The following discussion and analysis should be read in conjunction with the Company's Interim Consolidated Financial Statements and the related notes for the three and six months endedJune 30, 2020 in Item 1. Financial Statements, other information in this report, and Item 8. Financial Statements and Supplementary Data of the Company's 2019 Annual Report on Form 10-K. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars. For purposes of this report, all references herein to "CP", "the Company", "we", "our" and "us" refer to CPRL, CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL's subsidiaries, as the context may require.
Available Information
CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to theSecurities and Exchange Commission ("SEC"). Our website also contains charters for our Board of Directors and each of its committees, our corporate governance guidelines and our Code of Business Ethics.SEC filings made by CP are also accessible through theSEC's website at www.sec.gov. The information on our website is not part of this quarterly report on Form 10-Q. The Company has included the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits to this report. Executive Summary
Second Quarter of 2020 Results
• Financial performance - In the second quarter of 2020, CP reported Diluted
earnings per share ("EPS") of
same period of 2019 and Net income of
2020, a decrease of 12% as compared to the same period of 2019. These
decreases were primarily due to lower Operating income in the second quarter
of 2020 and an income tax recovery associated with a change in tax rate in
2019, partially offset by higher foreign exchange ("FX") translation gains on
debt and lease liabilities in 2020.
Adjusted diluted EPS was$4.07 in the second quarter of 2020, a decrease of 5% compared to the same period of 2019. Adjusted income was$553 million in the second quarter of 2020, a decrease of 8% compared to the same period of 2019. These decreases were primarily due to lower Operating income in the second quarter of 2020.
Adjusted diluted EPS and Adjusted income are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
CP reported an Operating ratio of 57.0% in the second quarter of 2020, a 140 basis point improvement as compared to the same period of 2019. This improvement was primarily due to favourable changes in fuel prices, revenue from liquidated damages, including customer volume commitments, higher freight rates, and efficiencies generated from improved operating performance, partially offset by lower volumes.
• Total revenues - Total revenues decreased by 9% in the second quarter of 2020
to
decrease was primarily due to lower volumes as measured by revenue ton-miles
("RTMs") primarily due to the impacts of the novel strain of Coronavirus
("COVID-19"), partially offset by the favourable effect of liquidated
damages, including customer volume commitments, and higher freight rates.
• Operating performance - CP's average train weight increased by 7% to 9,984
tons and average train length increased by 8% to 8,089 feet, compared to the
same period in 2019. These increases were a result of improvements in
operating plan efficiency and continued improvements in operational
efficiency for Grain trains, partially offset by lower volumes of heavier
commodities such as Canadian coal, in each case compared to the same period
in 2019. These metrics are discussed further in Performance Indicators of
this Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. Recent Developments
• On
outstanding Common Shares, an increase from
quarter. The dividend is payable on
the close of business on
• In the second quarter of 2020, the effects of COVID-19 on consumer demand
resulted in lower volumes in the following lines of business: Energy,
chemicals and plastics, Metals, minerals and consumer products, Intermodal,
and Automotive. The future impacts of the COVID-19 pandemic on CP's business
continue to be uncertain, however the Company has put forward our 18
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current estimate of the impact on our business in our revised 2020 outlook discussed below. CP continues to adapt its resources in real time and deliver for our customers and the North American economy.
As COVID-19 continued to spread throughoutCanada andthe United States during the three months endedJune 30, 2020 , CP conducted business as usual, to the greatest extent possible in the circumstances, while continuing to apply principles of precision scheduled railroading to respond to changes in demand. The Company is continuing to take a variety of measures to ensure the availability of its transportation services throughout our network, promote the safety and security of our employees , and support the communities in which we operate. CP is also supporting employees by working with labour unions to shorten recall times, to be prepared for demand increases. Certain modifications the Company has made in response to the COVID-19 pandemic include but are not limited to: implementing a period of working at home for all non-essential support staff; restricting employee business travel; implementing post-travel employee screening; strengthening clean workplace practices; reinforcing socially responsible sick leave recommendations; limiting visitor and third-party access to Company facilities; launching internal COVID-19 resources for employees; creating a pandemic response team comprised of employees and members of senior management; encouraging telephonic and video conference-based meetings along with other hygiene and social distancing practices recommended by health authorities includingHealth Canada , theU.S. Centers for Disease Control and Prevention , and theWorld Health Organization ; and supplementing employment insurance payments and maintaining health benefit coverage of employees through the pandemic. CP is responding to this crisis through measures designed to protect our workforce and prevent disruptions to the central role the Company's operations provide to the North American economy. CP's service is deemed essential as part of the transportation industry. We remain well positioned to adjust to market conditions to assist our customers as they work to manage their supply chain and inventories. Since health authorities in some North American jurisdictions have begun slowly easing restrictions, the Company began a phased reintegration back into the workplace of non-essential office employeeswho had been working remotely. The Company implemented preventative measures that serve to minimize the risk of exposure to COVID-19. The measures include slowly progressing the number of employees returning to the office, modifying our workspace to implement physical distancing measures, and continuously reevaluating our efforts with safety as a top priority. We have observed many other companies, including companies in our industry, taking precautionary and preemptive actions to address the COVID-19 pandemic, and companies may take further actions that alter their normal business operations. We will continue to actively monitor the situation and may take further actions that could materially alter our business operations as may be required or recommended by federal, provincial, state or local authorities, or that we determine are in the best interests of our employees, customers, shareholders, partners, suppliers, and other stakeholders.
Additional information concerning the impact COVID-19 may have to our future business and results of operations is provided in Part II, Item 1A. Risk Factors.
• In the second quarter of 2020, CP completed its previously announced
acquisition of
U.S. Inc. ("CMQU.S. "). Together with the earlier completion of the previously announced acquisition ofCentral Maine & QuébecRailway Canada Inc. ("CMQCanada "), the acquisition of CMQU.S. completes CP's purchase of the entire CMQ network originally announced onNovember 20, 2019 . CMQU.S. and CMQ Canada will continue to operate in theU.S. and inCanada respectively as subsidiaries of CP. This allows CP to integrate CMQU.S.'s 244.2 route-miles of rail line inMaine andVermont into CP's network. The transaction also includes 57.3 route-miles leased from theMaine Department of Transportation . CMQU.S.'s network links CP directly to theAtlantic Ocean port ofSearsport, Maine , and to Port Saint John inNew Brunswick through connections withEastern Maine Railway andNew Brunswick Southern Railway . With the CMQ acquisition, CP is now a 13,000-mile rail network connecting theAtlantic coast to the Pacific coast across six Canadian provinces and 11 U.S. states.
Prior Developments
• For the first quarter of 2020, the global emergence of the novel strain of
COVID-19 had no material impact to CP's business, financial condition, or
results of operations. However, given the uncertainty of the future impacts
of the COVID-19 pandemic on CP's business and the broader macroeconomic
environment, the Company updated its 2020 outlook based on the estimate of
the impact on its business.
• The Company's annual meeting of shareholders, held on
conducted via a virtual-only format by live webcast online for the first
time. All 11 director nominees were elected.
• During the first quarter of 2019, the Company experienced severe winter
operating conditions and an increase in the frequency and severity of
casualty incidents and derailments. As a result, the Company incurred
significant costs to manage severe weather conditions, as well as direct
casualty costs, and higher operating costs. During this period and the
subsequent network recovery the Company also experienced losses and deferrals
of potential revenues. 2020 Outlook Based on the strength of the Company's performance to date, onJuly 22, 2020 , CP updated the outlook for 2020 that CP had previously updated onApril 21, 2020 . The Company now expects to deliver Adjusted diluted EPS growth year over year based 19
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on Adjusted diluted EPS of$16.44 in 2019. CP continues to expect volume, as measured in RTMs, to be down mid-single digits and capital expenditures of$1.6 billion as the Company takes advantage of available track time to better position the network for recovery and support long-term shareholder returns. CP's revised earnings guidance assumes an FX rate of approximately$1.35 USD /CAD as compared to$1.40 USD /CAD previously, other components of net periodic benefit recovery to decrease by approximately$40 million as compared to 2019 and an effective tax rate of approximately 24.8 percent as a result of the accelerated reduction of theAlberta corporate tax rate as compared to 25.0 percent previously. Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Although CP has provided a forward-looking Non-GAAP measure (Adjusted diluted EPS), management is unable to reconcile, without unreasonable efforts, the forward-looking Adjusted diluted EPS to the most comparable GAAP measure, due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In past years, CP has recognized significant asset impairment charges, management transition costs related to senior executives and discrete tax items. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded from CP's Adjusted diluted EPS. Additionally, theU.S. -to-Canadian dollar exchange rate is unpredictable and can have a significant impact on CP's reported results but may be excluded from CP's Adjusted diluted EPS. In particular, CP excludes the FX impact of translating the Company's debt and lease liabilities, the impact from changes in income tax rates and a provision for uncertain tax item from Adjusted diluted EPS. Please see Forward-Looking Statements in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
Performance Indicators
The following table lists the key measures of the Company's operating performance: For the three months ended For the six months ended June June 30 30 2020 2019(1) % Change 2020 2019(1) % Change Operations Performance Gross ton-miles ("GTMs") (millions) 63,077 72,717 (13 ) 134,410 137,571 (2 ) Train miles (thousands) 6,865 8,373 (18 ) 15,238 16,196 (6 ) Average train weight - excluding local traffic (tons) 9,984 9,295 7 9,544 9,088 5 Average train length - excluding local traffic (feet) 8,089 7,523 8 7,713 7,350 5 Average terminal dwell (hours) 6.5 6.4 2 6.4 7.1 (10 ) Average train speed (miles per hour, or "mph") 22.4 22.4 - 22.0 21.8 1 Locomotive productivity (GTMs / operating horsepower) 212 207 2 206 196 5 Fuel efficiency (U.S. gallons of locomotive fuel consumed / 1,000 GTMs) 0.921 0.934 (1 ) 0.947 0.972 (3 ) Total Employees and Workforce Total employees (average) 12,001 13,274 (10 ) 12,244 13,059 (6 ) Total employees (end of period) 11,988 13,330 (10 ) 11,988 13,330 (10 ) Workforce (end of period) 12,033 13,365 (10 ) 12,033 13,365 (10 ) Safety Indicators(1) FRA personal injuries per 200,000 employee-hours 1.12 1.00 12 1.14 1.46 (22 ) FRA train accidents per million train-miles 1.06 0.87 22
1.02 1.23 (17 )
(1) FRA personal injuries per 200,000 employee-hours for the six months ended
current report. FRA train accidents per million train-miles for the three
and six months ended
1.18, restated to 0.87 and 1.23, respectively for the current report. These
adjustments reflect new information available within specified periods
stipulated by the FRA but that exceed the Company's financial reporting
timeline.
