CANADIAN PACIFIC KANSAS CITY LIMITED
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 Interim Consolidated Financial Statements and the related notes for
the three months ended March 31, 2022 in Item 1. Financial Statements, other
information in this report, and Item 8. Financial Statements and Supplementary
Data of the Company's 2021 Annual Report on Form 10-K. Except where otherwise
indicated, all financial information reflected herein is expressed in Canadian
dollars.
For purposes of this report, all references herein to "CP", "the Company", "we",
"our" and "us" refer to 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.
Available Information
CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to theSecurities and Exchange Commission ("SEC"). Our website also contains charters for our Board of Directors and each of its committees, our corporate governance guidelines and our Code of Business Ethics.SEC filings made by CP are also accessible through theSEC's website at www.sec.gov. The information on our website is not part of this quarterly report on Form 10-Q. The Company has included the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits to this report. Executive Summary
First Quarter of 2022 Results
•Financial performance - In the first quarter of 2022, CP reported Diluted
earnings per share ("EPS") of $0.63 and Adjusted diluted EPS of $0.63 , both a
decrease of 30% compared to the same period in 2021. Core adjusted diluted EPS,
which excludes the impact of Kansas City Southern ("KCS") purchase accounting,
was $0.67 in the first quarter of 2022, a decrease of 26% compared to the same
period of 2021. These decreases were primarily due to a higher average number of
shares outstanding due to shares issued for the KCS acquisition and lower
volumes as measured by revenue ton-miles ("RTM"), partially offset by equity
earnings of KCS.
CP reported Net income of $590 million and Adjusted income was $588 million in
the first quarter of 2022, both a decrease of 2% compared to the same period in
2021. These decreases were primarily due to lower volumes as measured by RTMs
and lower gains on land sales, partially offset by equity earnings of KCS. Core
adjusted income, which excludes the impact of KCS purchase accounting from
Adjusted income, was $628 million in the first quarter of 2022, an increase of
5% compared to the same period of 2021. This increase was due to equity earnings
of KCS, adjusted for acquisition-related costs incurred by KCS and the impact of
KCS purchase accounting, partially offset by lower volumes as measured by RTMs.
CP reported an Operating ratio of 70.9% in the first quarter of 2022, a 1,070
basis point increase compared to the same period of 2021. Adjusted operating
ratio was 69.8%, a 1,130 basis point increase compared to the same period of
2021. These increases were primarily due to lower volumes as measured by RTMs,
lower gains on land sale, cost inflation and the unfavourable impact of changes
in fuel prices, net of recoveries.
Adjusted diluted EPS, Core adjusted diluted EPS, Adjusted income, Core adjusted income, and Adjusted Operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
•Total revenues - Total revenues decreased by 6% in the first quarter of 2022 to$1,838 million compared to the same period of 2021. This decrease was primarily due to lower volumes as measured by RTMs, partially offset by increased freight revenue per RTM. •Operating performance - CP's average train weight was flat at 9,757 tons as a result of lower volumes of heavier commodities such as Canadian Grain and Coal, offset by improvements in operating plan efficiency. CP's average train length increased by 1% to 8,050 feet, compared to the same period in 2021. This increase was a result of improvements in operating plan efficiency. These metrics are discussed further in Performance Indicators of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 17
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Recent Developments
•OnMarch 16, 2022 , CP issued a 72-hour notice to theTeamsters Canada Rail Conference ("TCRC") - Train & Engine, of its plan to lock-out employees at00:01 Eastern Time onMarch 20, 2022 if the TCRC leadership and the Company were unable to come to a negotiated settlement or agree to binding arbitration. The TCRC represents approximately 3,000 locomotive engineers, conductors, and train and yard workers acrossCanada . OnMarch 19, 2022 , while the Company was still engaged in ongoing negotiations facilitated by federal mediators, the TCRC withdrew its services in the final hours before the deadline for a legal strike or lockout to potentially occur. OnMarch 22, 2022 , CP reached an agreement with the TCRC Negotiating Committee to enter into binding arbitration. This agreement enabled CP employees to return to work effective noonMarch 22, 2022 local time to resume our essential services for our customers and the North American supply chain.
The work stoppage resulted in lower volumes during the first quarter. Once the
TCRC members returned to work on
•The United States Surface Transportation Board's ("STB") review of CP's
proposed control of KCS while KCS is in the voting trust is expected to be
completed in the first quarter of 2023. Prior to obtaining STB control approval,
KCS's management and Board of Directors will continue to steward KCS while it is
in trust, pursuing its independent business plan and growth strategies.
Specific risk factors related to the KCS acquisition and pending KCS business
combination are provided in Part I, Item 1A. Risk Factors of the Company's 2021
Annual Report on Form 10-K.
•In the first quarter of 2022, CP's Pandemic Team continued to proactively
monitor guidance and orders from governments, public health authorities, and
regulatory agencies.
Additional information concerning the impact that COVID-19 may have to our future business and results of operations is provided in Part I, Item 1A. Risk Factors of the Company's 2021 Annual Report on Form 10-K.
Performance Indicators
The following table lists the key measures of the Company's operating performance:
For the three months ended
2022 2021 % Change
Operations Performance
Gross ton-miles ("GTMs") (millions) 62,182 71,326 (13)
Train miles (thousands) 6,893 7,803 (12)
Average train weight - excluding local traffic (tons) 9,757 9,795 -
Average train length - excluding local traffic (feet) 8,050 7,972 1
Average terminal dwell (hours) 8.7 7.4 18
Average train speed (miles per hour, or "mph") 21.2 20.9 1
Locomotive productivity (GTMs / operating horsepower) 178 201 (11)
Fuel efficiency (
0.994 0.958 4
Total Employees and Workforce
Total employees (average) 11,767 12,061 (2)
Total employees (end of period) 11,942 12,398 (4)
Workforce (end of period) 11,977 12,426 (4)
Safety Indicators(1)
FRA personal injuries per 200,000 employee-hours 1.31 1.16 13
FRA train accidents per million train-miles 1.04 1.39 (25)
(1)Federal Railroad Administration ("FRA") personal injuries per 200,000
employee-hours for the three months ended March 31, 2021 , previously reported as
1.20, was restated to 1.16 in this Earnings Release. FRA train accidents per
million train-miles for the three months ended March 31, 2021 , previously
reported as 1.28, was restated to 1.39 in this Earnings Release. These
restatements reflect new information available within specified periods
stipulated by the FRA but that exceed the Company's financial reporting
timeline.
