Notes to Consolidated Financial Statements
December 31, 2016
Canadian Pacific Railway Limited (“CPRL”), through its subsidiaries (collectively referred to as “CP” or “the Company”), operates a transcontinental railway in Canada and the United States. CP provides rail and intermodal transportation services over a network of approximately
12,400
miles, serving the principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. CP’s railway network feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend the Company’s market reach east of Montreal in Canada, throughout the U.S. and into Mexico. CP transports bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, fertilizers and sulphur. Merchandise freight consists of finished vehicles and automotive parts, as well as forest, industrial and consumer products. Intermodal traffic consists largely of retail goods in overseas containers that can be transported by train, ship and truck, and in domestic containers and trailers that can be moved by train and truck.
1 Summary of significant accounting policies
Accounting principles generally accepted in the United States of America (“GAAP”)
These consolidated financial statements are expressed in Canadian dollars and have been prepared in accordance with GAAP.
Principles of consolidation
These consolidated financial statements include the accounts of CP and all its subsidiaries. The Company’s investments in which it has significant influence are accounted for using the equity method. All intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the year, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates, including those related to environmental liabilities, pensions and other benefits, depreciable lives of properties, deferred income tax assets and liabilities, as well as legal and personal injury liabilities based upon currently available information. Actual results could differ from these estimates.
Principal subsidiaries
The following list sets out CPRL’s principal railway operating subsidiaries, including the jurisdiction of incorporation. All of these subsidiaries are wholly owned, directly or indirectly, by CPRL as at
December 31, 2016
.
|
|
|
Principal subsidiary
|
Incorporated under
the laws of
|
Canadian Pacific Railway Company
|
Canada
|
Soo Line Railroad Company (“Soo Line”)
|
Minnesota
|
Delaware and Hudson Railway Company, Inc. (“D&H”)
|
Delaware
|
Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”)
|
Delaware
|
Mount Stephen Properties Inc. (“MSP”)
|
Canada
|
Revenue recognition
Railway freight revenues are recognized based on the percentage of completed service method. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred. Volume rebates to customers are accrued as a reduction of freight revenues based on estimated volume and contract terms as freight service is provided. Other revenues, including passenger revenue, revenue from leasing certain assets, switching fees, and revenue from logistics services, are recognized as service is performed or contractual obligations are met. Revenues are presented net of taxes collected from customers and remitted to government authorities.
Cash and cash equivalents
Cash and cash equivalents include highly liquid short-term investments that are readily convertible to cash with original maturities of
three
months or less, but exclude cash and cash equivalents subject to restrictions.
Restricted cash and cash equivalents
Cash and cash equivalents that are restricted as to withdrawal or usage, in accordance with specific agreements, are presented as restricted cash and cash equivalents on the balance sheets when applicable.
Foreign currency translation
Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into Canadian dollars at the year-end exchange rate for monetary items and at the historical exchange rates for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the related transactions. Foreign exchange ("FX") gains and losses, other than those arising from the translation of the Company’s net investment in foreign subsidiaries, are included in income.
The accounts of the Company’s foreign subsidiaries are translated into Canadian dollars using the year-end exchange rate for assets and liabilities and the average exchange rates during the year for revenues, expenses, gains and losses. FX gains and losses arising from the translation of the foreign subsidiaries’ assets and liabilities are included in “Other comprehensive income (loss)”. A portion of U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. As a result, unrealized FX gains and losses on U.S. dollar-denominated long-term debt, designated as a hedge, are offset against FX gains and losses arising from the translation of foreign subsidiaries’ accounts in “Other comprehensive income (loss)”.
Pensions and other benefits
Pension costs are actuarially determined using the projected-benefit method pro-rated over the credited service periods of employees. This method incorporates management’s best estimates of expected plan investment performance, salary escalation and retirement ages of employees. The expected return on fund assets is calculated using market-related asset values developed from a
five-year average of market values
for the fund’s public equity securities and absolute return strategies (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the fund’s fixed income, real estate and infrastructure securities, subject to the market-related asset value not being greater than
120%
of the market value nor being less than
80%
of the market value. The discount rate used to determine the projected-benefit obligation is based on blended market interest rates on high-quality corporate debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of
10%
of the greater of the benefit obligation and the market-related value of plan assets are amortized over the expected average remaining service period of active employees expected to receive benefits under the plan (approximately
11
years). Prior service costs arising from collectively bargained amendments to pension plan benefit provisions are amortized over the term of the applicable union agreement. Prior service costs arising from all other sources are amortized over the expected average remaining service period of active employees who are expected to receive benefits under the plan at the date of amendment.
Costs for post-retirement and post-employment benefits other than pensions, including post-retirement health care and life insurance and some workers’ compensation and long-term disability benefits in Canada, are actuarially determined on a basis similar to pension costs.
The over or under funded status of defined benefit pension and other post-retirement benefit plans are measured as the difference between the fair value of the plan assets and the benefit obligation, and are recognized on the balance sheets. In addition, any unrecognized actuarial gains and losses and prior service costs and credits that arise during the period are recognized as a component of “Other comprehensive income (loss)”, net of tax.
Gains and losses on post-employment benefits that do not vest or accumulate, including some workers’ compensation and long-term disability benefits in Canada, are included immediately in income as “Compensation and benefits”.
Materials and supplies
Materials and supplies are carried at the lower of average cost or market value and consist primarily of fuel and parts used in the repair and maintenance of track structures, equipment, locomotives and freight cars.
Properties
Fixed asset additions and major renewals are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated depreciation and any impairment. When there is a legal obligation associated with the retirement of property, a liability is initially recognized at its fair value and a corresponding asset retirement cost is added to the gross book value of the related asset and amortized to expense over the estimated term to retirement. The Company reviews the carrying amounts of its properties whenever changes in circumstances indicate that such carrying amounts may not be recoverable based on future undiscounted cash flows. When such properties are determined to be impaired, recorded asset values are revised to their fair value.
The Company recognizes expenditures as additions to properties or operating expenses based on whether the expenditures increase the output or service capacity, lower the associated operating costs or extend the useful life of the properties and whether the expenditures exceed minimum physical and financial thresholds.
Much of the additions to properties, both new and replacement properties, are self-constructed. These are initially recorded at cost, including direct costs and attributable indirect costs, overheads and carrying costs. Direct costs include, among other things, labour costs, purchased services, equipment costs and material costs. Attributable indirect costs and overheads include incremental long-term variable costs resulting from the execution of capital projects. Indirect costs mainly include work trains, material distribution, highway vehicles and work equipment. Overheads primarily include a portion of the engineering department’s costs, which plans, designs and administers these capital projects. These costs are allocated to projects by applying a measure consistent with the nature of the cost, based on cost studies. For replacement properties, the project costs are allocated to dismantling and installation based on cost studies. Dismantling work is performed concurrently with the installation.
Ballast programs including undercutting, shoulder ballasting and renewal programs that form part of the annual track program are capitalized as this work, and the related added ballast material, significantly improves drainage, which in turn extends the life of ties and other track materials. These costs are tracked separately from the underlying assets and depreciated over the period to the next estimated similar ballast program. Spot replacement of ballast is considered a repair which is expensed as incurred.
The costs of large refurbishments are capitalized and locomotive overhauls are expensed as incurred, except where overhauls represent a betterment of the locomotive in which case costs are capitalized.
The Company capitalizes development costs for major new computer systems.
The Company follows group depreciation which groups assets which are similar in nature and have similar economic lives. The property groups are depreciated on a straight-line basis reflecting their expected economic lives determined by studies of historical retirements of properties in the group and engineering estimates of changes in current operations and of technological advances. Actual use and retirement of assets may vary from current estimates, which would impact the amount of depreciation expense recognized in future periods. Rail and other track material in the U.S. are depreciated based directly on usage.
When depreciable property is retired or otherwise disposed of in the normal course of business, the book value, less net salvage proceeds, is charged to accumulated depreciation and if different than the assumptions under the depreciation study could potentially result in adjusted depreciation expense over a period of years. However, when removal costs exceed the salvage value on assets and the Company has no legal obligation to remove the assets, the removal costs incurred are charged to income in the period in which the assets are removed and are not charged to accumulated depreciation.
For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in depreciation studies, CP records a gain or loss for the difference between net proceeds and net book value of the assets sold or retired.
Equipment under capital lease is included in Properties and depreciated over the period of expected use.
Assets held for sale
Assets to be disposed that meet the held for sale criteria are reported at the lower of their carrying amount and fair value, less costs to sell, and are no longer depreciated.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets upon acquisition of a business. Goodwill is assigned to the reporting units that are expected to benefit from the business acquisition which, after integration of operations with the railway network, may be different than the acquired business.
The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year as at October 1
st
, or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors (“Step 0”) to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test (“Step 1”). Qualitative factors include but are not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If Step 0 indicates that the carrying value is less than the fair value, then performing the two-step impairment test is unnecessary. Under Step 1, the fair value of the reporting unit is compared to its carrying value, including goodwill. If the fair value of the reporting unit is less than its carrying value, goodwill is potentially impaired. The impairment charge that would be recognized is the excess of the carrying value of the goodwill over the fair value of the goodwill, determined in the same manner as in a business combination.
Intangible assets with finite lives are amortized on a straight-line basis over the estimated useful lives of the respective assets. Favourable leases, customer relationships and interline contracts have amortization periods ranging from
15
to
20
years. When there is a change in the estimated useful life of an intangible asset with a finite life, amortization is adjusted prospectively.
Financial instruments
Financial instruments are contracts that give rise to a financial asset of one party and a financial liability or equity instrument of another party.
Financial instruments are recognized initially at fair value, which is the amount of consideration that would be agreed upon in an arm’s-length transaction between willing parties.
Subsequent measurement depends on how the financial instruments have been classified. Accounts receivable and investments, classified as loans and receivables, are measured at amortized cost, using the effective interest method. Cash and cash equivalents and derivatives are classified as held for trading and are measured at fair value. Accounts payable, accrued liabilities, short-term borrowings, dividends payable, other long-term liabilities and long-term debt, classified as other liabilities, are also measured at amortized cost.
Derivative financial instruments
Derivative financial and commodity instruments may be used from time to time by the Company to manage its exposure to risks relating to foreign currency exchange rates, stock-based compensation, interest rates and fuel prices. When CP utilizes derivative instruments in hedging relationships, CP identifies, designates and documents those hedging transactions and regularly tests the transactions to demonstrate effectiveness in order to continue hedge accounting.
All derivative instruments are classified as held for trading and recorded at fair value. Any change in the fair value of derivatives not designated as hedges is recognized in the period in which the change occurs in the Consolidated Statements of Income in the line item to which the derivative instrument is related. On the Consolidated Balance Sheets they are classified in “Other assets”, “Other long-term liabilities”, “Other current assets” or “Accounts payable and accrued liabilities” as applicable. Gains and losses arising from derivative instruments may affect the following lines on the Consolidated Statements of Income: “Revenues”, “Compensation and benefits”, “Fuel”, “Other income and charges”, and “Net interest expense”.
For fair value hedges, the periodic changes in values are recognized in income, on the same line as the changes in values of the hedged items are also recorded. For a cash flow hedge, the change in value of the effective portion is recognized in “Other comprehensive income (loss)”. Any ineffectiveness within an effective cash flow hedge is recognized in income as it arises in the same income account as the hedged item. Should a cash flow hedging relationship become ineffective, previously unrealized gains and losses remain within “Accumulated other comprehensive loss” until the hedged item is settled and, prospectively, future changes in value of the derivative are recognized in income. The change in value of the effective portion of a cash flow hedge remains in “Accumulated other comprehensive loss” until the related hedged item settles, at which time amounts recognized in “Accumulated other comprehensive loss” are reclassified to the same income or balance sheet account that records the hedged item.
In the Consolidated Statements of Cash Flows, cash flows relating to derivative instruments designated as hedges are included in the same line as the related hedged items.
Environmental remediation
Environmental remediation accruals, recorded on an undiscounted basis unless a reliably determinable estimate as to amount and timing of costs can be established, cover site-specific remediation programs. The accruals are recorded when the costs to remediate are probable and reasonably estimable. Certain future costs to monitor sites are discounted at an adjusted risk free rate. Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion, which is recorded in “Accounts payable and accrued liabilities”.
Income taxes
The Company follows the liability method of accounting for income taxes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period during which the change occurs.
When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, CP considers whether it is more likely than not that all or some portion of CP’s deferred tax assets will not be realized, based on management’s judgment using available evidence about future events.
At times, tax benefit claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit
that is greater than
50%
likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in CP’s tax returns that do not meet these recognition and measurement standards.
Investment and other similar tax credits are deferred on the Consolidated Balance Sheets and amortized to “Income tax expense” as the related asset is recognized in income.
Earnings per share
Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method for determining the dilutive effect of options.
Stock-based compensation
CP follows the fair value based approach to account for stock options. Compensation expense and an increase in “Additional paid-in capital” are recognized for stock options over their vesting period, or over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period, based on their estimated fair values on the grant date, as determined using the Black-Scholes option-pricing model.
Any consideration paid by employees on exercise of stock options is credited to “Share capital” when the option is exercised and the recorded fair value of the option is removed from “Additional paid-in capital“ and credited to “Share capital”.
Compensation expense is also recognized for deferred share units (“DSUs”), performance share units (“PSUs”) and restricted share units (“RSUs”) using the fair value method. Compensation expense is recognized over the vesting period, or for PSUs and DSUs only, over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period. Forfeitures of DSUs, PSUs and RSUs are estimated at issuance and subsequently at the balance sheet date.
The employee share purchase plan (“ESPP”) gives rise to compensation expense that is recognized using the issue price by amortizing the cost over the vesting period or over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period.
2 Accounting changes
Implemented in
2016
Early Adoption of Restricted Cash
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-18, Restricted Cash a consensus of the FASB Emerging Issues Task Force under FASB Accounting Standards Codification ("ASC")Topic 230 Statement of Cash Flows. The amendments required the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Restricted cash will therefore be included in beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The updated standard does not provide a definition of restricted cash and restricted cash equivalents. This ASU is effective retrospectively for public entities for fiscal years and interim periods within those years, beginning on or after December 15, 2017. Early adoption of this ASU is permitted. The Company adopted the provisions of this ASU during the fourth quarter of 2016. As a result of the adoption of ASU 2016-18, the 2014 comparative Statement of Cash Flows has been restated to reflect
$411 million
in restricted cash and cash equivalents used to collateralize letters of credit in the beginning-of-period total cash and cash equivalents, with the corresponding change in restricted cash and cash equivalents of the year removed from investing activities. There was no restricted cash balance remaining at the end of both comparative periods.
Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis under FASB 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 existing VIEs and all arrangements that might give rise to a VIE; no changes to consolidation, disclosure or financial statement presentation were required as a result of this evaluation.
Future changes
Simplifying the Subsequent Measurement of Inventory
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory under FASB ASC Topic 330 Inventory. The amendments require reporting entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using the first-in, first-out or average cost basis. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2016, and will be applied prospectively. The Company does not anticipate that the adoption of this ASU will have an impact on the consolidated financial statements.
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 assessing contractual arrangements through a cross functional team and assessing potential system changes required to deliver required accounting changes. There will be a material increase to right of use assets and lease liabilities on the Consolidated balance sheet, but the Company does not anticipate a material impact on the Consolidated statement of income.
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. CP is currently assessing the transition methods for adoption in the first quarter of 2018. CP expects to continue to recognize freight revenue, which represents greater than 95% of CP's annual revenues, over time and is currently reviewing agreements to determine the impact of the new standard on non-freight revenue.
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 does not anticipate the adoption of this ASU will have an impact on the consolidated financial statements.
3 Other income and charges
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Foreign exchange (gain) loss on long-term debt
|
$
|
(79
|
)
|
$
|
297
|
|
$
|
11
|
|
Other foreign exchange gains
|
(5
|
)
|
(24
|
)
|
—
|
|
Early redemption premium on notes (Note 16)
|
—
|
|
47
|
|
—
|
|
Legal settlement
|
25
|
|
—
|
|
—
|
|
Other
|
14
|
|
15
|
|
8
|
|
Total other income and charges
|
$
|
(45
|
)
|
$
|
335
|
|
$
|
19
|
|
4 Net interest expense
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Interest cost
|
$
|
497
|
|
$
|
409
|
|
$
|
301
|
|
Interest capitalized to Properties
|
(25
|
)
|
(14
|
)
|
(15
|
)
|
Interest expense
|
472
|
|
395
|
|
286
|
|
Interest income
|
(1
|
)
|
(1
|
)
|
(4
|
)
|
Net interest expense
|
$
|
471
|
|
$
|
394
|
|
$
|
282
|
|
Interest expense includes interest on capital leases of
$11 million
for the year ended December 31, 2016
(
2015
–
$11 million
;
2014
–
$12 million
).