For key measures of the Company's revenue performance, refer to Operating Revenues of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Operations Performance
These key measures are used by management as comparisons to historical operating results and in the planning process to facilitate decisions that continue to drive further productivity improvements in the Company's operations. Results of these key measures reflect how effective CP's management is at controlling costs and executing the Company's operating plan and strategy. Continued monitoring of these key measures ensures that the Company can take appropriate actions to ensure the delivery of superior service and be able to grow its business at low incremental cost. 20
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Three months ended
• A GTM is defined as the movement of one ton of train weight over one mile.
GTMs are calculated by multiplying total train weight by the distance the
train moved. Total train weight comprises the weight of the freight cars,
their contents, and any inactive locomotives. An increase in GTMs indicates
additional workload. GTMs decreased by 13% in the second quarter of 2020
compared to the same period of 2019. This decrease was mainly attributable to
lower volumes of crude, Coal, frac sand, and Intermodal. This decrease was
partially offset by higher volumes of Canadian grain, Fertilizers and sulphur, and Potash.
• Train miles are defined as the sum of the distance moved by all trains
operated on the network. Changes in train miles indicate the combined effect
of changes in workload (GTMs) and train weight efficiency. Train miles
decreased by 18% in the second quarter of 2020 compared to the same period of
2019. This decrease reflects the impact of a 13% decrease in workload (GTMs)
as well as a 7% increase in average train weights.
• Average train weight is defined as the average gross weight of CP trains,
both loaded and empty. This excludes trains in short-haul service, work
trains used to move CP's track equipment and materials, and the haulage of
other railroads' trains on CP's network. An increase in average train weight
indicates improved asset utilization and may also be the result of moving
heavier commodities. Average train weight increased by 7% in the second quarter of 2020 compared to the same period of 2019. This increase was a result of improvements in operating plan efficiency and continued improvements in operational efficiency for Grain trains driven by the
8,500-foot High Efficiency Product ("HEP") train model, partially offset by
lower volumes of heavier commodities such as Canadian coal.
• Average train length is defined as the average total length of CP trains,
both loaded and empty. This includes all cars and locomotives on the train
and is calculated as the sum of each car or locomotive's length multiplied by
the distance travelled, divided by train miles. This excludes trains in short-haul service, work trains used to move CP's track equipment and materials, and the haulage of other railroads' trains on CP's network. An increase in average train length indicates improved asset utilization.
Average train length increased by 8% in the second quarter of 2020 compared
to the same period of 2019. This increase was a result of improvements in operating plan efficiency and continued improvements in operational efficiency for Grain trains driven by the 8,500-foot HEP train model,
partially offset by lower volumes of commodities such as Canadian coal, which
move in longer trains.
• Average terminal dwell is defined as the average time a freight car resides
within terminal boundaries expressed in hours. The timing starts with a train
arriving at the terminal, a customer releasing the car to the Company, or a
car arriving at interchange from another railroad. The timing ends when the
train leaves, a customer receives the car from CP, or the freight car is
transferred to another railroad. Freight cars are excluded if they are being
stored at the terminal or used in track repairs. A decrease in average
terminal dwell indicates improved terminal performance resulting in faster
cycle times and improved railcar utilization. Average terminal dwell
increased by 2% in the second quarter of 2020 compared to the same period of
2019. This increase was a result of aligning the operating plan to demand in
order to maintain efficiencies in network fluidity.
• Average train speed is defined as a measure of the line-haul movement from
origin to destination including terminal dwell hours. It is calculated by
dividing the total train miles travelled by the total train hours operated.
This calculation does not include delay time related to customers or foreign
railroads and excludes the time and distance travelled by: i) trains used in
or around CP's yards; ii) passenger trains; and iii) trains used for
repairing track. An increase in average train speed indicates improved
on-time performance resulting in improved asset utilization. Average train
speed was flat in the second quarter of 2020 compared to the same period of
2019.
• 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 online. An increase in locomotive productivity indicates more efficient
locomotive utilization and may also be the result of moving heavier
commodities. Locomotive productivity increased by 2% in the second quarter of
2020 compared to the same period of 2019. This increase was due to improvements in operating plan efficiency.
• Fuel efficiency is defined as
1,000 GTMs. Fuel consumed includes gallons from freight, yard and commuter
service but excludes fuel used in capital projects and other non-freight
activities. An improvement in fuel efficiency indicates operational cost
savings and CP's commitment to corporate sustainability through a reduction
of greenhouse gas emissions intensity. Fuel efficiency improved by 1% in the
second quarter of 2020 compared to the same period of 2019. This increase in
efficiency was due to improved train productivity.
Six months ended
• GTMs decreased by 2% for the first six months of 2020 compared to the same
period of 2019. This decrease was primarily due to decreased volumes of
Canadian coal, frac sand, and
by increased volumes of Canadian grain, and Fertilizers and sulphur. 21
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• Train miles decreased by 6% for the first six months of 2020 compared to the
same period of 2019. This decrease reflected the impact of a 2% decrease in
workload (GTMs), as well as a 5% increase in average train weights.
• Average train weight increased by 5% for the first six months of 2020
compared to the same period of 2019. This increase was a result of
improvements in operating plan efficiency, continued improvements in
operational efficiency for Grain trains driven by the 8,500-foot HEP train
model, and improved winter operating conditions in the first quarter of 2020.
This increase is partially offset by lower volumes of heavier commodities
such as Canadian coal.
• Average train length increased by 5% for the first six months of 2020 from
the same period of 2019. This increase was primarily due to improvements in
operating plan efficiency and continued improvements in operational
efficiency for Grain trains driven by the 8,500-foot HEP train model,
partially offset by lower volumes of commodities such as Canadian coal, which
move in longer trains.
• Average terminal dwell decreased by 10% in the first six months of 2020
compared to the same period of 2019. This favourable decrease was due to
improved network fluidity as a result of a continued focus on velocity and
terminal efficiency in the first quarter of 2020, partially offset by the
alignment of the operating plan to demand in order to maintain efficiencies
in network fluidity in the second quarter of 2020.
• Average train speed increased by 1% in the first six months of 2020 compared
to the same period of 2019. This increase in speed was due to improved winter
operating conditions in the first quarter of 2020.
• Locomotive productivity increased by 5% in the first six months of 2020
compared to the same period of 2019. This increase was driven by improvements
in operating plan efficiency.
• Fuel efficiency improved by 3% in the first six months of 2020 compared to
the same period of 2019. This increase in efficiency was primarily due to improved winter operating conditions in the first quarter of 2020 and increased train productivity.
Total Employees and Workforce
An employee is defined as an individual currently engaged in full-time, part-time, or seasonal employment with CP while workforce is defined as total employees plus contractors and consultants. The Company monitors employment and workforce levels in order to efficiently meet service and strategic requirements. The number of employees is a key driver to total compensation and benefits costs. The average number of total employees decreased by 10% and 6% for the three and six months endedJune 30, 2020 , respectively, compared to the same periods of 2019. The total number of employees as atJune 30, 2020 was 11,988, a decrease of 1,342, or 10%, compared to 13,330 as atJune 30, 2019 . The total workforce as atJune 30, 2020 was 12,033, a decrease of 1,332, or 10%, compared to 13,365 as atJune 30, 2019 . The decrease in total employees and workforce is due to more efficient resource planning, including furloughs associated with the economic downturn caused by COVID-19, partially offset by the addition of employees from the acquisition of CMQ. Safety Indicators Safety is a key priority and core strategy for CP's management, employees, and Board of Directors. Personal injuries and train accidents are indicators of the effectiveness of the Company's safety systems, and are used by management to evaluate and, as necessary, alter the Company's safety systems, procedures, and protocols. Each measure followsU.S. Federal Railroad Administration ("FRA") reporting guidelines, which can result in restatement after initial publication to reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline. The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 1.12 in the second quarter of 2020, an increase from 1.00 in the same period of 2019. For the first six months of 2020, the FRA personal injury rate per 200,000 employee-hours for CP was 1.14, a decrease from 1.46 in the same period of 2019. The FRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold ofU.S. $10,700 in damage. The FRA train accidents per million train-miles was 1.06 in the second quarter of 2020, an increase from 0.87 in the same period of 2019. For the first six months of 2020, the FRA train accidents per million train-miles was 1.02, a decrease from 1.23 in the same period of 2019.