For key measures of the Company's revenue performance, refer to Operating Revenues of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Operations Performance
These key measures are used by management as comparisons to historical operating results and in the planning process to facilitate decisions that continue to drive further productivity improvements in the Company's operations. Results of these key measures reflect how effective CP's management is at controlling costs and executing the Company's operating plan and strategy. Continued monitoring of these key measures ensures that the Company can take appropriate actions to ensure the delivery of superior service and be able to grow its business at low incremental cost.
Three months ended
•A GTM is defined as the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs decreased by 13% in the first quarter of 2022 compared to the same period of 2021. This decrease was primarily driven by lower volumes of Canadian grain, Energy, chemicals and plastics, and Coal. This decrease was partially offset by higher volumes ofU.S. grain. •Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles provide a measure of the productive utilization of our network. A smaller increase in train miles relative to increases in volumes, as measured by RTMs, and/or workload, as measured by GTMs, indicate improved train productivity. Train miles decreased by 12% in the first quarter of 2022 compared to the same period of 2021. This decrease was driven by a 13% decrease in GTMs. •Average train weight is defined as the average gross weight of CP trains, both loaded and empty. This excludes trains in short-haul service, work trains used to move CP's track equipment and materials, and the haulage of other railroads' trains on CP's network. An increase in average train weight indicates improved asset utilization and may also be the result of moving heavier commodities. Average train weight was flat in the first quarter of 2022 compared to the same period of 2021. •Average train length is defined as the average total length of CP trains, both loaded and empty. This includes all cars and locomotives on the train and is calculated as the sum of each car or locomotive's length multiplied by the distance travelled, divided by train miles. This excludes trains in short-haul service, work trains used to move CP's track equipment and materials, and the haulage of other railroads' trains on CP's network. An increase in average train length indicates improved asset utilization. Average train length increased by 1% in the first quarter of 2022 compared to the same period of 2021. This increase was a result of improvements in operating plan efficiency. •Average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving at the terminal, a customer releasing the car to the Company, or a car arriving at interchange from another railroad. The timing ends when the train leaves, a customer receives the car from CP, or the freight car is transferred to another railroad. Freight cars are excluded if they are being stored at the terminal or used in track repairs. A decrease in average terminal dwell indicates improved terminal performance resulting in faster cycle times and improved railcar utilization. Average terminal dwell increased by 18% in the first quarter of 2022 compared to the same period of 2021, primarily as a result of proportionally lower volumes of bulk commodities which require less processing time in yards, and harsher winter operating conditions. •Average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It is calculated by dividing the total train miles travelled by the total train hours operated. This calculation does not include delay time related to customers or foreign railroads and excludes the time and distance travelled by: i) trains used in or around CP's yards; ii) passenger trains; and iii) trains used for repairing track. An increase in average train speed indicates improved on-time performance resulting in improved asset utilization. Average train speed increased by 1% in the first quarter of 2022 compared to the same period of 2021 primarily as a result of lower volumes of Canadian grain and Coal trains through westernCanada , which generally have lower train speeds. •Locomotive productivity is defined as the daily average GTMs divided by daily average operating horsepower. Operating horsepower excludes units offline, tied up or in storage, or in use on other railways, and includes foreign units online. An increase in locomotive productivity indicates more efficient locomotive utilization and may also be the result of moving heavier commodities. Locomotive productivity decreased by 11% in the first quarter of 2022 compared to the same period of 2021 as a result of harsher winter operating conditions. •Fuel efficiency is defined asU.S. gallons of locomotive fuel consumed per 1,000 GTMs. Fuel consumed includes gallons from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. An improvement in fuel efficiency indicates operational cost savings and CP's commitment to corporate sustainability through a reduction of greenhouse gas emissions intensity. Fuel efficiency decreased by 4% in the first quarter of 2022 compared to the same period of 2021. This decrease in efficiency was due to lower locomotive productivity and harsher winter operating conditions. 19
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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 was 11,767 for the three months endedMarch 31, 2022 , a decrease of 294 or 2% for the three months endedMarch 31, 2022 , compared to 12,061 for the same period of 2021. The total number of employees as atMarch 31, 2022 was 11,942, a decrease of 456, or 4%, compared to 12,398 as atMarch 31, 2021 . The total workforce as atMarch 31, 2022 was 11,977, a decrease of 449 or 4%, compared to 12,426 as atMarch 31, 2021 . The decrease in total employees (average), total employees (end of period) and workforce is to accommodate a decrease in workload. Safety Indicators Safety is a key priority and core strategy for CP's management, employees, and Board of Directors. Personal injuries and train accidents are indicators of the effectiveness of the Company's safety systems, and are used by management to evaluate and, as necessary, alter the Company's safety systems, procedures, and protocols. Each measure followsU.S. FRA reporting guidelines, which can result in restatement after initial publication to reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline. The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties, or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 1.31 in the first quarter of 2022, an increase from 1.16 in the same period of 2021. 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. $11,300 in 2022 andU.S. $11,200 in damage for 2021. The FRA train accidents per million train-miles was 1.04 in the first quarter of 2022, a decrease from 1.39 in the same period of 2021.