5 Income taxes
The following is a summary of the major components of the Company’s income tax expense:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Current income tax expense
|
$
|
233
|
|
$
|
373
|
|
$
|
208
|
|
Deferred income tax expense
|
|
|
|
Origination and reversal of temporary differences
|
336
|
|
105
|
|
317
|
|
Effect of tax rate increases
|
—
|
|
23
|
|
—
|
|
Effect of hedge of net investment in foreign subsidiaries
|
(20
|
)
|
100
|
|
42
|
|
Other
|
4
|
|
6
|
|
(5
|
)
|
Total deferred income tax expense
|
320
|
|
234
|
|
354
|
|
Total income taxes
|
$
|
553
|
|
$
|
607
|
|
$
|
562
|
|
Income before income tax expense
|
|
|
|
Canada
|
$
|
1,513
|
|
$
|
1,099
|
|
$
|
1,269
|
|
Foreign
|
639
|
|
860
|
|
769
|
|
Total income before income tax expense
|
$
|
2,152
|
|
$
|
1,959
|
|
$
|
2,038
|
|
Income tax expense
|
|
|
|
Current
|
|
|
|
Canada
|
$
|
165
|
|
$
|
173
|
|
$
|
50
|
|
Foreign
|
68
|
|
200
|
|
158
|
|
Total current income tax expense
|
233
|
|
373
|
|
208
|
|
Deferred
|
|
|
|
Canada
|
207
|
|
163
|
|
292
|
|
Foreign
|
113
|
|
71
|
|
62
|
|
Total deferred income tax expense
|
320
|
|
234
|
|
354
|
|
Total income taxes
|
$
|
553
|
|
$
|
607
|
|
$
|
562
|
|
The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carry forwards. The items comprising the deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Deferred income tax assets
|
|
|
Amount related to tax losses carried forward
|
$
|
18
|
|
$
|
16
|
|
Liabilities carrying value in excess of tax basis
|
149
|
|
89
|
|
Future environmental remediation costs
|
30
|
|
33
|
|
Tax credits carried forward including minimum tax
|
—
|
|
—
|
|
Other
|
58
|
|
72
|
|
Total deferred income tax assets
|
255
|
|
210
|
|
Deferred income tax liabilities
|
|
|
Properties carrying value in excess of tax basis
|
3,796
|
|
3,553
|
|
Other
|
30
|
|
48
|
|
Total deferred income tax liabilities
|
3,826
|
|
3,601
|
|
Total net deferred income tax liabilities
|
$
|
3,571
|
|
$
|
3,391
|
|
The Company’s consolidated effective income tax rate differs from the expected Canadian statutory tax rates. Expected income tax expense at statutory rates is reconciled to income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars, except percentage)
|
2016
|
|
2015
|
|
2014
|
|
Statutory federal and provincial income tax rate (Canada)
|
26.65
|
%
|
26.47
|
%
|
26.31
|
%
|
Expected income tax expense at Canadian enacted statutory tax rates
|
$
|
573
|
|
$
|
519
|
|
$
|
536
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
(Gains) losses not subject to tax
|
(23
|
)
|
28
|
|
(5
|
)
|
Canadian tax rate differentials
|
—
|
|
1
|
|
(1
|
)
|
Foreign tax rate differentials
|
—
|
|
39
|
|
36
|
|
Effect of tax rate increases
|
—
|
|
23
|
|
—
|
|
Other
|
3
|
|
(3
|
)
|
(4
|
)
|
Income tax expense
|
$
|
553
|
|
$
|
607
|
|
$
|
562
|
|
The Company has
no
unrecognized tax benefits from capital losses at
December 31, 2016
and
2015
.
The Company has not provided a deferred liability for the income taxes, if any, which might become payable on any temporary difference associated with its foreign investments because the Company intends to indefinitely reinvest in its foreign investments and has no intention to realize this difference by a sale of its interest in foreign investments. It is not practical to calculate the amount of the deferred tax liability.
During the second quarter of 2015, legislation was enacted to increase the province of Alberta's corporate income tax rate. As a result, the Company recalculated its deferred income taxes as at January 1, 2015 based on this change and recorded an income tax expense of
$23 million
in the second quarter of 2015.
At
December 31, 2016
, the Company had income tax operating losses carried forward of
$48 million
, which have been recognized as a deferred tax asset. Certain of these losses carried forward will begin to expire in 2027, with the majority expiring between 2029 and 2035. The Company also has minimum tax credits of approximately
$1 million
that are carried forward indefinitely without expiration. The Company did not have any investment tax credits carried forward.
It is more likely than not that the Company will realize the majority of its deferred income tax assets from the generation of future taxable income, as the payments for provisions, reserves and accruals are made and losses and tax credits carried forward are utilized.
The following table provides a reconciliation of uncertain tax positions in relation to unrecognized tax benefits for Canada and the United States
for the year ended December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Unrecognized tax benefits at January 1
|
$
|
15
|
|
$
|
17
|
|
$
|
16
|
|
Increase in unrecognized:
|
|
|
|
Tax benefits related to the current year
|
—
|
|
4
|
|
2
|
|
Dispositions:
|
|
|
|
Gross uncertain tax benefits related to prior years
|
(2
|
)
|
(6
|
)
|
(1
|
)
|
Unrecognized tax benefits at December 31
|
$
|
13
|
|
$
|
15
|
|
$
|
17
|
|
If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at
December 31, 2016
would impact the Company’s effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Company’s Consolidated Statements of Income. The total amount of accrued interest and penalties in
2016
was
$1 million
(
2015
–
$4 million
;
2014
–
$1 million
). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at
December 31, 2016
was
$10 million
(
2015
–
$9 million
;
2014
–
$5 million
).
The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, or the relevant income tax in other international jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax matters for the years through 2012. The federal and provincial income tax returns filed for 2013 and subsequent years remain subject to examination by the Canadian taxation authorities. The Internal Revenue Service ("IRS") of the United States has completed their examinations and issued notices of deficiency for the tax years 2012 and 2013. The Company disagrees with many of their proposed adjustments, and is at the IRS Appeals for those years. The income tax returns for 2014 and subsequent years continue to remain subject to examination by the IRS. Additionally, various U.S. state tax authorities are examining the Company's state income tax returns for the years 2011 through 2015. The Company believes that it has recorded sufficient income tax reserves at
December 31, 2016
with respect to these income tax examinations.
The Company does not anticipate any material changes to the unrecognized tax benefits previously disclosed within the next twelve months as at
December 31, 2016
.
6 Earnings per share
Basic earnings per share have been calculated using net income for the year divided by the weighted average number of shares outstanding during the year.
Diluted earnings per share have been calculated using the treasury stock method which assumes that any proceeds received from the exercise of in-the-money options would be used to purchase CP Common Shares at the average market price for the period. For purposes of this calculation, at
December 31, 2016
, there were
2.2 million
dilutive options outstanding (
2015
–
2.5 million
;
2014
–
3.1 million
).
The number of shares used and the earnings per share calculations are reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars, except per share data)
|
2016
|
|
2015
|
|
2014
|
|
Net income
|
$
|
1,599
|
|
$
|
1,352
|
|
$
|
1,476
|
|
Weighted average basic shares outstanding (millions)
|
149.6
|
|
159.7
|
|
172.8
|
|
Dilutive effect of weighted average number of stock options (millions)
|
0.9
|
|
1.3
|
|
1.6
|
|
Weighted average diluted shares outstanding (millions)
|
150.5
|
|
161.0
|
|
174.4
|
|
Earnings per share – basic
|
$
|
10.69
|
|
$
|
8.47
|
|
$
|
8.54
|
|
Earnings per share – diluted
|
$
|
10.63
|
|
$
|
8.40
|
|
$
|
8.46
|
|
In
2016
, the number of options excluded from the computation of diluted earnings per share because their effect was not dilutive was
0.4 million
(
2015
–
0.2 million
;
2014
–
0.1 million
).
7 Other comprehensive income (loss) and accumulated other comprehensive loss
The components of “Accumulated other comprehensive loss”, net of tax, are as follows:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Unrealized foreign exchange gain on translation of the net investment in U.S. subsidiaries
|
$
|
738
|
|
$
|
870
|
|
Unrealized foreign exchange loss on translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries
|
(611
|
)
|
(741
|
)
|
Deferred losses on settled hedge instruments
|
(3
|
)
|
(11
|
)
|
Unrealized effective losses on cash flow hedges
|
(99
|
)
|
(89
|
)
|
Amounts for defined benefit pension and other post-retirement plans not recognized in income (Note 20)
|
(1,822
|
)
|
(1,504
|
)
|
Equity accounted investments
|
(2
|
)
|
(2
|
)
|
Accumulated other comprehensive loss
|
$
|
(1,799
|
)
|
$
|
(1,477
|
)
|
The components of Other comprehensive (loss) income and the related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Before
tax amount
|
|
Income tax
recovery
(expense)
|
|
Net of tax
amount
|
|
For the year ended December 31, 2016
|
|
|
|
Unrealized foreign exchange gain (loss) on:
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
$
|
(132
|
)
|
$
|
—
|
|
$
|
(132
|
)
|
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 17)
|
150
|
|
(20
|
)
|
130
|
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
Realized loss on cash flow hedges recognized in income
|
10
|
|
(2
|
)
|
8
|
|
Unrealized loss on cash flow hedges
|
(12
|
)
|
2
|
|
(10
|
)
|
Change in pension and other benefits actuarial gains and losses
|
(422
|
)
|
113
|
|
(309
|
)
|
Change in prior service pension and other benefit costs
|
(12
|
)
|
3
|
|
(9
|
)
|
Other comprehensive loss
|
$
|
(418
|
)
|
$
|
96
|
|
$
|
(322
|
)
|
For the year ended December 31, 2015
|
|
|
|
Unrealized foreign exchange gain (loss) on:
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
$
|
671
|
|
$
|
—
|
|
$
|
671
|
|
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 17)
|
(757
|
)
|
100
|
|
(657
|
)
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
Realized loss on cash flow hedges recognized in income
|
7
|
|
(2
|
)
|
5
|
|
Unrealized loss on cash flow hedges
|
(76
|
)
|
21
|
|
(55
|
)
|
Change in pension and other benefits actuarial gains and losses
|
1,058
|
|
(281
|
)
|
777
|
|
Change in prior service pension and other benefit costs
|
1
|
|
—
|
|
1
|
|
Other comprehensive income
|
$
|
904
|
|
$
|
(162
|
)
|
$
|
742
|
|
For the year ended December 31, 2014
|
|
|
|
Unrealized foreign exchange gain (loss) on:
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
$
|
287
|
|
$
|
—
|
|
$
|
287
|
|
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 17)
|
(319
|
)
|
42
|
|
(277
|
)
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
Realized gain on cash flow hedges recognized in income
|
(3
|
)
|
—
|
|
(3
|
)
|
Unrealized loss on cash flow hedges
|
(46
|
)
|
12
|
|
(34
|
)
|
Change in pension and other benefits actuarial gains and losses
|
(873
|
)
|
234
|
|
(639
|
)
|
Change in prior service pension and other benefit costs
|
(68
|
)
|
18
|
|
(50
|
)
|
Other comprehensive loss
|
$
|
(1,022
|
)
|
$
|
306
|
|
$
|
(716
|
)
|
Changes in accumulated other comprehensive loss by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2016
|
$
|
129
|
|
$
|
(102
|
)
|
$
|
(1,504
|
)
|
$
|
(1,477
|
)
|
Other comprehensive (loss) income before reclassifications
|
(2
|
)
|
(10
|
)
|
(456
|
)
|
(468
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
8
|
|
138
|
|
146
|
|
Net current-period other comprehensive income (loss)
|
(2
|
)
|
(2
|
)
|
(318
|
)
|
(322
|
)
|
Closing balance, 2016
|
$
|
127
|
|
$
|
(104
|
)
|
$
|
(1,822
|
)
|
$
|
(1,799
|
)
|
Opening balance, 2015
|
$
|
115
|
|
$
|
(52
|
)
|
$
|
(2,282
|
)
|
$
|
(2,219
|
)
|
Other comprehensive income (loss) before reclassifications
|
14
|
|
(55
|
)
|
585
|
|
544
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
5
|
|
193
|
|
198
|
|
Net current-period other comprehensive income (loss)
|
14
|
|
(50
|
)
|
778
|
|
742
|
|
Closing balance, 2015
|
$
|
129
|
|
$
|
(102
|
)
|
$
|
(1,504
|
)
|
$
|
(1,477
|
)
|
(1)
Amounts are presented net of tax.
Amounts in Pension and post-retirement defined benefit plans reclassified from Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Amortization of prior service costs
(1)
|
$
|
(6
|
)
|
$
|
(5
|
)
|
Recognition of net actuarial loss
(1)
|
194
|
|
269
|
|
Total before income tax
|
$
|
188
|
|
$
|
264
|
|
Income tax recovery
|
(50
|
)
|
(71
|
)
|
Net of income tax
|
$
|
138
|
|
$
|
193
|
|
(1)
Impacts Compensation and benefits on the Consolidated Statements of Income.
8 Change in non-cash working capital balances related to operations
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Source (use) of cash:
|
|
|
|
Accounts receivable, net
|
$
|
44
|
|
$
|
80
|
|
$
|
(112
|
)
|
Materials and supplies
|
14
|
|
15
|
|
7
|
|
Other current assets
|
(18
|
)
|
55
|
|
(75
|
)
|
Accounts payable and accrued liabilities
|
(95
|
)
|
125
|
|
56
|
|
Change in non-cash working capital
|
$
|
(55
|
)
|
$
|
275
|
|
$
|
(124
|
)
|
9 Accounts receivable, net
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Freight
|
$
|
461
|
|
$
|
491
|
|
Non-freight
|
162
|
|
185
|
|
|
623
|
|
676
|
|
Allowance for doubtful accounts
|
(32
|
)
|
(31
|
)
|
Total accounts receivable, net
|
$
|
591
|
|
$
|
645
|
|
The Company maintains an allowance for doubtful accounts based on expected collectability of accounts receivable. Credit losses are based on specific identification of uncollectable accounts, the application of historical percentages by aging category and an assessment of the current economic environment. At
December 31, 2016
, allowances of
$32 million
(
2015
–
$31 million
) were recorded in “Accounts receivable, net”. During
2016
, provisions of
$7 million
of accounts receivable (
2015
–
$7 million
;
2014
–
$2 million
) were recorded within “Purchased services and other”.
10 Dispositions of properties
Gain on sale of Obico
During the fourth quarter of 2016, the Company completed the sale of its Obico rail yard, for gross proceeds of
$38 million
. The Company recorded a gain on sale of
$37 million
(
$33 million
after tax) within "Purchased services and other" from the transaction.
Gain on sale of Arbutus Corridor
In March 2016, the Company completed 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
(
$43 million
after tax) within "Purchased services and other" from the transaction during the first quarter of 2016.
Gain on sale of Delaware & Hudson South
During the first quarter of 2015, the Company finalized a sales agreement with Norfolk Southern Corporation ("NS") for approximately 283 miles of the Delaware and Hudson Railway Company, Inc.'s line between Sunbury, Pennsylvania, and Schenectady, New York ("D&H South"). The sale, which received approval by the U.S. Surface Transportation Board (“STB”) on May 15, 2015, was completed on September 18, 2015 for proceeds of
$281 million
(U.S.
$214 million
). The Company recorded a gain on sale of
$68 million
(
$42 million
after tax) from the transaction during the third quarter of 2015.
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. A gain of
$31 million
(
$27 million
after tax) was recorded as a credit within “Purchased services and other”.
Dakota, Minnesota & Eastern Railroad – West
On January 2, 2014, the Company executed an agreement with Genesee & Wyoming Inc. (“G&W”) for the sale of a portion of CP’s DM&E line between Tracy, Minnesota; Rapid City, South Dakota; Colony, Wyoming; and Crawford, Nebraska to connecting branch lines (“DM&E West”). The sale was subject to regulatory approval by the STB.
On May 30, 2014, the Company completed the sale of DM&E West to G&W for net proceeds of
$236 million
(U.S.
$218 million
). As the assets of DM&E West had previously been written down to the estimated transaction amount in 2013, the transaction did not give rise to a significant earnings impact in 2014.
