CANADIAN PACIFIC KANSAS CITY LIMITED INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS
Page
Executive Summary 43
Performance Indicators 44
Results of Operations 47
Impact of Foreign Exchange on Earnings 50
Impact of Fuel Price on Earnings 51
Impact of Share Price on Earnings 52
Operating Revenues 53
Operating Expenses 59
Other Income Statement Items 62
Liquidity and Capital Resources 63
Share Capital 69
Non-GAAP Measures 69
Critical Accounting Estimates 79
Forward-Looking Statements 83
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43 CP 2021 ANNUAL REPORT
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to enhance a reader's understanding
of the Company's results of operations and financial condition. The MD&A is
provided as a supplement to, and should be read in conjunction with the
Company's Consolidated Financial Statements and the related notes in Item 8.
Financial Statements and Supplementary Data, and other information in this
annual report. 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 Canadian 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.
Executive Summary
2021 Results
•Financial performance - In 2021, CP reported Diluted earnings per share ("EPS")
of $4.18 , a 16% increase from $3.59 in 2020. Adjusted diluted EPS increased by
7% to $3.76 in 2021 from $3.53 in 2020. CP's commitment to service and
operational efficiency produced an Operating ratio of 59.9% and an Adjusted
operating ratio of 57.6%. Adjusted diluted EPS and Adjusted operating ratio are
defined and reconciled in Non-GAAP Measures and discussed further in Results of
Operations of this Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
•Total revenues - CP's Total revenues increased by 4% to $7,995 million in 2021
from $7,710 million in 2020, driven primarily by higher freight rates, partially
offset by lower volumes as measured by revenue ton-miles ("RTMs").
•Operating performance - Average train weight increased by 3% to 9,967 tons and average train length increased by 3% to 8,200 feet due to improvements in operating plan efficiency, in each case compared to 2020. These metrics are discussed further in Performance Indicators of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following table compares 2021 outlook to actual results:
RTM growth Adjusted diluted EPS(1) Capital expenditures
Outlook High-single-digit growth Double-digit growth Approximately $1.55 billion
Revised quarterly and updated Revisedquarterly and updated during
during the fourth quarter to be the fourth quarter to high
approximately flat single-digit growth
Actual outcomes RTMs decreased by 2,205 million, or Adjusted diluted EPS growth of 7% to
1% $3.76
(1) Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The update in RTM growth expectation was based on the impact of severe weather
from the drought conditions on Canadian grain and the British Columbia ("B.C .")
floods. The update in Adjusted diluted EPS expectation was also based on the
impacts of the accelerated timeline of the Kansas City Southern ("KCS")
acquisition closing into trust.
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CP 2021 ANNUAL REPORT 44
Performance Indicators
The following table lists the key measures of the Company's operating
performance:
% Change
2020 vs.
For the year ended December 31 2021 2020 2019 2021 vs. 2020 2019
Operations Performance
Gross ton-miles ("GTMs") (millions) 271,921 272,360 280,724 - (3)
Train miles (thousands) 29,397 30,324 32,924 (3) (8)
Average train weight - excluding local traffic (tons) 9,967
9,707 9,129 3 6
Average train length - excluding local traffic (feet) 8,200
7,929 7,388 3 7 Average terminal dwell (hours) 7.2 6.5 6.4 11 2 Average train speed (miles per hour, or "mph") 21.6 22.0 22.2 (2) (1) Locomotive productivity (GTMs / operating horsepower, 201 207 202 (3) 2 or "GTMs/OHP") Fuel efficiency (U.S. gallons of locomotive fuel 0.931 0.942 0.955 (1) (1)
consumed /1,000 GTMs)
Total Employees and Workforce Total employees (average) 12,337 12,168 13,103 1 (7) Total employees (end of period) 11,834 11,890 12,694 - (6) Workforce (end of period) 11,872 11,904 12,732 - (7) Safety Indicators FRA personal injuries per 200,000 employee-hours 0.92 1.11 1.42 (17) (22) FRA train accidents per million train-miles 1.10 0.96 1.06 15 (9) 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. 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 for 2021 were 271,921 million, a slight decrease compared with 272,360 million in 2020. This decrease was mainly attributable to lower volumes of Grain and Potash. This decrease was partially offset by increased volumes of Metals, minerals and consumer products, Energy, chemicals and plastics, and Automotive. GTMs in 2020 were 272,360 million, a 3% decrease compared with 280,724 million in 2019. This decrease was primarily driven by decreased volumes of crude, Coal, and frac sand. This decrease was partially offset by increased volumes of Grain, Potash, and Fertilizers and sulphur. 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, indicates improved train productivity. Train miles for 2021 were 29,397 thousands, a decrease of 3% compared with 30,324 thousands in 2020. This decrease reflects the impact of a slight decrease in workload (GTMs), as well as the impact of a 3% increase in average train weights.
Train miles in 2020 were 30,324, an decrease of 8% compared with 32,924 thousands in 2019. This decrease reflects the impact of a 3% decrease in workload (GTMs), as well as a 6% 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 railways' 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 of 9,967 tons in 2021 increased by 260 tons, or 3% compared with 9,707 tons in 2020. This increase was a result of improvements in operating plan efficiency and continued improvements --------------------------------------------------------------------------------
45 CP 2021 ANNUAL REPORT
in bulk train efficiency due to moving longer and heavier Grain and export
potash trains. This increase was partially offset by lower volumes of heavier
bulk commodities. 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 weight of 9,707 tons in 2020 increased by 578 tons, or 6% compared
with 9,129 tons in 2019. This increase was a result of improvements in operating
plan efficiency, continued improvements in operational efficiency due to moving
longer and heavier export potash and Grain trains, and improved winter operating
conditions in the first quarter of 2020. This increase was partially offset by
moving lower volumes of heavier commodities such as Canadian coal and crude.
Improvements for Grain trains were driven by the 8,500-foot HEP train model.
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 of 8,200 feet
in 2021 increased by 271 feet, or 3%, compared with 7,929 feet in 2020. This
increase was a result of improvements in operating plan efficiency and continued
improvements in bulk train efficiency due to moving longer Grain and export
potash trains. Improvements for Grain trains were driven by the 8,500-foot HEP
train model.
Average train length of 7,929 feet in 2020 increased by 541 feet, or 7%,
compared with 7,388 feet in 2019. This increase was a result of improvements in
operating plan efficiency and continued improvements in operational efficiency
due to moving longer Grain and export potash trains. This increase was partially
offset by moving lower volumes of commodities such as Canadian coal, which move
in longer 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 of 7.2 hours in 2021
increased by 11% from 6.5 hours in 2020. This unfavourable increase was a result
of aligning the operating plan to demand in order to maintain network
efficiencies, as well as the impacts of the B.C. wildfires in the third quarter
and B.C. floods in the fourth quarter of 2021. Aligning the operating plan to
demand resulted in increased average train weight and average train length.
Average terminal dwell of 6.5 hours in 2020 increased by 2% from 6.4 hours in
2019. This unfavourable increase was a result of aligning the operating plan to
demand in order to maintain network efficiencies in the last three quarters of
2020. Aligning the operating plan to demand resulted in increased average train
weight, average train length, and increased locomotive productivity.
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 railways
and excludes the time and distance travelled by: i) trains used in or around
CP's yards; ii) passenger trains; and iii) trains used for repairing track. An
increase in average train speed indicates improved on-time performance resulting
in improved asset utilization. Average train speed was 21.6 mph in 2021, a
decrease of 2%, from 22.0 mph in 2020. This decrease in speed was driven
primarily by harsh winter operating conditions in the first quarter of 2021 as
well as the impact of the B.C. wildfires in the third quarter of 2021.
Average train speed in 2020 was 22.0 mph, a decrease of 1%, from 22.2 mph in
2019. This decrease in speed was a result of aligning the operating plan to
demand in order to maintain network efficiencies in the last three quarters of
2020, partially offset by improved winter operating conditions in the first
quarter of 2020. Aligning the operating plan to demand resulted in increased
average train weight, average train length, and increased locomotive
productivity.
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 201 GTMs/OHP in 2021, a decrease of 6 GTMs/OHP, or
3%, compared to 207 GTMs/OHP in 2020. This decrease was primarily due to moving
higher volumes of merchandise, which are lighter than bulk commodities, as well
the impacts of the B.C. floods in the fourth quarter of 2021.
