CP reports solid third-quarter results; well-positioned for strong finish to 2022
Canadian Pacific Railway reported third-quarter 2022 earnings with revenues of $2.31 billion, a 19% increase from last year. The company achieved a reported operating ratio of 59.5% and a diluted EPS of $0.96, reflecting a 37% rise year-over-year. Core adjusted diluted EPS rose 15% to $1.01. Significant improvements in safety metrics were noted, with a 76% decline in train accidents. CP is progressing towards creating a single-line rail network with Kansas City Southern, pending regulatory approval, enhancing market access across North America.
- Revenues increased by 19% to $2.31 billion.
- Reported operating ratio improved to 59.5%.
- Diluted EPS rose by 37% year-over-year to $0.96.
- Core adjusted diluted EPS increased 15% to $1.01.
- Train accident frequency decreased 76% to a record-low 0.37.
- None.
CALGARY, AB, Oct. 26, 2022 /PRNewswire/ - Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) today announced its third-quarter 2022 results, including revenues of
"Throughout the year, we have said 2022 would be a tale of two halves and that is exactly how it is unfolding," said Keith Creel, CP President and Chief Executive Officer. "The third quarter saw strong demand in potash and intermodal that we anticipated, and CP was well-resourced to handle the volume increases we have seen. I'm proud of the results the team delivered this quarter and excited about the opportunities in front of us."
Third-quarter highlights
- Revenues increased by 19 percent to
$2.31 billion from$1.94 billion last year - Reported OR improved by 70 basis points to 59.5 percent from 60.2 percent last year
- Adjusted OR1 improved by 70 basis points to 58.7 percent from 59.4 percent last year
- Reported diluted EPS was
$0.96 , a 37 percent increase from last year - Core adjusted diluted EPS1, excluding significant items and Kansas City Southern ("KCS") purchase accounting, was
$1.01 , a 15 percent increase from last year - Federal Railroad Administration ("FRA") - reportable train accident frequency decreased 76 percent to a record-low 0.37 from 1.54 in Q3 2021. FRA-reportable personal injury frequency declined 12 percent to 0.86 from 0.982 in Q3 2021.
"CP's unique growth initiatives coupled with a robust Canadian grain harvest provide a strong volume backdrop as we finish the year," said Creel. "We are well-positioned to carry the momentum we gained in the third quarter through the rest of the year and beyond."
CP is continuing to progress towards creating the first single-line rail network linking the U.S., Mexico and Canada by combining with KCS, subject to U.S. Surface Transportation Board approval.
"We've successfully demonstrated how our proposed combination with KCS will connect customers to new markets, enhance competition in the U.S. rail network, take trucks off the roads and drive economic growth across North America," Creel said. "Our excitement grows each day we progress toward this transformative combination."
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. For information regarding non-GAAP measures, including reconciliations to the most comparable GAAP measures, see the attached supplementary schedule Non-GAAP Measures. |
2 | FRA personal injuries per 200,000 employee-hours for the three months ended September 30, 2021 was previously reported as 0.97, restated to 0.98 in this Earnings Release. |
Conference Call Details
CP will discuss its results with the financial community in a conference call beginning at 4:30 p.m. ET (2:30 p.m. MT) on Oct. 26, 2022.
Conference Call Access
Canada and U.S.: 866-831-8713
International: 203-518-9822
*Conference ID: CPQ322
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 Nov. 2, 2022 at 800-839-2456 (Canada/U.S.) or 402-220-7216 (International).
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, the success of our business, changes to economic and industry conditions, the status of the CP-KCS transaction, including related regulatory approvals, and the opportunities arising there from, 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 and conditions; commodity demand growth; sustainable industrial and agricultural production; commodity prices and interest rates; 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; carbon markets, evolving sustainability strategies, and scientific or technological developments; and the 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 and conditions; 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, 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 realization of anticipated benefits and synergies of the CP-KCS transaction and the timing thereof; the success of integration plans for KCS; the focus of management time and attention on the CP-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; improvement in data collection and measuring systems; industry-driven changes to methodologies; and the ability of the management of the Company to execute key priorities, including those in connection with the CP-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 "Item 1A - Risk Factors" and "Item 7 - 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 | For the nine months | |||
(in millions of Canadian dollars, except share and per share data) | 2022 | 2021 | 2022 | 2021 |
Revenues (Note 3) | ||||
Freight | $ 2,264 | $ 1,896 | $ 6,214 | $ 5,822 |
Non-freight | 48 | 46 | 138 | 133 |
Total revenues | 2,312 | 1,942 | 6,352 | 5,955 |
Operating expenses | ||||
Compensation and benefits | 393 | 381 | 1,154 | 1,165 |
Fuel | 358 | 199 | 1,001 | 623 |
Materials | 66 | 51 | 191 | 164 |
Equipment rents | 33 | 31 | 97 | 92 |
Depreciation and amortization | 213 | 203 | 634 | 605 |
Purchased services and other (Note 10) | 312 | 303 | 935 | 932 |
Total operating expenses | 1,375 | 1,168 | 4,012 | 3,581 |
Operating income | 937 | 774 | 2,340 | 2,374 |
Less: | ||||
Equity earnings of Kansas City Southern (Note 10) | (221) | — | (627) | — |
Other expense (Note 4, 10) | 7 | 124 | 13 | 253 |
Merger termination fee (Note 10) | — | — | — | (845) |
Other components of net periodic benefit recovery (Note 15) | (102) | (95) | (304) | (286) |
Net interest expense | 166 | 104 | 486 | 315 |
Income before income tax expense | 1,087 | 641 | 2,772 | 2,937 |
Income tax expense (Note 5) | 196 | 169 | 526 | 617 |
Net income | $ 891 | $ 472 | $ 2,246 | $ 2,320 |
Earnings per share (Note 6) | ||||
Basic earnings per share | $ 0.96 | $ 0.71 | $ 2.42 | $ 3.48 |
Diluted earnings per share | $ 0.96 | $ 0.70 | $ 2.41 | $ 3.46 |
Weighted-average number of shares (millions) (Note 6) | ||||
Basic | 930.0 | 666.9 | 929.9 | 666.7 |
Diluted | 932.9 | 669.8 | 932.8 | 669.8 |
Dividends declared per share | $ 0.190 | $ 0.190 | $ 0.570 | $ 0.570 |
See Notes to Interim Consolidated Financial Statements. |
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Net income | $ 891 | $ 472 | $ 2,246 | $ 2,320 |
Net gain (loss) in foreign currency translation adjustments, net of hedging | 1,565 | (17) | 1,948 | 3 |
Change in derivatives designated as cash flow hedges | 2 | 141 | 5 | 69 |
Change in pension and post-retirement defined benefit plans | 22 | 53 | 99 | 158 |
Equity accounted investments | 47 | — | 182 | — |
Other comprehensive income before income taxes | 1,636 | 177 | 2,234 | 230 |
Income tax recovery (expense) on above items | 36 | (29) | 2 | (59) |
Other comprehensive income (Note 7) | 1,672 | 148 | 2,236 | 171 |
Comprehensive income | $ 2,563 | $ 620 | $ 4,482 | $ 2,491 |
See Notes to Interim Consolidated Financial Statements. |
INTERIM CONSOLIDATED BALANCE SHEETS AS AT
(unaudited)
September 30 | December 31 | |
(in millions of Canadian dollars) | 2022 | 2021 |
Assets | ||
Current assets | ||
Cash and cash equivalents | $ 138 | $ 69 |
Restricted cash and cash equivalents | — | 13 |
Accounts receivable, net (Note 8) | 1,053 | 819 |
Materials and supplies | 267 | 235 |
