CALGARY,
AB, July 27, 2023 /PRNewswire/ - Canadian
Pacific Kansas City (TSX: CP) (NYSE: CP) (CPKC) today announced its
second-quarter results, including revenues of $3.2 billion,
diluted earnings per share ("EPS") of $1.42 and core adjusted combined diluted
EPS1 of $0.83.
"This quarter we made history by completing our transformational
combination to create the first single-line transnational railroad
linking Canada, the United States and Mexico," said Keith
Creel, CPKC President and Chief Executive Officer. "By
uniting the outstanding railroaders at Canadian Pacific and Kansas
City Southern to form our new CPKC family, we already are changing
the freight rail industry, redrawing the map and delivering on the
many benefits of our combined network."
Second quarter 2023 results2
- Reported operating ratio (OR) increased by 970 basis points to
70.3 percent from 60.6 percent in Q2 2022
- Core adjusted combined OR1 increased 430 basis
points to 64.6 percent from 60.3 percent in Q2 2022
- Reported diluted EPS increased to $1.42 from $0.82 in
Q2 2022 due to the net impact of the derecognition of the
investment in Kansas City Southern (KCS) upon consolidation
- Core adjusted combined diluted EPS1 decreased to
$0.83 from $0.95 in Q2 2022
- Federal Railroad Administration-reportable train accident
frequency declined 32 percent to 0.76 from 1.11 in Q2 2022
"Despite the challenging results, we still expect to deliver
mid-single-digit Core adjusted combined diluted EPS1
growth in 2023," Creel added. "The long-term growth opportunities
for this franchise are unique and undeniable. With our CPKC
advantage, we are extending our reach for our customers,
introducing new service offerings to the marketplace and creating
new competition in North American supply chains."
2023 Guidance
CPKC expects core adjusted combined
diluted EPS1 to grow mid-single-digits versus 2022 core
adjusted combined diluted EPS1 of $3.77. CPKC's reported diluted EPS was also
$3.77 in 2022.
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, see attached supplementary schedule of
Non-GAAP Measures and Forward-Looking Non-GAAP Measures
below.
|
2
|
The results of KCS are
included on a consolidated basis from April 14, 2023, the date we
acquired control. From December 14, 2021 to April 13, 2023, we
recorded our interest in KCS under the equity method of
accounting.
|
Conference Call Details
CPKC 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 July 27,
2023.
Conference Call Access
Canada and U.S.: 800-225-9448
International: 203-518-9708
*Conference ID: CPQ223
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 CPKC's website at
investor.cpkcr.com.
A replay of the second-quarter conference call will be available
by phone through to Aug. 4, 2023, at
800-839-2434 (Canada/U.S.) or
402-220-7211 (International).
Forward looking information
This news release contains
certain forward-looking information and forward-looking statements
(collectively, "forward-looking information") within the meaning of
applicable securities laws in both the U.S. and Canada. 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", "guidance", "should" or similar words suggesting future
outcomes. This news release contains forward-looking information
relating, but not limited, to statements concerning financial
guidance for 2023, the success of our business, the realization of
anticipated benefits and synergies of the CP-KCS combination, and
the opportunities arising therefrom, our operations, priorities and
plans, 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 CPKC'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 CPKC; and carbon markets, evolving
sustainability strategies, and scientific or technological
developments. Although CPKC 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,
CPKC'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 CPKC; 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 satisfaction of the
conditions imposed by the U.S. Surface Transportation Board in its
March 15, 2023 final decision; the
success of integration plans for KCS; other disruptions arising
from the CP-KCS integration; 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 CPKC 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 CPKC 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 CPKC'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, CPKC
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.
Forward-Looking Non-GAAP Measures
Although CPKC has
provided forward-looking non-GAAP measures (Core adjusted combined
diluted EPS) management is unable to reconcile, without
unreasonable efforts, the forward-looking Core adjusted combined
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, the Company has recognized
acquisition-related costs, the merger termination payment received,
KCS' gain on unwinding of interest rate hedges (net of Canadian
Pacific's (CP) associated purchase accounting basis differences and
tax), the FX impact of translating the Company's debt and lease
liabilities (including borrowings under the credit facility), loss
on derecognition of CPKC's previously held equity method investment
in KCS, discrete tax items, changes in the outside basis tax
difference between the carrying amount of the Company's equity
investment in KCS and its tax basis of the investment, changes in
income tax rates, and changes to an uncertain tax item.
Acquisition-related costs include legal, consulting, financing
fees, integration planning costs consisting of third-party services
and system migration, debt exchange transaction costs, community
investments, 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, restructuring, employee retention and synergy
incentive costs, and transaction and integration costs incurred by
KCS which were recognized within Equity earnings of Kansas City
Southern in the Company's Consolidated Statements of Income. KCS
has also recognized significant transaction costs and FX gains and
losses. These or other similar, large unforeseen transactions
affect diluted EPS but may be excluded from CPKC's core adjusted
combined diluted EPS. Additionally, the Canadian-to-U.S. dollar and
Mexican peso-to-U.S. dollar exchange rates are unpredictable and
can have a significant impact on CPKC's reported results but may be
excluded from CPKC's core adjusted combined diluted EPS. For
further information regarding non-GAAP measures, see below.
About CPKC
With its global headquarters in
Calgary, Alta., Canada, CPKC is the first and only single-line
transnational railway linking Canada, the United
States and México, with unrivaled access to major ports from
Vancouver to Atlantic Canada to the Gulf of México to
Lázaro Cárdenas, México. Stretching approximately 20,000 route
miles and employing 20,000 railroaders, CPKC provides North
American customers unparalleled rail service and network reach to
key markets across the continent. CPKC is growing with its
customers, offering a suite of freight transportation services,
logistics solutions and supply chain expertise. Visit cpkcr.com to
learn more about the rail advantages of CPKC. CP-IR
FINANCIAL STATEMENTS
INTERIM CONSOLIDATED STATEMENTS OF
INCOME
(unaudited)
|
For the three
months
ended June 30
|
For the six months
ended
June 30
|
(in millions of
Canadian dollars, except share and per share data)
|
2023
|
2022
|
2023
|
2022
|
Revenues (Note
3)
|
|
|
|
|
Freight
|
$
3,101
|
$
2,154
|
$
5,318
|
$
3,950
|
Non-freight
|
73
|
48
|
122
|
90
|
Total
revenues
|
3,174
|
2,202
|
5,440
|
4,040
|
Operating
expenses
|
|
|
|
|
Compensation and
benefits (Note 8)
|
659
|
348
|
1,097
|
761
|
Fuel
|
397
|
370
|
723
|
643
|
Materials
|
98
|
63
|
170
|
125
|
Equipment
rents
|
80
|
29
|
110
|
64
|
Depreciation and
amortization
|
410
|
211
|
635
|
421
|
Purchased services and
other (Note 8)
|
586
|
313
|
932
|
623
|
Total operating
expenses
|
2,230
|
1,334
|
3,667
|
2,637
|
|
|
|
|
|
Operating
income
|
944
|
868
|
1,773
|
1,403
|
Less:
|
|
|
|
|
Equity earnings of
Kansas City Southern (Note 8, 9)
|
(26)
|
(208)
|
(230)
|
(406)
|
Other expense (Note
8)
|
21
|
7
|
23
|
6
|
Other components of net
periodic benefit recovery (Note 14)
|
(83)
|
(101)
|
(169)
|
(202)
|
Net interest
expense
|
204
|
160
|
358
|
320
|
Remeasurement loss of
Kansas City Southern (Note 8)
|
7,175
|
—
|
7,175
|
—
|
(Loss) income before
income tax expense
|
(6,347)
|
1,010
|
(5,384)
|
1,685
|
Less:
|
|
|
|
|
Current income tax
expense (Note 4)
|
281
|
131
|
419
|
217
|
Deferred tax
(recovery) expense (Note 4)
|
(7,953)
|
114
|
(7,928)
|
113
|
Income tax (recovery)
expense (Note 4)
|
(7,672)
|
245
|
(7,509)
|
330
|
Net
income
|
$
1,325
|
$
765
|
$
2,125
|
$
1,355
|
Less: Net income
attributable to non-controlling interest
|
1
|
—
|
1
|
—
|
Net income
attributable to controlling shareholders
|
$
1,324
|
$
765
|
$
2,124
|
$
1,355
|
|
|
|
|
|
Earnings per share
(Note 5)
|
|
|
|
|
Basic earnings per
share
|
$
1.42
|
$
0.82
|
$
2.28
|
$
1.46
|
Diluted earnings per
share
|
$
1.42
|
$
0.82
|
$
2.28
|
$
1.45
|
|
|
|
|
|
Weighted-average
number of shares (millions) (Note 5)
|
|
|
|
|
Basic
|
931.2
|
929.9
|
930.9
|
929.8
|
Diluted
|
933.8
|
932.6
|
933.6
|
932.7
|
|
|
|
|
|
Dividends declared
per share
|
$
0.190
|
$
0.190
|
$
0.380
|
$
0.380
|
See Notes to Interim
Consolidated Financial Statements.
|
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(unaudited)
|
For the three
months
ended June 30
|
For the six
months
ended June 30
|
(in millions of
Canadian dollars)
|
2023
|
2022
|
2023
|
2022
|
Net income
|
$
1,325
|
$
765
|
$
2,125
|
$
1,355
|
Net (loss) gain in
foreign currency translation adjustments, net of hedging
activities
|
(611)
|
719
|
(638)
|
383
|
Change in derivatives
designated as cash flow hedges
|
1
|
2
|
3
|
3
|
Change in pension and
post-retirement defined benefit plans
|
(3)
|
38
|
5
|
77
|
Equity accounted
investments
|
4
|
73
|
7
|
135
|
Other comprehensive
(loss) income before income taxes
|
(609)
|
832
|
(623)
|
598
|
Income tax (expense)
recovery on above items
|
(17)
|
2
|
(20)
|
(34)
|
Other comprehensive
(loss) income (Note 6)
|
(626)
|
834
|
(643)
|
564
|
Comprehensive
income
|
$
699
|
$
1,599
|
$
1,482
|
$
1,919
|
Comprehensive loss
attributable to the non-controlling interest
|
(7)
|
—
|
(7)
|
—
|
Comprehensive income
attributable to controlling shareholders
|
$
706
|
$
1,599
|
$
1,489
|
$
1,919
|
See Notes to Interim
Consolidated Financial Statements.
|
INTERIM CONSOLIDATED BALANCE SHEETS AS
AT
(unaudited)
|
June
30
|
December 31
|
(in millions of
Canadian dollars)
|
2023
|
2022
|
Assets
|
|
|
Current
assets
|
|
|
Cash and cash
equivalents
|
$
325
|
$
451
|
Accounts receivable,
net (Note 7)
|
1,656
|
1,016
|
Short-term investments
(Note 12)
|
264
|
—
|
Materials and
supplies
|
381
|
284
|
Other current
assets
|
292
|
138
|
|
2,918
|
1,889
|
Investment in Kansas
City Southern (Note 9)
|
—
|
45,091
|
Investments
|
532
|
223
|
Properties
|
51,183
|
22,385
|
Goodwill (Note
10)
|
17,674
|
344
|
Intangible assets (Note
11)
|
3,019
|
42
|
Pension
asset
|
3,261
|
3,101
|
Other assets
|
585
|
420
|
Total
assets
|
$
79,172
|
$
73,495
|
Liabilities and
equity
|
|
|
Current
liabilities
|
|
|
Accounts payable and
accrued liabilities
|
$
2,430
|
$
1,703
|
Long-term debt
maturing within one year (Note 12, 13)
|
1,909
|
1,510
|
|
4,339
|
3,213
|
Pension and other
benefit liabilities
|
562
|
538
|
Other long-term
liabilities
|
834
|
520
|
Long-term debt (Note
12, 13)
|
21,353
|
18,141
|
Deferred income
taxes
|
11,080
|
12,197
|
Total
liabilities
|
38,168
|
34,609
|
Shareholders'
equity
|
|
|
Share
capital
|
25,563
|
25,516
|
Additional paid-in
capital
|
88
|
78
|
Accumulated other
comprehensive (loss) income (Note 6)
|
(544)
|
91
|
Retained
earnings
|
14,972
|
13,201
|
|
40,079
|
38,886
|
Non-controlling
interest (Note 8)
|
925
|
—
|
Total
equity
|
41,004
|
38,886
|
Total liabilities
and equity
|
$
79,172
|
$
73,495
|
Certain of the
comparative figures have been reclassified in order to be
consistent with the 2023 presentation (Note 8).
|
See Contingencies (Note
16).
|
See Notes to Interim
Consolidated Financial Statements.
