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Key Assumptions | Assessments |
•Whole and remaining asset lives
| •Statistical analysis of historical retirement patterns; | | •Evaluation of management strategy and its impact on operations and the future use of specific property assets; | | •Assessment of technological advances; •Engineering estimates of changes in current operations and analysis of historic, current, and projected future usage; •Additional factors considered for track assets: density of traffic and whether rail is new or has been re-laid in a subsequent position; •Assessment of policies and practices for the management of assets including maintenance; and •Comparison with cause | | Termination without cause
| | industry data. |
| | | | | | | | Mr. Creel: 24 months•Analysis of base salary Mr. Ellis: 12 months of salary
Other NEOs: per legislative requirements
| | |
| | | | Award forhistorical, current, year ispro-rated
to retirement date | | | | Equal to the target award for severance period for Mr. Creel
Other NEOs: award for current year ispro-rated
to termination date as per plan | | |
| | Unvested DSUs are forfeited
| | Unvested DSUs are forfeited
| | Unvested DSUs are forfeited
| | Unvested DSUs are forfeited
| | Unvested units vest early if the holder is terminated following change in control
|
| | | | Award continues to vest based on performance factors and executive is entitled to receive the full value as long as they have worked for six months of the performance period, otherwise the award is forfeited
| | | | Pro-rated
based on active service within the performance period | | Only vest if the executive is terminated following a change in control
PSUs vest at target,pro-rated
based on active service within the performance period |
| | Vested options are exercisable for 30 days or until the expiry date, whichever comes first
Unvested options are forfeited
Performance stock options are forfeited
| | Award expires five years after the retirement date or the normal expiry date, whichever is earlier
Performance stock options are forfeited
| | | | Vested options are exercisable for six months following termination as well as any options that vest during thesix-month
periodPerformance stock options are forfeited
| | Options only vest early if the option holder is terminated following the change in control
Performance stock options are forfeited
|
| | | | | | | | | | |
| | Unvested shares are forfeited
| | | | Unvested shares are forfeited
| | | | |
| | | | Post-retirement life insurance of $50,000 and a health spending account based on years of service (same for all employees)
| | | | | | |
| | Any unused flex perquisite dollars are forfeited
| | Any unused flex perquisite dollars are forfeited
| | Any unused flex perquisite dollars are forfeited
| | Any unused flex perquisite dollars are forfeited
| | Any unused flex perquisite dollars are forfeited estimated future salvage values. |
The estimates of economic lives are uncertain and can vary due to changes in any of the assessed factors noted in the table above for whole and remaining asset lives. Additionally, the depreciation rates are updated to reflect the change in residual values of the assets in the class.
It is anticipated that there will be changes in the estimates of weighted-average useful lives and net salvage for each property asset class as assets are acquired, used, and retired. Substantial changes in either the useful lives of properties or the salvage assumptions could result in significant changes to depreciation expense. For example, if the estimated average life of track assets, including rail, ties, ballast, and other track material, increased (or decreased) by one year, annual depreciation expense would decrease (or increase) by approximately $19 million.
Due to the capital intensive nature of the railway industry, depreciation represents a significant part of operating expenses. The estimated useful lives of properties have a direct impact on the amount of depreciation recorded as a component of "Properties" on the Company’s Consolidated Balance Sheets.
Deferred Income Taxes
The Company accounts for deferred income taxes based on the liability method. This method focuses on the Company’s balance sheet and the temporary differences otherwise calculated from the comparison of book versus tax values. The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carryforwards. The provision amount is sensitive to any changes in book and tax values and changes to statutory tax rates. For example, a change in temporary differences of $10 million would result in an approximate deferred income tax change of $3 million.It is assumed that such temporary differences will be settled in the deferred income tax assets and liabilities at the balance sheet date.
In determining deferred income taxes, the Company makes estimates and assumptions regarding deferred tax matters, including estimating the timing of the realization and settlement of deferred income tax assets (including the benefit of tax losses) and liabilities, and estimating unrecognized tax benefits for uncertain tax positions. Deferred income taxes are calculated using enacted federal, provincial, and state future income tax rates, which may differ in future periods.
Deferred income tax expense is included in "Income tax expense" on the Company's Consolidated Statements of Income. At December 31, 2022 and 2021, deferred income tax expense was $136 million and $242 million, respectively. Management does anticipate the total net deferred tax liabilities will change significantly within the next 12 months as a result of the pending business combination with KCS, subject to STB approval. A future fair value remeasurement of the carrying value of the Company's investment in KCS would result in a change in the deferred tax liability recognized in the Company’s income statement. Upon the Company obtaining control, the entire deferred tax liability of $7.5 billion at December 31, 2022, reflecting the outside basis of the investment in KCS, would be reversed through deferred tax expense in the Company’s income statement. Under a business combination, the Company would allocate the purchase price to the individual assets and liabilities assumed, and goodwill would be recognized. A deferred tax liability would be recognized on an inside basis based on the liability method described above with a resultant offsetting increase in goodwill. Additional disclosures are provided in Item 8. Financial Statements and Supplementary Data, Note 5 Income taxes.
Personal Injury and Other Claims Liabilities
The Company estimates the potential liability arising from incidents, claims and pending litigations relating to personal injury claims by employees, third-party claims, certain occupation-related claims, and property damage claims.
Personal Injury
In Canada, employee occupational injuries are governed by provincial workers' compensation legislation. Occupational injury claims in the provinces of Québec, Ontario, Manitoba, and B.C. are self-insured and administered through each Worker's Compensation Board ("WCB"). The future costs related to occupation-related injuries are actuarially determined based on past experience and assumptions associated with the injury, compensation, income replacement, health care, and administrative costs. In the four provinces where the Company is self-insured, a discount rate is applied to the future estimated costs based on market rates for investment-grade corporate bonds to determine the liability. An actuarial study is performed on an annual basis. In the provinces of Saskatchewan and Alberta, the Company is assessed an annual WCB contribution on a premium basis and this amount is not subject to estimation by management. Changes to these assumptions could have a material adverse impact to the Company's results of operations, financial position and liquidity. At December 31, 2022 and 2021, respectively, the WCB liability was $74 million and $77 million in "Pension and other benefit liabilities"; $11 million and $11 million in "Accounts payable and accrued liabilities", offset by deposits paid to WCB of $1 million and $1 million in "Other assets" on the Company's Consolidated Balance Sheets.