22
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Financial Highlights
The following table presents selected financial data related to the Company's financial results as of, and for the three and six months ended,June 30, 2020 and the comparative figures in 2019. The financial highlights should be read in conjunction with Item 1. Financial Statements and this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. For the three months ended June 30 For the six months ended June 30 (in millions, except per share data, percentages and ratios) 2020 2019 2020 2019 Financial Performance and Liquidity Total revenues$ 1,792 $ 1,977 $ 3,835 $ 3,744 Operating income 770 822 1,604 1,365 Net income 635 724 1,044 1,158 Adjusted income(1) 553 602 1,160 994 Basic EPS 4.68 5.19 7.67 8.28 Diluted EPS 4.66 5.17 7.64 8.25 Adjusted diluted EPS(1) 4.07 4.30 8.49 7.08 Dividends declared per share 0.8300 0.8300 1.6600 1.4800 Cash provided by operating activities 835 721 1,324 1,134 Cash used in investing activities (468 ) (455 ) (830 ) (674 ) Cash used in financing activities (322 ) (572 ) (366 ) (474 ) Free cash(1) 333 265 491 458 Financial Position As at June 30, 2020 As at December 31, 2019 Total assets $ 23,562 $ 22,367 Total long-term debt, including current portion 9,548 8,757 Total shareholders' equity 7,465 7,069 For the three months ended June 30 For the six months ended June 30 Financial Ratios 2020 2019 2020 2019 Operating ratio(2) 57.0 % 58.4 % 58.2 % 63.5 % For the twelve months ended June 30 2020 2019 Return on average shareholders' equity(3) 31.8 % 33.9 % Adjusted return on invested capital ("Adjusted ROIC")(1) 17.1 % 16.8 % Long-term debt to Net income ratio(4) 4.1 3.7 Adjusted net debt to adjusted EBITDA ratio(1) 2.4 2.4
(1) These measures have no standardized meanings prescribed by accounting
principles generally accepted in
therefore, may not be comparable to similar measures presented by other
companies. These measures are defined and reconciled in Non-GAAP Measures of
this Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (2) Operating ratio is defined as operating expenses divided by revenues,
further discussed in Results of Operations of this Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
(3) Return on average shareholders' equity is defined as Net income divided by
average shareholders' equity, averaged between the beginning and ending
balance over a rolling 12-month period, further discussed in Results of
Operations of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(4) Long-term debt to Net income ratio is defined as long-term debt, including
long-term debt maturing within one year, divided by Net income, further
discussed in Liquidity and Capital Resources of this Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations. 23
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Results of Operations
Three months ended
Income Operating income was$770 million in the second quarter of 2020, a decrease of$52 million , or 6%, from$822 million in the same period of 2019. This decrease was primarily due to lower volumes as measured by RTMs due to the impacts of COVID-19.
This decrease was partially offset by: • liquidated damages, including customer volume commitments, and higher freight
rates;
• the favourable impact of
• the efficiencies generated from improved operating performance and asset
utilization. Net income was$635 million in the second quarter of 2020, a decrease of$89 million , or 12%, from$724 million in the same period of 2019. This decrease was primarily due to lower Operating income in 2020 and an income tax recovery associated with a change in tax rate in 2019, partially offset by higher FX translation gains onU.S. dollar-denominated debt and lease liabilities compared to the same period of 2019. Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$553 million in the second quarter of 2020, a decrease of$49 million , or 8%, from$602 million in the same period of 2019. This decrease was primarily due to lower Operating income.
Diluted Earnings per Share
Diluted EPS was$4.66 in the second quarter of 2020, a decrease of$0.51 , or 10%, from$5.17 in the same period of 2019. This decrease was due to lower Net income, partially offset by a lower average number of outstanding shares due to the Company's share repurchase program. Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$4.07 in the second quarter of 2020, a decrease of$0.23 , or 5%, from$4.30 in the same period of 2019. This decrease was primarily due to lower Adjusted income, partially offset by a lower average number of outstanding shares due to the Company's share repurchase program.
Operating Ratio
The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company's Operating ratio was 57.0% in the second quarter of 2020, a 140 basis point improvement from 58.4% in the same period of 2019. This improvement was primarily due to: • the favourable impact of changes in fuel prices;
• liquidated damages, including customer volume commitments, and higher freight
rates; and
• the efficiencies generated from improved operating performance and asset
utilization.
This improvement was partially offset by lower volumes as measured by RTMs and lower gains on land sales.
Return on Average Shareholders' Equity and Adjusted Return on
Return on average shareholders' equity and Adjusted ROIC are measures used by management to determine how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions. Adjusted ROIC is also an important performance criteria in determining certain elements of the Company's long-term incentive plan.
Return on average shareholders' equity was 31.8% for the twelve months ended
Adjusted ROIC was 17.1% for the twelve months endedJune 30, 2020 , a 30 basis point increase compared to 16.8% for the twelve months endedJune 30, 2019 , primarily due to higher Operating income. This increase was partially offset by the increase in adjusted average invested capital primarily due to higher Adjusted income, partially offset by the impact of the Company's share repurchase program. Adjusted ROIC is a Non-GAAP measure, which is defined and reconciled from Return on average shareholders' equity, the most comparable measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 24
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Six months ended
Income
Operating income was$1,604 million in the first six months of 2020, an increase of$239 million , or 18%, from$1,365 million in the same period of 2019. This increase was primarily due to: • liquidated damages, including customer volume commitments, and higher freight
rates;
• the efficiencies generated from improved operating performance and asset
utilization;
• the favourable impact of changes in fuel prices; and
• the impact of harsher winter operating conditions in 2019.
This increase was partially offset by higher depreciation and amortization of
Net income was$1,044 million in the first six months of 2020, a decrease of$114 million , or 10%, from$1,158 million in the same period of 2019. This decrease was primarily due to an FX translation loss onU.S. dollar-denominated debt and lease liabilities of$129 million , compared to an FX translation gain of$82 million in the same period of 2019, an income tax recovery of$88 million associated with a change in tax rate in 2019, partially offset by higher Operating income.
Adjusted income was
Diluted Earnings per Share
Diluted EPS was$7.64 in the first six months of 2020, a decrease of$0.61 , or 7%, from$8.25 in the same period of 2019. This decrease was due to lower Net income, partially offset by a lower average number of outstanding shares due to the Company's share repurchase program.
Adjusted diluted EPS was
Operating Ratio
The Company's Operating ratio was 58.2% in the first six months of 2020, a 530 basis point improvement from 63.5% in the same period of 2019. This improvement was primarily due to: • liquidated damages, including customer volume commitments, and higher freight
rates;
• the favourable impact of changes in fuel prices;
• the efficiencies generated from improved operating performance and asset
utilization; and
• the impact of harsh winter operating conditions in 2019.
This improvement was partially offset by higher depreciation and amortization and cost inflation.
Impact of FX on Earnings Fluctuations in FX affect the Company's results becauseU.S. dollar-denominated revenues and expenses are translated into Canadian dollars.U.S. dollar-denominated revenues and expenses increase (decrease) when the Canadian dollar weakens (strengthens) in relation to theU.S. dollar. In the second quarter of 2020, the impact of a strongerU.S. dollar resulted in an increase in total revenues of$35 million , an increase in total operating expenses of$19 million , and an increase in interest expense of$4 million from the same period of 2019. In the first six months of 2020, the impact of a strongerU.S. dollar resulted in an increase in total revenues of$41 million , an increase in total operating expenses of$25 million , and an increase in interest expense of$5 million from the same period of 2019.
On
25
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The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and theU.S. dollar expressed in the Canadian dollar equivalent ofone U.S. dollar , the period end exchange rates, and the high and low exchange rates for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by theU.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of theFederal Reserve Board . Average exchange rates (Canadian/U.S. dollar) 2020 2019 For the three months ended -June 30 $ 1.39 $ 1.34 For the six months ended -June 30 $ 1.37 $ 1.33
Ending exchange rates (Canadian/
$ 1.30 $ 1.36 Beginning of quarter - April 1$ 1.41 $ 1.33 End of quarter - June 30$ 1.36 $ 1.31 For the three months ended For the six months ended June 30 June 30 High/Low exchange rates (Canadian/U.S. dollar) 2020 2019 2020 2019 High$ 1.42 $ 1.35 $ 1.45 $ 1.36 Low$ 1.34 $ 1.31 $ 1.30 $ 1.31 The impact of FX on total revenues and operating expenses is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the Foreign Exchange Risk section.
Impact of Fuel Price on Earnings
Fluctuations in fuel prices affect the Company's results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be an impact on earnings due to the timing of recoveries from CP's fuel cost adjustment program. The following table indicates the average fuel price for the three and six months endedJune 30, 2020 and the comparative periods of 2019. Average Fuel Price (U.S. dollars perU.S. gallon) 2020 2019 For the three months ended -June 30 $ 1.63 $ 2.61 For the six months ended -June 30 $ 1.98 $ 2.51
The impact of fuel prices on earnings includes the impacts of carbon taxes, levies, and obligations under cap-and-trade programs recovered and paid, on revenues and expenses, respectively.