Locomotive productivity was 207 GTMs/OHP in 2020, an increase of 5 GTMs/OHP, or
2%, compared to 202 GTMs/OHP in 2019. This increase was primarily due to
improvements in operating plan efficiency as a result of aligning the operating
plan to demand.
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 for 2021 was 0.931 U.S. gallons/1,000 GTMs,
an improvement of 1% compared to 0.942 U.S. gallons/1,000 GTMs in 2020. This
improvement was due to running longer and
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CP 2021 ANNUAL REPORT 46
heavier trains as a result of improvements in the operating plan. Fuel
efficiency for 2020 was 0.942 U.S. gallons/1,000 GTMs, an improvement of 1%
compared to 0.955 U.S. gallons/1,000 GTMs in 2019. This improvement was
primarily due to improved winter operating conditions in the first quarter of
2020.
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 for 2021 was 12,337, an increase of 169,
or 1%, compared to 12,168 in 2020. This increase was driven by the return to
work of employees furloughed in the prior year as a result of the economic
downturn caused by COVID-19. The total number of employees as at December 31,
2021 was 11,834, a decrease of 56 compared to 11,890 as at December 31, 2020 .
The average number of total employees for 2020 was 12,168, a decrease of 935, or
7%, compared to 13,103 in 2019. This decrease was primarily due to more
efficient resource planning, including furloughs associated with the economic
downturn caused by COVID-19, partially offset by the addition of Central Maine &
Quebec Railway U.S. Inc. employees. The total number of employees as at December
31, 2020 was 11,890, a decrease of 804, or 6%, compared to 12,694 as at December
31, 2019 , due to reduced workload as measured in GTMs and more efficient
resource planning.
The total workforce as at
The total workforce as atDecember 31, 2020 was 11,904, a decrease of 828, or 7%, compared to 12,732 as atDecember 31, 2019 , due to more efficient resource planning. 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 follows U.S Federal Railroad Administration ("FRA") reporting guidelines, which can result in restatement after initial publication to reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline. The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 0.92 in 2021, compared with 1.11 in 2020 and 1.42 in 2019. The FRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold ofU.S. $11,200 in damage in 2021 andU.S. $10,700 in damage for 2020 and 2019. The FRA train accidents per million train-miles frequency for CP was 1.10 in 2021 , compared with 0.96 in 2020 and 1.06 in 2019. --------------------------------------------------------------------------------
47 CP 2021 ANNUAL REPORT Results of Operations Income [[Image Removed: cp-20211231_g43.jpg]][[Image Removed: cp-20211231_g44.jpg]] * Adjusted operating income is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating income was$3,206 million in 2021, a decrease of$105 million , or 3%, from$3,311 million in 2020. This decrease was primarily due to: •acquisition-related costs of$183 million associated with the KCS acquisition that were recognized in Purchased services and other; •lower volumes as measured by RTMs; •the unfavourable impact of the change in foreign exchange ("FX") of$117 million ; •a gain of$68 million recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in theDetroit River Tunnel Partnership ("DRTP"); •higher depreciation and amortization of$46 million (excluding FX); •cost inflation; and •higher defined benefit ("DB") pension and post-retirement benefits current service cost of$32 million . This decrease was partially offset by: •higher freight rates; •a gain on the exchange of property and construction easements inChicago of$50 million and higher gains on land sales primarily in B.C. of$29 million ; •lower stock-based compensation of$39 million primarily driven by the impact of changes in share price; and •the efficiencies generated from improved operating performance and asset utilization. Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$3,389 million in 2021, an increase of$78 million , or 2%, from$3,311 million in 2020. This increase was primarily due to: •higher freight rates; •a gain on the exchange of property and construction easements inChicago of$50 million and higher gains on land sales primarily in B.C. of$29 million ; •lower stock-based compensation of$39 million primarily driven by the impact of changes in share price; and •the efficiencies generated from improved operating performance and asset utilization. This increase was partially offset by: •lower volumes as measured by RTMs; •the unfavourable impact of the change in FX of$117 million ; •a gain of$68 million recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in DRTP; •higher depreciation and amortization of$46 million (excluding FX); •cost inflation; and •higher DB pension and post-retirement benefits current service cost of$32 million .
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CP 2021 ANNUAL REPORT 48
Operating income was $3,311 million in 2020, an increase of $187 million , or 6%,
from $3,124 million in 2019. This increase was primarily due to:
•liquidated damages, including customer volume commitments, and higher freight
rates;
•the efficiencies generated from improved operating performance and asset
utilization;
•a gain of $68 million as a result of the remeasurement to fair value of the
previously held equity investment in DRTP;
•the impact of harsher winter operating conditions in 2019; and
•decreased operating expense associated with lower casualty costs incurred in
2020.
This increase was partially offset by:
•lower volumes as measured by RTMs;
•higher depreciation and amortization of $71 million (excluding FX);
•cost inflation; and
•higher stock-based compensation of $37 million primarily driven by an increase
in stock price.
There were no adjustments to operating income in 2020 and 2019.
Operating Ratio
[[Image Removed: cp-20211231_g45.jpg]][[Image Removed: cp-20211231_g46.jpg]] *Adjusted operating ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 59.9% in 2021, a 280 basis point increase from 57.1% in 2020. This increase was primarily due to: •acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other; •the unfavourable impact of changes in fuel prices, net of recoveries; •lower volumes as measured by RTMs; •a gain recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in DRTP; •higher depreciation and amortization (excluding FX); and •cost inflation. This increase was partially offset by higher freight rates and a gain on the exchange of property and construction easements inChicago and higher gains on land sales primarily in B.C. Adjusted operating ratio was 57.6% in 2021, a 50 basis point increase from 57.1% in 2020. This increase reflects the same factors discussed above for the increase in Operating ratio, except that Adjusted operating ratio in 2021 excludes the acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other. The Company's Operating ratio was 57.1% in 2020, a 280 basis point improvement from 59.9% in 2019. This improvement was primarily due to: •liquidated damages, including customer volume commitments, and higher freight rates; •the favourable impact of changes in fuel prices; •the efficiencies generated from improved operating performance and asset utilization; and •a gain as a result of the remeasurement to fair value of the previously held equity investment in DRTP. --------------------------------------------------------------------------------
49 CP 2021 ANNUAL REPORT
This improvement was partially offset by: •higher depreciation and amortization; •cost inflation; and •higher stock-based compensation.
There were no adjustments to the operating ratio in 2020 and 2019.
Net Income
[[Image Removed: cp-20211231_g47.jpg]][[Image Removed: cp-20211231_g48.jpg]] *Adjusted income is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Net income was$2,852 million in 2021, an increase of$408 million , or 17%, from$2,444 million in 2020. This increase was primarily due to the$845 million merger termination payment received in connection with KCS's termination of the Original Merger Agreement and higher freight rates. This increase was partially offset by: •acquisition-related costs of$599 million associated with the KCS acquisition including$169 million costs incurred by KCS recognized in Equity loss of KCS; •lower volumes as measured by RTMs; and •the unfavourable impact of the change in FX of$90 million . Net income was$2,444 million in 2020, an increase of$4 million , from$2,440 million in 2019. This increase was primarily due to: •higher Operating income; •a deferred tax recovery relating to a tax return filing election for the state ofNorth Dakota ; and •a provision for an uncertain tax item of a prior period in 2019. This increase was partially offset by: •an income tax recovery associated with changes in tax rates in 2019; •lower FX translation gain onU.S. dollar-denominated debt and lease liabilities compared to 2019; and •lower other components of net periodic benefit recovery. Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$2,565 million in 2021, an increase of$162 million , or 7%, from$2,403 million in 2020. This increase was primarily due to higher Adjusted operating income and higher other components of net periodic benefit recovery. Adjusted income was$2,403 million in 2020, an increase of$113 million , or 5%, from$2,290 million in 2019. This increase was primarily due to higher Operating income, partially offset by lower other components of net periodic benefit recovery. -------------------------------------------------------------------------------- CP 2021 ANNUAL REPORT 50 Diluted Earnings per Share [[Image Removed: cp-20211231_g49.jpg]][[Image Removed: cp-20211231_g50.jpg]] *Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Diluted EPS was
Diluted EPS was$3.59 in 2020, an increase of$0.09 , or 3%, from$3.50 in 2019. This increase was due to a lower average number of outstanding Common Shares due to the Company's share repurchase program, and higher Net income. Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$3.76 in 2021, an increase of$0.23 , or 7%, from$3.53 in 2020. This increase was due to higher Adjusted income.