11 Investments
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Rail investments accounted for on an equity basis
|
$
|
136
|
|
$
|
115
|
|
Other investments
|
58
|
|
37
|
|
Total investments
|
$
|
194
|
|
$
|
152
|
|
12 Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars except percentages)
|
|
2016
|
|
2016
|
|
2015
|
|
|
Average
annual depreciation rate
|
|
|
Cost
|
|
|
Accumulated
depreciation
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
depreciation
|
|
|
Net book
value
|
|
Track and roadway
|
|
2.8
|
%
|
|
$
|
16,817
|
|
|
$
|
4,573
|
|
|
$
|
12,244
|
|
|
$
|
16,303
|
|
|
$
|
4,427
|
|
|
$
|
11,876
|
|
Buildings
|
|
3.0
|
%
|
|
662
|
|
|
178
|
|
|
484
|
|
|
642
|
|
|
165
|
|
|
477
|
|
Rolling stock
|
|
2.8
|
%
|
|
4,060
|
|
|
1,524
|
|
|
2,536
|
|
|
4,041
|
|
|
1,524
|
|
|
2,517
|
|
Information systems
(1)
|
|
11.7
|
%
|
|
584
|
|
|
299
|
|
|
285
|
|
|
599
|
|
|
291
|
|
|
308
|
|
Other
|
|
5.3
|
%
|
|
1,691
|
|
|
551
|
|
|
1,140
|
|
|
1,640
|
|
|
545
|
|
|
1,095
|
|
Total
|
|
$
|
23,814
|
|
|
$
|
7,125
|
|
|
$
|
16,689
|
|
|
$
|
23,225
|
|
|
$
|
6,952
|
|
|
$
|
16,273
|
|
(1)
During
2016
, CP capitalized costs attributable to the design and development of internal-use software in the amount of
$46 million
(
2015
–
$42 million
;
2014
–
$69 million
). Current year depreciation expense related to internal use software was
$63 million
(
2015
–
$69 million
;
2014
–
$70 million
).
Capital leases included in properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
2015
|
|
Cost
|
|
Accumulated
depreciation
|
|
Net book
value
|
|
Cost
|
|
Accumulated
depreciation
|
|
Net book
value
|
|
Buildings
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
Rolling stock
|
311
|
|
105
|
|
206
|
|
311
|
|
96
|
|
215
|
|
Total assets held under capital lease
|
$
|
312
|
|
$
|
106
|
|
$
|
206
|
|
$
|
312
|
|
$
|
97
|
|
$
|
215
|
|
13 Goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
(in millions of Canadian dollars)
|
Goodwill
|
|
Cost
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
|
Total goodwill and intangible assets
|
|
Balance at December 31, 2014
|
$
|
164
|
|
$
|
22
|
|
$
|
(10
|
)
|
$
|
12
|
|
$
|
176
|
|
Amortization
|
—
|
|
—
|
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
Foreign exchange impact
|
31
|
|
—
|
|
2
|
|
2
|
|
33
|
|
Additions
|
3
|
|
—
|
|
—
|
|
—
|
|
3
|
|
Balance at December 31, 2015
|
$
|
198
|
|
$
|
22
|
|
$
|
(9
|
)
|
$
|
13
|
|
$
|
211
|
|
Amortization
|
—
|
|
—
|
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
Foreign exchange impact
|
(7
|
)
|
—
|
|
(1
|
)
|
(1
|
)
|
(8
|
)
|
Balance at December 31, 2016
|
$
|
191
|
|
$
|
22
|
|
$
|
(11
|
)
|
$
|
11
|
|
$
|
202
|
|
14 Other assets
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Long-term materials
|
$
|
22
|
|
$
|
20
|
|
Prepaid leases
|
6
|
|
9
|
|
Unamortized fees on credit facility
|
7
|
|
6
|
|
Contracted customer incentives
|
2
|
|
5
|
|
Long-term receivables
|
2
|
|
2
|
|
Other
|
18
|
|
21
|
|
Total other assets
|
$
|
57
|
|
$
|
63
|
|
Fees on credit facility and contracted customer incentives are amortized to income over the term of the related facility and over the term of the related revenue contract, respectively.
15 Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Trade payables
|
$
|
352
|
|
$
|
339
|
|
Accrued charges
|
282
|
|
293
|
|
Income and other taxes payable
|
146
|
|
218
|
|
Accrued interest
|
137
|
|
147
|
|
Financial derivative liability (Note 17)
|
69
|
|
60
|
|
Payroll-related accruals
|
73
|
|
88
|
|
Accrued vacation
|
65
|
|
69
|
|
Dividends payable
|
73
|
|
53
|
|
Personal injury and other claims provision
|
26
|
|
30
|
|
Provision for environmental remediation (Note 18)
|
9
|
|
13
|
|
Stock-based compensation liabilities
|
40
|
|
48
|
|
Other
|
50
|
|
59
|
|
Total accounts payable and accrued liabilities
|
$
|
1,322
|
|
$
|
1,417
|
|
16 Debt
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Maturity
|
Currency
in which
payable
|
2016
|
|
2015
|
|
6.500%
|
|
10-year Notes (A)
|
2018-05
|
U.S.$
|
$
|
369
|
|
$
|
380
|
|
6.250%
|
|
10-year Medium Term Notes (A)
|
2018-06
|
CDN$
|
375
|
|
374
|
|
7.250%
|
|
10-year Notes (A)
|
2019-05
|
U.S.$
|
469
|
|
484
|
|
9.450%
|
|
30-year Debentures (A)
|
2021-08
|
U.S.$
|
336
|
|
346
|
|
5.100%
|
|
10-year Medium Term Notes (A)
|
2022-01
|
CDN$
|
125
|
|
125
|
|
4.500%
|
|
10-year Notes (A)
|
2022-01
|
U.S.$
|
333
|
|
343
|
|
4.450%
|
|
12.5-year Notes (A)
|
2023-03
|
U.S.$
|
469
|
|
483
|
|
7.125%
|
|
30-year Debentures (A)
|
2031-10
|
U.S.$
|
470
|
|
484
|
|
5.750%
|
|
30-year Debentures (A)
|
2033-03
|
U.S.$
|
328
|
|
339
|
|
5.950%
|
|
30-year Notes (A)
|
2037-05
|
U.S.$
|
597
|
|
615
|
|
6.450%
|
|
30-year Notes (A)
|
2039-11
|
CDN$
|
400
|
|
400
|
|
5.750%
|
|
30-year Notes (A)
|
2042-01
|
U.S.$
|
330
|
|
340
|
|
2.900%
|
|
10-year Notes (A)
|
2025-02
|
U.S.$
|
940
|
|
968
|
|
3.700%
|
|
10.5-year Notes (A)
|
2026-02
|
U.S.$
|
335
|
|
345
|
|
4.800%
|
|
30-year Notes (A)
|
2045-08
|
U.S.$
|
736
|
|
759
|
|
4.800%
|
|
20-year Notes (A)
|
2035-09
|
U.S.$
|
401
|
|
413
|
|
6.125%
|
|
100-year Notes (A)
|
2115-09
|
U.S.$
|
1,208
|
|
1,246
|
|
5.41%
|
|
Senior Secured Notes (B)
|
2024-03
|
U.S.$
|
126
|
|
138
|
|
6.91%
|
|
Secured Equipment Notes (C)
|
2024-10
|
CDN$
|
133
|
|
145
|
|
7.49%
|
|
Equipment Trust Certificates (D)
|
2021-01
|
U.S.$
|
56
|
|
64
|
|
Other long-term loans (nil% – 5.50%)
|
2016 – 2025
|
U.S.$/CDN$
|
—
|
|
10
|
|
Obligations under capital leases
|
|
|
|
|
|
|
(6.313% – 6.99%) (E)
|
2022 – 2026
|
U.S.$
|
163
|
|
172
|
|
|
|
(12.77%) (E)
|
2031-01
|
CDN$
|
3
|
|
3
|
|
|
|
|
8,702
|
|
8,976
|
|
Perpetual 4% Consolidated Debenture Stock (F)
|
|
U.S.$
|
41
|
|
42
|
|
Perpetual 4% Consolidated Debenture Stock (F)
|
|
G.B.£
|
6
|
|
7
|
|
|
|
|
8,749
|
|
9,025
|
|
Less: Unamortized fees on long-term debt
|
|
|
65
|
|
68
|
|
|
|
|
8,684
|
|
8,957
|
|
Less: Long-term debt maturing within one year
|
|
|
25
|
|
30
|
|
|
|
|
|
|
$
|
8,659
|
|
$
|
8,927
|
|
At
December 31, 2016
, the gross amount of long-term debt denominated in U.S. dollars was U.S.
$5,763 million
(
2015
– U.S.
$5,788 million
).
Annual maturities and principal repayment requirements, excluding those pertaining to capital leases, for each of the five years following
2016
are (in millions):
2017
–
$21
;
2018
–
$766
;
2019
–
$493
;
2020
–
$66
;
2021
–
$377
.
Fees on long-term debt are amortized to income over the term of the related debt.
During the year ended December 31, 2015, the Company repaid Senior Secured Notes in advance of their maturities for a total of U.S.
$285 million
(
$379 million
). The repayments were inclusive of the remaining principal of the notes, totalling U.S.
$247 million
(
$329 million
), early redemption premiums of U.S.
$34 million
(
$45 million
), and accrued interest of U.S.
$4 million
(
$5 million
). The early redemption premiums and accrued interest are included in “Other income and charges” and “Net interest expense” on the Company's Consolidated Statements of Income, respectively. The Company also expensed the unamortized financing fees of
$2 million
to “Other income and charges” upon payments of the notes.
A. These debentures and notes pay interest semi-annually and are unsecured, but carry a negative pledge.
During the first quarter of 2015, the Company issued U.S.
$700 million
2.900%
10
-year Notes due February 1, 2025 for net proceeds of U.S.
$694 million
(
$873 million
). In addition, the Company settled a notional U.S.
$700 million
of forward starting floating-to-fixed interest rate swap agreements (“forward starting swaps”) for a payment of U.S.
$50 million
(
$63 million
) cash (see Note 17). This payment was included in the same line item as the related hedged item on the Company's Consolidated Statements of Cash Flows. Inclusive of the settlement of the forward starting swap, the annualized effective yield at issuance was
3.61%
.
During the third quarter of 2015, the Company issued U.S.
$550 million
4.800%
30
-year Notes due August 1, 2045 and U.S.
$250 million
3.700%
10.5
-year notes due February 1, 2026 for a total of U.S.
$800 million
with net proceeds of U.S.
$789 million
(
$1,032 million
).
During the third quarter of 2015, the Company also issued U.S.
$900 million
6.125%
100
-year Notes due September 15, 2115 and U.S.
$300 million
4.800%
20
-year Notes due September 15, 2035 for a total of U.S.
$1,200 million
with net proceeds of U.S.
$1,186 million
(
$1,569 million
). At the time of the debt issuance the Company de-designated the hedging relationship for U.S.
$700 million
of the existing forward starting swaps. The Company did not cash settle these swaps and therefore recorded a non-cash loss of U.S.
$36 million
(
$47 million
) in “Accumulated other comprehensive loss” (see Note 17). Subsequently, the Company re-designated U.S.
$700 million
forward starting swaps as a hedging relationship to fix the benchmark rate on cash flows associated with a highly probable forecasted issuance of long-term notes.
B. The
5.41%
Senior Secured Notes are collateralized by specific locomotive units with a carrying value of
$124 million
at December 31,
2016
. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of U.S.
$44 million
is due in March
2024
.
C. The
6.91%
Secured Equipment Notes are full recourse obligations of the Company collateralized by a first charge on specific locomotive units with a carrying value of
$115 million
at December 31,
2016
. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of
$11 million
is due in October
2024
.
D. The
7.49%
Equipment Trust Certificates are secured by specific locomotive units with a carrying value of
$117 million
at December 31,
2016
. The Company makes semi-annual payments that vary in amount and are interest-only payments or blended principal and interest payments. Final repayment of the remaining principal of U.S.
$11 million
is due in
January 2021
.
E. At
December 31, 2016
, capital lease obligations included in long-term debt were as follows:
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Year
|
Capital leases
|
|
Minimum lease payments in:
|
|
|
|
2017
|
$
|
16
|
|
|
2018
|
16
|
|
|
2019
|
16
|
|
|
2020
|
16
|
|
|
2021
|
16
|
|
|
Thereafter
|
152
|
|
Total minimum lease payments
|
|
232
|
|
Less: Imputed interest
|
|
(66
|
)
|
Present value of minimum lease payments
|
|
166
|
|
Less: Current portion
|
|
(4
|
)
|
Long-term portion of capital lease obligations
|
|
$
|
162
|
|
During
2016
, the Company had
no
additions to property, plant and equipment under capital lease obligations (
2015
– $
nil
;
2014
– $
nil
).
The carrying value of the assets collateralizing the capital lease obligations was
$206 million
at
December 31, 2016
.
F. The Consolidated Debenture Stock, authorized by an Act of Parliament of 1889, constitutes a first charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property and effects of the Company, with certain exceptions.
Credit facility
CP has a revolving credit facility (the “facility”) agreement with 15 highly rated financial institutions for a commitment amount of U.S.
$2 billion
. The facility includes a U.S.
$1 billion
one-year plus one-year term-out portion and a U.S.
$1 billion
five-year portion. The facility can accommodate draws of cash and/or letters of credit at market competitive pricing. The agreement requires the Company not to exceed a maximum debt to earnings before interest, tax, depreciation, and amortization ratio.
Effective June 28, 2016, the Company extended the maturity date by one year on its credit facility. The maturity date on the first U.S.
$1 billion
tranche was extended to June 28, 2018; the maturity date on the second U.S.
$1 billion
tranche was extended to June 28, 2021. As at December 31, 2016 and 2015, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the threshold stipulated in the amended financial covenant. As at December 31, 2016 and 2015, the facility was undrawn.
The amount available under the terms of the credit facility was U.S.
$2 billion
at December 31, 2016 (December 31, 2015 – U.S.
$2 billion
).
The Company has also established a commercial paper program which enables it to issue commercial paper up to a maximum aggregate principal amount of U.S.
$1 billion
in the form of unsecured promissory notes. The commercial paper program is backed by the U.S.
$1 billion
committed, revolving credit facility tranche which matures on June 28, 2018. The Company had
no
commercial paper borrowings as at December 31, 2016 (December 31, 2015 – $
nil
).
CP has bilateral letter of credit facilities with 6 highly rated financial institutions to support its requirement to post letters of credit in the ordinary course of business. Under these agreements, the Company has the option to post collateral in the form of cash or cash equivalents, equal at least to the face value of the letter of credit issued. These agreements permit CP to withdraw amounts posted as collateral at any time; therefore, the amounts posted as collateral are presented as “Cash and cash equivalents” on the Company’s Consolidated Balance Sheets.
At
December 31, 2016
, under its bilateral facilities the Company had letters of credit drawn of
$320 million
(
December 31, 2015
–
$375 million
) from a total available amount of
$600 million
(
December 31, 2015
–
$600 million
). At
December 31, 2016
, under the terms of the bilateral letter of credit facilities,
no
cash and cash equivalents was recorded as “Restricted cash and cash equivalents” (
December 31, 2015
– $
nil
).
17 Financial instruments
A. Fair values of financial instruments
The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy established by GAAP that prioritizes those inputs to valuation techniques used to measure fair value based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs, other than quoted prices included within Level 1, are observable for the asset or liability either directly or indirectly; and Level 3 inputs are not observable in the market.
When possible, the estimated fair value is based on quoted market prices and, if not available, estimates from third-party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, FX and commodity) and volatility, depending on the type of derivative and nature of the underlying risk. The Company uses inputs and data used by willing market participants when valuing derivatives and considers its own credit default swap spread as well as those of its counterparties in its determination of fair value.
The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of approximately
$9,981 million
at
December 31, 2016
(
December 31, 2015
–
$9,750 million
) and a carrying value of
$8,684 million
(
December 31, 2015
–
$8,957 million
). The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of interest and principal at estimated interest rates expected to be available to the Company at period end. All derivatives and long-term debt are classified as Level 2.
As at
December 31, 2016
and
2015
, the Company did not have any deposits in the form of short-term investments with financial institutions.
B. Financial risk management
Derivative financial instruments
Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheets, commitments or forecasted transactions. At the time a derivative contract is entered into and at least quarterly thereafter, an assessment is made as to whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.
It is not the Company’s intent to use financial derivatives or commodity instruments for trading or speculative purposes.
Credit risk management
Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations under a contract and as a result create a financial loss for the Company.
The railway industry predominantly serves financially established customers and the Company has experienced limited financial losses with respect to credit risk. The credit worthiness of customers is assessed using credit scores supplied by a third party, and through direct monitoring of their financial well-being on a continual basis. The Company establishes guidelines for customer credit limits and should thresholds in these areas be reached, appropriate precautions are taken to improve collectability.
Counterparties to financial instruments expose the Company to credit losses in the event of non-performance. Counterparties for derivative and cash transactions are limited to high credit quality financial institutions, which are monitored on an ongoing basis. Counterparty credit assessments are based on the financial health of the institutions and their credit ratings from external agencies. The Company does not anticipate non-performance that would materially impact the Company’s financial statements. In addition, the Company believes there are no significant concentrations of credit risk.
FX management
The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in value of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.
Occasionally the Company will enter into short-term FX forward contracts as part of its cash management strategy.