|
INTERIM CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
|
For the three
months
ended June 30
|
For the six
months
ended June 30
|
(in millions of
Canadian dollars)
|
2023
|
2022
|
2023
|
2022
|
Operating
activities
|
|
|
|
|
Net income
|
$
1,325
|
$
765
|
$
2,125
|
$
1,355
|
Reconciliation of net
income to cash provided by operating activities:
|
|
|
|
|
Depreciation and
amortization
|
410
|
211
|
635
|
421
|
Deferred income tax
(recovery) expense (Note 4)
|
(7,953)
|
114
|
(7,928)
|
113
|
Pension recovery and
funding (Note 14)
|
(78)
|
(72)
|
(155)
|
(144)
|
Equity earnings of
Kansas City Southern (Note 8, 9)
|
(26)
|
(208)
|
(230)
|
(406)
|
Remeasurement loss of
Kansas City Southern (Note 8)
|
7,175
|
—
|
7,175
|
—
|
Dividend from Kansas
City Southern (Note 9)
|
—
|
—
|
300
|
334
|
Other operating
activities, net
|
28
|
(16)
|
(19)
|
(99)
|
Change in non-cash
working capital balances related to operations
|
11
|
(87)
|
(129)
|
(254)
|
Cash provided by
operating activities
|
892
|
707
|
1,774
|
1,320
|
Investing
activities
|
|
|
|
|
Additions to
properties
|
(628)
|
(370)
|
(1,034)
|
(596)
|
Additions to Meridian
Speedway properties
|
(8)
|
—
|
(8)
|
—
|
Proceeds from sale of
properties and other assets
|
12
|
11
|
16
|
26
|
Cash acquired on
control of Kansas City Southern (Note 8)
|
298
|
—
|
298
|
—
|
Investment in
government securities (Note 12)
|
(267)
|
—
|
(267)
|
—
|
Other
|
(24)
|
(3)
|
(24)
|
2
|
Cash used in
investing activities
|
(617)
|
(362)
|
(1,019)
|
(568)
|
Financing
activities
|
|
|
|
|
Dividends
paid
|
(176)
|
(176)
|
(353)
|
(353)
|
Issuance of Common
Shares
|
19
|
1
|
37
|
9
|
Repayment of long-term
debt, excluding commercial paper (Note 12)
|
(610)
|
(10)
|
(1,096)
|
(552)
|
Repayment of term
loan
|
—
|
(132)
|
—
|
(132)
|
Net issuance of
commercial paper (Note 12)
|
550
|
20
|
550
|
340
|
Acquisition-related
financing fees (Note 12)
|
(15)
|
—
|
(15)
|
—
|
Other
|
(1)
|
—
|
(1)
|
—
|
Cash used in
financing activities
|
(233)
|
(297)
|
(878)
|
(688)
|
Effect of foreign
currency fluctuations on foreign-denominated cash and cash
equivalents
|
(7)
|
8
|
(3)
|
8
|
Cash
position
|
|
|
|
|
Increase (decrease) in
cash, cash equivalents, and restricted cash
|
35
|
56
|
(126)
|
72
|
Cash, cash equivalents,
and restricted cash at beginning of period
|
290
|
98
|
451
|
82
|
Cash and cash
equivalents at end of period
|
$
325
|
$
154
|
$
325
|
$
154
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
Income taxes
paid
|
$
259
|
$
93
|
$
443
|
$
252
|
Interest
paid
|
$
271
|
$
169
|
$
418
|
$
319
|
See Notes to Interim
Consolidated Financial Statements.
|
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY
(unaudited)
|
For the three months
ended June 30
|
(in millions of
Canadian dollars
except per share data)
|
|
Common
Shares
(in
millions)
|
|
Share capital
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income
(loss)
|
Retained
earnings
|
Total
shareholders'
equity
|
Non-
controlling
interest
|
Total
equity
|
Balance as at April
1, 2023
|
|
930.9
|
|
$
25,538
|
$
84
|
$
74
|
$
13,824
|
$
39,520
|
$
—
|
$
39,520
|
Net income
|
|
—
|
|
—
|
—
|
—
|
1,324
|
1,324
|
1
|
1,325
|
Other comprehensive
loss (Note 6)
|
|
—
|
|
—
|
—
|
(618)
|
—
|
(618)
|
(8)
|
(626)
|
Dividends declared
($0.190 per
share)
|
|
—
|
|
—
|
—
|
—
|
(176)
|
(176)
|
—
|
(176)
|
Effect of
stock-based
compensation expense
|
|
—
|
|
—
|
9
|
—
|
—
|
9
|
—
|
9
|
Shares issued under
stock option
plan
|
|
0.5
|
|
25
|
(5)
|
—
|
—
|
20
|
—
|
20
|
Non-controlling
interest in
connection with business
acquisition
|
|
—
|
|
—
|
—
|
—
|
—
|
—
|
932
|
932
|
Balance as at June
30, 2023
|
|
931.4
|
|
$
25,563
|
$
88
|
$
(544)
|
$
14,972
|
$
40,079
|
$
925
|
$
41,004
|
Balance as at April 1,
2022
|
|
929.9
|
|
$ 25,486
|
$
68
|
$
(2,373)
|
$
10,804
|
$
33,985
|
$
—
|
$ 33,985
|
Net income
|
|
—
|
|
—
|
—
|
—
|
765
|
765
|
—
|
765
|
Other comprehensive
income
(Note 6)
|
|
—
|
|
—
|
—
|
834
|
—
|
834
|
—
|
834
|
Dividends declared
($0.190 per
share)
|
|
—
|
|
—
|
—
|
—
|
(177)
|
(177)
|
—
|
(177)
|
Effect of
stock-based
compensation expense
|
|
—
|
|
—
|
5
|
—
|
—
|
5
|
—
|
5
|
Shares issued under
stock option
plan
|
|
0.1
|
|
2
|
—
|
—
|
—
|
2
|
—
|
2
|
Balance as at June 30,
2022
|
|
930.0
|
|
$ 25,488
|
$
73
|
$
(1,539)
|
$
11,392
|
$
35,414
|
$
—
|
$ 35,414
|
|
For the six months
ended June 30
|
(in millions of
Canadian dollars
except per share data)
|
|
Common
Shares (in
millions)
|
|
Share
capital
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income
(loss)
|
Retained
earnings
|
Total
shareholders'
equity
|
Non-
controlling
interest
|
Total
equity
|
Balance at January
1, 2023
|
|
930.5
|
|
$
25,516
|
$
78
|
$
91
|
$
13,201
|
$
38,886
|
$
—
|
$
38,886
|
Net income
|
|
—
|
|
—
|
—
|
—
|
2,124
|
2,124
|
1
|
2,125
|
Other comprehensive
loss (Note
6)
|
|
—
|
|
—
|
—
|
(635)
|
—
|
(635)
|
(8)
|
(643)
|
Dividends declared
($0.380 per
share)
|
|
—
|
|
—
|
—
|
—
|
(353)
|
(353)
|
—
|
(353)
|
Effect of
stock-based
compensation expense
|
|
—
|
|
—
|
19
|
—
|
—
|
19
|
—
|
19
|
Shares issued under
stock option
plan
|
|
0.9
|
|
47
|
(9)
|
—
|
—
|
38
|
—
|
38
|
Non-controlling
interest in
connection with business
acquisition
|
|
—
|
|
—
|
—
|
—
|
—
|
—
|
932
|
932
|
Balance as at June
30, 2023
|
|
931.4
|
|
$
25,563
|
$
88
|
$
(544)
|
$
14,972
|
$
40,079
|
$
925
|
$
41,004
|
Balance at January 1,
2022
|
|
929.7
|
|
$ 25,475
|
$
66
|
$
(2,103)
|
$
10,391
|
$
33,829
|
$
—
|
$ 33,829
|
Net income
|
|
—
|
|
—
|
—
|
—
|
1,355
|
1,355
|
—
|
1,355
|
Other comprehensive
income
(Note 6)
|
|
—
|
|
—
|
—
|
564
|
—
|
564
|
—
|
564
|
Dividends declared
($0.380 per
share)
|
|
—
|
|
—
|
—
|
—
|
(354)
|
(354)
|
—
|
(354)
|
Effect of
stock-based
compensation expense
|
|
—
|
|
—
|
12
|
—
|
—
|
12
|
—
|
12
|
Shares issued for
Kansas City
Southern acquisition
|
|
—
|
|
—
|
(2)
|
—
|
—
|
(2)
|
—
|
(2)
|
Shares issued under
stock option
plan
|
|
0.3
|
|
13
|
(3)
|
—
|
—
|
10
|
—
|
10
|
Balance as at June 30,
2022
|
|
930.0
|
|
$ 25,488
|
$
73
|
$
(1,539)
|
$
11,392
|
$
35,414
|
$
—
|
$ 35,414
|
See Notes to Interim
Consolidated Financial Statements.
|
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
June 30,
2023
(unaudited)
1 Description of business and Basis
of presentation
On April 14, 2023, Canadian
Pacific Railway Limited ("CPRL" or "CP") assumed control of Kansas
City Southern ("KCS") (through an indirect wholly owned
subsidiary), and filed articles of amendment to change CPRL's name
to Canadian Pacific Kansas City Limited ("CPKC"). CPKC owns and
operates the only freight railway spanning Canada, the United
States ("U.S."), and Mexico. CPKC provides rail and intermodal
transportation services over a network of approximately 20,000
miles, directly serving principal business centres of Canada, the U.S., and Mexico.
These unaudited Interim Consolidated Financial Statements
("Interim Consolidated Financial Statements") of CPKC and its
subsidiaries (collectively, "CPKC", 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
2022 annual Consolidated Financial Statements and notes included in
CPRL's 2022 Annual Report on Form 10-K. The accounting policies
used are consistent with the accounting policies used in preparing
CPRL's 2022 annual Consolidated Financial Statements except as
discussed in Note 2.
In these Interim Consolidated Financial Statements, unless the
context indicates otherwise, references to "CPKC", "the Company",
"we", "our", or "us" are to Canadian Pacific Kansas City Limited
and its subsidiaries, which includes KCS as a consolidated
subsidiary on and from April 14, 2023. Prior to April 14,
2023, KCS was held as an equity investment accounted for by the
equity method of accounting.
The Company'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 2023
On January 1, 2023, the Company
adopted the new Accounting Standards Update ("ASU") 2021-08, issued
by the Financial Accounting Standards Board ("FASB"), and all
related amendments under FASB Accounting Standards Codification
("ASC"), Topic 805, Business Combinations, Accounting for Contract
Assets and Contract Liabilities from Contracts with Customers in
anticipation of obtaining effective control of KCS. The 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. The Company assumed control of KCS (through an indirect
wholly owned subsidiary) on April 14, 2023. This update was
applied prospectively to contract assets and liabilities within the
scope of this amendment, which includes contract assets and
liabilities of KCS that are recorded in the purchase price
allocation. The adoption of the amendment did not result in a
material impact to the Company's financial statements. See Note 8
for further discussion on the business acquisition of KCS.
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
All accounting pronouncements recently issued, but not effective
until after June 30, 2023, 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
ended June 30
|
For the six
months
ended June 30
|
(in millions of
Canadian dollars)
|
2023
|
2022
|
2023
|
2022
|
Freight
|
|
|
|
|
Grain
|
$
537
|
$
370
|
$
1,052
|
$
730
|
Coal
|
219
|
163
|
374
|
302
|
Potash
|
144
|
171
|
276
|
275
|
Fertilizers and
sulphur
|
89
|
85
|
185
|
163
|
Forest
products
|
187
|
104
|
290
|
190
|
Energy, chemicals and
plastics
|
575
|
340
|
941
|
650
|
Metals, minerals and
consumer products
|
440
|
228
|
673
|
409
|
Automotive
|
257
|
120
|
382
|
211
|
Intermodal
|
653
|
573
|
1,145
|
1,020
|
Total freight
revenues
|
3,101
|
2,154
|
5,318
|
3,950
|
Non-freight excluding
leasing revenues
|
39
|
27
|
66
|
49
|
Revenues from contracts
with customers
|
3,140
|
2,181
|
5,384
|
3,999
|
Leasing
revenues
|
34
|
21
|
56
|
41
|
Total
revenues
|
$
3,174
|
$
2,202
|
$
5,440
|
$
4,040
|
4 Income taxes
The effective tax rates including discrete items for the three
and six months ended June 30, 2023
were 120.88% and 139.47%, respectively, compared to 24.21% and
19.59%, respectively for the same periods of 2022.
For the three months ended June 30,
2023, the effective tax rate was 25.18%, excluding the
discrete items of the derecognition of the deferred tax liability
on the outside basis difference of the investment in KCS of
$7,832 million upon acquiring control
(refer to Note 8), remeasurement loss of KCS of $7,175 million (refer to Note 8),
acquisition-related costs incurred by CPKC of $119 million,
amortization of business acquisition fair value adjustments of
$75 million, revaluation of deferred
income tax balances on unitary state apportionment changes of
$51 million, and the equity earnings
of KCS of $26 million.