20
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Financial Highlights
The following table presents selected financial data related to the Company's financial results as of, and for the three months ended,March 31, 2022 and the comparative figures in 2021. The financial highlights should be read in conjunction with Item 1. Financial Statements and this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. For the three
months ended
2022 2021
Financial Performance and Liquidity
Total revenues $ 1,838 $ 1,959
Operating income 535 780
Adjusted operating income(1) 555 813
Net income 590 602
Adjusted income(1) 588 600
Core adjusted income(1) 628 600
Basic EPS 0.63 0.90
Diluted EPS 0.63 0.90
Adjusted diluted EPS(1) 0.63 0.90
Core adjusted diluted EPS(1) 0.67 0.90
Dividends declared per share 0.190 0.190
Cash provided by operating activities 613 582
Cash used in investing activities (206) (286)
Cash used in financing activities (391) (80)
Free cash(1) 424 296
Financial Position As at March 31, 2022 As at December 31, 2021
Total assets $ 67,592 $ 68,177
Total long-term debt, including current portion 19,663 20,127
Total shareholders' equity 33,985 33,829
For the three months ended March 31
Financial Ratios 2022 2021
Operating ratio(2) 70.9 % 60.2 %
Adjusted operating ratio(1) 69.8 % 58.5 %
For the twelve months ended March 31
2022 2021
Return on average shareholders' equity(3) 13.6 % 35.6 %
Adjusted return on invested capital ("Adjusted
ROIC")(1) 8.2 % 15.8 %
Long-term debt to Net income ratio(4) 6.9 3.7
Adjusted net debt to adjusted EBITDA ratio(1) 4.7 2.4
Pro-forma adjusted Net Debt to Pro-forma adjusted
EBITDA Ratio(1) 4.1 N/A
(1)These measures have no standardized meanings prescribed by accounting
principles generally accepted in the United States of America ("GAAP") and,
therefore, may not be comparable to similar measures presented by other
companies. These measures are defined and reconciled in Non-GAAP Measures of
this Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(2)Operating ratio is defined as operating expenses divided by revenues, further
discussed in Results of Operations of this Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(3)Return on average shareholders' equity is defined as Net income divided by
average shareholders' equity, averaged between the beginning and ending balance
over a trailing twelve month period, further discussed in Results of Operations
of this Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(4)Long-term debt to Net income ratio is defined as long-term debt, including
long-term debt maturing within one year, divided by Net income, further
discussed in Liquidity and Capital Resources of this Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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Results of Operations
Three months ended
Income Operating income was$535 million in the first quarter of 2022, a decrease of$245 million , or 31%, from$780 million in the same period of 2021. This decrease was primarily due to: •lower freight volumes as measured by RTMs; •a gain on exchange of property and easements inChicago of$50 million in 2021; •cost inflation; and •higher operating costs primarily driven by harsher winter operating conditions.
This decrease was partially offset by higher freight rates and lower casualty costs incurred in 2022.
Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$555 million in the first quarter of 2022, a decrease of$258 million , or 32%, from$813 million in the same period of 2021. This decrease reflected the same factors discussed above except that Adjusted operating income excludes the acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other in both periods. Net income was$590 million in the first quarter of 2022, a decrease of$12 million , or 2%, from$602 million in the same period of 2021. This decrease was primarily due to lower Operating income and higher interest expense primarily due to debt issued related to the KCS acquisition, partially offset by equity earnings of KCS and lower income tax expense due to lower taxable earnings. Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$588 million in the first quarter of 2022, a decrease of$12 million , or 2%, from$600 million in the same period of 2021. This decrease was primarily due to lower Adjusted operating income, partially offset by equity earnings of KCS excluding acquisition-related costs incurred by KCS. Core adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$628 million in the first quarter of 2022, an increase of$28 million , or 5%, from$600 million in the same period of 2021. This increase was due to equity earnings of KCS excluding acquisition-related costs and the impact of KCS purchase accounting and lower income tax expense on taxable earnings, partially offset by lower Adjusted operating income and higher interest expense due to debt issued related to the KCS acquisition.
Diluted Earnings per Share
Diluted EPS was$0.63 in the first quarter of 2022, a decrease of$0.27 , or 30%, from$0.90 in the same period of 2021. This decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition and lower Net income. Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$0.63 in the first quarter of 2022, a decrease of$0.27 , or 30%, from$0.90 in the same period of 2021. This decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition and lower Adjusted income. Core adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was$0.67 in the first quarter of 2022, a decrease of$0.23 , or 26%, from$0.90 in the same period of 2021. The decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition, partially offset by higher Core adjusted income.
Operating Ratio
The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company's Operating ratio was 70.9% in the first quarter of 2022, a 1,070 basis point increase from 60.2% in the same period of 2021. This increase was primarily due to: •lower freight volumes as measured by RTMs; •a gain on exchange of property and easements inChicago in 2021; •cost inflation; •the unfavourable impact of changes in fuel prices, net of recoveries; and •higher operating costs primarily driven by harsher winter operating conditions.
This increase was partially offset by higher freight rates.
22
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Adjusted operating ratio, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, which excludes the acquisition-related costs associated with the KCS transaction, was 69.8% in the first quarter of 2022, a 1,130 basis points increase from the same period of 2021. This increase was due to the same factors discussed above for the increase in Operating ratio.
Return on Average Shareholders' Equity and Adjusted Return on
Return on average shareholders' equity and Adjusted ROIC are measures used by management to determine how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions. Adjusted ROIC is also an important performance criteria in determining certain elements of the Company's long-term incentive plan. Return on average shareholders' equity was 13.6% for the twelve months endedMarch 31, 2022 , a 2,200 basis point decrease compared to 35.6% for the twelve months endedMarch 31, 2021 , primarily due to higher average shareholder's equity driven by shares issued for the KCS acquisition and accumulated Net income. Adjusted ROIC was 8.2% for the twelve months endedMarch 31, 2022 , a 760 basis point decrease compared to 15.8% for the twelve months endedMarch 31, 2021 , primarily due to the shares issued for the KCS acquisition and higher average long-term debt, and accumulated Adjusted 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Impact of FX on Earnings
Fluctuations in FX affect the Company's results becauseU.S. dollar-denominated revenues and expenses are translated into Canadian dollars.U.S. dollar-denominated revenues and expenses increase (decrease) when the Canadian dollar weakens (strengthens) in relation to theU.S. dollar.