Net investment hedge
The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar-denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majority of the Company’s U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on net income by offsetting long-term FX gains and losses on U.S. dollar-denominated long-term debt and gains and losses on its net investment. The effective portion recognized in “Other comprehensive income” in
2016
was an FX gain of
$150 million
, the majority of which was unrealized (
2015
– loss of
$757 million
, the majority of which was unrealized;
2014
– unrealized loss of
$319 million
) (see Note 7). There was
no
ineffectiveness during
2016
(
2015
– $
nil
;
2014
– $
nil
).
FX forward contracts
The Company may enter into FX forward contracts to lock-in the amount of Canadian dollars it has to pay on U.S. dollar-denominated debt maturities.
At
December 31, 2016
, the Company had net unamortized gains related to FX forward contracts to fix the exchange rate on U.S. dollar-denominated debt maturities settled in previous years totalling
$1 million
(
December 31, 2015
–
$2 million
). During 2016,
$1 million
of pretax gain related to these previously settled derivatives has been amortized from "Accumulated other comprehensive loss" to “Other income and charges” (
December 31, 2015
–
$1 million
). At December 31, 2016, the Company expected that, during the next 12 months, a
$1 million
pretax gain will be reclassified to “Other income and charges”.
At
December 31, 2016
and
2015
, the Company had no remaining FX forward contracts to fix the exchange rate on U.S. dollar-denominated debt maturities.
Interest rate management
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a result of changes in market interest rates. In order to manage funding needs or capital structure goals, the Company enters into debt or capital lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.
To manage interest rate exposure, the Company accesses diverse sources of financing and manages borrowings in line with a targeted range of capital structure, debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles. In anticipation of future debt issuances, the Company may enter into forward rate agreements, that are designated as cash flow hedges, to substantially lock in all or a portion of the effective future interest expense. The Company may also enter into swap agreements, designated as fair value hedges, to manage the mix of fixed and floating rate debt.
Forward starting swaps
As at
December 31, 2016
and
2015
, the Company had forward starting floating-to-fixed interest rate swap agreements (“forward starting swaps”) totalling a notional U.S.
$700 million
to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes. The effective portion of changes in fair value on the forward starting swaps is recorded in “Accumulated other comprehensive loss”, net of tax, as cash flow hedges until the highly probable forecasted notes are issued. Subsequent to the notes issuance, amounts in “Accumulated other comprehensive loss” are reclassified to “Net interest expense”.
During the first quarter of 2015, the Company settled a notional U.S.
$700 million
of forward starting swaps related to the U.S.
$700 million
2.900%
10-year notes issued in the same period.
During the third quarter of 2015, the Company de-designated the hedging relationship for U.S.
$700 million
of forward starting swaps related to a portion of the U.S.
$900 million
6.125%
100-year notes issued. The Company did not cash settle these swaps and concurrently re-designated the forward starting swaps totalling U.S.
$700 million
to fix the benchmark rate on cash flows associated with a highly probable forecasted issuance of long-term notes.
During the second quarter of 2016, the Company rolled the notional U.S.
$700 million
forward starting swaps. The Company de-designated the hedging relationship for U.S.
$700 million
of forward starting swaps. The Company did not cash settle these swaps. There was no ineffectiveness to record upon de-designation.
Concurrently the Company re-designated the forward starting swaps totalling U.S.
$700 million
to fix the benchmark rate on cash flows associated with a highly probable forecasted debt issuance of long-term notes.
As at
December 31, 2016
, the total fair value loss of
$69 million
(
December 31, 2015
– fair value loss of
$60 million
) derived from the forward starting swaps was included in “Accounts payable and accrued liabilities”. Changes in fair value from the forward starting swaps
for the year ended December 31, 2016
was a loss of
$9 million
(
2015
– a loss of
$77 million
). The effective portion
for the year ended December 31, 2016
was a loss of
$12 million
(
2015
– loss of
$75 million
) and was recorded in “Other comprehensive income”.
For the year ended December 31, 2016
, the ineffective portion was a
$3 million
gain (
2015
–
$2 million
loss) and is recorded to “Net interest expense” on the Consolidated Statements of Income.
For the year ended December 31, 2016
, a loss of
$11 million
related to previous forward starting swap hedges has been amortized to “Net interest expense” (
2015
– a loss of
$6 million
). The Company expects that during the next 12 months
$11 million
of losses will be amortized to “Net interest expense”.
Treasury rate locks
At
December 31, 2016
, the Company had net unamortized losses related to interest rate locks, which are accounted for as cash flow hedges, settled in previous years totalling
$21 million
(
December 31, 2015
–
$21 million
). This amount is composed of various unamortized gains and losses related to specific debts which are reflected in “Accumulated other comprehensive loss” and are amortized to “Net interest expense” in the period that interest on the related debt is charged. The amortization of these gains and losses resulted in a negligible increase to “Net interest expense” and “Other comprehensive income” in
2016
(
2015
– negligible;
2014
– negligible). At
December 31, 2016
, the Company expected that, during the next 12 months, a negligible amount of loss related to these previously settled derivatives would be reclassified to “Net interest expense”.
Fuel price management
The Company is exposed to commodity risk related to purchases of diesel fuel and the potential reduction in net income due to increases in the price of diesel. Fuel expense constitutes a large portion of the Company’s operating costs and volatility in diesel fuel prices can have a significant impact on the Company’s income. Items affecting volatility in diesel prices include, but are not limited to, fluctuations in world markets for crude oil and distillate fuels, which can be affected by supply disruptions and geopolitical events.
The impact of variable fuel expense is mitigated substantially through fuel cost adjustment programs, which apportion incremental changes in fuel prices to shippers through price indices, tariffs, and by contract, within agreed-upon guidelines. While these programs provide effective and meaningful coverage, residual exposure remains as the fuel expense risk may not be completely recovered from shippers due to timing and volatility in the market.
18 Other long-term liabilities
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
Provision for environmental remediation, net of current portion
(1)
|
$
|
76
|
|
$
|
80
|
|
Stock-based compensation liabilities, net of current portion
|
72
|
|
73
|
|
Deferred revenue on rights-of-way licence agreements, net of current portion
|
29
|
|
33
|
|
Deferred retirement compensation
|
29
|
|
28
|
|
Deferred gains on sale leaseback transactions
|
19
|
|
22
|
|
Other, net of current portion
|
59
|
|
82
|
|
Total other long-term liabilities
|
$
|
284
|
|
$
|
318
|
|
(1)
As at December 31, 2016
, the aggregate provision for environmental remediation, including the current portion was
$85 million
(
2015
–
$93 million
).
The deferred revenue on rights-of-way licence agreements, and deferred gains on sale leaseback transactions are being amortized to income on a straight-line basis over the related lease terms.
Environmental remediation accruals
Environmental remediation accruals cover site-specific remediation programs. The estimate of the probable costs to be incurred in the remediation of properties contaminated by past railway use reflects the nature of contamination at individual sites according to typical activities and scale of operations conducted. CP has developed remediation strategies for each property based on the nature and extent of the contamination, as well as the location of the property and surrounding areas that may be adversely affected by the presence of contaminants, considering available technologies, treatment and disposal facilities and the acceptability of site-specific plans based on the local regulatory environment. Site-specific plans range from containment and risk management of the contaminants through to the removal and treatment of the contaminants and affected soils and groundwater. The details of the estimates reflect the environmental liability at each property. Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities” (see Note 15). Payments are expected to be made over
10
years to 2026.
The accruals for environmental remediation represent CP’s best estimate of its probable future obligation and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include CP’s best estimate of all probable costs, CP’s total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable. Changes to costs are reflected as changes to “Other long-term liabilities” or “Accounts payable and accrued liabilities” on the Company's Consolidated Balance Sheets and to “Purchased services and other” within operating expenses on the Company's Consolidated Statements of Income. The amount charged to income in
2016
was
$6 million
(
2015
–
$7 million
;
2014
–
$4 million
).
19 Shareholders’ equity
Authorized and issued share capital
The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of First Preferred Shares and unlimited number of Second Preferred Shares. At
December 31, 2016
,
no
First or Second Preferred Shares had been issued.
An analysis of Common Share balances is as follows:
|
|
|
|
|
|
|
|
(number of shares in millions)
|
2016
|
|
2015
|
|
2014
|
|
Share capital, January 1
|
153.0
|
|
166.1
|
|
175.4
|
|
CP Common Shares repurchased
|
(6.9
|
)
|
(13.7
|
)
|
(10.3
|
)
|
Shares issued under stock option plan
|
0.2
|
|
0.6
|
|
1.0
|
|
Share capital, December 31
|
146.3
|
|
153.0
|
|
166.1
|
|
The change in the “Share capital” balances includes
$1 million
(
2015
–
$2 million
;
2014
–
$3 million
) related to the cancellation of the tandem share appreciation rights liability on exercise of tandem stock options, and
$5 million
(
2015
–
$10 million
;
2014
–
$17 million
) of stock-based compensation transferred from “Additional paid-in capital”.
Share repurchase
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
9.1
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
9.1 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 NCIB program.
On April 20, 2016, the Company announced a new NCIB, commencing May 2, 2016 to
May 1, 2017
, to purchase up to
6.9 million
of its outstanding Common Shares for cancellation. The Company completed this NCIB on September 28, 2016.
All purchases are made in accordance with the respective NCIB at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, 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 the activities under the share repurchase programs:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Number of Common Shares repurchased
(1)
|
6,910,000
|
|
13,549,977
|
|
10,476,074
|
|
Weighted-average price per share
(2)
|
$
|
175.08
|
|
$
|
202.79
|
|
$
|
199.42
|
|
Amount of repurchase (in millions)
(2)
|
$
|
1,210
|
|
$
|
2,748
|
|
$
|
2,089
|
|
(1)
Excludes shares repurchased and not yet cancelled in the prior year.
(2)
Includes brokerage fees.
20 Pensions and other benefits
The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At
December 31, 2016
, the Canadian pension plans represent approximately
99%
of total combined pension plan assets and approximately
98%
of total combined pension plan obligations.
The DB plans provide for pensions based principally on years of service and compensation rates near retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer contributions to the DB plans, which are actuarially determined, are made on the basis of being not less than the minimum amounts required by federal pension supervisory authorities.
The Company has other benefit plans including post-retirement health and life insurance for pensioners, and post-employment long-term disability and workers’ compensation benefits, which are based on Company-specific claims. At
December 31, 2016
, the Canadian other benefits plans represent approximately
96%
of total combined other plan obligations.
The Finance Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets which take into account the Company’s expected risk tolerances. Pension plan assets are managed by a suite of independent investment managers, with the allocation by manager reflecting these asset mix targets. Most of the assets are actively managed with the objective of outperforming applicable benchmarks. In accordance with the investment policy, derivative instruments may be used to hedge or adjust existing or anticipated exposures.
To develop the expected long-term rate of return assumption used in the calculation of net periodic benefit cost applicable to the market-related value of assets, the Company considers the expected composition of the plans’ assets, past experience and future estimates of long-term investment returns. Future estimates of investment returns reflect the expected annual yield on applicable fixed income capital market indices, and the long-term return expectation for public equity, real estate, infrastructure and absolute return investments and the expected added value (relative to applicable benchmark indices) from active management of pension fund assets.
The Company has elected to use a market-related value of assets for the purpose of calculating net periodic benefit cost, developed from a
five
-year average of market values for the plans’ public equity and absolute return investments (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the plans’ fixed income, real estate and infrastructure securities.
The benefit obligation is discounted using a discount rate that is a blended yield to maturity for a hypothetical portfolio of high-quality corporate debt instruments with cash flows matching project benefit payments. The discount rate is determined by management.
Net periodic benefit cost
The elements of net periodic benefit cost for DB pension plans and other benefits recognized in the year include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current service cost (benefits earned by employees in the year)
|
$
|
106
|
|
|
$
|
126
|
|
|
$
|
106
|
|
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
14
|
|
Interest cost on benefit obligation
|
467
|
|
|
463
|
|
|
477
|
|
|
21
|
|
|
21
|
|
|
23
|
|
Expected return on fund assets
|
(846
|
)
|
|
(816
|
)
|
|
(757
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
190
|
|
|
265
|
|
|
190
|
|
|
7
|
|
|
2
|
|
|
(2
|
)
|
Amortization of prior service costs
|
(7
|
)
|
|
(6
|
)
|
|
(68
|
)
|
|
1
|
|
|
1
|
|
|
—
|
|
Net periodic benefit (recovery) cost
|
$
|
(90
|
)
|
|
$
|
32
|
|
|
$
|
(52
|
)
|
|
$
|
40
|
|
|
$
|
36
|
|
|
$
|
35
|
|
Projected benefit obligation, fund assets, and funded status
Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
Benefit obligation at January 1
|
$
|
11,194
|
|
$
|
11,360
|
|
|
$
|
513
|
|
$
|
517
|
|
Current service cost
|
106
|
|
126
|
|
|
11
|
|
12
|
|
Interest cost
|
467
|
|
463
|
|
|
21
|
|
21
|
|
Employee contributions
|
40
|
|
43
|
|
|
1
|
|
1
|
|
Benefits paid
|
(645
|
)
|
(608
|
)
|
|
(31
|
)
|
(34
|
)
|
Foreign currency changes
|
(7
|
)
|
42
|
|
|
—
|
|
4
|
|
Plan amendments and other
|
6
|
|
(6
|
)
|
|
—
|
|
—
|
|
Actuarial loss (gain)
|
238
|
|
(226
|
)
|
|
(5
|
)
|
(8
|
)
|
Projected benefit obligation at December 31
|
$
|
11,399
|
|
$
|
11,194
|
|
|
$
|
510
|
|
$
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
Change in fund assets:
|
|
|
|
|
|
Fair value of fund assets at January 1
|
$
|
12,300
|
|
$
|
11,376
|
|
|
$
|
6
|
|
$
|
7
|
|
Actual return on fund assets
|
461
|
|
1,374
|
|
|
(1
|
)
|
(1
|
)
|
Employer contributions
|
48
|
|
81
|
|
|
30
|
|
33
|
|
Employee contributions
|
40
|
|
43
|
|
|
1
|
|
1
|
|
Benefits paid
|
(645
|
)
|
(608
|
)
|
|
(31
|
)
|
(34
|
)
|
Foreign currency changes
|
(8
|
)
|
34
|
|
|
—
|
|
—
|
|
Fair value of fund assets at December 31
|
$
|
12,196
|
|
$
|
12,300
|
|
|
$
|
5
|
|
$
|
6
|
|
Funded status – plan surplus (deficit)
|
$
|
797
|
|
$
|
1,106
|
|
|
$
|
(505
|
)
|
$
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(in millions of Canadian dollars)
|
Pension
plans in
surplus
|
|
Pension
plans in
deficit
|
|
|
Pension
plans in
surplus
|
|
Pension
plans in
deficit
|
|
Projected benefit obligation at December 31
|
$
|
(10,902
|
)
|
$
|
(497
|
)
|
|
$
|
(10,681
|
)
|
$
|
(513
|
)
|
Fair value of fund assets at December 31
|
11,972
|
|
224
|
|
|
12,082
|
|
218
|
|
Funded Status
|
$
|
1,070
|
|
$
|
(273
|
)
|
|
$
|
1,401
|
|
$
|
(295
|
)
|
All Other benefits plans were in a deficit position at
December 31, 2016
and
2015
.
Pension asset and liabilities in the Company’s Consolidated Balance Sheets
Amounts recognized in the Company’s Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
Pension asset
|
$
|
1,070
|
|
$
|
1,401
|
|
|
$
|
—
|
|
$
|
—
|
|
Accounts payable and accrued liabilities
|
(10
|
)
|
(10
|
)
|
|
(34
|
)
|
(34
|
)
|
Pension and other benefit liabilities
|
(263
|
)
|
(285
|
)
|
|
(471
|
)
|
(473
|
)
|
Total amount recognized
|
$
|
797
|
|
$
|
1,106
|
|
|
$
|
(505
|
)
|
$
|
(507
|
)
|
The defined benefit pension plans’ accumulated benefit obligation as at
December 31, 2016
was
$11,143 million
(
2015
–
$10,893 million
). The accumulated benefit obligation is calculated on a basis similar to the projected benefit obligation, except no future salary increases are assumed in the projection of future benefits.
The measurement date used to determine the plan assets and the accrued benefit obligation is
December 31
. The most recent actuarial valuation for pension funding purposes for the Company’s main Canadian pension plan was performed as at January 1, 2016. During
2017
, the Company expects to file a new valuation with the pension regulator.
Accumulated other comprehensive losses
Amounts recognized in accumulated other comprehensive losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
Net actuarial loss:
|
|
|
|
|
|
Other than deferred investment gains
|
$
|
2,842
|
|
$
|
3,144
|
|
|
$
|
66
|
|
$
|
77
|
|
Deferred investment gains
|
(366
|
)
|
(1,101
|
)
|
|
—
|
|
—
|
|
Prior service cost
|
(7
|
)
|
(20
|
)
|
|
3
|
|
4
|
|
Deferred income tax
|
(699
|
)
|
(580
|
)
|
|
(17
|
)
|
(20
|
)
|
Total (Note 7)
|
$
|
1,770
|
|
$
|
1,443
|
|
|
$
|
52
|
|
$
|
61
|
|
The unamortized actuarial loss and the unamortized prior service cost included in “Accumulated other comprehensive loss” that are expected to be recognized in net periodic benefit cost during
2017
are
$153 million
and a recovery of
$5 million
, respectively, for pensions and
$2 million
and
$1 million
, respectively, for other post-retirement benefits.