Fluctuations in WCB can result from changes in the discount rate used. A 0.1% increase (decrease) in the discount rate would decrease (increase) the obligation by approximately $1 million.
U.S. railway employees are covered by federal law under the Federal Employers' Liability Act ("FELA") rather than workers' compensation programs. Accruals are set for individual cases based on facts, legal opinion and statistical analysis. U.S. accruals are also set and include alleged occupational exposure or injury.
Other Claims
A provision for litigation matters, equipment damages or other claims will be accrued according to applicable accounting standards and any such accrual will be based on an ongoing assessment of the strengths and weaknesses of the litigation or claim and its likelihood of success, together with an evaluation of the damages or other monetary relief sought. The Company accrues for probable claims when the facts of an incident become known and investigation results provide a reasonable basis for estimating the liability. The lower end of the range is accrued if the facts and circumstances permit only a range of reasonable estimates and no single amount in that range is a better estimate than any other. Facts and circumstances related to asserted claims can change, and a process is in place to monitor accruals for changes in accounting estimates. The final outcome with respect to actions
outstanding or pending at December 31, 2022, or with respect to future claims cannot be predicted with certainty. Material changes to litigation trends, equipment damages, or other claims could have a material adverse impact to the Company's results of operations, financial position, and liquidity.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of other relevant securities legislation, including applicable securities laws in Canada (collectively referred to herein as "forward-looking statements"). Forward-looking statements typically include words such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”, “plan”, “will”, “outlook”, “should” or similar words suggesting future outcomes. To the extent that the Company has provided forecasts or targets using Non-GAAP financial measures, the Company may not be able to provide a reconciliation to a GAAP measure without unreasonable efforts, due to unknown variables and uncertainty related to future results.
This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K includes forward-looking statements relating, but not limited to statements concerning the Company’s defined benefit pension expectations for 2023 and through 2026, expected impacts resulting from changes in the U.S.-to-Canadian dollar exchange rate, and the effective tax rate, as well as statements concerning the Company’s operations, anticipated financial performance, business prospects and strategies, including statements concerning the anticipation that cash flow from operations and various sources of financing will be sufficient to meet debt repayments and obligations in the foreseeable future and concerning anticipated capital programs, statements regarding future payments including income taxes, statements regarding the Company's greenhouse gas ("GHG") emissions targets, and statements concerning the pending KCS business combination.
The forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K are based on current expectations, estimates, projections and assumptions, having regard to the Company's experience and its perception of historical trends, and includes, but is not limited to, expectations, estimates, projections and assumptions relating to: North American and global economic growth; commodity demand growth; sustainable industrial and agricultural production; commodity prices and interest rates; foreign exchange rates (as specified herein); effective tax rates (as specified herein); performance of our assets and equipment; sufficiency of our budgeted capital expenditures in carrying out our business plan; geopolitical conditions; applicable laws, regulations and government policies; the availability and cost of labour, services and infrastructure; the satisfaction by third parties of their obligations to the Company; and the anticipated impacts of the COVID-19 pandemic on the Company's business, operating results, cash flows and/or financial condition. Although the Company believes the expectations, estimates, projections and assumptions reflected in the forward-looking statements presented herein are reasonable as of the date hereof, there can be no assurance that they will prove to be correct. Current conditions, economic and otherwise, render assumptions, although reasonable when made, subject to greater uncertainty.
With respect to the pending KCS business combination, we can provide no assurance when or if the combination will be completed. Completion of the combination is subject to the receipt of final approval from the STB of the CP-KCS control application by December 31, 2023. There can be no assurance of receipt of this final approval by December 31, 2023. Additionally, even if such final approval is received, there can be no guarantee of the successful integration of KCS or that the combined company will realize the anticipated benefits of the business combination, whether financial, strategic or otherwise, and this may be exacerbated by changes to the economic, political and global environment in which the merged company will operate.
Our GHG emissions targets are subject to a number of inherent risks, assumptions and uncertainties that include, but are not limited to, changes in carbon markets, evolving sustainability strategies and scientific or technological developments. Additionally, although our data underlying GHG emissions estimates have been internally vetted using accepted and relevant scientific and technical methodologies, historical performance data may become outdated due to a variety of factors, including improvement in our data collection and measuring systems, activities such as joint ventures, mergers and acquisitions or divestitures, and industry-driven changes to methodologies. As a result of these and other factors, we may not achieve our stated targets.
Undue reliance should not be placed on forward-looking statements as actual results may differ materially from those expressed or implied by forward-looking statements. By their nature, forward-looking statements involve numerous inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking statements, including but not limited to the following factors: changes in business strategies; general North American and global economic, credit and business conditions; risks associated with agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via the Company; inflation; geopolitical instability; changes in laws, regulations and government policies, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; changes in fuel prices; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; trade restrictions or other changes to international trade arrangements; climate change; various events that could disrupt operations, including severe weather, such as droughts, floods, avalanches and earthquakes, and cybersecurity attacks, as well as security threats and governmental response to them, and technological changes; and the pandemic created by the outbreak of COVID-19 and its variants and resulting effects on economic conditions, the demand
environment for logistics requirements and energy prices, restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and financial institutions, and disruptions to global supply chains. The foregoing list of factors is not exhaustive.
There are more specific factors that could cause actual results to differ materially from those described in the forward-looking statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K. These more specific factors are identified and discussed in Item 1A. Risk Factors. Other risks are detailed from time to time in reports filed by the Company with securities regulators in Canada and the United States.
The forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K are made as of the date hereof. Except as required by law, the Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, or the foregoing assumptions and risks affecting such forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk sensitive instruments is set forth under Item 7. Management’s Discussion and Analysis of ContentsFinancial Condition and Results of Operations – Impact of Foreign Exchange on Earnings and Foreign Exchange Risk and Impact of Changes in Share Price on Earnings and Stock-Based Compensation.
