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 months endedMarch 31, 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 to CPRL, CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL's subsidiaries, as the context may require.
Available Information
CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to theSecurities and Exchange Commission ("SEC"). Our website also contains charters for our Board of Directors and each of its committees, our corporate governance guidelines and our Code of Business Ethics.SEC filings made by CP are also accessible through theSEC's website at www.sec.gov. The information on our website is not part of this quarterly report on Form 10-Q. The Company has included the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits to this report. Executive Summary
First Quarter of 2021 Results
•Financial performance - In the first quarter of 2021, CP reported Diluted
earnings per share ("EPS") of $4.50 , an increase of 51% compared to the same
period of 2020 and Net income of $602 million in the first quarter of 2021, an
increase of 47% compared to the same period of 2020. These increases were
primarily due to foreign exchange ("FX") translation gains on debt and lease
liabilities in 2021 compared to FX losses during the same period of 2020,
partially offset by lower Operating income.
Adjusted diluted EPS was $4.48 in the first quarter of 2021, an increase of 1%
compared to the same period of 2020. This increase was primarily due to lower
average number of outstanding Common Shares due to the Company's share
repurchase program, partially offset by lower Adjusted operating income.
Adjusted income was $600 million in the first quarter of 2021, a decrease of 1%
compared to the same period of 2020. This decrease was primarily due to lower
Adjusted operating income in the first quarter of 2021, partially offset by
higher other components of net periodic benefit recovery. No adjustment was made
to operating income in 2020.
CP reported an Operating ratio of 60.2% in the first quarter of 2021, a 100
basis point increase as compared to the same period of 2020. This increase was
primarily due to the acquisition-related costs associated with the pending
Kansas City Southern ("KCS") transaction, the unfavourable impact of higher fuel
prices, and higher depreciation and amortization, partially offset by a gain on
exchange of property and easements in Chicago . Adjusted operating ratio, which
excludes the acquisition-related costs associated with the pending KCS
transaction, was 58.5%, a 70 basis points improvement as compared to the same
period of 2020. This improvement was primarily due to a gain on exchange of
property and easements in Chicago , 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 decreased by 4% in the first quarter of 2021 to
$1,959 million compared to the same period of 2020. This decrease was primarily
due to the unfavourable impact of the change in FX, and lower fuel surcharge
revenue as a result of the timing of recoveries.
•Operating performance - CP's average train weight increased by 7% to 9,795 tons
and average train length increased by 8% to 7,972 feet, compared to the same
period in 2020. These increases were a result of improvements in operating plan
efficiency and continued improvements in operational efficiency for Grain and
Potash 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.
16--------------------------------------------------------------------------------
Recent Developments •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. The requirements of theToronto Stock Exchange ("TSX") andNew York Stock Exchange ("NYSE") in respect of the Share Split were also met. The Share Split is expected to be made effective onMay 13, 2021 for holders of Common Shares on the record date ofMay 5, 2021 . At the time the Share Split becomes effective, each Common Share will become five Common Shares. •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 21, 2021 , CP announced that it entered into an Agreement and Plan of Merger with Kansas City Southern ("KCS"), under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximatelyU.S. $29 billion , which includes the assumption ofU.S. $3.8 billion of outstanding KCS debt. The Merger Agreement was unanimously approved by the Board of Directors of each of CP and KCS. The transaction will combine the two railroads to create the first rail network connecting theU.S. ,Mexico , andCanada and will deliver dramatically expanded market reach for customers served by CP and KCS, provide new competitive transportation service options, and support North American economic growth. The transaction will be completed in two steps. First, upon the Company's and KCS' shareholders' approval of the transaction, and satisfaction or waiver of customary closing conditions, the shares of KCS will be deposited into a voting trust subject to a voting trust agreement, pending final approval of the transaction by theSurface Transportation Board ("STB"). This step is currently expected to be completed in the second half of 2021. KCS' management and Board of Directors will continue to steward KCS while it is in trust, pursuing its independent business plan and growth strategies. Under the Merger Agreement, common shareholders of KCS will receive 0.489 (exchange ratio) of a common share of the Company andU.S. $90 in cash for each KCS common share held. Preferred shareholders will receiveU.S. $37.50 in cash for each KCS preferred share held. The share split will change the exchange ratio as defined in the Merger Agreement to 2.445 CP shares for every KCS common share. Immediately after the KCS transaction closes into the voting trust, former KCS stockholders are expected to own approximately 25 percent of the Common Shares. The second step of the transaction is to obtain control approval from the STB and other applicable regulatory authorities. The STB review of the transaction is expected to be completed while KCS is in the voting trust by the middle of 2022. Upon obtaining control approval by the STB and any other remaining approvals of regulatory authorities, if applicable, the two companies will be combined.Mr. Creel will serve as the Chief Executive Officer of the combined company. The combined entity will be named Canadian Pacific Kansas City ("CPKC").Calgary will be the global headquarters of CPKC, andKansas City, Missouri will be designated as theU.S. headquarters. TheMexico headquarters will remain inMexico City andMonterrey . CP's currentU.S. headquarters inMinneapolis-St. Paul, Minnesota will remain an important base of operations. Four KCS Directors will join CP's expanded Board at the appropriate time, bringing their experience and expertise in overseeing KCS' multinational operations.