For the three months ended June 30,
2022, the effective tax rate was 24.25%, excluding the
discrete items of equity earnings of KCS of $208 million, acquisition-related costs incurred
by CPKC of $19 million, and outside basis deferred tax expense
of $49 million arising from the difference between the
carrying amount of CPKC's investment in KCS for financial reporting
and the underlying tax basis of this investment.
For the six months ended June 30,
2023, the effective tax rate was 24.88%, excluding the
discrete items of the reversal of the deferred tax liability on the
outside basis difference of the investment in KCS of $7,832 million upon acquiring control (refer to
Note 8), remeasurement loss of KCS of $7,175
million (refer to Note 8), the equity earnings of KCS of
$230 million, acquisition-related
costs incurred by CPKC of $134
million, amortization of business acquisition fair value
adjustments of $75 million,
revaluation of deferred income tax balances on unitary state
apportionment changes of $51 million,
and an outside basis deferred tax recovery of $23 million arising from the difference between
the carrying amount of CPKC's investment in KCS for financial
reporting and the underlying tax basis of this investment.
For the six months ended June 30,
2022, the effective tax rate was 24.25%, excluding the
discrete items of equity earnings of KCS of $406 million, acquisition-related costs incurred
by CPKC of $39 million, and outside basis deferred tax expense
of $17 million arising from the difference between the
carrying amount of CPKC's investment in KCS for financial reporting
and the underlying tax basis of this investment.
Mexican Value Added Tax
Kansas City Southern de México, S.A. de C.V. (also known as
Canadian Pacific Kansas City Mexico) ("CPKCM") is not required to
charge its customers value added tax ("VAT") on international
import or export transportation services, which prior to 2022
resulted in CPKCM paying more VAT on its expenses than it collected
from customers. These excess VAT payments are refundable by the
Mexican government. Prior to 2019, Mexican companies could offset
their monthly refundable VAT balance with other tax obligations. In
January 2019, Mexican tax reform
eliminated the ability to offset other tax obligations with
refundable VAT. From 2019 through 2021, CPKCM generated a
refundable VAT balance and filed refund claims with the Servicio de
Administración Tributaria ("SAT") (Mexican tax authority), which
have not been refunded.
In November 2021, changes to the
VAT law were announced and became effective beginning January 1, 2022. These changes reduced the
recoverability of VAT paid by CPKCM on its expenditures that
support international import transportation service revenues that
are not subject to a VAT charge. VAT that is unrecoverable from the
Mexican government results in incremental VAT expense for CPKCM.
Beginning in 2022, CPKCM changed certain service offerings to
either require VAT to be charged to customers on revenue, or impose
a rate increase to offset the incremental VAT expense. These
measures implemented by CPKCM increased the VAT collected from
customers and payable to the Mexican government.
As of June 30, 2023 and
April 14, 2023, the CPKCM refundable
VAT balance was $64 million and
$80 million, respectively, which was
classified within "Accounts receivable, net". CPKCM has prior
favourable Mexican court decisions and a legal opinion supporting
its right under Mexican law to recover the refundable VAT balance
from the Mexican government and believes the VAT to be fully
recoverable. CPKCM will recover the refundable VAT balance as VAT
billed to customers exceeds creditable VAT charged by vendors.
5 Earnings per share
|
For the three
months
ended June 30
|
For the six
months
ended June 30
|
(in
millions)
|
2023
|
2022
|
2023
|
2022
|
Net income attributable
to controlling shareholders
|
$
1,324
|
$
765
|
$
2,124
|
$
1,355
|
Weighted-average basic
shares outstanding
|
931.2
|
929.9
|
930.9
|
929.8
|
Dilutive effect of
stock options
|
2.6
|
2.7
|
2.7
|
2.9
|
Weighted-average
diluted shares outstanding
|
933.8
|
932.6
|
933.6
|
932.7
|
Earnings per share -
basic
|
$
1.42
|
$
0.82
|
$
2.28
|
$
1.46
|
Earnings per share -
diluted
|
$
1.42
|
$
0.82
|
$
2.28
|
$
1.45
|
For the three and six months ended June 30,
2023, there were 0.5 million and 0.2 million options,
respectively, excluded from the computation of diluted earnings per
share because their effects were not dilutive (three and six months
ended June 30, 2022 - 0.8 million and
0.4 million, respectively).
6 Changes in Accumulated other
comprehensive (loss) income ("AOCL") by component
|
For the three months
ended June 30
|
(in millions of
Canadian dollars)
|
Foreign currency
net of hedging
activities(1)(2)
|
Derivatives(1)(2)
|
Pension and post-
retirement defined
benefit plans(1)(2)
|
Equity
accounted
investments(1)(2)
|
Total(1)(2)
|
Opening balance,
April 1, 2023
|
$
1,478
|
$
1
|
$
(1,404)
|
$
(1)
|
$
74
|
Other comprehensive
(loss)
income before reclassifications
|
(621)
|
—
|
(9)
|
3
|
(627)
|
Amounts reclassified
from
accumulated other
comprehensive income
|
—
|
1
|
7
|
1
|
9
|
Net other comprehensive
(loss)
income
|
(621)
|
1
|
(2)
|
4
|
(618)
|
Closing balance,
June 30,
2023
|
$
857
|
$
2
|
$
(1,406)
|
$
3
|
$
(544)
|
Opening balance, April
1, 2022
|
$
(531)
|
$
(3)
|
$
(1,884)
|
$
45
|
$
(2,373)
|
Other comprehensive
income
before reclassifications
|
748
|
—
|
—
|
57
|
805
|
Amounts reclassified
from
accumulated other
comprehensive loss
|
—
|
1
|
28
|
—
|
29
|
Net other comprehensive
income
|
748
|
1
|
28
|
57
|
834
|
Closing balance, June
30, 2022
|
$
217
|
$
(2)
|
$
(1,856)
|
$
102
|
$
(1,539)
|
(1)
|
Amounts are presented
net of tax.
|
(2)
|
Amounts presented are
those attributable to common shareholders.
|
|
For the six months
ended June 30
|
(in millions of
Canadian dollars)
|
Foreign currency
net of hedging
activities(1)(2)
|
Derivatives(1)(2)
|
Pension and post-
retirement defined
benefit plans(1)(2)
|
Equity
accounted
investments(1)(2)
|
Total(1)(2)
|
Opening balance,
January 1,
2023
|
$
1,505
|
$
—
|
$
(1,410)
|
$
(4)
|
$
91
|
Other comprehensive
(loss)
income before reclassifications
|
(648)
|
—
|
(9)
|
6
|
(651)
|
Amounts reclassified
from
accumulated other
comprehensive income (loss)
|
—
|
2
|
13
|
1
|
16
|
Net other comprehensive
(loss)
income
|
(648)
|
2
|
4
|
7
|
(635)
|
Closing balance,
June 30,
2023
|
$
857
|
$
2
|
$
(1,406)
|
$
3
|
$
(544)
|
Opening balance,
January 1,
2022
|
$
(182)
|
$
(4)
|
$
(1,915)
|
$
(2)
|
$
(2,103)
|
Other comprehensive
income
before reclassifications
|
399
|
—
|
—
|
103
|
502
|
Amounts reclassified
from
accumulated other
comprehensive loss
|
—
|
2
|
59
|
1
|
62
|
Net other comprehensive
income
|
399
|
2
|
59
|
104
|
564
|
Closing balance, June
30, 2022
|
$
217
|
$
(2)
|
$
(1,856)
|
$
102
|
$
(1,539)
|
(1)
|
Amounts are presented
net of tax.
|
(2)
|
Amounts presented are
those attributable to common shareholders.
|
7 Accounts receivable, net
(in millions of
Canadian dollars)
|
As at June 30,
2023
|
As at December 31,
2022
|
Total accounts
receivable
|
$
1,726
|
$
1,057
|
Allowance for credit
losses
|
(70)
|
(41)
|
Total accounts
receivable, net
|
$
1,656
|
$
1,016
|
8 Business acquisition
Management is required to make estimates and assumptions of the
fair value of assets acquired and liabilities and non-controlling
interest assumed in the business combination at the acquisition
date. These estimates and assumptions are inherently uncertain and
subject to refinement. Therefore, during the measurement period,
which may be up to one year from the date of acquisition, the
Company will adjust the fair values of the assets and liabilities
based on new information about facts and circumstances that existed
at the Control Date that, if known, would affect the amounts
recognized as of that date. Changes in the provisional amounts may
impact goodwill. After the earlier of the end of the measurement
period or when the final fair value of the assets and liabilities
assumed have been determined, any subsequent adjustments are
recorded in the Interim Consolidated Statements of Income.
The Company identifies pre-acquisition contingencies as of the
date of acquisition and will continue to assess these contingencies
on a quarterly basis throughout the measurement period to determine
whether these contingencies should be included in the fair value of
assets and liabilities assumed. After the earlier of the end of the
measurement period or when the final fair value of the assets and
liabilities assumed have been determined, any subsequent changes to
the pre-acquisition contingencies that impact the fair value of the
assets and liabilities assumed are recorded in the Interim
Consolidated Statements of Income.
In the event that the Company acquires a business in which it
previously held an equity interest, the Company remeasures the fair
value of the investment at the acquisition date, with any
difference in the valuation recorded as a net remeasurement gain or
loss in the Interim Consolidated Statements of Income. Any
pre-existing relationship between the Company and the acquiree is
effectively settled with a corresponding gain or loss recorded in
the Interim Consolidated Statements of Income, separately, from the
business acquisition.
Kansas City Southern
On December 14, 2021, the Company
purchased 100% of the issued and outstanding shares of KCS and
placed the shares of KCS in a voting trust. Prior to control, KCS
was a U.S. Class I railway with approximately 7,000 route miles
extending from the Midwest and southeast portions of the United States south to Mexico and connected with all Class I
railways. KCS is connected with the Company's network in
Kansas City.
On March 15, 2023, the U.S.
Surface Transportation Board (the "STB") issued a final decision
approving the Company and KCS's joint merger application, subject
to certain conditions. The Company assumed control of KCS on
April 14, 2023 ("Control Date"). Between December 14, 2021 and April 13, 2023 the Company recorded its
investment in KCS using the equity method of accounting, see Note 9
Investment in KCS for further discussion. On assuming control, the
merger created the only single-line railroad linking the United States, Mexico, and Canada and will enable significant growth for
the Company's rail customers.
Accordingly, the Company commenced consolidation of KCS on the
Control Date, accounting for the acquisition as a business
combination achieved in stages. The results from operations and
cash flows have been consolidated prospectively from the Control
Date. The Company derecognized its previously held equity method
investment in KCS of $44,402 million as of April 13, 2023 and remeasured the investment at
its Control Date fair value of $37,227 million, which formed part of the
purchase consideration, resulting in a net remeasurement loss of
$7,175 million. In addition, a
deferred tax recovery of $7,832
million was recognized upon the derecognition of the
deferred tax liability computed on the outside basis that the
Company had recognized in relation to its investment in KCS while
accounted for using the equity method. The fair value of the
previously held equity interest in KCS was determined through use
of a discounted cash flow approach, which incorporated the
Company's best estimates of long term growth rates, tax rates,
discount rates, and terminal multiples.
The identifiable assets acquired, and liabilities and
non-controlling interest assumed are measured at their provisional
fair values at the Control Date, with certain exceptions. The
provisional fair values of the tangible assets were determined
using valuation techniques including, but not limited to, the
market approach and the cost approach. The significant assumptions
used to determine the provisional fair value of the tangible assets
included, but were not limited to, a selection of comparable assets
and inflation. Presented with the acquired Properties are
concession rights and related assets held under the terms of a
concession from the Mexican government. The concession expires in
June 2047 and is renewable under
certain conditions for additional periods, each of up to 50
years.
The provisional fair values of the intangible assets were
determined using valuation techniques including, but not limited
to, the multi-period excess earnings method, the replacement cost
method, the relief from royalty method and the income approach. The
significant assumptions used to determine the provisional fair
values of the intangible assets included, but were not limited to,
the renewal probability and term of the Mexican concession
extension, discount rates, earnings before interest, tax,
depreciation, and amortization ("EBITDA") margins and terminal
growth rates.
During the measurement period, the Company will finalize its
allocation of the Control Date fair value of KCS to the acquired
assets and assumed liabilities and non-controlling interest to
reflect additional information, which may become available as to
facts and circumstances as of the Control Date. Measurement
uncertainty existed at the Control date with respect to, but not
limited to, property plant and equipment, materials and supplies,
environmental, legal, personal injury and other contingent
liabilities, deferred income taxes, uncertain tax positions and
other tax assets or liabilities, pensions and other benefits and
other assets and liabilities. During the measurement period, this
uncertainty may be resolved due to new information being obtained
about facts and circumstances that existed as of the Control Date
that, if known, would have affected the amounts recognized for
assets and liabilities as of the Control Date.
