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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission File Number 001-01342
Canadian Pacific Railway Limited
(Exact name of registrant as specified in its charter)
Canada
 
98-0355078
(State or Other Jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
7550 Ogden Dale Road S.E.
Calgary
AB
T2C 4X9
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (403) 319-7000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
 
Trading Symbol(s)
 
 
Name of Each Exchange on which Registered
 
Common Shares, without par value
 
CP
 
New York Stock Exchange
Common Share Purchase Rights
 

 
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 þ
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No þ



As of the close of business on July 15, 2019, there were 138,576,204 of the registrant’s Common Shares issued and outstanding.
 



CANADIAN PACIFIC RAILWAY LIMITED
FORM 10-Q
TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION


 
 
Page
Item 1.
Financial Statements:
 
 
 
 
 
Interim Consolidated Statements of Income
 
For the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
Interim Consolidated Statements of Comprehensive Income
 
For the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
Interim Consolidated Balance Sheets
 
As at June 30, 2019 and December 31, 2018
 
 
 
 
 
Interim Consolidated Statements of Cash Flows
 
For the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
Interim Consolidated Statements of Changes in Shareholders' Equity
 
For the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
Notes to Interim Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Summary
 
Performance Indicators
 
Financial Highlights
 
Results of Operations
 
Liquidity and Capital Resources
 
Share Capital
 
Non-GAAP Measures
 
Off-Balance Sheet Arrangements
 
Contractual Commitments
 
Critical Accounting Estimates
 
Forward-Looking Statements
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits




PART I

ITEM 1. FINANCIAL STATEMENTS


INTERIM CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars, except share and per share data)
2019
2018
2019
2018
Revenues (Note 3)
 
 
 
 
Freight
$
1,931

$
1,709

$
3,657

$
3,334

Non-freight
46

41

87

78

Total revenues
1,977

1,750

3,744

3,412

Operating expenses
 
 
 
 
Compensation and benefits
383

351

789

725

Fuel
236

230

445

445

Materials
54

53

111

108

Equipment rents
34

33

69

66

Depreciation and amortization
183

172

343

342

Purchased services and other
265

284

622

559

Total operating expenses
1,155

1,123

2,379

2,245

 
 
 
 
 
Operating income
822

627

1,365

1,167

Less:
 
 
 
 
Other (income) expense (Note 5)
(40
)
52

(87
)
103

Other components of net periodic benefit recovery (Note 13)
(98
)
(95
)
(195
)
(191
)
Net interest expense
112

112

226

227

Income before income tax expense
848

558

1,421

1,028

Income tax expense (Note 6)
124

122

263

244

Net income
$
724

$
436

$
1,158

$
784

 
 
 
 
 
Earnings per share (Note 7)
 
 
 
 
Basic earnings per share
$
5.19

$
3.05

$
8.28

$
5.46

Diluted earnings per share
$
5.17

$
3.04

$
8.25

$
5.44

 
 
 
 
 
Weighted-average number of shares (millions) (Note 7)
 
 
 
 
Basic
139.7

142.8

139.9

143.6

Diluted
140.2

143.2

140.4

144.0

 
 
 
 
 
Dividends declared per share
$
0.8300

$
0.6500

$
1.4800

$
1.2125

See Notes to Interim Consolidated Financial Statements.

2


INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2018
2019
2018
Net income
$
724

$
436

$
1,158

$
784

Net gain (loss) in foreign currency translation adjustments, net of hedging activities
15

(16
)
31

(36
)
Change in derivatives designated as cash flow hedges
4

14

6

35

Change in pension and post-retirement defined benefit plans
21

29

41

58

Other comprehensive income before income taxes
40

27

78

57

Income tax (expense) recovery on above items
(22
)
5

(44
)
11

Other comprehensive income (Note 4)
18

32

34

68

Comprehensive income
$
742

$
468

$
1,192

$
852

See Notes to Interim Consolidated Financial Statements.

