CANADIAN PACIFIC KANSAS CITY LIMITED 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, 2021 in Item 1. Financial Statements, other information in this report, and Item 8. Financial Statements and Supplementary Data of the Company's 2020 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 toCanadian Pacific Railway Limited ("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 2021 Results
•Financial performance - In the second quarter of 2021, CP reported Diluted
earnings per share ("EPS") of $1.86 , an increase of 100% compared to the same
period of 2020 and Net income of $1,246 million in the second quarter of 2021,
an increase of 96% compared to the same period of 2020. These increases were
primarily due to the merger termination fee received as a result of Kansas City
Southern's ("KCS") termination of the Agreement and Plan of Merger (the "Merger
Agreement") and higher freight revenue associated with higher volumes and higher
freight revenue per revenue ton-mile ("RTM"), partially offset by
acquisition-related costs associated with the proposed KCS transaction and
volume variable expenses. The Merger Agreement is discussed further in Recent
Developments of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Adjusted diluted EPS was $1.03 in the second quarter of 2021, an increase of 27%
compared to the same period of 2020. Adjusted income was $689 million in the
second quarter of 2021, an increase of 25% compared to the same period of 2020.
These increases were primarily due to higher freight revenue associated with
higher volumes and higher freight revenue per RTM, partially offset by volume
variable expenses in the second quarter of 2021.
CP reported an Operating ratio of 60.1% in the second quarter of 2021, a 310
basis point increase as compared to the same period of 2020. This increase was
primarily due to the acquisition-related costs associated with the proposed KCS
transaction and the unfavourable impact of higher fuel prices, partially offset
by higher freight revenue associated with higher volumes and higher freight
revenue per RTM. Adjusted operating ratio, which excludes the
acquisition-related costs, was 55.3%, a 170 basis point improvement as compared
to the same period of 2020. This improvement was primarily due to higher freight
revenue volumes, higher freight revenue per RTM, and efficiencies generated from
improved operating performance and asset utilization, partially offset by the
unfavourable impact of higher fuel prices and higher depreciation and
amortization. No adjustment was made to Operating ratio in 2020.
Adjusted diluted EPS, Adjusted income and Adjusted Operating ratio 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.
•Total revenues - Total revenues increased by 15% in the second quarter of 2021
to $2,054 million compared to the same period of 2020. This increase was
primarily due to higher freight revenue volumes and higher freight revenue per
RTM.
•Operating performance - CP's average train weight increased by 1% to 10,101
tons and average train length increased by 3% to 8,335 feet, compared to the
same period in 2020. These increases were a result of improvements in operating
plan efficiency and continued improvements in bulk train efficiency due to
moving longer and heavier Grain trains in each case compared to the same period
in 2020. These metrics are discussed further in Performance Indicators of this
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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Recent Developments
•OnMarch 21, 2021 , CP announced that it entered into the Merger Agreement with KCS, under which CP agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximatelyU.S. $29 billion , including the assumption ofU.S. $3.8 billion of outstanding KCS debt. OnMay 21, 2021 , KCS terminated the Merger Agreement in order to enter into a definitive merger agreement with Canadian National Railway ("CN") (the "CN Agreement"). As a result and under the terms of the Merger Agreement, KCS concurrently paid a merger termination fee of$845 million (U.S. $700 million ) to the Company. CP remains available to re-engage with KCS. •OnApril 21, 2021 , the five-for-one Share Split of the issued and outstanding Common Shares was approved at the Annual and Special Meeting of Shareholders. OnMay 13, 2021 , the Company's shareholders of record as ofMay 5, 2021 received four additional Common Shares for every Common Share held. Ex-distribution trading in the Company's Common Shares on a split-adjusted basis commenced onMay 14, 2021 . Proportional adjustments were also made to outstanding awards under the Company's stock-based compensation plans in order to reflect the share split. All outstanding Common Shares, stock-based compensation awards, and per share amounts herein have been retrospectively adjusted to reflect the share split. •In the second quarter of 2021, CP's Pandemic Team continued to proactively monitor guidance and orders from governments, public health authorities, and regulatory agencies. Utilizing that guidance while implementing CP protocols and safety measures, the Company has begun safely reintegrating its employees into the workplace where permissible. The Company maintained preventative measures that serve to minimize the risk of exposure to COVID-19, including physical distancing measures, restricting employee business travel, strengthening clean workplace and face covering practices, reinforcing socially responsible sick leave recommendations, limiting visitor and third-party access to Company facilities, and continuously reevaluating our efforts with safety as a top priority. Additional information concerning the impact COVID-19 may have to our future business and results of operations is provided in Part I, Item 1A. Risk Factors of the Company's 2020 Annual Report on Form 10-K.
Prior Developments
•On
•OnMarch 31, 2021 , CP completed the installation of the solar energy farm at itsCalgary headquarters. This sustainability-driven project is one of the largest private solar farms inAlberta and is expected to generate more power than consumed annually by the main headquarters building. •OnMarch 30, 2021 , CP and theIllinois State Toll Highway Authority closed their transaction regarding western access atO'Hare Airport and atBensenville Yard, CP's principal rail facility inChicago . The transaction allows for the construction of a new tollway to the west side ofO'Hare Airport while protecting CP's ability to serve its customers moving freight through the criticalChicago gateway. •OnMarch 21, 2021 , CP's Board of Directors and President and CEOKeith Creel agreed on certain contract amendments toMr. Creel's incentive compensation that are intended to see him lead the Company until at least early 2026. •OnMarch 9, 2021 , CP announced that it will employ Ballard's hydrogen fuel cell modules in CP's pioneering Hydrogen Locomotive Program. Through its Hydrogen Locomotive Program, CP plans to developNorth America's first hydrogen-powered line-haul freight locomotive by retrofitting a diesel-powered locomotive with Ballard hydrogen fuel cells. This purchase from Ballard further demonstrates the Company's commitment to action on climate change and developing the next generation locomotive - one that produces zero emissions.
2021 Outlook
With a 2021 plan that encompasses profitable sustainable growth, CP expects high single-digit RTM growth and double-digit Adjusted diluted EPS growth. CP's expectations for Adjusted diluted EPS growth in 2021 are based on Adjusted diluted EPS of$3.53 in 2020. For the purposes of this outlook, CP assumes an effective tax rate of 24.6 percent. CP estimates other components of net periodic benefit recovery to increase by approximately$40 million versus 2020. As CP continues to invest in service, productivity and safety, the Company plans to invest approximately$1.55 billion in capital programs in 2021. Although CP has provided a forward-looking Non-GAAP measure (Adjusted diluted EPS), management is unable to reconcile, without unreasonable efforts, the forward-looking Adjusted diluted EPS to the most comparable GAAP measure, due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In recent years, CP has recognized acquisition-related costs (including legal, consulting, and financing fees and fair value gain or loss on FX forward contracts and interest rate hedges), the merger termination fee, changes in income tax rates and a change to an uncertain tax item. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded
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from CP's Adjusted diluted EPS. Additionally, the
Performance Indicators
The following table lists the key measures of the Company's operating
performance:
For the three months ended June 30 For the six months ended June 30
2021 2020(1) % Change 2021 2020(1) % Change
Operations Performance
Gross ton-miles ("GTMs") (millions) 71,355 63,077 13 142,682 134,410 6
Train miles (thousands) 7,605 6,865 11 15,407 15,238 1
Average train weight - excluding local traffic
(tons) 10,101 9,984 1 9,945 9,544 4
Average train length - excluding local traffic
(feet) 8,335 8,089 3 8,150 7,713 6
Average terminal dwell (hours) 6.8 6.5 5 7.1 6.4 11
Average train speed (miles per hour, or "mph") 21.8 22.4 (3) 21.3 22.0 (3)
Locomotive productivity (GTMs / operating
horsepower) 208 212 (2) 205 206 -
Fuel efficiency (U.S. gallons of locomotive
fuel consumed / 1,000 GTMs) 0.918 0.921 - 0.938 0.947 (1)
Total Employees and Workforce
Total employees (average) 12,688 12,001 6 12,375 12,244 1
Total employees (end of period) 12,709 11,988 6 12,709 11,988 6
Workforce (end of period) 12,749 12,033 6 12,749 12,033 6
Safety Indicators(1)
FRA personal injuries per 200,000
employee-hours 0.77 1.16 (34) 0.96 1.14 (16)
FRA train accidents per million train-miles 0.36 1.19 (70) 0.88 1.02 (14)
(1)Federal Railroad Administration ("FRA") personal injuries per 200,000
employee-hours for the three months ended June 30, 2020 , previously reported as
1.12, was restated to 1.16 in this Earnings Release. FRA train accidents per
million train-miles for the three months ended June 30, 2020 , previously
reported as 1.06, was restated to 1.19 in this Earnings Release. These
restatements reflect new information available within specified periods
stipulated by the FRA but that exceed the Company's financial reporting
timeline.
