditures: 2012 capital programs are expected to range between $1.1 billion and $1.2 billion, focusing on network enhancements, locomotive upgrades, and IT renewal.
• Pension Contributions: Estimated to be between $100 million and $125 million annually through 2016.

Risks and Contingencies:

• Labour Relations: Collective agreements with key Canadian unions (Teamsters Canada Rail Conference) expired in December 2011; conciliation is ongoing with negotiations scheduled for April 2012.
• Regulatory: Potential impacts from the Surface Transportation Board (STB) rule changes in the U.S. and the implementation of Positive Train Control (PTC) by 2015, estimated to cost up to $250 million.
• Market Conditions: Exposure to global economic conditions, commodity prices (grain, coal, potash), and fuel price volatility.
• Environmental: Ongoing remediation obligations, with an accrual of $95 million as of March 31, 2012.

Investor Verification Checklist

• Labour Negotiations: Monitor the outcome of collective bargaining with Canadian unions, specifically the Teamsters, to assess strike risk.
• Operating Ratio Trajectory: Verify if the 1,050 bps improvement is sustainable or if it was aided by favorable winter weather compared to 2011.
• Capital Spending Execution: Track actual capital expenditures against the $1.1B-$1.2B guidance to ensure alignment with the Multi-Year Plan.
• Pension Volatility: Review future pension funding requirements and the impact of market returns on the defined benefit plan deficit.
• Commodity Mix: Assess the sustainability of volume growth in key sectors like Coal and Grain, which are sensitive to global demand and weather.