In the second quarter of 2020, the favourable impact of fuel prices on Operating income was$24 million . Lower fuel prices resulted in a decrease in Total operating expenses of$81 million . Lower fuel prices, partially offset by the timing of recoveries from CP's fuel cost adjustment program, and increased carbon tax recoveries, resulted in a decrease in Total revenues of$57 million from the same period of 2019. In the first six months of 2020, the favourable impact of fuel prices on Operating income was$38 million . Lower fuel prices resulted in a decrease in Total operating expenses of$94 million . Lower fuel prices, partially offset by the timing of recoveries from CP's fuel cost adjustment program, and increased carbon tax recoveries, resulted in a decrease in Total revenues of$56 million from the same period of 2019. 26
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Impact of Share Price on Earnings
Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on theToronto Stock Exchange ("TSX") and theNew York Stock Exchange ("NYSE") with ticker symbol "CP". The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for the three and six months endedJune 30, 2020 and the comparative periods in 2019. TSX (in Canadian dollars) 2020
2019
Opening Common Share price, as atJanuary 1 $ 331.03 $
242.24
Ending Common Share price, as atMarch 31 $ 310.55 $
275.34
Ending Common Share price, as atJune 30 $ 345.32 $
308.43
Change in Common Share price for the three months ended
33.09
Change in Common Share price for the six months ended
66.19 NYSE (in U.S. dollars) 2020 2019 Opening Common Share price, as at January 1$ 254.95 $
177.62
Ending Common Share price, as atMarch 31 $ 219.59 $
206.03
Ending Common Share price, as atJune 30 $ 255.34 $
235.24
Change in Common Share price for the three months ended
29.21
Change in Common Share price for the six months ended
57.62
In the second quarter of 2020, the impact of the change in Common Share prices
resulted in an increase in stock-based compensation expense of
In the first six months of 2020, the impact of the change in Common Share prices
resulted in an increase in stock-based compensation expense of
The impact of share price on stock-based compensation is discussed further in
Item 3. Quantitative and Qualitative Disclosures About Market Risk , Share Price Impact on Stock-Based Compensation.
Operating Revenues
The Company's revenues are primarily derived from transporting freight. Changes in freight volumes generally contribute to corresponding changes in freight revenues and certain variable expenses, such as fuel, equipment rents, and crew costs. Non-freight revenues are generated from leasing of certain assets; other arrangements, including logistical services and contracts with passenger service operators; and switching fees. For the three months ended June FX Adjusted 30 2020 2019 Total Change % Change % Change(2) Freight revenues (in millions)(1)$ 1,752 $ 1,931 $ (179 ) (9 ) (11 ) Non-freight revenues (in millions) 40 46 (6 ) (13 ) (13 ) Total revenues (in millions)$ 1,792 $ 1,977 $ (185 ) (9 ) (11 ) Carloads (in thousands) 631.0 716.8 (85.8 ) (12 ) N/A Revenue ton-miles (in millions) 35,727 39,820 (4,093 ) (10 ) N/A Freight revenue per carload (in dollars)$ 2,777 $ 2,694 $ 83 3 1 Freight revenue per revenue ton-mile (in cents) 4.90 4.85 0.05 1 (1 )
(1) Freight revenues include fuel surcharge revenues of
taxes, levies, and obligations under cap-and-trade programs. (2) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Freight revenues were$1,752 million in the second quarter of 2020, a decrease of$179 million , or 9%, from$1,931 million in the same period of 2019. This decrease was primarily due to lower volumes as measured by RTMs. This decrease was partially offset by higher freight revenue per revenue ton-mile. RTMs are defined as the movement of one revenue-producing ton of freight over a distance of one mile. RTMs measure the relative weight and distance of rail freight moved by the Company. RTMs for the second quarter of 2020 were 35,727 million, a decrease of 10% compared with 39,820 million in the same period of 2019. This decrease was mainly attributable to lower volumes of crude,
27
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Coal, frac sand, and Intermodal. This decrease was partially offset by higher volumes of Canadian grain, Fertilizers and sulphur, and Potash.
Freight revenue per revenue ton-mile is defined as freight revenue per revenue-producing ton of freight over a distance of one mile. This is an indicator of yield. Freight revenue per revenue ton-mile was4.90 cents in the second quarter of 2020, an increase of0.05 cents , or 1%, from4.85 cents in the same period of 2019. This increase was primarily due to higher liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of$35 million . This increase was partially offset by moving lower volumes of Automotive, which has a higher freight revenue per revenue ton-mile compared to the corporate average, as well as the unfavourable impact of lower fuel surcharge revenue, as a result of lower fuel prices of$57 million . Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 631.0 thousand in the second quarter of 2020, a decrease of 85.8 thousand, or 12%, from 716.8 thousand in the same period of 2019. This decrease was primarily due to lower volumes of Automotive, Coal, crude, Intermodal, and frac sand. This decrease was partially offset by higher volumes of Canadian grain, Fertilizers and sulphur and Potash. Freight revenue per carload is defined as freight revenue per revenue-generating shipment of containers or freight cars. This is an indicator of yield. Freight revenue per carload was$2,777 in the second quarter of 2020, an increase of$83 , or 3%, from$2,694 in the same period of 2019. This increase was primarily due to liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of$35 million . This increase was partially offset by the unfavourable impact of lower fuel surcharge revenue, as a result of lower fuel prices of$57 million .
Non-freight revenues were
FX Adjusted
For the six months ended
% Change % Change(2) Freight revenues (in millions)(1)$ 3,752 $ 3,657 $ 95 3 1 Non-freight revenues (in millions) 83 87 (4 ) (5 ) (5 ) Total revenues (in millions)$ 3,835 $ 3,744 $ 91 2 1 Carloads (in thousands) 1,321.6 1,352.4 (30.8 ) (2 ) N/A Revenue ton-miles (in millions) 74,945 75,822 (877 ) (1 ) N/A Freight revenue per carload (in dollars)$ 2,839 $ 2,704 $ 135 5 4 Freight revenue per revenue ton-mile (in cents) 5.01 4.82 0.19 4 3
(1) Freight revenues include fuel surcharge revenues of
and obligations recovered under cap-and-trade programs. (2) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Freight revenues were$3,752 million in the first six months of 2020, an increase of$95 million , or 3%, from$3,657 million in the same period of 2019. This increase was primarily due to higher freight revenue per revenue ton-mile, partially offset by lower volumes as measured by RTMs.
RTMs for the first six months of 2020 were 74,945 million, a decrease of 1%
compared with 75,822 million in the same period of 2019. This decrease was
mainly attributable to lower volumes of Coal, frac sand, and
Freight revenue per revenue ton-mile was5.01 cents in the first six months of 2020, an increase of0.19 cents , or 4%, from4.82 cents in the same period of 2019. This increase was primarily due to liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of$41 million . This increase was partially offset by moving lower volumes of Automotive, which has a higher freight revenue per revenue ton-mile compared to the corporate average, as well as the unfavourable impact of lower fuel surcharge revenue, as a result of lower fuel prices, of$56 million . Carloads were 1,321.6 thousand in the first six months of 2020, a decrease of 30.8 thousand, or 2%, from 1,352.4 thousand in the same period of 2019. This decrease was primarily due to lower volumes of Coal, Automotive, and frac sand. This decrease was partially offset by higher volumes of Canadian grain. Freight revenue per carload was$2,839 in the first six months of 2020, an increase of$135 , or 5%, from$2,704 in the same period of 2019. This increase was primarily due to higher liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of$41 million . This increase is partially offset by the unfavourable impact of lower fuel surcharge revenue, as a result of lower fuel prices of$56 million . 28
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Non-freight revenues were
Fuel Cost Adjustment Program
Freight revenues include fuel surcharge revenues associated with CP's fuel cost adjustment program, which is designed to respond to fluctuations in fuel prices and help reduce exposure to changing fuel prices. The surcharge is applied to shippers through tariffs and by contract, within agreed-upon guidelines. This program includes recoveries of carbon taxes, levies, and obligations under cap-and-trade programs. Freight revenues included fuel surcharge revenues of$63 million in the second quarter of 2020, a decrease of$63 million , or 50%, from$126 million in the same period of 2019. This decrease was primarily due to lower fuel prices and lower volumes. This decrease was partially offset by the timing of recoveries from CP's fuel cost adjustment program and increased carbon tax recoveries. In the first six months of 2020, fuel surcharge revenues were$182 million , a decrease of$51 million , from$233 million in the same period of 2019. This decrease was primarily due to lower fuel prices. This decrease was partially offset by the timing of recoveries from CP's fuel cost adjustment program and increased carbon tax recoveries. Lines of Business Grain FX Adjusted
For the three months ended