Actuarial assumptions
Weighted-average actuarial assumptions used were approximately:
|
|
|
|
|
|
|
|
(percentages)
|
2016
|
|
2015
|
|
2014
|
|
Benefit obligation at December 31:
|
|
|
|
|
|
|
Discount rate
|
4.02
|
|
4.22
|
|
4.09
|
|
Projected future salary increases
|
2.75
|
|
3.00
|
|
3.00
|
|
Health care cost trend rate
|
7.00
|
(1)
|
7.00
|
(2)
|
7.00
|
(2)
|
Benefit cost for year ended December 31:
|
|
|
|
|
|
|
Discount rate
|
4.22
|
|
4.09
|
|
4.90
|
|
Expected rate of return on fund assets
|
7.75
|
|
7.75
|
|
7.75
|
|
Projected future salary increases
|
3.00
|
|
3.00
|
|
3.00
|
|
Health care cost trend rate
|
7.00
|
(2)
|
7.00
|
(2)
|
7.50
|
(3)
|
(1)
The health care cost trend rate is assumed to be
7.00%
in
2017
and
2018
, and then decreasing by
0.50%
per year to an ultimate rate of
5.00%
per year in
2022
and thereafter.
(2)
The health care cost trend rate was previously assumed to be
6.50%
in
2017
(
7.00%
in
2016
and
2015
), and then decreasing by
0.50%
per year to an ultimate rate of
5.00%
per year in 2020 and thereafter.
(3)
For the
2014
benefit cost, the health care cost trend rate was assumed to be
6.00%
in
2017
(
6.50%
in
2016
,
7.00%
in
2015
,
7.50%
in
2014
), and then decreasing by
0.50%
per year to an ultimate rate of
5.00%
per year in
2019
and thereafter.
Assumed health care cost trend rates affect the amounts reported for the health care plans. A one-percentage-point increase in the assumed health care cost trend rate would increase the post-retirement benefit obligation by
$6 million
, and a one-percentage-
point decrease in the assumed health care cost trend rate would decrease the post-retirement benefit obligation by
$5 million
. A one-percentage-point increase or decrease in the assumed health care cost trend rate would have no material effect on the total of service and interest costs.
In 2014, the Canadian Institute of Actuaries and the Society of Actuaries each published updated mortality tables based on broad pension plan experience in Canada and the U.S., respectively. At December 31, 2014, the Company changed the basis for its obligations for defined benefit pension and post-retirement benefit plans to these new mortality tables, with adjustments to reflect actual plan mortality experience to the extent that credible experience data were available. The changes to the new mortality tables increased the obligations for pensions and post-retirement benefits at that date by approximately
$225 million
. The Company's obligations for defined benefit pension and post-retirement benefit plans continue to be based on the new mortality tables at December 31, 2016.
Plan assets
Plan assets are recorded at fair value. The major asset categories are public equity securities, fixed income securities, real estate, infrastructure and absolute return investments. The fair values of the public equity and fixed income securities are primarily based on quoted market prices. Real estate values are based on annual valuations performed by external parties, taking into account current market conditions and recent sales transactions where practical and appropriate. Infrastructure values are based on the fair value of each fund’s assets as calculated by the fund manager, generally using a discounted cash flow analysis that takes into account current market conditions and recent sales transactions where practical and appropriate. Absolute return investments are a portfolio of units of externally managed hedge funds and are valued by the fund administrators.
The Company’s pension plan asset allocation, the current weighted average asset allocation targets and the current weighted average policy range for each major asset class, were as follows:
|
|
|
|
|
|
|
Current
asset
allocation
target
|
Current
policy
range
|
Percentage of plan assets
at December 31
|
Asset allocation (percentage)
|
2016
|
2015
|
Cash and cash equivalents
|
0.5
|
0 – 5
|
1.1
|
1.1
|
Fixed income
|
29.5
|
20 – 40
|
21.4
|
21.0
|
Public equity
|
46.0
|
35 – 55
|
53.8
|
54.5
|
Real estate and infrastructure
|
12.0
|
4 – 20
|
7.5
|
5.8
|
Absolute return
|
12.0
|
0 – 18
|
16.2
|
17.6
|
Total
|
100.0
|
|
100.0
|
100.0
|
Summary of the assets of the Company’s DB pension plans at fair values
The following is a summary of the assets of the Company’s DB pension plans at fair values at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Quoted prices in
active markets
for identical assets (Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable inputs
(Level 3)
|
|
Investments measured at NAV
(1)
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
121
|
|
$
|
11
|
|
$
|
—
|
|
$
|
—
|
|
$
|
132
|
|
Fixed income
|
|
|
|
|
|
• Government bonds
(2)
|
—
|
|
1,357
|
|
—
|
|
—
|
|
1,357
|
|
• Corporate bonds
(2)
|
—
|
|
1,186
|
|
—
|
|
—
|
|
1,186
|
|
• Mortgages
(3)
|
—
|
|
71
|
|
—
|
|
—
|
|
71
|
|
Public equities
|
|
|
|
|
|
• Canada
|
1,480
|
|
57
|
|
—
|
|
—
|
|
1,537
|
|
• U.S. and international
|
4,985
|
|
36
|
|
—
|
|
—
|
|
5,021
|
|
Real estate
(4)
|
—
|
|
—
|
|
437
|
|
188
|
|
625
|
|
Derivative assets
(5)
|
—
|
|
7
|
|
—
|
|
—
|
|
7
|
|
Absolute return
(6)
|
|
|
|
|
|
• Funds of hedge funds
|
—
|
|
—
|
|
—
|
|
668
|
|
668
|
|
• Multi-strategy funds
|
—
|
|
—
|
|
—
|
|
502
|
|
502
|
|
• Credit funds
|
—
|
|
—
|
|
—
|
|
505
|
|
505
|
|
• Equity funds
|
—
|
|
—
|
|
—
|
|
300
|
|
300
|
|
Infrastructure
(7)
|
—
|
|
—
|
|
—
|
|
285
|
|
285
|
|
|
$
|
6,586
|
|
$
|
2,725
|
|
$
|
437
|
|
$
|
2,448
|
|
$
|
12,196
|
|
December 31, 2015
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
129
|
|
$
|
11
|
|
$
|
—
|
|
$
|
—
|
|
$
|
140
|
|
Fixed income
|
|
|
|
|
|
• Government bonds
(2)
|
—
|
|
1,276
|
|
—
|
|
—
|
|
1,276
|
|
• Corporate bonds
(2)
|
—
|
|
1,228
|
|
—
|
|
—
|
|
1,228
|
|
• Mortgages
(3)
|
—
|
|
81
|
|
—
|
|
—
|
|
81
|
|
Public equities
|
|
|
|
|
|
• Canada
|
1,449
|
|
46
|
|
—
|
|
—
|
|
1,495
|
|
• U.S. and international
|
5,169
|
|
34
|
|
—
|
|
—
|
|
5,203
|
|
Real estate
(4)
|
—
|
|
—
|
|
451
|
|
—
|
|
451
|
|
Derivative assets
(5)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Absolute return
(6)
|
|
|
|
|
|
• Funds of hedge funds
|
—
|
|
—
|
|
—
|
|
781
|
|
781
|
|
• Multi-strategy funds
|
—
|
|
—
|
|
—
|
|
517
|
|
517
|
|
• Credit funds
|
—
|
|
—
|
|
—
|
|
555
|
|
555
|
|
• Equity funds
|
—
|
|
—
|
|
—
|
|
311
|
|
311
|
|
Infrastructure
(7)
|
—
|
|
—
|
|
—
|
|
262
|
|
262
|
|
|
$
|
6,747
|
|
$
|
2,676
|
|
$
|
451
|
|
$
|
2,426
|
|
$
|
12,300
|
|
(1)
Investments measured at net asset value ("NAV"):
Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.
(2)
Government & Corporate Bonds:
Fair values for bonds are based on market prices supplied by independent sources as of the last trading day.
(3)
Mortgages:
The fair value of mortgages of
$71 million
(
2015
–
$81 million
) is based on current market yields of financial instruments of similar maturity, coupon and risk factors.
(4)
Real estate:
The fair value of real estate investments of
$437 million
(
2015
–
$451 million
) is based on property appraisals which use a number of approaches that typically include a discounted cash flow analysis, a direct capitalization income method and/or a direct comparison approach. Appraisals of real estate investments are generally performed semi-annually by qualified external accredited appraisers. There are
$81 million
of unfunded commitments for real estate investments as at
December 31, 2016
(
2015
–
$278 million
).
(5)
Derivatives:
The Company’s pension funds may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and interest rate risk (Level 2); credit default swaps to manage credit risk (Level 2); and options to manage interest rate risk and volatility (Level 2). There are currency forwards with a notional value of
$937 million
and a fair value of
$7 million
as at December 31, 2016 with maturities varying from three to fifteen months. These currency forwards reduce the funds' exposure to the U.S. dollar.
(6)
Absolute return:
The fair value of absolute return fund investments of
$1,975 million
(
2015
–
$2,164 million
) is based on the NAV reported by the fund administrators. The funds have different redemption policies and periods. There are
no
unfunded commitments for absolute return investments
as at December 31, 2016
(
2015
– $
nil
).
|
|
|
-
|
Funds of hedge funds invest in a portfolio of hedge funds that allocate capital across a broad array of funds and/or investment managers, with monthly redemptions upon 95 days' notice.
|
-
|
Multi-strategy funds include funds that invest in broadly diversified portfolios of equity, fixed income and derivative instruments with quarterly redemptions upon 60 days' notice.
|
-
|
Credit funds invest in an array of fixed income securities with quarterly redemptions upon 60 days' notice.
|
-
|
Equity funds invest primarily in U.S. and global equity securities. Redemptions range from quarterly upon 60 days' notice to triennially upon 45 days' notice.
|
(7)
Infrastructure:
Infrastructure fund values of
$285 million
(
2015
–
$262 million
) are based on the NAV of the funds that invest directly in infrastructure investments. The fair values of the investments have been estimated using the capital accounts representing the plans ownership interest in the funds. The investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments. It was estimated that the investments in these funds will be liquidated over the weighted-average period of approximately two years.
As at December 31, 2016
, unfunded commitments for infrastructure investments were $
nil
(
2015
- $
nil
).
Portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3)
During
2015
and
2016
the portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3) changed as follows:
|
|
|
|
|
(in millions of Canadian dollars)
|
Real Estate
|
|
As at January 1, 2015
|
$
|
654
|
|
Disbursements
|
(223
|
)
|
Net realized gains
|
64
|
|
Decrease in net unrealized gains
|
(44
|
)
|
As at December 31, 2015
|
$
|
451
|
|
Disbursements
|
(36
|
)
|
Net realized gains
|
24
|
|
Decrease in net unrealized gains
|
(2
|
)
|
As at December 31, 2016
|
$
|
437
|
|
Additional plan assets information
The Company’s expected long-term target return is
7.75%
, net of all fees and expenses. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return expectations and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation and interest rates. When advantageous and with due consideration, derivative instruments may be utilized, provided the total value of the underlying assets represented by financial derivatives, excluding currency forwards, is limited to
30%
of the market value of the fund.
When investing in foreign securities, the plans are exposed to foreign currency risk; the effect of which is included in the valuation of the foreign securities. CP has entered into currency forward contracts to partially offset pension plan exposure to the U.S. dollar. At
December 31, 2016
the plans were
34%
exposed to the U.S. dollar net of the currency forwards (42% excluding the currency forwards),
14%
exposed to European currencies, and
5%
exposed to various other currencies.
At
December 31, 2016
, fund assets consisted primarily of listed stocks and bonds, including
109,630
of the Company’s Common Shares (
2015
–
188,276
) at a market value of
$21 million
(
2015
–
$33 million
) and
Unsecured Notes issued by the Company at a par value of
$3 million
(
2015
–
$3 million
) and a market value of
$3 million
(
2015
–
$3 million
).
Cash flows
In
2016
, the Company contributed
$57 million
to its pension plans (
2015
–
$90 million
;
2014
–
$88 million
), including
$9 million
to the DC plans (
2015
–
$9 million
;
2014
–
$8 million
),
$36 million
to the Canadian registered and U.S. qualified DB pension plans (
2015
–
$69 million
;
2014
–
$67 million
), and
$12 million
to the Canadian non-registered supplemental pension plan (
2015
–
$12 million
;
2014
–
$13 million
). In addition, the Company made payments directly to employees, their beneficiaries or estates or to third-party benefit administrators of
$30 million
in
2016
(
2015
–
$33 million
;
2014
–
$26 million
) with respect to other benefits.
Estimated future benefit payments
The estimated future defined benefit pension and other benefit payments to be paid by the plans for each of the next five years and the subsequent five-year period are as follows:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Pensions
|
|
Other benefits
|
|
2017
|
$
|
616
|
|
$
|
33
|
|
2018
|
626
|
|
32
|
|
2019
|
634
|
|
32
|
|
2020
|
641
|
|
31
|
|
2021
|
649
|
|
31
|
|
2022 – 2026
|
3,315
|
|
147
|
|
The benefit payments from the Canadian registered and U.S. qualified DB pension plans are payable from their respective pension funds. Benefit payments from the supplemental pension plan and from the other benefits plans are payable directly from the Company.
Defined contribution plan
Canadian non-unionized employees hired prior to July 1, 2010 had the option to participate in the Canadian DC plan. All Canadian non-unionized employees hired after such date must participate in this plan. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year.
Effective July 1, 2010, a new U.S. DC plan was established. All U.S. non-unionized employees hired after such date must participate in this plan. Employees do not contribute to the plan. The Company annually contributes a percentage of salary.
The DC plans provide a pension based on total employee and employer contributions plus investment income earned on those contributions.
In
2016
, the net cost of the DC plans, which generally equals the employer’s required contribution, was
$9 million
(
2015
–
$9 million
;
2014
–
$8 million
).
Contributions to multi-employer plans
Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the Company to this plan in
2016
in respect of post-retirement medical benefits were
$4 million
(
2015
–
$4 million
;
2014
–
$4 million
).
21 Stock-based compensation
At
December 31, 2016
, the Company had several stock-based compensation plans, including a stock option plan, various cash settled liability plans and an employee stock savings plan. These plans resulted in an expense in
2016
of
$51 million
(
2015
–
$66 million
;
2014
–
$110 million
). The information in this note excludes the effects of the subsequent event described in Note 27.
A. Stock Option Plan
Summary of stock options
The following table summarizes the Company’s stock option plan as at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Nonvested options
|
|
Number of
options
|
|
Weighted
average
exercise price
|
|
|
Number of
options
|
|
Weighted
average
grant date
fair value
|
|
Outstanding, January 1, 2016
|
2,407,973
|
|
$
|
113.01
|
|
|
984,979
|
|
$
|
41.88
|
|
New options granted
|
403,740
|
|
161.06
|
|
|
403,740
|
|
39.01
|
|
Exercised
|
(269,491
|
)
|
74.99
|
|
|
—
|
|
—
|
|
Vested
|
—
|
|
—
|
|
|
(449,712
|
)
|
33.70
|
|
Forfeited
|
(90,340
|
)
|
186.95
|
|
|
(88,840
|
)
|
42.42
|
|
Expired
|
(1,800
|
)
|
60.84
|
|
|
—
|
|
—
|
|
Outstanding, December 31, 2016
|
2,450,082
|
|
$
|
121.95
|
|
|
850,167
|
|
$
|
44.49
|
|
Vested or expected to vest at
December 31, 2016
(1)
|
2,437,475
|
|
$
|
121.62
|
|
|
N/A
|
|
N/A
|
|
Exercisable, December 31, 2016
|
1,599,915
|
|
$
|
93.79
|
|
|
N/A
|
|
N/A
|
|
(1)
As at December 31, 2016
, the weighted average remaining term of vested or expected to vest options was
6.9 years
with an aggregate intrinsic value of
$181 million
.