Specific risk factors related to the pending KCS transaction are included in Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
•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. •In the first quarter of 2021, the Company maintained preventative measures that serve to minimize the risk of exposure to COVID-19, including working at home for certain office employees, 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.
17
--------------------------------------------------------------------------------
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.
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$17.67 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. CP's 2021 guidance does not include any potential impacts from the pending KCS transaction. 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, changes in income tax rates and a change to an uncertain tax item. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded from CP's Adjusted diluted EPS. Additionally, theU.S. -to-Canadian dollar exchange rate is unpredictable and can have a significant impact on CP's reported results but may be excluded from CP's Adjusted diluted EPS. In particular, CP excludes the FX impact of translating the Company's debt and lease liabilities from Adjusted diluted EPS. Please see Forward-Looking Statements in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
Performance Indicators
The following table lists key measures of the Company's operating performance:
For the three months ended
2021 2020 % Change
Operations Performance
Gross ton-miles ("GTMs") (millions) 71,326 71,309 -
Train miles (thousands) 7,803 8,367 (7)
Average train weight - excluding local traffic (tons) 9,795 9,188 7
Average train length - excluding local traffic (feet) 7,972 7,409 8
Average terminal dwell (hours) 7.4 6.2 19
Average train speed (miles per hour, or "mph") 20.9 21.6 (3)
Locomotive productivity (GTMs / operating horsepower) 201 201 -
Fuel efficiency (
0.958 0.971 (1)
Total Employees and Workforce
Total employees (average) 12,061 12,486 (3)
Total employees (end of period) 12,398 12,330 1
Workforce (end of period) 12,426 12,366 -
Safety Indicators(1)
FRA personal injuries per 200,000 employee-hours 1.20 1.13 6
FRA train accidents per million train-miles 1.28 0.87 47
(1)Federal Railroad Administration ("FRA") personal injuries per 200,000
employee-hours for the three months ended March 31, 2020 , previously reported as
1.20, was restated to 1.13 in this Earnings Release. FRA train accidents per
million train-miles for the three months ended March 31, 2020 , previously
reported as 0.99, was restated to 0.87 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. 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.
18
--------------------------------------------------------------------------------
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 17 million in the first quarter of 2021 compared to
the same period of 2020. This increase was primarily driven by higher volumes of
Grain and Coal. This increase was partially offset by lower volumes of crude and
international intermodal.
•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 decreased by 7% in the first quarter of 2021
compared to the same period of 2020. This decrease indicates the impact of a 7%
increase in train weights partially offset by a slight increase in workload
(GTMs).
•Average train weight is defined as the average gross weight of CP trains, both
loaded and empty. This excludes trains in short-haul service, work trains used
to move CP's track equipment and materials, and the haulage of other railroads'
trains on CP's network. An increase in average train weight indicates improved
asset utilization and may also be the result of moving heavier commodities.
Average train weight increased by 7% in the first quarter of 2021 compared to
the same period of 2020. This increase was a result of improvements in operating
plan efficiency and continued operational efficiency due to moving longer and
heavier Grain and export potash trains, partially offset by moving lower amounts
of heavier commodities such as crude. 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
8% in the first quarter of 2021 compared to the same period of 2020. This
increase was a result of improvements in operating plan efficiency and continued
operational efficiency due to moving longer export potash and 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 19% in the
first quarter of 2021 compared to the same period of 2020. This increase was a
result of aligning the operating plan to demand in order to maintain
efficiencies in average train weight and average train length.
•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 first quarter of 2021 compared to the same period of 2020 primarily as a
result of harsh winter operating conditions.
•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 was flat in the first quarter of 2021 compared to the
same period of 2020.
•Fuel efficiency is defined as U.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 improved by 1% in the first
quarter of 2021 compared to the same period of 2020. This increase in efficiency
was due to improvements in the operating plan resulting in running longer and
heavier trains.
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
19
--------------------------------------------------------------------------------
levels in order to efficiently meet service and strategic requirements. The number of employees is a key driver to total compensation and benefits costs.