Other current assets | 186 | 216 |
1,644 | 1,352 | |
Investment in Kansas City Southern (Note 11) | 45,964 | 42,309 |
Investments | 230 | 209 |
Properties | 22,150 | 21,200 |
Goodwill and intangible assets | 390 | 371 |
Pension asset | 2,631 | 2,317 |
Other assets | 426 | 419 |
Total assets | $ 73,435 | $ 68,177 |
Liabilities and shareholders' equity | ||
Current liabilities | ||
Accounts payable and accrued liabilities | $ 1,575 | $ 1,609 |
Long-term debt maturing within one year (Note 12, 13) | 1,236 | 1,550 |
2,811 | 3,159 | |
Pension and other benefit liabilities | 726 | 718 |
Other long-term liabilities | 519 | 542 |
Long-term debt (Note 12, 13) | 19,339 | 18,577 |
Deferred income taxes | 12,226 | 11,352 |
Total liabilities | 35,621 | 34,348 |
Shareholders' equity | ||
Share capital | 25,498 | 25,475 |
Additional paid-in capital | 77 | 66 |
Accumulated other comprehensive income (loss) (Note 7) | 133 | (2,103) |
Retained earnings | 12,106 | 10,391 |
37,814 | 33,829 | |
Total liabilities and shareholders' equity | $ 73,435 | $ 68,177 |
See Contingencies (Note 17). | ||
See Notes to Interim Consolidated Financial Statements. |
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Operating activities | ||||
Net income | $ 891 | $ 472 | $ 2,246 | $ 2,320 |
Reconciliation of net income to cash provided by operating activities: | ||||
Depreciation and amortization | 213 | 203 | 634 | 605 |
Deferred income tax expense (Note 5) | 38 | 130 | 151 | 190 |
Pension recovery and funding (Note 15) | (74) | (62) | (218) | (188) |
Equity earnings of Kansas City Southern (Note 10) | (221) | — | (627) | — |
Foreign exchange loss (gain) on debt and lease liabilities (Note 4) | — | 46 | — | (39) |
Dividend from Kansas City Southern (Note 10) | 259 | — | 593 | — |
Other operating activities, net | (3) | (14) | (102) | (50) |
Change in non-cash working capital balances related to operations | (1) | (227) | (255) | 246 |
Cash provided by operating activities | 1,102 | 548 | 2,422 | 3,084 |
Investing activities | ||||
Additions to properties | (422) | (372) | (1,018) | (1,111) |
Payment to Kansas City Southern (Note 10) | — | (1,773) | — | (1,773) |
Proceeds from sale of properties and other assets | 11 | 16 | 37 | 65 |
Other | 1 | — | 3 | (1) |
Cash used in investing activities | (410) | (2,129) | (978) | (2,820) |
Financing activities | ||||
Dividends paid | (177) | (127) | (530) | (380) |
Issuance of CP Common Shares | 9 | 4 | 18 | 20 |
Repayment of long-term debt, excluding commercial paper (Note 12) | (7) | (318) | (559) | (349) |
Repayment of term loan (Note 12) | (504) | — | (636) | — |
Proceeds from term loan | — | 633 | — | 633 |
Net (repayment) issuance of commercial paper (Note 12) | (42) | 713 | 298 | (66) |
Acquisition-related financing fees (Note 10) | — | — | — | (45) |
Other | — | (3) | — | (7) |
Cash (used in) provided by financing activities | (721) | 902 | (1,409) | (194) |
Effect of foreign currency fluctuations on U.S. dollar-denominated | 13 | 10 | 21 | 6 |
Cash position | ||||
(Decrease) increase in cash, cash equivalents, and restricted cash | (16) | (669) | 56 | 76 |
Cash, cash equivalents, and restricted cash at beginning of period | 154 | 892 | 82 | 147 |
Cash, cash equivalents, and restricted cash at end of period | $ 138 | $ 223 | $ 138 | $ 223 |
Supplemental disclosures of cash flow information: | ||||
Income taxes paid | $ 67 | $ 129 | $ 319 | $ 401 |
Interest paid | $ 148 | $ 153 | $ 467 | $ 365 |
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 | Share capital | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total shareholders' equity | ||
Balance as at July 1, 2022 | 930.0 | $ 25,488 | $ 73 | $ (1,539) | $ 11,392 | $ 35,414 | ||
Net income | — | — | — | — | 891 | 891 | ||
Other comprehensive income (Note 7) | — | — | — | 1,672 | — | 1,672 | ||
Dividends declared ( | — | — | — | — | (177) | (177) | ||
Effect of stock-based compensation expense | — | — | 5 | — | — | 5 | ||
Shares issued under stock option plan | 0.1 | 10 | (1) | — | — | 9 | ||
Balance as at September 30, 2022 | 930.1 | $ 25,498 | $ 77 | $ 133 | $ 12,106 | $ 37,814 | ||
Balance as at July 1, 2021 | 666.8 | $ 63 | $ (2,791) | $ 9,690 | $ 8,965 | |||
Net income | — | — | — | — | 472 | 472 | ||
Other comprehensive income (Note 7) | — | — | — | 148 | — | 148 | ||
Dividends declared ( | — | — | — | — | (127) | (127) | ||
Effect of stock-based compensation expense | — | — | 6 | — | — | 6 | ||
Shares issued under stock option plan | 0.1 | 5 | (1) | — | — | 4 | ||
Balance as at September 30, 2021 | 666.9 | $ 68 | $ (2,643) | $ 10,035 | $ 9,468 | |||
For the nine months ended September 30 | ||||||||
(in millions of Canadian dollars except per share data) | Common | Share capital | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total shareholders' equity | ||
Balance as at January 1, 2022 | 929.7 | $ 25,475 | $ 66 | $ (2,103) | $ 10,391 | $ 33,829 | ||
Net income | — | — | — | — | 2,246 | 2,246 | ||
Other comprehensive income (Note 7) | — | — | — | 2,236 | — | 2,236 | ||
Dividends declared ( | — | — | — | — | (531) | (531) | ||
Effect of stock-based compensation expense | — | — | 17 | — | — | 17 | ||
Shares issued for Kansas City Southern acquisition | — | — | (2) | — | — | (2) | ||
Shares issued under stock option plan | 0.4 | 23 | (4) | — | — | 19 | ||
Balance as at September 30, 2022 | 930.1 | $ 25,498 | $ 77 | $ 133 | $ 12,106 | $ 37,814 | ||
Balance as at January 1, 2021 | 666.3 | $ 55 | $ (2,814) | $ 8,095 | $ 7,319 | |||
Net income | — | — | — | — | 2,320 | 2,320 | ||
Other comprehensive income (Note 7) | — | — | — | 171 | — | 171 | ||
Dividends declared ( | — | — | — | — | (380) | (380) | ||
Effect of stock-based compensation expense | — | — | 18 | — | — | 18 | ||
Shares issued under stock option plan | 0.6 | 25 | (5) | — | — | 20 | ||
Balance as at September 30, 2021 | 666.9 | $ 68 | $ (2,643) | $ 10,035 | $ 9,468 | |||
See Notes to Interim Consolidated Financial Statements. |
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(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 2021 annual Consolidated Financial Statements and notes included in CP's 2021 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 2021 annual Consolidated Financial Statements.
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
Implemented in 2022
Government Assistance
On January 1, 2022, the Company adopted the new Accounting Standards Update ("ASU") 2021-10, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 832, Government Assistance. The amendment is made to increase transparency by introducing specific disclosure requirements for entities who apply a grant or contribution model by analogy to account for transactions with a government. This update is applied to government assistance transactions within the scope of this amendment that are in the financial statements at the date of initial application and prospectively to new transactions entered into after initial application. See Note 9 for further discussion on government assistance.
All other 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 Consolidated Financial Statements and related disclosures.
Future changes
Contract Assets and Contract Liabilities Acquired in a Business Combination
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This amendment introduces the requirement for an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the requirements of FASB ASC Topic 606, Revenue from Contracts with Customers, rather than at fair value. This amendment will be effective prospectively from January 1, 2023, with early adoption permitted. The Company is currently assessing the impact of this amendment.
All other accounting pronouncements recently issued, but not effective until after September 30, 2022, have been assessed and are not expected to have a material impact on the Company's Consolidated Financial Statements and related disclosures.