The following table provides the number of stock options outstanding and exercisable
as at December 31, 2016
by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on
December 31, 2016
at the Company’s closing stock price of
$191.56
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Options exercisable
|
Range of exercise prices
|
Number of
options
|
|
Weighted
average
years to
expiration
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic
value
(millions)
|
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic
value
(millions)
|
|
$36.29 – $72.54
|
304,025
|
|
2.3
|
$
|
60.59
|
|
$
|
40
|
|
|
304,025
|
|
$
|
60.59
|
|
$
|
40
|
|
$72.55 – $86.71
|
747,445
|
|
5.4
|
73.69
|
|
88
|
|
|
747,445
|
|
73.69
|
|
88
|
|
$86.72 – $161.38
|
678,416
|
|
7.0
|
127.62
|
|
44
|
|
|
347,061
|
|
111.34
|
|
28
|
|
$161.39 – $236.50
|
720,196
|
|
8.5
|
192.56
|
|
(1
|
)
|
|
201,384
|
|
188.23
|
|
—
|
|
Total
(1)
|
2,450,082
|
|
6.2
|
$
|
121.94
|
|
$
|
171
|
|
|
1,599,915
|
|
$
|
93.79
|
|
$
|
156
|
|
(1)
As at December 31, 2016
, the total number of in-the-money stock options outstanding was
2,140,692
with a weighted-average exercise price of
$107.27
. The weighted-average years to expiration of exercisable stock options is
5.1 years
.
Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after 10 years. Under the fair value method, the fair value of options at the grant date was approximately
$16 million
for options issued in
2016
(
2015
–
$18 million
;
2014
–
$21 million
). The weighted average fair value assumptions were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Expected option life (years)
(1)
|
5.25
|
|
5.25
|
|
5.98
|
|
Risk-free interest rate
(2)
|
1.21
|
%
|
1.10
|
%
|
1.66
|
%
|
Expected stock price volatility
(3)
|
27
|
%
|
26
|
%
|
29
|
%
|
Expected annual dividends per share
(4)
|
$
|
1.40
|
|
$
|
1.40
|
|
$
|
1.40
|
|
Estimated forfeiture rate
(5)
|
2.0
|
%
|
1.2
|
%
|
1.2
|
%
|
Weighted average grant date fair value
of options granted during the year
|
$
|
39.01
|
|
$
|
55.28
|
|
$
|
48.88
|
|
(1)
Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option.
(2)
Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant.
(3)
Based on the historical stock price volatility of the Company’s stock over a period commensurate with the expected term of the option.
(4)
Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option. On April 20, 2016, the Company announced an increase in its quarterly dividend to
$0.50
per share, representing
$2.00
on an annual basis.
(5)
The Company estimated forfeitures based on past experience. The rate is monitored on a periodic basis.
In
2016
, the expense for stock options (regular and performance) was
$14 million
(
2015
–
$15 million
;
2014
–
$18 million
). At
December 31, 2016
, there was
$8 million
of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average period of approximately
1.1
years.
The total fair value of shares vested for the stock option plan during
2016
was
$15 million
(
2015
–
$17 million
;
2014
–
$15 million
).
The following table provides information related to all options exercised in the stock option plan during the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Total intrinsic value
|
$
|
30
|
|
$
|
72
|
|
$
|
115
|
|
Cash received by the Company upon exercise of options
|
21
|
|
43
|
|
62
|
|
B. Other Share-based Plans
Performance share units plan
During
2016
, the Company issued
147,157
PSUs with a grant date fair value of
$25 million
. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately
three years
after the grant date, contingent upon CP’s performance (performance factor). Grant recipients who are eligible to retire and have provided six months of service during the performance period are entitled to the full award. The fair value of PSUs is measured periodically until settlement, using a latticed-based valuation model.
The performance period of the PSUs issued in 2016 is January 1, 2016 to December 31, 2018, and the performance period for the PSUs issued in 2015 is January 1, 2015 to December 31, 2017. The performance factors for these PSUs are Operating Ratio, Return on Invested Capital, Total Shareholder Return ("TSR") compared to the S&P/TSX60 index, and TSR compared to Class 1 railways.
The performance period for the PSUs issued in 2014 was January 1, 2014 to December 31, 2016. The performance factors for these PSUs were Operating Ratio, Free cash flow, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting estimated payout was
118%
on
134,063
total outstanding awards at December 31, 2016 resulting in a liability of
$31 million
at
December 31, 2016
and was calculated using the Company's average share price using the last
30
trading days preceding
December 31, 2016
.
The performance period for the PSUs issued in the fourth quarter of 2012 and in 2013 was January 1, 2013 to December 31, 2014. The performance factors for these PSUs were Operating Ratio, Free cash flow, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. All performance factors met the
200%
payout thresholds, in effect resulting in a target payout of
200%
on
300,095
total outstanding awards
as at December 31, 2015
. A payout of
$79 million
on
217,179
outstanding awards, occurred on
December 31, 2015
and was calculated using the Company's average share price using the last
30
trading days preceding
December 31, 2015
. In the first quarter of 2016, final payouts occurred on the total outstanding awards, including dividends reinvested, totalling
$31 million
on
83,466
outstanding awards
The following table summarizes information related to the Company’s PSUs as at
December 31
:
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Outstanding, January 1
|
348,276
|
|
460,783
|
|
Granted
|
147,157
|
|
137,958
|
|
Units, in lieu of dividends
|
4,010
|
|
3,570
|
|
Settled
|
(83,466
|
)
|
(217,179
|
)
|
Forfeited
|
(42,384
|
)
|
(36,856
|
)
|
Outstanding, December 31
|
373,593
|
|
348,276
|
|
In
2016
, the expense for PSUs was
$29 million
(
2015
–
$55 million
;
2014
–
$50 million
). At
December 31, 2016
, there was
$15 million
of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of approximately
1.4
years.
Deferred share units plan
The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to
48 months
and are only redeemable for a specified period after employment is terminated.
Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a
25%
company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have
five
years to meet their ownership targets.
An expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.
The following table summarizes information related to the DSUs as at
December 31
:
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Outstanding, January 1
|
318,176
|
|
308,447
|
|
Granted
|
31,069
|
|
21,690
|
|
Units, in lieu of dividends
|
2,798
|
|
2,015
|
|
Settled
|
(87,996
|
)
|
(11,784
|
)
|
Forfeited
|
(30,011
|
)
|
(2,192
|
)
|
Outstanding, December 31
|
234,036
|
|
318,176
|
|
During
2016
, the Company granted
31,069
DSUs with a grant date fair value of
$5 million
. In
2016
, the expense was
$2 million
(
2015
–
$10 million
recovery;
2014
–
$28 million
expense). At
December 31, 2016
, there was
$1 million
of total unrecognized compensation related to DSUs which is expected to be recognized over a weighted-average period of approximately
1.2
years.
Summary of share based liabilities paid
The following table summarizes the total share based liabilities paid for each of the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2016
|
|
2015
|
|
2014
|
|
Plan
|
|
|
|
DSUs
|
$
|
17
|
|
$
|
3
|
|
$
|
17
|
|
PSUs
|
31
|
|
79
|
|
—
|
|
Other
|
—
|
|
8
|
|
12
|
|
Total
|
$
|
48
|
|
$
|
90
|
|
$
|
29
|
|
C. Employee share purchase plan
The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the
one year
vesting period. Under the plan, the Company matches
$1 for every $3 contributed by employees
up to a maximum employee contribution of
6%
of annual salary.
The total number of shares purchased in
2016
on behalf of participants, including the Company's contributions, was
140,560
(
2015
–
131,703
;
2014
–
176,906
). In
2016
, the Company’s contributions totalled
$5 million
(
2015
–
$5 million
;
2014
–
$5 million
) and the related expense was
$5 million
(
2015
–
$4 million
;
2014
–
$5 million
).
22 Variable interest entities
The Company leases equipment from certain trusts, which have been determined to be variable interest entities financed by a combination of debt and equity provided by unrelated third parties. The lease agreements, which are classified as operating leases, have a fixed price purchase option which create the Company’s variable interest and result in the trusts being considered variable interest entities.
Maintaining and operating the leased assets according to specific contractual obligations outlined in the terms of the lease agreements and industry standards is the Company’s responsibility. The rigor of the contractual terms of the lease agreements and industry
standards are such that the Company has limited discretion over the maintenance activities associated with these assets. As such, the Company concluded these terms do not provide the Company with the power to direct the activities of the variable interest entities in a way that has a significant impact on the entities’ economic performance.
The financial exposure to the Company as a result of its involvement with the variable interest entities is equal to the fixed lease payments due to the trusts. In
2016
, lease payments after tax were
$12 million
. Future minimum lease payments, before tax, of
$207 million
will be payable over the next
14 years
(see Note 23).
The Company does not guarantee the residual value of the assets to the lessor; however, it must deliver to the lessor the assets in good operating condition, subject to normal wear and tear, at the end of the lease term.
As the Company’s actions and decisions do not significantly affect the variable interest entities’ performance, and the Company’s fixed price purchase option is not considered to be potentially significant to the variable interest entities, the Company is not considered to be the primary beneficiary, and does not consolidate these variable interest entities.
23 Commitments and contingencies
In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at
December 31, 2016
, cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s financial position or results of operations.
Commitments
At
December 31, 2016
, the Company had committed to total future capital expenditures amounting to
$186 million
and operating expenditures relating to supplier purchase obligations, such as locomotive maintenance and overhaul agreements, as well as agreements to purchase other goods and services amounting to approximately
$2.5 billion
for the years
2017
–
2032
, of which CP estimates approximately
$1.9 billion
will be incurred in the next five years.
As at December 31, 2016
, the Company’s commitments under operating leases were estimated at
$450 million
in aggregate, with minimum annual payments in each of the next five years and thereafter as follows:
|
|
|
|
|
(in millions of Canadian dollars)
|
Operating
leases
|
|
2017
|
$
|
97
|
|
2018
|
66
|
|
2019
|
52
|
|
2020
|
44
|
|
2021
|
40
|
|
Thereafter
|
151
|
|
Total minimum lease payments
|
$
|
450
|
|
Expenses for operating leases
for the year ended December 31, 2016
, were
$111 million
(
2015
–
$127 million
;
2014
–
$121 million
).
Legal proceedings related to Lac-Mégantic rail accident
On July 6, 2013, a train carrying crude oil operated by Montreal Maine and Atlantic Railway (“MMA”) or a subsidiary, Montreal Maine & Atlantic Canada Co. (“MMAC” and collectively the “MMA Group”) derailed and exploded in Lac-Mégantic, Québec. The accident occurred on a section of railway owned and operated by the MMA Group. The previous day CP had interchanged the train to the MMA Group, and after the interchange, the MMA Group exclusively controlled the train.
Following this incident, Québec's Minister of Sustainable Development, Environment, Wildlife and Parks (the "Minister") ordered the named parties to recover the contaminants and to clean up the derailment site. On August 14, 2013, the Minister added CP as a party (the “Amended Cleanup Order”). CP appealed the Amended Cleanup Order to the Administrative Tribunal of Québec. On July 5, 2016, the Minister served a Notice of Claim for nearly
$95 million
of compensation spent on cleanup, alleging that CP refused or neglected to undertake the work. On September 6, 2016, CP filed a contestation of the Notice of Claim with the Administrative Tribunal of Québec. In October 2016, CP and the Minister agreed to stay the tribunal proceedings pending the outcome of the Province of Québec's action, set out below. The Court's decision to stay the tribunal proceedings is pending, but
de facto
, the file has been suspended. Directly related to that matter, on July 6, 2015, the Province of Québec sued CP in Québec Superior Court claiming
$409 million
in derailment damages, including cleanup costs. The Province alleges that CP exercised custody or control over the crude oil lading and that CP was otherwise negligent. Therefore, CP is said to be solidarily (joint and severally) liable with
third parties responsible for the accident. The Province filed a motion for leave to amend its complaint in September 2016, but no date has been fixed for the hearing of this motion, as most of the Attorney General of Québec's lawyers have been on strike since October 2016 and current reports are that there is no imminent end in sight. As at the end of 2016, no timetable governing the conduct of this lawsuit has been ordered by the Québec Superior Court. This proceeding appears to be duplicative of the administrative proceedings.
A class action lawsuit has also been filed in the Québec Superior Court on behalf of persons and entities residing in, owning or leasing property in, operating a business in or physically present in Lac-Mégantic at the time of the derailment (the “Class Action”). That lawsuit seeks derailment damages, including for wrongful death, personal injury, and property harm. On August 16, 2013, CP was added as a defendant. On May 8, 2015, the Québec Superior Court authorized (certified) the Class Action against CP, the shipper – Western Petroleum, and the shipper’s parent – World Fuel Services (collectively, the “World Fuel Entities”). The World Fuel Entities have since settled. The plaintiffs filed a motion for leave to amend their complaint, but subsequently withdrew it.
On October 24, 2016, the Québec Superior Court authorized class action proceedings against two additional defendants in the same matter discussed above, i.e., against MMAC and Mr. Thomas Harding. On December 9, 2016, the Superior Court granted CP's motion asking the latter to confirm the validity of the opt-outs from this class action by most of the estates of the deceased parties following the train derailment who had opted out to allow them to sue in the United States instead (i.e., the wrongful death cases, filed in the United States, which are further discussed hereinafter). As at the end of 2016, no timetable governing the conduct of this lawsuit has been ordered by the Québec Superior Court.
On July 4, 2016,
eight
subrogated insurers served CP with claims of approximately
$16 million
. On July 11, 2016,
two
additional subrogated insurers served CP with claims of approximately
$3 million
. The lawsuits do not identify the parties to which the insurers are subrogated, and therefore the extent of claim overlap and the extent that claims will be satisfied after proof of claim review and distribution from the Plans, referred to below, is difficult to determine. These lawsuits have been stayed until June 2, 2017.
In the wake of the derailment and ensuing litigation, MMAC filed for bankruptcy in Canada (the “Canadian Proceeding”) and MMA filed for bankruptcy in the United States (the “U.S. Proceeding”). Plans of arrangement have been approved in both the Canadian Proceeding and the U.S. Proceeding (the “Plans”). These Plans provide for the distribution of a fund of approximately
$440 million
amongst those claiming derailment damages. The Plans also provide settling parties broadly worded third-party releases and injunctions preventing lawsuits against settlement contributors. CP has not settled and therefore will not benefit from those provisions. Both Plans do, however, contain judgment reduction provisions, affording CP a credit for the greater of (i) the settlement monies received by the plaintiff(s), or (ii) the amount, in contribution or indemnity, that CP would have been entitled to charge against third parties other than MMA and MMAC, but for the Plans' releases and injunctions. CP may also have judgment reduction rights, as part of the contribution/indemnification credit, for the fault of the MMA Group. Finally, the Plans provide for a potential re-allocation of the MMA Group’s liability among plaintiffs and CP, the only non-settling party.
An Adversary Proceeding filed by the MMA U.S. bankruptcy trustee (now, estate representative) against CP, Irving Oil, and the World Fuel Entities accuses CP of failing to ensure that World Fuel Entities or Irving Oil properly classified the oil lading and of not refusing to ship the misclassified oil as packaged. By that action the estate representative seeks to recover MMA's going concern value supposedly destroyed by the derailment. The estate representative has since settled with the World Fuel Entities and Irving Oil and now bases CP misfeasance on the railroad’s failure to abide in North Dakota by a Canadian regulation. That regulation supposedly would have caused the railroads to not move the crude oil train because an inaccurate classification was supposedly suspected. In a recently amended complaint, the estate representative named a CP affiliate, Soo Line Railroad Company ("Soo Line"), and asserts that CP and Soo Line breached terms or warranties allegedly contained in the bill of lading. CP's motion to dismiss this amended complaint was heard on December 20, 2016 and a decision is pending.
In response to one of CP’s motions to withdraw the Adversary Proceedings bankruptcy reference, the estate representative maintained that Canadian law rather than U.S. law controlled. The Article III court that heard the motion found that if U.S. federal regulations governed, the case was not complex enough to warrant withdrawal. Before the bankruptcy court, CP moved to dismiss for want of personal jurisdiction, but the court denied the motion because CP had participated in the bankruptcy proceedings.
Lac-Mégantic residents and wrongful death representatives commenced a class action and a mass action in Texas and wrongful death and personal injury actions in Illinois and Maine. CP removed all of these lawsuits to federal court, and a federal court thereafter consolidated those cases in Maine. These actions generally charge CP with misclassification and mis-packaging (that is, using inappropriate DOT-111 tank cars) negligence. On CP's motion, the Maine court dismissed all wrongful death and personal injury actions on several grounds on September 28, 2016. The plaintiffs’ subsequent motion for reconsideration was denied on January 9, 2017. The plaintiffs filed a notice of appeal on January 19, 2017. CP will file a motion to dismiss the appeal. If the ruling is upheld on appeal these cases will be litigated, if anywhere, in Canada. As previously mentioned, many of these plaintiffs had previously opted-out of the Québec Class Action in order to bring their claims in the United States. CP brought a motion on December 1, 2016 to seek a declaration from the Québec Superior Court that the plaintiffs who had opted were precluded from opting back into the Québec Class Action. CP’s motion was successful. Accordingly, if these plaintiffs seek to sue CP, they would have to do so in Québec in individual actions (they could also join their individual claims in the same individual action).