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.
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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.
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 increased by 13% in the second quarter of 2021 compared to the
same period of 2020. This increase was mainly attributable to higher volumes of
Energy, chemicals and plastics, Metals, minerals and consumer products,
Intermodal, and Coal. This increase was partially offset by lower volumes of
Potash.
•Train miles are defined as the sum of the distance moved by all trains operated
on the network. Train miles provide a measure of the productive utilization of
our network. A smaller increase in train miles relative to increases in volumes,
as measured by RTMs, and/or workload, as measured by GTMs, indicate improved
train productivity. Train miles increased by 11% in the second quarter of 2021
compared to the same period of 2020. This increase reflects the impact of a 13%
increase in workload (GTMs) partially offset by a 1% 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 1% in the second quarter of 2021 compared to
the same period of 2020. This increase was a result of improvements in operating
plan efficiency and continued improvements in bulk train efficiency due to
moving longer and heavier Grain trains. Improvements for Grain trains were
driven by the High Efficiency Product ("HEP") train model, which is an
8,500-foot train model that features the new high-capacity grain hopper cars and
increased grain carrying capacity.
•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
3% in the second quarter of 2021 compared to the same period of 2020. This
increase was a result of improvements in operating plan efficiency and continued
improvements in bulk train efficiency due to moving longer Grain trains.
Improvements for Grain trains were driven by the 8,500-foot HEP train model.
•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 5% in the
second quarter of 2021 compared to the same period of 2020, as a result of
increased network activity in response to demand recovery from the impact of the
COVID-19 pandemic in the prior year.
•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 decreased by 3% in
the second quarter of 2021 compared to the same period of 2020, as a result of
increased network activity in response to demand recovery from the impact of the
COVID-19 pandemic in the prior year.
•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 decreased by 2% in the second quarter of 2021 compared
to the same period of 2020, as a result of moving proportionately higher volumes
of lighter merchandise and Intermodal.
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•Fuel efficiency is defined asU.S. gallons of locomotive fuel consumed per 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 was flat in the second quarter of 2021 compared to the same period of 2020.
Six months ended
•GTMs increased by 6% for the first six months of 2021 compared to the same period of 2020. This increase was primarily attributable to higher volumes of Grain, Energy, chemicals and plastics, excluding crude, Metals, minerals and consumer products, and Automotive. This increase was partially offset by lower volumes of crude and Potash.
•Train miles increased by 1% for the first six months of 2021 compared to the same period of 2020. This increase reflected the impact of a 6% increase in workload (GTMs), partially offset by a 4% increase in average train weights.
•Average train weight increased by 4% for the first six months of 2021 compared to the same period of 2020. This increase was a result of improvements in operating plan efficiency and continued improvements in bulk train efficiency due to moving longer and heavier Grain trains. Improvements for Grain trains were driven by the 8,500-foot HEP train model. This increase was partially offset by lower volumes of heavier commodities such as crude. •Average train length increased by 6% for the first six months of 2021 from the same period of 2020. This increase was primarily due to improvements in operating plan efficiency and continued improvements in bulk train efficiency due to moving longer Grain trains. Improvements for Grain trains were driven by the 8,500-foot HEP train model.
•Average terminal dwell increased by 11% in the first six months of 2021 compared to the same period of 2020. This unfavourable increase was driven primarily by increased network activity in response to demand recovery from the impact of the COVID-19 pandemic in the prior year.
•Average train speed decreased by 3% in the first six months of 2021 compared to the same period of 2020. This decrease was driven primarily by harsh winter operating conditions in the first quarter of 2021 and increased network activity in response to demand recovery from the impact of the COVID-19 pandemic in the prior year.
•Locomotive productivity was flat in the first six months of 2021 compared to the same period of 2020.
•Fuel efficiency improved by 1% in the first six months of 2021 compared to the same period of 2020. This increase in efficiency was due to running longer and heavier trains as a result of improvements in the operating plan.
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 increased by 6% and 1% for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020. The total number of employees as atJune 30, 2021 was 12,709, an increase of 721, or 6%, compared to 11,988 as atJune 30, 2020 . The total workforce as atJune 30, 2021 was 12,749, an increase of 716, or 6%, compared to 12,033 as atJune 30, 2020 . The increases in the total employees and workforce were driven by current and anticipated volume growth in 2021 and furloughs in the prior year associated with the economic downturn caused by COVID-19.
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. 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. 22
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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 0.77 in the second quarter of 2021, a decrease from 1.16 in the same period of 2020. For the first six months of 2021, the FRA personal injury rate per 200,000 employee-hours for CP was 0.96, a decrease from 1.14 in the same period of 2020. 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. $11,200 in 2021 andU.S. $10,700 in damage for 2020. The FRA train accidents per million train-miles was 0.36 in the second quarter of 2021, a decrease from 1.19 in the same period of 2020. For the first six months of 2021, the FRA train accidents per million train-miles was 0.88, a decrease from 1.02 in the same period of 2020. 23
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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, 2021 and the comparative figures in 2020. 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) 2021 2020 2021 2020 Financial Performance and Liquidity Total revenues $ 2,054 $ 1,792$ 4,013 $ 3,835 Operating income 820 770 1,600 1,604 Adjusted operating income(1) 919 770 1,732 1,604 Net income 1,246 635 1,848 1,044 Adjusted income(1) 689 553 1,289 1,160 Basic EPS 1.87 0.94 2.77 1.53 Diluted EPS 1.86 0.93 2.76 1.53 Adjusted diluted EPS(1) 1.03 0.81 1.92 1.70 Dividends declared per share 0.190 0.166 0.380 0.332 Cash provided by operating activities 1,954 835 2,536 1,324 Cash used in investing activities (405) (468) (691) (830) Cash used in financing activities (1,016) (322) (1,096) (366) Free cash(1) 746 333 1,042 491 Financial Position As at June 30, 2021 As at December 31, 2020 Total assets $ 24,704 $ 23,640 Total long-term debt, including current portion 8,722 9,771 Total shareholders' equity 8,965 7,319 For the three months ended June 30 For the six months ended June 30 Financial Ratios 2021 2020 2021 2020 Operating ratio(2) 60.1 % 57.0 % 60.1 % 58.2 % Adjusted operating ratio(1) 55.3 % 57.0 % 56.8 % 58.2 %
For the twelve months ended
2021 2020
Return on average shareholders' equity(3) 39.5 % 31.8 %
Adjusted return on invested capital ("Adjusted
ROIC")(1) 16.7 % 17.1 %
Long-term debt to Net income ratio(4) 2.7 4.1
Adjusted net debt to adjusted EBITDA ratio(1) 2.0 2.4
(1)These measures have no standardized meanings prescribed by accounting
principles generally accepted in the United States of America ("GAAP") and,
therefore, may not be comparable to similar measures presented by other
companies. These measures are defined and reconciled in 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.