On
The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and theU.S. dollar expressed in the Canadian dollar equivalent ofone U.S. dollar , the high and low exchange rates and period end exchange rates for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by theU.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of theFederal Reserve Board .
Average exchange rates (Canadian/
$ 1.27 $ 1.27 Ending exchange rates (Canadian/U.S. dollar) 2022 2021 Beginning of year - January 1$ 1.28 $ 1.28 End of quarter - March 31$ 1.25 $ 1.26 For the three months ended March 31 High/Low exchange rates (Canadian/U.S. dollar) 2022 2021 High$ 1.29 $ 1.28 Low$ 1.25 $ 1.24
In the first quarter of 2022, the impact of a slightly stronger
The impact of FX on total revenues and operating expenses is discussed further
in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the
Foreign Exchange Risk section.
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Impact of Fuel Price on Earnings
Fluctuations in fuel prices affect the Company's results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be an impact on earnings due to the timing of recoveries from CP's fuel cost adjustment program. The following table indicates the average fuel price for the three months endedMarch 31, 2022 and the comparative periods of 2021.
Average Fuel Price (
$ 3.49 $ 2.39
The impact of fuel prices on earnings includes the impacts of carbon taxes, levies, and obligations under cap-and-trade programs recovered and paid, on revenues and expenses, respectively.
In the first quarter of 2022, the favourable impact of fuel prices on Operating income was$17 million . Higher fuel prices and increased carbon tax recoveries resulted in an increase in Total revenues of$113 million from the same period of 2021. Higher fuel prices resulted in an increase in Total operating expenses of$96 million .
Impact of Share Price on Earnings
Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on theToronto Stock Exchange ("TSX") and theNew York Stock Exchange ("NYSE") with ticker symbol "CP". The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for the three months endedMarch 31, 2022 and the comparative period in 2021. TSX (in Canadian dollars) 2022 2021 Opening Common Share price, as at January 1$ 90.98 $ 88.31 Ending Common Share price, as at March 31$ 103.18 $ 96.00 Change in Common Share price for the three months ended March 31$ 12.20 $ 7.69 NYSE (in U.S. dollars) 2022 2021 Opening Common Share price, as at January 1$ 71.94 $ 69.34 Ending Common Share price, as at March 31 $
82.54
In the first quarter of 2022, the impact of the change in Common Share prices
resulted in an increase in stock-based compensation expense of
The impact of share price on stock-based compensation is discussed further in
Item 3. Quantitative and Qualitative Disclosures About Market Risk , Share Price Impact on Stock-Based Compensation.
Operating Revenues
The Company's revenues are primarily derived from transporting freight. Changes
in freight volumes generally contribute to corresponding changes in freight
revenues and certain variable expenses, such as fuel, equipment rents, and crew
costs. Non-freight revenue is generated from leasing of certain assets; other
arrangements, including contracts with passenger service operators and
logistical services; and switching fees.
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FX Adjusted
For the three months ended
(6) (6)
Non-freight revenues (in millions) 42 41 1 2 2
Total revenues (in millions) $ 1,838 $ 1,959 $ (121) (6) (6)
Carloads (in thousands) 625.7 691.4 (65.7) (10) N/A
Revenue ton-miles (in millions) 33,693 39,273 (5,580) (14) N/A
Freight revenue per carload (in dollars)
96 3 3 Freight revenue per revenue ton-mile (in cents) 5.33 4.88 0.45 9 9 (1)Freight revenues include fuel surcharge revenues of$189 million in 2022 and$85 million in 2021. Fuel surcharge revenues include recoveries of carbon taxes, levies, and obligations under cap-and-trade programs. (2)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Freight revenues were
RTMs are defined as the movement of one revenue-producing ton of freight over a distance of one mile. RTMs measure the relative weight and distance of rail freight moved by the Company. RTMs for the first quarter of 2022 were 33,693 million, a decrease of 5,580 million, or 14%, compared with 39,273 million in the same period of 2021. This decrease was mainly attributable to lower volumes of Canadian grain, Coal, and Energy, chemicals and plastics. This decrease was partially offset by higher volumes ofU.S. grain. The work stoppage contributed to the reduction in volumes during the first quarter. Once the TCRC members returned to work onMarch 22, 2022 , the Company quickly re-established service. 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 was5.33 cents in the first quarter of 2022, an increase of0.45 cents , or 9%, from4.88 cents in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of$113 million and higher freight rates. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts. Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 625.7 thousand in the first quarter of 2022, a decrease of 65.7 thousand, or 10%, from 691.4 thousand in the same period of 2021. This decrease was primarily due to lower volumes of Canadian grain, Energy, chemicals and plastics, and Automotive. This decrease was partially offset by higher volumes ofU.S. grain. 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$2,870 in the first quarter of 2022, an increase of$96 , or 3%, from$2,774 in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of$113 million and higher freight rates. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts. Non-freight revenues were$42 million in the first quarter of 2022, an increase of$1 million , or 2%, from$41 million in the same period of 2021. This increase was primarily due to revenue recognized for construction easements inChicago of$3 million , higher revenue from passenger service operators, and higher leasing revenues, partially offset by lower revenue from logistical services and switching fees.