3 Revenues
The following table disaggregates the Company's revenues from contracts with customers by major source:
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Freight | ||||
Grain | $ 391 | $ 352 | $ 1,121 | $ 1,244 |
Coal | 156 | 158 | 458 | 491 |
Potash | 170 | 113 | 445 | 348 |
Fertilizers and sulphur | 81 | 72 | 244 | 227 |
Forest products | 109 | 89 | 299 | 259 |
Energy, chemicals and plastics | 360 | 392 | 1,010 | 1,149 |
Metals, minerals and consumer products | 246 | 196 | 655 | 535 |
Automotive | 111 | 83 | 322 | 289 |
Intermodal | 640 | 441 | 1,660 | 1,280 |
Total freight revenues | 2,264 | 1,896 | 6,214 | 5,822 |
Non-freight excluding leasing revenues | 28 | 25 | 77 | 75 |
Revenues from contracts with customers | 2,292 | 1,921 | 6,291 | 5,897 |
Leasing revenues | 20 | 21 | 61 | 58 |
Total revenues | $ 2,312 | $ 1,942 | $ 6,352 | $ 5,955 |
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 | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Opening balance | $ 69 | $ 245 | $ 67 | $ 61 |
Revenue recognized that was included in the contract liability balance | (8) | (93) | (16) | (36) |
Increase due to consideration received, net of revenue recognized | 4 | 4 | 14 | 131 |
Closing balance | $ 65 | $ 156 | $ 65 | $ 156 |
4 Other expense
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Foreign exchange loss (gain) on debt and lease liabilities | $ — | $ 46 | $ — | $ (39) |
Other foreign exchange losses (gains) | 2 | (7) | 1 | (9) |
Acquisition-related costs (Note 10) | — | 83 | — | 295 |
Other | 5 | 2 | 12 | 6 |
Other expense | $ 7 | $ 124 | $ 13 | $ 253 |
5 Income taxes
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Current income tax expense | $ 158 | $ 39 | $ 375 | $ 427 |
Deferred income tax expense | 38 | 130 | 151 | 190 |
Income tax expense | $ 196 | $ 169 | $ 526 | $ 617 |
During the three months ended September 30, 2022, legislation was enacted to decrease the Iowa state corporate income tax rate. As a result of this change, the Company recorded a deferred tax recovery of
The effective tax rates including discrete items for the three and nine months ended September 30, 2022 were
For the three months ended September 30, 2022, the effective tax rate was
For the three months ended September 30, 2021, the effective tax rate was
For the nine months ended September 30, 2022, the effective tax rate was
For the nine months ended September 30, 2021, the effective tax rate was
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 | For the nine months | |||
(in millions) | 2022 | 2021 | 2022 | 2021 |
Weighted-average basic shares outstanding | 930.0 | 666.9 | 929.9 | 666.7 |
Dilutive effect of stock options | 2.9 | 2.9 | 2.9 | 3.1 |
Weighted-average diluted shares outstanding | 932.9 | 669.8 | 932.8 | 669.8 |
For the three and nine months ended September 30, 2022, there were nil and 0.3 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, 2021 - 0.2 million and 0.1 million, respectively).
7 Changes in Accumulated other comprehensive income (loss) ("AOCI") by component
For the three months ended September 30 | |||||
(in millions of Canadian dollars) | Foreign currency | Derivatives(1)(2) | Pension and post- | Equity investments(1)(2) | Total(1) |
Opening balance, July 1, 2022 | $ 217 | $ (2) | $ (1,856) | $ 102 | $ (1,539) |
Other comprehensive income | 1,618 | — | (14) | 37 | 1,641 |
Amounts reclassified from | — | 1 | 30 | — | 31 |
Net other comprehensive income | 1,618 | 1 | 16 | 37 | 1,672 |
Closing balance, September 30, 2022 | $ 1,835 | $ (1) | $ (1,840) | $ 139 | $ 133 |
Opening balance, July 1, 2021 | $ 110 | $ (91) | $ (2,800) | $ (10) | $ (2,791) |
Other comprehensive income | 6 | 101 | — | — | 107 |
Amounts reclassified from | — | 2 | 39 | — | 41 |
Net other comprehensive income | 6 | 103 | 39 | — | 148 |
Closing balance, September 30, 2021 | $ 116 | $ 12 | $ (2,761) | $ (10) | $ (2,643) |
(1) Amounts are presented net of tax. |
(2) Comparative figures have been reclassified to conform with current period presentation. |
For the nine months ended September 30 | |||||
(in millions of Canadian dollars) | Foreign currency | Derivatives(1)(2) | Pension and post- | Equity | Total(1) |
Opening balance, | $ (182) | $ (4) | $ (1,915) | $ (2) | $ (2,103) |
Other comprehensive income | 2,017 | — | (14) | 140 | 2,143 |
Amounts reclassified from | — | 3 | 89 | 1 | 93 |
Net other comprehensive income | 2,017 | 3 | 75 | 141 | 2,236 |
Closing balance, | $ 1,835 | $ (1) | $ (1,840) | $ 139 | $ 133 |
Opening balance, January 1, 2021 | $ 112 | $ (40) | $ (2,878) | $ (8) | $ (2,814) |
Other comprehensive income | 4 | 46 | — | (2) | 48 |
Amounts reclassified from | — | 6 | 117 | — | 123 |
Net other comprehensive income (loss) | 4 | 52 | 117 | (2) | 171 |
Closing balance, | $ 116 | $ 12 | $ (2,761) | $ (10) | $ (2,643) |
(1) Amounts are presented net of tax. |
(2) Comparative figures have been reclassified to conform with current period presentation. |
Amounts in Pension and post-retirement defined benefit plans reclassified from AOCI are as follows:
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Recognition of net actuarial loss(1) | $ 39 | $ 53 | $ 116 | $ 158 |
Income tax recovery | (9) | (14) | (27) | (41) |
Total net of income tax | $ 30 | $ 39 | $ 89 | $ 117 |
(1) Impacts "Other components of net periodic benefit recovery" on the Interim Consolidated Statements of Income. |
8 Accounts receivable, net
As at September 30, 2022 | As at December 31, 2021 | |||||
(in millions of Canadian dollars) | Freight | Non-freight | Total | Freight | Non-freight | Total |
Total accounts receivable | $ 835 | $ 257 | $ 1,092 | $ 614 | $ 239 | $ 853 |
Allowance for credit losses | (26) | (13) | (39) | (20) | (14) | (34) |
Total accounts receivable, net | $ 809 | $ 244 | $ 1,053 | $ 594 | $ 225 | $ 819 |
For the three months ended | For the three months ended | |||||
(in millions of Canadian dollars) | Freight | Non-freight | Total | Freight | Non-freight | Total |
Allowance for credit losses, opening balance | $ (24) | $ (15) | $ (39) | $ (23) | $ (15) | $ (38) |
Current period credit loss provision, net | (2) | 2 | — | 1 | (1) | — |
Allowance for credit losses, closing balance | $ (26) | $ (13) | $ (39) | $ (22) | $ (16) | $ (38) |
For the nine months ended | For the nine months ended | |||||
(in millions of Canadian dollars) | Freight | Non-freight | Total | Freight | Non-freight | Total |
Allowance for credit losses, opening balance | $ (20) | $ (14) | $ (34) | $ (25) | $ (15) | $ (40) |
Current period credit loss provision, net | (6) | 1 | (5) | 3 | (1) | 2 |
Allowance for credit losses, closing balance | $ (26) | $ (13) | $ (39) | $ (22) | $ (16) | $ (38) |
9 Government assistance
By analogy to the grant model of accounting within International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance, CP records government assistance from various levels of Canadian and U.S. governments and government agencies when the conditions of their receipt are complied with and there is reasonable assurance that the assistance will be received.
Government assistance related to properties has as a primary condition that CP should purchase, construct, or otherwise acquire property, plant and equipment. Under certain government assistance arrangements, there is a secondary condition that requires CP to repay a portion of the assistance if certain conditions related to the assets are not adhered to during a specified period. In these cases, it is CP's intention to comply with all conditions imposed by the terms of the government assistance. Government assistance received or receivable related to CP's property assets is deducted from the cost of the assets in the Interim Consolidated Balance Sheets within "Properties" and amortized over the same period as the related assets in "Depreciation and amortization" in the Interim Consolidated Statements of Income.