Adjusted diluted EPS was
Return on Average Shareholders' Equity and Adjusted Return onInvested Capital Return on average shareholders' equity and Adjusted return on invested capital ("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 13.9% in 2021, a 2,010 basis point decrease compared to 34.0% in 2020. This decrease was due to higher average shareholders' equity driven by shares issued for the KCS acquisition and accumulated Net income, partially offset by higher Net income.
Return on average shareholders' equity was 34.0% in 2020, a 160 basis point decrease compared to 35.6% in 2019. This decrease was due to higher average shareholders' equity due to accumulated Net income, partially offset by the impact of the Company's share repurchase program.
Adjusted ROIC was 8.2% in 2021, an 850 basis point decrease compared to 16.7% in 2020. This decrease was primarily due to higher average long-term debt and shares issued for the KCS acquisition and accumulated Adjusted income.
Adjusted ROIC was 16.7% in 2020, a 20 basis point decrease compared to 16.9% in 2019. This decrease was primarily due to higher average long-term debt, partially offset by higher Operating income.
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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Impact of Foreign Exchange 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. --------------------------------------------------------------------------------
51 CP 2021 ANNUAL REPORT
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 period end exchange rates, and the high and low exchange rates for the periods indicated. Average exchange rates 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/
2018 2017
For the year ended - December 31 $ 1.25 $ 1.34 $ 1.33
Exchange rates (Canadian/
$ 1.28 $ 1.30 $ 1.36 $ 1.25 $ 1.34 Beginning of quarter - April 1$ 1.26 $ 1.41 $ 1.33 $ 1.29 $ 1.33 Beginning of quarter - July 1$ 1.24 $ 1.36 $ 1.31 $ 1.32 $ 1.30 Beginning of quarter - October 1$ 1.27 $ 1.33 $ 1.32 $ 1.29 $ 1.25 End of year - December 31$ 1.28 $ 1.28 $ 1.30 $ 1.36 $ 1.25 High/Low exchange rates (Canadian/U.S. dollar) 2021 2020 2019 2018 2017 High$ 1.29 $ 1.45 $ 1.36 $ 1.37 $ 1.37 Low$ 1.20 $ 1.27 $ 1.30 $ 1.23 $ 1.21 In 2021, the impact of a weakerU.S. dollar resulted in a decrease in Total revenues of$228 million , a decrease in Total operating expenses of$111 million and a decrease in Net interest expense of$27 million . In 2020, the impact of a strongerU.S. dollar resulted in an increase in Total revenues of$33 million , an increase in Total operating expenses of$23 million and an increase in Net interest expense of$4 million . The impact of fluctuations in the exchange rate between the Canadian dollar and theU.S. dollar on the Company's results is discussed further in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Foreign Exchange Risk. 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 a timing impact on earnings, as discussed further in Item 1. Business, Operations, Fuel Cost Adjustment Program and Item 1A. Risk Factors, Fuel Cost Volatility.
Average Fuel Price (
$ 2.70 $ 1.90 $
2.49
For the three months ended - December 31$ 3.03 $ 1.91 $
2.53
The impact of fuel price on earnings includes the impacts of provincial and federal carbon taxes and levies recovered and paid, on revenues and expenses, respectively.
In 2021, the unfavourable impact of fuel prices on Operating income was$7 million . Higher fuel prices resulted in an increase in Total operating expenses of$243 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$236 million from 2020. In 2020, the impact of lower fuel prices resulted in a decrease in Total revenues of$170 million and a decrease in Total operating expenses of$195 million . -------------------------------------------------------------------------------- CP 2021 ANNUAL REPORT 52 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". As a result of the five-for-one share split of the Company's issued and outstanding Common Shares, which began trading on a post-split basis onMay 14, 2021 , per share amounts and all outstanding Common Shares for periods prior to Q2 2021 have been retrospectively adjusted. The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for each quarter, on a post-split basis, and the change in the price of the Common Shares on the TSX and the NYSE for the years endedDecember 31, 2021 , 2020 and 2019: Toronto Stock Exchange (in Canadian dollars) 2021 2020 2019
Opening Common Share price, as at
$ 96.00 $ 62.11 $ 55.07 Ending Common Share price, as at June 30$ 95.32 $ 69.06 $ 61.69 Ending Common Share price, as at September 30$ 82.71 $ 81.01 $ 58.88 Ending Common Share price, as at December 31$ 90.98 $ 88.31 $ 66.21 Change in Common Share price for the year ended$ 2.67 $ 22.10 $ 17.76 December 31 New York Stock Exchange (in U.S. dollars) 2021 2020 2019
Opening Common Share price, as at
$ 75.86 $ 43.92 $ 41.21 Ending Common Share price, as at June 30$ 76.91 $ 51.07 $ 47.05 Ending Common Share price, as at September 30$ 65.07 $ 60.89 $ 44.49 Ending Common Share price, as at December 31$ 71.94 $ 69.34 $ 50.99 Change in Common Share price for the year ended$ 2.60 $ 18.35 $ 15.47 December 31 In 2021, the impact of the change in Common Share prices resulted in an increase in stock-based compensation expense of$11 million compared to$58 million in 2020, and$42 million in 2019. The impact of share price on stock-based compensation is discussed further in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Share Price Impact on Stock-Based Compensation. --------------------------------------------------------------------------------
53 CP 2021 ANNUAL REPORT
Operating Revenues
2021 vs. 2020 2020 vs. 2019
Total Total
For the year ended
Change % Change FX Adjusted % Change(2)
Freight revenues (in
millions)(1) $ 7,816 $ 7,541 $ 7,613 $ 275 4 7 $ (72) (1) (1)
Non-freight revenues (in
millions) 179 169 179 10 6 7 (10) (6) (6)
Total revenues (in millions) $ 7,995 $ 7,710 $ 7,792 $ 285 4 7 $ (82) (1) (1)
Carloads (in thousands) 2,735.5 2,708.4 2,766.4 27.1 1 N/A (58.0) (2) N/ARevenue ton-miles (in millions) 149,686 151,891 154,378 (2,205) (1)
N/A (2,487) (2) N/A
Freight revenue per carload (in
dollars) $ 2,857 $ 2,784 $ 2,752 $ 73 3 6 $ 32 1 1
Freight revenue per revenue
ton-mile (in cents) 5.22 4.96 4.93 0.26 5 8 0.03 1 -
(1) Freight revenues include fuel surcharge revenues of $535 million in 2021,
$297 million in 2020 and $464 million in 2019. 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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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, crew costs, and equipment
rents. Non-freight revenue is generated from leasing of certain assets; other
arrangements, including contracts with passenger service operators and
logistical services; and switching fees.
Freight Revenues
Freight revenues were $7,816 million in 2021, an increase of $275 million , or
4%, from $7,541 million in 2020. This increase was primarily due to increased
freight revenue per RTM. This increase was partially offset by lower volumes as
measured by RTMs.
Freight revenues were $7,541 million in 2020, a decrease of $72 million , or 1%,
from $7,613 million in 2019. This decrease was primarily due to lower volumes as
measured by RTMs. This decrease was partially offset by higher freight revenue
per RTM.
RTMs
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 2021 were 149,686 million, a decrease of 2,205 million, or 1%, compared with 151,891 million in 2020. This decrease was mainly attributable to lower volumes of Grain and Potash. This decrease was partially offset by higher volumes of Metals, minerals and consumer products, Energy, chemicals and plastics, and Automotive. RTMs for 2020 were 151,891 million, a decrease of 2,487 million, or 2%, compared with 154,378 million in 2019. This decrease was mainly attributable to lower volumes of crude, Coal and frac sand. This decrease was partially offset by higher volumes of Grain, Potash, and Fertilizers and sulphur. Freight revenue per RTM 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 was5.22 cents in 2021, an increase of0.26 cents , or 5%, from4.96 cents in 2020. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of$236 million , higher freight rates, and moving higher volumes of Automotive, which has a higher freight revenue per RTM compared to the corporate average. This increase was partially offset by the unfavourable impact of the change in FX of$226 million . Freight revenue per RTM was4.96 cents in 2020, an increase of0.03 cents , or 1%, from4.93 cents in 2019. This increase was primarily due to higher liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of$33 million . This increase was partially offset by the unfavourable impact of lower fuel surcharge revenue as a result of lower fuel prices of$170 million and moving lower volumes of Automotive, which has a higher freight revenue per RTM compared to the corporate average.