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Results of Operations
Three months ended
Income Operating income was$820 million in the second quarter of 2021, an increase of$50 million , or 6%, from$770 million in the same period of 2020. This increase was primarily due to higher freight volumes as measured by RTMs and higher freight rates. This increase was partially offset by: •acquisition-related costs of$99 million associated with the proposed KCS transaction that were recognized in Purchased services and other; •the unfavourable impact of the change in FX of$47 million ; •the unfavourable impact of higher fuel price of$15 million ; and •increased training costs. Adjusted operating 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$919 million in the second quarter of 2021, an increase of$149 million , or 19%, from$770 million in the same period of 2020. This increase reflects the same factors discussed above except that Adjusted operating income in 2021 excludes the acquisition-related costs of$99 million associated with the proposed KCS transaction. Net income was$1,246 million in the second quarter of 2021, an increase of$611 million , or 96%, from$635 million in the same period of 2020. This increase was primarily due to the$845 million merger termination fee received in connection with KCS' termination of the Merger Agreement and higher operating income excluding acquisition-related costs, partially offset by$308 million in acquisition-related costs associated with the proposed KCS transaction and higher income tax expense due to higher taxable earnings. 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$689 million in the second quarter of 2021, an increase of$136 million , or 25%, from$553 million in the same period of 2020. This increase was primarily due to higher Adjusted operating income.
Diluted Earnings per Share
Diluted EPS was$1.86 in the second quarter of 2021, an increase of$0.93 , or 100%, from$0.93 in the same period of 2020. This increase was due to higher Net income and lower average number of outstanding shares due to share repurchases under 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$1.03 in the second quarter of 2021, an increase of$0.22 , or 27%, from$0.81 in the same period of 2020. This increase was due to higher Adjusted income and lower average number of outstanding shares due to share repurchases under 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 60.1% in the second
quarter of 2021, a 310 basis point increase from 57.0% in the same period of
2020. This increase was primarily due to acquisition-related costs associated
with the proposed KCS transaction and the unfavourable impact of higher fuel
prices.
This increase was partially offset by:
•higher freight volumes as measured by RTMs and higher freight rates;
•decreased stock-based compensation primarily driven by the impact of changes in
share price; and
•a legal claim recovery.
Adjusted operating ratio, defined and reconciled in Non-GAAP Measures of this
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, was 55.3% in the second quarter of 2021, a 170 basis point
improvement from the same period of 2020. This improvement was primarily due to:
•higher freight volumes as measured by RTMs and higher freight rates;
•decreased stock-based compensation primarily driven by the impact of changes in
share price; and
•a legal claim recovery.
This improvement was partially offset by the unfavourable impact of higher fuel
prices.
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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 39.5% for the twelve months endedJune 30, 2021 , a 770 basis point increase compared to 31.8% for the twelve months endedJune 30, 2020 , primarily due to higher Net income. This increase was partially offset by higher average shareholders' equity due to accumulated Net income, partially offset by the impact of the Company's share repurchase program. Adjusted ROIC was 16.7% for the twelve months endedJune 30, 2021 , a 40 basis point decrease compared to 17.1% for the twelve months endedJune 30, 2020 . This decrease was primarily due to the increase in adjusted average invested capital driven by 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.
Six months ended
Income
Operating income was$1,600 million in the first six months of 2021, a decrease of$4 million , from$1,604 million in the same period of 2020. This decrease was primarily due to: •acquisition-related costs of$132 million associated with the proposed KCS transaction that were recognized in Purchased services and other; •the unfavourable impact of the change in FX of$72 million ; •the unfavourable impact of higher fuel prices of$52 million ; •higher depreciation and amortization of$24 million (excluding FX); •cost inflation; •higher defined benefit pension current service cost of$16 million ; and •increased training costs. This decrease was partially offset by: •higher freight volumes as measured by RTMs and higher freight rates; •a gain on exchange of property and construction easements inChicago of$50 million ; and •the efficiencies generated from improved operating performance and asset utilization. Adjusted operating 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$1,732 million in the first six months of 2021, an increase of$128 million , or 8%, from$1,604 million in the same period of 2020. This increase was primarily due to: •higher freight volumes as measured by RTMs and higher freight rates; •a gain on exchange of property and construction easements inChicago of$50 million ; and •the efficiencies generated from improved operating performance and asset utilization. This increase was partially offset by: •the unfavourable impact of the change in FX of$72 million ; •the unfavourable impact of higher fuel prices of$52 million ; •higher depreciation and amortization of$24 million (excluding FX); •cost inflation; and •higher defined benefit pension current service costs of$16 million . Net income was$1,848 million in the first six months of 2021, an increase of$804 million , or 77%, from$1,044 million in the same period of 2020. This increase was primarily due to the$845 million merger termination fee received in connection with KCS' termination of the Merger Agreement and an FX translation gain on debt and lease liabilities of$85 million , compared to an FX translation loss on debt and lease liabilities of$129 million in the same period of 2020, partially offset by$344 million in acquisition-related costs associated with the proposed KCS transaction. Adjusted income was$1,289 million in the first six months of 2021, an increase of$129 million , or 11%, from$1,160 million in the same period of 2020. This increase was primarily due to higher Adjusted operating income.
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Diluted Earnings per Share
Diluted EPS was$2.76 in the first six months of 2021, an increase of$1.23 , or 80%, from$1.53 in the same period of 2020. This increase was due to higher Net income and lower average number of outstanding shares due to share repurchases under the Company's share repurchase program. Adjusted diluted EPS was$1.92 in the first six months of 2021, an increase of$0.22 , or 13%, from$1.70 in the same period of 2020. This increase was due to higher Adjusted income and lower average number of outstanding shares due to share repurchases under the Company's share repurchase program.
Operating Ratio
The Company's Operating ratio was 60.1% in the first six months of 2021, a 190 basis point increase from 58.2% in the same period of 2020. This increase was primarily due to acquisition-related costs associated with the proposed KCS transaction and the unfavourable impact of higher fuel prices. This increase was partially offset by higher freight volumes as measured by RTMs and higher freight rates and a gain on exchange of property and construction easements inChicago . Adjusted operating ratio, which excludes the acquisition-related costs associated with the proposed KCS transaction, was 56.8% in the first six months of 2021, a 140 basis point improvement from the same period of 2020. This improvement was primarily due to: •higher freight volumes as measured by RTMs and higher freight rates; •a gain on exchange of property and construction easements inChicago ; and •the efficiencies generated from improved operating performance and asset utilization.
This improvement was partially offset by the unfavourable impact of higher fuel prices and higher depreciation and amortization.
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.
On
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 high and low exchange rates and period end exchange rates for the periods indicated. Average 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) 2021 2020 For the three months ended - June 30$ 1.23 $ 1.39 For the six months ended - June 30$ 1.25 $ 1.37
Ending exchange rates (Canadian/
$ 1.28 $ 1.30 Beginning of quarter - April 1$ 1.26 $ 1.41 End of quarter - June 30$ 1.24 $ 1.36 For the three
months For the six months ended
ended June 30 June 30
High/Low exchange rates (Canadian/U.S. dollar) 2021 2020 2021 2020
High $ 1.26 $ 1.42 $ 1.28 $ 1.45
Low $ 1.20 $ 1.34 $ 1.20 $ 1.30
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In the second quarter of 2021, the impact of a weakerU.S. dollar resulted in a decrease in total revenues of$94 million , a decrease in total operating expenses of$47 million , and a decrease in interest expense of$12 million from the same period of 2020. In the first six months of 2021, the impact of a weakerU.S. dollar resulted in a decrease in total revenues of$146 million , a decrease in total operating expenses of$74 million , and a decrease in interest expense of$18 million from the same period of 2020. The impact of FX on total revenues and operating expenses is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the Foreign Exchange Risk section.