The following table summarizes the preliminary purchase price
allocation with the amounts recognized in respect of the
identifiable assets acquired and liabilities and non-controlling
interest assumed on the Control Date, as well as the fair value at
the Control Date of the previously held equity interest in KCS:
(in millions of
Canadian dollars)
|
|
Net assets
acquired:
|
|
Cash and cash
equivalents
|
$
298
|
Net working
capital
|
51
|
Properties
|
28,748
|
Intangible
assets
|
3,022
|
Other long-term
assets
|
496
|
Long-term
debt
|
(4,545)
|
Deferred income
taxes
|
(6,984)
|
Other long-term
liabilities
|
(406)
|
Total identifiable net
assets
|
$
20,680
|
Goodwill
|
17,491
|
|
$
38,171
|
Consideration:
|
|
Fair value of
previously held equity method investment
|
$
37,227
|
Intercompany net
balances acquired
|
12
|
Fair value of
non-controlling interest
|
932
|
Total
|
$
38,171
|
Acquired cash and cash equivalents of $298
million are presented as an investing activity on the
Company's Interim Consolidated Statements of Cash Flows for the
three and six months ended June 30,
2023.
The fair value of net working capital acquired included trade
receivables of $644 million and gross intercompany receivables
with CPKC of $24 million and did not
include acquired debt securities with credit deterioration. The
gross amount of trade receivables due under contracts was
$664 million, of which $20 million is expected to be uncollectible.
Intangible assets of $3,022 million consist of contracts and
customer relationships with amortization periods of nine to 22
years as well as U.S. trackage rights and the KCS brand with
indefinite estimated useful lives. Included in the acquired
Properties are concession rights and related assets held under the
terms of a concession from the Mexican government, which have
provisional fair values totalling $9,176
million. The concession rights and related assets are
amortized over the shorter of the underlying asset lives and the
estimated concession term, including one renewal period, of 74
years.
Other long-term liabilities included environmental liabilities
of $132 million and legal and
personal injury claims of $41
million, which are contingent on the outcome of uncertain
future events. The values are measured at amortized cost and
evaluated for changes in facts at the end of the reporting period.
Gain contingencies not recorded at acquisition date related to
income taxes are discussed in Note 4.
The excess of the total consideration, over the amounts
allocated to acquired assets and assumed liabilities and the
non-controlling interest recognized, was recognized as goodwill of
$17,491 million. All of the goodwill
has been assigned to the rail transportation segment. None of the
goodwill is expected to be deductible for income tax purposes.
The Interim Consolidated Statements of Income for the three and
six months ended June 30, 2023
included revenue of $998 million from KCS and net income
attributable to controlling shareholders of $138 million from
KCS from April 14, 2023 to
June 30, 2023. On a pro forma basis,
if the Company had consolidated KCS starting January 1, 2022, the revenue and earnings of the
combined entity would be as follows for the three and six months
ended June 30, 2023 and June 30, 2022:
|
Three Months Ended
June
30, 2023
|
Three Months Ended
June
30, 2022
|
(in millions of
Canadian dollars)
|
KCS
Historical(1)
|
Pro Forma
CPKC
|
KCS
Historical(1)
|
Pro Forma
CPKC
|
Revenue
|
$
164
|
$
3,338
|
$
1,079
|
$
3,285
|
Net income
attributable to controlling shareholders
|
34
|
615
|
248
|
794
|
(1)
|
KCS's results were
translated into Canadian dollars at the Bank of Canada daily
exchange rate for the period from April 1 to April 13, 2023 and
three
months ended June 30, 2022 with effective exchange rates of $1.35
and $1.28, respectively.
|
|
Six Months Ended
June 30,
2023
|
Six Months Ended
June 30,
2022
|
(in millions of
Canadian dollars)
|
KCS
Historical(1)
|
Pro Forma
CPKC
|
KCS
Historical(1)
|
Pro Forma
CPKC
|
Revenue
|
$
1,351
|
$
6,794
|
$
2,065
|
$
6,112
|
Net income
attributable to controlling shareholders
|
280
|
1,371
|
485
|
2,018
|
(1)
|
KCS's results were
translated into Canadian dollars at the Bank of Canada daily
exchange rate for the period from January 1 to April 13, 2023 and
six
months ended June 30, 2022 with effective exchange rates of $1.35
and $1.27, respectively.
|
The supplemental pro forma Net income attributable to controlling
shareholders for the combined entity were adjusted for:
- the removal of the remeasurement loss of $7,175 million upon the derecognition of CPRL's
previously held equity method investment in KCS from the three and
six months ended June 30, 2023, which
included the reclassification of associated accumulated other
comprehensive income to retained earnings; and recognition of this
remeasurement loss in the three months ended March 31, 2022;
- depreciation and amortization of differences between the
historic carrying value and the preliminary fair value of tangible
and intangible assets and investments prior to the Control
Date;
- amortization of differences between the carrying amount and the
fair value of debt through net interest expense prior to the
Control Date;
- the elimination of intercompany transactions prior to the
Control Date between the Company and KCS;
- miscellaneous amounts have been reclassified across revenue,
operating expenses, and non-operating income or expense, consistent
with CPKC's financial statement captions;
- the removal of equity earnings from KCS, previously held as an
equity method investment prior to the Control Date, of $26 million, $208
million, $230 million, and
$406 million for the three months
ended June 30, 2023 and June 30, 2022 and six months ended June 30, 2023 and June 30,
2022, respectively;
- estimated transaction costs expected to be incurred by the
Company; and
- income tax adjustments including:
-
- the derecognition of a deferred tax recovery of
$7,832 million for the three and six
months ended June 30, 2023 related to
the elimination of the deferred tax liability on the outside basis
difference of the investment in KCS; and recognition of this
deferred tax recovery in the three months ended March 31, 2022;
- the derecognition of a deferred tax recovery for the three
months ended June 30, 2023 on CPKC
unitary state apportionment changes; and recognition of these CPKC
unitary state apportionment changes in the three months ended
March 31, 2022;
- a deferred tax recovery prior to the Control Date on
amortization of fair value adjustments to investments, properties,
intangible assets and debt; and
- a current tax recovery on transaction costs expected to be
incurred by CPKC.
During the three and six months ended June 30, 2023, the Company incurred
$119 million and $134 million, in acquisition-related
costs, respectively, of which $63
million and $63 million were
recorded in "Compensation and benefits", $53
million and $65 million were recorded within "Purchased
services and other", and $3 million and $6 million, were
recorded within "Other expense (income)". Acquisition-related costs
of $1 million and $11 million incurred by KCS during the
three and six months ended June 30,
2023 were included within "Equity earnings of Kansas City
Southern".
During the three and six months ended June 30, 2022, the Company incurred
$19 million and $39 million, in acquisition-related
costs, respectively, recorded within "Purchased services and
other". Acquisition-related costs of $14 million and
$27 million incurred by KCS during the three and six months
ended June 30, 2022 were included
within "Equity earnings of Kansas City Southern".
9 Investment in KCS
On April 14, 2023 the Company assumed control of KCS and
subsequently derecognized its previously held equity method
investment in KCS of $44,402 million
as of April 13, 2023 (December 31, 2022 - $45,091 million).
For the period April 1 to 13, 2023
and the period January 1 to April 13,
2023, the Company recognized $26
million and $230 million of
equity earnings of KCS, respectively (three and six months ended
June 30, 2022 - $208 million and $406
million, respectively), and received dividends from KCS for
the period April 1 to 13, 2023 and
the period January 1 to April 13,
2023 of nil and $300 million
respectively (three and six months ended June 30, 2022 - nil and $334 million respectively). The foreign currency
translation of the investment in KCS for the period April 1 to 13, 2023 and January 1 to April 13, 2023, totaled losses of
$41 million and $578 million, respectively (three and six months
ended June 30, 2022 - gains of
$608 million and $694 million, respectively). Included within the
equity earnings of KCS recognized for the period April 1 to 13, 2023 and the period January 1 to April 13, 2023 was amortization (net
of tax) of basis differences of $6
million and $48 million,
respectively (three and six months ended June 30, 2022 - $39
million and $79 million,
respectively). These basis differences relate to depreciable
property, plant and equipment, intangible assets with definite
lives, and long-term debt, and are amortized over the related
assets' remaining useful lives and the remaining terms to maturity
of the debt instruments.
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 period
April
1 to April 13, 2023
|
For the three
months ended June
30, 2022
|
For the period
January 1 to April 13,
2023
|
For the six
months
ended June 30, 2022
|
Total
revenues
|
$
164
|
$
1,079
|
$
1,351
|
$
2,065
|
Total operating
expenses
|
109
|
680
|
888
|
1,297
|
Operating
income
|
55
|
399
|
463
|
768
|
Less:
Other(2)
|
9
|
59
|
83
|
98
|
Income before income
taxes
|
46
|
340
|
380
|
670
|
Net
income
|
$
34
|
$
248
|
$
280
|
$
485
|
(1)
|
Amounts translated at
the average FX rate for the period April 1 to April 13, 2023 and
three months ended June 30, 2022 of $1.00 USD = $1.35 CAD
and $1.00 USD = $1.28 CAD respectively. Also, for the period
January 1 to April 13, 2023 and six months ended June 30,
2022 of $1.00 USD= $1.35
CAD and $1.00 USD = $1.27 CAD respectively.
|
(2)
|
Includes Equity in net
earnings of KCS's affiliates, Interest expense, FX loss, and Other
income, net.
|
10 Goodwill
(in millions of
Canadian dollars)
|
Net carrying
amount
|
Balance as at December
31, 2022
|
$
344
|
Additions (Note
8)
|
17,491
|
Foreign exchange
impact
|
(161)
|
Balance as at June
30, 2023
|
$
17,674
|
Goodwill acquired in the period is the excess of the purchase price
over the estimated fair value of net assets acquired in the
business acquisition of KCS. The goodwill represents future growth
opportunities, synergies and an assembled workforce.
11 Intangible assets
(in millions of
Canadian dollars)
|
Cost
|
Accumulated
amortization
|
Net carrying
amount
|
Balance as at December
31, 2022
|
$
66
|
$
(24)
|
$
42
|
Additions (Note
8)
|
3,022
|
—
|
3,022
|
Amortization
|
—
|
(18)
|
(18)
|
Foreign exchange
impact
|
(27)
|
—
|
(27)
|
Balance as at June
30, 2023
|
$
3,061
|
$
(42)
|
$
3,019
|
12 Debt
During the six months ended June 30,
2023, the Company repaid U.S. $350
million ($479 million) 4.450%
12.5-year Notes at maturity, and U.S. $439
million ($592 million) of
3.00% 10-year Senior Notes at maturity by release of funds from the
trustee as discussed below in "Satisfaction and Discharge of KCS
2023 Notes".
Credit facility
Effective May 11, 2023, the
Company entered into a second amended and restated credit agreement
to extend the maturity dates and increase the total amount
available under the facility. The amended revolving credit facility
increased the aggregate commitments under the second amended and
restated credit agreement from U.S. $1.3
billion to U.S. $2.2 billion,
and extended the maturity dates of the five year facility and two
year facility from September 27, 2026
to May 11, 2028, and September 27, 2023 to May
11, 2025, respectively. As at June
30, 2023, the revolving credit facility was undrawn
(December 31, 2022 - undrawn). The
Company also terminated the legacy KCS credit facility effective
May 11, 2023.
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. $2.2 billion revolving
credit facility. As at June 30, 2023
the Company had total commercial paper borrowings outstanding of
U.S. $405 million ($536 million) included in "Long-term
debt maturing within one year" on the Company's Interim
Consolidated Balance Sheets (December 31,
2022 - $nil). The weighted-average interest rate on these
borrowings as at June 30, 2023 was
5.41%. 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. The Company also terminated the legacy KCS commercial paper
program effective May 19, 2023.
On July 12, 2023, the Company
increased the maximum aggregate principal amount of commercial
paper available to be issued to U.S $1.5
billion.
KCS Debt Exchange
On March 20, 2023, the Company
announced the commencement of offers to exchange any and all
validly tendered (and not validly withdrawn notes) and accepted
notes of seven series, each previously issued by KCS (the "Old
Notes") for notes issued by Canadian Pacific Railway Company
("CPRC") (the "CPRC Notes"), a wholly owned subsidiary of CPKC, and
unconditionally guaranteed on an unsecured basis by CPKC. Each
series of CPRC Notes has the same interest rates, interest payment
dates, maturity dates, and substantively the same optional
redemption provisions as the corresponding series of Old Notes.