Carloads
Carloads are defined as revenue-generating shipments of containers and freight
cars. Carloads were 2,735.5 thousand in 2021, an increase of 27.1 thousand, or
1%, from 2,708.4 thousand in 2020. This increase was primarily due to higher
volumes of Coal, Metals, minerals and consumer products, Intermodal, and Energy,
chemicals and plastics. This increase was partially offset by lower volumes of
Grain and Potash.
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CP 2021 ANNUAL REPORT 54
Carloads were 2,708.4 thousand in 2020, a decrease of 58.0 thousand, or 2%, from
2,766.4 thousand in 2019. This decrease was primarily due to lower volumes of
crude, Coal, and frac sand. This decrease was partially offset by higher volumes
of Grain and Potash.
Freight revenue per carload
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 $2,857 in 2021, an increase of $73 , or 3%, from $2,784
in 2020. This increase was primarily due to higher fuel surcharge revenue as a
result of higher fuel prices of $236 million and higher freight rates. This
increase was partially offset by the unfavourable impact of the change in FX of
$226 million .
Freight revenue per carload was $2,784 in 2020, an increase of $32 , or 1%, from
$2,752 in 2019. This increase was primarily due to higher liquidated damages,
including customer volume commitments, higher freight rates, and the favourable
impact of the change in FX of $33 million . This increase was partially offset by
the unfavourable impact of lower fuel surcharge revenue as a result of lower
fuel prices of $170 million .
Non-freight Revenues
Non-freight revenues were $179 million in 2021, an increase of $10 million , or
6%, from $169 million in 2020. This increase was primarily due to revenue
recognized for construction easements in Chicago of $13 million , higher leasing
revenues, and higher revenue from passenger service operators, partially offset
by lower revenue from logistical services and switching fees.
Non-freight revenues were $169 million in 2020, a decrease of $10 million , or
6%, from $179 million in 2019. This decrease was primarily due to lower revenue
from passenger service operators.
Lines of Business
Grain
2021 vs. 2020 2020 vs. 2019
Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1) Freight revenues (in millions)$ 1,684 $ 1,829 $ 1,684 $ (145) (8) (5)$ 145 9 8 Carloads (in thousands) 426.2 480.1 431.4 (53.9) (11) N/A 48.7 11 N/A Revenue ton-miles (in millions) 37,999 41,747 36,941 (3,748) (9) N/A 4,806 13 N/A Freight revenue per carload (in dollars)$ 3,951 $ 3,810 $ 3,904 $ 141 4 6$ (94) (2)
(3)
Freight revenue per revenue ton-mile (in cents) 4.43 4.38 4.56 0.05 1 4 (0.18) (4) (4) (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Grain revenue was$1,684 million in 2021, a decrease of$145 million , or 8%, from$1,829 million in 2020. The decrease was primarily due to lower volumes of Canadian grain toVancouver and easternCanada primarily as a result of drought conditions and the unfavourable impact of the change in FX. This decrease was partially offset by higher volumes ofU.S. corn to westernCanada and theU.S. Pacific Northwest and increased freight revenue per RTM. Freight revenue per RTM increased due to higher freight rates and higher fuel surcharge revenue as a result of higher fuel prices. Carloads decreased more than RTMs due to moving higher volumes ofU.S. corn to westernCanada and theU.S. Pacific Northwest , which have longer lengths of haul. Grain revenue was$1,829 million in 2020, an increase of$145 million , or 9%, from$1,684 million in 2019. This increase was primarily due to moving record volumes of Canadian grain, primarily toVancouver andThunder Bay , higher volumes ofU.S. soybeans and corn to theU.S. Pacific Northwest , higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to moving proportionately higher volumes of long haul soybeans and corn to theU.S. Pacific Northwest , which also caused RTMs to increase more than carloads, and lower fuel surcharge revenue as a result of lower fuel prices. --------------------------------------------------------------------------------
55 CP 2021 ANNUAL REPORT
Coal
2021 vs. 2020 2020 vs. 2019
Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1) Freight revenues (in millions)$ 625 $ 566 $ 682 $ 59 10 11$ (116) (17) (17) Carloads (in thousands) 291.5 260.4 304.3 31.1 12 N/A (43.9) (14) N/A Revenue ton-miles (in millions) 18,345 18,510 21,820 (165) (1) N/A (3,310) (15) N/A Freight revenue per carload (in dollars)$ 2,144 $ 2,174 $ 2,241 $ (30) (1) (1)$ (67) (3)
(3)
Freight revenue per revenue ton-mile (in cents) 3.41 3.06 3.13 0.35 11 12 (0.07) (2) (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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Coal revenue was$625 million in 2021, an increase of$59 million , or 10%, from$566 million in 2020. This increase was primarily due to increased freight revenue per RTM, higher volumes of Canadian coal toKamloops, B.C. , and higher volumes ofU.S. coal to theU.S. Midwest. This increase was partially offset by lower volumes of Canadian coal toVancouver and 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. RTMs decreased while carloads increased due to moving lower volumes of Canadian coal toVancouver , which has a longer length of haul, and moving higher volumes of Canadian coal toKamloops, B.C. , which has a shorter length of haul. Coal revenue was$566 million in 2020, a decrease of$116 million , or 17%, from$682 million in 2019. This decrease was primarily due to lower volumes of Canadian coal primarily toVancouver , driven by supply chain challenges at both the mines and the ports, lower volumes ofU.S. coal toWisconsin , and decreased freight revenue per RTM. Freight revenue per RTM decreased due to lower fuel surcharge revenue as a result of lower fuel prices. Potash 2021 vs. 2020 2020 vs. 2019 Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1) Freight revenues (in millions)$ 463 $ 493 $ 462 $ (30) (6) (3)$ 31 7 6 Carloads (in thousands) 150.9 162.9 149.3 (12.0) (7) N/A 13.6 9 N/A Revenue ton-miles (in millions) 16,671 18,784 17,297 (2,113) (11) N/A 1,487 9 N/A Freight revenue per carload (in dollars)$ 3,068 $ 3,026 $ 3,094 $ 42 1 5$ (68) (2)
(3)
Freight revenue per revenue ton-mile (in cents) 2.78 2.62 2.67 0.16 6 9 (0.05) (2) (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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Potash revenue was$463 million in 2021, a decrease of$30 million , or 6%, from$493 million in 2020. This decrease was primarily due to lower volumes of export potash toVancouver and theU.S. Pacific Northwest as a result of construction at thePort of Vancouver and thePort of Portland , lower volumes of domestic potash, and the unfavourable impact of the change in FX. This decrease was partially offset by increased freight revenue per RTM due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of export potash, which has a longer length of haul. Potash revenue was$493 million in 2020, an increase of$31 million , or 7%, from$462 million in 2019. This increase was primarily due to higher volumes of export potash following resolved international contract negotiations, higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM due to lower fuel surcharge revenue as a result of lower fuel prices. --------------------------------------------------------------------------------
CP 2021 ANNUAL REPORT 56
Fertilizers and Sulphur
2021 vs. 2020 2020 vs. 2019
Total
For the year ended
Change % Change FX Adjusted % Change(1)
Freight revenues (in millions) $ 305 $ 290 $ 250 $ 15 5 11 $ 40 16 15
Carloads (in thousands) 64.4 61.6 57.0 2.8 5 N/A 4.6 8 N/A
Revenue ton-miles (in
millions) 4,845 4,683 3,846 162 3 N/A 837 22 N/A
Freight revenue per carload
(in dollars) $ 4,736 $ 4,708 $ 4,386 $ 28 1 6 $ 322 7 6
Freight revenue per revenue
ton-mile (in cents) 6.30 6.19 6.50 0.11 2 7 (0.31) (5) (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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Fertilizers and sulphur revenue was $305 million in 2021, an increase of $15
million , or 5%, from $290 million in 2020. This increase was primarily due to
higher volumes of wet and dry fertilizer and increased freight revenue per RTM.
This increase was partially offset by the unfavourable impact of the change in
FX and lower volumes of sulphur. 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 higher volumes of dry
fertilizer within western Canada , which has a shorter length of haul.
