CALGARY, AB, Oct. 20, 2021 /PRNewswire/ - Canadian Pacific
Railway Limited (TSX: CP) (NYSE: CP) today announced third-quarter
revenues of $1.94 billion, diluted
earnings per share ("EPS") of $0.70,
adjusted diluted EPS1 of $0.88, an operating ratio ("OR") of 60.2 percent
and an adjusted OR1 of 59.4 percent.
"The third quarter presented challenges across the supply chain,
but the CP team's commitment to the foundations of precision
scheduled railroading enabled us to respond quickly and effectively
to changing environments," said Keith
Creel, CP President and Chief Executive Officer. "We are
committed to controlling what we can control, as CP continues to
focus on providing service excellence to our customers and driving
value for our shareholders."
Third-quarter highlights
- Revenues increased by 4 percent to $1.94
billion, from $1.86 billion
last year
- Reported diluted EPS of $0.70, a
20 percent decrease from $0.88 last
year, and adjusted diluted EPS of $0.88, a 7 percent increase from $0.82 last year
- Reported OR, which includes Kansas City Southern ("KCS")
acquisition-related costs, increased by 200 basis points to 60.2
percent from 58.2 percent
- Adjusted OR, which excludes the KCS acquisition-related costs,
increased 120 basis points to 59.4 percent over last year's
third-quarter OR of 58.2 percent
Updated outlook
CP now expects low single-digit volume
growth in 2021, as measured in revenue ton-miles, compared to 2020.
CP remains confident that it will deliver full-year double-digit
adjusted diluted EPS growth2,3 in 2021.
CP's revised guidance continues to assume other components of
net periodic benefit recovery to increase by approximately
$40 million versus 2020, an effective
tax rate of approximately 24.6 percent and capital expenditure of
$1.55 billion.
"Despite global supply chain issues and a challenging Canadian
grain crop, we remain confident in our ability to deliver full-year
double-digit adjusted diluted EPS growth," said Creel. "The
underlying demand environment remains strong, and our commitment to
generate sustainable, profitable growth will not be distracted by
elements outside our control."
Additionally, CP will continue its work preparing to create the
first single-line rail network linking the U.S., Mexico and Canada by combining with Kansas City
Southern.
"The transitory issues over the past year have only reinforced
the need for enhanced competition and optionality for North
American shippers," Creel said. "Our excitement about the
opportunities ahead with the combined companies continues to
grow."
1 These measures have no standardized
meanings prescribed by accounting principles generally accepted in
the United States of America
("GAAP") and, therefore, may not be comparable to similar measures
presented by other companies. These measures are defined and
reconciled in the Non-GAAP Measures supplementary schedule of this
Earnings Release.
2 CP's expectation for full year double-digit
adjusted diluted EPS growth in 2021 is relative to 2020's adjusted
diluted EPS of $3.53. CP's reported
diluted EPS was $3.59 in 2020.
3 Although CP has provided a forward-looking non-GAAP
measure (adjusted diluted EPS), management is unable to reconcile,
without unreasonable efforts, the forward-looking adjusted diluted
EPS to the most comparable GAAP measure (diluted EPS), due to
unknown variables and uncertainty related to future results. These
unknown variables may include unpredictable transactions of
significant value. In recent years, CP has recognized
acquisition-related costs (including legal, consulting and
financing fees, and fair value gain or loss on foreign exchange
(FX) forward contracts and interest rate hedges), the merger
termination payment received, changes in income tax rates and a
change to an uncertain tax item. These or other similar, large
unforeseen transactions affect diluted EPS but may be excluded from
CP's adjusted diluted EPS. Additionally, the U.S.-to-Canadian
dollar FX rate is unpredictable and can have a significant impact
on CP's reported results but may be excluded from CP's adjusted
diluted EPS. In particular, CP excludes the FX impact of
translating the Company's debt and lease liabilities from adjusted
diluted EPS.
For information regarding non-GAAP measures, including
reconciliations to the most comparable GAAP measures, see the
attached supplementary schedule Non-GAAP Measures.
Conference call details
CP will discuss its results
with the financial community in a conference call beginning at
8 a.m. ET (6
a.m. MT) today.
Conference call access
Toronto participants dial in number:
1-416-764-8688
Operator assisted toll free dial in number:
1-888-390-0546
Callers should dial in 10 minutes prior to the call.
Webcast
We encourage you to access the webcast and
presentation material in the Investors section of CP's website at
investor.cpr.ca.
A replay of the third-quarter conference call will be available
by phone through to Oct. 27, 2021 at
416-764-8677 or toll free 1-888-390-0541, password 549569.
Note on forward-looking information
This news release
may contain certain forward-looking information and forward-looking
statements (collectively, "forward-looking information") within the
meaning of applicable securities laws. Forward-looking information
includes, but is not limited to, statements concerning
expectations, beliefs, plans, goals, objectives, assumptions and
statements about possible future events, conditions, and results of
operations or performance. Forward-looking information may contain
statements with words or headings such as "financial expectations",
"key assumptions", "anticipate", "believe", "expect", "plan",
"will", "outlook", "should" or similar words suggesting future
outcomes. This news release contains forward-looking information
relating, but not limited to statements concerning 2021 volume as
measured in revenue ton-miles, adjusted diluted EPS growth, capital
program investments, the U.S.-to-Canadian dollar exchange rate,
annualized effective tax rate, other components of net periodic
benefit recovery, cost control efforts, the success of our
business, our operations, priorities and plans, anticipated
financial and operational performance, business prospects and
demand for our services and growth opportunities.
The forward-looking information that may be in this news release
is based on current expectations, estimates, projections and
assumptions, having regard to CP's experience and its perception of
historical trends, and includes, but is not limited to,
expectations, estimates, projections and assumptions relating to:
changes in business strategies, North American and global economic
growth; commodity demand growth; sustainable industrial and
agricultural production; commodity prices and interest rates;
foreign exchange rates (as specified herein); effective tax rates
(as specified herein); performance of our assets and equipment;
sufficiency of our budgeted capital expenditures in carrying out
our business plan; geopolitical conditions, applicable laws,
regulations and government policies; the availability and cost of
labour, services and infrastructure; the satisfaction by third
parties of their obligations to CP; and the anticipated impacts of
the COVID-19 pandemic on CP businesses, operating results, cash
flows and/or financial condition. Although CP believes the
expectations, estimates, projections and assumptions reflected in
the forward-looking information presented herein are reasonable as
of the date hereof, there can be no assurance that they will prove
to be correct. Current conditions, economic and otherwise, render
assumptions, although reasonable when made, subject to greater
uncertainty.
Undue reliance should not be placed on forward-looking
information as actual results may differ materially from those
expressed or implied by forward-looking information. By its nature,
CP's forward-looking information involves inherent risks and
uncertainties that could cause actual results to differ materially
from the forward looking information, including, but not limited
to, the following factors: changes in business strategies and
strategic opportunities; general Canadian, U.S., Mexican and global
social, economic, political, credit and business conditions; risks
associated with agricultural production such as weather conditions
and insect populations; the availability and price of energy
commodities; the effects of competition and pricing pressures,
including competition from other rail carriers, trucking companies
and maritime shippers in Canada,
the U.S. and Mexico; North
American and global economic growth; industry capacity; shifts in
market demand; changes in commodity prices and commodity demand;
uncertainty surrounding timing and volumes of commodities being
shipped via CP; inflation; geopolitical instability; changes in
laws, regulations and government policies, including regulation of
rates; changes in taxes and tax rates; potential increases in
maintenance and operating costs; changes in fuel prices; disruption
in fuel supplies; uncertainties of investigations, proceedings or
other types of claims and litigation; compliance with environmental
regulations; labour disputes; changes in labour costs and labour
difficulties; risks and liabilities arising from derailments;
transportation of dangerous goods; timing of completion of capital
and maintenance projects; sufficiency of budgeted capital
expenditures in carrying out business plans; services and
infrastructure; the satisfaction by third parties of their
obligations; currency and interest rate fluctuations; exchange
rates; effects of changes in market conditions and discount rates
on the financial position of pension plans and investments; trade
restrictions or other changes to international trade arrangements;
the effects of current and future multinational trade agreements on
the level of trade among Canada,
the U.S. and Mexico; climate
change and the market and regulatory responses to climate change;
anticipated in-service dates; success of hedging activities;
operational performance and reliability; customer, shareholder,
regulatory and other stakeholder approvals and support; regulatory
and legislative decisions and actions; the adverse impact of any
termination or revocation by the Mexican government of Kansas City
Southern de México, S.A. de C.V.'s Concession; public opinion;
various events that could disrupt operations, including severe
weather, such as droughts, floods, avalanches and earthquakes, and
cybersecurity attacks, as well as security threats and governmental
response to them, and technological changes; acts of terrorism, war
or other acts of violence or crime or risk of such activities;
insurance coverage limitations; material adverse changes in
economic and industry conditions, including the availability of
short and long-term financing; the pandemic created by the outbreak
of COVID-19 and its variants and resulting effects on economic
conditions, the demand environment for logistics requirements and
energy prices, restrictions imposed by public health authorities or
governments, fiscal and monetary policy responses by governments
and financial institutions, and disruptions to global supply
chains; the timing and completion of the pending KCS transaction,
including receipt of regulatory and shareholder approvals and the
satisfaction of other conditions precedent; interloper risk to the
pending KCS transaction; the realization of anticipated benefits
and synergies of the transaction and the timing thereof; the
success of integration plans for KCS; the focus of management time
and attention on the pending KCS transaction and other disruptions
arising from the transaction; estimated future dividends; financial
strength and flexibility; debt and equity market conditions,
including the ability to access capital markets on favourable terms
or at all; cost of debt and equity capital; potential changes in
CP's share price which may negatively impact the value of
consideration offered to KCS stockholders; and the ability of the
management of the Company, its subsidiaries and affiliates to
execute key priorities, including those in connection with the
pending KCS transaction. The foregoing list of factors is not
exhaustive. These and other factors are detailed from time to time
in reports filed by CP with securities regulators in Canada and the
United States. Reference should be made to "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward-Looking Statements" in CP's
annual and interim reports on Form 10-K and 10-Q.
Any forward-looking information contained in this news release
is made as of the date hereof. Except as required by law, CP
undertakes no obligation to update publicly or otherwise revise any
forward-looking information, or the foregoing assumptions and risks
affecting such forward-looking information, whether as a result of
new information, future events or otherwise.
About Canadian Pacific
Canadian Pacific is a
transcontinental railway in Canada
and the United States with direct
links to major ports on the west and east coasts. CP provides North
American customers a competitive rail service with access to key
markets in every corner of the globe. CP is growing with its
customers, offering a suite of freight transportation services,
logistics solutions and supply chain expertise. Visit cpr.ca to see
the rail advantages of CP. CP-IR
FINANCIAL STATEMENTS
INTERIM CONSOLIDATED STATEMENTS OF
INCOME
(unaudited)
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars, except share and per share data)
|
2021
|
2020
|
2021
|
2020
|
Revenues (Note
3)
|
|
|
|
|
Freight
|
$
|
1,896
|
|
$
|
1,821
|
|
$
|
5,822
|
|
$
|
5,573
|
|
Non-freight
|
46
|
|
42
|
|
133
|
|
125
|
|
Total
revenues
|
1,942
|
|
1,863
|
|
5,955
|
|
5,698
|
|
Operating
expenses
|
|
|
|
|
Compensation and
benefits
|
381
|
|
382
|
|
1,165
|
|
1,127
|
|
Fuel
|
199
|
|
140
|
|
623
|
|
483
|
|
Materials
|
51
|
|
53
|
|
164
|
|
162
|
|
Equipment
rents
|
31
|
|
39
|
|
92
|
|
108
|
|
Depreciation and
amortization
|
203
|
|
195
|
|
605
|
|
582
|
|
Purchased services and
other (Note 9, 10)
|
303
|
|
275
|
|
932
|
|
853
|
|
Total operating
expenses
|
1,168
|
|
1,084
|
|
3,581
|
|
3,315
|
|
|
|
|
|
|
Operating
income
|
774
|
|
779
|
|
2,374
|
|
2,383
|
|
Less:
|
|
|
|
|
Other expense (income)
(Note 4, 10)
|
124
|
|
(36)
|
|
253
|
|
89
|
|
Merger termination fee
(Note 10)
|
—
|
|
—
|
|
(845)
|
|
—
|
|
Other components of net
periodic benefit recovery (Note 14)
|
(95)
|
|
(86)
|
|
(286)
|
|
(257)
|
|
Net interest
expense
|
104
|
|
114
|
|
315
|
|
346
|
|
Income before
income tax expense
|
641
|
|
787
|
|
2,937
|
|
2,205
|
|
Income tax expense
(Note 5)
|
169
|
|
189
|
|
617
|
|
563
|
|
Net
income
|
$
|
472
|
|
$
|
598
|
|
$
|
2,320
|
|
$
|
1,642
|
|
|
|
|
|
|
Earnings per share
(Note 1, 6)
|
|
|
|
|
Basic earnings per
share
|
$
|
0.71
|
|
$
|
0.88
|
|
$
|
3.48
|
|
$
|
2.42
|
|
Diluted earnings per
share
|
$
|
0.70
|
|
$
|
0.88
|
|
$
|
3.46
|
|
$
|
2.41
|
|
|
|
|
|
|
Weighted-average
number of shares (millions) (Note 1, 6)
|
|
|
|
|
Basic
|
666.9
|
|
676.2
|
|
666.7
|
|
679.3
|
|
Diluted
|
669.8
|
|
679.0
|
|
669.8
|
|
681.8
|
|
|
|
|
|
|
Dividends declared
per share (Note 1)
|
$
|
0.190
|
|
$
|
0.190
|
|
$
|
0.570
|
|
$
|
0.522
|
|
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(unaudited)
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Net income
|
$
|
472
|
|
$
|
598
|
|
$
|
2,320
|
|
$
|
1,642
|
|
Net (loss) gain in
foreign currency translation adjustments, net of hedging
activities
|
(17)
|
|
16
|
|
3
|
|
(18)
|
|
Change in derivatives
designated as cash flow hedges
|
141
|
|
3
|
|
69
|
|
6
|
|
Change in pension and
post-retirement defined benefit plans
|
53
|
|
44
|
|
158
|
|
134
|
|
Other comprehensive
income before income taxes
|
177
|
|
63
|
|
230
|
|
122
|
|
Income tax expense on
above items
|
(29)
|
|
(29)
|
|
(59)
|
|
(16)
|
|
Other comprehensive
income (Note 7)
|
148
|
|
34
|
|
171
|
|
106
|
|
Comprehensive
income
|
$
|
620
|
|
$
|
632
|
|
$
|
2,491
|
|
$
|
1,748
|
|
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED BALANCE SHEETS AS
AT
(unaudited)
|
September
30
|
December
31
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
Assets
|
|
|
Current
assets
|
|
|
Cash and cash
equivalents
|
$
|
210
|
|
$
|
147
|
|
Restricted cash and
cash equivalents
|
13
|
|
—
|
|
Accounts receivable,
net (Note 8)
|
811
|
|
825
|
|
Materials and
supplies
|
227
|
|
208
|
|
Other current
assets
|
190
|
|
141
|
|
|
1,451
|
|
1,321
|
|
Investments
|
205
|
|
199
|
|
Properties
|
21,007
|
|
20,422
|
|
Goodwill and
intangible assets
|
372
|
|
366
|
|
Pension
asset
|
1,232
|
|
894
|
|
Other
assets
|
405
|
|
438
|
|
Payment to Kansas
City Southern (Note 10)
|
1,773
|
|
—
|
|
Total
assets
|
$
|
26,445
|
|
$
|
23,640
|
|
Liabilities and
shareholders' equity
|
|
|
Current
liabilities
|
|
|
Accounts payable and
accrued liabilities
|
$
|
1,744
|
|
$
|
1,467
|
|
Long-term debt
maturing within one year (Note 11, 12)
|
1,932
|
|
1,186
|
|
|
3,676
|
|
2,653
|
|
Pension and other
benefit liabilities
|
825
|
|
832
|
|
Other long-term
liabilities
|
522
|
|
585
|
|
Long-term debt (Note
11, 12)
|
8,036
|
|
8,585
|
|
Deferred income
taxes
|
3,918
|
|
3,666
|
|
Total
liabilities
|
16,977
|
|
16,321
|
|
Shareholders'
equity
|
|
|
Share
capital
|
2,008
|
|
1,983
|
|
Additional paid-in
capital
|
68
|
|
55
|
|
Accumulated other
comprehensive loss (Note 7)
|
(2,643)
|
|
(2,814)
|
|
Retained
earnings
|
10,035
|
|
8,095
|
|
|
9,468
|
|
7,319
|
|
Total liabilities
and shareholders' equity
|
$
|
26,445
|
|
$
|
23,640
|
|
See Contingencies (Note 16).