In exchange for each U.S. $1,000
principal amount of Old Notes that was validly tendered prior to
March 31, 2023 (the "Early
Participation Date") and not validly withdrawn, holders of Old
Notes received consideration consisting of U.S. $1,000 principal amount of CPRC Notes and a cash
amount of U.S. $1.00. This total
consideration included an early participation premium, consisting
of U.S. $30 principal amount of CPRC
Notes per U.S. $1,000 principal
amount of Old Notes. In exchange for each U.S. $1,000 principal amount of Old Notes that was
validly tendered after the Early Participation Date but prior to
the expiration of the exchange offers on April 17, 2023 (the "Expiration Date") and not
validly withdrawn, holders of Old Notes received consideration
consisting of U.S. $970 principal
amount of CPRC Notes and a cash amount of U.S. $1.00. On April 19,
2023, the exchange offerings were settled as follows:
(in millions of U.S. dollars, except percentages)
Series of Old
Notes
Subject to
Exchange
|
|
Aggregate
Principal Amount
Tendered and
Consents
Received
|
|
Percentage of
Total
Outstanding
Principal
Amount of such
Series
of Old Notes Tendered
and
Consenting
|
|
Series of CPRC
Notes
Issued by CPRC
|
|
Aggregate
Principal
Amount of
CPRC Notes
Issued
|
3.125 %
|
Senior Notes due
2026
|
|
$
227
|
|
90.8 %
|
|
3.125 %
|
|
Notes due
2026
|
|
$
227
|
2.875 %
|
Senior Notes due
2029
|
|
415
|
|
97.6 %
|
|
2.875 %
|
|
Notes due
2029
|
|
415
|
4.300 %
|
Senior Notes due
2043
|
|
448
|
|
100.0 %
|
|
4.300 %
|
|
Notes due
2043
|
|
448
|
4.950 %
|
Senior Notes due
2045
|
|
463
|
|
92.8 %
|
|
4.950 %
|
|
Notes due
2045
|
|
463
|
4.700 %
|
Senior Notes due
2048
|
|
498
|
|
99.6 %
|
|
4.700 %
|
|
Notes due
2048
|
|
498
|
3.500 %
|
Senior Notes due
2050
|
|
543
|
|
98.7 %
|
|
3.500 %
|
|
Notes due
2050
|
|
543
|
4.200 %
|
Senior Notes due
2069
|
|
420
|
|
98.9 %
|
|
4.200 %
|
|
Notes due
2069
|
|
420
|
Total
|
|
|
$
3,014
|
|
97.3 %
|
|
|
|
|
|
$
3,014
|
The debt exchange was accounted for as a modification of debt as
the financial terms of the CPRC Notes do not differ from the Old
Notes of KCS and there is no substantial difference between the
present value of cash flows under each respective set of notes.
During the three and six months ended June
30, 2023, the Company incurred $9
million and $12 million,
respectively of costs associated with the debt exchange, recorded
within "Other expense". These charges, along with amounts paid to
noteholders, totalling $15 million
have been classified as "Acquisition-related financing fees" within
the Company's Interim Consolidated Statements of Cash
Flows.
Satisfaction and Discharge of KCS 2023 Notes
On April 24, 2023, KCS irrevocably
deposited U.S. $647 million of
non-callable government securities ("Treasury notes") with the
trustee of two series of notes that mature in 2023 and were not
included within the KCS debt exchange (the "KCS 2023 Notes") to
satisfy and discharge KCS's obligations under the KCS 2023 Notes.
As a result of the satisfaction and discharge, the obligations of
the Company under the indenture with respect to the KCS 2023 Notes
have been terminated, except those provisions of the indenture
that, by their terms, survive the satisfaction and discharge. The
Company utilized existing cash resources and issuances of
commercial paper to fund the satisfaction and discharge. On
May 15, 2023 the U.S. $439 million 3.00% Senior Notes were repaid by
release of funds from the trustee. The remaining KCS 2023 Notes as
well as the short-term investment in Treasury notes will be
reported on the Company's Interim Consolidated Balance Sheets until
their maturity date. The balance of principal and interest
outstanding as of June 30, 2023 on
the 3.85% Senior Notes maturing November
2023 was U.S. $200 million. In
the Company's Interim Consolidated Statements of Cash Flows, the
government securities of U.S. $447
million ($600 million)
purchased towards the settlement of the May maturity were treated
as a cash equivalent, with settlement ultimately presented within
financing activities as a repayment of long-term debt; the purchase
of government securities of U.S. $198
million ($267 million) towards
the settlement of the November maturity was presented within
investing activities. This transaction, along with the debt
exchange mentioned above, relieved KCS from continuous disclosure
obligations.
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 values have 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 $22,726 million as at
June 30, 2023 (December 31, 2022 - $19,651 million), had a fair value of
$21,169 million (December 31, 2022 - $17,720 million).
B. Financial risk management
FX management
Net investment hedge
The effect of the Company's net investment hedge for the three
and six months ended June 30, 2023
was an unrealized FX loss of $163
million and $162 million,
respectively (three and six months ended June 30, 2022 - unrealized FX loss of
$216 million and $118 million, respectively) recognized in "Other
comprehensive (loss) income".
Foreign currency derivative instruments
The Company's Mexican subsidiaries have net U.S.
dollar-denominated monetary assets which, for Mexican income tax
purposes, are subject to periodic revaluation based on changes in
the value of the Mexican peso ("Ps.") against the U.S dollar. This
revaluation creates fluctuations in the Company's Mexican income
tax expense and the amount of income taxes paid in Mexican peso.
The Company also has net monetary assets denominated in Mexican
pesos that are subject to periodic re-measurement and settlement
that create fluctuations within "Other expense". The Company has
hedged its net exposure to Mexican peso/U.S dollar fluctuations in
earnings with foreign currency forward contracts. The foreign
currency forward contracts involve the Company's agreement to buy
or sell pesos at an agreed-upon exchange rate on a future date.
As at June 30, 2023, the Company
had outstanding foreign currency forward contracts to purchase a
notional value of U.S. $215 million. These outstanding
contracts are at a weighted-average exchange rate of Ps.20.61 per
U.S. $1.00, with exchange rates
ranging from Ps.19.55 to Ps.20.72. The weighted average term
of contracts is 345 days. The Company has not designated any of the
foreign currency derivative contracts as hedging instruments for
accounting purposes. The Company measures the foreign currency
derivative contracts at fair value each period and recognizes any
change in "Other expense". The cash flows associated with these
instruments are classified as "Operating activities" within the
Interim Consolidated Statements of Cash Flows.
Following the acquisition of control of KCS on April 14, 2023, the Company recorded a loss of
$24 million related to foreign
exchange currency forwards. As at June 30,
2023, the fair value of outstanding foreign exchange
contracts included in "Accounts payable and accrued liabilities"
was $46 million.
Offsetting
The Company's foreign currency forward
contracts are executed with counterparties in the U.S. and are
governed by International Swaps and Derivatives Association
agreements that include standard netting arrangements. Asset and
liability positions from contracts with the same counterparty are
net settled upon maturity/expiration and presented on a net basis
in the Interim Consolidated Balance Sheets prior to settlement.
14 Pension and other
benefits
In the three and six months ended June
30, 2023, the Company made contributions to its defined
benefit pension plans of $5 million
and $9 million, respectively (three
and six months ended June 30, 2022 -
$4 million and $7 million, respectively).
Net periodic benefit costs for defined benefit pension plans and
other benefits included the following components:
|
For the three months
ended June 30
|
|
Pensions
|
Other
benefits
|
(in millions of
Canadian dollars)
|
2023
|
2022
|
2023
|
2022
|
Current service cost
(benefits earned by employees)
|
$
17
|
$
37
|
$
3
|
$
3
|
Other components of net
periodic benefit (recovery) cost:
|
|
|
|
|
Interest cost on
benefit obligation
|
122
|
96
|
6
|
4
|
Expected return on
plan assets
|
(221)
|
(239)
|
—
|
—
|
Recognized net
actuarial loss
|
8
|
38
|
—
|
—
|
Amortization of prior
service costs
|
1
|
—
|
1
|
—
|
Total other components
of net periodic benefit (recovery) cost
|
(90)
|
(105)
|
7
|
4
|
Net periodic benefit
(recovery) cost
|
$
(73)
|
$
(68)
|
$
10
|
$
7
|
|
For the six months
ended June 30
|
|
Pensions
|
Other
benefits
|
(in millions of
Canadian dollars)
|
2023
|
2022
|
2023
|
2022
|
Current service cost
(benefits earned by employees)
|
$
35
|
$
74
|
$
5
|
$
5
|
Other components of net
periodic benefit (recovery) cost:
|
|
|
|
|
Interest cost on
benefit obligation
|
243
|
192
|
11
|
8
|
Expected return on
plan assets
|
(441)
|
(479)
|
—
|
—
|
Recognized net
actuarial loss
|
16
|
76
|
—
|
1
|
Amortization of prior
service costs
|
1
|
—
|
1
|
—
|
Total other components
of net periodic benefit (recovery) cost
|
(181)
|
(211)
|
12
|
9
|
Net periodic benefit
(recovery) cost
|
$
(146)
|
$
(137)
|
$
17
|
$
14
|
15 Stock-based compensation
As at June 30, 2023, 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
six months ended June 30, 2023 of
$39 million and $71 million, respectively (three and six months
ended June 30, 2022 - expense of
$2 million and $46 million, respectively).
Stock option plans
In the six months ended June 30,
2023, under the Company's stock option plans, the Company
issued 856,332 options at the weighted-average price of
$105.82 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 six
months
ended June 30, 2023
|
Expected option life
(years)(1)
|
4.75
|
Risk-free interest
rate(2)
|
3.35 %
|
Expected share price
volatility(3)
|
28.44 %
|
Expected annual
dividends per share(4)
|
$0.760
|
Expected forfeiture
rate(5)
|
3.18 %
|
Weighted-average grant
date fair value per option granted during the period
|
$29.79
|
(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 six months ended June 30,
2023, the Company issued 891,411 Performance Share Units
("PSUs") with a grant date fair value of approximately $96 million and 26,333 Performance Deferred Share
Units ("PDSUs") with a grant date fair value, including the value
of expected future matching units, of approximately $3 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 to
four years after the grant date, contingent upon the Company'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 the Company.
The performance period for 544,175 PSUs and all PDSUs issued in
the six months ended June 30, 2023 is
January 1, 2023 to December 31, 2025 and the performance factors are
Free Cash Flow ("FCF"), Total Shareholder Return ("TSR") compared
to the S&P/TSX 60 Index, and TSR compared to the S&P 500
Industrials Index. The performance period for the remaining 347,236
PSUs is April 28, 2023 to
December 1, 2026 and the performance
factors are annualized earnings before interest, tax, depreciation,
and amortization ("EBITDA"), and TSR compared to Class I
Railways.
The performance period for 489,990 PSUs and 50,145 PDSUs issued
in 2020 was January 1, 2020 to
December 31, 2022, and the
performance factors for these 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 180% of the
outstanding units multiplied by the Company's average share price
calculated using the last 30 trading days preceding December 31, 2022. In the first quarter of 2023,
payouts occurred on 459,358 PSUs outstanding, including dividends
reinvested, totalling $87 million. The 45,058 PDSUs that
vested on December 31, 2022 for a
total fair value of $11 million, including dividends
reinvested and matching units, will payout in the future pursuant
to the DSU plan (as described above).
16 Contingencies
Litigation
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
June 30, 2023 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, results of operations, or liquidity.
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 $440
million amongst those claiming derailment damages.
A number of legal proceedings, set out below, were commenced in
Canada and the U.S. against the
Company and others:
(1) Québec's Minister of Sustainable
Development, Environment, Wildlife and Parks ordered various
parties, including the Company, to remediate the derailment site
(the "Cleanup Order") and served the Company with a Notice of Claim
for $95 million for those costs. The
Company 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 the Company 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) the Company was
responsible for the petroleum crude oil from its point of origin
until its delivery to Irving Oil Ltd.; and (ii) the Company 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 the Company 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
the Company 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 the Company 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 with oral arguments ending on June 15, 2022. The Québec Superior Court issued a
decision on December 14, 2022
dismissing all claims as against the Company, finding that the
Company's actions were not the direct and immediate cause of the
accident and the damages suffered by the plaintiffs. All three
plaintiffs filed a declaration of appeal on January 13, 2023. A damages trial will follow
after the disposition of all appeals, if necessary.
(5) Forty-eight plaintiffs (all
individual claims joined in one action) sued the Company, 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 the Company, 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 the Company in
November 2014 in the Maine Bankruptcy
Court claiming that the Company 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 expert report filed by the
bankruptcy estate. This action asserts that the Company knew or
ought to have known that the shipper misclassified the petroleum
crude oil and therefore should have refused to transport it.
Summary judgment motion was argued and taken under advisement on
June 9, 2022, and decision is
pending. On May 23, 2023, the case
management judge stayed the proceedings pending the outcome of the
appeal in the Canadian consolidated claims.
(7) The class and mass tort action
commenced against the Company 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 the
Company 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
the Company negligently misclassified and improperly packaged the
petroleum crude oil. On the Company'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 the Company
in North Dakota Federal Court, seeking to recover approximately
U.S. $6 million for damaged rail cars
and lost crude oil 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. Final briefs of
dispositive motions for summary judgment and for reconsideration on
tariff applicability were submitted on September 30, 2022. On January 20, 2023, the Court granted in part the
Company's summary judgment motion by dismissing all claims for
recovery of settlement payments but leaving for trial the
determination of the value of the lost crude oil. It also dismissed
the Company's motion for reconsideration on tariff applicability.