Interest Rate Risk
Debt financing forms part of the Company's capital structure. The debt agreements entered into expose the Company to increased interest costs on future fixed debt instruments and existing variable rate debt instruments, should market rates increase. As at December 31, 2022, a hypothetical one percentage point change in interest rates on the Company's floating rate debt obligations outstanding is not material. In addition, the present value of the Company’s assets and liabilities will also vary with interest rate changes. To manage interest rate exposure, the Company may enter into forward rate agreements such as treasury rate locks or bond forwards that lock in rates for a future date, thereby protecting against interest rate increases. The Company may also enter into swap agreements whereby one party agrees to pay a fixed rate of interest while the other party pays a floating rate. Contingent on the direction of interest rates, the Company may incur higher costs depending on the contracted rate.
The fair value of the Company’s fixed rate debt may fluctuate with changes in market interest rates. A hypothetical one percentage point decrease in interest rates as of December 31, 2022, would result in an increase of approximately $1.5 billion to the fair value of the Company's debt as at December 31, 2022 (December 31, 2021 - approximately $2.3 billion). Fair values of the Company’s fixed rate debt are estimated by considering the impact of the hypothetical interest rates on quoted market prices and current borrowing rates, but do not consider other factors that could impact actual results.
Information concerning market risks is supplemented in Item 8. Financial Statements and Supplementary Data, Note 16 Financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Reports of Independent Registered Public Accounting Firms (Ernst & Young LLP, PCAOB ID: 1263; Deloitte LLP, PCAOB ID: 1208) | |
| |
Consolidated Statements of Income | |
For the Year Ended December 31, 2022, 2021, and 2020 | |
| |
Consolidated Statements of Comprehensive Income | |
For the Year Ended December 31, 2022, 2021, and 2020 | |
| |
Consolidated Balance Sheets | |
As at December 31, 2022 and 2021 | |
| |
Consolidated Statements of Cash Flows | |
For the Year Ended December 31, 2022, 2021, and 2020 | |
| |
Consolidated Statements of Changes in Shareholders' Equity | |
For the Year Ended December 31, 2022, 2021, and 2020 | |
| |
Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the estimated incremental amounts that would be paid to Mr. CreelShareholders and Mr. Ellis, if their employment had been terminated without causethe Board of Directors of Canadian Pacific Railway Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Canadian Pacific Railway Limited and its subsidiaries (the "Company") as of December 31, 2020. There2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows, for the year ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission framework (2013) and our report dated February 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is no extra taxto express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
gross-up
provisionWe conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit and Finance Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any termination benefit.way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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| | Severance period (# of months) | | | | | | | | | Additional retirement benefits ($) | | | | | | Value of vesting of options and equity-based awards
($) (2) | | | Payable on termination without cause ($) | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description of the Matter
At December 31, 2022, the projected benefit obligation of the Company's defined benefit pension plans was $9,936 million, of which the Canadian pension plans represent nearly all the combined pension obligations. As explained in Notes 1 and 21 to the consolidated financial statements, the discount rate used to determine the projected benefit obligation is based on blended market interest rates on high-quality debt instruments with matching cash flows.
(1) | Reflects the value of accelerated vesting of shares purchased under the ESPP for Mr. Creel and Mr. Ellis. Also includes the cost of group benefits for Mr. Ellis for the severance period.
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Auditing the Canadian projected benefit obligation was complex and required the involvement of specialists due to the magnitude of the projected benefit obligation and judgement applied related to the discount rate used in the measurement process.
(2) | Reflects the value of stock options and equity-based awards vesting within six months following termination in accordance with our stock option plan, and thepro-rated
value as of the termination date of PSU awards. Mr. Creel’s calculation is based on US$346.69, our closing share price on the NYSE on December 31, 2020, converted to Canadian dollars using ayear-end
exchange rate of $1.2732. Mr. Ellis’ calculation is based on $441.53, our closing share price on the TSX on December 31, 2020. |
How We Addressed the Matter in Our Audit
To test the discount rate for the Canadian projected benefit obligation, our audit procedure included, among others, testing the Company’s internal controls over the assumptions and data used in the determination of the discount rate.
We assessed the competence and objectivity of the qualified actuary engaged by the Company to value the Canadian projected benefit obligation under ASC 715 ‘Compensation Retirement Benefits’.
We involved an actuarial specialist to assist with our procedures. We evaluated management’s methodology and actuarial assumptions with respect to the determination of the discount rate for the Canadian plans in accordance with actuarial principles and practices under Canadian actuarial standards of practice. We developed an independent estimate of the expected duration of the Canadian plans’ projected benefit cash flows and used other common
Director compensation
CP 2022 ANNUAL REPORT 66
methodologies to determine the discount rate for the Canadian plans, at the current measurement date, that reflects the maturity and duration of the Canadian expected benefit payments and compared those to the discount rate for the Canadian plans selected by management.
/s/ Ernst & Young LLP
Chartered Professional Accountants
Calgary, Canada
February 24, 2023
We have served as the Company's auditor since 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Canadian Pacific Railway Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Canadian Pacific Railway Limited and subsidiaries (the "Company") as of December 31, 2021, the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders' equity, for each of the two years in the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America ("US GAAP").
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Canada
February 23, 2022
We began serving as the Company's auditor in 2011. In 2022, we became the predecessor auditor.