3


INTERIM CONSOLIDATED BALANCE SHEETS AS AT
(unaudited)
 
June 30
December 31
(in millions of Canadian dollars)
2019
2018
Assets
 
 
Current assets
 
 
Cash and cash equivalents
$
45

$
61

Accounts receivable, net
795

815

Materials and supplies
195

173

Other current assets
80

68

 
1,115

1,117

Investments
210

203

Properties (Note 9)
18,489

18,418

Goodwill and intangible assets
193

202

Pension asset
1,460

1,243

Other assets (Note 9)
466

71

Total assets
$
21,933

$
21,254

Liabilities and shareholders’ equity
 
 
Current liabilities
 
 
Accounts payable and accrued liabilities (Note 9)
$
1,401

$
1,449

Long-term debt maturing within one year (Note 8, 9, 11)
273

506

 
1,674

1,955

Pension and other benefit liabilities
713

718

Other long-term liabilities (Note 9)
598

237

Long-term debt (Note 8, 9, 11)
8,266

8,190

Deferred income taxes
3,525

3,518

Total liabilities
14,776

14,618

Shareholders’ equity
 
 
Share capital
1,996

2,002

Additional paid-in capital
45

42

Accumulated other comprehensive loss (Note 4)
(2,009
)
(2,043
)
Retained earnings
7,125

6,635

 
7,157

6,636

Total liabilities and shareholders’ equity
$
21,933

$
21,254

Contingencies (Note 14)
See Notes to Interim Consolidated Financial Statements.

4


INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2018
2019
2018
Operating activities
 
 
 
 
Net income
$
724

$
436

$
1,158

$
784

Reconciliation of net income to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
183

172

343

342

Deferred income tax (recovery) expense (Note 6)
(18
)
37

20

78

Pension recovery and funding (Note 13)
(89
)
(82
)
(177
)
(154
)
Foreign exchange (gain) loss on debt and lease liabilities (Note 5)
(37
)
44

(82
)
93

Settlement of forward starting swaps on debt issuance (Note 11)

(24
)

(24
)
Other operating activities, net
18

4

63

(17
)
Change in non-cash working capital balances related to operations
(60
)
124

(191
)
6

Cash provided by operating activities
721

711

1,134

1,108

Investing activities
 
 
 
 
Additions to properties
(459
)
(413
)
(683
)
(654
)
Proceeds from sale of properties and other assets
8

5

14

9

Other
(4
)

(5
)
(1
)
Cash used in investing activities
(455
)
(408
)
(674
)
(646
)
Financing activities
 
 
 
 
Dividends paid
(91
)
(81
)
(182
)
(163
)
Issuance of CP Common Shares
10

4

14

12

Purchase of CP Common Shares (Note 10)
(257
)
(261
)
(464
)
(559
)
Issuance of long-term debt, excluding commercial paper (Note 8)

638

397

638

Repayment of long-term debt, excluding commercial paper (Note 8)
(480
)
(734
)
(485
)
(739
)
Net issuance of commercial paper (Note 8)
246

53

246

53

Cash used in financing activities
(572
)
(381
)
(474
)
(758
)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
(1
)
4

(2
)
9

Cash position
 
 
 
 
Decrease in cash and cash equivalents
(307
)
(74
)
(16
)
(287
)
Cash and cash equivalents at beginning of period
352

125

61

338

Cash and cash equivalents at end of period
$
45

$
51

$
45

$
51

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Income taxes paid
$
108

$
52

$
257

$
156

Interest paid
$
83

$
90

$
232

$
233

See Notes to Interim Consolidated Financial Statements.

5


INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
 
For the three months ended June 30
(in millions of Canadian dollars except per share data)
 
Common shares (in millions)

 
Share
capital

Additional
paid-in
capital

Accumulated
other
comprehensive
loss

Retained
earnings

Total
shareholders’
equity

Balance at April 1, 2019
 
139.8

 
$
1,997

$
46

$
(2,027
)
$
6,798

$
6,814

Net income
 

 



724

724

Other comprehensive income (Note 4)
 

 


18


18

Dividends declared ($0.8300 per share)
 

 



(115
)
(115
)
Effect of stock-based compensation expense
 

 

3



3

CP Common Shares repurchased (Note 10)
 
(0.9
)
 
(14
)


(282
)
(296
)
Shares issued under stock option plan
 
0.2

 
13

(4
)


9

Balance at June 30, 2019
 
139.1

 
$
1,996

$
45

$
(2,009
)
$
7,125

$
7,157

Balance at April 1, 2018
 
143.7

 
$
2,022

$
45

$
(1,705
)
$
6,072

$
6,434

Net income
 

 