Fuel Cost Adjustment Program
Freight revenues include fuel surcharge revenues associated with CP's fuel cost adjustment program, which is designed to respond to fluctuations in fuel prices and help reduce exposure to changing fuel prices. The surcharge is applied to shippers through tariffs and by contract, within agreed-upon guidelines. This program includes recoveries of carbon taxes, levies, and obligations under cap-and-trade programs. Freight revenues included fuel surcharge revenues of$189 million in the first quarter of 2022, an increase of$104 million , or 122%, from$85 million in the same period of 2021. This increase was primarily due to higher fuel prices and increased carbon tax recoveries, partially offset by lower volumes. 25
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Lines of Business
Grain
FX Adjusted
For the three months ended March 31 2022 2021 Total Change % Change % Change(1)
Freight revenues (in millions) $ 360 $ 448 $ (88) (20) (20)
Carloads (in thousands) 83.7 116.4 (32.7) (28) N/A
Revenue ton-miles (in millions) 7,974 10,773 (2,799) (26) N/A
Freight revenue per carload (in dollars)
452 12 12 Freight revenue per revenue ton-mile (in cents) 4.51 4.16 0.35 8 8 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Grain revenue was$360 million in the first quarter of 2022, a decrease of$88 million , or 20%, from$448 million in the same period of 2021. This decrease was primarily due to lower volumes of Canadian grain toVancouver and easternCanada due to drought conditions that impacted the Canadian crop size. This decrease was partially offset by higher volumes ofU.S. corn from theU.S. Midwest to westernCanada and increased freight revenue per RTM. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. Carloads decreased more than RTMs due to moving higher volumes ofU.S. corn from theU.S. Midwest to westernCanada , which has a longer length of haul. Coal FX Adjusted For the three months ended March 31 2022 2021 Total Change % Change % Change(1) Freight revenues (in millions)$ 139 $ 163 $ (24) (15) (15) Carloads (in thousands) 69.9 72.0 (2.1) (3) N/A Revenue ton-miles (in millions) 3,997 5,280 (1,283) (24) N/A
Freight revenue per carload (in dollars)
(12)
Freight revenue per revenue ton-mile (in
cents) 3.48 3.09 0.39 13 13
(1)FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures presented
by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Coal revenue was $139 million in the first quarter of 2022, a decrease of $24
million , or 15%, from $163 million in the same period of 2021. This decrease was
primarily due to lower volumes of Canadian coal to Vancouver , partially offset
by higher volumes of Canadian coal to Kamloops, B.C. and increased freight
revenue per RTM. Freight revenue per RTM increased due to higher fuel surcharge
revenue as a result of higher fuel prices. RTMs decreased more than carloads due
to moving lower volumes of Canadian coal to Vancouver , which has a longer length
of haul, and moving higher volumes of Canadian coal to Kamloops, B.C. , which has
a shorter length of haul.
Potash
FX Adjusted
For the three months ended March 31 2022 2021 Total Change % Change % Change(1)
Freight revenues (in millions) $ 104 $ 101 $ 3 3 3
Carloads (in thousands) 32.1 34.4 (2.3) (7) N/A
Revenue ton-miles (in millions) 3,652 3,786 (134) (4) N/A
Freight revenue per carload (in dollars)
304 10 10 Freight revenue per revenue ton-mile (in cents) 2.85 2.67 0.18 7 7 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Potash revenue was$104 million in the first quarter of 2022, an increase of$3 million , or 3%, from$101 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of export potash to theU.S. Pacific Northwest due to prior year construction at thePort of Portland . This increase was partially offset by lower volumes of export potash toVancouver and lower volumes of domestic potash. Freight revenue per RTM increased due to higher fuel
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surcharge revenue as a result of higher fuel prices and higher freight rates. Carloads decreased more than RTMs due to moving lower volumes of domestic potash within westernCanada , which has a shorter length of haul.
Fertilizers and Sulphur
FX Adjusted
For the three months ended March 31 2022 2021 Total Change % Change % Change(1)
Freight revenues (in millions) $ 78 $ 77 $ 1 1 -
Carloads (in thousands) 15.9 16.3 (0.4) (2) N/A
Revenue ton-miles (in millions) 1,219 1,269 (50) (4) N/A
Freight revenue per carload (in dollars)
182 4 3 Freight revenue per revenue ton-mile (in cents) 6.40 6.07 0.33 5 4 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Fertilizers and sulphur revenue was$78 million in the first quarter of 2022, an increase of$1 million , or 1%, from$77 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM, partially offset by lower volumes of wet fertilizers. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of wet fertilizers fromAlberta to theU.S. Midwest, which has a longer length of haul. Forest Products FX Adjusted For the three months ended March 31 2022 2021 Total Change % Change % Change(1) Freight revenues (in millions)$ 86 $ 80 $ 6 8 8 Carloads (in thousands) 17.4 17.5 (0.1) (1) N/A Revenue ton-miles (in millions) 1,361 1,363 (2) - N/A
Freight revenue per carload (in dollars)
372 8 8 Freight revenue per revenue ton-mile (in cents) 6.32 5.87 0.45 8 8 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forest products revenue was$86 million in the first quarter of 2022, an increase of$6 million , or 8%, from$80 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of newsprint and wood pulp fromSaint John, NB , partially offset by lower volumes of lumber. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates.
Energy, Chemicals and Plastics
FX Adjusted
For the three months ended March 31 2022 2021 Total Change % Change % Change(1)
Freight revenues (in millions) $ 310 $ 388 $ (78) (20) (20)
Carloads (in thousands) 72.6 87.2 (14.6) (17) N/A
Revenue ton-miles (in millions) 5,907 7,142 (1,235) (17) N/A
Freight revenue per carload (in dollars)
(4) (4)
Freight revenue per revenue ton-mile (in
cents) 5.25 5.43 (0.18) (3) (3)
(1)FX Adjusted % Change does not have any standardized meaning prescribed by
GAAP and, therefore, is unlikely to be comparable to similar measures presented
by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Energy, chemicals and plastics revenue was $310 million in the first quarter of
2022, a decrease of $78 million , or 20%, from $388 million in the same period of
2021. This decrease was primarily due to lower volumes of crude, petroleum
products, chemicals, and plastics and decreased freight revenue per RTM. This
decrease was partially offset by higher fuel surcharge revenue as a result of
higher fuel prices and higher freight rates. Freight revenue per RTM decreased
due to lower crude liquidated damages, including customer volume commitments, as
a result of the completion of customer contracts.