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | |
Year ended December 31 (in millions of Canadian dollars, except share and per share data) | 2022 | 2021 | 2020 |
Revenues (Note 3) | | | |
Freight | $ | 8,627 | | $ | 7,816 | | $ | 7,541 | |
Non-freight | 187 | | 179 | | 169 | |
Total revenues | 8,814 | | 7,995 | | 7,710 | |
Operating expenses | | | |
Compensation and benefits (Note 21, 22) | 1,570 | | 1,570 | | 1,560 | |
Fuel | 1,400 | | 854 | | 652 | |
Materials | 260 | | 215 | | 216 | |
Equipment rents | 140 | | 121 | | 142 | |
Depreciation and amortization | 853 | | 811 | | 779 | |
Purchased services and other (Note 9, 10) | 1,262 | | 1,218 | | 1,050 | |
Total operating expenses | 5,485 | | 4,789 | | 4,399 | |
Operating income | 3,329 | | 3,206 | | 3,311 | |
Less: | | | |
Equity (earnings) loss of Kansas City Southern (Note 10) | (1,074) | | 141 | | — | |
Other expense (income) (Note 4, 10) | 17 | | 237 | | (7) | |
Merger termination fee (Note 10) | — | | (845) | | — | |
Other components of net periodic benefit recovery (Note 21) | (411) | | (387) | | (342) | |
Net interest expense | 652 | | 440 | | 458 | |
Income before income tax expense | 4,145 | | 3,620 | | 3,202 | |
Income tax expense (Note 5) | 628 | | 768 | | 758 | |
Net income | $ | 3,517 | | $ | 2,852 | | $ | 2,444 | |
Earnings per share (Note 6) | | | |
Basic earnings per share | $ | 3.78 | | $ | 4.20 | | $ | 3.61 | |
Diluted earnings per share | $ | 3.77 | | $ | 4.18 | | $ | 3.59 | |
Weighted-average number of shares (millions) (Note 6) | | | |
Basic | 930.0 | | 679.7 | | 677.2 | |
Diluted | 932.9 | | 682.8 | | 679.9 | |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Year ended December 31 (in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Net income | $ | 3,517 | | $ | 2,852 | | $ | 2,444 | |
Net gain (loss) in foreign currency translation adjustments, net of hedging activities | 1,628 | | (291) | | 18 | |
Change in derivatives designated as cash flow hedges | 6 | | 48 | | 10 | |
Change in pension and post-retirement defined benefit plans | 680 | | 1,286 | | (407) | |
Equity accounted investments | (5) | | 9 | | (1) | |
Other comprehensive income (loss) before income taxes | 2,309 | | 1,052 | | (380) | |
Income tax (expense) recovery on above items | (115) | | (341) | | 88 | |
Other comprehensive income (loss) (Note 7) | 2,194 | | 711 | | (292) | |
Comprehensive income | $ | 5,711 | | $ | 3,563 | | $ | 2,152 | |
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
As at December 31 (in millions of Canadian dollars, except Common Shares) | 2022 | 2021 |
Assets | | |
Current assets | | |
Cash and cash equivalents | $ | 451 | | $ | 69 | |
Restricted cash and cash equivalents | — | | 13 | |
Accounts receivable, net (Note 8) | 1,016 | | 819 | |
Materials and supplies | 284 | | 235 | |
Other current assets | 138 | | 216 | |
| 1,889 | | 1,352 | |
Investment in Kansas City Southern (Note 11) | 45,091 | | 42,309 | |
Investments | 223 | | 209 | |
Properties (Note 12, 18) | 22,385 | | 21,200 | |
Goodwill and intangible assets (Note 10, 13) | 386 | | 371 | |
Pension asset (Note 21) | 3,101 | | 2,317 | |
Other assets (Note 18) | 420 | | 419 | |
Total assets | $ | 73,495 | | $ | 68,177 | |
Liabilities and shareholders’ equity | | |
Current liabilities | | |
Accounts payable and accrued liabilities (Note 14, 18) | $ | 1,703 | | $ | 1,609 | |
Long-term debt maturing within one year (Note 15, 16, 18) | 1,510 | | 1,550 | |
| 3,213 | | 3,159 | |
Pension and other benefit liabilities (Note 21) | 538 | | 718 | |
Other long-term liabilities (Note 17, 18) | 520 | | 542 | |
Long-term debt (Note 15, 16, 18) | 18,141 | | 18,577 | |
Deferred income taxes (Note 5) | 12,197 | | 11,352 | |
Total liabilities | 34,609 | | 34,348 | |
Shareholders’ equity | | |
Share capital (Note 19) Authorized unlimited Common Shares without par value. Issued and outstanding are 930.5 million and 929.7 million as at December 31, 2022 and 2021, respectively. | 25,516 | | 25,475 | |
Authorized unlimited number of first and second preferred shares; none outstanding. | | |
Additional paid-in capital | 78 | | 66 | |
Accumulated other comprehensive income (loss) (Note 7) | 91 | | (2,103) | |
Retained earnings | 13,201 | | 10,391 | |
| 38,886 | | 33,829 | |
Total liabilities and shareholders’ equity | $ | 73,495 | | $ | 68,177 | |
See Commitments and contingencies (Note 24).
See Notes to Consolidated Financial Statements.
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Our director compensation program shares the same objective as our executive compensation program: to attract and retain qualified directors and to align the interests of directors and shareholders.
We pay directors a flat fee retainer, which reflects the director’s ongoing oversight and responsibilities throughout the year and attendance at Board and committee meetings.
| | | | | | Aligning director and shareholder interests
Directors receive their annual
retainer in deferred share units so they have an ongoing stake in our future success, aligning their interests with those of our shareholders.
DDSUs are granted to directors under the director deferred share unit plan. Onlynon-employee
directors participate in the plan.A DDSU is a bookkeeping entry that has the same value as one CP common share. DDSUs earn additional units as dividend equivalents at the same rate as dividends paid on our shares. DDSUs vest immediately. The DDSU Plan was amended effective in April 2020 to allow for directors to elect to receive their DDSUs in cash after leaving the Board instead of waiting for a six or twelve month period. These changes to the DDSU plans are subject to tax rules in the country of the director’s residence and in the case of U.S. directors, this election is only possible on DDSUs awarded after April 2020.
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Directors receive 100 percent of their annual retainer in DDSUs until they have met their share ownership requirements. After that they must receive at least 50 percent of their retainer in DDSUs, and can receive the balance in cash. Directors must make their election before the beginning of each calendar year.
Directors must meet their share ownership requirements within five years of joining the Board, and must hold their DDSUs for one year after they retire from the Board.
The table below shows the flat fee retainers for 2020. In 2020, Canadian directors’ fees were converted to Canadian dollars and the number of DDSUs received was based on the trading price of our shares on the TSX. U.S. directors were paid in U.S. dollars and the number of DDSUs they received was based on the trading price of our shares on the NYSE.
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We reimburse directors for travel andexpenses related to attending their Board and committee meetings and other business on behalf of CP.Mr. Creel does not receive any director compensation because he is compensated in his role as President and CEO.