During the three and nine months ended September 30, 2022, the Company received
As of September 30, 2022, the total Properties balance of
10 Business acquisition
Kansas City Southern
The Company accounts for its investment in KCS using the equity method of accounting while the U.S. Surface Transportation Board ("STB") considers the Company's application to control KCS. The STB review of CP's proposed control of KCS while KCS is in the voting trust is expected to be completed in the first quarter of 2023. The investment in KCS of
During the three and nine months ended September 30, 2022, the Company incurred
During the three and nine months ended September 30, 2021, the Company incurred
On May 21, 2021, KCS terminated the Original Merger Agreement entered into on March 21, 2021 with CP to enter into a definitive agreement with Canadian National Railway ("CN"). At the same time and in accordance with the terms of the Original Merger Agreement, KCS paid CP a termination fee of
In connection with the Merger Agreement, the Company remitted
11 Investment in KCS
The KCS investment carrying cost of
The following table presents summarized financial information for KCS, on its historical cost basis:
Statement of Income
(in millions of Canadian dollars)(1) | For the three months ended | For the nine months ended |
Total revenues | $ 1,152 | $ 3,216 |
Total operating expenses | 728 | 2,024 |
Operating income | 424 | 1,192 |
Less: Other(2) | 67 | 164 |
Income before income taxes | 357 | 1,028 |
Net income | $ 263 | $ 748 |
(1) Amounts translated at the average FX rate for the three and nine months ended September 30, 2022 of |
(2) Includes Equity in net earnings of KCS's affiliates, Interest expense, FX loss, and Other income, net. |
12 Debt
During the nine months ended September 30, 2022, the Company repaid at maturity
Credit facility
Effective March 14, 2022, the Company extended the maturity date of the U.S.
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.
13 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.
The Company's short-term financial instruments may 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 approximate their fair values.
The carrying value of the Company's long-term 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 long-term debt and finance lease liabilities, including current maturities, with a carrying value of
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, 2022 was an unrealized FX loss of
14 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. Upon expiry of this NCIB, the Company had not purchased any Common Shares under this NCIB.
15 Pension and other benefits
In the three and nine months ended September 30, 2022, the Company made contributions to its defined benefit pension plans of
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) | 2022 | 2021 | 2022 | 2021 |
Current service cost (benefits earned by employees) | $ 37 | $ 42 | $ 3 | $ 4 |
Other components of net periodic benefit (recovery) cost: | ||||
Interest cost on benefit obligation | 95 | 88 | 4 | 4 |
Expected return on fund assets | (240) | (240) | — | — |
Recognized net actuarial loss | 39 | 52 | — | 1 |
Total other components of net periodic benefit (recovery) cost | (106) | (100) | 4 | 5 |
Net periodic benefit (recovery) cost | $ (69) | $ (58) | $ 7 | $ 9 |
For the nine months ended September 30 | ||||
Pensions | Other benefits | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Current service cost (benefits earned by employees) | $ 111 | $ 128 | $ 8 | $ 10 |
Other components of net periodic benefit (recovery) cost: | ||||
Interest cost on benefit obligation | 287 | 264 | 12 | 12 |
Expected return on fund assets | (719) | (720) | — | — |
Recognized net actuarial loss | 115 | 155 | 1 | 3 |
Total other components of net periodic benefit (recovery) cost | (317) | (301) | 13 | 15 |
Net periodic benefit (recovery) cost | $ (206) | $ (173) | $ 21 | $ 25 |
16 Stock-based compensation
As at September 30, 2022, 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, 2022 of
Stock option plans
In the nine months ended September 30, 2022, under CP's stock option plans, the Company issued 836,379 options at the weighted-average price of
Under the fair value method, the fair value of the stock options at grant date was approximately
For the nine months | |
Expected option life (years)(1) | 4.75 |
Risk-free interest rate(2) | 1.61 % |
Expected share price volatility(3) | 26.84 % |
Expected annual dividends per share(4) | |
Expected forfeiture rate(5) | 3.00 % |
Weighted-average grant date fair value per option granted during the period |
(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 option life. |
(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, 2022, the Company issued 414,375 Performance Share Units ("PSUs") with a grant date fair value of approximately
The performance period for PSUs and PDSUs issued in the nine months ended September 30, 2022 is January 1, 2022 to December 31, 2024 and the performance factors are Free Cash Flow ("FCF"), Adjusted Net Debt to Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") Modifier, Total Shareholder Return ("TSR") compared to the S&P/TSX 60 Index, and TSR compared to S&P 500 Industrials Index.
The performance period for PSUs issued in 2019 was January 1, 2019 to December 31, 2021. The performance factors for 668,405 PSUs were Return on Invested Capital ("ROIC"), TSR compared to the S&P/TSX 60 Index, and TSR compared to Class I Railways. The resulting payout was
Deferred share unit plan
During the nine months ended September 30, 2022, the Company granted 53,834 Deferred Share Units ("DSUs") with a grant date fair value of approximately
17 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, 2022 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. However, an unexpected adverse resolution of one or more of these legal actions could have a material adverse effect on the Company's business, financial position, results of operations, or liquidity in a particular quarter or fiscal year.
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
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
(2) The AGQ sued CP in the Québec Superior Court claiming
(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. On November 28, 2019, the plaintiffs' motion to discontinue their action against Harding was granted. 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
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 with oral arguments ending on June 15, 2022. A decision is expected by December 15, 2022. A damages trial will follow 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
(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.
(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 United States First Circuit Court of Appeals, which dismissed the plaintiffs' appeal on June 2, 2021. The plaintiffs further petitioned the United States First Circuit Court of Appeals for a rehearing, which was denied on September 8, 2021. On January 24, 2022, the plaintiffs further appealed to the U.S. Supreme Court on two bankruptcy procedural grounds. On May 31, 2022, the U.S. Supreme Court denied the petition, thereby rejecting the plaintiffs' appeal.
(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.
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.
Court decision related to Remington Development Corporation legal claim
On October 20, 2022, the Court of King's Bench of Alberta issued a decision in a claim brought by Remington Development Corporation ("Remington") against the Company and the Province of Alberta ("Alberta") with respect to an alleged breach of contract by the Company in relation to the sale of certain properties in Calgary. In its decision, the Court found the Company had breached its contract with Remington and Alberta had induced the contract breach. The Court found the Company and Alberta liable for damages of approximately