% Change % Change(1) Freight revenues (in millions)$ 446 $ 422 $ 24 6 3 Carloads (in thousands) 118.4 113.1 5.3 5 N/A Revenue ton-miles (in millions) 10,169 9,452 717 8 N/A Freight revenue per carload (in dollars)$ 3,767 $ 3,731 $ 36 1 (1 ) Freight revenue per revenue ton-mile (in cents) 4.39 4.46 (0.07 ) (2 ) (4 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Grain revenue was$446 million in the second quarter of 2020, an increase of$24 million , or 6%, from$422 million in the same period of 2019. This increase was primarily due to moving record volumes of Canadian grain, primarily toVancouver andThunder Bay , higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per revenue ton-mile and moving lower volumes ofU.S. grain, primarily corn, to westernCanada . Freight revenue per revenue ton-mile decreased due to the unfavourable impact of lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads driven by moving increased volumes of Canadian grain toVancouver , which has a longer length of haul. FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 864 $ 802 $ 62 8 6 Carloads (in thousands) 219.0 205.9 13.1 6 N/A Revenue ton-miles (in millions) 19,185 17,804 1,381 8 N/A Freight revenue per carload (in dollars)$ 3,945 $ 3,895 $ 50 1 - Freight revenue per revenue ton-mile (in cents) 4.50 4.50 - - (1 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Grain revenue was$864 million in the first six months of 2020, an increase of$62 million , or 8%, from$802 million in the same period of 2019. This increase was primarily due to moving record volumes of Canadian grain, primarily toVancouver andThunder Bay , higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by lower volumes ofU.S. grain, primarily corn, to westernCanada and lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads driven by moving increased volumes of Canadian grain toVancouver , which has a longer length of haul. 29
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Coal
FX Adjusted
For the three months ended
(24 ) (24 ) Carloads (in thousands) 59.4 77.7 (18.3 ) (24 ) N/A Revenue ton-miles (in millions) 4,337 5,492 (1,155 ) (21 ) N/A Freight revenue per carload (in dollars)$ 2,205 $ 2,227 $ (22 ) (1 ) (1 ) Freight revenue per revenue ton-mile (in cents) 3.02 3.15 (0.13 ) (4 ) (4 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Coal revenue was$131 million in the second quarter of 2020, a decrease of$42 million , or 24%, from$173 million in the same period of 2019. This decrease was primarily due to lower volumes of Canadian coal, driven by supply chain challenges at both the mines and the ports, lower volumes ofU.S. coal toWisconsin , and decreased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due to the unfavourable impact of lower fuel surcharge revenue as a result of lower fuel prices. Carloads decreased more than RTMs driven by moving lower volumes ofU.S. coal toWisconsin , which has a shorter length of haul. FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 281 $ 331 $ (50 ) (15 ) (15 ) Carloads (in thousands) 123.2 148.1 (24.9 ) (17 ) N/A Revenue ton-miles (in millions) 8,772 10,724 (1,952 ) (18 ) N/A Freight revenue per carload (in dollars)$ 2,281 $ 2,235 $ 46 2 2 Freight revenue per revenue ton-mile (in cents) 3.20 3.09 0.11 4 4 (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Coal revenue was$281 million in the first six months of 2020, a decrease of$50 million , or 15%, from$331 million in the same period of 2019. This decrease was primarily due to lower volumes of Canadian coal, driven by supply chain challenges at both the mines and ports and lower fuel surcharge revenue as a result of lower fuel prices. This decrease was partially offset by increased freight revenue per revenue ton-mile due to higher freight rates.
Potash
FX Adjusted For the three months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 146 $ 136 $ 10 7 5 Carloads (in thousands) 47.0 44.4 2.6 6 N/A Revenue ton-miles (in millions) 5,490 5,242 248 5 N/A Freight revenue per carload (in dollars)$ 3,106 $ 3,063 $ 43 1 (1 ) Freight revenue per revenue ton-mile (in cents) 2.66 2.59 0.07 3 - (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Potash revenue was$146 million in the second quarter of 2020, an increase of$10 million , or 7%, from$136 million in the same period of 2019. This increase was primarily due to higher volumes of domestic potash following three consecutive poor application seasons, higher volumes of export potash following resolved international contract negotiations as well as increased freight revenue per revenue ton-mile. This increase was partially offset by lower fuel surcharge revenue as a result of lower fuel prices. Freight revenue per revenue ton-mile increased due to higher freight rates and the favourable impact of the change in FX. 30
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FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 258 $ 250 $ 8 3 2 Carloads (in thousands) 83.4 82.3 1.1 1 N/A
Revenue ton-miles (in millions) 9,628 9,815 (187 )
(2 ) N/A Freight revenue per carload (in dollars)$ 3,094 $ 3,038 $ 56 2 1 Freight revenue per revenue ton-mile (in cents) 2.68 2.55 0.13 5 4 (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Potash revenue was$258 million in the first six months of 2020, an increase of$8 million , or 3%, from$250 million in the same period of 2019. This increase was primarily due to increased freight revenue per revenue ton-mile and higher volumes of domestic potash. This increase was partially offset by lower fuel surcharge revenue as a result of lower fuel prices and lower volumes of export potash driven by unresolved international contract negotiations in the first quarter of 2020. Freight revenue per revenue ton-mile increased due to higher freight rates and the favourable impact of the change in FX. Carloads increased while RTMs decreased driven by moving proportionately less export potash to thePort of Vancouver , which has a longer length of haul.
Fertilizers and Sulphur
FX Adjusted
For the three months ended
% Change % Change(1) Freight revenues (in millions)$ 77 $ 63 $ 14 22 20 Carloads (in thousands) 16.7 14.1 2.6 18 N/A Revenue ton-miles (in millions) 1,233 940 293 31 N/A Freight revenue per carload (in dollars)$ 4,611 $ 4,468 $ 143 3 2 Freight revenue per revenue ton-mile (in cents) 6.24 6.70 (0.46 ) (7 ) (8 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Fertilizers and sulphur revenue was$77 million in the second quarter of 2020, an increase of$14 million , or 22%, from$63 million in the same period of 2019. This increase was primarily due to higher volumes of dry fertilizers and sulphur as a result of improved application conditions and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per revenue-ton mile. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads driven by moving proportionately more dry fertilizers fromChicago, Illinois to westernCanada , which has a longer length of haul. FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 147 $ 120 $ 27 23 20 Carloads (in thousands) 31.8 27.8 4.0 14 N/A Revenue ton-miles (in millions) 2,328 1,842 486 26 N/A Freight revenue per carload (in dollars)$ 4,623 $ 4,317 $ 306 7 5 Freight revenue per revenue ton-mile (in cents) 6.31 6.51 (0.20 ) (3 ) (5 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Fertilizers and sulphur revenue was$147 million in the first six months of 2020, an increase of$27 million , or 23%, from$120 million in the same period of 2019. This increase was primarily due to higher volumes of dry fertilizers, sulphur, and wet fertilizers as well as the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per revenue-ton mile. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads driven by moving proportionately more dry fertilizers fromChicago, Illinois to westernCanada , which has a longer length of haul.
31
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Forest Products
FX Adjusted
For the three months ended
% Change % Change(1) Freight revenues (in millions)$ 81 $ 78 $ 3 4 - Carloads (in thousands) 17.5 18.5 (1.0 ) (5 ) N/A Revenue ton-miles (in millions) 1,319 1,289 30 2 N/A Freight revenue per carload (in dollars)$ 4,629 $ 4,216 $ 413 10 6 Freight revenue per revenue ton-mile (in cents) 6.14 6.05 0.09 1 (2 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Forest products revenue was$81 million in the second quarter of 2020, an increase of$3 million , or 4%, from$78 million in the same period of 2019. This increase was primarily due to higher volumes of wood pulp and increased freight revenue per revenue ton-mile. This increase was partially offset by lower volumes of lumber and lower fuel surcharge revenue as a result of lower fuel prices. Freight revenue per revenue ton-mile increased due to higher freight rates and the favourable impact of the change in FX. RTMs increased while carloads decreased due to higher volumes of wood pulp fromOntario to theU.S. , which has a longer length of haul. FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 159 $ 151 $ 8 5 3 Carloads (in thousands) 35.6 35.6 - - N/A Revenue ton-miles (in millions) 2,596 2,468 128 5 N/A Freight revenue per carload (in dollars)$ 4,466 $ 4,242 $ 224 5 3 Freight revenue per revenue ton-mile (in cents) 6.12 6.12 - - (2 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Forest products revenue was$159 million in the first six months of 2020, an increase of$8 million , or 5%, from$151 million in the same period of 2019. This increase was primarily due to higher volumes of wood pulp and panel products, higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased while carloads remained flat due to higher volumes of panel products and wood pulp from easternCanada to theU.S. , which have a longer length of haul.
Energy, Chemicals and Plastics
FX Adjusted
For the three months ended
(1 ) (3 ) Carloads (in thousands) 62.8 87.4 (24.6 ) (28 ) N/A Revenue ton-miles (in millions) 4,512 6,971 (2,459 ) (35 ) N/A Freight revenue per carload (in dollars)$ 5,430 $ 3,959 $ 1,471 37 35 Freight revenue per revenue ton-mile (in cents) 7.56 4.96 2.60 52 50 (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Energy, chemicals and plastics revenue was$341 million in the second quarter of 2020, a decrease of$5 million , or 1%, from$346 million in the same period of 2019. This decrease was primarily due to lower volumes of crude and liquefied petroleum gas ("LPG") as a result of the COVID-19 pandemic and lower fuel surcharge revenue as a result of lower fuel prices. This decrease was partially offset by increased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile increased primarily due to higher liquidated damages, including customer volume commitments, the favourable impact of the change in FX, and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of crude, which has a longer length of haul.