Impact of Fuel Price on Earnings
Fluctuations in fuel prices affect the Company's results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be an impact on earnings due to the timing of recoveries from CP's fuel cost adjustment program. The following table indicates the average fuel price for the three and six months endedJune 30, 2021 and the comparative periods of 2020. Average Fuel Price (U.S. dollars per U.S. gallon) 2021 2020 For the three months ended - June 30$ 2.71 $ 1.63 For the six months ended - June 30$ 2.54 $ 1.98
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 2021, the unfavourable impact of fuel prices on Operating income was$15 million . Higher fuel prices resulted in an increase in Total operating expenses of$68 million . Higher fuel prices and increased carbon tax recoveries, partially offset by the unfavourable impact of the timing of recoveries from CP's fuel cost adjustment program resulted in an increase in Total revenues of$53 million from the same period of 2020. In the first six months of 2021, the unfavourable impact of fuel prices on Operating income was$52 million . Higher fuel prices resulted in an increase in Total operating expenses of$75 million . Higher fuel prices and increased carbon tax recoveries, partially offset by the timing of recoveries from CP's fuel cost adjustment program resulted in an increase in Total revenues of$23 million from the same period of 2020.
Impact of Share Price on Earnings
Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on theToronto Stock Exchange ("TSX") and theNew York Stock Exchange ("NYSE") with ticker symbol "CP". The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for the three and six months endedJune 30, 2021 and the comparative periods in 2020. TSX (in Canadian dollars) 2021
2020
Opening Common Share price, as at January 1$ 88.31 $ 66.21 Ending Common Share price, as at March 31$ 96.00 $ 62.11 Ending Common Share price, as at June 30$ 95.32
Change in Common Share price for the three months ended
NYSE (inU.S. dollars) 2021
2020
Opening Common Share price, as at January 1$ 69.34 $ 50.99 Ending Common Share price, as at March 31$ 75.86 $ 43.92 Ending Common Share price, as at June 30$ 76.91
Change in Common Share price for the three months ended
In the second quarter of 2021, the impact of the change in Common Share prices resulted in a negligible change in stock-based compensation expense compared to an increase of$20 million in the same period of 2020.
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In the first six months of 2021, 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 revenue is generated from leasing of certain assets; other
arrangements, including contracts with passenger service operators and
logistical services; and switching fees.
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(2)
Freight revenues (in millions)(1) $ 2,008 $ 1,752 $ 256 15 21
Non-freight revenues (in millions) 46 40 6 15 18
Total revenues (in millions) $ 2,054 $ 1,792 $ 262 15 21
Carloads (in thousands) 723.5 631.0 92.5 15 N/A
Revenue ton-miles (in millions) 39,061 35,727 3,334 9 N/A
Freight revenue per carload (in dollars)
(2) - 6 Freight revenue per revenue ton-mile (in cents) 5.14 4.90 0.24 5 11 (1)Freight revenues include fuel surcharge revenues of$133 million in 2021 and$63 million in 2020. Fuel surcharge revenues include recoveries of carbon 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$2,008 million in the second quarter of 2021, an increase of$256 million , or 15%, from$1,752 million in the same period of 2020. This increase was primarily due to higher volumes as measured by RTMs and higher freight revenue per RTM. 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 2021 were 39,061 million, an increase of 3,334 million, or 9%, from 35,727 million in the same period of 2020. This increase was mainly attributable to higher volumes of Energy, chemicals and plastics, Metals, minerals and consumer products, Intermodal, and Coal. This increase was partially offset by lower volumes of Potash. Freight revenue per RTM 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 RTM was5.14 cents in the second quarter of 2021, an increase of0.24 cents , or 5%, from4.90 cents in the same period of 2020. This increase was primarily due to moving higher volumes of Automotive, which has a higher freight revenue per RTM compared to the corporate average, higher fuel surcharge revenue as a result of higher fuel prices of$53 million , and higher freight rates. This increase was partially offset by the unfavourable impact of the change in FX of$93 million . Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 723.5 thousand in the second quarter of 2021, an increase of 92.5 thousand, or 15%, from 631.0 thousand in the same period of 2020. This increase was primarily due to higher volumes of Intermodal, Coal, Automotive, Metals, minerals and consumer products, and Energy, chemicals and plastics. 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$2,775 in the second quarter of 2021, a decrease of$2 from$2,777 in the same period of 2020. This decrease was primarily due to the unfavourable impact of the change in FX of$93 million , offset by higher fuel surcharge revenue as a result of higher fuel prices of$53 million , and higher freight rates. Non-freight revenues were$46 million in the second quarter of 2021, an increase of$6 million , or 15%, from$40 million in the same period of 2020. This increase was primarily due to revenue recognized for construction easements inChicago of$4 million , higher leasing revenue, and switching fees.
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FX Adjusted
For the six months ended June 30 2021 2020 Total Change % Change % Change(2)
Freight revenues (in millions)(1) $ 3,926 $ 3,752 $ 174 5 9
Non-freight revenues (in millions) 87 83 4 5 6
Total revenues (in millions) $ 4,013 $ 3,835 $ 178 5 9
Carloads (in thousands) 1,414.9 1,321.6 93.3 7 N/A
Revenue ton-miles (in millions) 78,334 74,945 3,389 5 N/A
Freight revenue per carload (in dollars)
(64) (2) 2
Freight revenue per revenue ton-mile (in
cents) 5.01 5.01 - - 4
(1)Freight revenues include fuel surcharge revenues of $218 million in 2021 and
$182 million in 2020. Fuel surcharge revenues include carbon taxes, levies, 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
RTMs for the first six months of 2021 were 78,334 million, an increase of 3,389 million, or 5% from 74,945 million in the same period of 2020. This increase was mainly attributable to higher volumes of Grain, Coal, Energy, chemicals and plastics, excluding crude, Metals, minerals and consumer products, and Automotive. This increase was partially offset by lower volumes of crude and Potash. Freight revenue per RTM was5.01 cents in the first six months of 2021, consistent with the same period in 2020. This was primarily due to moving higher volumes of Automotive, which has a higher freight revenue per RTM compared to the corporate average, higher freight rates, and higher fuel surcharge revenue as a result of higher fuel prices of$23 million . This increase was offset by the unfavourable impact of the change in FX of$145 million . Carloads were 1,414.9 thousand in the first six months of 2021, an increase of 93.3 thousand, or 7%, from 1,321.6 thousand in the same period of 2020. This increase was primarily due to higher volumes of Coal, Automotive, Intermodal, Grain, Metals minerals and consumer products, and Energy, chemicals and plastics, excluding crude. This increase was partially offset by lower volumes of crude and Potash. Freight revenue per carload was$2,775 in the first six months of 2021, a decrease of$64 , or 2%, from$2,839 in the same period of 2020. This decrease was primarily due to the unfavourable impact of the change in FX of$145 million . This decrease was partially offset by higher freight rates and higher fuel surcharge revenue as a result of higher fuel prices of$23 million . Non-freight revenues were$87 million in the first six months of 2021, an increase of$4 million , or 5%, from$83 million in the same period of 2020. This increase was primarily due to revenue recognized for construction easements inChicago of$4 million and higher leasing revenues, partially offset by lower revenue from logistical services, passenger service operators, and switching fees.