The average number of total employees decreased by 3% for the three months endedMarch 31, 2021 , compared to the same period of 2020. This decrease was due to more efficient resource planning. The total number of employees as atMarch 31, 2021 was 12,398, an increase of 68, or 1%, compared to 12,330 as atMarch 31, 2020 . The total workforce as atMarch 31, 2021 was 12,426, an increase of 60, compared to 12,366 as atMarch 31, 2020 . The increase in total employees and workforce is due to anticipated volume growth. 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. The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties, or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 1.20 in the first quarter of 2021, an increase from 1.13 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 damage. The FRA train accidents per million train-miles was 1.28 in the first quarter of 2021, an increase from 0.87 in the same period of 2020.
20
--------------------------------------------------------------------------------
Financial Highlights
The following table presents selected financial data related to the Company's financial results as of, and for the three months ended,March 31, 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
2021 2020
Financial Performance and Liquidity
Total revenues $ 1,959 $ 2,043
Operating income 780 834
Adjusted operating income(1) 813 834
Net income 602 409
Adjusted income(1) 600 607
Basic EPS 4.52 2.99
Diluted EPS 4.50 2.98
Adjusted diluted EPS(1) 4.48 4.42
Dividends declared per share 0.95 0.83
Cash provided by operating activities 582 489
Cash used in investing activities (286) (362)
Cash used in financing activities (80) (44)
Free cash(1) 296 158
Financial Position As at March 31, 2021 As at December 31, 2020
Total assets $ 24,121 $ 23,640
Total long-term debt, including current portion 9,740 9,771
Total shareholders' equity 7,866 7,319
For the three months ended March 31
Financial Ratios 2021 2020
Operating ratio(2) 60.2 % 59.2 %
Adjusted operating ratio(1) 58.5 % 59.2 %
For the twelve months ended March 31
2021 2020
Return on average shareholders' equity(3) 35.6 % 35.1 %
Adjusted return on invested capital ("Adjusted
ROIC")(1) 15.8 % 17.4 %
Long-term debt to Net income ratio(4) 3.7 4.2
Adjusted net debt to adjusted EBITDA ratio(1) 2.4 2.5
(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.
21--------------------------------------------------------------------------------
Results of Operations
Three months ended
Income Operating income was$780 million in the first quarter of 2021, a decrease of$54 million , or 6%, from$834 million in the same period of 2020. This decrease was primarily due to: •the unfavourable impact of$37 million from higher fuel prices; •acquisition-related costs of$33 million associated with the pending KCS transaction; •the unfavourable impact of the change in FX translation effects of$25 million ; •higher stock-based compensation of$13 million ; and •higher depreciation and amortization of$13 million (excluding FX translation effects).
This decrease was partially offset by a gain on exchange of property and
easements in
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$813 million in the first quarter of 2021, a decrease of$21 million , or 3%, from$834 million in the same period of 2020. This decrease reflects the same factors discussed above except that Adjusted operating income in 2021 excludes the acquisition-related costs of$33 million associated with the pending KCS transaction. Net income was$602 million in the first quarter of 2021, an increase of$193 million , or 47%, from$409 million in the same period of 2020. This increase was primarily due to an FX translation gain onU.S. dollar-denominated debt and lease liabilities of$33 million , compared to an FX translation loss of$215 million in the same period of 2020, partially offset by lower Operating income. 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$600 million in the first quarter of 2021, a decrease of$7 million , or 1%, from$607 million in the same period of 2020. This decrease was primarily due to lower Adjusted operating income, partially offset by higher other components of net periodic benefit recovery.
Diluted Earnings per Share
Diluted EPS was$4.50 in the first quarter of 2021, an increase of$1.52 , or 51%, from$2.98 in the same period of 2020. This increase was due to higher Net income and a 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$4.48 in the first quarter of 2021, an increase of$0.06 , or 1%, from$4.42 in the same period of 2020. This increase was due to lower average number of outstanding shares due to the Company's share repurchase program, partially offset by lower Adjusted income.
Operating
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 60.2% in the first quarter of 2021, a 100 basis point increase from 59.2% in the same period of 2020. This increase was primarily due to: •acquisition-related costs associated with the pending KCS transaction; •the unfavourable impact from higher fuel prices; •higher stock-based compensation; •higher depreciation and amortization (excluding FX translation effects); and •cost inflation. This increase was partially offset by the gain on exchange of property and easements inChicago and efficiencies generated from improved operating performance and asset utilization. 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, which excludes the acquisition-related costs associated with the pending KCS transaction, was 58.5% in the first quarter of 2021, a 70 basis points improvement from the same period of 2020. This improvement was primarily due to a gain on exchange of property and easements inChicago and efficiencies generated from improved operating performance and asset utilization.
22
--------------------------------------------------------------------------------
This improvement was partially offset by: •the unfavourable impact from higher fuel prices; •higher stock based compensation; •higher depreciation and amortization (excluding FX translation effects); and •cost inflation.
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 35.6% for the twelve months endedMarch 31, 2021 , a 50 basis point increase compared to 35.1% for the twelve months endedMarch 31, 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 15.8% for the twelve months endedMarch 31, 2021 , a 160 basis point decrease compared to 17.4% for the twelve months endedMarch 31, 2020 , primarily due to lower Adjusted income, and the increase in adjusted average invested capital primarily due to higher average long-term debt, 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.