Fertilizers and sulphur revenue was $290 million in 2020, an increase of $40
million , or 16%, from $250 million in 2019. This increase was primarily due to
higher volumes of dry fertilizers, sulphur, and wet fertilizers, as well as the
favourable impact of the change in FX. This increase was partially offset by
decreased freight revenue per RTM due to lower fuel surcharge revenue as a
result of lower fuel prices. RTMs increased more than carloads due to moving
lower volumes of wet and dry fertilizers within Alberta , which has a shorter
length of haul.
Forest Products
2021 vs. 2020 2020 vs. 2019
Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1) Freight revenues (in millions)$ 348 $ 328 $ 304 $ 20 6 12$ 24 8 7 Carloads (in thousands) 73.6 71.6 71.5 2.0 3 N/A 0.1 - N/A Revenue ton-miles (in millions) 5,718 5,491 4,974 227 4 N/A 517 10 N/A Freight revenue per carload (in dollars)$ 4,728 $ 4,581 $ 4,252 $ 147 3 9$ 329 8
7
Freight revenue per revenue ton-mile (in cents) 6.09 5.97 6.11 0.12 2 8 (0.14) (2) (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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forest products revenue was$348 million in 2021, an increase of$20 million , or 6%, from$328 million in 2020. This increase was primarily due to higher volumes of lumber and panel products 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. Forest products revenue was$328 million in 2020, an increase of$24 million , or 8%, from$304 million in 2019. This increase was primarily due to higher volumes of lumber and wood pulp, higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM due to lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads due to moving higher volumes of panel products and wood pulp fromCanada to theU.S. , which has a longer length of haul. --------------------------------------------------------------------------------
57 CP 2021 ANNUAL REPORT
Energy, Chemicals and Plastics
2021 vs. 2020 2020 vs. 2019
Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1) Freight revenues (in millions)$ 1,563 $ 1,519 $ 1,534 $ 44 3 7$ (15) (1) (1) Carloads (in thousands) 320.1 308.8 358.1 11.3 4 N/A (49.3) (14) N/A Revenue ton-miles (in millions) 25,469 24,172 29,356 1,297 5 N/A (5,184) (18) N/A Freight revenue per carload (in dollars)$ 4,883 $ 4,919 $ 4,284 $ (36) (1) 3$ 635 15
15
Freight revenue per revenue ton-mile (in cents) 6.14 6.28 5.23 (0.14) (2) 1 1.05 20 20 (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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Energy, chemicals and plastics revenue was$1,563 million in 2021, an increase of$44 million , or 3%, from$1,519 million in 2020. This increase was primarily due to higher volumes of liquefied petroleum gas ("LPG") and other petroleum products as a result of demand recovery from the impact of the COVID-19 pandemic in the prior year, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. The increase was partially offset by decreased freight revenue per RTM due to the unfavourable impact of the change inFX. Energy , chemicals and plastics revenue was$1,519 million in 2020, a decrease of$15 million , or 1%, from$1,534 million in 2019. This decrease was primarily due to lower volumes of crude, LPG, and biofuels as a result of the COVID-19 pandemic and lower fuel surcharge revenue as a result of lower fuel prices. The decrease was partially offset by increased freight revenue per RTM and higher volumes of plastics. Freight revenue per RTM increased primarily due to higher liquidated damages, including customer volume commitments, and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of crude, which has a longer length of haul.
Metals, Minerals and Consumer Products
2021 vs. 2020 2020 vs. 2019
Total
For the year ended
Change % Change FX Adjusted % Change(1)
Freight revenues (in millions) $ 728 $ 629 $ 752 $ 99 16 22 $ (123) (16) (17)
Carloads (in thousands) 236.7 207.3 234.3 29.4 14 N/A (27.0) (12) N/A
Revenue ton-miles (in
millions) 11,170 9,325 10,684 1,845 20 N/A (1,359) (13) N/AFreight revenue per carload (in dollars)$ 3,076 $ 3,034 $ 3,210 $ 42 1 7$ (176) (5) (6) Freight revenue per revenue ton-mile (in cents) 6.52 6.75 7.04 (0.23) (3) 2 (0.29) (4) (5) (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Metals, minerals and consumer products revenue was$728 million in 2021, an increase of$99 million , or 16%, from$629 million in 2020. This increase was primarily due to higher volumes of steel and frac sand, 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 due to the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving proportionately higher volumes of frac sand, which has a longer length of haul. Metals, minerals and consumer products revenue was$629 million in 2020, a decrease of$123 million , or 16%, from$752 million in 2019. This decrease was primarily due to lower volumes of frac sand as a result of the COVID-19 pandemic and decreased freight revenue per RTM. This decrease was partially offset by the favourable impact of the change in FX. Freight revenue per RTM decreased due to lower fuel surcharge revenue as a result of lower fuel prices.
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CP 2021 ANNUAL REPORT 58
Automotive
2021 vs. 2020 2020 vs. 2019
Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1) Freight revenues (in millions)$ 376 $ 324 $ 352 $ 52 16 22$ (28) (8) (9) Carloads (in thousands) 109.2 106.1 114.4 3.1 3 N/A (8.3) (7) N/A Revenue ton-miles (in millions) 1,765 1,321 1,427 444 34 N/A (106) (7) N/A Freight revenue per carload (in dollars)$ 3,443 $ 3,054 $ 3,077 $ 389 13 18$ (23) (1)
(2)
Freight revenue per revenue ton-mile (in cents) 21.30 24.53 24.67 (3.23) (13) (9) (0.14) (1) (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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Automotive revenue was$376 million in 2021, an increase of$52 million , or 16%, from$324 million in 2020. This increase was primarily due to higher volumes as a result of onboarding customers moving to and fromVancouver , prior year manufacturing plant shutdowns in the second quarter of 2020 acrossNorth America as a result of the COVID-19 pandemic, 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 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. Automotive revenue was$324 million in 2020, a decrease of$28 million , or 8%, from$352 million in 2019. This decrease was primarily due to lower volumes caused by manufacturing plant shutdowns in the second quarter of 2020 acrossNorth America as a result of the COVID-19 pandemic, and decreased freight revenue per RTM. This decrease was partially offset by the onboarding of customers moving to and fromVancouver , higher freight rates, and the favourable impact of the change in FX. Freight revenue per RTM decreased due to lower fuel surcharge revenue as a result of lower fuel prices. Intermodal 2021 vs. 2020 2020 vs. 2019 Total Total
For the year ended
% Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1)
Freight revenues (in millions) $ 1,724 $ 1,563 $ 1,593 $ 161 10 12 $ (30) (2) (2)
Carloads (in thousands) 1,062.9 1,049.6 1,046.1 13.3 1 N/A 3.5 - N/A
Revenue ton-miles (in
millions) 27,704 27,858 28,033 (154) (1) N/A (175) (1) N/A
Freight revenue per carload
(in dollars) $ 1,622 $ 1,489 $ 1,523 $ 133 9 11 $ (34) (2) (2)
Freight revenue per revenue
ton-mile (in cents) 6.22 5.61 5.68 0.61 11 13 (0.07) (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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Intermodal revenue was $1,724 million in 2021, an increase of $161 million , or
10%, from $1,563 million in 2020. This increase was primarily due to increased
freight revenue per RTM, onboarding new international intermodal customers, and
higher domestic retail and wholesale intermodal volumes. This increase was
partially offset by the completion of an international intermodal customer
contract and 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 while RTMs decreased due to
moving lower volumes of international intermodal to and from the Port of
Vancouver , which has a longer length of haul.
Intermodal revenue was $1,563 million in 2020, a decrease of $30 million , or 2%,
from $1,593 million in 2019. This decrease was primarily due to decreased
freight revenue per RTM and lower volumes of international intermodal driven by
the completion of a customer contract. This decrease was partially offset by the
onboarding of a new international intermodal customer, higher freight rates, and
the favourable impact of the change in FX. Freight revenue per RTM decreased due
to lower fuel surcharge revenues as a result of lower fuel prices.