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$133 million in the second quarter of 2021, an increase of$70 million , or 111%, from$63 million in the same period of 2020. This increase was primarily due to higher fuel prices, higher volumes, and increased carbon tax recoveries. This increase was partially offset by the timing of recoveries from CP's fuel adjustment program and the unfavourable impact of the change in FX. In the first six months of 2021, fuel surcharge revenues were$218 million , an increase of$36 million , or 20%, from$182 million in the same period of 2020. This increase was primarily due to higher fuel prices, higher volumes, and increased carbon tax recoveries. This increase was partially offset by the timing of recoveries from CP's fuel cost adjustment program and the unfavourable impact of the change in FX. 30
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Lines of Business
Grain
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 444 $ 446 $ (2) - 4
Carloads (in thousands) 118.4 118.4 - - N/A
Revenue ton-miles (in millions) 10,076 10,169 (93) (1) N/A
Freight revenue per carload (in dollars)
(17) - 4 Freight revenue per revenue ton-mile (in cents) 4.41 4.39 0.02 - 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. Grain revenue was$444 million in the second quarter of 2021, a decrease of$2 million from$446 million in the same period of 2020. This decrease was primarily due to lower volumes of Canadian grain to easternCanada andVancouver and the unfavourable impact of the change in FX. This decrease was partially offset by moving higher volumes ofU.S. corn and wheat to theU.S. Pacific Northwest , higher freight rates, and higher fuel surcharge revenue as a result of higher fuel prices. FX Adjusted For the six months ended June 30 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 892 $ 864 $ 28 3 7 Carloads (in thousands) 234.8 219.0 15.8 7 N/A Revenue ton-miles (in millions) 20,849 19,185 1,664 9 N/A
Freight revenue per carload (in dollars)
(4) -
Freight revenue per revenue ton-mile (in
cents) 4.28 4.50 (0.22) (5) (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.
Grain revenue was $892 million in the first six months of 2021, an increase of
$28 million , or 3%, from $864 million in the same period of 2020. This increase
was primarily due to higher volumes of U.S. corn and wheat to the U.S. Pacific
Northwest . This increase was partially offset by decreased freight revenue per
RTM. Freight revenue per RTM decreased due to the unfavourable impact of the
change in FX. RTMs increased more than carloads due to moving higher volumes of
U.S. corn to the U.S. Pacific Northwest , which has a longer length of haul.
Coal
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 170 $ 131 $ 39 30 32
Carloads (in thousands) 78.8 59.4 19.4 33 N/A
Revenue ton-miles (in millions) 4,837 4,337 500 12 N/A
Freight revenue per carload (in dollars)
(48) (2) (1) Freight revenue per revenue ton-mile (in cents) 3.51 3.02 0.49 16 18 (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$170 million in the second quarter of 2021, an increase of$39 million , or 30%, from$131 million in the same period of 2020. This increase was primarily due to increased freight revenue per RTM and higher volumes of Canadian coal, driven by prior year supply chain challenges at both the mines and the ports. Freight revenue per RTM increased due to moving higher volumes of Canadian coal toKamloops, B.C. , which has a shorter length of haul, and higher fuel surcharge revenue as a result of higher fuel prices.
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FX Adjusted
For the six months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 333 $ 281 $ 52 19 20
Carloads (in thousands) 150.8 123.2 27.6 22 N/A
Revenue ton-miles (in millions) 10,117 8,772 1,345 15 N/A
Freight revenue per carload (in dollars)
(73) (3) (2) Freight revenue per revenue ton-mile (in cents) 3.29 3.20 0.09 3 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$333 million in the first six months of 2021, an increase of$52 million , or 19%, from$281 million in the same period of 2020. This increase was primarily due to higher volumes of Canadian coal, driven by prior year supply chain challenges at both the mines and the ports, and increased freight revenue per RTM. Freight revenue per RTM increased due to moving higher volumes of Canadian coal toKamloops, B.C. , which has a shorter length of haul.
Potash
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 134 $ 146 $ (12) (8) (3)
Carloads (in thousands) 44.6 47.0 (2.4) (5) N/A
Revenue ton-miles (in millions) 4,978 5,490 (512) (9) N/A
Freight revenue per carload (in dollars)
(3) 2
Freight revenue per revenue ton-mile (in
cents) 2.69 2.66 0.03 1 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.
Potash revenue was $134 million in the second quarter of 2021, a decrease of $12
million , or 8%, from $146 million in the same period of 2020. This decrease was
primarily due to lower volumes of export potash to Vancouver and the U.S.
Pacific Northwest as a result of construction at the Port of Vancouver and the
Port of Portland , and the unfavourable impact of the change in FX. This decrease
was partially offset by increased freight revenue per RTM. Freight revenue per
RTM increased due to higher fuel surcharge revenue as a result of higher fuel
prices, moving lower volumes of export potash, which has a longer length of
haul, and higher freight rates.
FX Adjusted
For the six months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 235 $ 258 $ (23) (9) (5)
Carloads (in thousands) 79.0 83.4 (4.4) (5) N/A
Revenue ton-miles (in millions) 8,764 9,628 (864) (9) N/A
Freight revenue per carload (in dollars)
(4) -
Freight revenue per revenue ton-mile (in
cents) 2.68 2.68 - - 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 $235 million in the first six months of 2021, a decrease of
$23 million , or 9%, from $258 million in the same period of 2020. This decrease
was primarily due to lower volumes of export potash to Vancouver and the U.S.
Pacific Northwest as a result of construction at the Port of Vancouver and the
Port of Portland , and the unfavourable impact of the change in FX. This decrease
was partially offset by higher freight rates and higher fuel surcharge revenue
as a result of higher fuel prices. RTMs decreased more than carloads due to
moving lower volumes of export potash, which has a longer length of haul.
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Fertilizers and Sulphur
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 78 $ 77 $ 1 1 10
Carloads (in thousands) 17.0 16.7 0.3 2 N/A
Revenue ton-miles (in millions) 1,263 1,233 30 2 N/A
Freight revenue per carload (in dollars)
(23) - 8 Freight revenue per revenue ton-mile (in cents) 6.18 6.24 (0.06) (1) 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. Fertilizers and sulphur revenue was$78 million in the second quarter of 2021, an increase of$1 million , or 1%, from$77 million in the same period of 2020. This increase was primarily due to higher volumes of wet fertilizer, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to the unfavourable impact of the change in FX. FX Adjusted For the six months ended June 30 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 155 $ 147 $ 8 5 12 Carloads (in thousands) 33.3 31.8 1.5 5 N/A Revenue ton-miles (in millions) 2,532 2,328 204 9 N/A
Freight revenue per carload (in dollars)
32 1 7 Freight revenue per revenue ton-mile (in cents) 6.12 6.31 (0.19) (3) 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. Fertilizers and sulphur revenue was$155 million in the first six months of 2021, an increase of$8 million , or 5%, from$147 million in the same period of 2020. This increase was primarily due to higher volumes of wet and dry fertilizer, higher freight rates, and higher fuel surcharge revenue as a result of higher fuel prices. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving higher volumes of wet fertilizers from westernCanada to theU.S. Midwest, which has a longer length of haul. Forest Products FX Adjusted For the three months ended June 30 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 90 $ 81 $ 9 11 22 Carloads (in thousands) 18.9 17.5 1.4 8 N/A Revenue ton-miles (in millions) 1,508 1,319 189 14 N/A
Freight revenue per carload (in dollars)
133 3 13 Freight revenue per revenue ton-mile (in cents) 5.97 6.14 (0.17) (3) 6 (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$90 million in the second quarter of 2021, an increase of$9 million , or 11%, from$81 million in the same period of 2020. This increase was primarily due to higher volumes of lumber, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving higher volumes of lumber, which has a longer length of haul.
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FX Adjusted
For the six months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 170 $ 159 $ 11 7 15
Carloads (in thousands) 36.4 35.6 0.8 2 N/A
Revenue ton-miles (in millions) 2,871 2,596 275 11 N/A
Freight revenue per carload (in dollars)
204 5 12 Freight revenue per revenue ton-mile (in cents) 5.92 6.12 (0.20) (3) 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. Forest products revenue was$170 million in the first six months of 2021, an increase of$11 million , or 7%, from$159 million in the same period of 2020. This increase was primarily due to higher volumes of lumber, higher freight rates, and higher fuel surcharge revenue as a result of higher fuel prices. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving higher volumes of lumber, which has a longer length of haul.