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Operating
activities
|
|
|
|
|
Net income
|
$
|
472
|
|
$
|
598
|
|
$
|
2,320
|
|
$
|
1,642
|
|
Reconciliation of net
income to cash provided by operating activities:
|
|
|
|
|
Depreciation and
amortization
|
203
|
|
195
|
|
605
|
|
582
|
|
Deferred income tax
expense (Note 5)
|
130
|
|
45
|
|
190
|
|
133
|
|
Pension recovery and
funding (Note 14)
|
(62)
|
|
(65)
|
|
(188)
|
|
(192)
|
|
Foreign exchange loss
(gain) on debt and lease liabilities (Note 4)
|
46
|
|
(40)
|
|
(39)
|
|
89
|
|
Other operating
activities, net
|
(14)
|
|
56
|
|
(50)
|
|
11
|
|
Change in non-cash
working capital balances related to operations
|
(227)
|
|
(296)
|
|
246
|
|
(448)
|
|
Cash provided by
operating activities
|
548
|
|
493
|
|
3,084
|
|
1,817
|
|
Investing
activities
|
|
|
|
|
Additions to
properties
|
(372)
|
|
(484)
|
|
(1,111)
|
|
(1,341)
|
|
Investment in Central
Maine & Québec Railway
|
—
|
|
—
|
|
—
|
|
19
|
|
Payment to Kansas
City Southern (Note 10)
|
(1,773)
|
|
—
|
|
(1,773)
|
|
—
|
|
Proceeds from sale of
properties and other assets
|
16
|
|
2
|
|
65
|
|
9
|
|
Other
|
—
|
|
(1)
|
|
(1)
|
|
—
|
|
Cash used in
investing activities
|
(2,129)
|
|
(483)
|
|
(2,820)
|
|
(1,313)
|
|
Financing
activities
|
|
|
|
|
Dividends
paid
|
(127)
|
|
(113)
|
|
(380)
|
|
(339)
|
|
Issuance of CP Common
Shares
|
4
|
|
3
|
|
20
|
|
32
|
|
Purchase of CP Common
Shares (Note 13)
|
—
|
|
(400)
|
|
—
|
|
(945)
|
|
Issuance of long-term
debt, excluding commercial paper
|
—
|
|
—
|
|
—
|
|
958
|
|
Repayment of
long-term debt, excluding commercial paper (Note 11)
|
(318)
|
|
(49)
|
|
(349)
|
|
(74)
|
|
Proceeds from term
loan (Note 11)
|
633
|
|
—
|
|
633
|
|
—
|
|
Net issuance
(repayment) of commercial paper (Note 11)
|
713
|
|
459
|
|
(66)
|
|
(114)
|
|
Net increase in
short-term borrowings
|
—
|
|
—
|
|
—
|
|
5
|
|
Acquisition-related
financing fees (Note 10)
|
—
|
|
—
|
|
(45)
|
|
—
|
|
Other
|
(3)
|
|
—
|
|
(7)
|
|
11
|
|
Cash provided by
(used in) financing activities
|
902
|
|
(100)
|
|
(194)
|
|
(466)
|
|
Effect of foreign
currency fluctuations on U.S. dollar-denominated cash and
cash equivalents
|
10
|
|
(4)
|
|
6
|
|
12
|
|
Cash
position
|
|
|
|
|
(Decrease) increase
in cash, cash equivalents, and restricted cash
|
(669)
|
|
(94)
|
|
76
|
|
50
|
|
Cash, cash
equivalents, and restricted cash at beginning of period
|
892
|
|
277
|
|
147
|
|
133
|
|
Cash, cash
equivalents, and restricted cash at end of period
|
$
|
223
|
|
$
|
183
|
|
$
|
223
|
|
$
|
183
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
Income taxes
paid
|
$
|
129
|
|
$
|
311
|
|
$
|
401
|
|
$
|
455
|
|
Interest
paid
|
$
|
153
|
|
$
|
163
|
|
$
|
365
|
|
$
|
383
|
|
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
(unaudited)
|
|
|
For the three
months ended September 30
|
(in millions of
Canadian dollars except per share data)
|
|
Common
Shares (in
millions)
|
|
Share
capital
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
|
Total
shareholders'
equity
|
Balance at July 1,
2021
|
|
666.8
|
|
$
|
2,003
|
$
|
63
|
$
|
(2,791)
|
$
|
9,690
|
$
|
8,965
|
Net income
|
|
—
|
|
—
|
—
|
—
|
472
|
472
|
Other comprehensive
income (Note 7)
|
|
—
|
|
—
|
—
|
148
|
—
|
148
|
Dividends declared
($0.190 per share)
|
|
—
|
|
—
|
—
|
—
|
(127)
|
(127)
|
Effect of stock-based
compensation expense
|
|
—
|
|
—
|
6
|
—
|
—
|
6
|
Shares issued under
stock option plan
|
|
0.1
|
|
5
|
(1)
|
—
|
—
|
4
|
Balance at
September 30, 2021
|
|
666.9
|
|
$
|
2,008
|
$
|
68
|
$
|
(2,643)
|
$
|
10,035
|
$
|
9,468
|
Balance at July 1,
2020
|
|
677.6
|
|
$
|
1,990
|
$
|
53
|
$
|
(2,450)
|
$
|
7,872
|
$
|
7,465
|
Net income
|
|
—
|
|
—
|
—
|
—
|
598
|
598
|
Other comprehensive
income (Note 7)
|
|
—
|
|
—
|
—
|
34
|
—
|
34
|
Dividends declared
($0.190 per share) (Note 1)
|
|
—
|
|
—
|
—
|
—
|
(128)
|
(128)
|
Effect of stock-based
compensation expense
|
|
—
|
|
—
|
4
|
—
|
—
|
4
|
CP Common Shares
repurchased (Note 13)
|
|
(5.3)
|
|
(15)
|
—
|
—
|
(381)
|
(396)
|
Shares issued under
stock option plan
|
|
0.2
|
|
3
|
(1)
|
—
|
—
|
2
|
Balance at September
30, 2020
|
|
672.5
|
|
$
|
1,978
|
$
|
56
|
$
|
(2,416)
|
$
|
7,961
|
$
|
7,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
months ended September 30
|
(in millions of
Canadian dollars except per share data)
|
|
Common
shares (in
millions)
|
|
Share
capital
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
|
Total
shareholders'
equity
|
Balance at January
1, 2021
|
|
666.3
|
|
$
|
1,983
|
$
|
55
|
$
|
(2,814)
|
$
|
8,095
|
$
|
7,319
|
Net income
|
|
—
|
|
—
|
—
|
—
|
2,320
|
2,320
|
Other comprehensive
income (Note 7)
|
|
—
|
|
—
|
—
|
171
|
—
|
171
|
Dividends declared
($0.570 per share) (Note 1)
|
|
—
|
|
—
|
—
|
—
|
(380)
|
(380)
|
Effect of stock-based
compensation expense
|
|
—
|
|
—
|
18
|
—
|
—
|
18
|
Shares issued under
stock option plan
|
|
0.6
|
|
25
|
(5)
|
—
|
—
|
20
|
Balance at
September 30, 2021
|
|
666.9
|
|
$
|
2,008
|
$
|
68
|
$
|
(2,643)
|
$
|
10,035
|
$
|
9,468
|
Balance at January 1,
2020
|
|
685.0
|
|
$
|
1,993
|
$
|
48
|
$
|
(2,522)
|
$
|
7,549
|
$
|
7,068
|
Net income
|
|
—
|
|
—
|
—
|
—
|
1,642
|
1,642
|
Other comprehensive
income (Note 7)
|
|
—
|
|
—
|
—
|
106
|
—
|
106
|
Dividends declared
($0.522 per share) (Note 1)
|
|
—
|
|
—
|
—
|
—
|
(353)
|
(353)
|
Effect of stock-based
compensation expense
|
|
—
|
|
—
|
13
|
—
|
—
|
13
|
CP Common Shares
repurchased (Note 13)
|
|
(13.7)
|
|
(39)
|
—
|
—
|
(877)
|
(916)
|
Shares issued under
stock option plan
|
|
1.2
|
|
24
|
(5)
|
—
|
—
|
19
|
Balance at September
30, 2020
|
|
672.5
|
|
$
|
1,978
|
$
|
56
|
$
|
(2,416)
|
$
|
7,961
|
$
|
7,579
|
See Notes to Interim Consolidated Financial Statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
1 Basis of presentation
These unaudited Interim Consolidated Financial Statements
("Interim Consolidated Financial Statements") of Canadian Pacific
Railway Limited ("CPRL") and its subsidiaries (collectively, "CP",
or "the Company"), expressed in Canadian dollars, reflect
management's estimates and assumptions that are necessary for their
fair presentation in conformity with generally accepted accounting
principles in the United States of
America ("GAAP"). They do not include all disclosures
required under GAAP for annual financial statements and should be
read in conjunction with the 2020 annual Consolidated Financial
Statements and notes included in CP's 2020 Annual Report on Form
10-K. The accounting policies used are consistent with the
accounting policies used in preparing the 2020 annual Consolidated
Financial Statements.
On April 21, 2021, the Company's
shareholders approved a five-for-one share split of the Company's
issued and outstanding Common Shares. On May
13, 2021, the Company's shareholders of record as of
May 5, 2021 received four additional
shares for every Common Share held. Ex-distribution trading in the
Company's Common Shares on a split-adjusted basis commenced on
May 14, 2021. Proportional
adjustments were also made to outstanding awards under the
Company's stock-based compensation plans in order to reflect the
share split. All outstanding Common Shares, stock-based
compensation awards, and per share amounts herein have been
retrospectively adjusted to reflect the share split.
CP's operations can be affected by seasonal fluctuations such as
changes in customer demand and weather-related issues. This
seasonality could impact quarter-over-quarter comparisons.
In management's opinion, the Interim Consolidated Financial
Statements include all adjustments (consisting of normal and
recurring adjustments) necessary to present fairly such
information. Interim results are not necessarily indicative of the
results expected for the fiscal year.
2 Accounting changes
Accounting pronouncements that became effective during the
period covered by the Interim Consolidated Financial Statements did
not have a material impact on the Company's Interim Consolidated
Balance Sheets, Interim Consolidated Statements of Income, or
Interim Consolidated Statements of Cash Flows. Likewise, accounting
pronouncements issued, but not effective until after September 30, 2021, are not expected to have a
material impact on the Company's Consolidated Balance Sheets,
Consolidated Statements of Income, or Consolidated Statements of
Cash Flows.
Future changes
Reference Rate Reform
In March 2020, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial
Reporting. From the end of 2021, banks will no longer be
required to report information that is used to determine the London
Interbank Offered Rate ("LIBOR"), which is a benchmark interest
rate commonly referenced in a variety of contractual agreements. As
a result, LIBOR or other reference rates used globally could be
discontinued.
The ASU provides optional expedients and exceptions for applying
generally accepted accounting principles to transactions affected
by reference rate reform if certain criteria are met. These
transactions include contract modifications, hedging relationships,
and sale or transfer of debt securities classified as
held-to-maturity.
The guidance in the ASU was effective starting on March 12, 2020, and is available to be adopted on
a prospective basis no later than December
31, 2022. The Company currently has a fully drawn U.S.
$500 million non-revolving term credit facility referencing
LIBOR that could be affected by the provisions of this ASU (See
Note 11 - Debt). The Company also has a revolving credit facility
that references LIBOR. The Company had no outstanding borrowings
under the revolving credit facility as at September 30, 2021. The Company is evaluating the
effects that the adoption of the ASU will have on its Consolidated
Financial Statements and related disclosures, and whether it will
elect to apply any of the optional expedients and exceptions
provided in the ASU.