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. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by theU.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of theFederal Reserve Board . Average exchange rates (Canadian/U.S. dollar) 2021 2020 For the three months ended - March 31$ 1.27 $ 1.35 Ending exchange rates (Canadian/U.S. dollar) 2021 2020 Beginning of year - January 1$ 1.28 $ 1.30 End of quarter - March 31$ 1.26 $ 1.41 For the three months ended March 31 High/Low exchange rates (Canadian/U.S. dollar) 2021 2020 High$ 1.28 $ 1.45 Low$ 1.24 $ 1.30 In the first quarter of 2021, the impact of a weakerU.S. dollar resulted in a decrease in total revenues of$52 million , a decrease in total operating expenses of$27 million , and a decrease in net interest expense of$6 million from the same period of 2020.
The impact of FX on earnings is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the Foreign Exchange Risk section.
23
--------------------------------------------------------------------------------
Impact of Fuel Price on Earnings
Fluctuations in fuel prices affect the Company's results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be an impact on earnings due to the timing of recoveries from CP's fuel cost adjustment program. The following table indicates the average fuel price for the three months endedMarch 31, 2021 and the comparative periods of 2020. Average Fuel Price (U.S. dollars per U.S. gallon) 2021 2020 For the three months ended - March 31$ 2.39 $ 2.33
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 first quarter of 2021, the unfavourable impact of fuel prices on Operating income was$37 million . The unfavourable timing of recoveries from CP's fuel cost adjustment program, partially offset by increased carbon surcharge recoveries, resulted in a decrease in total revenues of$30 million from the same period of 2020. Higher fuel prices resulted in an increase in total operating expenses of$7 million .
Impact of Share Price on Earnings
Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on the TSX and theNew York Stock Exchange ("NYSE") with ticker symbol "CP". The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for the three months endedMarch 31, 2021 and the comparative period in 2020. TSX (in Canadian dollars) 2021 2020 Opening Common Share price, as at January 1$ 441.53 $ 331.03 Ending Common Share price, as at March 31$ 480.00 $ 310.55 Change in Common Share price for the three months ended March 31$ 38.47 $ (20.48) NYSE (in U.S. dollars) 2021 2020 Opening Common Share price, as at January 1$ 346.69 $ 254.95 Ending Common Share price, as at March 31 $
379.29
In the first quarter 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.
24
--------------------------------------------------------------------------------
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
(4) (2)
Non-freight revenues (in millions) 41 43 (2) (5) (5)
Total revenues (in millions) $ 1,959 $ 2,043 $ (84) (4) (2)
Carloads (in thousands) 691.4 690.6 0.8 - N/A
Revenue ton-miles (in millions) 39,273 39,218 55 - N/A
Freight revenue per carload (in dollars)
(4) (2)
Freight revenue per revenue ton-mile (in
cents) 4.88 5.10 (0.22) (4) (2)
(1)Freight revenues include fuel surcharge revenues of $85 million in 2021 and
$119 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
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 first quarter of 2021 were 39,273 million, an increase of 55 million compared with 39,218 million in the same period of 2020. This increase was mainly attributable to higher volumes of Grain and Coal. This increase was partially offset by lower volumes of crude and international intermodal. Freight revenue per revenue ton-mile is defined as freight revenue per revenue-producing ton of freight over a distance of one mile. This is an indicator of yield. Freight revenue per revenue ton-mile was4.88 cents in the first quarter of 2021, a decrease of0.22 cent , or 4%, from5.10 cents in the same period of 2020. This decrease was primarily due to the unfavourable impact of the change in FX of$52 million and lower fuel surcharge revenue as a result of the timing of recoveries of$30 million . Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 691.4 thousand in the first quarter of 2021, an increase of 0.8 thousand from 690.6 thousand in the same period of 2020. This increase was primarily due to higher volumes of Grain, Coal, and Automotive. This decrease was partially offset by lower volumes of crude and international intermodal. 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$2,774 in the first quarter of 2021, a decrease of$122 , or 4%, from$2,896 in the same period of 2020. This decrease was primarily due to the unfavourable impact of the change in FX of$52 million and lower fuel surcharge revenue as a result of the timing of recoveries of$30 million . Non-freight revenues were$41 million in the first quarter of 2021, a decrease of$2 million , or 5%, from$43 million in the same period of 2020. This decrease was primarily due to lower logistical services revenue, switching fees, and revenue from passenger service operators. This decrease was partially offset by higher leasing revenue.