32
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FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 832 $ 661 $ 171 26 25 Carloads (in thousands) 164.6 166.2 (1.6 ) (1 ) N/A Revenue ton-miles (in millions) 13,361 13,330 31 - N/A Freight revenue per carload (in dollars)$ 5,055 $ 3,977 $ 1,078 27 26 Freight revenue per revenue ton-mile (in cents) 6.23 4.96 1.27 26 25 (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Energy, chemicals and plastics revenue was$832 million in the first six months of 2020, an increase of$171 million , or 26%, from$661 million in the same period of 2019. This increase was primarily due to higher freight revenue per revenue ton-mile and higher volumes of crude. This increase was partially offset by lower fuel surcharge revenue as a result of lower fuel prices and lower volumes of LPG as a result of the COVID-19 pandemic. Freight revenue per revenue ton-mile increased primarily due to higher liquidated damages, including customer volume commitments, higher freight rates and the favourable impact of the change in FX.
Metals, Minerals and Consumer Products
FX Adjusted
For the three months ended
(35 ) (37 ) Carloads (in thousands) 45.1 63.7 (18.6 ) (29 ) N/A Revenue ton-miles (in millions) 1,877 2,867 (990 ) (35 ) N/A Freight revenue per carload (in dollars)$ 2,949 $ 3,218 $ (269 ) (8 ) (11 ) Freight revenue per revenue ton-mile (in cents) 7.09 7.15 (0.06 ) (1 ) (4 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Metals, minerals and consumer products revenue was$133 million in the second quarter of 2020, a decrease of$72 million , or 35%, from$205 million in the same period of 2019. This decrease was primarily due to lower volumes of frac sand and steel as a result of the COVID-19 pandemic and decreased freight revenue per revenue ton-mile. This decrease was partially offset by the favourable impact of the change in FX. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of lower fuel prices. RTMs decreased more than carloads due to moving lower volumes of frac sand to the Bakken, which has a longer length of haul. FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 322 $ 378 $ (56 ) (15 ) (17 ) Carloads (in thousands) 103.3 117.2 (13.9 ) (12 ) N/A Revenue ton-miles (in millions) 4,648 5,315 (667 ) (13 ) N/A Freight revenue per carload (in dollars)$ 3,117 $ 3,225 $ (108 ) (3 ) (5 ) Freight revenue per revenue ton-mile (in cents) 6.93 7.11 (0.18 ) (3 ) (5 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Metals, minerals and consumer products revenue was$322 million in the first six months of 2020, a decrease of$56 million , or 15%, from$378 million in the same period of 2019. This decrease was primarily due to moving lower volumes of frac sand as a result of the COVID-19 pandemic and decreased freight revenue per revenue ton-mile. This decrease was partially offset by the favourable impact of the change in FX. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of lower fuel prices.
33
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Automotive
FX Adjusted
For the three months ended
(67 ) (68 ) Carloads (in thousands) 11.9 31.5 (19.6 ) (62 ) N/A Revenue ton-miles (in millions) 130 439 (309 ) (70 ) N/A Freight revenue per carload (in dollars)$ 2,857 $ 3,302 $ (445 ) (13 ) (16 ) Freight revenue per revenue ton-mile (in cents) 26.15 23.69 2.46 10 7 (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Automotive revenue was$34 million in the second quarter of 2020, a decrease of$70 million , or 67%, from$104 million in the same period of 2019. This decrease was primarily due to lower volumes caused by manufacturing plant shutdowns acrossNorth America as a result of the COVID-19 pandemic and lower fuel surcharge revenue as a result of lower fuel prices. This decrease was partially offset by higher freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile increased due the favourable impact of the change in FX and higher freight rates. RTMs decreased more than carloads due to increased short haul volumes within southernOntario . FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 121 $ 180 $ (59 ) (33 ) (34 ) Carloads (in thousands) 40.1 56.6 (16.5 ) (29 ) N/A Revenue ton-miles (in millions) 456 774 (318 ) (41 ) N/A Freight revenue per carload (in dollars)$ 3,017 $ 3,180 $ (163 ) (5 ) (7 ) Freight revenue per revenue ton-mile (in cents) 26.54 23.26 3.28 14 12 (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Automotive revenue was$121 million in the first six months of 2020, a decrease of$59 million , or 33%, from$180 million in the same period of 2019. This decrease was primarily due to lower volumes caused by manufacturing plant shutdowns acrossNorth America as a result of the COVID-19 pandemic and lower fuel surcharge revenue as a result of lower fuel prices. This decrease was partially offset by higher freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile increased due to the favourable impact of the change in FX and higher freight rates. RTMs decreased more than carloads due to increased short haul volumes within southernOntario .
Intermodal
FX Adjusted
For the three months ended
(10 ) (11 ) Carloads (in thousands) 252.2 266.4 (14.2 ) (5 ) N/A Revenue ton-miles (in millions) 6,660 7,128 (468 ) (7 ) N/A Freight revenue per carload (in dollars)$ 1,439 $ 1,517 $ (78 ) (5 ) (6 ) Freight revenue per revenue ton-mile (in cents) 5.45 5.67 (0.22 ) (4 ) (5 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Intermodal revenue was$363 million in the second quarter of 2020, a decrease of$41 million , or 10%, from$404 million in the same period of 2019. This decrease was primarily due to lower domestic volumes as a result of the COVID-19 pandemic, and decreased freight revenue per revenue ton-mile. This decrease was partially offset by the onboarding of a new international customer and the favourable impact of the change in FX. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of lower fuel prices. Carloads decreased less than RTMs due to moving proportionately higher volumes of international intermodal, which has a shorter length of haul.
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FX Adjusted For the six months ended June 30 2020 2019 Total Change % Change % Change(1) Freight revenues (in millions)$ 768 $ 784 $ (16 ) (2 ) (3 ) Carloads (in thousands) 520.6 512.7 7.9 2 N/A Revenue ton-miles (in millions) 13,971 13,750 221 2 N/A Freight revenue per carload (in dollars)$ 1,475 $ 1,529 $ (54 ) (4 ) (4 ) Freight revenue per revenue ton-mile (in cents) 5.50 5.70 (0.20 ) (4 ) (4 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Intermodal revenue was$768 million in the first six months of 2020, a decrease of$16 million , or 2%, from$784 million in the same period of 2019. This decrease was primarily due to decreased freight revenue per revenue ton-mile, and lower domestic volumes as a result of the COVID-19 pandemic. This decrease was partially offset by higher international volumes due to onboarding of a new international customer and the favourable impact of the change in FX. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenues as a result of lower fuel prices, and moving proportionately more international intermodal, which has a lower freight revenue per revenue ton-mile compared to domestic intermodal. Operating Expenses For the three months ended June 30 FX Adjusted % (in millions) 2020 2019 Total Change % Change Change(1) Compensation and benefits$ 347 $ 383 $ (36 ) (9 ) (11 ) Fuel 131 236 (105 ) (44 ) (46 ) Materials 50 54 (4 ) (7 ) (7 ) Equipment rents 33 34 (1 ) (3 ) (6 ) Depreciation and amortization 195 183 12 7 6 Purchased services and other 266 265 1 - (1 ) Total operating expenses$ 1,022 $ 1,155 $ (133 ) (12 ) (13 )
(1) FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Operating expenses were$1,022 million in the second quarter of 2020, a decrease of$133 million , or 12%, from$1,155 million in the same period of 2019. This decrease was primarily due to: • the favourable impact of$81 million from lower fuel prices;
• lower volume variable expense; and
• efficiencies generated from improved operating performance and asset
utilization.
This decrease was partially offset by the unfavourable impact of the change in
FX of
For the six months ended June 30 FX Adjusted % (in millions) 2020 2019 Total Change % Change Change(1) Compensation and benefits$ 745 $ 789 $ (44 ) (6 ) (6 ) Fuel 343 445 (102 ) (23 ) (24 ) Materials 109 111 (2 ) (2 ) (2 ) Equipment rents 69 69 - - (1 ) Depreciation and amortization 387 343 44 13 12 Purchased services and other 578 622 (44 ) (7 ) (8 ) Total operating expenses$ 2,231 $ 2,379 $ (148 ) (6 ) (7 ) (1) FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures
presented by other companies. FX Adjusted % Change is defined and reconciled
in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 35
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Operating expenses were$2,231 million in the first six months of 2020, a decrease of$148 million , or 6%, from$2,379 million in the same period of 2019. This decrease was primarily due to: • the favourable impact of$94 million from lower fuel prices;
• efficiencies generated from improved operating performance and asset
utilization;
• lower volume variable expenses;
• the impact of harsher winter operating conditions in 2019; and
• the impact of changes in share price on stock-based compensation of
million. This decrease was partially offset by: • higher depreciation and amortization of$42 million (excluding FX);
• cost inflation; and
• the unfavourable impact of the change in FX of
Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was$347 million in the second quarter of 2020, a decrease of$36 million , or 9%, from$383 million in the same period of 2019. This decrease was primarily due to: • lower volume variable expense as a result of decreased workload as measured by GTMs; • labour efficiencies;
• reduced training costs; and
• lower incentive compensation.
This decrease was partially offset by: • higher pension current service cost of$8 million ;
• the impact of wage and benefit inflation;
• the unfavourable impact of the change in FX of
• increase to stock-based compensation primarily driven by the
impact of changes to stock price.