The remaining issues of the value of the lost crude oil and
applicability of judgement reduction provisions do not require
trial, and have been fully briefed. Decision is pending.
At this stage of the proceedings, any potential responsibility
and the quantum of potential losses cannot be determined.
Nevertheless, the Company 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
$164 million plus interest and costs, and subject to an
adjustment to the acquisition value of the property. However, the
Court has not provided any indication of how the damages, which are
currently estimated to total approximately $200 million before
Remington's costs are established, should be apportioned between
the Company and Alberta. As a
result, at this time, the Company cannot reasonably estimate the
amount of damages for which it is liable under the ruling of the
Court. The Company has filed an appeal of the Court's decision.
2014 Tax Assessment
On April 13, 2022, the SAT issued
an assessment to CPKCM, a wholly-owned subsidiary of the Company,
for Ps.5,525 million ($428 million) for the fiscal year
2014, which included inflation, interest, and penalties. On
July 7, 2022, CPKCM filed with the
SAT an administrative challenge (recurso de revocación) against the
assessment. On September 26, 2022,
the SAT withdrew the administrative challenge. On November 10, 2022, CPKCM filed an administrative
lawsuit against the withdrawal of the administrative challenge. As
part of the lawsuit, CPKCM asked the Court for an injunction to
avoid the collection by the SAT of the 2014 assessment. On
December 7, 2022, the Administrative
Court admitted the annulment lawsuit filed by CPKCM. On
February 10, 2023, the SAT filed its
response to the lawsuit. On March 15,
2023, the lawsuit was opened to the evidentiary stage. A
resolution from the Administrative Court is expected in the fourth
quarter of 2023. The decision from the Administrative Court may be
appealed by CPKCM or the SAT.
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 the
Company'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 the Company's best estimate of all probable costs,
the Company'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 six months ended June 30, 2023
was $3 million and $4 million, respectively (three and
six months ended June 30, 2022 -
$2 million and $4 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 as at June 30, 2023 was
$228 million (December 31, 2022
- $83 million) including liabilities recognized with the
acquisition of KCS. Payments are expected to be made over 10 years
through 2032.
Summary of Rail
Data(1)
U.S. GAAP Financial
Information As Reported
|
Second
Quarter
|
|
Year-to-date
|
(in millions, except
per share data)
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Freight
|
$
3,101
|
$
2,154
|
$ 947
|
44
|
|
$
5,318
|
$
3,950
|
$
1,368
|
35
|
Non-freight
|
73
|
48
|
25
|
52
|
|
122
|
90
|
32
|
36
|
Total
revenues
|
3,174
|
2,202
|
972
|
44
|
|
5,440
|
4,040
|
1,400
|
35
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
659
|
348
|
311
|
89
|
|
1,097
|
761
|
336
|
44
|
Fuel
|
397
|
370
|
27
|
7
|
|
723
|
643
|
80
|
12
|
Materials
|
98
|
63
|
35
|
56
|
|
170
|
125
|
45
|
36
|
Equipment
rents
|
80
|
29
|
51
|
176
|
|
110
|
64
|
46
|
72
|
Depreciation and
amortization
|
410
|
211
|
199
|
94
|
|
635
|
421
|
214
|
51
|
Purchased services and
other
|
586
|
313
|
273
|
87
|
|
932
|
623
|
309
|
50
|
Total operating
expenses
|
2,230
|
1,334
|
896
|
67
|
|
3,667
|
2,637
|
1,030
|
39
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
944
|
868
|
76
|
9
|
|
1,773
|
1,403
|
370
|
26
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Equity earnings of
Kansas City Southern
|
(26)
|
(208)
|
182
|
(88)
|
|
(230)
|
(406)
|
176
|
(43)
|
Other
expense
|
21
|
7
|
14
|
200
|
|
23
|
6
|
17
|
283
|
Other components of
net periodic benefit recovery
|
(83)
|
(101)
|
18
|
(18)
|
|
(169)
|
(202)
|
33
|
(16)
|
Net interest
expense
|
204
|
160
|
44
|
28
|
|
358
|
320
|
38
|
12
|
Remeasurement loss of
Kansas City Southern
|
7,175
|
—
|
7,175
|
100
|
|
7,175
|
—
|
7,175
|
100
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before
income tax (recovery) expense
|
(6,347)
|
1,010
|
(7,357)
|
(728)
|
|
(5,384)
|
1,685
|
(7,069)
|
(420)
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Current income tax
expense
|
281
|
131
|
150
|
115
|
|
419
|
217
|
202
|
93
|
Deferred tax
(recovery) expense
|
(7,953)
|
114
|
(8,067)
|
(7,076)
|
|
(7,928)
|
113
|
(8,041)
|
(7,116)
|
Income tax (recovery)
expense
|
(7,672)
|
245
|
(7,917)
|
(3,231)
|
|
(7,509)
|
330
|
(7,839)
|
(2,375)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
1,325
|
$ 765
|
$ 560
|
73
|
|
$
2,125
|
$
1,355
|
$ 770
|
57
|
|
|
|
|
|
|
|
|
|
|
Less: Net income
attributable to non-controlling
shareholders
|
1
|
—
|
1
|
100
|
|
1
|
—
|
1
|
100
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to controlling shareholders
|
$
1,324
|
$ 765
|
$ 559
|
73
|
|
$
2,124
|
$
1,355
|
$ 769
|
57
|
Operating ratio
(%)
|
70.3
|
60.6
|
9.7
|
970
bps
|
|
67.4
|
65.3
|
2.1
|
210
bps
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
$ 1.42
|
$ 0.82
|
$ 0.60
|
73
|
|
$ 2.28
|
$ 1.46
|
$ 0.82
|
56
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
$ 1.42
|
$ 0.82
|
$ 0.60
|
73
|
|
$ 2.28
|
$ 1.45
|
$ 0.83
|
57
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted average
number of basic shares outstanding
(millions)
|
931.2
|
929.9
|
1.3
|
—
|
|
930.9
|
929.8
|
1.1
|
—
|
Weighted average
number of diluted shares
outstanding (millions)
|
933.8
|
932.6
|
1.2
|
—
|
|
933.6
|
932.7
|
0.9
|
—
|
|
|
|
|
|
|
|
|
|
|
Foreign
Exchange
|
|
|
|
|
|
|
|
|
|
Average foreign
exchange rate (U.S.$/Canadian$)
|
0.75
|
0.78
|
(0.03)
|
(4)
|
|
0.74
|
0.79
|
(0.05)
|
(6)
|
Average foreign
exchange rate (Canadian$/U.S.$)
|
1.34
|
1.28
|
0.06
|
5
|
|
1.35
|
1.27
|
0.08
|
6
|
Average foreign
exchange rate (Mexican
peso/Canadian$)
|
13.16
|
15.70
|
(2.54)
|
(16)
|
|
13.47
|
15.94
|
(2.47)
|
(15)
|
Average foreign
exchange rate (Canadian$/Mexican
peso)
|
0.0760
|
0.0637
|
0.0123
|
19
|
|
0.0742
|
0.0627
|
0.0115
|
18
|
(1)
|
The results of Kansas
City Southern ("KCS") are included on a consolidated basis from
April 14, 2023, the date the Company acquired control. From
December 14,
2021 to April 13, 2023, the Company recorded its interest in KCS
under the equity method of accounting.
|
Summary of Rail Data (Continued)(1)
|
Second
Quarter
|
|
Year-to-date
|
Commodity
Data
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues as
reported
(millions)
|
|
|
|
|
|
|
|
|
|
- Grain
|
$
537
|
$
370
|
$
167
|
45
|
|
$
1,052
|
$
730
|
$
322
|
44
|
- Coal
|
219
|
163
|
56
|
34
|
|
374
|
302
|
72
|
24
|
- Potash
|
144
|
171
|
(27)
|
(16)
|
|
276
|
275
|
1
|
—
|
- Fertilizers and
sulphur
|
89
|
85
|
4
|
5
|
|
185
|
163
|
22
|
13
|
- Forest
products
|
187
|
104
|
83
|
80
|
|
290
|
190
|
100
|
53
|
- Energy, chemicals and
plastics
|
575
|
340
|
235
|
69
|
|
941
|
650
|
291
|
45
|
- Metals, minerals and
consumer
products
|
440
|
228
|
212
|
93
|
|
673
|
409
|
264
|
65
|
- Automotive
|
257
|
120
|
137
|
114
|
|
382
|
211
|
171
|
81
|
- Intermodal
|
653
|
573
|
80
|
14
|
|
1,145
|
1,020
|
125
|
12
|
|
|
|
|
|
|
|
|
|
|
Total Freight
Revenues
|
$
3,101
|
$ 2,154
|
$
947
|
44
|
|
$
5,318
|
$ 3,950
|
$ 1,368
|
35
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per
Revenue Ton-
Mile ("RTM") (cents)
|
|
|
|
|
|
|
|
|
|
- Grain
|
4.91
|
4.75
|
0.16
|
3
|
|
5.02
|
4.63
|
0.39
|
8
|
- Coal
|
3.85
|
3.90
|
(0.05)
|
(1)
|
|
3.89
|
3.69
|
0.20
|
5
|
- Potash
|
3.21
|
3.12
|
0.09
|
3
|
|
3.25
|
3.01
|
0.24
|
8
|
- Fertilizers and
sulphur
|
8.04
|
6.92
|
1.12
|
16
|
|
7.56
|
6.66
|
0.90
|
14
|
- Forest
products
|
8.76
|
6.86
|
1.90
|
28
|
|
8.26
|
6.60
|
1.66
|
25
|
- Energy, chemicals and
plastics
|
7.18
|
5.64
|
1.54
|
27
|
|
6.62
|
5.45
|
1.17
|
21
|
- Metals, minerals and
consumer
products
|
8.54
|
7.34
|
1.20
|
16
|
|
8.35
|
7.27
|
1.08
|
15
|
- Automotive
|
25.60
|
24.64
|
0.96
|
4
|
|
25.85
|
23.71
|
2.14
|
9
|
- Intermodal
|
7.40
|
6.92
|
0.48
|
7
|
|
7.10
|
6.83
|
0.27
|
4
|
|
|
|
|
|
|
|
|
|
|
Total Freight Revenue
per RTM
|
6.55
|
5.65
|
0.90
|
16
|
|
6.26
|
5.50
|
0.76
|
14
|
|
|
|
|
|
|
|
|
|
|
Freight Revenue per
Carload
|
|
|
|
|
|
|
|
|
|
- Grain
|
$
4,590
|
$ 4,400
|
$
190
|
4
|
|
$
4,743
|
$ 4,350
|
$
393
|
9
|
- Coal
|
1,908
|
2,273
|
(365)
|
(16)
|
|
1,998
|
2,133
|
$
(135)
|
(6)
|
- Potash
|
3,618
|
3,615
|
3
|
—
|
|
3,598
|
3,463
|
$
135
|
4
|
- Fertilizers and
sulphur
|
5,855
|
5,313
|
542
|
10
|
|
5,745
|
5,110
|
$
635
|
12
|
- Forest
products
|
5,374
|
5,361
|
13
|
—
|
|
5,524
|
5,163
|
$
361
|
7
|
- Energy, chemicals and
plastics
|
4,510
|
4,626
|
(116)
|
(3)
|
|
4,642
|
4,449
|
$
193
|
4
|
- Metals, minerals and
consumer
products
|
3,403
|
3,423
|
(20)
|
(1)
|
|
3,522
|
3,375
|
$
147
|
4
|
- Automotive
|
4,573
|
4,167
|
406
|
10
|
|
4,499
|
3,989
|
$
510
|
13
|
- Intermodal
|
1,501
|
1,877
|
(376)
|
(20)
|
|
1,635
|
1,819
|
$
(184)
|
(10)
|
|
|
|
|
|
|
|
|
|
|
Total Freight Revenue
per Carload
|
$
2,899
|
$ 3,022
|
$
(123)
|
(4)
|
|
$
3,040
|
$ 2,951
|
$
89
|
3
|
(1)
|
KCS's freight revenues
are included on a consolidated basis from April 14, 2023, the date
the Company acquired control of KCS. From December 14, 2021 to
April
13, 2023, the Company recorded its interest in KCS under the equity
method of accounting, therefore, no KCS data was included in those
periods.