3 Revenues
The following table disaggregates the Company's revenues from
contracts with customers by major source:
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
|
Freight
|
|
|
|
|
|
Grain
|
$
|
352
|
|
$
|
457
|
|
$
|
1,244
|
|
$
|
1,321
|
|
Coal
|
158
|
|
130
|
|
491
|
|
411
|
|
Potash
|
113
|
|
132
|
|
348
|
|
390
|
|
Fertilizers and
sulphur
|
72
|
|
65
|
|
227
|
|
212
|
|
Forest
products
|
89
|
|
85
|
|
259
|
|
244
|
|
Energy, chemicals and
plastics
|
392
|
|
321
|
|
1,149
|
|
1,153
|
|
Metals, minerals and
consumer products
|
196
|
|
152
|
|
535
|
|
474
|
|
Automotive
|
83
|
|
94
|
|
289
|
|
215
|
|
Intermodal
|
441
|
|
385
|
|
1,280
|
|
1,153
|
|
Total freight
revenues
|
1,896
|
|
1,821
|
|
5,822
|
|
5,573
|
|
Non-freight excluding
leasing revenues
|
25
|
|
27
|
|
75
|
|
80
|
|
Revenues from
contracts with customers
|
1,921
|
|
1,848
|
|
5,897
|
|
5,653
|
|
Leasing
revenues
|
21
|
|
15
|
|
58
|
|
45
|
|
Total
revenues
|
$
|
1,942
|
|
$
|
1,863
|
|
$
|
5,955
|
|
$
|
5,698
|
|
Contract
liabilities
Contract liabilities represent payments received for performance
obligations not yet satisfied and relate to deferred revenue, and
are presented as components of "Accounts payable and accrued
liabilities" and "Other long-term liabilities" on the Company's
Interim Consolidated Balance Sheets.
The following table summarizes the changes in contract
liabilities:
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Opening
balance
|
$
|
245
|
|
$
|
79
|
|
$
|
61
|
|
$
|
146
|
|
Revenue recognized
that was included in the contract liability
balance at the beginning of the period
|
(93)
|
|
(25)
|
|
(36)
|
|
(95)
|
|
Increase due to
consideration received, net of revenue recognized
during the period
|
4
|
|
5
|
|
131
|
|
8
|
|
Closing
balance
|
$
|
156
|
|
$
|
59
|
|
$
|
156
|
|
$
|
59
|
|
4 Other expense (income)
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Foreign exchange loss
(gain) on debt and lease liabilities
|
$
|
46
|
|
$
|
(40)
|
|
$
|
(39)
|
|
$
|
89
|
|
Other foreign
exchange (gains) losses
|
(7)
|
|
2
|
|
(9)
|
|
(2)
|
|
Acquisition-related
costs (Note 10)
|
83
|
|
—
|
|
295
|
|
—
|
|
Other
|
2
|
|
2
|
|
6
|
|
2
|
|
Other expense
(income)
|
$
|
124
|
|
$
|
(36)
|
|
$
|
253
|
|
$
|
89
|
|
5 Income taxes
|
For the three
months
ended September 30
|
|
For the nine
months ended September
30
|
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
|
2021
|
2020
|
|
Current income tax
expense
|
$
|
39
|
$
|
144
|
|
$
|
427
|
$
|
430
|
|
Deferred income tax
expense
|
|
130
|
|
45
|
|
|
190
|
|
133
|
|
Income tax
expense
|
$
|
169
|
$
|
189
|
|
$
|
617
|
$
|
563
|
|
The effective tax rates including discrete items for the three
and nine months ended September 30,
2021 were 26.36% and 21.00%, respectively, compared to
23.97% and 25.52%, respectively for the same periods of 2020.
For the three months ended September 30,
2021, the effective tax rate was 24.60%, excluding the
discrete items of the Kansas City Southern ("KCS")
acquisition-related costs of $98 million, and foreign exchange
("FX") loss of $46 million on debt and lease liabilities.
For the three months ended September 30,
2020, the effective tax rate was 25.00%, excluding the
discrete item of the FX gain of $40
million on debt and lease liabilities.
For the nine months ended September 30,
2021, the effective tax rate was 24.60%, excluding the
discrete items of the KCS acquisition-related costs of
$442 million, the $845 million (U.S. $700 million)
merger termination payment received in connection with KCS's
termination of the Agreement and Plan of Merger (the "Original
Merger Agreement"), and FX gain of $39
million on debt and lease liabilities.
For the nine months ended September 30,
2020, the effective tax rate was 25.00%, excluding the
discrete item of the FX loss of $89
million on debt and lease liabilities.
6 Earnings per share
Basic earnings per share has been calculated using Net income
for the period divided by the weighted-average number of shares
outstanding during the period. The number of shares used in the
earnings per share calculations are reconciled as follows:
|
For the three
months
ended September 30
|
For the nine
months
ended September
30
|
(in
millions)
|
2021
|
2020
|
2021
|
2020
|
Weighted-average
basic shares outstanding
|
666.9
|
676.2
|
666.7
|
679.3
|
Dilutive effect of
stock options
|
2.9
|
2.8
|
3.1
|
2.5
|
Weighted-average
diluted shares outstanding
|
669.8
|
679.0
|
669.8
|
681.8
|
For the three and nine months ended September 30, 2021, there were 0.2 million
and 0.1 million options, respectively, excluded from the
computation of diluted earnings per share because their effects
were not dilutive (three and nine months ended September 30, 2020 - nil and 0.6 million,
respectively).
7 Changes in Accumulated other
comprehensive loss ("AOCL") by component
|
For the three
months ended September 30
|
(in millions of
Canadian dollars)
|
Foreign currency
net of hedging
activities(1)
|
Derivatives and
other(1)
|
Pension and post-
retirement defined
benefit plans(1)
|
Total(1)
|
Opening balance,
July 1, 2021
|
$
|
110
|
$
|
(101)
|
$
|
(2,800)
|
$
|
(2,791)
|
Other comprehensive
income before reclassifications
|
6
|
101
|
—
|
107
|
Amounts reclassified
from accumulated other comprehensive loss
|
—
|
2
|
39
|
41
|
Net other
comprehensive income
|
6
|
103
|
39
|
148
|
Closing balance,
September 30, 2021
|
$
|
116
|
$
|
2
|
$
|
(2,761)
|
$
|
(2,643)
|
Opening balance, July
1, 2020
|
$
|
116
|
$
|
(52)
|
$
|
(2,514)
|
$
|
(2,450)
|
Other comprehensive
loss before reclassifications
|
(1)
|
—
|
—
|
(1)
|
Amounts reclassified
from accumulated other comprehensive loss
|
—
|
2
|
33
|
35
|
Net other
comprehensive (loss) income
|
(1)
|
2
|
33
|
34
|
Closing balance,
September 30, 2020
|
$
|
115
|
$
|
(50)
|
$
|
(2,481)
|
$
|
(2,416)
|
(1) Amounts are presented net
of tax.
|
|
For the nine
months ended September 30
|
(in millions of
Canadian dollars)
|
Foreign currency
net of hedging
activities(1)
|
Derivatives and
other(1)
|
Pension and post-
retirement defined
benefit plans(1)
|
Total(1)
|
Opening balance,
January 1, 2021
|
$
|
112
|
$
|
(48)
|
$
|
(2,878)
|
$
|
(2,814)
|
Other comprehensive
income before reclassifications
|
4
|
44
|
—
|
48
|
Amounts reclassified
from accumulated other comprehensive loss
|
—
|
6
|
117
|
123
|
Net other
comprehensive income
|
4
|
50
|
117
|
171
|
Closing balance,
September 30, 2021
|
$
|
116
|
$
|
2
|
$
|
(2,761)
|
$
|
(2,643)
|
Opening balance,
January 1, 2020
|
$
|
112
|
$
|
(54)
|
$
|
(2,580)
|
$
|
(2,522)
|
Other comprehensive
income (loss) before reclassifications
|
3
|
(2)
|
—
|
1
|
Amounts reclassified
from accumulated other comprehensive loss
|
—
|
6
|
99
|
105
|
Net other
comprehensive income
|
3
|
4
|
99
|
106
|
Closing balance,
September 30, 2020
|
$
|
115
|
$
|
(50)
|
$
|
(2,481)
|
$
|
(2,416)
|
(1) Amounts are
presented net of tax.
|
Amounts in Pension and post-retirement defined benefit plans
reclassified from AOCL are as follows:
|
For the three
months
ended September
30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Amortization of prior
service costs(1)
|
$
|
—
|
$
|
(1)
|
$
|
—
|
$
|
(1)
|
Recognition of net
actuarial loss(1)
|
53
|
45
|
158
|
135
|
Total before income
tax
|
53
|
44
|
158
|
134
|
Income tax
recovery
|
(14)
|
(11)
|
(41)
|
(35)
|
Total net of income
tax
|
$
|
39
|
$
|
33
|
$
|
117
|
$
|
99
|
(1) Impacts "Other
components of net periodic benefit recovery" on the Interim
Consolidated Statements of Income.
|
8 Accounts receivable, net
|
As at September
30, 2021
|
As at December 31,
2020
|
(in millions of
Canadian dollars)
|
Freight
|
Non-
freight
|
Total
|
Freight
|
Non-
freight
|
Total
|
Total accounts
receivable
|
$
|
655
|
$
|
194
|
$
|
849
|
$
|
662
|
$
|
203
|
$
|
865
|
Allowance for credit
losses
|
(22)
|
(16)
|
(38)
|
(25)
|
(15)
|
(40)
|
Total accounts
receivable, net
|
$
|
633
|
$
|
178
|
$
|
811
|
$
|
637
|
$
|
188
|
$
|
825
|
|
For the three
months ended
September 30,
2021
|
For the three
months ended
September 30, 2020
|
(in millions of
Canadian dollars)
|
Freight
|
Non-
freight
|
Total
|
Freight
|
Non-
freight
|
Total
|
Allowance for credit
losses, opening balance
|
$
|
(23)
|
$
|
(15)
|
$
|
(38)
|
$
|
(26)
|
$
|
(14)
|
$
|
(40)
|
Current period credit
loss provision, net
|
1
|
(1)
|
—
|
—
|
—
|
—
|
Allowance for credit
losses, closing balance
|
$
|
(22)
|
$
|
(16)
|
$
|
(38)
|
$
|
(26)
|
$
|
(14)
|
$
|
(40)
|
|
For the nine
months ended
September 30, 2021
|
For the nine
months ended
September 30, 2020
|
(in millions of
Canadian dollars)
|
Freight
|
Non-
freight
|
Total
|
Freight
|
Non-
freight
|
Total
|
Allowance for credit
losses, opening balance
|
$
|
(25)
|
$
|
(15)
|
$
|
(40)
|
$
|
(27)
|
$
|
(16)
|
$
|
(43)
|
Current period credit
loss provision, net
|
3
|
(1)
|
2
|
1
|
2
|
3
|
Allowance for credit
losses, closing balance
|
$
|
(22)
|
$
|
(16)
|
$
|
(38)
|
$
|
(26)
|
$
|
(14)
|
$
|
(40)
|
9 Property sale
Gain on exchange of property and construction easements in
Chicago
During the first quarter of 2021, the Company exchanged property
and construction easements in Chicago with a government agency for proceeds
of $103 million including cash of $61 million and
property assets at a fair value of $42 million. Fair value was
determined based on comparable market transactions. The Company
recorded a gain in the first quarter within "Purchased services and
other" of $50 million ($38 million after tax) from the
transaction, and a deferred gain of $53 million which will be
recognized in income over the period of use of certain
easements.
For the three and nine months ended September 30, 2021, the Company recognized
$5 million and $9 million, respectively, of the deferred
gain into income.
10 Business acquisition
Kansas City Southern Transaction
On March 21, 2021, the Company
entered into the Original Merger Agreement with KCS, under which CP
agreed to acquire KCS in a stock and cash transaction representing
an enterprise value of approximately U.S. $29 billion, based
on the CP closing price on March 19,
2021, including the assumption of U.S. $3.8 billion of outstanding KCS debt.
On May 21, 2021, KCS terminated
the Original Merger Agreement in order to enter into a merger
agreement with Canadian National Railway ("CN") (the "CN Merger
Agreement"). As a result, and under the terms of the Original
Merger Agreement, KCS concurrently paid a merger termination fee of
$845 million (U.S. $700 million) to the Company, recorded
as "Merger termination fee" in the Company's Interim Consolidated
Statements of Income during the second quarter of 2021.
On August 10, 2021, CP submitted a
proposal to acquire KCS in a stock and cash transaction
representing an enterprise value of approximately U.S.
$31 billion, based on the CP closing price on August 9, 2021, which includes the assumption of
U.S. $3.8 billion of outstanding
KCS debt. The terms of the proposal were very similar in nearly
every respect to those in the Original Merger Agreement, except for
an increase in the share exchange ratio from 2.445 to 2.884.
Following the Surface Transportation Board's ("STB") decision on
August 31, 2021 to refuse CN and
KCS's joint motion for voting trust approval in respect of the CN
Merger Agreement, and after renewed negotiations with CP, KCS's
Board of Directors deemed CP's proposal a "Company Superior
Proposal", as defined in the CN Merger Agreement, and terminated
the CN Merger Agreement.
On September 15, 2021, upon KCS's
termination of the CN Merger Agreement, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with KCS.
Pursuant to the terms of the CN Merger Agreement, KCS paid a merger
termination fee of U.S. $700 million and refunded the CP
merger termination fee of U.S. $700 million to CN (together,
the "CN merger termination fees"). In connection with the Merger
Agreement, the Company remitted $1,773
million (U.S. $1,400 million) to KCS on September 15, 2021 in connection with KCS's
payment of the CN merger termination fees, recorded as "Payment to
Kansas City Southern" in the Company's Interim Balance Sheets in
compliance with the acquisition method of accounting.
Upon the approval of the transaction by the shareholders of both
the Company and KCS, Mexican regulatory approvals, and satisfaction
or waiver of customary closing conditions, the shares of KCS will
be deposited into a voting trust subject to a voting trust
agreement, pending final approval of the acquisition of control by
the STB. Approval to use the voting trust has been received from
the STB and CP currently expects to close the transaction into the
voting trust in the first quarter of 2022. CP will use the equity
method of accounting for the voting trust during the period when
the shares are held in an independent voting trust while the STB
considers the Company's control application. Subject to final
approval of the transaction by the STB and any other remaining
approvals of regulatory authorities, if applicable, the acquisition
will be accounted for as a business combination using the
acquisition method of accounting.
Under the Merger Agreement, common stockholders of KCS will
receive 2.884 (exchange ratio) of the Company's Common Shares and
U.S. $90 in cash for each KCS common
stock held. Preferred stockholders of KCS will receive U.S.
$37.50 in cash for each KCS preferred
stock held.