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, 2022 was
Summary of Rail Data
Third Quarter | Year-to-date | ||||||||
Financial (millions, except per share data) | 2022 | 2021 | Total | % | 2022 | 2021 | Total | % | |
Revenues | |||||||||
Freight | $ 2,264 | $ 1,896 | $ 368 | 19 | $ 6,214 | $ 5,822 | $ 392 | 7 | |
Non-freight | 48 | 46 | 2 | 4 | 138 | 133 | 5 | 4 | |
Total revenues | 2,312 | 1,942 | 370 | 19 | 6,352 | 5,955 | 397 | 7 | |
Operating expenses | |||||||||
Compensation and benefits | 393 | 381 | 12 | 3 | 1,154 | 1,165 | (11) | (1) | |
Fuel | 358 | 199 | 159 | 80 | 1,001 | 623 | 378 | 61 | |
Materials | 66 | 51 | 15 | 29 | 191 | 164 | 27 | 16 | |
Equipment rents | 33 | 31 | 2 | 6 | 97 | 92 | 5 | 5 | |
Depreciation and amortization | 213 | 203 | 10 | 5 | 634 | 605 | 29 | 5 | |
Purchased services and other | 312 | 303 | 9 | 3 | 935 | 932 | 3 | — | |
Total operating expenses | 1,375 | 1,168 | 207 | 18 | 4,012 | 3,581 | 431 | 12 | |
Operating income | 937 | 774 | 163 | 21 | 2,340 | 2,374 | (34) | (1) | |
Less: | |||||||||
Equity earnings of Kansas City Southern | (221) | — | (221) | 100 | (627) | — | (627) | 100 | |
Other expense | 7 | 124 | (117) | (94) | 13 | 253 | (240) | (95) | |
Merger termination fee | — | — | — | — | — | (845) | 845 | (100) | |
Other components of net periodic benefit recovery | (102) | (95) | (7) | 7 | (304) | (286) | (18) | 6 | |
Net interest expense | 166 | 104 | 62 | 60 | 486 | 315 | 171 | 54 | |
Income before income tax expense | 1,087 | 641 | 446 | 70 | 2,772 | 2,937 | (165) | (6) | |
Income tax expense | 196 | 169 | 27 | 16 | 526 | 617 | (91) | (15) | |
Net income | $ 891 | $ 472 | $ 419 | 89 | $ 2,246 | $ 2,320 | $ (74) | (3) | |
Operating ratio (%) | 59.5 | 60.2 | (0.7) | (70) bps | 63.2 | 60.1 | 3.1 | 310 bps | |
Basic earnings per share | $ 0.96 | $ 0.71 | $ 0.25 | 35 | $ 2.42 | $ 3.48 | $ (1.06) | (30) | |
Diluted earnings per share | $ 0.96 | $ 0.70 | $ 0.26 | 37 | $ 2.41 | $ 3.46 | $ (1.05) | (30) | |
Shares Outstanding | |||||||||
Weighted average number of basic shares | 930.0 | 666.9 | 263.1 | 39 | 929.9 | 666.7 | 263.2 | 39 | |
Weighted average number of diluted shares | 932.9 | 669.8 | 263.1 | 39 | 932.8 | 669.8 | 263.0 | 39 | |
Foreign Exchange | |||||||||
Average foreign exchange rate (U.S.$/Canadian$) | 0.77 | 0.79 | (0.02) | (3) | 0.78 | 0.80 | (0.02) | (3) | |
Average foreign exchange rate (Canadian$/U.S.$) | 1.30 | 1.26 | 0.04 | 3 | 1.28 | 1.25 | 0.03 | 2 | |
Summary of Rail Data (Continued)
Third Quarter | Year-to-date | ||||||||||
Commodity Data | 2022 | 2021 | Total | % | FX % | 2022 | 2021 | Total | % | FX % | |
Freight Revenues (millions) | |||||||||||
- Grain | $ 391 | $ 352 | $ 39 | 11 | 9 | $ (123) | (10) | (11) | |||
- Coal | 156 | 158 | (2) | (1) | (2) | 458 | 491 | (33) | (7) | (7) | |
- Potash | 170 | 113 | 57 | 50 | 48 | 445 | 348 | 97 | 28 | 26 | |
- Fertilizers and sulphur | 81 | 72 | 9 | 13 | 11 | 244 | 227 | 17 | 7 | 6 | |
- Forest products | 109 | 89 | 20 | 22 | 18 | 299 | 259 | 40 | 15 | 13 | |
- Energy, chemicals and plastics | 360 | 392 | (32) | (8) | (10) | 1,010 | 1,149 | (139) | (12) | (13) | |
- Metals, minerals and consumer | 246 | 196 | 50 | 26 | 22 | 655 | 535 | 120 | 22 | 20 | |
- Automotive | 111 | 83 | 28 | 34 | 31 | 322 | 289 | 33 | 11 | 10 | |
- Intermodal | 640 | 441 | 199 | 45 | 44 | 1,660 | 1,280 | 380 | 30 | 29 | |
Total Freight Revenues | $ 368 | 19 | 17 | $ 392 | 7 | 6 | |||||
Freight Revenue per Revenue Ton- | |||||||||||
- Grain | 5.16 | 4.56 | 0.60 | 13 | 11 | 4.80 | 4.36 | 0.44 | 10 | 9 | |
- Coal | 4.04 | 3.65 | 0.39 | 11 | 10 | 3.80 | 3.40 | 0.40 | 12 | 12 | |
- Potash | 3.29 | 2.87 | 0.42 | 15 | 13 | 3.11 | 2.74 | 0.37 | 14 | 12 | |
- Fertilizers and sulphur | 7.12 | 6.31 | 0.81 | 13 | 11 | 6.81 | 6.18 | 0.63 | 10 | 8 | |
- Forest products | 7.33 | 6.27 | 1.06 | 17 | 13 | 6.85 | 6.04 | 0.81 | 13 | 11 | |
- Energy, chemicals and plastics | 5.73 | 6.19 | (0.46) | (7) | (9) | 5.54 | 5.94 | (0.40) | (7) | (8) | |
- Metals, minerals and consumer | 7.63 | 6.55 | 1.08 | 16 | 14 | 7.40 | 6.42 | 0.98 | 15 | 13 | |
- Automotive | 26.56 | 20.60 | 5.96 | 29 | 26 | 24.62 | 20.97 | 3.65 | 17 | 15 | |
- Intermodal | 7.60 | 6.20 | 1.40 | 23 | 22 | 7.11 | 6.09 | 1.02 | 17 | 16 | |
Total Freight Revenue per RTM | 6.03 | 5.36 | 0.67 | 13 | 11 | 5.68 | 5.12 | 0.56 | 11 | 10 | |
Freight Revenue per Carload | |||||||||||
- Grain | $ 508 | 13 | 11 | $ 547 | 14 | 13 | |||||
- Coal | 2,179 | 2,153 | 26 | 1 | 1 | 2,148 | 2,190 | (42) | (2) | (2) | |
- Potash | 3,720 | 3,156 | 564 | 18 | 16 | 3,557 | 3,031 | 526 | 17 | 16 | |
- Fertilizers and sulphur | 5,436 | 4,768 | 668 | 14 | 12 | 5,214 | 4,690 | 524 | 11 | 9 | |
- Forest products | 5,892 | 4,759 | 1,133 | 24 | 20 | 5,407 | 4,701 | 706 | 15 | 12 | |
- Energy, chemicals and plastics | 4,794 | 5,013 | (219) | (4) | (6) | 4,566 | 4,758 | (192) | (4) | (5) | |
- Metals, minerals and consumer | 3,727 | 3,245 | 482 | 15 | 12 | 3,499 | 3,019 | 480 | 16 | 14 | |
- Automotive | 4,422 | 3,562 | 860 | 24 | 21 | 4,128 | 3,384 | 744 | 22 | 20 | |
- Intermodal | 1,966 | 1,627 | 339 | 21 | 20 | 1,873 | 1,581 | 292 | 18 | 18 | |
Total Freight Revenue per Carload | $ 250 | 9 | 7 | $ 205 | 7 | 6 | |||||
(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) | 2022 | 2021 | Total | % | 2022 | 2021 | Total | % | |
Millions of RTM | |||||||||
- Grain | 7,577 | 7,715 | (138) | (2) | 23,335 | 28,564 | (5,229) | (18) | |
- Coal | 3,857 | 4,334 | (477) | (11) | 12,037 | 14,451 | (2,414) | (17) | |
- Potash | 5,164 | 3,941 | 1,223 | 31 | 14,297 | 12,705 | 1,592 | 13 | |
- Fertilizers and sulphur | 1,138 | 1,141 | (3) | — | 3,585 | 3,673 | (88) | (2) | |
- Forest products | 1,488 | 1,419 | 69 | 5 | 4,366 | 4,290 | 76 | 2 | |
- Energy, chemicals and plastics | 6,286 | 6,330 | (44) | (1) | 18,221 | 19,328 | (1,107) | (6) | |
- Metals, minerals and consumer | 3,225 | 2,992 | 233 | 8 | 8,852 | 8,328 | 524 | 6 | |
- Automotive | 418 | 403 | 15 | 4 | 1,308 | 1,378 | (70) | (5) | |
- Intermodal | 8,416 | 7,116 | 1,300 | 18 | 23,354 | 21,008 | 2,346 | 11 | |
Total RTMs | 37,569 | 35,391 | 2,178 | 6 | 109,355 | 113,725 | (4,370) | (4) | |
Carloads (thousands) | |||||||||
- Grain | 87.6 | 89.0 | (1.4) | (2) | 255.4 | 323.8 | (68.4) | (21) | |
- Coal | 71.6 | 73.4 | (1.8) | (2) | 213.2 | 224.2 | (11.0) | (5) | |
- Potash | 45.7 | 35.8 | 9.9 | 28 | 125.1 | 114.8 | 10.3 | 9 | |
- Fertilizers and sulphur | 14.9 | 15.1 | (0.2) | (1) | 46.8 | 48.4 | (1.6) | (3) | |
- Forest products | 18.5 | 18.7 | (0.2) | (1) | 55.3 | 55.1 | 0.2 | — | |
- Energy, chemicals and plastics | 75.1 | 78.2 | (3.1) | (4) | 221.2 | 241.5 | (20.3) | (8) | |
- Metals, minerals and consumer | 66.0 | 60.4 | 5.6 | 9 | 187.2 | 177.2 | 10.0 | 6 | |
- Automotive | 25.1 | 23.3 | 1.8 | 8 | 78.0 | 85.4 | (7.4) | (9) | |
- Intermodal | 325.5 | 271.1 | 54.4 | 20 | 886.2 | 809.5 | 76.7 | 9 | |
Total Carloads | 730.0 | 665.0 | 65.0 | 10 | 2,068.4 | 2,079.9 | (11.5) | (1) | |
Third Quarter | Year-to-date | ||||||||||
2022 | 2021 | Total | % | FX | 2022 | 2021 | Total | % | FX | ||
Operating Expenses (millions) | |||||||||||
Compensation and benefits | $ 393 | $ 381 | $ 12 | 3 | 2 | $ (11) | (1) | (2) | |||
Fuel | 358 | 199 | 159 | 80 | 75 | 1,001 | 623 | 378 | 61 | 58 | |
Materials | 66 | 51 | 15 | 29 | 29 | 191 | 164 | 27 | 16 | 16 | |
Equipment rents | 33 | 31 | 2 | 6 | 3 | 97 | 92 | 5 | 5 | 3 | |
Depreciation and amortization | 213 | 203 | 10 | 5 | 4 | 634 | 605 | 29 | 5 | 4 | |
Purchased services and other | 312 | 303 | 9 | 3 | 2 | 935 | 932 | 3 | — | — | |