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 include fuel surcharge revenues of$85 million in the first quarter of 2021, a decrease of$34 million , or 29%, from$119 million in the same period of 2020. This decrease was primarily due to lower fuel surcharge revenue as a result of the timing of recoveries from CP's fuel cost adjustment program. This decrease was partially offset by increased carbon tax recoveries. 25
--------------------------------------------------------------------------------
Lines of Business
Grain
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 448 $ 418 $ 30 7 10
Carloads (in thousands) 116.4 100.6 15.8 16 N/A
Revenue ton-miles (in millions) 10,773 9,016 1,757 19 N/A
Freight revenue per carload (in dollars)
(7) (5)
Freight revenue per revenue ton-mile (in
cents) 4.16 4.64 (0.48) (10) (8)
(1)FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures presented
by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Grain revenue was $448 million in the first quarter of 2021, an increase of $30
million , or 7%, from $418 million in the same period of 2020. This increase was
primarily due to moving higher volumes of Canadian grain to Vancouver and
eastern Canada as well as higher volumes of U.S. corn and soybeans to the U.S.
Pacific Northwest . This increase was partially offset by decreased freight
revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due
to moving higher volumes of Canadian grain to Vancouver and eastern Canada ,
which has a longer length of haul, the unfavourable impact of the change in FX,
and lower fuel surcharge revenue as a result of the timing of recoveries. RTMs
increased more than carloads as a result of moving proportionately higher
volumes of Canadian whole grains to eastern Canada and proportionately higher
volumes of corn and soybeans to the U.S. Pacific Northwest , which have a longer
length of haul.
Coal
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 163 $ 150 $ 13 9 9
Carloads (in thousands) 72.0 63.8 8.2 13 N/A
Revenue ton-miles (in millions) 5,280 4,435 845 19 N/A
Freight revenue per carload (in dollars)
(87) (4) (3) Freight revenue per revenue ton-mile (in cents) 3.09 3.38 (0.29) (9) (8) (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Coal revenue was$163 million in the first quarter of 2021, an increase of$13 million , or 9%, from$150 million in the same period of 2020. This increase was primarily due to moving higher volumes of Canadian coal toVancouver . This increase was partially offset by decreased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due to moving proportionately higher volumes of Canadian coal toVancouver , which has a longer length of haul, lower fuel surcharge revenue as a result of the timing of recoveries, and the unfavourable impact of the change in FX. RTMs increased more than carloads as a result of moving proportionately higher volumes of Canadian coal toVancouver , which has a longer length of haul.
Potash
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 101 $ 112 $ (11) (10) (7)
Carloads (in thousands) 34.4 36.4 (2.0) (5) N/A
Revenue ton-miles (in millions) 3,786 4,138 (352) (9) N/A
Freight revenue per carload (in dollars)
(5) (2)
Freight revenue per revenue ton-mile (in
cents) 2.67 2.71 (0.04) (1) 2
(1)FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures presented
by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Potash revenue was $101 million in the first quarter of 2021, a decrease of $11
million , or 10%, from $112 million in the same period of 2020. This decrease was
primarily due to moving lower volumes of export potash to the U.S. Pacific
Northwest as a
26
--------------------------------------------------------------------------------
result of construction at thePort of Portland and decreased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of the timing of recoveries and the unfavourable impact of the change in FX. RTMs decreased more than carloads as a result of moving lower volumes of export potash, which has a longer length of haul. Fertilizers and Sulphur FX Adjusted For the three months ended March 31 2021 2020 Total Change % Change % Change(1) Freight revenues (in millions)$ 77 $ 70 $ 7 10 15 Carloads (in thousands) 16.3 15.1 1.2 8 N/A Revenue ton-miles (in millions) 1,269 1,095 174 16 N/A
Freight revenue per carload (in dollars)
88 2 6 Freight revenue per revenue ton-mile (in cents) 6.07 6.39 (0.32) (5) (1) (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Fertilizers and sulphur revenue was$77 million in the first quarter of 2021, an increase of$7 million , or 10%, from$70 million in the same period of 2020. This increase was primarily due to moving higher volumes of both dry and wet fertilizers and higher freight rates. This increase was partially offset by decreased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due to the unfavourable impact of the change in FX and lower fuel surcharge revenue as a result of the timing of recoveries. RTMs increased more than carloads driven by 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 March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 80 $ 78 $ 2 3 8
Carloads (in thousands) 17.5 18.1 (0.6) (3) N/A
Revenue ton-miles (in millions) 1,363 1,277 86 7 N/A
Freight revenue per carload (in dollars)
262 6 12 Freight revenue per revenue ton-mile (in cents) 5.87 6.11 (0.24) (4) 1 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forest products revenue was$80 million in the first quarter of 2021, an increase of$2 million , or 3%, from$78 million in the same period of 2020. This increase was primarily due to moving higher volumes of lumber and higher freight rates. This increase was partially offset by decreased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due to the unfavourable impact of the change in FX and lower fuel surcharge revenue as a result of the timing of recoveries. RTMs increased while carloads decreased due to moving higher volumes of lumber, which has a longer length of haul, and moving lower volumes of wood pulp within B.C., which has a shorter length of haul.