CP has received
two
damage to cargo notices of claims from the shipper of the oil, Western Petroleum. Western Petroleum submitted U.S. and Canadian notices of claims for the same damages and under the Carmack Amendment (49 U.S.C. Section 11706) Western
Petroleum seeks to recover for all injuries associated with, and indemnification for, the derailment. Both jurisdictions permit a shipper to recover the value of damaged lading against any carrier in the delivery chain, subject to limitations in the carrier’s tariffs. CP’s tariffs significantly restrict shipper damage claim rights. Western Petroleum is part of the World Fuel Services Entities, and those companies settled with the trustee. In settlements with the estate representative the World Fuel Services Entities and the consignee (Irving Oil) assigned all claims against CP, if any, including Carmack Amendment claims. The estate representative has since designated a trust formed for the benefit of the wrongful death plaintiff to pursue those claims.
On April 12, 2016, the Trustee (the “WD Trustee”) for a wrongful death trust (the “WD Trust”), as defined and established under the confirmed Plans, sued CP in North Dakota federal court, asserting Carmack Amendment claims. The WD Trustee maintains that the estate representative assigned Carmack Amendment claims to the WD Trustee. The Plan supposedly gave the estate representative Carmack Amendment assignment rights. The WD Trustee seeks to recover amounts for damaged railcars (approximately
$6 million
), and the settlement amounts the consignor (i.e., the shipper, the World Fuel Entities) and the consignee (Irving Oil) paid to the bankruptcy estates, alleged to be
$110 million
and
$60 million
, respectively. The WD Trustee maintains that Carmack Amendment liability extends beyond lading losses to cover all derailment related damages suffered by the World Fuel Entities or Irving Oil. CP disputes this interpretation of Carmack Amendment exposure and maintains that CP’s tariffs preclude anything except a minimal recovery. Canadian Pacific Railway Limited and Soo Line Corporation, both non-carriers, have moved to dismiss the Carmack Amendment claims, which only apply to common carriers. CP has brought threshold motions to dismiss the Carmack Amendment claims. The determination of these motions is pending.
At this early stage of the proceedings, any potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, CP denies liability and intends to vigorously defend against all derailment-related proceedings.
24 Guarantees
In the normal course of operating the railway, the Company enters into contractual arrangements that involve providing certain guarantees, which extend over the term of the contracts. These guarantees include, but are not limited to:
|
|
•
|
residual value guarantees on operating lease commitments of
$19 million
at
December 31, 2016
;
|
|
|
•
|
guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in the operation of the railway through operating leases, rental agreements, easements, trackage, and interline agreements; and
|
|
|
•
|
indemnifications of certain tax-related payments incurred by lessors and lenders.
|
The maximum amount that could be payable under these guarantees, excluding residual value guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or a portion of amounts paid under guarantees to other parties in the event of the occurrence of specified events could be recoverable from other parties or through insurance. The Company has accrued for all guarantees that it expects to pay. At
December 31, 2016
, these accruals amounted to
$5 million
(
2015
–
$4 million
), recorded in “Accounts payable and accrued liabilities”.
Indemnifications
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Plan, the Company has undertaken to indemnify and save harmless the trustee, to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs, and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The indemnity includes liabilities, costs, or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined contribution option of the pension plans or otherwise with respect to the assets of the pension plans that are not part of the fund. The indemnity survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry. At
December 31, 2016
, the Company had not recorded a liability associated with this indemnification, as it does not expect to make any payments pertaining to it.
25 Segmented and geographic information
Operating segment
The Company operates in only
one
operating segment: rail transportation. Operating results by geographic areas, railway corridors or other lower level components or units of operation are not reviewed by the Company’s chief operating decision-maker to make decisions about the allocation of resources to, or the assessment of performance of, such geographic areas, corridors, components or units of operation.
In the years ended
December 31, 2016
,
2015
, and
2014
,
no
one customer comprised more than 10% of total revenues and accounts receivable.
Geographic information
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Canada
|
|
United States
|
|
Total
|
|
2016
|
|
|
|
Revenues
|
$
|
4,473
|
|
$
|
1,759
|
|
$
|
6,232
|
|
Long-term assets excluding financial instruments, mortgages receivable and deferred tax assets
|
$
|
11,000
|
|
$
|
6,121
|
|
$
|
17,121
|
|
2015
|
|
|
|
Revenues
|
$
|
4,662
|
|
$
|
2,050
|
|
$
|
6,712
|
|
Long-term assets excluding financial instruments, mortgages receivable and deferred tax assets
|
$
|
10,630
|
|
$
|
6,068
|
|
$
|
16,698
|
|
2014
|
|
|
|
Revenues
|
$
|
4,655
|
|
$
|
1,965
|
|
$
|
6,620
|
|
Long-term assets excluding financial instruments, mortgages receivable and deferred tax assets
|
$
|
10,114
|
|
$
|
4,733
|
|
$
|
14,847
|
|
26 Selected quarterly data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
2016
|
|
2015
|
(in millions of Canadian dollars, except per share data)
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Total revenues
|
$
|
1,637
|
|
$
|
1,554
|
|
$
|
1,450
|
|
$
|
1,591
|
|
|
$
|
1,687
|
|
$
|
1,709
|
|
$
|
1,651
|
|
$
|
1,665
|
|
Operating income
|
717
|
|
657
|
|
551
|
|
653
|
|
|
677
|
|
753
|
|
646
|
|
612
|
|
Net income
|
384
|
|
347
|
|
328
|
|
540
|
|
|
319
|
|
323
|
|
390
|
|
320
|
|
Basic earnings per share
(1)
|
$
|
2.63
|
|
$
|
2.35
|
|
$
|
2.16
|
|
$
|
3.53
|
|
|
$
|
2.09
|
|
$
|
2.05
|
|
$
|
2.38
|
|
$
|
1.94
|
|
Diluted earnings per share
(1)
|
2.61
|
|
2.34
|
|
2.15
|
|
3.51
|
|
|
2.08
|
|
2.04
|
|
2.36
|
|
1.92
|
|
(1)
Per share net income for the four quarters combined may not equal the per share net income for the year due to rounding.
On January 18, 2017, the Company announced the resignation of Mr. E. Hunter Harrison from all positions held by him at the Company, including as the Company’s Chief Executive Officer and a member of the Board of Directors of the Company, effective January 31, 2017. In connection with Mr. Harrison’s resignation, the Company entered into a separation agreement with Mr. Harrison. Under the terms of the separation agreement, the Company has agreed to a limited waiver of Mr. Harrison’s non-competition and non-solicitation obligations.
Effective January 31, 2017, pursuant to the separation agreement, Mr. Harrison forfeited certain pension and post-retirement benefits and agreed to the surrender for cancellation of
22,514
PSUs,
68,612
DSUs, and
752,145
Stock options.
As a result of this agreement, the Company has recognized a recovery of
$51 million
in "Compensation and benefits" in the first quarter of 2017.
28 Condensed consolidating financial information
Canadian Pacific Railway Company, a 100%-owned subsidiary of Canadian Pacific Railway Limited (“CPRL”), is the issuer of certain debt securities, which are fully and unconditionally guaranteed by CPRL. The following tables present condensed consolidating financial information (“CCFI”) in accordance with Rule 3-10(c) of Regulation S-X.
Investments in subsidiaries are accounted for under the equity method when presenting the CCFI.
The tables include all adjustments necessary to reconcile the CCFI on a consolidated basis to CPRL’s consolidated financial statements for the periods presented.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Revenues
|
|
|
|
|
|
Freight
|
$
|
—
|
|
$
|
4,332
|
|
$
|
1,728
|
|
$
|
—
|
|
$
|
6,060
|
|
Non-freight
|
—
|
|
134
|
|
386
|
|
(348
|
)
|
172
|
|
Total revenues
|
—
|
|
4,466
|
|
2,114
|
|
(348
|
)
|
6,232
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
—
|
|
749
|
|
434
|
|
6
|
|
1,189
|
|
Fuel
|
—
|
|
458
|
|
109
|
|
—
|
|
567
|
|
Materials
|
—
|
|
130
|
|
32
|
|
18
|
|
180
|
|
Equipment rents
|
—
|
|
204
|
|
(31
|
)
|
—
|
|
173
|
|
Depreciation and amortization
|
—
|
|
422
|
|
218
|
|
—
|
|
640
|
|
Purchased services and other
|
—
|
|
673
|
|
604
|
|
(372
|
)
|
905
|
|
Total operating expenses
|
—
|
|
2,636
|
|
1,366
|
|
(348
|
)
|
3,654
|
|
Operating income
|
—
|
|
1,830
|
|
748
|
|
—
|
|
2,578
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and charges
|
(40
|
)
|
(34
|
)
|
29
|
|
—
|
|
(45
|
)
|
Net interest expense (income)
|
1
|
|
493
|
|
(23
|
)
|
—
|
|
471
|
|
Income before income tax expense and equity in net earnings of subsidiaries
|
39
|
|
1,371
|
|
742
|
|
—
|
|
2,152
|
|
Less: Income tax expense
|
6
|
|
337
|
|
210
|
|
—
|
|
553
|
|
Add: Equity in net earnings of subsidiaries
|
1,566
|
|
532
|
|
—
|
|
(2,098
|
)
|
—
|
|
Net income
|
$
|
1,599
|
|
$
|
1,566
|
|
$
|
532
|
|
$
|
(2,098
|
)
|
$
|
1,599
|
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Revenues
|
|
|
|
|
|
Freight
|
$
|
—
|
|
$
|
4,532
|
|
$
|
2,020
|
|
$
|
—
|
|
$
|
6,552
|
|
Non-freight
|
—
|
|
128
|
|
363
|
|
(331
|
)
|
160
|
|
Total revenues
|
—
|
|
4,660
|
|
2,383
|
|
(331
|
)
|
6,712
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
—
|
|
943
|
|
428
|
|
—
|
|
1,371
|
|
Fuel
|
—
|
|
549
|
|
159
|
|
—
|
|
708
|
|
Materials
|
—
|
|
148
|
|
36
|
|
—
|
|
184
|
|
Equipment rents
|
—
|
|
181
|
|
(7
|
)
|
—
|
|
174
|
|
Depreciation and amortization
|
—
|
|
411
|
|
184
|
|
—
|
|
595
|
|
Purchased services and other
|
—
|
|
711
|
|
680
|
|
(331
|
)
|
1,060
|
|
Gain on sale of Delaware & Hudson South
|
—
|
|
—
|
|
(68
|
)
|
—
|
|
(68
|
)
|
Total operating expenses
|
—
|
|
2,943
|
|
1,412
|
|
(331
|
)
|
4,024
|
|
Operating income
|
—
|
|
1,717
|
|
971
|
|
—
|
|
2,688
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and charges
|
84
|
|
322
|
|
(71
|
)
|
—
|
|
335
|
|
Net interest (income) expense
|
(5
|
)
|
447
|
|
(48
|
)
|
—
|
|
394
|
|
(Loss) income before income tax expense and equity in net earnings of subsidiaries
|
(79
|
)
|
948
|
|
1,090
|
|
—
|
|
1,959
|
|
Less: Income tax (recovery) expense
|
(21
|
)
|
303
|
|
325
|
|
—
|
|
607
|
|
Add: Equity in net earnings of subsidiaries
|
1,410
|
|
765
|
|
—
|
|
(2,175
|
)
|
—
|
|
Net income
|
$
|
1,352
|
|
$
|
1,410
|
|
$
|
765
|
|
$
|
(2,175
|
)
|
$
|
1,352
|
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Revenues
|
|
|
|
|
|
Freight
|
$
|
—
|
|
$
|
4,524
|
|
$
|
1,940
|
|
$
|
—
|
|
$
|
6,464
|
|
Non-freight
|
—
|
|
130
|
|
357
|
|
(331
|
)
|
156
|
|
Total revenues
|
—
|
|
4,654
|
|
2,297
|
|
(331
|
)
|
6,620
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
—
|
|
945
|
|
403
|
|
—
|
|
1,348
|
|
Fuel
|
—
|
|
779
|
|
269
|
|
—
|
|
1,048
|
|
Materials
|
—
|
|
156
|
|
37
|
|
—
|
|
193
|
|
Equipment rents
|
—
|
|
137
|
|
18
|
|
—
|
|
155
|
|
Depreciation and amortization
|
—
|
|
396
|
|
156
|
|
—
|
|
552
|
|
Purchased services and other
|
—
|
|
706
|
|
610
|
|
(331
|
)
|
985
|
|
Total operating expenses
|
—
|
|
3,119
|
|
1,493
|
|
(331
|
)
|
4,281
|
|
Operating income
|
—
|
|
1,535
|
|
804
|
|
—
|
|
2,339
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and charges
|
3
|
|
46
|
|
(30
|
)
|
—
|
|
19
|
|
Net interest expense
|
—
|
|
250
|
|
32
|
|
—
|
|
282
|
|
(Loss) income before income tax expense and equity in net earnings of subsidiaries
|
(3
|
)
|
1,239
|
|
802
|
|
—
|
|
2,038
|
|
Less: Income tax (recovery) expense
|
(1
|
)
|
320
|
|
243
|
|
—
|
|
562
|
|
Add: Equity in net earnings of subsidiaries
|
$
|
1,478
|
|
$
|
559
|
|
$
|
—
|
|
$
|
(2,037
|
)
|
$
|
—
|
|
Net income
|
$
|
1,476
|
|
$
|
1,478
|
|
$
|
559
|
|
$
|
(2,037
|
)
|
$
|
1,476
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Net income
|
$
|
1,599
|
|
$
|
1,566
|
|
$
|
532
|
|
$
|
(2,098
|
)
|
$
|
1,599
|
|
Net gain (loss) in foreign currency translation
adjustments, net of hedging activities
|
—
|
|
149
|
|
(131
|
)
|
—
|
|
18
|
|
Change in derivatives designated as cash flow
hedges
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
Change in pension and post-retirement defined
benefit plans
|
—
|
|
(443
|
)
|
9
|
|
—
|
|
(434
|
)
|
Other comprehensive loss before
income taxes
|
—
|
|
(296
|
)
|
(122
|
)
|
—
|
|
(418
|
)
|
Income tax recovery (expense) on above items
|
—
|
|
99
|
|
(3
|
)
|
—
|
|
96
|
|
Equity accounted investments
|
(322
|
)
|
(125
|
)
|
—
|
|
447
|
|
—
|
|
Other comprehensive loss
|
(322
|
)
|
(322
|
)
|
(125
|
)
|
447
|
|
(322
|
)
|
Comprehensive income
|
$
|
1,277
|
|
$
|
1,244
|
|
$
|
407
|
|
$
|
(1,651
|
)
|
$
|
1,277
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Net income