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Metals, Minerals and Consumer Products
FX Adjusted
For the three months ended March 31 2022 2021 Total Change % Change % Change(1)
Freight revenues (in millions) $ 181 $ 159 $ 22 14 14
Carloads (in thousands) 54.6 55.7 (1.1) (2) N/A
Revenue ton-miles (in millions) 2,519 2,499 20 1 N/A
Freight revenue per carload (in dollars)
460 16 16 Freight revenue per revenue ton-mile (in cents) 7.19 6.36 0.83 13 13 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Metals, minerals and consumer products revenue was$181 million in the first quarter of 2022, an increase of$22 million , or 14%, from$159 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of frac sand, partially offset by lower volumes of steel, aggregates, and consumer products. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. Carloads decreased while RTMs increased due to moving lower volumes of aggregates and consumer products, which have a shorter length of haul. Automotive FX Adjusted For the three months ended March 31 2022 2021 Total Change % Change % Change(1) Freight revenues (in millions)$ 91 $ 108 $ (17) (16) (16) Carloads (in thousands) 24.1 33.4 (9.3) (28) N/A Revenue ton-miles (in millions) 403 508 (105) (21) N/A
Freight revenue per carload (in dollars)
542 17 17 Freight revenue per revenue ton-mile (in cents) 22.58 21.26 1.32 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Automotive revenue was$91 million in the first quarter of 2022, a decrease of$17 million , or 16%, from$108 million in the same period of 2021. This decrease was primarily due to lower volumes as a result of the global semiconductor chip shortage. This decrease was partially offset by increased freight revenue per RTM due to higher fuel surcharge revenue as a result of higher fuel prices. Carloads decreased more than RTMs due to moving proportionately lower volumes from theU.S. Midwest to theU.S. Northeast, which has a shorter length of haul. Intermodal FX Adjusted For the three months ended March 31 2022 2021 Total Change % Change % Change(1) Freight revenues (in millions)$ 447 $ 394 $ 53 13 13 Carloads (in thousands) 255.4 258.5 (3.1) (1) N/A Revenue ton-miles (in millions) 6,661 6,653 8 - N/A
Freight revenue per carload (in dollars)
226 15 15 Freight revenue per revenue ton-mile (in cents) 6.71 5.92 0.79 13 13 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Intermodal revenue was$447 million in the first quarter of 2022, an increase of$53 million , or 13%, from$394 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and onboarding new international intermodal customers. This increase was partially offset by lower volumes of international intermodal to and from thePort of Vancouver and lower volumes of domestic intermodal. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher intermodal ancillary revenue, and higher freight rates.
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Operating Expenses
For the three months endedMarch 31 (in millions of Canadian dollars) 2022 2021 Total Change % Change FX Adjusted % Change(1) Compensation and benefits$ 413 $ 405 $ 8 2 2 Fuel 273 206 67 33 33 Materials 62 59 3 5 5 Equipment rents 35 33 2 6 6 Depreciation and amortization 210 202 8 4 4 Purchased services and other 310 274 36 13 13 Total operating expenses$ 1,303 $ 1,179 $ 124 11 11 (1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operating expenses were$1,303 million in the first quarter of 2022, an increase of$124 million , or 11%, from$1,179 million in the same period of 2021. This increase was primarily due to: •the unfavourable impact of higher fuel prices of$96 million ; •a gain on exchange of property and easements inChicago of$50 million in 2021; •cost inflation; •higher operating costs primarily driven by harsher winter operating conditions; and •higher stock-based compensation of$20 million .
This increase was partially offset by lower volume variable expenses and lower casualty costs incurred in 2022.
Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was$413 million in the first quarter of 2022, an increase of$8 million , or 2%, from$405 million in the same period of 2021. This increase was primarily due to: •higher stock-based compensation of$20 million ; •the impact of wage and benefit inflation; •labour inefficiencies associated with the reduction in volumes; and •the impact of weather related costs as a result of harsher winter operating conditions. This increase was partially offset by: •lower volume variable expenses as a result of a decrease in workload as measured by GTMs; •decreased incentive compensation costs; and •lower defined benefit pension current service costs of$6 million .
Fuel
Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was$273 million in the first quarter of 2022, an increase of$67 million , or 33%, from$206 million in the same period of 2021. This increase was primarily due to the unfavourable impact of$96 million from higher fuel prices and a decrease in fuel efficiency of 4% due to lower locomotive productivity and harsher winter operating conditions. This increase was partially offset by a decrease in workload, as measured by GTMs. Materials Materials expense includes the cost of materials used for the maintenance of track, locomotives, freight cars, and buildings, as well as software sustainment. Materials expense was$62 million in the first quarter of 2022, an increase of$3 million , or 5% from$59 million in the same period of 2021. This increase was primarily due to the impact of inflation and increased fuel prices, partially offset by a decrease in freight car maintenance.
Equipment Rents
Equipment rents expense includes the cost associated with using other railways' freight cars, intermodal equipment, and locomotives, net of rental income received from other railroads for the use of CP's equipment. Equipment rents expense was$35 million in the first quarter of 2022, an increase of$2 million , or 6%, from$33 million in the same period of 2021. This increase was primarily due to inefficiencies in usage of pooled freight cars by CP as a result of harsher winter operating conditions.
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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$210 million in the first quarter of 2022, an increase of$8 million , or 4%, from$202 million in the same period of 2021. This increase was primarily due to a higher depreciable asset base.