We did not make any changes to our comparator group in 2020. The comparator group was extensively reviewed and updated in 2018. Our comparator group consists of companies we compete with for talent. It includes six Class 1 Railroad peers as well as 11 capital-intensive Canadian companies. For certain positions within the organization, we apply a heavier weighting to Class 1 Railroad peers; however, we consistently review alignment and compensation practices against the whole group.
The 2020 compensation comparator group can be seen on page 10.
The Governance Committee may engage an independent consultant with respect to director compensation. The Governance Committee makes its own decisions, which may reflect factors and considerations other than the information and recommendations provided by its external consultant. The Governance Committee did not retain a compensation consultant in 2020 with respect to director compensation. The Governance Committee did not make changes to its compensation in 2020.
2020 director compensation
The Governance Committee reviews director compensation every two to three years based on the directors’ responsibilities, time commitment and the compensation provided by comparable companies. Each director is paid an annual retainer of US$200,000. Committee chairs receive an additional US$30,000 per year and the Board Chair receives an annual retainer of US$395,000. No changes were made to the director compensation program in 2020.
We paid directors a total of approximately $3,125,160 in 2020 as detailed in the table below. Directors receive a flat fee retainer to cover their ongoing oversight and responsibilities throughout the year and their attendance at Board and committee meetings.
Directors receive 100 percent of their annual retainer in director deferred share units (DDSUs) until they have met their share ownership requirements. After that, directors are required to receive at least 50 percent of their compensation in DDSUs. The total represents the approximate dollar value of DDSUs credited to each director’s DDSU account in 2020, based on the closing fair market value of our shares on the grant date plus the cash portion paid if a director elected to receive a portion of compensation in cash.
Mr. Creel does not receive director compensation because he is compensated in his role as President and CEO (see pages 30 and 31 for details).
(1) | The value of the share-based awards has been calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC 718) using the grant date fair value, which is prescribed by the DDSU Plan.
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(2) | Each director was provided with a $1,000 donation, in local currency, to the charity of their choice in December 2020 in gratitude for their year of service. This amount appears under All other compensation.
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(3) | All directors were paid in U.S. dollars and the value of their share-based awards, and cash and other payments, as applicable, have been converted to Canadian dollars using the 2020 average exchange rate of $1.3415.
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You can read more about our director compensation program beginning on page 49.
Outstanding share-based awards and option-based awards
The table below shows all vested and unvested equity incentive awards that are outstanding as of December 31, 2020.
On July 21, 2003, the Board suspended any additional grants of options under the director stock option plan and there are no outstanding options under that plan.
Non-employee
directors are not granted stock options under the stock option plan. | | | | | | | | | | | | |
Approved on behalf of the Board: | | | | | | | | |
| | /s/ ISABELLE COURVILLE | | | | | | | /s/ JANE L. PEVERETT |
| | Isabelle Courville, Director, | | | | | | | | | | Jane L. Peverett, Director, |
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(1) | Calculated based on the closing price of our shares on December 31, 2020 on the TSX ($441.53), in the case of directors resident in Canada, and on the NYSE (US$346.69) which was converted to Canadian dollars using theyear-end
exchange rate of $1.2732, in the caseChair of the directors resident inBoard | | | Chair of the U.S.Audit and Finance Committee |
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Year ended December 31 (in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Operating activities | | | |
Net income | $ | 3,517 | | $ | 2,852 | | $ | 2,444 | |
Reconciliation of net income to cash provided by operating activities: | | | |
Depreciation and amortization | 853 | | 811 | | 779 | |
Deferred income tax expense (Note 5) | 136 | | 242 | | 221 | |
Pension recovery and funding (Note 21) | (288) | | (249) | | (250) | |
Equity (earnings) loss of Kansas City Southern (Note 10) | (1,074) | | 141 | | — | |
Foreign exchange gain on debt and lease liabilities (Note 4) | — | | (7) | | (14) | |
Dividends from Kansas City Southern (Note 10) | 1,157 | | — | | — | |
Other operating activities, net | (67) | | (36) | | 11 | |
Change in non-cash working capital balances related to operations (Note 20) | (92) | | (66) | | (389) | |
Cash provided by operating activities | 4,142 | | 3,688 | | 2,802 | |
Investing activities | | | |
Additions to properties | (1,557) | | (1,532) | | (1,671) | |
Investment in Kansas City Southern (Note 10) | — | | (12,299) | | — | |
Investment in Detroit River Tunnel Partnership (Note 10) | — | | — | | (398) | |
Investment in Central Maine & Québec Railway | — | | — | | 19 | |
Proceeds from sale of properties and other assets | 58 | | 96 | | 22 | |
Other | 3 | | 5 | | (2) | |
Cash used in investing activities | (1,496) | | (13,730) | | (2,030) | |
Financing activities | | | |
Dividends paid | (707) | | (507) | | (467) | |
Issuance of Common Shares (Note 22) | 32 | | 25 | | 52 | |
Purchase of Common shares (Note 19) | — | | — | | (1,509) | |
Issuance of long-term debt, excluding commercial paper (Note 15) | — | | 10,673 | | 958 | |
Repayment of long-term debt, excluding commercial paper (Note 15) | (571) | | (359) | | (84) | |
Proceeds from term loan (Note 15) | — | | 633 | | — | |
Repayment of term loan (Note 15) | (636) | | — | | — | |
Net (repayment) issuance of commercial paper (Note 15) | (415) | | (454) | | 270 | |
Net increase in short-term borrowings | — | | — | | 5 | |
Acquisition-related financing fees (Note 10) | — | | (51) | | — | |
Other | — | | (24) | | 11 | |
Cash (used in) provided by financing activities | (2,297) | | 9,936 | | (764) | |
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents | 20 | | 41 | | 6 | |
Cash position | | | |
Increase (decrease) in cash, cash equivalents and restricted cash | 369 | | (65) | | 14 | |
Cash, cash equivalents and restricted cash at beginning of year | 82 | | 147 | | 133 | |
Cash, cash equivalents and restricted cash at end of year | $ | 451 | | $ | 82 | | $ | 147 | |
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Supplemental disclosures of cash flow information: | | | |
Income taxes paid | $ | 408 | | $ | 552 | | $ | 582 | |
Interest paid | $ | 641 | | $ | 426 | | $ | 443 | |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
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(in millions of Canadian dollars, except per share data) | Share capital | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total shareholders’ equity |
Balance at December 31, 2019 | $ | 1,993 | | $ | 48 | | $ | (2,522) | | $ | 7,550 | | $ | 7,069 | |