436

436

Other comprehensive income (Note 4)
 

 


32


32

Dividends declared ($0.6500 per share)
 

 



(93
)
(93
)
Effect of stock-based compensation expense
 

 

2



2

CP Common Shares repurchased (Note 10)
 
(1.2
)
 
(15
)


(226
)
(241
)
Shares issued under stock option plan
 

 
6

(2
)


4

Balance at June 30, 2018
 
142.5

 
$
2,013

$
45

$
(1,673
)
$
6,189

$
6,574


 
For the six months ended June 30
(in millions of Canadian dollars except per share data)
 
Common shares (in millions)

 
Share
capital

Additional
paid-in
capital

Accumulated
other
comprehensive
loss

Retained
earnings

Total
shareholders’
equity

Balance at December 31, 2018, as previously reported
 
140.5

 
$
2,002

$
42

$
(2,043
)
$
6,635

$
6,636

Impact of accounting change (Note 2)
 

 



(5
)
(5
)
Balance at January 1, 2019, as restated
 
140.5

 
$
2,002

$
42

$
(2,043
)
$
6,630

$
6,631

Net income
 

 



1,158

1,158

Other comprehensive income (Note 4)
 

 


34


34

Dividends declared ($1.4800 per share)
 

 



(206
)
(206
)
Effect of stock-based compensation expense
 

 

8



8

CP Common Shares repurchased (Note 10)
 
(1.6
)
 
(24
)


(457
)
(481
)
Shares issued under stock option plan
 
0.2

 
18

(5
)


13

Balance at June 30, 2019
 
139.1

 
$
1,996

$
45

$
(2,009
)
$
7,125

$
7,157

Balance at January 1, 2018
 
144.9

 
$
2,032

$
43

$
(1,741
)
$
6,103

$
6,437

Net income
 

 



784

784

Other comprehensive income (Note 4)
 

 


68


68

Dividends declared ($1.2125 per share)
 

 



(174
)
(174
)
Effect of stock-based compensation expense
 

 

6



6

CP Common Shares repurchased (Note 10)
 
(2.5
)
 
(35
)


(524
)
(559
)
Shares issued under stock option plan
 
0.1

 
16

(4
)


12

Balance at June 30, 2018
 
142.5

 
$
2,013

$
45

$
(1,673
)
$
6,189

$
6,574

See Notes to Interim Consolidated Financial Statements.

6


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(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 2018 annual consolidated financial statements and notes included in CP's 2018 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 2018 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 2019

Leases

On January 1, 2019, the Company adopted the new Accounting Standards Update ("ASU") 2016-02, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 842, Leases. Using the cumulative-effect adjustment transition approach, the Company recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Accordingly, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.

In January 2019, the Company implemented a lease management system to assist in delivering the required accounting changes. To facilitate the transition, the Company made policy choices to utilize available practical expedients provided by the new standard, including the:
Acceptance of the package of practical expedients, permitting the Company not to reassess lease existence, classification, and capitalization of initial direct costs previously determined for all leases under Topic 840, Leases;
Acceptance of the previous accounting treatment for land easements where Topic 840 was not applied; and
Use of hindsight at transition to determine lease term length.

Operating leases with fixed terms and in-substance fixed terms were transitioned by recognizing both an operating lease liability and right-of-use ("ROU") asset. Operating lease liabilities and ROU assets were calculated at the present value of remaining lease payments using the Company’s incremental borrowing interest rate as at January 1, 2019. ROU assets were further modified to include previously accrued balances for prepayments and initial direct costs, but reduced for accrued lease incentives. The Company did not recognize operating lease liabilities or ROU assets for leases requiring variable payment not dependent on an index or rate, or short term leases with a term of 12 months or less.

On adoption, the standard had a material impact on the Company's consolidated balance sheet, but did not have a significant impact on its consolidated statement of income. The most significant impact was the recognition of operating lease ROU assets and operating lease liabilities, while the Company's accounting for finance leases remained substantially unchanged.