Energy, Chemicals and Plastics
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 369 $ 341 $ 28 8 16
Carloads (in thousands) 76.1 62.8 13.3 21 N/A
Revenue ton-miles (in millions) 5,856 4,512 1,344 30 N/A
Freight revenue per carload (in dollars)
(5)
Freight revenue per revenue ton-mile (in
cents) 6.30 7.56 (1.26) (17) (11)
(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 $369 million in the second quarter of
2021, an increase of $28 million , or 8%, from $341 million in the same period of
2020. This increase was primarily due to higher volumes of crude and liquefied
petroleum gas ("LPG") as a result of demand recovery from the impact of the
COVID-19 pandemic in the prior year, and higher fuel surcharge revenue as a
result of higher fuel prices. This increase was partially offset by decreased
freight revenue per RTM. Freight revenue per RTM decreased primarily due to
moving proportionately higher volumes of crude, which has a longer length of
haul, and the unfavourable impact of the change in FX.
FX Adjusted
For the six months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 757 $ 832 $ (75) (9) (5)
Carloads (in thousands) 163.3 164.6 (1.3) (1) N/A
Revenue ton-miles (in millions) 12,998 13,361 (363) (3) N/A
Freight revenue per carload (in dollars)
(8) (4)
Freight revenue per revenue ton-mile (in
cents) 5.82 6.23 (0.41) (7) (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.
Energy, chemicals and plastics revenue was $757 million in the first six months
of 2021, a decrease of $75 million , or 9%, from $832 million in the same period
of 2020. This decrease was primarily due to lower volumes of crude and decreased
freight revenue per RTM. This decrease was partially offset by higher volumes of
LPG. Freight revenue per RTM decreased primarily due to the unfavourable impact
of the change in FX and lower fuel surcharge revenue as a result of the timing
of recoveries. RTMs decreased more than carloads due to moving lower volumes of
crude, which has a longer length of haul.
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Metals, Minerals and Consumer Products
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 180 $ 133 $ 47 35 49
Carloads (in thousands) 61.1 45.1 16.0 35 N/A
Revenue ton-miles (in millions) 2,837 1,877 960 51 N/A
Freight revenue per carload (in dollars)
(3) - 10 Freight revenue per revenue ton-mile (in cents) 6.34 7.09 (0.75) (11) (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. Metals, minerals and consumer products revenue was$180 million in the second quarter of 2021, an increase of$47 million , or 35%, from$133 million in the same period of 2020. This increase was primarily due to higher volumes of frac sand and steel, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to moving proportionately higher volumes of frac sand, which has a longer length of haul, and the unfavourable impact of the change in FX. FX Adjusted For the six months ended June 30 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 339 $ 322 $ 17 5 12 Carloads (in thousands) 116.8 103.3 13.5 13 N/A Revenue ton-miles (in millions) 5,336 4,648 688 15 N/A
Freight revenue per carload (in dollars)
(7) (1)
Freight revenue per revenue ton-mile (in
cents) 6.35 6.93 (0.58) (8) (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.
Metals, minerals and consumer products revenue was $339 million in the first six
months of 2021, an increase of $17 million , or 5%, from $322 million in the same
period of 2020. This increase was primarily due to higher volumes of steel,
aggregates, and frac sand. This increase was partially offset by decreased
freight revenue per RTM. Freight revenue per RTM decreased due to the
unfavourable impact of the change in FX and moving proportionately higher
volumes of frac sand, which has a longer length of haul.
Automotive
FX Adjusted
For the three months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 98 $ 34 $ 64 188 216
Carloads (in thousands) 28.7 11.9 16.8 141 N/A
Revenue ton-miles (in millions) 467 130 337 259 N/A
Freight revenue per carload (in dollars)
558 20 31 Freight revenue per revenue ton-mile (in cents) 20.99 26.15 (5.16) (20) (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$98 million in the second quarter of 2021, an increase of$64 million , or 188%, from$34 million in the same period of 2020. This increase was primarily due to higher volumes as a result of the onboarding of customers moving to and fromVancouver , prior year manufacturing plant shutdowns acrossNorth America as a result of the COVID-19 pandemic, higher freight rates, and higher fuel surcharge revenue as a result of higher fuel prices. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to moving proportionately higher volumes fromVancouver to easternCanada , which has a longer length of haul, and the unfavourable impact of the change in FX. 35
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FX Adjusted
For the six months ended June 30 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 206 $ 121 $ 85 70 82
Carloads (in thousands) 62.1 40.1 22.0 55 N/A
Revenue ton-miles (in millions) 975 456 519 114 N/A
Freight revenue per carload (in dollars)
300 10 18 Freight revenue per revenue ton-mile (in cents) 21.13 26.54 (5.41) (20) (15) (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$206 million in the first six months of 2021, an increase of$85 million , or 70%, from$121 million in the same period of 2020. This increase was primarily due to higher volumes as a result of the onboarding of customers moving to and fromVancouver , prior year manufacturing plant shutdowns acrossNorth America as a result of the COVID-19 pandemic, and higher freight rates. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to moving proportionately higher volumes fromVancouver to easternCanada , which has a longer length of haul, and the unfavourable impact of the change in FX. Intermodal FX Adjusted For the three months ended June 30 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 445 $ 363 $ 82 23 27 Carloads (in thousands) 279.9 252.2 27.7 11 N/A Revenue ton-miles (in millions) 7,239 6,660 579 9 N/A
Freight revenue per carload (in dollars)
151 10 15 Freight revenue per revenue ton-mile (in cents) 6.15 5.45 0.70 13 17 (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$445 million in the second quarter of 2021, an increase of$82 million , or 23%, from$363 million in the same period of 2020. This increase was primarily due to higher domestic retail and wholesale intermodal volumes and increased freight revenue per RTM. This increase was partially offset by the unfavourable impact of the change in FX. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. Carloads increased more than RTMs due to moving lower volumes of international intermodal to and from thePort of Vancouver , which has a longer length of haul. FX Adjusted For the six months ended June 30 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 839 $ 768 $ 71 9 12 Carloads (in thousands) 538.4 520.6 17.8 3 N/A Revenue ton-miles (in millions) 13,892 13,971 (79) (1) N/A
Freight revenue per carload (in dollars)
83 6 8 Freight revenue per revenue ton-mile (in cents) 6.04 5.50 0.54 10 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. Intermodal revenue was$839 million in the first six months of 2021, an increase of$71 million , or 9%, from$768 million in the same period of 2020. This increase was primarily due to higher domestic retail and wholesale intermodal volumes and increased freight revenue per RTM. This increase was partially offset by lower volumes of international intermodal driven by the completion of a customer contract and the unfavourable impact of the change in FX. Freight revenue per RTM increased due to higher freight rates and higher fuel surcharge revenue as a result of higher fuel prices. Carloads increased while RTMs decreased due to moving lower volumes of international intermodal to and from thePort of Vancouver , which has a longer length of haul.