Impact of accounting change(1) | — | | — | | — | | (1) | | (1) | |
Balance at January 1, 2020, as restated | 1,993 | | 48 | | (2,522) | | 7,549 | | 7,068 | |
Net income | — | | — | | — | | 2,444 | | 2,444 | |
Other comprehensive loss (Note 7) | — | | — | | (292) | | — | | (292) | |
Dividends declared ($0.712 per share) | — | | — | | — | | (479) | | (479) | |
Effect of stock-based compensation expense | — | | 17 | | — | | — | | 17 | |
Common Shares repurchased (Note 19) | (58) | | — | | — | | (1,419) | | (1,477) | |
Shares issued under stock option plan (Note 19) | 48 | | (10) | | — | | — | | 38 | |
Balance at December 31, 2020 | 1,983 | | 55 | | (2,814) | | 8,095 | | 7,319 | |
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Net income | — | | — | | — | | 2,852 | | 2,852 | |
Other comprehensive income (Note 7) | — | | — | | 711 | | — | | 711 | |
Dividends declared ($0.760 per share) | — | | — | | — | | (556) | | (556) | |
Effect of stock-based compensation expense | — | | 23 | | — | | — | | 23 | |
Shares issued for Kansas City Southern acquisition (Note 10, 19) | 23,461 | | (5) | | — | | — | | 23,456 | |
Shares issued under stock option plan (Note 19) | 31 | | (7) | | — | | — | | 24 | |
Balance as at December 31, 2021 | 25,475 | | 66 | | (2,103) | | 10,391 | | 33,829 | |
Net income | — | | — | | — | | 3,517 | | 3,517 | |
Other comprehensive income (Note 7) | — | | — | | 2,194 | | — | | 2,194 | |
Dividends declared ($0.760 per share) | — | | — | | — | | (707) | | (707) | |
Effect of stock-based compensation expense | — | | 23 | | — | | — | | 23 | |
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Shares issued for Kansas City Southern acquisition (Note 10, 19) | — | | (2) | | — | | — | | (2) | |
Shares issued under stock option plan (Note 19) | 41 | | (9) | | — | | — | | 32 | |
Balance as at December 31, 2022 | $ | 25,516 | | $ | 78 | | $ | 91 | | $ | 13,201 | | $ | 38,886 | |
(1) Impact of the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) on January 1, 2020.
See Notes to Consolidated Financial Statements.
CANADIAN PACIFIC RAILWAY LIMITED
Notes to Consolidated Financial Statements
December 31, 2022
Canadian Pacific Railway Limited (“CPRL”), through its subsidiaries (collectively referred to as “CP” or “the Company”), operates a transcontinental railway in Canada and the United States ("U.S."). The Company provides rail and intermodal transportation services over a network of approximately 13,000 miles, serving the principal business centres of Canada from Montréal, Québec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. The Company’s railway network feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend the Company’s market reach in Canada, throughout the U.S. and into Mexico. The Company transports bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, fertilizers and sulphur. Merchandise freight consists of finished vehicles and automotive parts, as well as forest, industrial and consumer products. Intermodal traffic consists largely of retail goods in overseas containers that can be transported by train, ship and truck, and in domestic containers and trailers that can be moved by train and truck.
1. Summary of significant accounting policies
Accounting principles generally accepted in the United States of America (“GAAP”)
These Consolidated Financial Statements are expressed in Canadian dollars and have been prepared in accordance with GAAP.
Principles of consolidation
These Consolidated Financial Statements include the accounts of the Company. The Company’s investments in which it has significant influence are accounted for using the equity method. Distributions received from equity method investees are classified using the nature of the distribution approach for cash flow presentation purposes, whereby distributions received are classified based on the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as a cash inflow from operating activities) or a return of investment (classified as a cash inflow from investing activities). All intercompany accounts and transactions have been eliminated.
Common stock split
On April 21, 2021, the Company's shareholders approved a five-for-one stock split to shareholders of record as of May 5, 2021. Proportional adjustments were made to all outstanding awards under the Company's stock-based compensation plans in order to reflect the share split. All share and per share amounts have been retroactively adjusted to reflect the impact of the stock split.
Use of estimates
The preparation of these Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the year, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Management regularly reviews its estimates, including those related to environmental liabilities, pensions and other benefits, depreciable lives of properties, deferred income tax assets and liabilities, as well as legal and personal injury liabilities based upon currently available information. Actual results could differ from these estimates.
Revenue recognition
Revenue is recognized when control of promised services is transferred to the customer and obligations under the terms of a contract with a customer are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing services. Government imposed taxes that the Company collects concurrent with revenue-generating activities are excluded from revenue. In the normal course of business, the Company does not generate any material revenue through acting as an agent for other entities.
The Company provides rail freight transportation services to a wide variety of customers and transports bulk commodities, merchandise freight and intermodal traffic. The Company signs master service agreements with customers that dictate future services the Company is to perform for a customer at the time a bill of lading or service request is received. Each bill of lading or service request represents a separate distinct performance obligation that the Company is obligated to satisfy. The transaction price is generally in the form of a fixed fee determined at the inception of the bill of lading or service request. The Company allocates the transaction price to each distinct performance obligation based on the estimated standalone selling price for each performance obligation. As each bill of lading or service request represents a separate distinct performance obligation, the estimated standalone selling price is assessed at an observable price which is fair market value. Certain customer agreements include variable consideration in the form of rebates, discounts, or incentives. The expected value method is used to estimate variable consideration and is allocated to the applicable performance obligation and is recognized when the related performance obligation is satisfied. Additionally, the Company offers published rates for services through public tariff agreements in which a customer can request service, triggering a performance obligation the Company must satisfy. Railway freight revenues are recognized over time as services are provided based on the percentage of completed service method. Volume rebates to customers are accrued as a
reduction of freight revenues based on estimated volumes and contract terms as freight service is provided. Freight revenues also include certain ancillary and other services provided in association with the performance of rail freight movements. Revenues from these activities are not material and therefore have been aggregated with the freight revenues from customer contracts with which they are associated.