Compensation and benefits expense was$745 million in the first six months of 2020, a decrease of$44 million , or 6%, from$789 million in the same period of 2019. This decrease was primarily due to: • labour efficiencies;
• reduction to stock-based compensation primarily driven by the impact of
changes in share price of
• reduced training costs;
• the impact of weather related costs as a result of harsh winter operating
conditions in the first quarter of 2019; and
• lower volume variable expense as a result of decreased workload as measured
by GTMs. This decrease was partially offset by: • the impact of wage and benefit inflation;
• higher pension current service cost of
• the unfavourable impact of the change in FX of
Fuel
Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was$131 million in the second quarter of 2020, a decrease of$105 million , or 44%, from$236 million in the same period of 2019. This decrease was primarily due to: • the favourable impact of$81 million from lower fuel prices;
• a decrease in workload, as measured by GTMs; and
• an increase in fuel efficiency of approximately 1% resulting from improved
train productivity and higher horsepower utilization.
This decrease was partially offset by the unfavourable impact of the change in
FX of
Fuel expense was$343 million in the first six months of 2020, a decrease of$102 million , or 23%, from$445 million in the same period of 2019. This decrease was primarily due to: • the favourable impact of$94 million from lower fuel prices;
• an improvement in fuel efficiency of 3% from improved winter operating
conditions in the first quarter of 2020 and increased train productivity; and
• a decrease in workload, as measured by GTMs.
This decrease was partially offset by the unfavourable impact of the change in FX of$9 million . 36
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Materials
Materials expense includes the cost of materials used for the maintenance of track, locomotives, freight cars, and buildings, as well as software sustainment. Materials expense was$50 million in the second quarter of 2020, a decrease of$4 million , or 7%, from$54 million in the same period of 2019. This decrease was due to lower freight car maintenance net of recoveries, locomotive maintenance and vehicle fuel prices. Materials expense was$109 million in the first six months of 2020, a decrease of$2 million , or 2%, from$111 million in the same period of 2019. This decrease was due to lower vehicle fuel prices, locomotive servicing and track maintenance, partially offset by higher locomotive maintenance.
Equipment Rents
Equipment rents expense includes the cost associated with using other railways' freight cars, intermodal equipment, and locomotives, net of rental income received from other railroads for the use of CP's equipment. Equipment rents expense was$33 million in the second quarter of 2020, a decrease of$1 million , or 3%, from$34 million in the same period of 2019. This decrease was primarily due to lower usage of pooled freight cars as a result of lower volumes; partially offset by the unfavourable impact of the change in FX of$1 million . Equipment rents expense was$69 million in the first six months of 2020, unchanged from$69 million in the same period of 2019. Lower usage of pooled freight cars as a result of lower volumes was offset by the unfavourable impact of the change in FX of$1 million .
Depreciation and Amortization
Depreciation and amortization expense represents the charge associated with the use of track and roadway, buildings, rolling stock, information systems, and other depreciable assets. Depreciation and amortization expense was$195 million in the second quarter of 2020, an increase of$12 million , or 7%, from$183 million in the same period of 2019. This increase was primarily due to a higher depreciable asset base and the unfavourable impact of the change in FX of$1 million . Depreciation and amortization expense was$387 million in the first six months of 2020, an increase of$44 million , or 13%, from$343 million in the same period of 2019. This increase was primarily due to a higher depreciable asset base, the unfavourable impact of the change in FX of$2 million , and other adjustments made in 2019. Purchased Services and Other For the three months ended June 30 (in millions) 2020 2019 Total Change % Change Support and facilities$ 63 $ 66 $ (3 ) (5 ) Track and operations 62 74 (12 ) (16 ) Intermodal 47 55 (8 ) (15 ) Equipment 27 35 (8 ) (23 ) Casualty 30 16 14 88 Property taxes 31 36 (5 ) (14 ) Other 6 - 6 - Land sales - (17 ) 17 (100 ) Total Purchased services and other$ 266 $ 265 $ 1
-
Purchased services and other expense encompasses a wide range of third-party costs, including expenses for joint facilities, personal injuries and damage claims, environmental remediation, property taxes, contractor and consulting fees, insurance, and gains on land sales. Purchased services and other expense was$266 million in the second quarter of 2020, an increase of$1 million from$265 million in the same period of 2019. This increase was primarily due to: • gains on land sales of$17 million in 2019, reported in Land sales;
• higher expenses primarily due to the increased number and severity of
casualty incidents, reported in Casualty; and
• the unfavourable impact of the change in FX of
This increase was partially offset by: • lower volume variable expenses, reported primarily in Intermodal and
Equipment;
• lower business travel and event costs due to COVID-19, reported primarily in
Support and facilities and Track and operations;
• efficiencies generated from improved operating performance, reported
primarily in Equipment and Track and operations; and
• lower property taxes. 37
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For the six months ended June 30 (in millions) 2020 2019 Total Change % Change Support and facilities$ 136 $ 137 $ (1 ) (1 ) Track and operations 140 149 (9 ) (6 ) Intermodal 104 111 (7 ) (6 ) Equipment 58 67 (9 ) (13 ) Casualty 68 85 (17 ) (20 ) Property taxes 67 72 (5 ) (7 ) Other 9 18 (9 ) (50 ) Land sales (4 ) (17 ) 13 (76 ) Total Purchased services and other$ 578 $ 622 $ (44
) (7 )
Purchased services and other expense was$578 million in the first six months of 2020, a decrease of$44 million , or 7%, from$622 million in the same period of 2019. This decrease was primarily due to: • lower expenses primarily due to the reduced number and severity of casualty
incidents, reported in Casualty;
• lower snow removal and other weather related costs reported in Track and
operations and Intermodal;
• a decrease in charges associated with contingencies of
in Other;
• reduced business travel, reported in Track and operations and Support and
facilities; and • lower property taxes. This decrease was partially offset by higher gains on land sales of$13 million in 2019, reported in Land sales and the unfavourable impact of the change in FX of$7 million . Other Income Statement Items Other (Income) Expense Other (income) expense consists of gains and losses from the change in FX on debt and lease liabilities and working capital, costs related to financing, shareholder costs, equity income, and other non-operating expenditures. Other income was$86 million in the second quarter of 2020, an increase of$46 million , or 115%, from$40 million in the same period of 2019. This increase was primarily due to a higher FX translation gain onU.S. dollar-denominated debt and lease liabilities of$49 million . Other expense was$125 million in the first six months of 2020, a change of$212 million , or 244%, compared to an income of$87 million in the same period of 2019. This change was primarily due to a FX translation loss onU.S. dollar-denominated debt and lease liabilities of$129 million , compared to a FX translation gain of$82 million in the same period of 2019.
FX translation gains and losses on debt and lease liabilities are discussed further in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .
Other Components of Net Periodic Benefit Recovery
Other components of net periodic recovery was$86 million in the second quarter of 2020, a decrease of$12 million or 12%, compared to$98 million in the same period of 2019 and was$171 million in the first six months of 2020, a decrease of$24 million or 12%, compared to$195 million in the same period of 2019. These decreases were primarily due to increases in the recognized net actuarial loss. Net Interest Expense Net interest expense includes interest on long-term debt and finance leases. Net interest expense was$118 million in the second quarter of 2020, an increase of$6 million , or 5%, from$112 million in the same period of 2019. This increase was primarily due to the unfavourable impact of the change in FX of$4 million . Net interest expense was$232 million in the first six months of 2020, an increase of$6 million , or 3%, from$226 million in the same period of 2019. This increase was primarily due to: • the unfavourable impact of an increase in debt levels of$11 million ;
• the unfavourable impact of the change in FX of
• an increase in commercial paper interest of
This was partially offset by a reduction in interest related to long-term debt
of
38
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Income Tax Expense
Income tax expense was$189 million in the second quarter of 2020, an increase of$65 million , or 52%, from$124 million in the same period of 2019. This increase was primarily due to theAlberta provincial corporate tax rate decrease enacted in 2019 resulting in deferred income tax recoveries of$88 million , partially offset by lower taxable earnings and a lower effective tax rate. Income tax expense was$374 million in the first six months of 2020, an increase of$111 million , or 42%, from$263 million in the same period of 2019. This increase was primarily due to deferred income tax recoveries in 2019, described above. The effective tax rate in the second quarter of 2020, including discrete items, was 22.98% compared to 14.63% in the same period of 2019. The effective tax rate in the first six months of 2020, including discrete items, was 26.38% compared to 18.50% in the same period of 2019. The effective tax rate in the second quarter and first six months of 2020, excluding discrete items, was 25.00% compared to 25.75% in 2019. The decrease in the effective tax rate excluding discrete items was primarily due to the decrease inAlberta's corporate tax rate and the 2020 U.S. track maintenance credit. The Company expects an effective tax rate in 2020 of 24.80%. The Company's 2020 outlook for its effective income tax rate is based on certain assumptions about events and developments that may or may not materialize or that may be offset entirely or partially by new events and developments. This is discussed further in Item 1A. Risk Factors of CP's 2019 Annual Report on Form 10-K.
Share Capital
AtJuly 21, 2020 , the latest practicable date, there were 135,533,633 Common Shares and no preferred shares issued and outstanding, which consists of 13,877 holders of record of the Common Shares. In addition, CP has a Management Stock Option Incentive Plan ("MSOIP"), under which key officers and employees are granted options to purchase the Common Shares. Each option granted can be exercised for one Common Share. AtJuly 21, 2020 , 1,510,722 options were outstanding under the MSOIP and stand-alone option agreements entered into with Mr.Keith Creel . There are 895,523 options available to be issued by the Company's MSOIP in the future. CP has a Director's Stock Option Plan ("DSOP"), under which directors are granted options to purchase Common Shares. There are no outstanding options under the DSOP, which has 340,000 options available to be issued in the future.