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Operating Expenses For the three months endedJune 30 (in millions of Canadian dollars) 2021 2020 Total Change % Change FX Adjusted % Change(1) Compensation and benefits$ 379 $ 347 $ 32 9 13 Fuel 218 131 87 66 82 Materials 54 50 4 8 13 Equipment rents 28 33 (5) (15) (7) Depreciation and amortization 200 195 5 3 6 Purchased services and other 355 266 89 33 40 Total operating expenses$ 1,234 $ 1,022 $ 212 21 27 (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$1,234 million in the second quarter of 2021, an increase of$212 million , or 21%, from$1,022 million in the same period of 2020. This increase was primarily due to: •acquisition-related costs of$99 million associated with the proposed KCS transaction; •the unfavourable impact of higher fuel prices of$68 million ; •increased variable expenses from higher volumes; •increased training costs; •cost inflation; •higher depreciation and amortization of$11 million (excluding FX); and •higher incentive compensation. This increase was partially offset by: •the favourable impact of the change in FX of$47 million ; •decreased stock-based compensation of$18 million primarily driven by the impact of changes in share price; and •a$16 million legal claim recovery. For the six months endedJune 30 (in millions of Canadian dollars) 2021 2020 Total Change % Change FX Adjusted % Change(1) Compensation and benefits$ 784 $ 745 $ 39 5 8 Fuel 424 343 81 24 31 Materials 113 109 4 4 7 Equipment rents 61 69 (8) (12) (5) Depreciation and amortization 402 387 15 4 6 Purchased services and other 629 578 51 9 13 Total operating expenses$ 2,413 $ 2,231 $ 182 8 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. Operating expenses were$2,413 million in the first six months of 2021, an increase of$182 million , or 8%, from$2,231 million in the same period of 2020. This increase was primarily due to: •acquisition-related costs of$132 million associated with the proposed KCS transaction; •the unfavourable impact of higher fuel prices of$75 million ; •increased variable expenses from higher volumes; •higher depreciation and amortization of$24 million (excluding FX); •cost inflation; •higher defined benefit pension current service cost of$16 million ; and •increased training costs. This increase was partially offset by: •the favourable impact of the change in FX of$74 million ; •a gain on exchange of property and construction easements inChicago of$50 million ; and •the efficiencies generated from improved operating performance and asset utilization. 37
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Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was$379 million in the second quarter of 2021, an increase of$32 million , or 9%, from$347 million in the same period of 2020. This increase was primarily due to: •higher volume variable expenses as a result of an increase in workload as measured by GTMs; •increased training costs; •higher incentive compensation; •higher defined benefit pension current service cost of$8 million ; and •the impact of wage and benefit inflation. This increase was partially offset by: •decreased stock-based compensation of$18 million primarily driven by the impact of changes in share price; •the favourable impact of the change in FX of$12 million ; and •labour efficiencies generated from improved operating performance and asset utilization. Compensation and benefits expense was$784 million in the first six months of 2021, an increase of$39 million , or 5%, from$745 million in the same period of 2020. This increase was primarily due to: •higher volume variable expenses as a result of an increase in workload as measured by GTMs; •the impact of wage and benefit inflation; •higher defined benefit pension current service cost of$16 million ; and •increased training costs. This increase was partially offset by: •the favourable impact of the change in FX$17 million ; •labour efficiencies generated from improved operating performance and asset utilization; and •lower stock-based compensation of$5 million .
Fuel
Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was$218 million in the second quarter of 2021, an increase of$87 million , or 66%, from$131 million in the same period of 2020. This increase was primarily due to the unfavourable impact of higher fuel prices of$68 million and an increase in workload, as measured by GTMs.
This increase was partially offset by the favourable impact of the change in FX
of
Fuel expense was$424 million in the first six months of 2021, an increase of$81 million , or 24%, from$343 million in the same period of 2020. This increase was primarily due to the unfavourable impact of higher fuel prices of$75 million and an increase in workload, as measured by GTMs. This increase was partially offset by the favourable impact of the change in FX of$19 million and an increase in fuel efficiency of 1% from improvements in the operating plan resulting in running longer and heavier trains.
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$54 million in the second quarter of 2021, an increase of$4 million , or 8%, from$50 million in the same period of 2020. This increase was primarily due to increased locomotive maintenance, fuel prices and cost inflation partially offset by the favourable impact of the change in FX.
Materials expense was
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$28 million in the second quarter of 2021, a decrease of$5 million , or 15%, from$33 million in the same period of 2020. This decrease was primarily due to: •efficiencies in usage of pooled freight cars by CP; •higher receipts for CP freight cars used by other railways; •price incentives received on intermodal cars; and
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•the favourable impact of the change in FX of
This increase was partially offset by greater usage of pooled freight cars as a result of higher volumes.
Equipment rents expense was$61 million in the first six months of 2021, a decrease of$8 million , or 12%, from$69 million in the same period of 2020. This decrease was primarily due to: •efficiencies in usage of pooled freight cars by CP; •higher receipts for CP freight cars used by other railways; •price incentives received on intermodal cars; and •the favourable impact of the change in FX of$5 million .
This increase was partially offset by greater usage of pooled freight cars as a result of higher volumes.
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$200 million in the second quarter of 2021, an increase of$5 million , or 3%, from$195 million in the same period of 2020. This increase was primarily due to a higher depreciable asset base, partially offset by the favourable impact of the change in FX of$6 million . Depreciation and amortization expense was$402 million in the first six months of 2021, an increase of$15 million , or 4%, from$387 million in the same period of 2020. This increase was primarily due to a higher depreciable asset base, partially offset by the favourable impact of the change in FX of$9 million . Purchased Services and Other For the three months endedJune 30 (in millions of Canadian dollars) 2021 2020 Total Change % Change Support and facilities$ 70 $ 63 $ 7 11 Track and operations 70 62 8 13 Intermodal 51 47 4 9 Equipment 26 27 (1) (4) Casualty 23 30 (7) (23) Property taxes 34 31 3 10 Other 86 6 80 1,333 Land sales (5) - (5) -
Total Purchased services and other
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$355 million in the second quarter of 2021, an increase of$89 million from$266 million in the same period of 2020. This increase was primarily due to: •the acquisition-related expenses of$99 million related to the proposed KCS transaction, reported in Other; •higher variable expenses from higher volumes, reported in Intermodal, Equipment, and Track and Operations; and •cost inflation. This increase was partially offset by: •a$16 million legal claim recovery, reported in Other; •the favourable impact of the change in FX of$13 million ; and •lower expenses primarily due to the reduced number and severity of casualty incidents, reported in Casualty.
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For the six months endedJune 30 (in millions of Canadian dollars) 2021 2020 Total Change % Change Support and facilities$ 140 $ 136 $ 4 3 Track and operations 132 140 (8) (6) Intermodal 104 104 - - Equipment 55 58 (3) (5) Casualty 60 68 (8) (12) Property taxes 68 67 1 1 Other 129 9 120 1,333 Land sales (59) (4) (55) 1,375
Total Purchased services and other
Purchased services and other expense was$629 million in the first six months of 2021, an increase of$51 million , or 9%, from$578 million in the same period of 2020. This increase was primarily due to: •the acquisition-related expenses of$132 million related to the proposed KCS transaction, reported in Other; •higher variable expenses from higher volumes, reported in Intermodal, Track and operations, and Equipment; and •cost inflation. This increase was partially offset by: •a gain on exchange of property and construction easements inChicago of$50 million ; •the favourable impact of the change in FX of$21 million . •a$16 million legal claim recovery, reported in Other; •lower expenses primarily due to the reduced number and severity of casualty incidents, reported in Casualty; and •a$7 million arbitration settlement, reported in Track and operations. Other Income Statement Items Other Expense (Income) Other expense (income) 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 expense was$157 million in the second quarter of 2021, a change of$243 million , or 283%, compared to an income of$86 million in the same period of 2020. This change was primarily due to acquisition-related expenses of$209 million , which include a loss on interest rate hedges of$150 million , bridge facility fees of$42 million , and a loss on FX hedges of$17 million , as well as a lower FX translation gain onU.S. dollar-denominated debt and lease liabilities of$34 million . Other expense was$129 million in the first six months of 2021, an increase of$4 million , or 3%, from$125 million in the same period of 2020. This change includes acquisition-related expenses of$212 million in 2021, which comprise a loss on interest rate hedges of$150 million , bridge facility and backstop revolver fees of$45 million , and a loss on FX hedges of$17 million . This is offset by a FX translation gain onU.S. dollar-denominated debt and lease liabilities of$85 million , compared to a FX translation loss onU.S. dollar-denominated debt and lease liabilities of$129 million in the same period of 2020.
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 .
Merger Termination Fee
OnMay 21, 2021 , KCS terminated the Merger Agreement with CP to enter into a definitive agreement with CN. At the same time and in accordance with the terms of the Merger Agreement, KCS paid CP a termination fee of$845 million (U.S. $700 million ). This amount is reported as "Merger termination fee" in the Company's Interim Consolidated Statements of Income. No similar items were received in the same period of 2020.