The actual value of the transaction may fluctuate based upon
changes in the price of the Company's Common Shares and the number
of KCS common stock, preferred stock and equity awards outstanding
on the closing date into trust. Subject to final approval of the
transaction by the STB and other applicable regulatory authorities,
the transaction is expected to be completed in the second half of
2022.
During the three and nine months ended September 30, 2021, the Company incurred
$98 million and $442 million, respectively, in
acquisition-related expenses associated with the Original Merger
Agreement and Merger Agreement, of which $15 million and
$147 million were recorded within "Purchased services and
other", and $83 million and $295 million were recorded
within "Other expense (income)" in each period, respectively. The
acquisition-related expenses recorded within "Other expense
(income)" include the changes in fair value and realized gain from
settlement of the FX forward contracts, and changes in fair value
of the bond locks and forward starting floating-to-fixed interest
rate swaps associated with the anticipated debt issuance (see Note
12), and amortization of financing fees associated with the credit
facilities (see Note 11). Total financing fees paid for a bridge
facility associated with the pending KCS transaction during the
three and nine months ended September 30,
2021 were $nil and $45 million, respectively, presented
under Cash provided by (used in) financing activities in the
Company's Interim Consolidated Statements of Cash Flows.
The Merger Agreement includes termination fees for both the
Company and KCS. The Company or KCS will be required to pay a
termination fee equal to U.S. $700 million if the Merger
Agreement is terminated in certain circumstances, including if the
Merger Agreement is terminated either because the Company's or
KCS's boards of directors have changed their recommendation. KCS is
also required, if the Merger Agreement is terminated in certain
circumstances, to pay to the Company U.S. $700 million in
return of the U.S. $700 million remitted to KCS by the Company
in connection with the CN Merger Agreement termination. The Company
will be required to pay a termination fee equal to U.S.
$1 billion if the Merger Agreement is terminated in certain
circumstances, including certain circumstances in which (i) the
transaction has not been consummated by February 21, 2022 (or, in the event the
authorizations required to be obtained from the relevant Mexican
regulatory authorities are the only outstanding conditions to be
satisfied or waived as of February 21,
2022, by May 21, 2022) because
there is an injunction or similar order prohibiting the transaction
or the voting trust transaction arising under applicable railroad
laws or under Section 721 of the United States Defense Production
Act of 1950 or (ii) a final non-appealable injunction or similar
order is issued under applicable railroad laws or Section 721 of
the United States Defense Production Act of 1950 prohibiting the
transaction or the voting trust transaction.
11 Debt
During the third quarter of 2021, the Company repaid U.S.
$250 million 9.450% 30-year debentures at maturity for a total
of U.S. $250 million ($312 million).
Shelf prospectus
On June 21, 2021, the Company
filed a new base shelf prospectus in each province of Canada and a registration statement with the
Securities and Exchange Commission ("SEC") to issue up to U.S.
$8.5 billion in debt securities
in the Canadian and U.S. capital markets over 25 months from the
filing date.
Credit facilities
During the first quarter of 2021, the Company obtained
commitments for a 364-day senior unsecured facility (the "original
bridge facility") in the amount of U.S. $8.5 billion to bridge debt financing
required to fund a portion of the cash component of the proposed
KCS transaction. Effective April 9,
2021, the Company also amended the financial covenant within
its revolving credit facility to provide flexibility upon the
closing of the proposed KCS transaction. Effective May 21, 2021, upon termination of the Original
Merger Agreement with KCS, the original bridge facility was
terminated.
During the third quarter of 2021, the Company obtained
commitments for a new 364-day senior unsecured facility (the
"bridge facility") in the amount of U.S. $8.5 billion to bridge debt financing
required to fund a portion of the cash component of the pending KCS
transaction. As of September 15,
2021, the Company also entered into a U.S. $500 million
unsecured non-revolving term credit facility with an initial due
date of March 15, 2022. As at
September 30, 2021, the Company had
borrowings of U.S. $500 million ($637 million) under this
facility at a weighted-average interest rate of 2.05%.
Effective September 29, 2021, the
Company amended the financial covenant within its revolving credit
facility to provide flexibility upon the closing of the pending KCS
transaction. Effective September 24,
2021, the Company also extended the maturity dates of the
U.S. $1.0 billion tranche to
September 27, 2026 and the U.S.
$300 million tranche to September 27,
2023 on this facility. As at September 30, 2021, the revolving credit facility
was undrawn (December 31, 2020 -
undrawn).
Commercial paper program
The Company has a commercial paper program which enables it to
issue commercial paper up to a maximum aggregate principal amount
of U.S. $1.0 billion in the form of
unsecured promissory notes. This commercial paper program is backed
by the U.S. $1.3 billion revolving
credit facility. As at September 30,
2021, the Company had total commercial paper borrowings of
U.S. $565 million ($720 million), included in "Long-term
debt maturing within one year" on the Company's Interim
Consolidated Balance sheets (December 31,
2020 - U.S. $644 million). The
weighted-average interest rate on these borrowings was 0.19%
(December 31, 2020 - 0.27%). The
Company presents issuances and repayments of commercial paper, all
of which have a maturity of less than 90 days, in the Company's
Interim Consolidated Statements of Cash Flows on a net basis.
12 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.
For non-exchange traded derivatives classified as 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. All derivatives are classified as Level 2.
The Company's short-term financial instruments include cash and
cash equivalents, restricted cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, and
short-term borrowings including commercial paper and term loans.
The carrying values of short-term financial instruments all
approximate their fair values.
The carrying value of the Company's debt and finance lease
liabilities does not approximate their fair value. Their estimated
fair value has been determined based on market information, where
available, or by discounting future payments of principal and
interest at estimated interest rates expected to be available to
the Company at period end. All measurements are classified as Level
2. The Company's debt and finance lease liabilities, including
current maturities, with a carrying value of $8,611 million at September 30, 2021 (December 31, 2020 - $8,951
million), had a fair value of $10,533
million (December 31, 2020 -
$11,597 million).
B. Financial risk management
FX management
Net investment hedge
The effect of the Company's net
investment hedge for the three and nine months ended September 30, 2021 was an unrealized FX loss of
$168 million and $6 million, respectively (three and nine months
ended September 30, 2020 - unrealized
FX gain of $135 million and
unrealized FX loss of $156 million,
respectively) recognized in "Other comprehensive income".
FX forward contracts
During the first nine months of
2021, the Company entered into various FX forward contracts
totalling a notional U.S. $1.0
billion to fix the FX rate and lock-in a portion of the
amount of Canadian dollars it may borrow to finance the U.S.
dollar-denominated cash portion of the total consideration payable
pursuant to the Original Merger Agreement with KCS. During the
three months ended September 30,
2021, the Company settled the FX forward contracts and did
not have any such contracts remaining as at September 30, 2021. For the three months ended
September 30, 2021, the change in
fair value of the FX forward contracts was a gain of
$30 million. For the nine months ended September 30, 2021, the realized gain from
settlement of the FX forward contracts was $13 million. These
gains were recorded in "Other expense (income)" on the Company's
Interim Consolidated Statements of Income.
Interest rate management
Forward starting swaps
In March and April of 2021,
the Company entered into forward starting floating-to-fixed
interest rate swap agreements ("forward starting swaps") with terms
of up to 30 years, totalling a notional U.S. $2.4 billion to fix the benchmark rate on
cash flows associated with highly probable forecasted issuances of
long-term notes.
On May 21, 2021, the Original
Merger Agreement with KCS was terminated which resulted in the
Company ceasing hedge accounting for the U.S. $2.4 billion of forward starting swaps.
However, as the note issuances were still reasonably possible to
occur, fair value losses prior to this determination remained in
"Accumulated other comprehensive loss", net of tax, as of
June 30, 2021. Subsequent to the
notes issuance, $73 million in "Accumulated other
comprehensive loss" will be reclassified to "Net interest expense"
ratably over the duration of the notes' hedged interest payments.
Fair value losses of $104 million and $251 million during
the period from May 21, 2021 through
to the roll and re-designation described below were recorded within
"Other expense (income)" on the Company's Interim Consolidated
Statements of Income for the three and nine months ended
September 30, 2021, respectively.
Following CP entering into the Merger Agreement with KCS, the
Company rolled the notional U.S. $2.4 billion of forward starting swaps but
did not effect a cash settlement. Concurrently, the Company
re-designated the forward starting swaps totalling U.S.
$2.4 billion to fix the
benchmark rate on cash flows associated with highly probable
forecasted issuances of long-term notes. The changes in fair value
on the forward starting swaps are recorded in "Accumulated other
comprehensive loss", net of tax, as cash flow hedges until the
notes are issued. Subsequent to the notes issuance, amounts in
"Accumulated other comprehensive loss" will be reclassified to "Net
interest expense" ratably over the duration of the notes' hedged
interest payments. Fair value gains subsequent to re-designation of
$129 million were recorded within "Other comprehensive income"
on the Company's Interim Consolidated Statements of Comprehensive
Income for the three and nine months ended September 30, 2021.
As at September 30, 2021, the
unrealized fair value loss derived from the forward starting swaps
of $195 million was included in "Accounts payable and accrued
liabilities" on the Company's Interim Consolidated Balance Sheets.
Changes in fair value of the forward starting swaps for the three
and nine months ended September 30,
2021 were a gain of $25 million and loss
$195 million, respectively.
Bond locks
In March
2021, the Company entered into seven-year interest rate bond
locks totalling a notional $600 million to fix the benchmark
rate on cash flows associated with a highly probable forecasted
issuance of long-term notes.
On May 21, 2021, the Original
Merger Agreement with KCS was terminated which resulted in the
Company ceasing hedge accounting for the $600 million of bond
locks. However, as the note issuances were still reasonably
possible to occur, fair value losses prior to this determination
remained in "Accumulated other comprehensive loss", net of tax, as
of June 30, 2021. Subsequent to the
notes issuance, $2 million in "Accumulated other comprehensive
loss" will be reclassified to "Net interest expense" ratably over
the duration of the notes' hedged interest payments. Fair value
losses subsequent to May 21, 2021 of
$7 million and $10 million were recorded within "Other
expense (income)" on the Company's Interim Consolidated Statements
of Income for the three and nine months ended September 30, 2021, respectively.
Following CP entering into the Merger Agreement with KCS, the
Company rolled the notional $600 million of bond locks but did
not effect a cash settlement. Concurrently, the Company
re-designated the bond locks totalling $600 million to fix the
benchmark rate on cash flows associated with highly probable
forecasted issuances of long-term notes. The changes in fair value
on the bond locks are recorded in "Accumulated other comprehensive
loss", net of tax, as cash flow hedges until the notes are issued.
Subsequent to the notes issuance, amounts in "Accumulated other
comprehensive loss" will be reclassified to "Net interest expense"
ratably over the duration of the notes' hedged interest payments.
Fair value gains subsequent to re-designation of $10 million
were recorded within "Other comprehensive income" on the Company's
Interim Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30,
2021.
As at September 30, 2021, the
unrealized fair value loss derived from the bond locks of
$2 million was included in "Accounts payable and accrued
liabilities" on the Company's Interim Consolidated Balance Sheets.
Changes in fair value of the bond locks for the three and nine
months ended September 30, 2021 were
a gain of $3 million and loss of $2 million,
respectively.
13 Shareholders' equity
On January 27, 2021, the Company
announced a normal course issuer bid ("NCIB"), commencing
January 29, 2021, to purchase up to
16.7 million Common Shares in the open market for cancellation
on or before January 28, 2022. As at
September 30, 2021, the Company had
not purchased any Common Shares under this NCIB.
On December 17, 2019, the Company
announced a NCIB, commencing December 20,
2019, to purchase up to 24.0 million Common Shares for
cancellation on or before December 19, 2020. Upon expiry of
this NCIB, the Company had purchased 21.4 million Common Shares for
$1,577 million.
All purchases were made in accordance with the NCIB at
prevailing market prices plus brokerage fees, or such other prices
that were permitted by the Toronto Stock Exchange ("TSX"), with
consideration allocated to "Share capital" up to the average
carrying amount of the shares and any excess allocated to "Retained
earnings".
The following table provides activities under the share
repurchase programs:
|
For the three
months
ended September
30
|
For the nine
months
ended September 30
|
|
2021
|
2020
|
2021
|
2020
|
Number of Common
Shares repurchased(1)
|
—
|
5,224,340
|
—
|
13,257,910
|
Weighted-average
price per share(2)
|
$
|
—
|
$
|
75.88
|
$
|
—
|
$
|
69.11
|
Amount of repurchase
(in millions of Canadian dollars)(2)
|
$
|
—
|
$
|
396
|
$
|
—
|
$
|
916
|
(1)
|
Includes
shares repurchased but not yet cancelled at end of
period.
|
(2)
|
Includes
brokerage fees.
|
On October 1, 2021, the Company
filed a registration statement with the SEC to issue up to
approximately 264.7 million Common Shares to KCS stockholders as
part of the purchase consideration payable pursuant to the Merger
Agreement (Note 10).
14 Pension and other benefits
In the three and nine months ended September 30, 2021, the Company made
contributions to its defined benefit pension plans of $4 million and $15 million, respectively
(three and nine months ended September 30,
2020 - $9 million and
$24 million, respectively).
Net periodic benefit costs for defined benefit pension plans and
other benefits included the following
components:
|
For the three
months ended September 30
|
|
Pensions
|
Other
benefits
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Current service cost
(benefits earned by employees)
|
$
|
42
|
$
|
35
|
$
|
4
|
$
|
3
|
Other components of
net periodic benefit (recovery) cost:
|
|
|
|
|
Interest cost on
benefit obligation
|
88
|
102
|
4
|
4
|
Expected return on
fund assets
|
(240)
|
(236)
|
—
|
—
|
Recognized net
actuarial loss
|
52
|
44
|
1
|
1
|
Amortization of prior
service costs (recoveries)
|
—
|
(1)
|
—
|
—
|
Total other
components of net periodic benefit (recovery) cost
|
(100)
|
(91)
|
5
|
5
|
Net periodic benefit
(recovery) cost
|
$
|
(58)
|
$
|
(56)
|
$
|
9
|
$
|
8
|
|
For the nine
months ended September 30
|
|
Pensions
|
Other
benefits
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Current service cost
(benefits earned by employees)
|
$
|
128
|
$
|
105
|
$
|
10
|
$
|
9
|
Other components of
net periodic benefit (recovery) cost:
|
|
|
|
|
Interest cost on
benefit obligation
|
264
|
305
|
12
|
13
|
Expected return on
fund assets
|
(720)
|
(709)
|
—
|
—
|
Recognized net
actuarial loss
|
155
|
132
|
3
|
3
|
Amortization of prior
service costs (recoveries)
|
—
|
(1)
|
—
|
—
|
Total other
components of net periodic benefit (recovery) cost
|
(301)
|
(273)
|
15
|
16
|
Net periodic benefit
(recovery) cost
|
$
|
(173)
|
$
|
(168)
|
$
|
25
|
$
|
25
|
15 Stock-based compensation
At September 30, 2021, the Company
had several stock-based compensation plans including stock option
plans, various cash-settled liability plans, and an employee share
purchase plan. These plans resulted in an expense for the three and
nine months ended September 30, 2021
of $26 million and $75 million, respectively (three and nine months
ended September 30, 2020 - expense of
$56 million and $110 million, respectively).