7


The impact of the adoption of ASC 842 as at January 1, 2019 was as follows:
(in millions of Canadian dollars)
As reported
December 31, 2018
New lease standard
cumulative-effect
As restated
January 1, 2019
Assets
 
 
 
   Properties
$
18,418

$
(12
)
$
18,406

   Other assets
71

399

470

Liabilities
 
 
 
   Accounts payable and accrued liabilities
$
1,449

$
58

$
1,507

   Other long-term liabilities
237

337

574

   Deferred income taxes
3,518

(3
)
3,515

Shareholders' equity
 
 
 
   Retained earnings
$
6,635

$
(5
)
$
6,630



There was no significant impact to lessor accounting upon the adoption of ASC 842.

3    Revenues

The following table disaggregates the Company’s revenues from contracts with customers by major source:
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2018
2019
2018
Freight


 
 
Grain
$
422

$
372

$
802

$
729

Coal
173

164

331

315

Potash
136

116

250

228

Fertilizers and sulphur
63

55

120

116

Forest products
78

69

151

135

Energy, chemicals and plastics
346

278

661

535

Metals, minerals and consumer products
205

204

378

387

Automotive
104

91

180

162

Intermodal
404

360

784

727

Total freight revenues
1,931

1,709

3,657

3,334

Non-freight excluding leasing revenues
30

25

57

48

Revenues from contracts with customers
1,961

1,734

3,714

3,382

Leasing revenues
16

16

30

30

Total revenues
$
1,977

$
1,750

$
3,744

$
3,412


Contract liabilities                         
(in millions of Canadian dollars)
2019
2018
Balance at January 1     
$
2

$
2

Balance at April 1
$
73

$
2

Balance at June 30
$
74

$
3



Contract liabilities represent payments received for performance obligations not yet satisfied and relate to deferred revenue and are presented as components of Accounts payable and accrued liabilities and Other long-term liabilities on the Company's Interim Consolidated Balance Sheets. Revenue recognized during the three and six months ended June 30, 2019, included in contract liabilities at the beginning of the periods, was $3 million and $2 million, respectively (three and six months ended June 30, 2018 - $2 million and $2 million, respectively). Increases in contract liabilities arising from cash received net of amounts recognized as revenue on satisfaction of performance obligations during the three and six months ended June 30, 2019 were $3 million and $74 million, respectively (three and six months ended June 30, 2018 - $3 million and $3 million, respectively).

8


4    Changes in Accumulated other comprehensive loss ("AOCL") by component

 
For the three months ended June 30
(in millions of Canadian dollars)
Foreign currency net of hedging activities(1)

Derivatives and
other
(1)

Pension and post-
retirement defined
benefit plans
(1)

Total(1)

Opening balance, April 1, 2019
$
113

$
(61
)
$
(2,079
)
$
(2,027
)
Other comprehensive (loss) income before reclassifications
(1
)
1



Amounts reclassified from accumulated other comprehensive loss

2

16

18

Net other comprehensive (loss) income
(1
)
3

16

18

Closing balance, June 30, 2019
$
112

$
(58
)
$
(2,063
)
$
(2,009
)
Opening balance, April 1, 2018
$
109

$
(74
)
$
(1,740
)
$
(1,705
)
Other comprehensive income before reclassifications
1

8


9

Amounts reclassified from accumulated other comprehensive loss

2

21

23

Net other comprehensive income
1

10

21

32

Closing balance, June 30, 2018
$
110

$
(64
)
$
(1,719
)
$
(1,673
)
(1) Amounts are presented net of tax.
 
For the six months ended June 30
(in millions of Canadian dollars)
Foreign currency net of hedging activities(1)

Derivatives and
other
(1)

Pension and post-
retirement defined
benefit plans
(1)

Total(1)

Opening balance, January 1, 2019
$
113

$
(62
)
$
(2,094
)
$
(2,043
)
Other comprehensive loss before reclassifications
(1
)

(1
)
(2
)
Amounts reclassified from accumulated other comprehensive loss

4

32

36

Net other comprehensive (loss) income
(1
)
4

31

34

Closing balance, June 30, 2019
$
112

$
(58
)
$
(2,063
)
$
(2,009
)
Opening balance, January 1, 2018
$
109

$
(89
)
$
(1,761
)
$
(1,741
)
Other comprehensive income (loss) before reclassifications
1

21

(1
)
21

Amounts reclassified from accumulated other comprehensive loss

4

43

47

Net other comprehensive income
1

25

42

68

Closing balance, June 30, 2018
$
110

$
(64
)
$
(1,719
)
$
(1,673
)

1) Amounts are presented net of tax.