--------------------------------------------------------------------------------59 CP 2021 ANNUAL REPORT Operating Expenses
[[Image Removed: cp-20211231_g51.jpg]][[Image Removed: cp-20211231_g52.jpg]][[Image Removed: cp-20211231_g53.jpg]]
2021 Operating Expenses 2020 Operating Expenses 2019 Operating Expenses
2021 vs. 2020 2020 vs. 2019
For the year ended December 31
(in millions of Canadian Total Total
dollars) 2021 2020 2019 Change % Change FX Adjusted % Change(1) Change % Change FX Adjusted % Change(1)
Compensation and benefits $ 1,570 $ 1,560 $ 1,540 $ 10 1 2 $ 20 1 1
Fuel 854 652 882 202 31 37 (230) (26) (27)
Materials 215 216 210 (1) - 1 6 3 3
Equipment rents 121 142 137 (21) (15) (10) 5 4 2Depreciation and amortization 811 779 706 32
4 6 73 10 10
Purchased services and other 1,218 1,050 1,193 168
16 19 (143) (12) (12)
Total operating expenses
9 12$ (269) (6)
(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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operating expenses were$4,789 million in 2021, an increase of$390 million , or 9%, from$4,399 million in 2020. This increase was primarily due to: •the unfavourable impact of higher fuel prices of$243 million ; •acquisition-related costs of$183 million associated with the KCS acquisition that were recognized in Purchased services and other; •a gain of$68 million recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in DRTP; •higher depreciation and amortization of$46 million (excluding FX); •impact of cost inflation; and •higher DB pension and post-retirement benefits current service cost of$32 million . This increase was partially offset by: •the favourable impact of the change in FX of$111 million ; •a gain on the exchange of property and construction easements inChicago of$50 million and higher gains on land sales primarily in B.C. of$29 million ; •lower stock-based compensation of$39 million primarily driven by the impact of changes in share price; and •efficiencies generated from improved operating performance and asset utilization. Operating expenses were$4,399 million in 2020, a decrease of$269 million , or 6%, from$4,668 million in 2019. This decrease was primarily due to: •the favourable impact of lower fuel price of$195 million ; •efficiencies generated from improved operating performance and asset utilization; •a gain of$68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP; •reduced variable expenses from lower volumes; •the impact of harsher winter operating conditions in 2019; and •lower casualty costs incurred in 2020. -------------------------------------------------------------------------------- CP 2021 ANNUAL REPORT 60 This decrease was partially offset by: •higher depreciation and amortization of$71 million (excluding FX); •cost inflation; •higher stock-based compensation of$37 million primarily driven by an increase in stock price; and •the unfavourable impact of the change in FX of$23 million . Compensation and Benefits Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was$1,570 million in 2021, an increase of$10 million , or 1%, from$1,560 million in 2020. This increase was primarily due to: •the impact of wage and benefit inflation; •higher DB pension and post-retirement benefits current service cost of$32 million ; and •increased training costs driven by recovery from the economic downturn caused by COVID-19 in the prior year. This increase was partially offset by: •lower stock-based compensation of$39 million primarily driven by the impact of changes in share price; •the favourable impact of the change in FX of$27 million ; and •prior year bonus paid to frontline employees of$17 million . Compensation and benefits expense was$1,560 million in 2020, an increase of$20 million , or 1% from$1,540 million in 2019. This increase was primarily due to: •the impact of wage and benefit inflation; •higher stock-based compensation of$37 million primarily driven by an increase in stock price; •higher DB pension and post-retirement benefits current service cost of$33 million ; •a bonus paid to frontline employees of$17 million ; and •the unfavourable impact of the change in FX of$5 million . This increase was partially offset by: •labour efficiencies generated from improved operating performance and asset utilization; •reduced training costs; •lower volume variable expense as a result of decreased workload as measured by GTMs; and •the impact of weather related costs as a result of harsh winter operating conditions in the first quarter of 2019.
Fuel
Fuel expense consists mainly of fuel used by locomotives and includes
provincial, state, and federal fuel taxes. Fuel expense was
This increase was partially offset by: •the favourable impact of the change in FX of$29 million ; •an increase in fuel efficiency of 1% from improvements in the operating plan resulting in running longer and heavier trains; and •a decrease in workload, as measured by GTMs.
Fuel expense was
This decrease was partially offset by the unfavourable impact of the change in
FX of
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61 CP 2021 ANNUAL REPORT
Materials
Materials expense includes the cost of material used for maintenance of track, locomotives, freight cars, and buildings as well as software sustainment. Materials expense was$215 million in 2021, a decrease of$1 million , from$216 million in 2020. This decrease was primarily due to the favorable impact of the change in FX of$3 million and a decrease in freight car maintenance, partially offset by an increase in fuel costs. Materials expense was$216 million in 2020, an increase of$6 million , or 3%, from$210 million in 2019. This increase was primarily due to higher spending on locomotive maintenance and overhauls, and track maintenance. Equipment Rents Equipment rents expense includes the cost associated with using other companies' freight cars, intermodal equipment, and locomotives, net of rental income received from other railways for the use of CP's equipment. Equipment rents expense was$121 million in 2021, a decrease of$21 million , or 15%, from$142 million in 2020. This decrease was primarily due to: •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$8 million .
This decrease was partially offset by greater usage of pooled freight cars.
Equipment rents expense was$142 million in 2020, an increase of$5 million , or 4%, from$137 million in 2019. This increase was primarily due to lower receipts for CP freight cars used by other railways and the unfavourable impact of the change in FX of$2 million , partially offset by lower usage of pooled freight cars as a result of lower 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$811 million for 2021, an increase of$32 million , or 4%, from$779 million in 2020. This increase was primarily due to a higher asset base, as a result of the capital program spending in 2021 and recent years, and the impact of depreciation studies. This was partially offset by the favourable impact of the change in FX of$14 million . Depreciation and amortization expense was$779 million for 2020, an increase of$73 million , or 10%, from$706 million in 2019. This increase was primarily due to: •a higher asset base, as a result of the capital program spending in 2020; •the impact of depreciation studies and other adjustments made in 2019; and •the unfavourable impact of the change in FX of$2 million .
Purchased Services and Other
2021 vs. 2020 2020 vs. 2019
For the year ended December 31 Total Total
(in millions of Canadian dollars) 2021 2020 2019 Change % Change Change % Change
Support and facilities $ 293 $ 271 $ 278 $ 22 8 $ (7) (3)
Track and operations 260 282 278 (22) (8) 4 1
Intermodal 205 209 222 (4) (2) (13) (6)
Equipment 105 113 125 (8) (7) (12) (10)
Casualty 125 116 149 9 8 (33) (22)
Property taxes 128 126 133 2 2 (7) (5)
Other 191 (57) 29 248 (435) (86) (297)
Land sales (89) (10) (21) (79) 790 11 (52)
Total Purchased services and other
$ (143) (12) Purchased services and other expense encompasses a wide range of third-party costs, including contractor and consulting fees, locomotive and freight car repairs performed by third parties, property and other taxes, intermodal pickup and delivery services, casualty expense, expenses for joint facilities, and gains on land sales. Purchased services and other expense was$1,218 million in 2021, an increase of$168 million , or 16%, from$1,050 million in 2020. This increase was primarily due to: •the acquisition-related costs of$183 million related to the KCS acquisition, reported in Other; •a gain in 2020 of$68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP, reported in Other; •higher expenses primarily due to an increased number and severity of casualty incidents, reported in Casualty; -------------------------------------------------------------------------------- CP 2021 ANNUAL REPORT 62 •expenses due to the wildfire response in B.C., reported in Support and facilities, and Track and operations; and •an increase in legal and consulting fees, reported in Support and facilities. This increase was partially offset by: •a gain on the exchange of property and construction easements inChicago of$50 million and higher gains on land sales primarily in B.C. of$29 million ; •the favourable impact of the change in FX of$30 million ; •a$16 million legal claim recovery, reported in Other; and •a$7 million arbitration settlement, reported in Track and operations. Purchased services and other expense was$1,050 million in 2020, a decrease of$143 million , or 12%, from$1,193 million in 2019. This decrease was primarily due to: •a gain of$68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP, reported in Other. •lower expenses primarily due to reduced number and severity of casualty incidents, reported in Casualty; •reduced business travel and event cost due to COVID-19, reported in primarily Support and facilities and Track and operations; •a decrease in charges associated with contingencies of$10 million , reported in Other; and •reduced variable expenses from lower volumes, reported in Intermodal and Equipment. This decrease was partially offset by lower gains on land sales of$11 million in 2020, reported in Land sales and the unfavourable impact of the change in FX of$6 million . Other Income Statement Items Equity Loss of Kansas City Southern OnDecember 14, 2021 , following the consummation of the KCS acquisition, the shares of KCS were placed into a voting trust while theUnited States Surface Transportation Board ("STB") considers the Company's control application. In 2021, the Company recognized a$141 million equity loss from the date of acquisition of KCS closing into the voting trust toDecember 31, 2021 in the Company's Consolidated Statements of Income. The equity loss was attributable to the acquisition-related costs incurred during this period. No similar equity loss existed in the same period of 2020. 