Stock option plan
Options issued prior to the share split described in Note 1 now
each provide rights over five shares. For consistency, all number
of options presented herein are calculated and shown on the basis
of the number of shares subject to the options. In the nine months
ended September 30, 2021, under CP's
stock option plans, the Company issued 1,339,886 options at the
weighted-average price of $87.64 per
share, based on the closing price on the grant date. Pursuant to
the employee plan, these options may be exercised upon vesting,
which is between 12 months and 48 months after the grant date, and
will expire after seven years.
Under the fair value method, the fair value of the stock options
at grant date was approximately $26
million. The weighted-average fair value assumptions were
approximately:
|
For the nine
months ended September 30, 2021
|
Expected option life
(years)(1)
|
4.75
|
Risk-free interest
rate(2)
|
0.53%
|
Expected share price
volatility(3)
|
27.14%
|
Expected annual
dividends per share(4)
|
$0.760
|
Expected forfeiture
rate(5)
|
2.61%
|
Weighted-average
grant date fair value per option granted during the
period
|
$19.05
|
(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
term commensurate with the expected term of the option.
|
(3)
|
Based on the
historical volatility of the Company's share price 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.
|
(5)
|
The Company estimates
forfeitures based on past experience. This rate is monitored on a
periodic basis.
|
Performance share unit plans
During the nine months ended September
30, 2021, the Company issued 431,430 Performance Share Units
("PSUs") with a grant date fair value of approximately $37 million and 12,694 Performance Deferred Share
Units ("PDSUs") with a grant date fair value, including the value
of expected future matching units, of approximately $1 million. PSUs and PDSUs attract dividend
equivalents in the form of additional units based on dividends paid
on the Company's Common Shares, and vest approximately three years
after the grant date, contingent upon CP's performance
("performance factor"). The fair value of these PSUs and PDSUs is
measured periodically until settlement. Vested PSUs are settled in
cash. Vested PDSUs are settled in cash pursuant to the Deferred
Share Unit ("DSU") Plan and are eligible for a 25% match if the
holder has not exceeded their share ownership requirements, and are
paid out only when the holder ceases their employment with CP.
The performance period for PSUs and PDSUs issued in the nine
months ended September 30, 2021 is
January 1, 2021 to December 31, 2023 and the performance factors are
Return on Invested Capital ("ROIC"), Total Shareholder Return
("TSR") compared to the S&P/TSX 60 Index, and TSR compared to
Class I railways.
The performance period for PSUs issued in 2018 was January 1, 2018 to December 31, 2020. The performance factors for
626,400 PSUs were ROIC, TSR compared to the S&P/TSX Capped
Industrial Index, and TSR compared to the S&P 1500 Road and
Rail Index. The resulting payout was 200% of the outstanding units
multiplied by the Company's average share price calculated using
the last 30 trading days preceding December
31, 2020. In the first quarter of 2021, payouts occurred on
570,056 total outstanding awards, including dividends reinvested,
totalling $98 million. The
performance factors for the remaining 184,875 PSUs were annual
revenue for the fiscal year 2020, diluted earnings per share for
the fiscal year 2020, and share price appreciation. The resulting
payout was 125% of the outstanding units multiplied by the
Company's average share price calculated using the last 30 trading
days preceding the vesting dates. In the third quarter of 2021,
payouts occurred on 169,272 total outstanding awards, including
dividends reinvested, totalling $20 million.
Deferred share unit plan
During the nine months ended September
30, 2021, the Company granted 62,157 DSUs with a grant date
fair value of approximately $6
million. DSUs vest over various periods of up to 36 months
and are only redeemable for a specified period after employment is
terminated. The expense for DSUs is recognized over the vesting
period for both the initial subscription price and the change in
value between reporting periods.
16 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
September 30, 2021 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 business, financial position or results of
operations.
Legal proceedings related to Lac-Mégantic rail
accident
On July 6, 2013, a train carrying
petroleum crude oil operated by Montréal Maine and Atlantic Railway ("MMAR") or a
subsidiary, Montréal Maine &
Atlantic Canada Co. ("MMAC" and collectively the "MMA Group"),
derailed in Lac-Mégantic, Québec. The derailment occurred on a
section of railway owned and operated by the MMA Group and while
the MMA Group exclusively controlled the train.
Following the derailment, MMAC sought court protection in
Canada under the Companies'
Creditors Arrangement Act and MMAR filed for bankruptcy in the
U.S. Plans of arrangement were approved in both Canada and the U.S. (the "Plans"), providing
for the distribution of approximately $440
million amongst those claiming derailment damages.
A number of legal proceedings, set out below, were commenced in
Canada and the U.S. against CP and
others:
(1) Québec's Minister of Sustainable Development, Environment,
Wildlife and Parks ordered various parties, including CP, to
remediate the derailment site (the "Cleanup Order") and served CP
with a Notice of Claim for $95
million for those costs. CP appealed the Cleanup Order and
contested the Notice of Claim with the Administrative Tribunal of
Québec. These proceedings are stayed pending determination of the
Attorney General of Québec ("AGQ") action (paragraph 2 below).
(2) The AGQ sued CP in the Québec Superior Court claiming
$409 million in damages, which was
amended and reduced to $315 million
(the "AGQ Action"). The AGQ Action alleges that: (i) CP was
responsible for the petroleum crude oil from its point of origin
until its delivery to Irving Oil Ltd.; and (ii) CP is vicariously
liable for the acts and omissions of the MMA Group.
(3) A class action 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 was certified against CP on May 8, 2015 (the "Class Action"). Other
defendants including MMAC and Mr. Thomas
Harding ("Harding") were added to the Class Action on
January 25, 2017. The Class Action
seeks unquantified damages, including for wrongful death, personal
injury, property damage, and economic loss.
(4) Eight subrogated insurers sued CP in the Québec Superior
Court claiming approximately $16
million in damages, which was amended and reduced to
approximately $15 million (the
"Promutuel Action"), and two additional subrogated insurers sued CP
claiming approximately $3 million in
damages (the "Royal Action"). Both actions contain similar
allegations as the AGQ Action. The actions do not identify the
subrogated parties. As such, the extent of any overlap between the
damages claimed in these actions and under the Plans is unclear.
The Royal Action is stayed pending determination of the
consolidated proceedings described below.
On December 11, 2017, the AGQ
Action, the Class Action and the Promutuel Action were
consolidated. The joint liability trial of these consolidated
claims commenced on September 21,
2021 and will be followed by a damages trial, if
necessary.
(5) Forty-eight plaintiffs (all individual claims joined in one
action) sued CP, MMAC, and Harding in the Québec Superior Court
claiming approximately $5 million in
damages for economic loss and pain and suffering, and asserting
similar allegations as in the Class Action and the AGQ Action. The
majority of the plaintiffs opted-out of the Class Action and all
but two are also plaintiffs in litigation against CP, described in
paragraph 7 below. This action is stayed pending determination of
the consolidated claims described above.
(6) The MMAR U.S. bankruptcy estate representative commenced an
action against CP in November 2014 in
the Maine Bankruptcy Court claiming that CP failed to abide by
certain regulations and seeking approximately U.S. $30 million in damages for MMAR's loss in
business value according to a recent report. This action asserts
that CP knew or ought to have known that the shipper misclassified
the petroleum crude oil and therefore should have refused to
transport it.
(7) The class and mass tort action commenced against CP in
June 2015 in Texas (on behalf of Lac-Mégantic residents and
wrongful death representatives) and the wrongful death and personal
injury actions commenced against CP in June
2015 in Illinois and
Maine, were all transferred and
consolidated in Federal District Court in Maine (the "Maine Actions"). The Maine Actions
allege that CP negligently misclassified and improperly packaged
the petroleum crude oil. On CP's motion, the Maine Actions were
dismissed. The plaintiffs appealed the dismissal decision to the
First Circuit Court of Appeals, which dismissed the plaintiffs'
appeal on June 2, 2021. The
plaintiffs further petitioned the First Circuit Court of Appeals
for a rehearing, which was denied on September 8, 2021.
(8) The trustee for the wrongful death trust commenced Carmack
Amendment claims against CP in North Dakota Federal Court, seeking
to recover approximately U.S. $6
million for damaged rail cars and lost crude and
reimbursement for the settlement paid by the consignor and the
consignee under the Plans (alleged to be U.S. $110 million and U.S. $60
million, respectively). The Court issued an Order on
August 6, 2020 granting and denying
in parts the parties' summary judgment motions which has been
reviewed and confirmed following motions by the parties for
clarification and reconsideration. This action is scheduled for
trial on July 11 to 14, 2022.
At this stage of the proceedings, any potential responsibility
and the quantum of potential losses cannot be determined.
Nevertheless, CP denies liability and is vigorously defending these
proceedings.
Environmental liabilities
Environmental remediation accruals, recorded on an undiscounted
basis unless a reliable, determinable estimate as to an amount and
timing of costs can be established, cover site-specific remediation
programs.
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,
and as 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.
The expense included in "Purchased services and other" in the
Company's Interim Consolidated Statements of Income for the three
and nine months ended September 30,
2021 was $2 million and
$6 million (three and nine months ended September 30, 2020 - $2
million and $6 million, respectively). Provisions for
environmental remediation costs are recorded in the Company's
Interim Consolidated Balance Sheets in "Other long-term
liabilities", except for the current portion which is recorded in
"Accounts payable and accrued liabilities". The total amount
provided at September 30, 2021 was
$82 million (December 31, 2020 - $80
million). Payments are expected to be made over 10 years
through 2030.
Summary of Rail Data
|
Third
Quarter
|
|
Year-to-date
|
Financial
(millions, except per share data)
|
2021
|
2020
|
Total
Change
|
%
Change
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Freight
|
$
|
1,896
|
$
|
1,821
|
$
|
75
|
4
|
|
$
|
5,822
|
$
|
5,573
|
$
|
249
|
4
|
Non-freight
|
46
|
42
|
4
|
10
|
|
133
|
125
|
8
|
6
|
Total
revenues
|
1,942
|
1,863
|
79
|
4
|
|
5,955
|
5,698
|
257
|
5
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
381
|
382
|
(1)
|
—
|
|
1,165
|
1,127
|
38
|
3
|
Fuel
|
199
|
140
|
59
|
42
|
|
623
|
483
|
140
|
29
|
Materials
|
51
|
53
|
(2)
|
(4)
|
|
164
|
162
|
2
|
1
|
Equipment
rents
|
31
|
39
|
(8)
|
(21)
|
|
92
|
108
|
(16)
|
(15)
|
Depreciation and
amortization
|
203
|
195
|
8
|
4
|
|
605
|
582
|
23
|
4
|
Purchased services and
other
|
303
|
275
|
28
|
10
|
|
932
|
853
|
79
|
9
|
Total operating
expenses
|
1,168
|
1,084
|
84
|
8
|
|
3,581
|
3,315
|
266
|
8
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
774
|
779
|
(5)
|
(1)
|
|
2,374
|
2,383
|
(9)
|
—
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Other expense
(income)
|
124
|
(36)
|
160
|
(444)
|
|
253
|
89
|
164
|
184
|
Merger termination
fee
|
—
|
—
|
—
|
—
|
|
(845)
|
—
|
(845)
|
100
|
Other components of
net periodic benefit recovery
|
(95)
|
(86)
|
(9)
|
10
|
|
(286)
|
(257)
|
(29)
|
11
|
Net interest
expense
|
104
|
114
|
(10)
|
(9)
|
|
315
|
346
|
(31)
|
(9)
|
|
|
|
|
|
|
|
|
|
|
Income before income
tax expense
|
641
|
787
|
(146)
|
(19)
|
|
2,937
|
2,205
|
732
|
33
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
169
|
189
|
(20)
|
(11)
|
|
617
|
563
|
54
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
472
|
$
|
598
|
$
|
(126)
|
(21)
|
|
$
|
2,320
|
$
|
1,642
|
$
|
678
|
41
|
Operating ratio
(%)
|
60.2
|
58.2
|
2.0
|
200
bps
|
|
60.1
|
58.2
|
1.9
|
190
bps
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share(1)
|
$
|
0.71
|
$
|
0.88
|
$
|
(0.17)
|
(19)
|
|
$
|
3.48
|
$
|
2.42
|
$
|
1.06
|
44
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share(1)
|
$
|
0.70
|
$
|
0.88
|
$
|
(0.18)
|
(20)
|
|
$
|
3.46
|
$
|
2.41
|
$
|
1.05
|
44
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding(1)
|
|
|
|
|
|
|
|
|
|
Weighted average
number of basic shares outstanding (millions)
|
666.9
|
676.2
|
(9.3)
|
(1)
|
|
666.7
|
679.3
|
(12.6)
|
(2)
|
Weighted average
number of diluted shares outstanding (millions)
|
669.8
|
679.0
|
(9.2)
|
(1)
|
|
669.8
|
681.8
|
(12.0)
|
(2)
|
|
|
|
|
|
|
|
|
|
|
Foreign
Exchange
|
|
|
|
|
|
|
|
|
|
Average foreign
exchange rate (U.S.$/Canadian$)
|
0.79
|
0.75
|
0.04
|
4
|
|
0.80
|
0.74
|
0.06
|
8
|
Average foreign
exchange rate (Canadian$/U.S.$)
|
1.26
|
1.33
|
(0.07)
|
(5)
|
|
1.25
|
1.35
|
(0.10)
|
(7)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As a result of the
five-for-one share split of the Company's issued and outstanding
Common Shares, which began trading on a post-split basis on May 14,
2021, per share amounts and all outstanding Common Shares for
comparative periods of 2020 have been retrospectively
adjusted.