Amounts in Pension and post-retirement defined benefit plans reclassified from AOCL are as follows:
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2018
2019
2018
Amortization of prior service costs(1)
$
1

$

$
1

$
(1
)
Recognition of net actuarial loss(1)
20

29

41

59

Total before income tax
21

29

42

58

Income tax recovery
(5
)
(8
)
(10
)
(15
)
Total net of income tax
$
16

$
21

$
32

$
43

(1) Impacts "Other components of net periodic benefit recovery" on the Interim Consolidated Statements of Income.


9


5    Other (income) expense
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2018
2019
2018
Foreign exchange (gain) loss on debt and lease liabilities
$
(37
)
$
44

$
(82
)
$
93

Other foreign exchange (gains) losses
(4
)
4

(6
)
3

Other
1

4

1

7

Other (income) expense
$
(40
)
$
52

$
(87
)
$
103



6    Income taxes
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2018
2019
2018
Current income tax expense
$
142

$
85

$
243

$
166

Deferred income tax (recovery) expense
(18
)
37

20

78

Income tax expense
$
124

$
122

$
263

$
244



During the three months ended June 30, 2019, legislation was enacted to decrease the Alberta provincial corporate income tax rate. As a result of this change, the Company recorded a deferred tax recovery of $88 million in the second quarter of 2019 related to the revaluation of its deferred income tax balances as at January 1, 2019.

During the three months ended June 30, 2018, legislation was enacted to decrease the Iowa and Missouri state corporate income tax rates. As a result of these changes, the Company recorded a deferred tax recovery of $21 million in the second quarter of 2018 related to the revaluation of deferred income tax balances as at January 1, 2018.

The effective tax rates for the three and six months ended June 30, 2019 were 14.63% and 18.50%, respectively, compared to 21.88% and 23.73%, respectively for the same periods in 2018.

For the three months ended June 30, 2019, the effective tax rate excluding the discrete items of the foreign exchange ("FX") gain of $37 million on debt and lease liabilities and the $88 million deferred tax recovery on the Alberta provincial corporate income tax rate change, was 25.75%.

For the three months ended June 30, 2018, the effective tax rate excluding the discrete items of the FX loss of $44 million on debt and the $21 million deferred tax recovery on the Iowa and Missouri state corporate income tax rate changes, was 24.75%.

For the six months ended June 30, 2019, the effective tax rate excluding the discrete items of the FX gain of $82 million on debt and lease liabilities and the $88 million deferred tax recovery on the Alberta provincial corporate income tax rate change, was 25.75%.

For the six months ended June 30, 2018, the effective tax rate excluding the discrete items of the FX loss of $93 million on debt and the $21 million deferred tax recovery on the Iowa and Missouri state corporate income tax rate changes, was 24.75%.

7    Earnings per share

At June 30, 2019, the number of CP Common Shares outstanding was 139.1 million (June 30, 2018 - 142.5 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 June 30
For the six months ended June 30
(in millions)
2019
2018
2019
2018
Weighted-average basic shares outstanding
139.7

142.8

139.9

143.6

Dilutive effect of stock options
0.5

0.4

0.5

0.4

Weighted-average diluted shares outstanding
140.2

143.2

140.4

144.0



For the three months ended June 30, 2019, there were no options excluded from the computation of diluted earnings per share (three months ended June 30, 2018 - 0.1 million). For the six months ended June 30, 2019, there were 0.1 million options excluded

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from the computation of diluted earnings per share because their effects were not dilutive (six months ended June 30, 2018 - 0.2 million).

8    Debt

Retirement of long-term debt

During the three months ended June 30, 2019, the Company repaid U.S. $350 million 7.250% 10-year notes at maturity for a total of U.S. $350 million ($471 million).

Issuance of long-term debt

During the three months ended March 31, 2019, the Company issued $400 million 3.150% 10-year notes due March 13, 2029 for net proceeds of $397 million. These notes pay interest semi-annually and are unsecured but carry a negative pledge.