Total Operating Expenses | $ 207 | 18 | 16 | $ 431 | 12 | 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 | ||||||||
2022 | 2021 | Total | % | 2022 | 2021 | Total | % | ||
Operations Performance | |||||||||
Gross ton-miles ("GTMs") (millions) | 68,482 | 64,665 | 3,817 | 6 | 199,512 | 207,347 | (7,835) | (4) | |
Train miles (thousands) | 7,237 | 6,999 | 238 | 3 | 21,390 | 22,406 | (1,016) | (5) | |
Average train weight - excluding local traffic (tons) | 10,247 | 9,973 | 274 | 3 | 10,093 | 9,953 | 140 | 1 | |
Average train length - excluding local traffic (feet) | 8,578 | 8,285 | 293 | 4 | 8,387 | 8,192 | 195 | 2 | |
Average terminal dwell (hours) | 7.8 | 7.2 | 0.6 | 8 | 8.0 | 7.1 | 0.9 | 13 | |
Average train speed (miles per hour, or "mph")(1) | 21.5 | 21.7 | (0.2) | (1) | 21.5 | 21.4 | 0.1 | — | |
Locomotive productivity (GTMs / operating horsepower)(2) | 202 | 203 | (1) | — | 196 | 204 | (8) | (4) | |
Fuel efficiency(3) | 0.927 | 0.907 | 0.020 | 2 | 0.949 | 0.928 | 0.021 | 2 | |
U.S. gallons of locomotive fuel consumed (millions)(4) | 63.5 | 58.7 | 4.8 | 8 | 189.3 | 192.5 | (3.2) | (2) | |
Average fuel price (U.S. dollars per U.S. gallon) | 4.33 | 2.70 | 1.63 | 60 | 4.13 | 2.59 | 1.54 | 59 | |
Total Employees and Workforce | |||||||||
Total employees (average)(5) | 13,004 | 12,485 | 519 | 4 | 12,427 | 12,411 | 16 | — | |
Total employees (end of period)(5) | 13,087 | 12,262 | 825 | 7 | 13,087 | 12,262 | 825 | 7 | |
Workforce (end of period)(6) | 13,144 | 12,301 | 843 | 7 | 13,144 | 12,301 | 843 | 7 | |
Safety Indicators(7) | |||||||||
FRA personal injuries per 200,000 employee-hours | 0.86 | 0.98 | (0.12) | (12) | 0.96 | 0.98 | (0.02) | (2) | |
FRA train accidents per million train-miles | 0.37 | 1.54 | (1.17) | (76) | 0.84 | 1.13 | (0.29) | (26) | |
(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, 2021, previously reported as 0.97 and 0.97, were restated to 0.98 and 0.98, respectively in this Earnings Release. FRA train accidents per million train-miles for the nine months ended September 30, 2021, previously reported as 1.09, was restated to 1.13, respectively 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. Core adjusted income and Core adjusted diluted earnings per share are presented to provide financial statement users with additional transparency by isolating for the impact of KCS purchase accounting. KCS purchase accounting represents the amortization of basis differences, being the difference in value between the consideration paid to acquire KCS and the underlying carrying value of the net assets of KCS immediately prior to its acquisition by the Company. All assets subject to KCS purchase accounting contribute to income generation and will continue to amortize over their estimated useful lives. 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 or provide improved comparability to past performance. 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, 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 the outside basis tax difference between the carrying amount of CP's equity investment in KCS and its tax basis of this investment, changes in income tax rates, changes to an uncertain tax item, and certain items outside the control of management. Acquisition-related costs include legal, consulting, financing fees, integration planning costs consisting of third-party services and system migration, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction and integration costs incurred by KCS which were recognized within Equity earnings of Kansas City Southern in the Company's Interim Consolidated Statements of Income. 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 2022, the twelve months of 2021, and the last three months of 2020 include:
2022:
- in the third quarter, a deferred tax recovery of
$12 million due to a decrease in the Iowa state tax rate that favourably impacted Diluted EPS by 1 cent; - a net deferred tax expense of
$8 million on changes in the outside basis difference of the equity investment in KCS that unfavourably impacted Diluted EPS by 1 cent as follows:
- in the third quarter, a deferred tax recovery of
$9 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 1 cent; - in the second quarter, a deferred tax expense of
$49 million on changes in the outside basis difference of the equity investment in KCS that unfavourably impacted Diluted EPS by 5 cents; and - in the first quarter, a deferred tax recovery of
$32 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 3 cents; and
- acquisition-related costs of
$96 million in connection with the KCS acquisition ($92 million after current tax recovery of$4 million ), including costs of$57 million recognized in Purchased services and other, and$39 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 9 cents as follows:
- in the third quarter, acquisition-related costs of
$30 million ($33 million after current tax expense of$3 million ), including costs of$18 million recognized in Purchased services and other and$12 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 3 cents; - in the second quarter, acquisition-related costs of
$33 million ($29 million after current tax recovery of$4 million ), including costs of$19 million recognized in Purchased services and other and$14 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 3 cents; and - in the first quarter, acquisition-related costs of
$33 million ($30 million after current tax recovery of$3 million ), including costs of$20 million recognized in Purchased services and other and$13 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 3 cents.
2021:
- in the fourth quarter, a deferred tax recovery of
$33 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 5 cents; - in the second quarter, the 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") effective May 21, 2021 that favourably impacted Diluted EPS by$1.11 ; - during the course of the year, acquisition-related costs of
$599 million in connection with the KCS acquisition ($500 million after current tax recovery of$107 million net of deferred tax expense of$8 million ), including costs of$183 million recognized in Purchased services and other,$169 million recognized in Equity loss of KCS, and$247 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 75 cents as follows:
- in the fourth quarter, acquisition-related costs of
$157 million ($157 million after current tax recovery of$13 million net of deferred tax expense of$13 million ), including costs of$36 million recognized in Purchased services and other,$169 million in Equity loss of KCS, and a$48 million recovery recognized in Other (income) expense, that unfavourably impacted Diluted EPS by 22 cents; - 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 costs 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 costs 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 costs 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; and
- during the course of the year, a net non-cash gain of
$7 million ($6 million after deferred tax) due to FX translation of debt and lease liabilities that favourably impacted Diluted EPS by 1 cent as follows:
- in the fourth quarter, a
$32 million loss ($28 million after deferred tax) that unfavourably impacted Diluted EPS by 4 cents; - in the third quarter, a
$46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 6 cents; - 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:
- 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 - a
$103 million non-cash gain ($90 million after deferred tax) due to FX translation of debt that favourably impacted Diluted EPS by 13 cents.
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. Core adjusted income is calculated as Adjusted income less KCS purchase accounting.