Energy, Chemicals and Plastics
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 388 $ 491 $ (103) (21) (19)
Carloads (in thousands) 87.2 101.8 (14.6) (14) N/A
Revenue ton-miles (in millions) 7,142 8,849 (1,707) (19) N/A
Freight revenue per carload (in dollars)
(8) (5)
Freight revenue per revenue ton-mile (in
cents) 5.43 5.55 (0.12) (2) 1
(1)FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures presented
by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Energy, chemicals and plastics revenue was $388 million in the first quarter of
2021, a decrease of $103 million , or 21%, from $491 million in the same period
of 2020. This decrease was primarily due to moving lower volumes of crude and
decreased
27
--------------------------------------------------------------------------------
freight revenue per revenue ton-mile. This decrease was partially offset by moving higher volumes of liquefied petroleum gas and fuel oil. Freight revenue per revenue ton-mile decreased 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.
Metals, Minerals and Consumer Products
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 159 $ 189 $ (30) (16) (12)
Carloads (in thousands) 55.7 58.2 (2.5) (4) N/A
Revenue ton-miles (in millions) 2,499 2,771 (272) (10) N/A
Freight revenue per carload (in dollars)
(8)
Freight revenue per revenue ton-mile (in
cents) 6.36 6.82 (0.46) (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.
Metals, minerals and consumer products revenue was $159 million in the first
quarter of 2021, a decrease of $30 million , or 16%, from $189 million in the
same period of 2020. This decrease was primarily due to moving lower volumes of
frac sand and decreased freight revenue per revenue ton-mile. This decrease was
partially offset by moving higher volumes of steel and aggregates. Freight
revenue per revenue ton-mile decreased 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
frac sand, which has a longer length of haul.
Automotive
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 108 $ 87 $ 21 24 32
Carloads (in thousands) 33.4 28.2 5.2 18 N/A
Revenue ton-miles (in millions) 508 326 182 56 N/A
Freight revenue per carload (in dollars)
149 5 11 Freight revenue per revenue ton-mile (in cents) 21.26 26.69 (5.43) (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$108 million in the first quarter of 2021, an increase of$21 million , or 24%, from$87 million in the same period of 2020. This increase was primarily due to the onboarding of customers moving to and fromVancouver and higher freight rates. This increase was partially offset by decreased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile decreased due to the unfavourable impact of the change in FX and lower fuel surcharge revenue as a result of the timing of recoveries. RTMs increased more than carloads due to moving higher volumes fromVancouver to easternCanada , which has a longer length of haul.
Intermodal
FX Adjusted
For the three months ended March 31 2021 2020 Total Change % Change % Change(1)
Freight revenues (in millions) $ 394 $ 405 $ (11) (3) (2)
Carloads (in thousands) 258.5 268.4 (9.9) (4) N/A
Revenue ton-miles (in millions) 6,653 7,311 (658) (9) N/A
Freight revenue per carload (in dollars)
15 1 2
Freight revenue per revenue ton-mile (in
cents) 5.92 5.54 0.38 7 8
(1)FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures presented
by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Intermodal revenue was $394 million in the first quarter of 2021, a decrease of
$11 million , or 3%, from $405 million in the same period of 2020. This decrease
was primarily due to moving lower volumes of international intermodal driven by
the completion of
28
--------------------------------------------------------------------------------
a customer contract, lower fuel surcharge revenue as a result of the timing of recoveries, and the unfavourable impact of the change in FX. This decrease was partially offset by increased freight revenue per revenue ton-mile. Freight revenue per revenue ton-mile increased due to higher freight rates. RTMs decreased more than carloads due to moving lower volumes of international intermodal to and from thePort of Vancouver , which have a longer length of haul. Operating Expenses For the three months endedMarch 31 (in millions of Canadian dollars) 2021 2020 Total Change % Change FX Adjusted % Change(1) Compensation and benefits$ 405 $ 398 $ 7 2 3 Fuel 206 212 (6) (3) 1 Materials 59 59 - - 2 Equipment rents 33 36 (3) (8) (3) Depreciation and amortization 202 192 10 5 7 Purchased services and other 274 312 (38) (12) (10) Total operating expenses$ 1,179 $ 1,209 $ (30) (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. Operating expenses were$1,179 million in the first quarter of 2021, a decrease of$30 million , or 2%, from$1,209 million in the same period of 2020. This decrease was primarily due to: •a gain on exchange of property and easements inChicago of$50 million ; •the efficiencies generated from improved operating performance and asset utilization; and •the favourable impact of the change in FX translation effects of$27 million . This decrease was partially offset by: •acquisition-related costs of$33 million associated with the pending KCS transaction; •higher depreciation and amortization of$13 million (excluding FX translation effects); and •higher stock-based compensation of$13 million .
Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was$405 million in the first quarter of 2021, an increase of$7 million , or 2%, from$398 million in the same period of 2020. This increase was primarily due to: •higher stock-based compensation of$13 million driven primarily by an increase in the share price; •the impact of wage and benefit inflation; and •higher defined benefit pension current service costs of$8 million . This increase was partially offset by: •labour efficiencies generated from improved operating performance and asset utilization; •the favourable impact of the change in FX of$5 million ; and •lower incentive compensation.
Fuel
Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was$206 million in the first quarter of 2021, a decrease of$6 million , or 3%, from$212 million in the same period of 2020. This decrease was primarily due to the favourable impact of the change in FX of$8 million and an increase in fuel efficiency of 1% from improvements in the operating plan resulting in running longer and heavier trains. This decrease was partially offset by the unfavourable impact of$7 million from higher fuel prices.
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$59 million in the first quarter of 2021, unchanged from the same period in 2020.
29
--------------------------------------------------------------------------------
Equipment Rents
Equipment rents expense includes the cost associated with using other railways' freight cars, intermodal equipment, and locomotives, net of rental income received from other railroads for the use of CP's equipment. Equipment rents expense was$33 million in the first quarter of 2021, a decrease of$3 million , or 8%, from$36 million in the same period of 2020. This decrease was primarily due to efficiencies in usage of pooled freight cars by CP and the favourable impact of the change in FX of$2 million . This decrease was partially offset by greater usage of pooled freight cars as a result of higher volumes mainly in Automotive.
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$202 million in the first quarter of 2021, an increase of$10 million , or 5%, from$192 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$3 million . Purchased Services and Other For the three months endedMarch 31 (in millions of Canadian dollars) 2021 2020 Total Change % Change Support and facilities$ 72 $ 75 $ (3) (4) Track and operations 60 75 (15) (20) Intermodal 53 56 (3) (5) Equipment 29 30 (1) (3) Casualty 39 39 - - Property taxes 34 36 (2) (6) Other 41 5 36 720 Land sales (54) (4) (50) 1,250
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$274 million in the first quarter of 2021, a decrease of$38 million , or 12%, from$312 million in the same period of 2020. This decrease was primarily due to: •a gain on exchange of property and easements inChicago of$50 million ; •the favourable impact of the change in FX of$8 million ; •a$7 million arbitration settlement, reported in Track and operations; •efficiencies generated from improved operating performance, reported in Intermodal and Track and operations; and •reduced variable expenses from lower volumes, reported in Intermodal.
This decrease was partially offset by the acquisition-related expenses of
Other Income Statement Items Other (Income) Expense Other (income) expense consists of gains and losses from the change in FX on debt and lease liabilities and working capital, costs related to financing, shareholder costs, equity income, and other non-operating expenditures. Other income was$28 million in the first quarter of 2021, a change of$239 million , or 113%, compared to an expense of$211 million in the same period of 2020. This change was primarily due to a FX translation gain onU.S. dollar-denominated debt and lease liabilities of$33 million , compared to a FX translation loss of$215 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 .
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$95 million in the first quarter of 2021, an increase of$10 million , or 12% compared to$85 million in the same period of 2020. This increase was
30
--------------------------------------------------------------------------------
due to a decrease in the interest cost on benefit obligation of$15 million and an increase in expected return on fund assets of$3 million ; partially offset by an increase in recognized net actuarial loss of$8 million .
Net Interest Expense
Net interest expense includes interest on long-term debt and finance leases. Net interest expense was$110 million in the first quarter of 2021, a decrease of$4 million , or 4%, from$114 million in the same period of 2020. This was primarily due to the favourable impact from the change in FX of$6 million and a reduction in interest related to long-term debt of$5 million as a result of the lower effective interest rate following the Company's debt refinancing in 2020. This was partially offset by the unfavourable impact of an increase in debt levels of$7 million . Income Tax Expense Income tax expense was$191 million in the first quarter of 2021, an increase of$6 million , or 3%, from$185 million in the same period of 2020. This increase was due to higher taxable earnings from FX gains in 2021 compared to FX losses in 2020 on debt and lease liabilities, partially offset by the higher acquisition-related costs as well as a lower effective tax rate. The effective tax rate in the first quarter of 2021, including discrete items, was 24.05% compared to 31.10% in the same period of 2020. The effective tax rate in the first quarter of 2021, excluding discrete items, was 24.60%, compared to 25.00% in the same period of 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 annualized 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. Additionally, CP believes that its existing sources of liquidity, including the 364-day bridge facility described below, along with anticipated long-term financing will be sufficient to fund the pending KCS transaction. The Company is not aware of any trends or expected fluctuations in the Company's liquidity that would create any deficiencies. The Company's primary sources of liquidity include its cash and cash equivalents, its commercial paper program, its bilateral letter of credit facilities, and its revolving credit facility.