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$237 million in 2021, a change of$244 million , or 3,486%, from income of$7 million in 2020. This change was primarily due to acquisition-related costs of$247 million which include losses on interest rate hedges of$264 million and bridge facility and backstop revolver fees of$52 million , partially offset by gains on cash held for the KCS acquisition of$56 million and gains on FX hedges of$13 million . Other income was$7 million in 2020, a decrease of$82 million , or 92%, from$89 million in the same period of 2019. This decrease was primarily due to a lower FX translation gain onU.S. dollar-denominated debt and lease liabilities of$80 million . FX translation gains and losses on debt and lease liabilities and acquisition-related costs are discussed further in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Merger Termination Fee OnMay 21, 2021 , KCS terminated the Agreement and Plan of Merger (the "Original Merger Agreement") with CP to enter into a definitive agreement with Canadian National Railway. At the same time and in accordance with the terms of the Original 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 Consolidated Statements of Income in 2021. 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 were$387 million in 2021, an increase of$45 million , or 13%, from$342 million in 2020. This increase was primarily due to a decrease in the interest cost on the benefit obligation of$56 million and an increase in expected return on fund assets of$14 million , partially offset by an increase in recognized net actuarial losses of$24 million . --------------------------------------------------------------------------------
63 CP 2021 ANNUAL REPORT
Other components of net periodic benefit recovery were$342 million in 2020, a decrease of$39 million or 10%, from$381 million in 2019. This decrease was primarily due to an increase in recognized net actuarial losses of$85 million and a decrease in expected return on fund assets of$2 million , partially offset by a decrease in the interest cost on the benefit obligation of$47 million . Net Interest Expense Net interest expense includes interest on long-term debt and finance leases. Net interest expense was$440 million in 2021, a decrease of$18 million , or 4%, from$458 million in 2020. This decrease was primarily due to a change in FX of$27 million and a reduction of interest on long-term debt of$15 million as the result of a lower effective interest rate, partially offset by an increase in interest on long-term debt from debt issuances related to the KCS acquisition in the last quarter of 2021. Net interest expense was$458 million in 2020, an increase of$10 million , or 2%, from$448 million in 2019. This increase was primarily due to the unfavourable impacts of an increase in debt levels of$34 million and the change in FX of$4 million . This increase was partially offset by a reduction in interest related to long-term debt of$29 million as the result of a lower effective interest rate following the Company's debt refinancing completed in 2019 and 2020. Income Tax Expense Income tax expense was$768 million in 2021, an increase of$10 million , or 1%, from$758 million in 2020. The increase was primarily a result of higher taxable earnings due to the$845 million (U.S. $700 million ) merger termination payment received in connection with KCS's termination of the Original Merger Agreement, partially offset by acquisition-related costs associated with the KCS acquisition and a lower effective tax rate. Income tax expense was$758 million in 2020, an increase of$52 million , or 7%, from$706 million in 2019. The increase was primarily due to higher taxable earnings and lower net income tax recoveries in 2020. In 2020, a tax filing election lowered theNorth Dakota rate resulting in net income tax recoveries of$29 million compared to 2019 when net income tax recoveries were$88 million as a result of anAlberta corporate tax rate decrease, partially offset by a 2019 tax expense for an unrecognized tax benefit of$24 million . The effective income tax rate for 2021 was 21.23% on reported income and 23.85% on Adjusted income. The effective income tax rate for 2020 was 23.66% on reported income and 24.61% on Adjusted income. The effective income tax rate for 2019 was 22.43% on reported income and 24.96% on Adjusted income. Adjusted income is a Non-GAAP measure, which is discussed further in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's expected 2022 effective tax rate is between 24% and 24.5%, which excludes the impact of the change in the equity investment in KCS and associated deferred tax on the outside basis difference during the year. The Company's 2022 outlook for its effective 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. These assumptions are discussed further in Item 1A. Risk Factors.
Liquidity and Capital Resources
The Company's primary sources of liquidity include its Cash and cash equivalents, commercial paper program, bilateral letter of credit facilities, and revolving credit facility. The Company believes that these sources as well as cash flow generated through operations and existing debt capacity are adequate to meet its short-term and long-term cash requirements. The Company is not aware of any material trends, events, or uncertainties that would create any deficiencies in the Company's liquidity. During 2021, the Company obtained commitments for a 364-day senior unsecured facility (the "bridge facility") in the amount ofU.S. $8.5 billion to bridge debt financing required to fund a portion of the cash component of the KCS acquisition. This bridge facility was terminated onDecember 2, 2021 upon the issuance of debt. OnDecember 14, 2021 , the Company issued 262.6 million Common Shares to KCS common stockholders at the exchange ratio of 2.884 Common Shares per share of KCS common stock to fund the remaining component of the KCS acquisition.
As at
As atDecember 31, 2021 , the Company's revolving credit facility was undrawn, unchanged fromDecember 31, 2020 , from a total available amount ofU.S. $1.3 billion . EffectiveApril 9, 2021 , the Company amended its revolving credit facility to modify certain provisions relating to the calculation of the financial covenant ratio in its revolving credit facility. EffectiveSeptember 24, 2021 , the Company entered into an amendment to extend the two-year tranche and the five-year tranche of its revolving credit facility toSeptember 27, 2023 andSeptember 27, 2026 , respectively. EffectiveSeptember 29, 2021 , the Company entered into a further amendment to its revolving credit facility in order to provide financial covenant flexibility for the anticipated acquisition financing pertaining to the KCS acquisition, which is in place for a two-year period from the date the acquisition closed. In 2021, the Company also entered into aU.S. $500 million unsecured non-revolving term credit facility with a maturity date ofMarch 15, 2022 . As atDecember 31, 2021 , the unsecured non-revolving term credit facility was fully drawn. The credit facility agreements require the Company to maintain a financial covenant. As at -------------------------------------------------------------------------------- CP 2021 ANNUAL REPORT 64 December 31, 2021, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenants. 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 atDecember 31, 2021 , total commercial paper borrowings wereU.S. $265 million (December 31, 2020 -U.S. $644 million ). As atDecember 31, 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 (December 31, 2020 -$59 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 atDecember 31, 2021 , the Company did not have any collateral posted on its bilateral letter of credit facilities (December 31, 2020 - $nil).
Contractual Commitments
The Company's material cash requirements from known contractual obligations and commitments to make future payments primarily consist of long-term debt and related interest, supplier purchases, leases, and other long term liabilities. Outstanding obligations related to debt and leases can be found in Item 8. Financial Statements and Supplementary Data, Note 18 Debt and Note 21 Leases. Interest obligations related to debt and finance leases amount to$634 million within the next 12 months, with the remaining amount committed thereafter of$13,503 million . Supplier purchase agreements and other long-term liabilities amount to$676 million and$56 million within the next 12 months, respectively, with the remaining amount committed thereafter of$914 million and$435 million , respectively. Other long-term liabilities includes expected cash payments for environmental remediation, post-retirement benefits, worker's compensation benefits, long-term disability benefits, pension benefit payments for the Company's non-registered supplemental pension plan, and certain other long-term liabilities. Pension payments are discussed further in Critical Accounting Estimates of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Guarantees
Refer to Item 8. Financial Statements and Supplementary Data, Note 28 Guarantees for details.
Operating Activities Cash provided by operating activities was$3,688 million in 2021, an increase of$886 million , or 32%, compared to$2,802 million in 2020. This increase was primarily due to higher cash generating income as a result of the$845 million merger termination payment received from KCS in the second quarter of 2021.