|
Summary of Rail Data (Continued)(1)
|
Second
Quarter
|
|
Year-to-date
|
Commodity
Data
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Millions of
RTM
|
|
|
|
|
|
|
|
|
|
- Grain
|
10,947
|
7,784
|
3,163
|
41
|
|
20,961
|
15,758
|
5,203
|
33
|
- Coal
|
5,694
|
4,183
|
1,511
|
36
|
|
9,619
|
8,180
|
1,439
|
18
|
- Potash
|
4,490
|
5,481
|
(991)
|
(18)
|
|
8,500
|
9,133
|
(633)
|
(7)
|
- Fertilizers and
sulphur
|
1,107
|
1,228
|
(121)
|
(10)
|
|
2,447
|
2,447
|
—
|
—
|
- Forest
products
|
2,134
|
1,517
|
617
|
41
|
|
3,512
|
2,878
|
634
|
22
|
- Energy, chemicals
and plastics
|
8,005
|
6,028
|
1,977
|
33
|
|
14,212
|
11,935
|
2,277
|
19
|
- Metals, minerals and
consumer products
|
5,152
|
3,108
|
2,044
|
66
|
|
8,063
|
5,627
|
2,436
|
43
|
-
Automotive
|
1,004
|
487
|
517
|
106
|
|
1,478
|
890
|
588
|
66
|
-
Intermodal
|
8,827
|
8,277
|
550
|
7
|
|
16,117
|
14,938
|
1,179
|
8
|
|
|
|
|
|
|
|
|
|
|
Total RTMs
|
47,360
|
38,093
|
9,267
|
24
|
|
84,909
|
71,786
|
13,123
|
18
|
|
|
|
|
|
|
|
|
|
|
Carloads
(thousands)
|
|
|
|
|
|
|
|
|
|
- Grain
|
117.0
|
84.1
|
32.9
|
39
|
|
221.8
|
167.8
|
54.0
|
32
|
- Coal
|
114.8
|
71.7
|
43.1
|
60
|
|
187.2
|
141.6
|
45.6
|
32
|
- Potash
|
39.8
|
47.3
|
(7.5)
|
(16)
|
|
76.7
|
79.4
|
(2.7)
|
(3)
|
- Fertilizers and
sulphur
|
15.2
|
16.0
|
(0.8)
|
(5)
|
|
32.2
|
31.9
|
0.3
|
1
|
- Forest
products
|
34.8
|
19.4
|
15.4
|
79
|
|
52.5
|
36.8
|
15.7
|
43
|
- Energy, chemicals
and plastics
|
127.5
|
73.5
|
54.0
|
73
|
|
202.7
|
146.1
|
56.6
|
39
|
- Metals, minerals and
consumer products
|
129.3
|
66.6
|
62.7
|
94
|
|
191.1
|
121.2
|
69.9
|
58
|
-
Automotive
|
56.2
|
28.8
|
27.4
|
95
|
|
84.9
|
52.9
|
32.0
|
60
|
-
Intermodal
|
435.1
|
305.3
|
129.8
|
43
|
|
700.1
|
560.7
|
139.4
|
25
|
|
|
|
|
|
|
|
|
|
|
Total
Carloads
|
1,069.7
|
712.7
|
357.0
|
50
|
|
1,749.2
|
1,338.4
|
410.8
|
31
|
(1)
|
Includes KCS
information for the period from April 14, 2023 onwards. From
December 14, 2021 to April 13, 2023, the Company recorded its
interest
in KCS under the equity method of accounting, therefore, no KCS
data was included in those periods.
|
Summary of Rail Data (Continued)(1)
|
Second
Quarter
|
|
Year-to-date
|
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
2023
|
2022
|
Total
Change
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
Operations
Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles
("GTMs") (millions)
|
88,650
|
68,847
|
19,803
|
29
|
|
156,099
|
131,030
|
25,069
|
19
|
Train miles
(thousands)
|
10,577
|
7,259
|
3,318
|
46
|
|
17,834
|
14,152
|
3,682
|
26
|
Average train
weight - excluding local traffic (tons)
|
9,107
|
10,258
|
(1,151)
|
(11)
|
|
9,569
|
10,015
|
(446)
|
(4)
|
Average train
length - excluding local traffic (feet)
|
7,846
|
8,515
|
(669)
|
(8)
|
|
8,064
|
8,289
|
(225)
|
(3)
|
Average terminal dwell
(hours)
|
10.3
|
7.6
|
2.7
|
36
|
|
9.7
|
8.1
|
1.6
|
20
|
Average train speed
(miles per hour, or "mph")(2)
|
18.7
|
21.7
|
(3.0)
|
(14)
|
|
20.1
|
21.5
|
(1.4)
|
(7)
|
Locomotive productivity
(GTMs / operating horsepower)(3)
|
164
|
207
|
(43)
|
(21)
|
|
182
|
192
|
(10)
|
(5)
|
Fuel
efficiency(4)
|
1.036
|
0.930
|
0.106
|
11
|
|
1.009
|
0.960
|
0.049
|
5
|
U.S. gallons of
locomotive fuel consumed (millions)(5)
|
91.8
|
64.0
|
27.8
|
43
|
|
157.5
|
125.8
|
31.7
|
25
|
Average fuel price
(U.S. dollars per U.S. gallon)
|
3.33
|
4.55
|
(1.22)
|
(27)
|
|
3.47
|
4.03
|
(0.56)
|
(14)
|
|
|
|
|
|
|
|
|
|
|
Total Employees and
Workforce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees
(average)(6)
|
19,579
|
12,509
|
7,070
|
57
|
|
16,257
|
12,138
|
4,119
|
34
|
Total employees (end of
period)(6)
|
20,624
|
12,711
|
7,913
|
62
|
|
20,624
|
12,711
|
7,913
|
62
|
Workforce (end of
period)(7)
|
20,726
|
12,758
|
7,968
|
62
|
|
20,726
|
12,758
|
7,968
|
62
|
|
|
|
|
|
|
|
|
|
|
Safety
Indicators(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries
per 200,000 employee-hours
|
1.31
|
0.70
|
0.61
|
87
|
|
1.24
|
1.01
|
0.23
|
23
|
FRA train accidents per
million train-miles
|
0.76
|
1.11
|
(0.35)
|
(32)
|
|
0.85
|
1.08
|
(0.23)
|
(21)
|
(1)
|
Includes KCS
information for the period from April 14, 2023 onwards. From
December 14, 2021 to April 13, 2023, the Company recorded its
interest
in KCS under the equity method of accounting, therefore, no KCS
data was included in those periods.
|
(2)
|
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 CPKC's yards; ii) passenger trains; and
iii) trains used for repairing
track. An increase in average train speed indicates improved
on-time performance resulting in improved asset
utilization.
|
(3)
|
Locomotive productivity
is defined as the daily average 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.
|
(4)
|
Fuel efficiency is
defined as U.S. gallons of locomotive fuel consumed per 1,000
GTMs.
|
(5)
|
Fuel consumed includes
gallons from freight, yard and commuter service but excludes fuel
used in capital projects and other non-freight
activities.
|
(6)
|
An employee is defined
as an individual currently engaged in full-time, part-time, or
seasonal employment with CPKC. CPKC monitors employment
levels in order to efficiently meet service and strategic
requirements. The number of employees is a key driver to total
compensation and benefits costs.
|
(7)
|
Workforce is defined as
employees plus contractors and consultants.
|
(8)
|
Federal Railroad
Administration ("FRA") personal injuries per 200,000 employee-hours
for the second quarter and year to date ended June 30, 2022,
previously reported as 0.66 and 1.00, were restated to 0.70 and
1.01, 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, including Core adjusted
combined operating ratio and Core adjusted combined diluted
earnings per share, to provide an additional basis for evaluating
underlying earnings trends in the Company's current periods'
financial results that can be compared with the results of
operations in prior periods. Management believes these Non-GAAP
measures facilitate a multi-period assessment of long-term
profitability, including assessing future profitability.
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
On April 14, 2023 (the "Control
Date"), CP obtained control of KCS and CPKC began consolidating
KCS, which had been accounted for under the equity method of
accounting between December 14, 2021
and April 13, 2023. On the Control
Date, CPKC's previously-held interest in KCS was remeasured to its
Control Date fair value. CPKC is presenting Core adjusted combined
operating ratio and Core adjusted combined diluted earnings per
share to give effect to results while isolating and removing the
impact of the acquisition of KCS on those results. These measures
provide a comparison to prior period financial information as
adjusted to exclude certain significant items and are used to
evaluate CPKC's operating performance and for planning and
forecasting future business operations and future
profitability.
Management believes the use of Non-GAAP measures provides
meaningful supplemental information about our 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's 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,
KCS's gain on unwinding of interest rate hedges (net of CPKC's
associated purchase accounting basis differences and tax), as
recognized within Equity earnings of Kansas City Southern in the
Company's Consolidated Statements of Income, the foreign exchange
("FX") impact of translating the Company's debt and lease
liabilities (including borrowings under the credit facility), loss
on derecognition of CPKC's previously held equity method investment
in KCS, discrete tax items, changes in the outside basis tax
difference between the carrying amount of CPKC's equity investment
in KCS and its tax basis of this investment, a deferred tax
recovery related to the elimination of the deferred tax liability
on the outside basis difference of the 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, debt
exchange transaction costs, community investments, 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, restructuring, employee
retention and synergy incentive costs, and transaction and
integration costs incurred by KCS. These items may not be
non-recurring. However, management believes excluding these
significant items from GAAP results provides an additional
viewpoint which may give users a consistent understanding of CPKC's
financial performance when performing a multi-period assessment
including assessing the likelihood of future results. Accordingly,
these Non-GAAP financial measures may provide additional insight to
investors and other external users of CPKC's financial
information.
In addition, Core adjusted combined operating ratio and Core
adjusted combined diluted earnings per share exclude KCS purchase
accounting. KCS purchase accounting represents the amortization of
basis differences being the incremental depreciation and
amortization in relation to fair value adjustments to properties
and intangible assets, incremental amortization in relation to fair
value adjustments to KCS's investments, and amortization of the
change in fair value of debt of KCS assumed on the Control Date, as
recognized within Depreciation and amortization, Other expense, and
Net interest expense, respectively, in the Company's Consolidated
Statements of Income. During the periods that KCS was equity
accounted for, from December 14, 2021
to April 13, 2023, 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, net of tax, as
recognized within Equity (earnings) loss of Kansas City Southern in
the Company's Interim Consolidated Statements of Income. All assets
subject to KCS purchase accounting contribute to income generation
and will continue to amortize over their estimated useful lives.
Excluding KCS purchase accounting from GAAP results provides
financial statement users with additional transparency by isolating
for the impact of KCS purchase accounting.
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:
Core Adjusted Combined Diluted Earnings per Share
Core adjusted combined diluted earnings per share is calculated
using Net income attributable to controlling shareholders reported
on a GAAP basis adjusted for significant items less KCS purchase
accounting, divided by the weighted-average diluted number of
Common Shares outstanding during the period as determined in
accordance with GAAP. Between December 14,
2021 and April 13, 2023, KCS
was accounted for in CPKC's diluted earnings per share reported on
a GAAP basis using the equity method of accounting and on a
consolidated basis beginning April 14,
2023. As the equity method of accounting and consolidation
both provide the same diluted earnings per share for CPKC, no
adjustment is required to pre-control diluted earnings per share to
be comparable on a consolidated basis.
In the first six months of 2023, there were four significant
items included in the Net income attributable to controlling
shareholders as reported on a GAAP basis as follows:
- in the second quarter, a remeasurement loss of KCS of
$7,175 million recognized in
Remeasurement loss of Kansas City Southern due to the derecognition
of CPKC's previously held equity method investment in KCS and
remeasurement at its Control Date fair value that unfavourably
impacted Diluted EPS by $7.68;
- in the second quarter, a deferred tax recovery of $51 million due to CPKC unitary state
apportionment changes that favourably impacted Diluted EPS by
5 cents;
- Deferred tax recovery of $7,855
million that favourably impacted Diluted EPS by $8.42 cents as follows:
-
- in the second quarter, a deferred tax recovery of $7,832 million related to the elimination of the
deferred tax liability on the outside basis difference of the
investment in KCS that favourably impacted Diluted EPS by
$8.39; and
- in the first quarter, a deferred tax recovery of $23 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 $145
million in connection with the KCS acquisition ($122 million after current tax recovery of
$23 million), including an expense of
$128 million recognized in Purchased
services and other, $6 million
recognized in Other expense, and $11
million recognized in Equity earnings of KCS that
unfavourably impacted Diluted EPS by 13
cents as follows:
-
- in the second quarter, acquisition-related costs of
$120 million ($101 million after current tax recovery of
$19 million), including costs of
$53 million recognized in Purchased
services and other, $63 million
recognized in Compensation and benefits, $3
million recognized in Other expense, and $1 million recognized in Equity earnings of KCS,
that unfavourably impacted Diluted EPS by 11
cents; and
- in the first quarter, acquisition-related costs of $25 million ($21
million after current tax recovery of $4 million), including costs of $12 million recognized in Purchased services and
other, $3 million recognized in Other
expense, and $10 million recognized
in Equity earnings of KCS, that unfavourably impacted Diluted EPS
by 2 cents.