Purchased Services and Other
For the three months endedMarch 31 (in millions of Canadian dollars) 2022 2021 Total Change % Change Support and facilities$ 84 $ 72 $ 12 17 Track and operations 73 60 13 22 Intermodal 51 53 (2) (4) Equipment 29 29 - - Casualty 21 39 (18) (46) Property taxes 35 34 1 3 Other 27 41 (14) (34) Land sales (10) (54) 44 (81)
Total Purchased services and other
Purchased services and other expense encompasses a wide range of third-party costs, including expenses for joint facilities, personal injuries and damage claims, environmental remediation, property taxes, contractor and consulting fees, insurance, and gains on land sales. Purchased services and other expense was$310 million in the first quarter of 2022, an increase of$36 million , or 13%, from$274 million in the same period of 2021. This increase was primarily due to: •a gain on exchange of property and easements inChicago of$50 million in 2021; •cost inflation; •a$7 million arbitration settlement in 2021, reported in Track and operations; and •increased purchased services due to harsher weather conditions, reported in Track and operations. This increase was partially offset by: •lower expenses primarily due to the reduced number of casualty incidents, reported in Casualty; •lower acquisition-related costs of$13 million associated with the KCS acquisition, reported in Other; and •lower variable expenses from lower volumes, reported in Intermodal, and Track and operations. Other Income Statement Items Equity Earnings ofKansas City Southern In the first quarter of 2022, the Company recognized$198 million (U.S. $156 million ) of equity income related to the KCS acquisition in the Company's Interim Consolidated Statements of Income. This amount is net of amortization of basis differences of$40 million (U.S. $31 million ) associated with KCS purchase accounting. No similar equity income existed in the same period of 2021 as CP acquired KCS into trust onDecember 14, 2021 . On a historical basis, without any effect of purchase accounting, KCS recorded net income attributable to controlling interests of$238 million (U.S. $187 million ) in the first quarter of 2022, an increase of$44 million (U.S. $34 million ), or 23%, from$194 million (U.S. $153 million ) in the same period of 2021. This increase was primarily due to higher revenues of$91 million (U.S. $72 million ) partially offset by higher fuel cost of$33 million (U.S. $26 million ). Acquisition-related costs (net of tax) incurred by KCS in the first quarter of 2022 were$13 million (U.S. $10 million ), a decrease of$6 million (U.S. $5 million ), or 32%, from$19 million (U.S. $15 million ) in the same period of 2021. These values have been translated at the average FX rate of$1.27 CAD per USD for the three months periods endedMarch 31, 2022 and 2021.
Other Income
Other 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 income was$1 million in the first quarter of 2022, a decrease of$27 million , or 96%, compared to income of$28 million in the same period of 2021. This decrease was primarily due to a FX translation gain of$33 million in the first quarter of 2021 and nil in the same period of 2022 as a result of the designation of allU.S. dollar-denominated debt and lease liabilities as a hedge of the Company's net investment in foreign operations following the acquisition of KCS in the fourth quarter of 2021. 30
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FX translation gains and losses on debt and lease liabilities are discussed further in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .
Other Components of Net Periodic Benefit Recovery
Other components of net periodic benefit recovery is related to the Company's pension and other post-retirement and post-employment benefit plans. It includes interest cost on benefit obligations, expected return on fund assets, recognized net actuarial losses, and amortization of prior service costs. Other components of net periodic benefit recovery was$101 million in the first quarter of 2022, an increase of$6 million , or 6%, from$95 million in the same period of 2021. This increase was due to a decrease in recognized net actuarial losses of$14 million , partially offset by an increase in the interest cost on benefit obligations of$8 million .
Net Interest Expense
Net interest expense includes interest on long-term debt and finance leases. Net interest expense was$160 million in the first quarter of 2022, an increase of$50 million , or 45%, from$110 million in the same period of 2021. This increase was primarily due to interest of$63 million incurred on long-term debt issued in the last quarter of 2021 related to the KCS acquisition, partially offset by the favourable impacts of$9 million related to repayment of maturing long-term debt and$4 million as a result of a lower effective interest rate.
Income Tax Expense
Income tax expense was$85 million in the first quarter of 2022, a decrease of$106 million , or 55%, from$191 million in the same period of 2021. This decrease was due to: •lower taxable earnings; •a deferred tax recovery on the change in the equity investment in KCS, driven by the dividend of$334 million received in the period, partially offset by equity earnings of KCS of$198 million ; and •a lower effective tax rate. The effective tax rate in the first quarter of 2022, including equity earnings of KCS and discrete items, was 12.67% compared to 24.05% in the same period of 2021. The effective tax rate in the first quarter of 2022, excluding equity earnings of KCS and discrete items, was 24.25%, compared to 24.60% in the same period of 2021. 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 annualized effective income tax rate is based on certain assumptions about events and developments that may or may not materialize or that may be offset entirely or partially by new events and developments. This is discussed further in Item 1A. Risk Factors of CP's 2021 Annual Report on Form 10-K.
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.
As at
As atMarch 31, 2022 , the Company's existing revolving credit facility was undrawn, unchanged fromDecember 31, 2021 , from a total available amount ofU.S. $1.3 billion . EffectiveMarch 14, 2022 , the Company amended itsU.S. $500 million unsecured non-revolving term credit facility, extending the maturity toSeptember 15, 2022 . As atMarch 31, 2022 , the unsecured non-revolving term credit facility was fully drawn, unchanged fromDecember 31, 2021 . The credit facility agreements require the Company to maintain a financial covenant. As atMarch 31, 2022 , the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenant. The Company has a commercial paper program that enables it to issue commercial paper up to a maximum aggregate principal amount ofU.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As atMarch 31, 2022 , total commercial paper borrowings wereU.S. $520 million , compared toU.S. $265 million as atDecember 31, 2021 . As atMarch 31, 2022 , under its bilateral letter of credit facilities, the Company had letters of credit drawn of$57 million , compared to$58 million as atDecember 31, 2021 , from a total available amount of$300 million . Under the bilateral letter of credit facilities, the Company has the option to post collateral in the form of Cash or cash equivalents, equal at least to the face
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value of the letter of credit issued. As at
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, future capital commitments, supplier purchases, leases, and other long term liabilities. Debt and finance leases, interest obligations related to debt and finance leases, and letters of credit amount to$1,746 million ,$619 million and$57 million within the next 12 months, respectively, with the remaining amount committed thereafter of$18,103 million ,$13,181 million and nil respectively. Future capital commitments amount to$385 million within the next 12 months, with the remaining amount committed thereafter of$147 million . Supplier purchase agreements, operating leases, and other long-term liabilities amount to$938 million ,$70 million , and$56 million within the next 12 months, respectively, with the remaining amount committed thereafter of$973 million ,$235 million and$422 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Guarantees
The Company accrues for all guarantees that it expects to pay. As at
Operating Activities
Cash provided by operating activities was$613 million in the first quarter of 2022, an increase of$31 million , or 5%, compared to$582 million in the same period of 2021. This increase was primarily due to the dividend received from KCS of$334 million during the first quarter of 2022, partially offset by lower cash generating income compared to the same period of 2021.