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Net income as reported | $ 891 | $ 472 | $ 2,246 | $ 2,320 |
Less significant items (pre-tax): | ||||
Acquisition-related costs | (30) | (98) | (96) | (442) |
Merger termination fee | — | — | — | 845 |
Impact of FX translation (loss) gain on debt and lease liabilities | — | (46) | — | 39 |
Add: | ||||
Tax effect of adjustments(1) | 3 | (24) | (4) | 3 |
Deferred tax (recovery) expense on the outside basis difference of the | (9) | — | 8 | — |
Income tax rate changes | (12) | — | (12) | — |
Adjusted income | $ 903 | $ 592 | $ 2,334 | $ 1,881 |
Less: KCS purchase accounting | (42) | — | (121) | — |
Core adjusted income | $ 945 | $ 592 | $ 2,455 | $ 1,881 |
(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 ( |
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. Core adjusted diluted earnings per share is calculated as Adjusted diluted earnings per share less KCS purchase accounting.
For the three months | For the nine months | |||
2022 | 2021 | 2022 | 2021 | |
Diluted earnings per share as reported | $ 0.96 | $ 0.70 | $ 2.41 | $ 3.46 |
Less significant items (pre-tax): | ||||
Acquisition-related costs | (0.03) | (0.15) | (0.10) | (0.66) |
Merger termination fee | — | — | — | 1.26 |
Impact of FX translation (loss) gain on debt and lease liabilities | — | (0.07) | — | 0.06 |
Add: | ||||
Tax effect of adjustments(1) | — | (0.04) | (0.01) | 0.01 |
Deferred tax (recovery) expense on the outside basis difference of the | (0.01) | — | 0.01 | — |
Income tax rate changes | (0.01) | — | (0.01) | — |
Adjusted diluted earnings per share | $ 0.97 | $ 0.88 | $ 2.50 | $ 2.81 |
Less: KCS purchase accounting | (0.04) | — | (0.13) | — |
Core adjusted diluted earnings per share | $ 1.01 | $ 0.88 | $ 2.63 | $ 2.81 |
(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 ( |
Adjusted operating income is calculated as Operating income reported on a GAAP basis less significant items.
For the three months | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Operating income as reported | $ 937 | $ 774 | $ 2,340 | $ 2,374 |
Less significant item: | ||||
Acquisition-related costs | (18) | (15) | (57) | (147) |
Adjusted operating income | $ 955 | $ 789 | $ 2,397 | $ 2,521 |
Adjusted operating ratio excludes those significant items that are reported within operating income.
For the three months | For the nine months | |||
2022 | 2021 | 2022 | 2021 | |
Operating ratio as reported | 59.5 % | 60.2 % | 63.2 % | 60.1 % |
Less significant item: | ||||
Acquisition-related costs | 0.8 % | 0.8 % | 0.9 % | 2.4 % |
Adjusted operating ratio | 58.7 % | 59.4 % | 62.3 % | 57.7 % |
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 trailing twelve 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 | ||
(in millions of Canadian dollars, except for percentages) | 2022 | 2021 |
Net income as reported | $ 2,778 | $ 3,122 |
Average shareholders' equity | $ 23,641 | $ 8,524 |
Return on average shareholders' equity | 11.8 % | 36.6 % |
Reconciliation of Net income to Adjusted return
For the twelve months | ||
(in millions of Canadian dollars) | 2022 | 2021 |
Net income as reported | $ 2,778 | $ 3,122 |
Add: | ||
Net interest expense | 611 | 427 |
Tax on interest(1) | (145) | (104) |
Significant items (pre-tax): | ||
Acquisition-related costs | 253 | 442 |
Merger termination fee | — | (845) |
Impact of FX translation loss (gain) on debt and lease liabilities | 32 | (142) |
Tax on significant items(2) | (8) | 16 |
Deferred tax recovery on the outside basis difference of the investment in KCS | (25) | — |
Income tax rate changes | (12) | (29) |
Adjusted return | $ 3,484 | $ 2,887 |
(1) | Tax was calculated at the adjusted annualized effective tax rate of |
(2) | Tax was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of |
Reconciliation of Average shareholders' equity to Adjusted average invested capital
For the twelve months ended | ||
(in millions of Canadian dollars) | 2022 | 2021 |
Average shareholders' equity | $ 23,641 | $ 8,524 |
Average long-term debt, including long-term debt maturing within one year | 15,272 | 9,877 |
$ 38,913 | $ 18,401 | |
Less: | ||
Significant items (pre-tax): | ||
Acquisition-related costs | (127) | (221) |
Merger termination fee | — | 423 |
Tax on significant items(1) | 2 | — |
Deferred tax recovery on the outside basis difference of the investment in KCS | 13 | — |
Income tax rate changes | 6 | 15 |
Adjusted average invested capital | $ 39,019 | $ 18,184 |
(1) | Tax was calculated at the pre-tax effect of the adjustment multiplied by the applicable tax rate of |
Calculation of Adjusted ROIC
For the twelve months | ||
(in millions of Canadian dollars, except for percentages) | 2022 | 2021 |
Adjusted return | $ 3,484 | $ 2,887 |
Adjusted average invested capital | $ 39,019 | $ 18,184 |
Adjusted ROIC | 8.9 % | 15.9 % |
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 operating cash flow impacts of acquisition-related costs associated with the KCS transaction, the merger termination payment received related to KCS's termination of the Original Merger Agreement and the payment to KCS related to the KCS Acquisition. 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 costs and the merger termination fee related to the KCS acquisition are not indicative of operating trends and have been excluded from Free cash. The payment to KCS is not indicative of investment trends and has 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 | For the nine months | |||
(in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
Cash provided by operating activities | $ 1,102 | $ 548 | $ 2,422 | $ 3,084 |
Cash used in investing activities | (410) | (2,129) | (978) | (2,820) |
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents | 13 | 10 | 21 | 6 |
Less: | ||||
Acquisition-related costs | (16) | (1) | (49) | (47) |
Merger termination fee | — | — | — | 845 |
Payment to Kansas City Southern | — | (1,773) | — | (1,773) |
Free cash | $ 721 | $ 203 | $ 1,514 | $ 1,245 |
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 | Reported | Variance due to FX | FX Adjusted | FX Adjusted |
Freight revenues by line of business | |||||
Grain | $ 391 | $ 352 | $ 7 | $ 359 | 9 |
Coal | 156 | 158 | 1 | 159 | (2) |
Potash | 170 | 113 | 2 | 115 | 48 |
Fertilizers and sulphur | 81 | 72 | 1 | 73 | 11 |
Forest products | 109 | 89 | 3 | 92 | 18 |
Energy, chemicals and plastics | 360 | 392 | 7 | 399 | (10) |
Metals, minerals and consumer products | 246 | 196 | 5 | 201 | 22 |
Automotive | 111 | 83 | 2 | 85 | 31 |
Intermodal | 640 | 441 | 3 | 444 | 44 |
Freight revenues | 2,264 | 1,896 | 31 | 1,927 | 17 |
Non-freight revenues | 48 | 46 | — | 46 | 4 |
Total revenues | $ 2,312 | $ 1,942 | $ 31 | $ 1,973 | 17 |
For the nine months ended September 30 | |||||
(in millions of Canadian dollars) | Reported | Reported | Variance due to FX | FX Adjusted | FX Adjusted |
Freight revenues by line of business | |||||
Grain | $ 1,121 | $ 1,244 | $ 14 | $ 1,258 | (11) |
Coal | 458 | 491 | 1 | 492 | (7) |
Potash | 445 | 348 | 4 | 352 | 26 |
Fertilizers and sulphur | 244 | 227 | 4 | 231 | 6 |
Forest products | 299 | 259 | 6 | 265 | 13 |
Energy, chemicals and plastics | 1,010 | 1,149 | 14 | 1,163 | (13) |
Metals, minerals and consumer products | 655 | 535 | 10 | 545 | 20 |
Automotive | 322 | 289 | 5 | 294 | 10 |
Intermodal | 1,660 | 1,280 | 6 | 1,286 | 29 |
Freight revenues | 6,214 | 5,822 | 64 | 5,886 | 6 |
Non-freight revenues | 138 | 133 | 1 | 134 | 3 |
Total revenues | $ 6,352 | $ 5,955 | $ 65 | $ 6,020 | 6 |
FX adjusted % changes in operating expenses are as follows:
For the three months ended September 30 | |||||
(in millions of Canadian dollars) | Reported | Reported | Variance due to FX | FX Adjusted | FX Adjusted |
Compensation and benefits | $ 393 | $ 381 | $ 4 | $ 385 | 2 |
Fuel | 358 | 199 | 6 | 205 | 75 |
Materials | 66 | 51 | — | 51 | 29 |
Equipment rents | 33 | 31 | 1 | 32 | 3 |
Depreciation and amortization | 213 | 203 | 2 | 205 | 4 |
Purchased services and other | 312 | 303 | 4 | 307 | 2 |
Total operating expenses | $ 1,375 | $ 1,168 | $ 17 | $ 1,185 | 16 |
For the nine months ended September 30 | |||||
(in millions of Canadian dollars) | Reported | Reported | Variance due to FX | FX Adjusted | FX Adjusted |
Compensation and benefits | $ 1,154 | $ 1,165 | $ 8 | $ 1,173 | (2) |
Fuel | 1,001 | 623 | 12 | 635 | 58 |
Materials | 191 | 164 | 1 | 165 | 16 |
Equipment rents | 97 | 92 | 2 | 94 | 3 |
Depreciation and amortization | 634 | 605 | 4 | 609 | 4 |
Purchased services and other | 935 | 932 | 7 | 939 | — |
Total operating expenses | $ 4,012 | $ 3,581 | $ 34 | $ 3,615 | 11 |
FX adjusted % change in operating income is as follows:
For the three months ended September 30 | |||||
(in millions of Canadian dollars) | Reported | Reported | Variance due to FX | FX Adjusted | FX Adjusted |
Operating income | $ 937 | $ 774 | $ 14 | $ 788 | 19 |
For the nine months ended September 30 | |||||
(in millions of Canadian dollars) | Reported | Reported | Variance due to FX | FX Adjusted | FX Adjusted |
Operating income | $ 2,340 | $ 2,374 | $ 31 | $ 2,405 | (3) |
Adjusted Net Debt to Adjusted EBITDA Ratio and Pro-forma adjusted Net Debt to Pro-forma 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 from operations, excluding significant items. 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.