Non-freight revenues, including revenues earned from passenger service operators, switching fees, and revenues from logistics services, are recognized at the point in time the services are provided or over time as the customer obtains control when the performance obligations are satisfied. Non-freight revenues also include leasing revenues.
Payment by customers is due upon satisfaction of performance obligations. Payment terms are such that amounts outstanding at the period end are expected to be collected within one reporting period. The Company invoices customers at the time the bill of lading or service request is processed and therefore the Company has no material unbilled receivables and no contract assets. All performance obligations not fully satisfied at period end are expected to be satisfied within the reporting period immediately following. Contracted customer incentives are amortized to income over the term of the related revenue contract.
Income taxes
The Company follows the liability method of accounting for income taxes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period during which the change occurs.
When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not that all or some portion of the Company’s deferred tax assets will not be realized, based on management’s judgment using available evidence about future events.
At times, tax benefit claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
Investment and other similar tax credits are deferred on the Company's Consolidated Balance Sheets and amortized to “Income tax expense” as the related asset is recognized in income. Income tax recovery or expense on items in "Accumulated other comprehensive income (loss)" are recognized in "Income tax expense" as the related item is recognized in income.
Earnings per share
Basic earnings per share are calculated using the weighted-average number of the Company's Common Shares ("Common Shares") outstanding during the year. Diluted earnings per share are calculated using the treasury stock method for determining the dilutive effect of options.
Foreign currency translation
Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into Canadian dollars at the year-end exchange rate for monetary items and at the historical exchange rates for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the related transactions. Foreign exchange ("FX") gains and losses, other than those arising from the translation of the Company’s net investment in foreign subsidiaries, are included in income.
The accounts of the Company’s foreign subsidiaries and foreign equity method investees are translated into Canadian dollars using the year-end exchange rate for assets and liabilities and the average exchange rates during the year for revenues, expenses, gains, and losses. FX gains and losses arising from the translation of the foreign subsidiaries’ and foreign equity method investees' assets and liabilities are included in “Other comprehensive income (loss)”. Debt instruments and finance lease obligations ("long-term debt") and operating lease liabilities denominated in U.S. dollars have been designated as a hedge of the net investment in foreign subsidiaries and foreign equity method investees. As a result, unrealized FX gains and losses on U.S. dollar-denominated long-term debt and operating lease liabilities, designated as a hedge, are offset against FX gains and losses arising from the translation of foreign subsidiaries’ and foreign equity method investees' accounts in “Other comprehensive income (loss)”.
Cash and cash equivalents
Cash and cash equivalents include highly liquid short-term investments that are readily convertible to cash with original maturities of three months or less, but excludes cash and cash equivalents subject to restrictions.
Restricted cash and cash equivalents
Cash and cash equivalents that are restricted as to withdrawal or usage, in accordance with specific agreements, are presented as restricted cash and cash equivalents on the Company's Consolidated Balance Sheets when applicable. In the Company's Consolidated Statements of Cash Flows, these balances, if any, are included with cash and cash equivalents.
Accounts receivable
Accounts receivable from customers are recognized initially at fair value and subsequently measured at amortized cost less allowance for expected credit losses. Losses on accounts receivable are estimated based on historical credit loss experience of receivables with similar risk characteristics. Historical loss experience is adjusted to reflect any management expectations that current or future conditions will differ from conditions that existed for the period over which historical information is evaluated.
To determine expected credit losses, receivables are disaggregated by credit characteristics, type of customer service, customer line of business, and receivable aging. Receivables are considered to be in default and are written off against the allowance for credit losses when it is probable that all remaining contractual payments due will not be collected in accordance with the terms of the customer contracts. Subsequent recoveries of amounts previously written off are credited to earnings in the period recovered.
Materials and supplies
Materials and supplies are carried at the lower of average cost or market value and consist primarily of fuel and parts used in the repair and maintenance of track structures, equipment, locomotives and freight cars.
Properties
Fixed asset additions and major renewals are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated depreciation and any impairment. When there is a legal obligation associated with the retirement of property, a liability, when reliably estimable, is initially recognized at its fair value and a corresponding asset retirement cost is added to the gross book value of the related asset and amortized to expense over the estimated term to retirement. The Company reviews the carrying amounts of its properties whenever changes in circumstances indicate that such carrying amounts may not be recoverable based on future undiscounted cash flows. When such properties are determined to be impaired, recorded asset values are revised to their fair value and an impairment loss is recognized.
The Company recognizes expenditures as additions to properties or operating expenses based on whether the expenditures increase the output or service capacity, lower the associated operating costs or extend the useful life of the properties and whether the expenditures exceed minimum physical and financial thresholds.
Much of the additions to properties, both new and replacement properties, are self-constructed. These are initially recorded at cost, including direct costs and attributable indirect costs, overheads and carrying costs. Direct costs include, among other things, labour costs, purchased services, equipment costs, material costs, project supervision costs, and fringe benefits. Attributable indirect costs and overheads include incremental long-term variable costs resulting from the execution of capital projects. Indirect costs mainly include work trains, material distribution, highway vehicles, and work equipment. Overheads primarily include a portion of the engineering department’s costs, which plans, designs, and administers these capital projects. These costs are allocated to projects by applying a measure consistent with the nature of the cost, based on cost studies. For replacement properties, the project costs are allocated to dismantling and installation based on cost studies. Dismantling work, which is expensed, is performed concurrently with the installation.
Ballast programs including undercutting, shoulder ballasting and renewal programs that form part of the annual track program are capitalized as this work, and the related added ballast material, significantly improves drainage, which in turn extends the life of ties and other track materials. These costs are tracked separately from the underlying assets and depreciated over the period to the next estimated similar ballast program. Spot replacement of ballast is considered a repair, which is expensed as incurred.
The costs of large refurbishments are capitalized and locomotive overhauls are expensed as incurred, except where overhauls represent a betterment of the locomotive in which case costs are capitalized.
The Company capitalizes development costs for major new computer systems.