|
Summary of Rail Data (Continued)
|
Third
Quarter
|
|
Year-to-date
|
Commodity
Data
|
2021
|
2020
|
Total
Change
|
%
Change
|
FX
Adjusted
%
Change(1)
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
FX
Adjusted
%
Change(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
- Grain
|
$
|
352
|
$
|
457
|
$
|
(105)
|
(23)
|
(21)
|
|
$
|
1,244
|
$
|
1,321
|
$
|
(77)
|
(6)
|
(3)
|
- Coal
|
158
|
130
|
28
|
22
|
22
|
|
491
|
411
|
80
|
19
|
21
|
- Potash
|
113
|
132
|
(19)
|
(14)
|
(12)
|
|
348
|
390
|
(42)
|
(11)
|
(7)
|
- Fertilizers and
sulphur
|
72
|
65
|
7
|
11
|
16
|
|
227
|
212
|
15
|
7
|
14
|
- Forest
products
|
89
|
85
|
4
|
5
|
10
|
|
259
|
244
|
15
|
6
|
13
|
- Energy, chemicals
and plastics
|
392
|
321
|
71
|
22
|
27
|
|
1,149
|
1,153
|
(4)
|
—
|
4
|
- Metals, minerals
and consumer products
|
196
|
152
|
44
|
29
|
35
|
|
535
|
474
|
61
|
13
|
20
|
-
Automotive
|
83
|
94
|
(11)
|
(12)
|
(8)
|
|
289
|
215
|
74
|
34
|
42
|
-
Intermodal
|
441
|
385
|
56
|
15
|
16
|
|
1,280
|
1,153
|
127
|
11
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freight
Revenues
|
$
|
1,896
|
$
|
1,821
|
$
|
75
|
4
|
7
|
|
$
|
5,822
|
$
|
5,573
|
$
|
249
|
4
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue
per Revenue Ton-Mile ("RTM") (cents)
|
|
|
|
|
|
|
|
|
|
|
|
- Grain
|
4.56
|
4.33
|
0.23
|
5
|
8
|
|
4.36
|
4.44
|
(0.08)
|
(2)
|
1
|
- Coal
|
3.65
|
2.93
|
0.72
|
25
|
25
|
|
3.40
|
3.11
|
0.29
|
9
|
10
|
- Potash
|
2.87
|
2.62
|
0.25
|
10
|
12
|
|
2.74
|
2.66
|
0.08
|
3
|
7
|
- Fertilizers and
sulphur
|
6.31
|
6.14
|
0.17
|
3
|
8
|
|
6.18
|
6.26
|
(0.08)
|
(1)
|
5
|
- Forest
products
|
6.27
|
5.81
|
0.46
|
8
|
13
|
|
6.04
|
6.01
|
0.03
|
—
|
7
|
- Energy, chemicals
and plastics
|
6.19
|
6.95
|
(0.76)
|
(11)
|
(7)
|
|
5.94
|
6.41
|
(0.47)
|
(7)
|
(3)
|
- Metals, minerals
and consumer products
|
6.55
|
6.60
|
(0.05)
|
(1)
|
4
|
|
6.42
|
6.82
|
(0.40)
|
(6)
|
—
|
-
Automotive
|
20.60
|
24.10
|
(3.50)
|
(15)
|
(11)
|
|
20.97
|
25.41
|
(4.44)
|
(17)
|
(13)
|
-
Intermodal
|
6.20
|
5.63
|
0.57
|
10
|
12
|
|
6.09
|
5.54
|
0.55
|
10
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freight Revenue
per RTM
|
5.36
|
4.96
|
0.40
|
8
|
11
|
|
5.12
|
4.99
|
0.13
|
3
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue
per Carload
|
|
|
|
|
|
|
|
|
|
|
|
- Grain
|
$
|
3,955
|
$
|
3,671
|
$
|
284
|
8
|
10
|
|
$
|
3,842
|
$
|
3,846
|
$
|
(4)
|
—
|
3
|
- Coal
|
2,153
|
2,047
|
106
|
5
|
6
|
|
2,190
|
2,201
|
(11)
|
—
|
—
|
- Potash
|
3,156
|
3,028
|
128
|
4
|
7
|
|
3,031
|
3,071
|
(40)
|
(1)
|
2
|
- Fertilizers and
sulphur
|
4,768
|
4,676
|
92
|
2
|
7
|
|
4,690
|
4,639
|
51
|
1
|
7
|
- Forest
products
|
4,759
|
4,749
|
10
|
—
|
5
|
|
4,701
|
4,561
|
140
|
3
|
10
|
- Energy, chemicals
and plastics
|
5,013
|
5,047
|
(34)
|
(1)
|
3
|
|
4,758
|
5,053
|
(295)
|
(6)
|
(2)
|
- Metals, minerals
and consumer products
|
3,245
|
2,992
|
253
|
8
|
14
|
|
3,019
|
3,076
|
(57)
|
(2)
|
4
|
-
Automotive
|
3,562
|
3,013
|
549
|
18
|
23
|
|
3,384
|
3,015
|
369
|
12
|
19
|
-
Intermodal
|
1,627
|
1,540
|
87
|
6
|
7
|
|
1,581
|
1,496
|
85
|
6
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Freight Revenue
per Carload
|
$
|
2,851
|
$
|
2,763
|
$
|
88
|
3
|
6
|
|
$
|
2,799
|
$
|
2,814
|
$
|
(15)
|
(1)
|
3
|
|
|
(1)
|
This earnings measure
has no standardized meaning prescribed by GAAP and, therefore, is
unlikely to be comparable to similar measures presented by other
companies. This measure is defined and reconciled in Non-GAAP
Measures of this Earnings Release.
|
Summary of Rail Data (Continued)
|
Third
Quarter
|
|
Year-to-date
|
Commodity Data
(Continued)
|
2021
|
2020
|
Total
Change
|
%
Change
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Millions of
RTM
|
|
|
|
|
|
|
|
|
|
- Grain
|
7,715
|
10,549
|
(2,834)
|
(27)
|
|
28,564
|
29,734
|
(1,170)
|
(4)
|
- Coal
|
4,334
|
4,437
|
(103)
|
(2)
|
|
14,451
|
13,209
|
1,242
|
9
|
- Potash
|
3,941
|
5,036
|
(1,095)
|
(22)
|
|
12,705
|
14,664
|
(1,959)
|
(13)
|
- Fertilizers and
sulphur
|
1,141
|
1,059
|
82
|
8
|
|
3,673
|
3,387
|
286
|
8
|
- Forest
products
|
1,419
|
1,463
|
(44)
|
(3)
|
|
4,290
|
4,059
|
231
|
6
|
- Energy, chemicals
and plastics
|
6,330
|
4,620
|
1,710
|
37
|
|
19,328
|
17,981
|
1,347
|
7
|
- Metals, minerals and
consumer products
|
2,992
|
2,303
|
689
|
30
|
|
8,328
|
6,951
|
1,377
|
20
|
-
Automotive
|
403
|
390
|
13
|
3
|
|
1,378
|
846
|
532
|
63
|
-
Intermodal
|
7,116
|
6,833
|
283
|
4
|
|
21,008
|
20,804
|
204
|
1
|
|
|
|
|
|
|
|
|
|
|
Total RTMs
|
35,391
|
36,690
|
(1,299)
|
(4)
|
|
113,725
|
111,635
|
2,090
|
2
|
|
|
|
|
|
|
|
|
|
|
Carloads
(thousands)
|
|
|
|
|
|
|
|
|
|
- Grain
|
89.0
|
124.5
|
(35.5)
|
(29)
|
|
323.8
|
343.5
|
(19.7)
|
(6)
|
- Coal
|
73.4
|
63.5
|
9.9
|
16
|
|
224.2
|
186.7
|
37.5
|
20
|
- Potash
|
35.8
|
43.6
|
(7.8)
|
(18)
|
|
114.8
|
127.0
|
(12.2)
|
(10)
|
- Fertilizers and
sulphur
|
15.1
|
13.9
|
1.2
|
9
|
|
48.4
|
45.7
|
2.7
|
6
|
- Forest
products
|
18.7
|
17.9
|
0.8
|
4
|
|
55.1
|
53.5
|
1.6
|
3
|
- Energy, chemicals
and plastics
|
78.2
|
63.6
|
14.6
|
23
|
|
241.5
|
228.2
|
13.3
|
6
|
- Metals, minerals and
consumer products
|
60.4
|
50.8
|
9.6
|
19
|
|
177.2
|
154.1
|
23.1
|
15
|
-
Automotive
|
23.3
|
31.2
|
(7.9)
|
(25)
|
|
85.4
|
71.3
|
14.1
|
20
|
-
Intermodal
|
271.1
|
250.0
|
21.1
|
8
|
|
809.5
|
770.6
|
38.9
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
Carloads
|
665.0
|
659.0
|
6.0
|
1
|
|
2,079.9
|
1,980.6
|
99.3
|
5
|
|
Third
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
FX Adjusted
% Change(1)
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
FX Adjusted
% Change(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
$
|
381
|
$
|
382
|
$
|
(1)
|
—
|
2
|
|
$
|
1,165
|
$
|
1,127
|
$
|
38
|
3
|
6
|
Fuel
|
199
|
140
|
59
|
42
|
49
|
|
623
|
483
|
140
|
29
|
36
|
Materials
|
51
|
53
|
(2)
|
(4)
|
(4)
|
|
164
|
162
|
2
|
1
|
3
|
Equipment
rents
|
31
|
39
|
(8)
|
(21)
|
(16)
|
|
92
|
108
|
(16)
|
(15)
|
(9)
|
Depreciation and
amortization
|
203
|
195
|
8
|
4
|
6
|
|
605
|
582
|
23
|
4
|
6
|
Purchased services and
other
|
303
|
275
|
28
|
10
|
13
|
|
932
|
853
|
79
|
9
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
$
|
1,168
|
$
|
1,084
|
$
|
84
|
8
|
10
|
|
$
|
3,581
|
$
|
3,315
|
$
|
266
|
8
|
11
|
|
|
(1)
|
This earnings measure
has no standardized meaning prescribed by GAAP and, therefore, is
unlikely to be comparable to similar measures presented by other
companies. This measure is defined and reconciled in Non-GAAP
Measures of this Earnings Release.
|
Summary of Rail Data (Continued)
|
Third
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
|
2021
|
2020
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Operations
Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles
("GTMs") (millions)
|
64,665
|
65,997
|
(1,332)
|
(2)
|
|
207,347
|
200,383
|
6,964
|
3
|
Train miles
(thousands)
|
6,999
|
7,247
|
(248)
|
(3)
|
|
22,406
|
22,479
|
(73)
|
—
|
Average train
weight - excluding local traffic (tons)
|
9,973
|
9,857
|
116
|
1
|
|
9,953
|
9,644
|
309
|
3
|
Average train
length - excluding local traffic (feet)
|
8,285
|
8,082
|
203
|
3
|
|
8,192
|
7,831
|
361
|
5
|
Average terminal
dwell (hours)
|
7.2
|
6.7
|
0.5
|
7
|
|
7.1
|
6.5
|
0.6
|
9
|
Average train speed
(miles per hour, or "mph")(1)
|
21.7
|
22.5
|
(0.8)
|
(4)
|
|
21.4
|
22.1
|
(0.7)
|
(3)
|
Locomotive
productivity (GTMs / operating horsepower)(2)
|
203
|
207
|
(4)
|
(2)
|
|
204
|
207
|
(3)
|
(1)
|
Fuel
efficiency(3)
|
0.907
|
0.926
|
(0.019)
|
(2)
|
|
0.928
|
0.940
|
(0.012)
|
(1)
|
U.S. gallons of
locomotive fuel consumed (millions)(4)
|
58.7
|
61.1
|
(2.4)
|
(4)
|
|
192.5
|
188.5
|
4.0
|
2
|
Average fuel price
(U.S. dollars per U.S. gallon)
|
2.70
|
1.72
|
0.98
|
57
|
|
2.59
|
1.90
|
0.69
|
36
|
|
|
|
|
|
|
|
|
|
|
Total Employees
and Workforce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees
(average)(5)
|
12,485
|
12,156
|
329
|
3
|
|
12,411
|
12,214
|
197
|
2
|
Total employees (end
of period)(5)
|
12,262
|
12,166
|
96
|
1
|
|
12,262
|
12,166
|
96
|
1
|
Workforce (end of
period)(6)
|
12,301
|
12,185
|
116
|
1
|
|
12,301
|
12,185
|
116
|
1
|
|
|
|
|
|
|
|
|
|
|
Safety
Indicators(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries
per 200,000 employee-hours
|
0.97
|
1.03
|
(0.06)
|
(6)
|
|
0.97
|
1.11
|
(0.14)
|
(13)
|
FRA train accidents
per million train-miles
|
1.54
|
1.13
|
0.41
|
36
|
|
1.09
|
1.05
|
0.04
|
4
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average train speed
is defined as a measure of the line-haul movement from origin to
destination including terminal dwell hours. It is calculated by
dividing the total train miles travelled by the total train hours
operated. This calculation does not include delay time related to
customers or foreign railroads and excludes the time and distance
travelled by: i) trains used in or around CP's yards; ii) passenger
trains; and iii) trains used for repairing track.
|
(2)
|
Locomotive
productivity is defined as daily GTMs divided by daily average
operating horsepower. Operating horsepower excludes units offline,
tied up or in storage, or in use on other railways, and includes
foreign units online.
|
(3)
|
Fuel efficiency is
defined as U.S. gallons of locomotive fuel consumed per 1,000
GTMs.
|
(4)
|
Includes gallons of
fuel consumed from freight, yard and commuter service but excludes
fuel used in capital projects and other non-freight
activities.
|
(5)
|
An employee is
defined as an individual currently engaged in full-time, part-time,
or seasonal employment with CP.
|
(6)
|
Workforce is defined
as total employees plus contractors and consultants.
|
(7)
|
Federal Railroad
Administration ("FRA") personal injuries per 200,000 employee-hours
for the three and nine months ended September 30, 2020, previously
reported as 1.06 and 1.13, were restated to 1.03 and 1.11,
respectively in this Earnings Release. FRA train accidents per
million train-miles for the nine months ended September 30, 2020,
previously reported as 1.06, was restated to 1.05 in this Earnings
Release. These restatements reflect new information available
within specified periods stipulated by the FRA but that exceed the
Company's financial reporting timeline.
|
Non-GAAP Measures
The Company presents Non-GAAP measures to provide a basis for
evaluating underlying earnings and liquidity trends in the
Company's business that can be compared with the results of
operations in prior periods. In addition, these Non-GAAP measures
facilitate a multi-period assessment of long-term profitability,
allowing management and other external users of the Company's
consolidated financial information to compare profitability on a
long-term basis, including assessing future profitability, with
that of the Company's peers.