Commercial paper program

The Company has a commercial paper program which enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. The commercial paper is backed by the U.S. $1.0 billion revolving credit facility. As at June 30, 2019, the Company had total commercial paper borrowings of U.S. $185 million ($242 million), presented in "Long-term debt maturing within one year" on the Company's Interim Consolidated Balance Sheets (December 31, 2018 - $nil). The weighted-average interest rate on these borrowings was 2.64%.

The Company presents issuances and repayments of commercial paper, all of which have a maturity of less than 90 days, in the Company's Interim Consolidated Statements of Cash Flows on a net basis.

9 Leases

The Company has leases for rolling stock, buildings, vehicles, railway equipment, and roadway machines. CP has entered into rolling stock leases that are fully variable or contain both fixed and variable components. Variable components are dependent on the hours and miles that the underlying equipment has been used. Fixed term, short-term, and variable operating lease costs are recorded in Equipment rents and Purchased services and other on the Company's Interim Consolidated Income Statements. Components of finance lease costs are recorded in Depreciation and amortization and Net interest expense on the Company's Interim Consolidated Income Statements.

The Company determines lease existence and classification at the lease inception date. Leases are identified when an agreement conveys the right to control identified property for a period of time in exchange for consideration. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments include fixed and variable payments that are based on an index or a rate. If the Company's leases do not provide a readily determinable implicit interest rate, the Company uses internal incremental secured borrowing rates for comparable tenor in the same currency at the commencement date in determining the present value of lease payments. Operating and finance lease ROU assets also include lease prepayments and initial direct costs, but are reduced by lease incentives. The lease term may include periods associated with options to extend or exclude periods associated with options to terminate the lease when it is reasonably certain that the Company will exercise these options. The Company’s leases have remaining terms from one to 12 years, some of which include options to extend for up to an additional 10 years and some of which include options to terminate within one year.

The Company has short-term operating leases with terms of 12 months or less, some of which include options to purchase that the Company is not reasonably certain to exercise. The Company has elected to apply the recognition exemption and, as such, accounts for leases with a term of 12 months or less off-balance sheet. Therefore, lease payments on these short-term operating leases are not included in operating lease ROU assets and liabilities, but are recognized as an expense in the Company's Consolidated Statements of Income on a straight-line basis over the term of the lease. Further, the Company has elected to combine lease and non-lease components for all leases, except for leases of roadway machines.

Residual value guarantees are provided on certain rolling stock and vehicle operating leases. Cumulatively, these guarantees are limited to $2 million and are not included in lease liabilities as it is not currently probable that any amounts will be owed under these residual value guarantees.


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The components of lease expense are as follows:
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2019
Operating lease cost
$
23

$
45

Short-term lease cost
1

2

Variable lease cost
5

6

Sublease income
(1
)
(1
)
 
 
 
Finance Lease Cost
 
 
Amortization of right-of use-assets
3

5

Interest on lease liabilities
2

5

Total lease costs
$
33

$
62



Supplemental balance sheet information related to leases is as follows:
 
 
As at June 30
(in millions of Canadian dollars)
Classification
2019
Assets
 
 
Operating
Other assets
$
381

Finance
Properties, net book value
181

 
 
 
Liabilities
 
 
Current
 
 
Operating
Accounts payable and accrued liabilities
72

Finance
Long-term debt maturing within one year
7

Long-term
 
 
Operating
Other long-term liabilities
303

Finance
Long-term debt
148



The following table provides the Company's weighted average remaining lease terms and discount rates:
 
As at June 30
(in millions of Canadian dollars)
2019
Weighted Average Remaining Lease Term
 
Operating leases
8 years

Finance leases
4 years

 
 
Weighted Average Discount Rate
 
Operating leases
3.50
%
Finance leases
7.03
%


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Supplemental information related to leases is as follows:
 
For the three months ended June 30
For the six months ended June 30
(in millions of Canadian dollars)
2019
2019
Cash paid for amounts included in measurement of lease liabilities
 
 
Operating cash outflows from operating leases
$
18

$
46

Operating cash outflows from finance leases
2

5

Financing cash outflows from finance leases
1

2

 
 
 
Right-of-use assets obtained in exchange for lease liabilities
 
 
Operating leases
$
14

$