In 2022, there were five significant items included in Net
income attributable to controlling shareholders as reported on a
GAAP basis as follows:
- in the fourth quarter, a gain of $212
million due to KCS's gain on unwinding of interest rate
hedges (net of CPKC's associated purchase accounting basis
differences and tax) recognized in Equity earnings of KCS that
favourably impacted Diluted EPS by 23
cents;
- in the fourth quarter, a deferred tax recovery of $24 million as a result of a reversal of an
uncertain tax item related to a prior period that favourably
impacted Diluted EPS by 3 cents;
- 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;
- during the course of the year, a net deferred tax recovery of
$19 million on changes in the outside
basis difference of the equity investment in KCS that favourably
impacted Diluted EPS by 2 cents as
follows:
-
- in the fourth quarter, a $27
million recovery that favourably impacted Diluted EPS
by 3 cents;
- in the third quarter, a $9
million recovery that favourably impacted Diluted EPS
by 1 cent;
- in the second quarter, a $49
million expense that unfavourably impacted Diluted EPS
by 5 cents; and
- in the first quarter, a $32
million recovery that favourably impacted Diluted EPS
by 3 cents.
- during the course of the year, acquisition-related costs of
$123 million in connection with the
KCS acquisition ($108 million after
current tax recovery of $15 million),
including costs of $74 million
recognized in Purchased services and other, and $49 million recognized in Equity earnings of KCS
that unfavourably impacted Diluted EPS by 12
cents as follows:
-
- in the fourth quarter, acquisition-related costs of
$27 million ($16 million after current tax recovery of
$11 million), including costs of
$17 million recognized in Purchased
services and other and $10 million
recognized in Equity earnings of KCS that unfavourably impacted
Diluted EPS by 3 cents;
- 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.
KCS purchase accounting included in Net income attributable to
controlling shareholders as reported on a GAAP basis was as
follows:
2023:
- during the first six months ended June
30, 2023, KCS purchase accounting of $123 million ($103
million after deferred tax recovery of $20 million), including costs of $68 million recognized in Depreciation and
amortization, $6 million recognized
in Net interest expense, $1 million
recognized in Other expense, and $48
million recognized in Equity earnings of KCS that
unfavourably impacted Diluted EPS by 11
cents as follows:
-
- in the second quarter, KCS purchase accounting of $81 million ($61
million after deferred tax recovery of $20 million), including costs of $68 million recognized in Depreciation and
amortization, $6 million recognized
in Net interest expense, $1 million
recognized in Other expense, and $6
million recognized in Equity earnings of KCS that
unfavourably impacted Diluted EPS by 6
cents; and
- in the first quarter, KCS purchase accounting of $42 million recognized in Equity earnings of KCS
that unfavourably impacted Diluted EPS by 5
cents.
2022:
- during the twelve months ended December
31, 2022, KCS purchase accounting of $163 million expense recognized in Equity
earnings of KCS that unfavourably impacted Diluted EPS by
17 cents as follows:
-
- in the fourth quarter, KCS purchase accounting of $42 million that unfavourably impacted Diluted
EPS by 4 cents;
- in the third quarter, KCS purchase accounting of $42 million that unfavourably impacted Diluted
EPS by 4 cents;
- in the second quarter, KCS purchase accounting of $39 million that unfavourably impacted Diluted
EPS by 5 cents; and
- in the first quarter, KCS purchase accounting of $40 million that unfavourably impacted Diluted
EPS by 4 cents.
|
For the three
months
ended June 30
|
For the six months
ended
June 30
|
For the twelve
months
ended December 31
|
|
2023
|
2022
|
2023
|
2022
|
2022
|
CPKC diluted
earnings per share as reported
|
$
1.42
|
$
0.82
|
$
2.28
|
$
1.45
|
$
3.77
|
Less:
|
|
|
|
|
|
Significant items
(pre-tax):
|
|
|
|
|
|
KCS net gain on unwind
of interest rate hedges
|
—
|
—
|
—
|
—
|
0.23
|
Remeasurement loss of
KCS
|
(7.68)
|
—
|
(7.68)
|
—
|
—
|
Acquisition-related
costs
|
(0.13)
|
(0.03)
|
(0.16)
|
(0.07)
|
(0.14)
|
KCS purchase
accounting
|
(0.09)
|
(0.05)
|
(0.14)
|
(0.09)
|
(0.17)
|
Add:
|
|
|
|
|
|
Tax effect of
adjustments(1)
|
(0.05)
|
—
|
(0.06)
|
(0.01)
|
(0.02)
|
Income tax rate
changes
|
(0.05)
|
—
|
(0.05)
|
—
|
(0.01)
|
Deferred tax
(recovery) expense on the outside basis
difference of the investment in KCS
|
(8.39)
|
0.05
|
(8.42)
|
0.02
|
(0.02)
|
Reversal of provision
for uncertain tax item
|
—
|
—
|
—
|
—
|
(0.03)
|
Core adjusted
combined diluted earnings per share(2)
|
$
0.83
|
$
0.95
|
$
1.73
|
$
1.62
|
$
3.77
|
(1)
|
The tax effect of
adjustments was calculated as the pre-tax effect of the significant
items and KCS purchase accounting listed above multiplied by the
applicable tax
rate for the above items of 0.54% and 0.58% for the three and six
months ended June 30, 2023, respectively, 4.70% and 4.32% for
the three and six months ended
June 30, 2022, respectively, and 16.97% for the twelve months
ended December 31, 2022. The applicable tax rates reflect the
taxable jurisdictions and nature, being
on account of capital or income, of the adjustments.
|
(2)
|
The Company previously
used the non-GAAP measure Core adjusted diluted earnings per share,
which was calculated as diluted earnings per share adjusted for
significant items less KCS purchase accounting. Core adjusted
diluted earnings per share was $0.95 and $1.62 for the three and
six months ended June 30, 2022,
respectively, and $3.77 for the twelve months ended December 31,
2022, which are the same as the revised measure Core adjusted
combined diluted earnings per
share, as KCS was equity accounted for within CPKC's
results.
|
Core Adjusted Combined Operating Ratio
Core adjusted combined operating ratio is calculated from
reported GAAP revenue and operating expenses adjusted for (1) KCS
operating income prior to the Control Date and giving effect to
transaction accounting adjustments in a consistent manner with
Regulation S-X Article 11 ("Article 11"), where applicable, (2)
significant items (acquisition-related costs) that are reported
within Operating income, and (3) KCS purchase accounting recognized
in Depreciation and amortization.
This combined measure does not purport to represent what the
actual consolidated results of operations would have been had the
Company obtained control of KCS and consolidation actually occurred
on January 1, 2022, nor is it
indicative of future results. This information is based on
information as of the date hereof and upon assumptions that CPKC
believes reasonably reflect the impact to CPKC's historical
financial information, on a supplemental basis, of obtaining
control of KCS had it occurred as of January
1, 2022. This information does not include anticipated costs
related to integration activities, cost savings or synergies that
may be achieved by the combined company.
In the first six months of 2023, acquisition-related costs were
$141 million in connection with the KCS acquisition and
unfavourably impacted operating ratio on a combined basis,
calculated in a manner consistent with Article 11, by 2.1%:
- in the second quarter, acquisition-related costs of
$116 million that unfavourably
impacted operating ratio by 3.5%; and
- in the first quarter, acquisition-related costs of $25 million that unfavourably impacted operating
ratio by 0.7%.
In the first six months of 2022, acquisition-related costs were
$104 million in connection with the KCS acquisition and
unfavourably impacted operating ratio on a combined basis,
calculated in a manner consistent with Article 11, by 1.7%:
- in the second quarter, acquisition-related costs of
$35 million that unfavourably
impacted operating ratio by 1.1%; and
- in the first quarter, acquisition-related costs of $69 million that unfavourably impacted operating
ratio by 2.5%.
KCS purchase accounting included in operating ratio on a
combined basis, calculated in a manner consistent with Article 11,
was as follows:
2023:
- during the first six months ended June
30, 2023, KCS purchase accounting of $160 million recognized in Depreciation and
amortization that unfavourably impacted operating ratio by 2.4% as
follows:
-
- In the second quarter, KCS purchase accounting of
$80 million that unfavourably
impacted operating ratio by 2.4%; and
- In the first quarter, KCS purchase accounting of
$80 million that unfavourably
impacted operating ratio by 2.3%.
2022:
- during the first six months ended June
30, 2022, KCS purchase accounting of $152 million recognized in Depreciation and
amortization that unfavourably impacted operating ratio by 2.5% as
follows:
-
- in the second quarter, KCS purchase accounting of
$76 million that unfavourably
impacted operating ratio by 2.3%; and
- in the first quarter, KCS purchase accounting of
$76 million that unfavourably
impacted operating ratio by 2.7%.
|
For the three months
ended
June 30
|
For the six months
ended
June 30
|
|
2023
|
2022(3)
|
2023
|
2022(3)
|
CPKC operating ratio
as reported
|
70.3 %
|
60.6 %
|
67.4 %
|
65.3 %
|
Add:
|
|
|
|
|
KCS operating income as
reported prior to Control Date(1)
|
(0.2) %
|
0.8 %
|
(0.3) %
|
(0.8) %
|
Pro forma Article 11
transaction accounting adjustments(2)
|
0.4 %
|
2.3 %
|
1.4 %
|
3.0 %
|
|
70.5 %
|
63.7 %
|
68.5 %
|
67.5 %
|
Less:
|
|
|
|
|
Acquisition-related
costs
|
3.5 %
|
1.1 %
|
2.1 %
|
1.7 %
|
KCS purchase accounting
in Depreciation and amortization
|
2.4 %
|
2.3 %
|
2.4 %
|
2.5 %
|
Core adjusted
combined operating ratio
|
64.6 %
|
60.3 %
|
64.0 %
|
63.3 %
|
(1)
|
KCS results were
translated into Canadian dollars at the Bank of Canada monthly
average rate for April 1 through April 13 2023 and the three months
ended June
30, 2022, as well for January 1 through April 13, 2023 and the six
months ended June 30, 2022 of $1.35, $1.28, $1.35, and $1.27,
respectively.
|
(2)
|
Pro forma Article 11
transaction accounting adjustments represent adjustments made in a
manner consistent with Article 11, these include:
|
|
•
|
For April 1 through
April 13, 2023 in the three months ended June 30, 2023,
depreciation and amortization of differences between the historic
carrying values
and the provisional fair values of KCS's tangible and intangible
assets and investments prior to the Control Date of 0.4% operating
ratio and miscellaneous
immaterial amounts that have been reclassified across revenue,
operating expenses, and non-operating income or expense, consistent
with CPKC's financial
statement captions;
|
|
•
|
For January 1 through
April 13, 2023 in the six months ended June 30, 2023, depreciation
and amortization of differences between the historic carrying
values
and the provisional fair values of KCS's tangible and
intangible assets and investments prior to the Control Date of 1.4%
operating ratio and miscellaneous
immaterial amounts that have been reclassified across revenue,
operating expenses, and non-operating income or expense, consistent
with CPKC's financial
statement captions;
|
|
•
|
For the three months
ended June 30, 2022, depreciation and amortization of differences
between the historic carrying values and the provisional fair
values of
KCS's tangible and intangible assets and investments prior to
the Control Date of 2.3% operating ratio and miscellaneous
immaterial amounts that have been
reclassified across revenue, operating expenses, and non-operating
income or expense, consistent with CPKC's financial statement
captions; and
|
|
•
|
For the six months
ended June 30, 2022, depreciation and amortization of differences
between the historic carrying values and the provisional fair
values of
KCS's tangible and intangible assets and investments prior to the
Control Date of 2.5% operating ratio, the estimated transaction
costs expected to be incurred
by the Company of 0.5% operating ratio and miscellaneous immaterial
amounts that have been reclassified across revenue, operating
expenses, and non-
operating income or expense, consistent with CPKC's financial
statement captions.
|
|
|
|
|
For more information
about these pro forma transaction accounting adjustments for the
three months ended March 31, 2023, June 30, 2022, and March 31,
2022,
please see Exhibit 99.1 "Selected Unaudited Combined Summary of
Historical Financial Data" of CPKC's Current Report on Form 8-K
furnished with the Securities
and Exchange Commission ("SEC") on May 15, 2023.
|
(3)
|
The Company previously
used the non-GAAP measure Adjusted operating ratio, which was
defined as operating ratio excluding those significant items that
are
reported within Operating income. Adjusted operating ratio was
59.7% and 64.3% for the three and six months ended June 30, 2022,
respectively, which was
changed to the revised measure Core adjusted combined operating
ratio. The differences were due to the addition of KCS historical
operating income less KCS
acquisition-related costs (as defined above) prior to the Control
Date. For the three and six months ended June 30, 2023, CPKC has
presented the non-GAAP
measure of Core adjusted combined operating ratio, as defined
above, to provide a comparison to prior period combined information
calculated in a manner consistent
with Article 11 as further adjusted to conform to CPKC's core
adjusted measures.
|
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SOURCE CPKC