These Non-GAAP measures have no standardized meaning and are not
defined by accounting principles generally accepted in the United States of America ("GAAP") and,
therefore, may not be comparable to similar measures presented by
other companies. The presentation of these Non-GAAP measures is not
intended to be considered in isolation from, as a substitute for,
or as superior to the financial information presented in accordance
with GAAP.
Non-GAAP Performance Measures
The Company uses adjusted earnings results including Adjusted
income, Adjusted diluted earnings per share, Adjusted operating
income and Adjusted operating ratio to evaluate the Company's
operating performance and for planning and forecasting future
business operations and future profitability. These Non-GAAP
measures provide meaningful supplemental information regarding
operating results because they exclude certain significant items
that are not considered indicative of future financial trends
either by nature or amount. As a result, these items are excluded
for management assessment of operational performance, allocation of
resources and preparation of annual budgets. These significant
items may include, but are not limited to, restructuring and asset
impairment charges, individually significant gains and losses from
sales of assets, acquisition-related costs (including legal,
consulting, and financing fees and fair value gain or loss on FX
forward contracts and interest rate hedges), the merger termination
payment received, the foreign exchange ("FX") impact of translating
the Company's debt and lease liabilities (including borrowings
under the credit facility), discrete tax items, changes in income
tax rates, changes to an uncertain tax item, and certain items
outside the control of management. These items may not be
non-recurring. However, excluding these significant items from GAAP
results allows for a consistent understanding of the Company's
consolidated financial performance when performing a multi-period
assessment including assessing the likelihood of future results.
Accordingly, these Non-GAAP financial measures may provide insight
to investors and other external users of the Company's consolidated
financial information.
Significant items that impact reported earnings for the first
nine months of 2021, the twelve months of 2020, and the last three
months of 2019 include:
2021:
- acquisition-related costs of $442
million in connection with the pending Kansas City Southern
("KCS") transaction ($343 million
after current taxes of $94 million
and deferred taxes of $5 million),
including an expense of $147 million
recognized in Purchased services and other and $295 million recognized in Other expense
(income), that unfavourably impacted Diluted EPS by 51 cents as follows:
-
- in the third quarter, acquisition-related costs of $98 million ($80
million after current tax recovery of $61 million net of deferred tax expense of
$43 million), including an expense of
$15 million recognized in Purchased
services and other and $83 million
recognized in Other expense (income), that unfavourably impacted
Diluted EPS by 12 cents;
- in the second quarter, acquisition-related costs of
$308 million ($236 million after current taxes of $25 million and deferred taxes of $47 million), including an expense of
$99 million recognized in Purchased
services and other and $209 million
recognized in Other expense (income), that unfavourably impacted
Diluted EPS by 35 cents; and
- in the first quarter, acquisition-related costs of $36 million ($27
million after current taxes of $8
million and deferred taxes of $1
million), including an expense of $33
million recognized in Purchased services and other and
$3 million recognized in Other
expense (income), that unfavourably impacted Diluted EPS by
4 cents.
- merger termination payment received of $845 million ($748
million after current taxes) in connection with KCS's
termination of the Agreement and Plan of Merger (the "Original
Merger Agreement") dated March 21,
2021 effective May 21, 2021,
that favourably impacted Diluted EPS by $1.11; and
- a non-cash gain of $39 million
($34 million after deferred tax) due
to FX translation of debt and lease liabilities that favourably
impacted Diluted EPS by 5 cents as
follows:
-
- In the third quarter, a $46
million loss ($40 million
after deferred tax) that unfavourably impacted Diluted EPS by
6 cents; and
- in the second quarter, a $52
million gain ($45 million
after deferred tax) that favourably impacted Diluted EPS by
7 cents; and
- in the first quarter, a $33
million gain ($29 million
after deferred tax) that favourably impacted Diluted EPS by
4 cents.
2020:
- in the fourth quarter, a deferred tax recovery of $29 million due to a change relating to a tax
return filing election for the state of North Dakota that favourably impacted Diluted
EPS by 5 cents; and
- during the course of the year, a net non-cash gain of
$14 million ($12 million after deferred tax) due to FX
translation of debt and lease liabilities that favourably impacted
Diluted EPS by 2 cents as
follows:
-
- in the fourth quarter, a $103
million gain ($90 million
after deferred tax) that favourably impacted Diluted EPS by
13 cents;
- in the third quarter, a $40
million gain ($38 million
after deferred tax) that favourably impacted Diluted EPS by
6 cents;
- in the second quarter, an $86
million gain ($82 million
after deferred tax) that favourably impacted Diluted EPS by
12 cents; and
- in the first quarter, a $215
million loss ($198 million
after deferred tax) that unfavourably impacted Diluted EPS by
28 cents
2019:
- in the fourth quarter, a deferred tax expense of $24 million as a result of a provision for an
uncertain tax item of a prior period that unfavourably impacted
Diluted EPS by 3 cents; and
- in the fourth quarter, a $37
million non-cash gain ($32
million after deferred tax) due to FX translation of debt
that favourably impacted Diluted EPS by 4
cents.
2021 Outlook
As a result of diminished expectations for the 2021-2022
Canadian grain crop and ongoing supply chain challenges, CP has
updated its 2021 outlook. CP now expects volumes, as measured in
RTMs, to grow by low single-digits year-over-year. In spite of the
revised volume expectations, CP continues to expect double digit
growth in Adjusted diluted EPS based on Adjusted diluted EPS of
$3.53 in 2020. CP's revised guidance
continues to assume a decrease in Other components of net periodic
benefit recovery by approximately $40
million versus 2020, an effective tax rate of approximately
24.6 percent and capital expenditure of $1.55 billion.
Although CP has provided a forward-looking Non-GAAP measure
(Adjusted diluted EPS), management is unable to reconcile, without
unreasonable efforts, the forward-looking Adjusted diluted EPS to
the most comparable GAAP measure, due to unknown variables and
uncertainty related to future results. These unknown variables may
include unpredictable transactions of significant value. In recent
years, CP has recognized acquisition-related costs (including
legal, consulting, and financing fees and fair value gain or loss
on FX forward contracts and interest rate hedges), the merger
termination payment received, changes in income tax rates, and a
change to an uncertain tax item. These or other similar, large
unforeseen transactions affect diluted EPS but may be excluded from
CP's Adjusted diluted EPS. Additionally, the U.S.-to-Canada dollar exchange rate is unpredictable
and can have a significant impact on CP's reported results but may
be excluded from CP's Adjusted diluted EPS. In particular, CP
excludes the FX impact of translating the Company's debt and lease
liabilities, the impact from changes in income tax rates and a
provision for uncertain tax item from Adjusted diluted EPS. Please
see Note on Forward-Looking Information in this Earnings Release
for further discussion.
Reconciliation of GAAP Performance Measures to Non-GAAP
Performance Measures
The following tables reconcile the most directly comparable
measures presented in accordance with GAAP to the Non-GAAP
measures:
Adjusted income is calculated as Net income reported on a GAAP
basis adjusted for significant items.
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
For the twelve
months
ended December 31
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
2020
|
Net income as
reported
|
$
|
472
|
$
|
598
|
$
|
2,320
|
$
|
1,642
|
$
|
2,444
|
Less significant
items (pre-tax):
|
|
|
|
|
|
Acquisition-related
costs
|
(98)
|
—
|
(442)
|
—
|
—
|
Merger termination
fee
|
—
|
—
|
845
|
—
|
—
|
Impact of FX
translation (loss) gain on debt and lease liabilities
|
(46)
|
40
|
39
|
(89)
|
14
|
Add:
|
|
|
|
|
|
Tax effect of
adjustments(1)
|
(24)
|
2
|
3
|
(11)
|
2
|
Income tax rate
changes
|
—
|
—
|
—
|
—
|
(29)
|
Adjusted
income
|
$
|
592
|
$
|
560
|
$
|
1,881
|
$
|
1,720
|
$
|
2,403
|
(1)
|
The tax effect of
adjustments was calculated as the pre-tax effect of the adjustments
multiplied by the applicable tax rate for the above items of 16.88%
and 0.68% for the three and nine months ended September 30,
2021, respectively, 4.82% and 12.15% for the three and nine months
ended September 30, 2020, respectively, and 13.58% for the
twelve months ended December 31, 2020. The applicable tax rates
reflect the taxable jurisdictions and nature, being on account of
capital or income, of the significant items.
|
Adjusted diluted earnings per share is calculated using Adjusted
income, as defined above, divided by the weighted-average diluted
number of Common Shares outstanding during the period as determined
in accordance with GAAP.
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
For the twelve
months
ended December 31
|
|
2021
|
2020
|
2021
|
2020
|
2020
|
Diluted earnings
per share as reported
|
$
|
0.70
|
$
|
0.88
|
$
|
3.46
|
$
|
2.41
|
$
|
3.59
|
Less significant
items (pre-tax):
|
|
|
|
|
|
Acquisition-related
costs
|
(0.15)
|
—
|
(0.66)
|
—
|
—
|
Merger termination
fee
|
—
|
—
|
1.26
|
—
|
—
|
Impact of FX
translation (loss) gain on debt and lease liabilities
|
(0.07)
|
0.06
|
0.06
|
(0.13)
|
0.02
|
Add:
|
|
|
|
|
|
Tax effect of
adjustments(1)
|
(0.04)
|
—
|
0.01
|
(0.02)
|
—
|
Income tax rate
changes
|
—
|
—
|
—
|
—
|
(0.04)
|
Adjusted diluted
earnings per share
|
$
|
0.88
|
$
|
0.82
|
$
|
2.81
|
$
|
2.52
|
$
|
3.53
|
(1)
|
The tax effect of
adjustments was calculated as the pre-tax effect of the adjustments
multiplied by the applicable tax rate for the above items of 16.88%
and 0.68% for the three and nine months ended September 30,
2021, respectively, 4.82% and 12.15% for the three and nine months
ended September 30, 2020, respectively, and 13.58% for the
twelve months ended December 31, 2020. The applicable tax rates
reflect the taxable jurisdictions and nature, being on account of
capital or income, of the significant items.
|
Adjusted operating income is calculated as Operating income
reported on a GAAP basis less significant items.
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
2021
|
2020
|
Operating income
as reported
|
$
|
774
|
$
|
779
|
$
|
2,374
|
$
|
2,383
|
Less significant
item:
|
|
|
|
|
Acquisition-related
costs
|
(15)
|
—
|
(147)
|
—
|
Adjusted operating
income
|
$
|
789
|
$
|
779
|
$
|
2,521
|
$
|
2,383
|
Adjusted operating ratio excludes those significant items that
are reported within operating income.
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
|
2021
|
2020
|
2021
|
2020
|
Operating ratio as
reported
|
60.2
|
%
|
58.2
|
%
|
60.1
|
%
|
58.2
|
%
|
Less significant
item:
|
|
|
|
|
Acquisition-related
costs
|
0.8
|
%
|
—
|
%
|
2.4
|
%
|
—
|
%
|
Adjusted operating
ratio
|
59.4
|
%
|
58.2
|
%
|
57.7
|
%
|
58.2
|
%
|
Adjusted Return on Invested Capital ("Adjusted ROIC")
Adjusted ROIC is calculated as Adjusted return divided by
Adjusted average invested capital. Adjusted return is defined as
Net income adjusted for interest expense, tax effected at the
Company's adjusted annualized effective tax rate, and significant
items in the Company's Consolidated Financial Statements, tax
effected at the applicable tax rate. Adjusted average invested
capital is defined as the sum of total Shareholders' equity,
Long-term debt, and Long-term debt maturing within one year, as
presented in the Company's Consolidated Financial Statements, each
averaged between the beginning and ending balance over a rolling
12-month period, adjusted for the impact of significant items, tax
effected at the applicable tax rate, on closing balances as part of
this average. Adjusted ROIC excludes significant items reported in
the Company's Consolidated Financial Statements, as these
significant items are not considered indicative of future financial
trends either by nature or amount, and excludes interest expense,
net of tax, to incorporate returns on the Company's overall
capitalization. Adjusted ROIC is a performance measure that
measures how productively the Company uses its long-term capital
investments, representing critical indicators of good operating and
investment decisions made by management, and is an important
performance criteria in determining certain elements of the
Company's long-term incentive plan. Adjusted ROIC is reconciled
below from Return on average shareholders' equity, the most
comparable measure calculated in accordance with GAAP.
Calculation of Return on average shareholders' equity
|
For the twelve
months
ended September 30
|
(in millions of
Canadian dollars, except for percentages)
|
2021
|
2020
|
Net income as
reported
|
$
|
3,122
|
|
$
|
2,306
|
|
Average shareholders'
equity
|
$
|
8,524
|
|
$
|
7,397
|
|
Return on average
shareholders' equity
|
36.6
|
%
|
31.2
|
%
|
Reconciliation of Net income to Adjusted return
|
For the twelve
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
Net income as
reported
|
$
|
3,122
|
$
|
2,306
|
Add:
|
|
|
Net interest
expense
|
427
|
458
|
Tax on
interest(1)
|
(104)
|
(114)
|
Significant items
(pre-tax):
|
|
|
Acquisition-related
costs
|
442
|
—
|
Merger termination
fee
|
(845)
|
—
|
Impact of FX
translation (gain) loss on debt and lease liabilities
|
(142)
|
52
|
Tax on significant
items(2)
|
16
|
(6)
|
Income tax rate
changes
|
(29)
|
—
|
Provision for uncertain
tax item
|
—
|
24
|
Adjusted
return
|
$
|
2,887
|
$
|
2,720
|
(1)
|
Tax was calculated at
the adjusted annualized effective tax rate of 24.34% and 24.67% for
the twelve months ended September 30, 2021 and 2020,
respectively.
|
(2)
|
Tax was calculated as
the pre-tax effect of the adjustments multiplied by the applicable
tax rate for the above items of 2.57% and 11.22% for the twelve
months ended September 30, 2021 and 2020, respectively. The
applicable tax rates reflect the taxable jurisdictions and nature,
being on account of capital or income, of the significant
items.
|
Reconciliation of Average shareholders' equity to Adjusted
average invested capital
|
For the twelve
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
2020
|
Average
shareholders' equity
|
$
|
8,524
|
$
|
7,397
|
Average Long-term
debt, including long-term debt maturing within one year
|
9,877
|
9,385
|
|
$
|
18,401
|
$
|
16,782
|
Less:
|
|
|
Significant items
(pre-tax):
|
|
|
Acquisition-related
costs
|
(221)
|
—
|
Merger termination
fee
|
423
|
—
|
Tax on
significant items(1)
|
—
|
—
|
Income tax rate
changes
|
15
|
—
|
Provision for
uncertain tax item
|
—
|
(12)
|
Adjusted average
invested capital
|
$
|
18,184
|
$
|
16,794
|
(1)
|
Tax was calculated at
the pre-tax effect of the adjustment multiplied by the applicable
tax rate of 0.51% for the twelve months ended September 30, 2021.