Cash provided by operating activities was
Investing Activities Cash used in investing activities was$13,730 million in 2021, an increase of$11,700 million , or 576%, from$2,030 million in 2020. This increase was primarily due to cash payments made to KCS and their stockholders for the acquisition of KCS, compared to the acquisition of DRTP in 2020, as well as lower additions to properties during 2021. Cash used in investing activities was$2,030 million in 2020, an increase of$227 million , or 13%, from$1,803 million in 2019. This increase was primarily due to the acquisition of DRTP in 2020, compared to the acquisition of CMQ in 2019. --------------------------------------------------------------------------------
65 CP 2021 ANNUAL REPORT Capital Programs For the year endedDecember 31 (in millions of Canadian dollars, except for track miles and crossties) 2021 2020 2019 Additions to capital Track and roadway$ 970 $ 1,161 $ 1,004 Rolling stock 297 253 393 Information systems software 47 45 55 Buildings 105 103 58 Other 132 126 154 Total - accrued additions to capital 1,551 1,688 1,664 Less: Non-cash transactions 19 17 17 Cash invested in additions to properties (per Consolidated Statements of Cash Flows)$ 1,532 $ 1,671 $ 1,647 Track installation capital programs Track miles of rail laid (miles) 284 301 246 Track miles of rail capacity expansion (miles) 9 28 11 Crossties installed (thousands) 1,222
1,417 1,122
Track and roadway expenditures include the replacement and enhancement of the Company's track infrastructure. Of the$970 million additions in 2021 (2020 -$1,161 million ), approximately$907 million (2020 -$1,008 million ) was invested in the renewal of depleted assets, namely rail, ties, ballast, signals, and bridges. Approximately$10 million (2020 -$25 million ) was spent on Positive Train Control compliance requirements and$53 million (2020 -$128 million ) was invested in network improvements and growth initiatives.
Rolling stock investments encompass locomotives and railcars. In 2021,
expenditures on locomotives were approximately
In 2021, CP invested approximately$47 million (2020 -$45 million ) in information systems software primarily focused on rationalizing and enhancing business systems and providing real-time data. Investments in buildings were approximately$105 million (2020 -$103 million ) and included items such as facility upgrades, renovations and shop equipment. Other items were$132 million (2020 -$126 million ) and included investments in containers, work equipment and vehicles. For 2022, CP expects to invest approximately$1.55 billion in its capital programs, which will be financed with cash generated from operations. Approximately 60% to 70% of the planned capital programs is for track and roadway. Approximately 15% to 20% is expected to be allocated to rolling stock, including railcars and locomotive improvements. Approximately 5% is expected to be allocated to information services, and 5% is expected to be allocated to buildings. Other investments is expected to be 5% to 10%. Additional discussion of capital commitments can be found in Item 8. Financial Statements and Supplementary Data, Note 27 Commitments and Contingencies. Free Cash CP generated positive Free cash of$1,793 million in 2021, an increase of$636 million , or 55%, from$1,157 million in 2020. This increase was primarily due to an increase in cash provided by operating activities, before the Merger termination fee and Acquisition-related costs from KCS, and lower capital additions. CP generated positive Free cash of$1,157 million in 2020, a decrease of$200 million , or 15%, from$1,357 million in 2019. This decrease was primarily due to a decrease in cash provided by operating activities. Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's capital programs. The 2021 capital programs are discussed above. Free cash is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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CP 2021 ANNUAL REPORT 66
Financing Activities
Cash provided by financing activities was $9,936 million in 2021, a change of
$10,700 million , or 1401%, from cash used in financing activities of $764
million in 2020. This change was primarily due to issuances of U.S $6.7 billion
and $2.2 billion notes and a U.S. $500 million term loan to fund the cash
consideration component of the KCS acquisition, as well as a pause on payments
to buy back shares under the Company's share repurchase program due to the KCS
acquisition.
This was partially offset by:
•issuances of U.S. $500 million 2.050% notes due March 5, 2030 and $300 million
3.050% notes due March 9, 2050 in 2020;
•net repayments of commercial paper during 2021 compared to net issuances during
2020;
•principal repayment of U.S. $250 million of the Company's 9.450% notes at
maturity in August 2021 ;
•acquisition-related financing fees; and
•higher dividends paid in 2021.
Cash used in financing activities was $764 million in 2020, a decrease of $347
million , or 31%, from $1,111 million in 2019. This decrease was primarily due to
the issuances of U.S. $500 million 2.050% notes due March 5, 2030 and $300
million 3.050% notes due March 9, 2050 in 2020, compared to the issuance of $400
million 3.150% notes due March 13, 2029 in 2019, as well as the principal
repayment of U.S. $350 million of the Company's 7.250% notes at maturity in May
2019 . This was partially offset by higher payments to buy back shares under the
Company's share repurchase program, lower net issuances of commercial paper
during 2020, and higher dividends paid during 2020.
Credit Measures
Credit ratings provide information relating to the Company's operations and
liquidity, and affect the Company's ability to obtain short-term and long-term
financing and/or the cost of such financing.
A 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 atDecember 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 KCS transaction.
Credit ratings as at
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 stable
Commercial paper program Standard & Poor's A-2 N/A Moody's P-2 N/A (1) Credit ratings are not recommendations to purchase, hold, or sell securities and do not address the market price or suitability of a specific security for a particular investor. Credit ratings are based on the rating agencies' methodologies and may be subject to revision or withdrawal at any time by the rating agencies. Financial Ratios The Long-term debt to Net income ratio was 7.1 in 2021, compared with 4.0 in 2020 and 3.6 in 2019. These increases were primarily due to higher debt. --------------------------------------------------------------------------------
67 CP 2021 ANNUAL REPORT
The Adjusted net debt to Adjusted earnings before interest, tax, depreciation,
and amortization ("EBITDA") ratio was 4.8 in 2021, compared with 2.5 in 2020 and
2.4 in 2019. The increase in the ratio from 2020 to 2021 was primarily due to a
higher debt balance in connection with the KCS acquisition. The increase from
2019 to 2020 was primarily due to a higher debt balance, partially offset by an
increase in Adjusted EBITDA. Adjusted net debt to Adjusted EBITDA ratio is
defined and reconciled in Non-GAAP Measures of this Item 7. 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, fair value gain or loss on FX forward contracts and interest rate hedges,
FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term
debt to fund the KCS acquisition, and transaction costs (net of tax) incurred by
KCS which were recognized within the Equity loss of KCS), the merger termination
payment received, changes in the outside basis tax difference between the
carrying amount of CP's equity investment in KCS and its tax basis of the
investment, changes in income tax rates, and a change to an uncertain tax item.
KCS has also recognized significant transaction costs and FX gains and losses.
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 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
Dividend Payout Ratio
The dividend payout ratio was 18.2% in 2021, compared with 19.8% in 2020 and
17.9% in 2019. The decrease in the ratio from 2020 to 2021 was due to higher
diluted EPS, partially offset by higher dividends declared per share. The
increase in the ratio from 2019 to 2020 was due to higher dividends declared per
share, partially offset by higher diluted EPS.
The Adjusted dividend payout ratio was 20.2% in 2021, compared with 20.1% in
2020 and 19.1% in 2019. These increases were due to higher dividends declared
per share, partially offset by higher Adjusted diluted EPS. Adjusted dividend
payout ratio is defined and reconciled in Non-GAAP Measures of this Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Over the long term, CP targets an Adjusted dividend payout ratio of
25.0% to 30.0%.
Although CP has provided a target Non-GAAP measure (Adjusted dividend payout
ratio), management is unable to reconcile, without unreasonable efforts, the
target Adjusted dividend payout ratio to the most comparable GAAP measure
(Dividend payout 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, fair value gain or loss
on FX forward contracts and interest rate hedges, FX gain on U.S.
dollar-denominated cash on hand from the issuances of long-term debt to fund the
KCS acquisition, and transaction costs (net of tax) incurred by KCS which were
recognized within the Equity loss of KCS), the merger termination payment
received, outside basis tax differences related to KCS equity earnings or loss,
changes in income tax rates, and a change to an uncertain tax item. KCS has also
recognized significant transaction costs and FX gains and losses. These or other
similar, large unforeseen transactions affect Diluted EPS but may be excluded
from CP's Adjusted diluted EPS. 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 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 7.
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 of Canadian
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 of the date of the filing of the Form 10-K, CPRC had U.S. $12,050 million
principal amount of debt securities outstanding due through 2115, and U.S. $30
million and GBP £3 million in perpetual 4% consolidated debenture stock, for all
of which CPRL is the guarantor subject to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), as amended. As of the same
date, CPRC also had $3,300 million principal amount of debt securities issued
under Canadian Securities Law due through 2050 for which CPRL is the guarantor
and not subject to the Exchange Act.
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.
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CP 2021 ANNUAL REPORT 68
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 annual report.
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