Beginning in the first quarter of 2022, CP added disclosure of Pro-forma adjusted net debt to Pro-forma adjusted EBITDA ratio to better align with CP's debt covenant calculation, which incorporates the trailing twelve month adjusted EBITDA of KCS as well as KCS's outstanding debt. CP is incorporating the trailing twelve month adjusted EBITDA of KCS on a pro-forma basis, as CP is not entitled to earnings prior to the acquisition date of December 14, 2021. CP does not control KCS while it is in the voting trust during review of our merger application by the U.S. Surface Transportation Board ("STB"), though CP is the beneficial owner of KCS's outstanding shares and receives cash dividends from KCS. The adjustment to include the trailing twelve month EBITDA and KCS's outstanding debt provides users of the financial statements with better insight into CP's progress in achieving deleveraging commitments. KCS's disclosed U.S. dollar financial values for the trailing twelve months ended September 30, 2022 were adjusted to Canadian dollars reflecting the FX rate for the appropriate period presented. We have not presented 2021 Pro-forma adjusted net debt to Pro-forma adjusted EBITDA as CP was not the beneficial owner of KCS's shares as at September 30, 2021.
Calculation of Long-term Debt to Net Income Ratio
(in millions of Canadian dollars, except for ratios) | 2022 | 2021 |
Long-term debt including long-term debt maturing within one year as at September 30 | $ 20,575 | $ 9,968 |
Net income for the twelve months ended September 30 | $ 2,778 | $ 3,122 |
Long-term debt to Net income ratio | 7.4 | 3.2 |
Reconciliation of Long-term Debt to Adjusted Net Debt and Pro-forma 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. Adjusted net debt is used as a measure of debt and long-term obligations as part of the calculation of Adjusted Net Debt to Adjusted EBITDA.
(in millions of Canadian dollars)(1) | 2022 | 2021 |
CP Long-term debt including long-term debt maturing within one year as at September 30 | $ 20,575 | $ 9,968 |
Add: | ||
Pension plans deficit(2) | 265 | 323 |
Operating lease liabilities | 280 | 274 |
Less: | ||
Cash and cash equivalents | 138 | 210 |
CP Adjusted net debt as at September 30 | $ 20,982 | $ 10,355 |
KCS's long-term debt including long-term debt maturing within one year as at September 30 | $ 5,183 | N/A |
Add: | ||
KCS operating lease liabilities | 116 | N/A |
Less: | ||
KCS cash and cash equivalents | 225 | N/A |
KCS Adjusted net debt as at September 30 | 5,074 | N/A |
CP Adjusted net debt as at September 30 | 20,982 | N/A |
Pro-forma Adjusted net debt as at September 30 | $ 26,056 | N/A |
(1) | KCS's amounts were translated at the September 30, 2022 period end FX rate of |
(2) | 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 and Pro-forma 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. Adjusted EBITDA is calculated as Adjusted EBIT plus operating lease expense and Depreciation and amortization, less Other components of net periodic benefit recovery. Adjusted EBITDA is used as a measure of liquidity derived from operations, excluding significant items, as part of the calculation of Adjusted Net Debt to Adjusted EBITDA.
For the twelve months | ||
(in millions of Canadian dollars)(1) | 2022 | 2021 |
CP Net income as reported | $ 2,778 | $ 3,122 |
Add: | ||
Net interest expense | 611 | 427 |
Income tax expense | 677 | 812 |
EBIT | 4,066 | 4,361 |
Less significant items (pre-tax): | ||
Acquisition-related costs | (253) | (442) |
Merger termination fee | — | 845 |
Impact of FX translation (loss) gain on debt and lease liabilities | (32) | 142 |
Adjusted EBIT | 4,351 | 3,816 |
Add: | ||
Operating lease expense | 77 | 71 |
Depreciation and amortization | 840 | 802 |
Less: | ||
Other components of net periodic benefit recovery | 405 | 371 |
CP Adjusted EBITDA | $ 4,863 | $ 4,318 |
Net income attributable to KCS and subsidiaries | $ 1,497 | N/A |
Add: | ||
KCS interest expense | 200 | N/A |
KCS income tax expense | 498 | N/A |
KCS EBIT | 2,195 | N/A |
Less significant item (pre-tax): | ||
KCS merger income | 599 | N/A |
KCS Adjusted EBIT | 1,596 | N/A |
Add: | ||
KCS total lease cost | 40 | N/A |
KCS depreciation and amortization | 491 | N/A |
KCS Adjusted EBITDA | 2,127 | N/A |
CP Adjusted EBITDA | $ 4,863 | N/A |
Less: | ||
Equity earnings of KCS(2) | 486 | N/A |
Acquisition-related costs of KCS(3) | 208 | N/A |
Pro-forma Adjusted EBITDA | $ 6,296 | N/A |
(1) | KCS's amounts were translated at the quarterly average FX rate of |
(2) | Equity earnings of KCS were part of CP's reported net income and therefore have been deducted in arriving to the Pro-forma Adjusted EBITDA. |
(3) | Acquisition-related costs of KCS have been adjusted in CP's Adjusted EBITDA calculation above, therefore have been deducted in arriving to the Pro-forma Adjusted EBITDA. |
Calculation of Adjusted Net Debt to Adjusted EBITDA Ratio and Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA Ratio
(in millions of Canadian dollars, except for ratios) | 2022 | 2021 |
Adjusted net debt as at September 30 | $ 20,982 | $ 10,355 |
Adjusted EBITDA for the twelve months ended September 30 | $ 4,863 | $ 4,318 |
Adjusted net debt to Adjusted EBITDA ratio | 4.3 | 2.4 |
(in millions of Canadian dollars, except for ratios) | 2022 | 2021 |
Pro-forma adjusted net debt as at September 30 | $ 26,056 | N/A |
Pro-forma adjusted EBITDA for the twelve months ended September 30 | $ 6,296 | N/A |
Pro-forma adjusted net debt to Pro-forma adjusted EBITDA ratio | 4.1 | N/A |
View original content:https://www.prnewswire.com/news-releases/cp-reports-solid-third-quarter-results-well-positioned-for-strong-finish-to-2022-301660394.html
SOURCE Canadian Pacific
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