The applicable tax rate reflects the taxable jurisdiction and
nature, being on account of capital or income, of the significant
item.
|
Calculation of Adjusted ROIC
|
For the twelve
months
ended September 30
|
(in millions of
Canadian dollars, except for percentages)
|
2021
|
|
2020
|
|
Adjusted
return
|
$
|
2,887
|
|
$
|
2,720
|
|
Adjusted average
invested capital
|
$
|
18,184
|
|
$
|
16,794
|
|
Adjusted
ROIC
|
15.9
|
%
|
16.2
|
%
|
Free Cash
Free cash is calculated as Cash provided by operating
activities, less Cash used in investing activities, adjusted for
changes in cash and cash equivalents balances resulting from FX
fluctuations, the acquisition-related transaction costs paid in
cash, the merger termination payment received and the payment to
KCS related to the pending KCS transaction, and the acquisition of
Central Maine & Québec Railway
("CMQ"). Free cash is a measure that management considers to be a
valuable indicator of liquidity. Free cash is useful to investors
and other external users of the Company's Consolidated Financial
Statements as it assists with the evaluation of the Company's
ability to generate cash to satisfy debt obligations and
discretionary activities such as dividends, share repurchase
programs, and other strategic opportunities. The
acquisition-related transaction costs paid in cash and the merger
termination payment received related to the pending KCS transaction
are not indicative of operating trends and have been excluded from
Free cash. The payment to KCS and the acquisition of CMQ are not
indicative of investment trends and have also been excluded from
Free cash. Free cash should be considered in addition to, rather
than as a substitute for, Cash provided by operating
activities.
Reconciliation of Cash Provided by Operating Activities to Free
Cash
|
For the three
months
ended September 30
|
For the nine
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Cash provided by
operating activities
|
$
|
548
|
|
$
|
493
|
|
$
|
3,084
|
|
$
|
1,817
|
|
Cash used in
investing activities
|
(2,129)
|
|
(483)
|
|
(2,820)
|
|
(1,313)
|
|
Effect of foreign
currency fluctuations on U.S. dollar-denominated cash and cash
equivalents
|
10
|
|
(4)
|
|
6
|
|
12
|
|
Less:
|
|
|
|
|
|
|
|
|
Acquisition-related
costs
|
(1)
|
|
—
|
|
(47)
|
|
—
|
|
Merger termination
fee
|
—
|
|
—
|
|
845
|
|
—
|
|
Payment to Kansas City
Southern
|
(1,773)
|
|
—
|
|
(1,773)
|
|
—
|
|
Investment in Central
Maine and Québec Railway
|
—
|
|
—
|
|
—
|
|
19
|
|
Free
cash
|
$
|
203
|
|
$
|
6
|
|
$
|
1,245
|
|
$
|
497
|
|
Foreign Exchange Adjusted % Change
FX adjusted % change allows certain financial results to be
viewed without the impact of fluctuations in foreign currency
exchange rates, thereby facilitating period-to-period comparisons
in the analysis of trends in business performance. Financial result
variances at constant currency are obtained by translating the
comparable period of the prior year results denominated in U.S.
dollars at the foreign exchange rates of the current period.
FX adjusted % changes in revenues are further used in
calculating FX adjusted % change in freight revenue per carload and
RTM. FX adjusted % changes in revenues are as follows:
|
For the three
months ended September 30
|
(in millions of
Canadian dollars)
|
Reported
2021
|
Reported
2020
|
Variance due to FX
|
FX Adjusted
2020
|
FX Adjusted %
Change
|
Freight revenues by
line of business
|
|
|
|
|
|
Grain
|
$
|
352
|
|
$
|
457
|
|
$
|
(11)
|
|
$
|
446
|
|
(21)
|
|
Coal
|
158
|
|
130
|
|
(1)
|
|
129
|
|
22
|
|
Potash
|
113
|
|
132
|
|
(3)
|
|
129
|
|
(12)
|
|
Fertilizers and
sulphur
|
72
|
|
65
|
|
(3)
|
|
62
|
|
16
|
|
Forest
products
|
89
|
|
85
|
|
(4)
|
|
81
|
|
10
|
|
Energy, chemicals and
plastics
|
392
|
|
321
|
|
(12)
|
|
309
|
|
27
|
|
Metals, minerals and
consumer products
|
196
|
|
152
|
|
(7)
|
|
145
|
|
35
|
|
Automotive
|
83
|
|
94
|
|
(4)
|
|
90
|
|
(8)
|
|
Intermodal
|
441
|
|
385
|
|
(5)
|
|
380
|
|
16
|
|
Freight
revenues
|
1,896
|
|
1,821
|
|
(50)
|
|
1,771
|
|
7
|
|
Non-freight
revenues
|
46
|
|
42
|
|
—
|
|
42
|
|
10
|
|
Total
revenues
|
$
|
1,942
|
|
$
|
1,863
|
|
$
|
(50)
|
|
$
|
1,813
|
|
7
|
|
|
|
|
|
|
For the nine
months ended September 30
|
(in millions of
Canadian dollars)
|
Reported
2021
|
Reported
2020
|
Variance due to FX
|
FX Adjusted
2020
|
FX Adjusted %
Change
|
Freight revenues by
line of business
|
|
|
|
|
|
Grain
|
$
|
1,244
|
|
$
|
1,321
|
|
$
|
(41)
|
|
$
|
1,280
|
|
(3)
|
|
Coal
|
491
|
|
411
|
|
(4)
|
|
407
|
|
21
|
|
Potash
|
348
|
|
390
|
|
(14)
|
|
376
|
|
(7)
|
|
Fertilizers and
sulphur
|
227
|
|
212
|
|
(12)
|
|
200
|
|
14
|
|
Forest
products
|
259
|
|
244
|
|
(15)
|
|
229
|
|
13
|
|
Energy, chemicals and
plastics
|
1,149
|
|
1,153
|
|
(47)
|
|
1,106
|
|
4
|
|
Metals, minerals and
consumer products
|
535
|
|
474
|
|
(27)
|
|
447
|
|
20
|
|
Automotive
|
289
|
|
215
|
|
(12)
|
|
203
|
|
42
|
|
Intermodal
|
1,280
|
|
1,153
|
|
(23)
|
|
1,130
|
|
13
|
|
Freight
revenues
|
5,822
|
|
5,573
|
|
(195)
|
|
5,378
|
|
8
|
|
Non-freight
revenues
|
133
|
|
125
|
|
(1)
|
|
124
|
|
7
|
|
Total
revenues
|
$
|
5,955
|
|
$
|
5,698
|
|
$
|
(196)
|
|
$
|
5,502
|
|
8
|
|
FX adjusted % changes in operating expenses are as follows:
|
For the three
months ended September 30
|
(in millions of
Canadian dollars)
|
Reported
2021
|
Reported
2020
|
Variance due to FX
|
FX Adjusted
2020
|
FX Adjusted %
Change
|
Compensation and
benefits
|
$
|
381
|
|
$
|
382
|
|
$
|
(7)
|
|
$
|
375
|
|
2
|
|
Fuel
|
199
|
|
140
|
|
(6)
|
|
134
|
|
49
|
|
Materials
|
51
|
|
53
|
|
—
|
|
53
|
|
(4)
|
|
Equipment
rents
|
31
|
|
39
|
|
(2)
|
|
37
|
|
(16)
|
|
Depreciation and
amortization
|
203
|
|
195
|
|
(3)
|
|
192
|
|
6
|
|
Purchased services
and other
|
303
|
|
275
|
|
(6)
|
|
269
|
|
13
|
|
Total operating
expenses
|
$
|
1,168
|
|
$
|
1,084
|
|
$
|
(24)
|
|
$
|
1,060
|
|
10
|
|
|
For the nine
months ended September 30
|
(in millions of
Canadian dollars)
|
Reported
2021
|
Reported
2020
|
Variance
due to FX
|
FX Adjusted
2020
|
FX Adjusted %
Change
|
Compensation and
benefits
|
$
|
1,165
|
|
$
|
1,127
|
|
$
|
(24)
|
|
$
|
1,103
|
|
6
|
|
Fuel
|
623
|
|
483
|
|
(25)
|
|
458
|
|
36
|
|
Materials
|
164
|
|
162
|
|
(3)
|
|
159
|
|
3
|
|
Equipment
rents
|
92
|
|
108
|
|
(7)
|
|
101
|
|
(9)
|
|
Depreciation and
amortization
|
605
|
|
582
|
|
(12)
|
|
570
|
|
6
|
|
Purchased services
and other
|
932
|
|
853
|
|
(27)
|
|
826
|
|
13
|
|
Total operating
expenses
|
$
|
3,581
|
|
$
|
3,315
|
|
$
|
(98)
|
|
$
|
3,217
|
|
11
|
|
FX adjusted % change in operating income is as follows:
|
For the three
months ended September 30
|
(in millions of
Canadian dollars)
|
Reported
2021
|
Reported
2020
|
Variance due to FX
|
FX Adjusted
2020
|
FX Adjusted %
Change
|
Operating
income
|
$
|
774
|
|
$
|
779
|
|
$
|
(26)
|
|
$
|
753
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
months ended September 30
|
(in millions of
Canadian dollars)
|
Reported
2021
|
Reported
2020
|
Variance due to FX
|
FX Adjusted
2020
|
FX Adjusted %
Change
|
Operating
income
|
$
|
2,374
|
|
$
|
2,383
|
|
$
|
(98)
|
|
$
|
2,285
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Debt to Adjusted EBITDA Ratio
Adjusted net debt to Adjusted earnings before interest, tax,
depreciation and amortization ("EBITDA") ratio is calculated as
Adjusted net debt divided by Adjusted EBITDA. The Adjusted net debt
to Adjusted EBITDA ratio is a key credit measure used to assess the
Company's financial capacity. The ratio provides information on the
Company's ability to service its debt and other long-term
obligations. The Adjusted net debt to Adjusted EBITDA ratio is
reconciled below from the Long-term debt to Net income ratio, the
most comparable measure calculated in accordance with GAAP.
Calculation of Long-term Debt to Net Income Ratio
(in millions of
Canadian dollars, except for ratios)
|
2021
|
|
2020
|
|
Long-term debt
including long-term debt maturing within one year as at September
30
|
$
|
9,968
|
|
$
|
9,786
|
|
Net income for the
twelve months ended September 30
|
$
|
3,122
|
|
$
|
2,306
|
|
Long-term debt to
Net income ratio
|
3.2
|
|
4.2
|
|
Reconciliation of Long-term Debt to Adjusted Net Debt
Adjusted net debt is defined as Long-term debt, Long-term debt
maturing within one year, and Short-term borrowing as reported on
the Company's Consolidated Balance Sheets adjusted for pension
plans deficit, operating lease liabilities recognized on the
Company's Consolidated Balance Sheets, and Cash and cash
equivalents.
(in millions of
Canadian dollars)
|
2021
|
|
2020
|
|
Long-term debt
including long-term debt maturing within one year as at September
30
|
$
|
9,968
|
|
$
|
9,786
|
|
Add:
|
|
|
Pension plans
deficit(1)
|
323
|
|
287
|
|
Operating lease
liabilities
|
274
|
|
325
|
|
Less:
|
|
|
Cash and cash
equivalents
|
210
|
|
183
|
|
Adjusted net debt
as at September 30
|
$
|
10,355
|
|
$
|
10,215
|
|
(1)
|
Pension plans
deficit is the total funded status of the Pension plans in deficit
only.
|
Reconciliation of Net Income to EBIT, Adjusted EBIT and Adjusted
EBITDA
Earnings before interest and tax ("EBIT") is calculated as Net
income before Net interest expense and Income tax expense. Adjusted
EBIT excludes significant items reported in both Operating income
and Other expense (income). Adjusted EBITDA is calculated as
Adjusted EBIT plus operating lease expense and Depreciation and
amortization, less Other components of net periodic benefit
recovery.
|
For the twelve
months
ended September 30
|
(in millions of
Canadian dollars)
|
2021
|
|
2020
|
|
Net income as
reported
|
$
|
3,122
|
|
$
|
2,306
|
|
Add:
|
|
|
Net interest
expense
|
427
|
|
458
|
|
Income tax
expense
|
812
|
|
795
|
|
EBIT
|
4,361
|
|
3,559
|
|
Less significant
items (pre-tax):
|
|
|
Acquisition-related
costs
|
(442)
|
|
—
|
|
Merger termination
fee
|
845
|
|
—
|
|
Impact of FX
translation gain (loss) on debt and lease liabilities
|
142
|
|
(52)
|
|
Adjusted
EBIT
|
3,816
|
|
3,611
|
|
Add:
|
|
|
Operating lease
expense
|
71
|
|
79
|
|
Depreciation and
amortization
|
802
|
|
760
|
|
Less:
|
|
|
Other components of
net periodic benefit recovery
|
371
|
|
344
|
|
Adjusted
EBITDA
|
$
|
4,318
|
|
$
|
4,106
|
|
Calculation of Adjusted Net Debt to Adjusted EBITDA Ratio
(in millions of
Canadian dollars, except for ratios)
|
2021
|
2020
|
Adjusted net debt as
at September 30
|
$
|
10,355
|
|
$
|
10,215
|
|
Adjusted EBITDA for
the twelve months ended September 30
|
$
|
4,318
|
|
$
|
4,106
|
|
Adjusted net debt
to Adjusted EBITDA ratio
|
2.4
|
|
2.5
|
|
View original
content:https://www.prnewswire.com/news-releases/cp-reports-third-quarter-revenue-growth-of-4-percent-maintains-full-year-adjusted-diluted-eps-guidance-301404450.html
SOURCE Canadian Pacific