Liquidity and Capital Resources
The Company believes adequate amounts of Cash and cash equivalents are available in the normal course of business to provide for ongoing operations, including the obligations identified in the tables in Contractual Commitments of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company is not aware of any trends or expected fluctuations in the Company's liquidity that would create any deficiencies. The Company's primary sources of liquidity include its Cash and cash equivalents, its commercial paper program, its bilateral letter of credit facilities, and its revolving credit facility.
As at
As atJune 30, 2020 , the Company's revolving credit facility was undrawn (December 31, 2019 - undrawn), from a total available amount ofU.S. $1.3 billion . The agreement requires the Company to maintain a financial covenant in conjunction with the credit facility. As atJune 30, 2020 , the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenant. The Company has a commercial paper program that enables it to issue commercial paper up to a maximum aggregate principal amount ofU.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As atJune 30, 2020 , total commercial paper borrowings was $nil, compared toU.S. $397 million as atDecember 31, 2019 . As atJune 30, 2020 , under its bilateral letter of credit facilities, the Company had letters of credit drawn of$62 million from a total available amount of$300 million . This compares to letters of credit drawn of$80 million from a total available amount of$300 million as atDecember 31, 2019 . Under the bilateral letter of credit facilities, the Company has the option to post collateral in the form of Cash or cash equivalents, equal at least to the face value of the letter of credit issued. As atJune 30, 2020 andDecember 31, 2019 , the Company did not have any collateral posted on its bilateral letter of credit facilities.
The following discussion of operating, investing, and financing activities describes the Company's indicators of liquidity and capital resources.
39
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Operating Activities
Cash provided by operating activities was$835 million in the second quarter of 2020, an increase of$114 million , or 16%, compared to$721 million in the same period of 2019. This increase was primarily due to a favourable change in working capital which included lower income tax payments, partially offset by a decrease in cash generating income during the second quarter of 2020, compared to the same period of 2019. The Company had lower income tax payments in the second quarter of 2020 as a result of the deferral of Canadian federal and provincial as well asU.S. federal payments until the third quarter of 2020 due to COVID-19. Cash provided by operating activities was$1,324 million in the first six months of 2020, an increase of$190 million , or 17%, compared to$1,134 million in the same period of 2019. This increase was primarily due to higher cash generating income and a favourable change in working capital primarily due to lower income tax payments, partially offset by a decrease in receipts from customers in advance of performing services in the six months endedJune 30, 2020 , compared to the same period of 2019. Investing Activities Cash used in investing activities was$468 million in the second quarter of 2020, an increase of$13 million , or 3%, compared to$455 million in the same period of 2019. Cash used in investing activities was$830 million in the first six months of 2020, an increase of$156 million , or 23%, compared to$674 million in the same period of 2019. These increases were primarily due to higher capital additions during 2020 compared to the same periods of 2019.
Free Cash
CP generated positive Free cash of$333 million in the second quarter of 2020, an increase of$68 million from$265 million , or 26%, in the same period of 2019. For the first six months of 2020, CP generated positive Free cash of$491 million , an increase of$33 million , or 7%, from$458 million in the same period of 2019. These increases were primarily due to an increase in cash provided by operating activities, partially offset by an increase in cash used in investing activities as a result of higher additions to properties. Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's capital programs. Free cash is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financing Activities
Cash used in financing activities was$322 million in the second quarter of 2020, a decrease of$250 million , or 44%, compared to$572 million in the same period of 2019. This decrease was primarily due to the principal repayment ofU.S. $350 million 7.250% notes in the second quarter of 2019 as well as lower payments to buy back shares under the Company's share repurchase program during the three months endedJune 30, 2020 . This was partially offset by net repayments of commercial paper and short-term borrowings compared to net issuances of commercial paper in the same period of 2019. Cash used in financing activities was$366 million in the first six months of 2020, a decrease of$108 million , or 23%, compared to$474 million in the same period of 2019. This decrease was primarily due to the issuances ofU.S. $500 million 2.050% notes dueMarch 5, 2030 and$300 million 3.050% notes dueMarch 9, 2050 , compared to the issuance of$400 million 3.150% notes dueMarch 13, 2029 in the same period of 2019, as well as the principal repayment ofU.S. $350 million of the Company's 7.250% notes during the six months endedJune 30, 2019 . This was partially offset by net repayments of commercial paper during the six months endedJune 30, 2020 compared to net issuances in the same period of 2019, and higher payments to buy back shares under the Company's share repurchase program during 2020.
Credit Measures
Credit ratings provide information relating to the Company's operations and liquidity, and affect the Company's ability to obtain short-term and long-term financing and/or the cost of such financing.
A mid-investment grade credit rating is an important measure in assessing the Company's ability to maintain access to public financing and to minimize the cost of capital. It also affects the ability of the Company to engage in certain collateralized business activities on a cost-effective basis.
Credit ratings and outlooks are based on the rating agencies' methodologies and can change from time to time to reflect their views of CP. Their views are affected by numerous factors including, but not limited to, the Company's financial position and liquidity along with external factors beyond the Company's control.
As atJune 30, 2020 , CP's credit ratings fromStandard & Poor's Rating Services ("Standard & Poor's") and Moody's Investor Service ("Moody's") remain unchanged fromDecember 31, 2019 . 40
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Credit ratings as atJune 30, 2020 (1) Long-term debt Outlook
Long-term corporate credit BBB+ stable
Senior secured debt A stable Senior unsecured debt BBB+ stable Moody's Senior unsecured debt Baa1 stable Commercial paper program Standard & Poor's A-2 N/A Moody's P-2 N/A
(1) Credit ratings are not recommendations to purchase, hold or sell securities
and do not address the market price or suitability of a specific security
for a particular investor. Credit ratings are based on the rating agencies'
methodologies and may be subject to revision or withdrawal at any time by the rating agencies. Financial Ratios The Long-term debt to Net income ratio for the twelve months endedJune 30, 2020 andJune 30, 2019 was 4.1 and 3.7, respectively. This increase was primarily due to higher debt. The Adjusted net debt to Adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") ratio remained unchanged at 2.4 for the twelve months endedJune 30, 2020 andJune 30, 2019 . The Adjusted net debt to Adjusted EBITDA ratio is a Non-GAAP measure, which is defined and reconciled from the Long-term debt to Net income ratio, the most comparable measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted net debt to Adjusted EBITDA ratio of 2.0 to 2.5. Although CP has provided a target Non-GAAP measure (Adjusted net debt to Adjusted EBITDA ratio), management is unable to reconcile, without unreasonable efforts, the target Adjusted net debt to Adjusted EBITDA ratio to the most comparable GAAP measure (Long-term debt to Net income ratio), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In past years, CP has recognized significant asset impairment charges, management transition costs related to senior executives and discrete tax items. These or other similar, large unforeseen transactions affect Net income but may be excluded from CP's Adjusted EBITDA. Additionally, theU.S. -to-Canada dollar exchange rate is unpredictable and can have a significant impact on CP's reported results but may be excluded from CP's Adjusted EBITDA. In particular, CP excludes the FX impact of translating the Company's debt and lease liabilities, interest and taxes from Adjusted EBITDA. Please see Forward-Looking Statements in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
Supplemental Guarantor Financial Information
Canadian Pacific Railway Company ("CPRC"), a 100%-owned subsidiary ofCanadian Pacific Railway Limited ("CPRL"), is the issuer of certain securities which are fully and unconditionally guaranteed by CPRL on an unsecured basis. The other subsidiaries of CPRC do not guarantee the securities and are referred to below as the "Non-Guarantor Subsidiaries". The following is a description of the terms and conditions of the guarantees with respect to securities for which CPRC is the issuer and CPRL provides a full and unconditional guarantee. As ofJune 30, 2020 , CPRC has outstanding$7,972 million principal amount of debt securities due through 2115, and$47 million in perpetual 4% consolidated debenture stock, for all of which CPRL is the guarantor. CPRL fully and unconditionally guarantees the payment of the principal (and premium, if any) and interest on the debt securities and consolidated debenture stock issued by CPRC, any sinking fund or analogous payments payable with respect to such securities, and any additional amounts payable when they become due and payable, whether at maturity or otherwise. The guarantee is CPRL's unsubordinated and unsecured obligation and ranks equally with all of CPRL's other unsecured, unsubordinated obligations. CPRL will be released and relieved of its obligations under the guarantees after obligations to the holders are satisfied in accordance with the terms of the respective instruments. The Company early adopted Rule 13-01 of theSEC's Regulation S-X which simplifies the existing disclosure requirements relating to our guaranteed securities and allows such disclosure to be included within this Part 1, Item II, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pursuant to Rule 13-01, we are eligible to provide this summarized financial and non-financial information in lieu of providing separate financial statements of CPRC. 41
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More information on the securities under this guarantee structure can be found in Exhibit 22.1 List of Issuers and Guarantor Subsidiaries of this quarterly report.
Summarized Financial Information
The following tables present summarized financial information for CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor) on a combined basis after elimination of (i) intercompany transactions and balances among CPRC and CPRL; (ii) equity in earnings from and investments in the Non-Guarantor Subsidiaries; and (iii) intercompany dividend income.
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