Investing Activities
Cash used in investing activities was$206 million in the first quarter of 2022, a decrease of$80 million , or 28%, compared to$286 million in the same period of 2021. This decrease was primarily due to lower capital additions during the first quarter of 2022 compared to the same period of 2021 partially offset by lower proceeds from the sale of properties and other assets.
Free Cash
CP generated positive Free cash of$424 million in the first quarter of 2022, an increase of$128 million , or 43%, from$296 million in the same period of 2021. This increase was primarily due to a decrease in cash used in investing activities and an increase 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. Free cash is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Financing Activities
Cash used in financing activities was$391 million in the first quarter of 2022, an increase of$311 million , or 389%, compared to$80 million in the same period of 2021. This increase was primarily due to principal repayments of$125 million of the Company's 5.100% 10-year Medium Term Notes and$313 million (U.S. $250 million ) of the Company's 4.500% 10-year Notes at maturity inJanuary 2022 , principal repayment of$97 million (U.S. $76 million ) of the Company's 6.99% Finance lease at maturity inMarch 2022 , and higher dividends paid as a result of a higher number of shares outstanding associated with the shares issued to acquire KCS in the fourth quarter of 2021. This increase was partially offset by higher net issuances of commercial paper during the first quarter of 2022, compared to the same period of 2021, and acquisition-related financing fees amounting to$33 million paid during the first quarter of 2021 related to the KCS acquisition. 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.
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A strong investment grade credit rating is an important measure in assessing the Company's ability to maintain access to public financing and to minimize the cost of capital. It also affects the ability of the Company to engage in certain collateralized business activities on a cost-effective basis.
Credit ratings and outlooks are based on the rating agencies' methodologies and can change from time to time to reflect their views of CP. Their views are affected by numerous factors including, but not limited to, the Company's financial position and liquidity along with external factors beyond the Company's control.
As atMarch 31, 2022 , CP's credit ratings fromStandard & Poor's Rating Services ("Standard & Poor's") and Moody's Investor Service ("Moody's") remain unchanged fromDecember 31, 2021 .
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 stableCommercial paper program Standard & Poor's A-2 N/A Moody's P-2 N/A (1)Credit ratings are not recommendations to purchase, hold or sell securities and do not address the market price or suitability of a specific security for a particular investor. Credit ratings are based on the rating agencies' methodologies and may be subject to revision or withdrawal at any time by the rating agencies. Financial Ratios
The Long-term debt to Net income ratio for the twelve months ended
The Adjusted net debt to Adjusted earnings before interest, tax, depreciation
and amortization ("EBITDA") ratio for the twelve months ended March 31, 2022 and
March 31, 2021 was 4.7 and 2.4, respectively. The increase was primarily due to
a higher debt balance in connection with the KCS acquisition. The Adjusted net
debt to Adjusted EBITDA ratio is a Non-GAAP measure, which is defined and
reconciled from the Long-term debt to Net income ratio, the most comparable
measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Over the long term, CP targets an Adjusted net debt to Adjusted
EBITDA ratio of 2.0 to 2.5.
The Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA ratio for the
trailing twelve month ended March 31, 2022 was 4.1. This increase from the
Adjusted net debt to Adjusted EBITDA ratio in the same period of 2021 was
primarily due to a higher debt balance in connection with the KCS acquisition.
Beginning in the first quarter of 2022, CP added disclosure of Pro-forma
Adjusted Net Debt to Pro-forma Adjusted EBITDA Ratio to better align with CP's
debt covenant calculation, which takes into account the trailing twelve month
adjusted EBITDA of KCS as well as KCS's outstanding debt. Please see Non-GAAP
Measures of this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
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, 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. Acquisition-related costs
include legal, consulting, financing fees, integration planning costs consisting
of third-party services and system migration, 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 and integration costs (net of tax) incurred by KCS which were
recognized within the Equity loss of KCS). 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
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Forward-Looking Statements in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
Supplemental Guarantor Financial Information
Canadian Pacific Railway Company ("CPRC"), a 100%-owned subsidiary of CPRL, is the issuer of certain securities which are fully and unconditionally guaranteed by CPRL on an unsecured basis. The other subsidiaries of CPRC do not guarantee the securities and are referred to below as the "Non-Guarantor Subsidiaries". The following is a description of the terms and conditions of the guarantees with respect to securities for which CPRC is the issuer and CPRL provides a full and unconditional guarantee. As of the date of the filing of the Form 10-Q, CPRC hadU.S. $12,050 million principal amount of debt securities outstanding due through 2115, andU.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. CPRL will be released and relieved of its obligations under the guarantees after obligations to the holders are satisfied in accordance with the terms of the respective instruments.
Pursuant to Rule 13-01 of the
More information on the securities under this guarantee structure can be found in Exhibit 22.1 List of Issuers and Guarantor Subsidiaries of this quarterly report.
Summarized Financial Information
The following tables present summarized financial information for CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor) on a combined basis after elimination of (i) intercompany transactions and balances among CPRC and CPRL; (ii) equity in earnings from and investments in the Non-Guarantor Subsidiaries; and (iii) intercompany dividend income.
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