As at
EffectiveMarch 21, 2021 , the Company obtained commitments for a new 364-day senior unsecured facility in the amount ofU.S. $8.5 billion to bridge financing requirements for the pending KCS transaction. As atMarch 31, 2021 , the Company's existing 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 atMarch 31, 2021 , the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenant. EffectiveApril 9, 2021 , the Company amended the financial covenant within its existing revolving credit facility to provide flexibility upon close of the pending KCS transaction. 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 atMarch 31, 2021 , total commercial paper borrowings wereU.S. $715 million , compared toU.S. $644 million as atDecember 31, 2020 . As atMarch 31, 2021 , under its bilateral letter of credit facilities, the Company had letters of credit drawn of$58 million , compared to$59 million as atDecember 31, 2020 , from a total available amount of$300 million . 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 atMarch 31, 2021 andDecember 31, 2020 , the Company did not have any collateral posted on its bilateral letter of credit facilities. The Company plans to issue an aggregate of 44.5 million new Common Shares to fund the share consideration portion of the pending KCS transaction. This value will be adjusted to give effect to the share split once effective.
The following discussion of operating, investing, and financing activities describes the Company's indicators of liquidity and capital resources.
31
--------------------------------------------------------------------------------
Operating Activities
Cash provided by operating activities was$582 million in the first quarter of 2021, an increase of$93 million , or 19%, compared to$489 million in the same period of 2020. This increase was primarily due to a favourable change in working capital during the first quarter of 2021 compared to the same period of 2020, including cash received from theIllinois State Toll Highway Authority for future property easements. Investing Activities Cash used in investing activities was$286 million in the first quarter of 2021, a decrease of$76 million , or 21%, compared to$362 million in the same period of 2020. This decrease was primarily due to higher proceeds from the sale of properties and lower capital additions during the first quarter of 2021 compared to the same period of 2020. Free Cash CP generated positive Free cash of$296 million in the first quarter of 2021, an increase of$138 million , or 87%, from$158 million in the same period of 2020. This increase was primarily due to an increase in cash provided by operating activities and lower cash used in investing activities. 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$80 million in the first quarter of 2021, an increase of$36 million , or 82%, compared to$44 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 ,$300 million 3.050% notes dueMarch 9, 2050 , and short-term borrowings in Q1 2020; •acquisition-related financing fees due to the pending KCS transaction; and •lower issuances of CP Common Shares. This is partially offset by the net issuance of commercial paper and absence of payments to buy back shares under the Company's share repurchase program during the first quarter of 2021, compared to net repayments of commercial paper and payments made to buy back shares in the first quarter of 2020.
Credit Measures
Credit ratings provide information relating to the Company's operations and liquidity, and affect the Company's ability to obtain short-term and long-term financing and/or the cost of such financing.
A 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 atMarch 31, 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 pending KCS transaction.
32
--------------------------------------------------------------------------------
Credit ratings as atMarch 31, 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 ended
The Adjusted net debt to Adjusted earnings before interest, tax, depreciation
and amortization ("EBITDA") ratio for the twelve months ended March 31, 2021 and
March 31, 2020 was 2.4 and 2.5, respectively. This decrease was primarily due to
a decrease in Adjusted net debt as at March 31, 2021 , partially offset by a
decrease in Adjusted EBITDA. 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. The pending KCS
transaction and the anticipated issuance of debt securities in connection with
the pending transaction is expected to temporarily increase the Adjusted net
debt to Adjusted EBITDA ratio to approximately 4.0 in 2021. CP plans to repay a
portion of the financing in connection with the pending KCS transaction and
maturing long-term debt, and expects to return back to its target range within
36 months after the pending KCS transaction closes into the voting trust.
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, 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,
the U.S. -to-Canada dollar exchange rate is unpredictable and can have a
significant impact on CP's reported results but may be excluded from CP's
Adjusted EBITDA. In particular, CP excludes the FX impact of translating the
Company's debt and lease liabilities, interest and taxes from Adjusted EBITDA.
Please see Forward-Looking Statements in this Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations for further
discussion.
Supplemental Guarantor Financial Information
Canadian Pacific Railway Company ("CPRC"), a 100%-owned subsidiary ofCanadian Pacific Railway Limited ("CPRL"), is the issuer of certain securities which are fully and unconditionally guaranteed by CPRL on an unsecured basis. The other subsidiaries of CPRC do not guarantee the securities and are referred to below as the "Non-Guarantor Subsidiaries". The following is a description of the terms and conditions of the guarantees with respect to securities for which CPRC is the issuer and CPRL provides a full and unconditional guarantee.
As 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.
33--------------------------------------------------------------------------------
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.
© Edgar Online, source