|
$
|
1,352
|
|
$
|
1,410
|
|
$
|
765
|
|
$
|
(2,175
|
)
|
$
|
1,352
|
|
Net (loss) gain in foreign currency translation
adjustments, net of hedging activities
|
—
|
|
(757
|
)
|
671
|
|
—
|
|
(86
|
)
|
Change in derivatives designated as cash flow
hedges
|
—
|
|
(69
|
)
|
—
|
|
—
|
|
(69
|
)
|
Change in pension and post-retirement defined
benefit plans
|
—
|
|
1,061
|
|
(2
|
)
|
—
|
|
1,059
|
|
Other comprehensive income before
income taxes
|
—
|
|
235
|
|
669
|
|
—
|
|
904
|
|
Income tax (expense) recovery on above items
|
—
|
|
(163
|
)
|
1
|
|
—
|
|
(162
|
)
|
Equity accounted investments
|
742
|
|
670
|
|
—
|
|
(1,412
|
)
|
—
|
|
Other comprehensive income
|
742
|
|
742
|
|
670
|
|
(1,412
|
)
|
742
|
|
Comprehensive income
|
$
|
2,094
|
|
$
|
2,152
|
|
$
|
1,435
|
|
$
|
(3,587
|
)
|
$
|
2,094
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Net income
|
$
|
1,476
|
|
$
|
1,478
|
|
$
|
559
|
|
$
|
(2,037
|
)
|
$
|
1,476
|
|
Net (loss) gain in foreign currency translation
adjustments, net of hedging activities
|
—
|
|
(316
|
)
|
284
|
|
—
|
|
(32
|
)
|
Change in derivatives designated as cash flow
hedges
|
—
|
|
(49
|
)
|
—
|
|
—
|
|
(49
|
)
|
Change in pension and post-retirement defined
benefit plans
|
—
|
|
(908
|
)
|
(33
|
)
|
—
|
|
(941
|
)
|
Other comprehensive (loss) income before
income taxes
|
—
|
|
(1,273
|
)
|
251
|
|
—
|
|
(1,022
|
)
|
Income tax recovery on above items
|
—
|
|
293
|
|
13
|
|
—
|
|
306
|
|
Equity accounted investments
|
(716
|
)
|
264
|
|
—
|
|
452
|
|
—
|
|
Other comprehensive (loss) income
|
(716
|
)
|
(716
|
)
|
264
|
|
452
|
|
(716
|
)
|
Comprehensive income
|
$
|
760
|
|
$
|
762
|
|
$
|
823
|
|
$
|
(1,585
|
)
|
$
|
760
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
AS AT DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
100
|
|
$
|
64
|
|
$
|
—
|
|
$
|
164
|
|
Accounts receivable, net
|
—
|
|
435
|
|
156
|
|
—
|
|
591
|
|
Accounts receivable, intercompany
|
90
|
|
113
|
|
206
|
|
(409
|
)
|
—
|
|
Short-term advances to affiliates
|
500
|
|
692
|
|
4,035
|
|
(5,227
|
)
|
—
|
|
Materials and supplies
|
—
|
|
150
|
|
34
|
|
—
|
|
184
|
|
Other current assets
|
—
|
|
38
|
|
32
|
|
—
|
|
70
|
|
|
590
|
|
1,528
|
|
4,527
|
|
(5,636
|
)
|
1,009
|
|
Long-term advances to affiliates
|
1
|
|
—
|
|
91
|
|
(92
|
)
|
—
|
|
Investments
|
—
|
|
47
|
|
147
|
|
—
|
|
194
|
|
Investments in subsidiaries
|
8,513
|
|
10,249
|
|
—
|
|
(18,762
|
)
|
—
|
|
Properties
|
—
|
|
8,756
|
|
7,933
|
|
—
|
|
16,689
|
|
Goodwill and intangible assets
|
—
|
|
—
|
|
202
|
|
—
|
|
202
|
|
Pension asset
|
—
|
|
1,070
|
|
—
|
|
—
|
|
1,070
|
|
Other assets
|
1
|
|
48
|
|
8
|
|
—
|
|
57
|
|
Deferred income taxes
|
11
|
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
Total assets
|
$
|
9,116
|
|
$
|
21,698
|
|
$
|
12,908
|
|
$
|
(24,501
|
)
|
$
|
19,221
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
73
|
|
$
|
945
|
|
$
|
304
|
|
$
|
—
|
|
$
|
1,322
|
|
Accounts payable, intercompany
|
14
|
|
292
|
|
103
|
|
(409
|
)
|
—
|
|
Short-term advances from affiliates
|
4,403
|
|
816
|
|
8
|
|
(5,227
|
)
|
—
|
|
Long-term debt maturing within one year
|
—
|
|
25
|
|
—
|
|
—
|
|
25
|
|
|
4,490
|
|
2,078
|
|
415
|
|
(5,636
|
)
|
1,347
|
|
Pension and other benefit liabilities
|
—
|
|
658
|
|
76
|
|
—
|
|
734
|
|
Long-term advances from affiliates
|
—
|
|
92
|
|
—
|
|
(92
|
)
|
—
|
|
Other long-term liabilities
|
—
|
|
152
|
|
132
|
|
—
|
|
284
|
|
Long-term debt
|
—
|
|
8,605
|
|
54
|
|
—
|
|
8,659
|
|
Deferred income taxes
|
—
|
|
1,600
|
|
1,982
|
|
(11
|
)
|
3,571
|
|
Total liabilities
|
4,490
|
|
13,185
|
|
2,659
|
|
(5,739
|
)
|
14,595
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
2,002
|
|
1,037
|
|
5,823
|
|
(6,860
|
)
|
2,002
|
|
Additional paid-in capital
|
52
|
|
1,638
|
|
298
|
|
(1,936
|
)
|
52
|
|
Accumulated other comprehensive (loss) income
|
(1,799
|
)
|
(1,799
|
)
|
712
|
|
1,087
|
|
(1,799
|
)
|
Retained earnings
|
4,371
|
|
7,637
|
|
3,416
|
|
(11,053
|
)
|
4,371
|
|
|
4,626
|
|
8,513
|
|
10,249
|
|
(18,762
|
)
|
4,626
|
|
Total liabilities and shareholders’ equity
|
$
|
9,116
|
|
$
|
21,698
|
|
$
|
12,908
|
|
$
|
(24,501
|
)
|
$
|
19,221
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
AS AT DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
502
|
|
$
|
148
|
|
$
|
—
|
|
$
|
650
|
|
Accounts receivable, net
|
—
|
|
452
|
|
193
|
|
—
|
|
645
|
|
Accounts receivable, intercompany
|
59
|
|
105
|
|
265
|
|
(429
|
)
|
—
|
|
Short-term advances to affiliates
|
—
|
|
75
|
|
3,483
|
|
(3,558
|
)
|
—
|
|
Materials and supplies
|
—
|
|
154
|
|
34
|
|
—
|
|
188
|
|
Other current assets
|
—
|
|
37
|
|
17
|
|
—
|
|
54
|
|
|
59
|
|
1,325
|
|
4,140
|
|
(3,987
|
)
|
1,537
|
|
Long-term advances to affiliates
|
501
|
|
207
|
|
376
|
|
(1,084
|
)
|
—
|
|
Investments
|
—
|
|
22
|
|
130
|
|
—
|
|
152
|
|
Investments in subsidiaries
|
7,518
|
|
9,832
|
|
—
|
|
(17,350
|
)
|
—
|
|
Properties
|
—
|
|
8,481
|
|
7,792
|
|
—
|
|
16,273
|
|
Goodwill and intangible assets
|
—
|
|
3
|
|
208
|
|
—
|
|
211
|
|
Pension asset
|
—
|
|
1,401
|
|
—
|
|
—
|
|
1,401
|
|
Other assets
|
—
|
|
55
|
|
8
|
|
—
|
|
63
|
|
Deferred income taxes
|
25
|
|
—
|
|
—
|
|
(25
|
)
|
—
|
|
Total assets
|
$
|
8,103
|
|
$
|
21,326
|
|
$
|
12,654
|
|
$
|
(22,446
|
)
|
$
|
19,637
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
54
|
|
$
|
1,122
|
|
$
|
241
|
|
$
|
—
|
|
$
|
1,417
|
|
Accounts payable, intercompany
|
—
|
|
325
|
|
104
|
|
(429
|
)
|
—
|
|
Short-term advances from affiliates
|
3,253
|
|
230
|
|
75
|
|
(3,558
|
)
|
—
|
|
Long-term debt maturing within one year
|
—
|
|
24
|
|
6
|
|
—
|
|
30
|
|
|
3,307
|
|
1,701
|
|
426
|
|
(3,987
|
)
|
1,447
|
|
Pension and other benefit liabilities
|
—
|
|
676
|
|
82
|
|
—
|
|
758
|
|
Long-term advances from affiliates
|
—
|
|
877
|
|
207
|
|
(1,084
|
)
|
—
|
|
Other long-term liabilities
|
—
|
|
186
|
|
132
|
|
—
|
|
318
|
|
Long-term debt
|
—
|
|
8,863
|
|
64
|
|
—
|
|
8,927
|
|
Deferred income taxes
|
—
|
|
1,505
|
|
1,911
|
|
(25
|
)
|
3,391
|
|
Total liabilities
|
3,307
|
|
13,808
|
|
2,822
|
|
(5,096
|
)
|
14,841
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
2,058
|
|
1,037
|
|
5,465
|
|
(6,502
|
)
|
2,058
|
|
Additional paid-in capital
|
43
|
|
1,568
|
|
613
|
|
(2,181
|
)
|
43
|
|
Accumulated other comprehensive (loss) income
|
(1,477
|
)
|
(1,477
|
)
|
840
|
|
637
|
|
(1,477
|
)
|
Retained earnings
|
4,172
|
|
6,390
|
|
2,914
|
|
(9,304
|
)
|
4,172
|
|
|
4,796
|
|
7,518
|
|
9,832
|
|
(17,350
|
)
|
4,796
|
|
Total liabilities and shareholders’ equity
|
$
|
8,103
|
|
$
|
21,326
|
|
$
|
12,654
|
|
$
|
(22,446
|
)
|
$
|
19,637
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Cash provided by operating activities
|
$
|
255
|
|
$
|
1,424
|
|
$
|
879
|
|
$
|
(469
|
)
|
$
|
2,089
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Additions to properties
|
—
|
|
(728
|
)
|
(454
|
)
|
—
|
|
(1,182
|
)
|
Proceeds from sale of properties and other assets
|
—
|
|
102
|
|
14
|
|
—
|
|
116
|
|
Advances to affiliates
|
—
|
|
(664
|
)
|
(539
|
)
|
1,203
|
|
—
|
|
Repayment of advances to affiliates
|
—
|
|
222
|
|
—
|
|
(222
|
)
|
—
|
|
Capital contributions to affiliates
|
—
|
|
(472
|
)
|
—
|
|
472
|
|
—
|
|
Repurchase of share capital from affiliates
|
—
|
|
8
|
|
—
|
|
(8
|
)
|
—
|
|
Other
|
—
|
|
—
|
|
(3
|
)
|
—
|
|
(3
|
)
|
Cash used in investing activities
|
—
|
|
(1,532
|
)
|
(982
|
)
|
1,445
|
|
(1,069
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
(255
|
)
|
(255
|
)
|
(214
|
)
|
469
|
|
(255
|
)
|
Issuance of share capital
|
—
|
|
—
|
|
472
|
|
(472
|
)
|
—
|
|
Return of share capital to affiliates
|
—
|
|
—
|
|
(8
|
)
|
8
|
|
—
|
|
Issuance of CP Common Shares
|
21
|
|
—
|
|
—
|
|
—
|
|
21
|
|
Purchase of CP Common Shares
|
(1,210
|
)
|
—
|
|
—
|
|
—
|
|
(1,210
|
)
|
Repayment of long-term debt, excluding commercial paper
|
—
|
|
(24
|
)
|
(14
|
)
|
—
|
|
(38
|
)
|
Net repayment of commercial paper
|
—
|
|
(8
|
)
|
—
|
|
—
|
|
(8
|
)
|
Advances from affiliates
|
1,189
|
|
—
|
|
14
|
|
(1,203
|
)
|
—
|
|
Repayment of advances from affiliates
|
—
|
|
—
|
|
(222
|
)
|
222
|
|
—
|
|
Other
|
—
|
|
(3
|
)
|
—
|
|
—
|
|
(3
|
)
|
Cash (used in) provided by financing activities
|
(255
|
)
|
(290
|
)
|
28
|
|
(976
|
)
|
(1,493
|
)
|
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
|
—
|
|
(4
|
)
|
(9
|
)
|
—
|
|
(13
|
)
|
Cash position
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
—
|
|
(402
|
)
|
(84
|
)
|
—
|
|
(486
|
)
|
Cash and cash equivalents at beginning of year
|
—
|
|
502
|
|
148
|
|
—
|
|
650
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
$
|
100
|
|
$
|
64
|
|
$
|
—
|
|
$
|
164
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Cash provided by operating activities
|
$
|
2,283
|
|
$
|
1,650
|
|
$
|
1,074
|
|
$
|
(2,548
|
)
|
$
|
2,459
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Additions to properties
|
—
|
|
(766
|
)
|
(756
|
)
|
—
|
|
(1,522
|
)
|
Proceeds from the sale of Delaware & Hudson South
|
—
|
|
—
|
|
281
|
|
—
|
|
281
|
|
Proceeds from sale of properties and other assets
|
—
|
|
103
|
|
11
|
|
—
|
|
114
|
|
Advances to affiliates
|
(1,133
|
)
|
(311
|
)
|
(1,820
|
)
|
3,264
|
|
—
|
|
Repayment of advances to affiliates
|
—
|
|
804
|
|
1,000
|
|
(1,804
|
)
|
—
|
|
Capital contributions to affiliates
|
—
|
|
(1,655
|
)
|
—
|
|
1,655
|
|
—
|
|
Repurchase of share capital from affiliates
|
—
|
|
1,210
|
|
—
|
|
(1,210
|
)
|
—
|
|
Other
|
—
|
|
6
|
|
(2
|
)
|
—
|
|
4
|
|
Cash used in investing activities
|
(1,133
|
)
|
(609
|
)
|
(1,286
|
)
|
1,905
|
|
(1,123
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
(226
|
)
|
(2,272
|
)
|
(276
|
)
|
2,548
|
|
(226
|
)
|
Issuance of share capital
|
—
|
|
—
|
|
1,655
|
|
(1,655
|
)
|
—
|
|
Return of share capital to affiliates
|
—
|
|
—
|
|
(1,210
|
)
|
1,210
|
|
—
|
|
Issuance of CP Common Shares
|
43
|
|
—
|
|
—
|
|
—
|
|
43
|
|
Purchase of CP Common Shares
|
(2,787
|
)
|
—
|
|
—
|
|
—
|
|
(2,787
|
)
|
Issuance of long-term debt, excluding commercial paper
|
—
|
|
3,411
|
|
—
|
|
—
|
|
3,411
|
|
Repayment of long-term debt, excluding commercial paper
|
—
|
|
(461
|
)
|
(44
|
)
|
—
|
|
(505
|
)
|
Net repayment of commercial paper
|
—
|
|
(893
|
)
|
—
|
|
—
|
|
(893
|
)
|
Advances from affiliates
|
1,820
|
|
500
|
|
944
|
|
(3,264
|
)
|
—
|
|
Repayment of advances from affiliates
|
—
|
|
(1,000
|
)
|
(804
|
)
|
1,804
|
|
—
|
|
Cash (used in) provided by financing activities
|
(1,150
|
)
|
(715
|
)
|
265
|
|
643
|
|
(957
|
)
|
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
|
—
|
|
24
|
|
21
|
|
—
|
|
45
|
|
Cash position
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
—
|
|
350
|
|
74
|
|
—
|
|
424
|
|
Cash and cash equivalents at beginning of year
|
—
|
|
152
|
|
74
|
|
—
|
|
226
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
$
|
502
|
|
$
|
148
|
|
$
|
—
|
|
$
|
650
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Cash provided by operating activities
|
$
|
183
|
|
$
|
1,684
|
|
$
|
604
|
|
$
|
(348
|
)
|
$
|
2,123
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Additions to properties
|
—
|
|
(816
|
)
|
(702
|
)
|
69
|
|
(1,449
|
)
|
Proceeds from the sale of west end of Dakota, Minnesota and Eastern Railroad
|
—
|
|
—
|
|
236
|
|
—
|
|
236
|
|
Proceeds from sale of properties and other assets
|
—
|
|
116
|
|
5
|
|
(69
|
)
|
52
|
|
Advances to affiliates
|
—
|
|
(611
|
)
|
(2,636
|
)
|
3,247
|
|
—
|
|
Repayment of advances to affiliates
|
—
|
|
2,167
|
|
1,592
|
|
(3,759
|
)
|
—
|
|
Capital contributions to affiliates
|
—
|
|
(2,927
|
)
|
—
|
|
2,927
|
|
—
|
|
Other
|
—
|
|
2
|
|
(2
|
)
|
—
|
|
—
|
|
Cash used in investing activities
(1)
|
—
|
|
(2,069
|
)
|
(1,507
|
)
|
2,415
|
|
(1,161
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
(244
|
)
|
(182
|
)
|
(166
|
)
|
348
|
|
(244
|
)
|
Issuance of share capital
|
—
|
|
—
|
|
2,927
|
|
(2,927
|
)
|
—
|
|
Issuance of CP Common Shares
|
62
|
|
—
|
|
—
|
|
—
|
|
62
|
|
Purchase of CP Common Shares
|
(2,050
|
)
|
—
|
|
—
|
|
—
|
|
(2,050
|
)
|
Repayment of long-term debt, excluding commercial paper
|
—
|
|
(174
|
)
|
(9
|
)
|
—
|
|
(183
|
)
|
Net issuance of commercial paper
|
—
|
|
771
|
|
—
|
|
—
|
|
771
|
|
Settlement of foreign exchange forward on long-term debt
|
—
|
|
17
|
|
—
|
|
—
|
|
17
|
|
Advances from affiliates
|
2,049
|
|
1,198
|
|
—
|
|
(3,247
|
)
|
—
|
|
Repayment of advances from affiliates
|
—
|
|
(1,592
|
)
|
(2,167
|
)
|
3,759
|
|
—
|
|
Other
|
—
|
|
—
|
|
(3
|
)
|
—
|
|
(3
|
)
|
Cash (used in) provided by financing activities
|
(183
|
)
|
38
|
|
582
|
|
(2,067
|
)
|
(1,630
|
)
|
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
|
—
|
|
(3
|
)
|
10
|
|
—
|
|
7
|
|
Cash position
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash, cash equivalents, and restricted cash
(1)
|
—
|
|
(350
|
)
|
(311
|
)
|
—
|
|
(661
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
(1)
|
—
|
|
502
|
|
385
|
|
—
|
|
887
|
|
Cash, cash equivalents, and restricted cash at end of year
(1)
|
$
|
—
|
|
$
|
152
|
|
$
|
74
|
|
$
|
—
|
|
$
|
226
|
|
(1)
Certain figures have been reclassified due to a retrospective change in accounting policy (Note 2).