Other Components of Net Periodic Benefit Recovery
Other components of net periodic benefit recovery is related to the Company's pension and other post-retirement and post-employment benefit plans. It includes interest cost on benefit obligations, expected return on fund assets, recognized net actuarial losses, and amortization of prior service costs. Other components of net periodic benefit recovery was$96 million in the second quarter of 2021, an increase of$10 million or 12%, compared to$86 million in the same period of 2020. This increase was primarily due to a decrease in the interest cost on benefit obligation of$13 million and an increase in expected return on fund assets of$4 million , partially offset by an increase in recognized net actuarial losses of$7 million .
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Other components of net periodic benefit recovery was$191 million in the first six months of 2021, an increase of$20 million or 12%, compared to$171 million in the same period of 2020. This increase was primarily due to a decrease in the interest cost on benefit obligation of$28 million and an increase in expected return on fund assets of$7 million , partially offset by an increase in recognized net actuarial losses of$15 million .
Net Interest Expense
Net interest expense includes interest on long-term debt and finance leases. Net interest expense was$101 million in the second quarter of 2021, a decrease of$17 million , or 14%, from$118 million in the same period of 2020. This decrease was primarily due to the favourable impact of the change in FX rates of$12 million and higher interest income of$4 million . Net interest expense was$211 million in the first six months of 2021, a decrease of$21 million , or 9%, from$232 million in the same period of 2020. This decrease was primarily due to: •the favourable impact of the change in FX rates of$18 million ; •a reduction in interest related to long-term debt of$6 million as the result of a lower effective interest rate; and •higher interest income of$4 million .
This was partially offset by the unfavourable impact of an increase in debt
levels of
Income Tax Expense
Income tax expense was$257 million in the second quarter of 2021, an increase of$68 million , or 36%, from$189 million in the same period of 2020. Income tax expense was$448 million in the first six months of 2021, an increase of$74 million , or 20%, from$374 million in the same period of 2020. These increases were primarily due to higher taxable earnings due to the$845 million (U.S. $700 million ) merger termination fee received, partially offset by higher acquisition-related costs associated with the proposed KCS transaction and a lower effective tax rate. The effective tax rate in the second quarter of 2021, including discrete items, was 17.10% compared to 22.98% in the same period of 2020. The effective tax rate in the first six months of 2021, including discrete items, was 19.50% compared to 26.38% in the same period of 2020. The effective tax rate in the second quarter and first six months of 2021, excluding discrete items, was 24.60% compared to 25.00% for the same periods in 2020. The decrease in the effective tax rate, excluding discrete items, was primarily due to the decrease inAlberta's corporate tax rate and a lowerNorth Dakota tax rate. The Company expects an annualized effective tax rate in 2021 of 24.60%. The Company's 2021 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 2020 Annual Report on Form 10-K.
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. During the first quarter of 2021, the Company obtained commitments for a new 364-day senior unsecured facility (the "bridge facility") in the amount ofU.S. $8.5 billion to bridge financing requirements for the proposed KCS transaction. The Company planned to issue an aggregate of 222.5 million new Common Shares to fund the share consideration portion. EffectiveApril 9, 2021 , the Company also amended the financial covenant within its existing revolving credit facility to provide flexibility upon the closing of the proposed KCS transaction. EffectiveMay 21, 2021 , upon termination of the Merger Agreement with KCS, the bridge facility was terminated. OnJune 21, 2021 , the Company filed a new base shelf prospectus in each province ofCanada and a registration statement with theSEC to issue up toU.S. $8.5 billion in debt securities in the Canadian andU.S. capital markets over 25 months from the filing date. The Company had previously entered into forward starting floating-to-fixed interest rate swap agreements totalling a notionalU.S. $2.4 billion and interest rate bond locks totalling a notional$600 million to fix benchmark rates on future debt issuances in 2021.
As at
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As atJune 30, 2021 , the Company's revolving credit facility was undrawn, unchanged fromDecember 31, 2020 , 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, 2021 , 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, 2021 , there were no commercial paper borrowings outstanding, compared toU.S. $644 million as atDecember 31, 2020 . As atJune 30, 2021 , under its bilateral letter of credit facilities, the Company had letters of credit drawn of$58 million from a total available amount of$300 million , compared to$59 million from a total available amount of$300 million as atDecember 31, 2020 . 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, 2021 andDecember 31, 2020 , 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.
Operating Activities
Cash provided by operating activities was$1,954 million in the second quarter of 2021, an increase of$1,119 million , or 134%, compared to$835 million in the same period of 2020. Cash provided by operating activities was$2,536 million in the first six months of 2021, an increase of$1,212 million , or 92%, compared to$1,324 million in the same period of 2020. These increases were primarily due to higher cash generating income as a result of the$845 million merger termination fee received from KCS as well as a favourable change in working capital driven by acquisition-related payables and higher receipts from customers in advance of providing services. Investing Activities
Cash used in investing activities was
Cash used in investing activities was$691 million in the first six months of 2021, a decrease of$139 million , or 17%, compared to$830 million in the same period of 2020. This decrease was primarily due to lower capital additions as well as higher proceeds from the sale of properties during 2021 compared to the same period of 2020. Free Cash CP generated positive Free cash of$746 million in the second quarter of 2021, an increase of$413 million , or 124%, from$333 million in the same period of 2020. For the first six months of 2021, CP generated positive Free cash of$1,042 million , an increase of$551 million , or 112%, from$491 million in the same period of 2020. These increases were primarily due to an increase in cash provided by operating activities as well as lower capital additions and higher proceeds from the sale of properties during 2021 compared to the same period of 2020. 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$1,016 million in the second quarter of 2021, an increase of$694 million , or 216%, compared to$322 million in the same period of 2020. This increase was primarily due to higher net repayments of commercial paper, partially offset by net repayments of short-term borrowings in the three months endedJune 30, 2020 and a pause on payments to buy back shares under the Company's share repurchase program due to the proposed KCS transaction during the three months endedJune 30, 2021 . Cash used in financing activities was$1,096 million in the first six months of 2021, an increase of$730 million , or 199%, compared to$366 million in the same period of 2020. This increase 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 during the first six months 2020 and higher net repayments of commercial paper as well as acquisition-related financing fees during the six months endedJune 30, 2021 . This was partially offset by a pause on payments to buy back shares under the Company's share repurchase program due to the proposed KCS transaction during the six months endedJune 30, 2021 .
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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 strong 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, 2021 , CP's credit ratings fromStandard & Poor's Rating Services ("Standard & Poor's") remain unchanged fromDecember 31, 2020 . During the first quarter of 2021, Moody's Investor Service ("Moody's") downgraded CP's credit rating to Baa2 from Baa1 due to the announcement of the proposed KCS transaction. Credit ratings as atJune 30, 2021 (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 Baa2 stableCommercial 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, 2021 andJune 30, 2020 was 2.7 and 4.1, respectively. This decrease was primarily due to a lower debt balance and higher net income for the twelve months endedJune 30, 2021 . The Adjusted net debt to Adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") ratio for the twelve months endedJune 30, 2021 andJune 30, 2020 was 2.0 and 2.4, respectively. The decrease as atJune 30, 2021 was primarily due to a lower adjusted net debt balance, as a result of the merger termination fee received onMay 21, 2021 and the pause on payments to buy back shares under the Company's share repurchase program due to the proposed KCS transaction. 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 recent years, CP has recognized acquisition-related costs (including legal, consulting, and financing fees and fair value gain or loss on FX forward contracts and interest rate hedges), the merger termination fee, changes in income tax rates and a change to an uncertain tax item. 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. 43
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Supplemental Guarantor Financial Information
Canadian Pacific Railway Company ("CPRC"), a 100%-owned subsidiary of 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 at
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, 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.
Pursuant to Rule 13-01 of the
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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