The Company follows group depreciation, which groups assets that are similar in nature and have similar economic lives. The property groups are depreciated on a straight-line basis reflecting their expected economic lives determined by depreciation studies. Depreciation studies are regular reviews of asset service lives, salvage values, accumulated depreciation, and other related factors. Depreciation rates are established through these studies. Actual use and retirement of assets may vary from current estimates, and would be identified in the next study. These changes in expected economic lives would impact the amount of depreciation expense recognized in future periods. All track assets are depreciated using a straight-line method, which recognizes the value of the asset consumed as a percentage of the whole life of the asset.
When depreciable property is retired or otherwise disposed of in the normal course of business, the book value, less net salvage proceeds, is charged to accumulated depreciation and if different than the assumptions under the depreciation study could potentially result in adjusted depreciation expense over a period of years. However, when removal costs exceed the salvage value on assets and the Company has no legal obligation to remove the assets, the removal costs incurred are charged to income in the period in which the assets are removed and are not charged to accumulated depreciation.
For certain asset classes, the historical cost of the asset is separately recorded in the Company’s property records. This amount is retired from the property records upon retirement of the asset. For assets for which the historical cost cannot be separately identified the amount of the gross book value to be retired is estimated using either an indexation methodology, whereby the current replacement cost of the asset is indexed to the estimated year of installation for the asset, or a first-in, first-out approach, or statistical analysis is used to determine the age of the retired asset. The Company uses indices that closely correlate to the principal costs of the assets.
There are a number of estimates inherent in the depreciation and retirement processes and as it is not possible to precisely estimate each of these variables until a group of property is completely retired, the Company regularly monitors the estimated service lives of assets and the associated accumulated depreciation for each asset class to ensure depreciation rates are appropriate. If the recorded amounts of accumulated depreciation are greater or less than the amounts indicated by the depreciation studies, then the excess or deficit is amortized as a component of depreciation expense over the remaining service lives of the applicable asset classes.
For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in the Company’s depreciation studies, the Company records a gain or loss for the difference between net proceeds and net book value of the assets sold or retired. The accumulated depreciation to be retired includes asset-specific accumulated depreciation, when known, and an appropriate portion of the accumulated depreciation recorded for the relevant asset class as a whole, calculated using a cost-based allocation.
Revisions to the estimated useful lives and net salvage projections constitute a change in accounting estimate and are addressed prospectively by amending depreciation rates.
Equipment under finance lease is included in Properties and depreciated over the period of expected use.
Leases
The Company has leases for rolling stock, buildings, vehicles, railway equipment, roadway machines, and information systems hardware. The Company has entered into rolling stock and roadway machine leases that are fully variable or contain both fixed and variable components. Variable components are dependent on the hours and miles that the underlying equipment has been used. Fixed-term, short-term, and variable operating lease costs are recorded in "Equipment rents" and "Purchased services and other" on the Company's Consolidated Statements of Income. Components of finance lease costs are recorded in "Depreciation and amortization" and "Net interest expense" on the Company's Consolidated Statements of Income.
The Company determines lease existence and classification at the lease inception date. Leases are identified when an agreement conveys the right to control identified property for a period of time in exchange for consideration. The Company recognizes both an operating lease liability and right-of-use (“ROU”) asset for operating leases with fixed terms and in-substance fixed terms. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments include fixed and variable payments that are based on an index or a rate. If the Company's leases do not provide a readily determinable implicit interest rate, the Company uses internal incremental secured borrowing rates for comparable tenor in the same currency at the commencement date in determining the present value of lease payments. Operating and finance lease ROU assets also include lease prepayments and initial direct costs, but are reduced by lease incentives. The lease term may include periods associated with options to extend or exclude periods associated with options to terminate the lease when it is reasonably certain that the Company will exercise these options.
The Company has short-term operating leases with terms of 12 months or less, some of which include options to purchase that the Company is not reasonably certain to exercise. The Company has elected to apply the recognition exemption and, as such, accounts for leases with a term of 12 months or less off-balance sheet. Therefore, lease payments on these short-term operating leases are not included in operating lease ROU assets and liabilities, but are recognized as an expense in the Company's Consolidated Statements of Income on a straight-line basis over the term of the lease. Further, the Company has elected to combine lease and non-lease components for all leases, except for leases of roadway machines and information systems hardware.
Assets held for sale
Assets to be disposed that meet the held for sale criteria are reported in "Other assets" at the lower of their carrying amount and fair value, less costs to sell, and are no longer depreciated. This classification is applied at the date at which applicable criteria for recognition are met.
Government assistance
By analogy to the grant model of accounting within International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance, the Company records government assistance from various levels of the Canadian and U.S. governments and government agencies when the conditions of their receipt are complied with and there is reasonable assurance that the assistance will be received.
Government assistance related to properties has as a primary condition that the Company should purchase, construct, or otherwise acquire property, plant, and equipment. Under certain government assistance arrangements, there is a secondary condition that requires the Company to repay a portion of the assistance if certain conditions related to the assets are not adhered to during a specified period. In these cases, it is the Company's intention to comply with all conditions imposed by the terms of the government assistance. Government assistance received or receivable related to the Company's property assets is deducted from the cost of the assets in the Consolidated Balance Sheets within "Properties" and amortized over the same period as the related assets in "Depreciation and amortization" in the Consolidated Statements of Income.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of identifiable net assets acquired. Goodwill is allocated at the date of the business combination to the reporting unit that is expected to benefit from the business acquisition which, after integration of operations with the railway network, may be different than the acquired business.
The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year as at October 1, or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test. Qualitative factors include but are not limited to, economic, market and industry conditions, cost factors, overall financial performance of the reporting unit, and events such as notable changes in management or customers. If the assessment of qualitative factors indicates that the carrying value is less than the fair value, then performing the quantitative goodwill impairment test is unnecessary. The quantitative assessment compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than its carrying value, goodwill is impaired. The impairment charge that would be recognized is the excess of the carrying value over the fair value of the reporting unit, limited to the total amount of goodwill allocated to the reporting unit.
The Company defines the fair value of a reporting unit as the price expected to be received to sell the entire reporting unit in an orderly transaction between market participants as of the impairment date. In order to determine the fair value of a reporting unit, the Company uses the discounted cash flow method with a pre-tax discount rate, reflecting current market assessments of the time value of money and the risks specific to the asset(s).
Intangible assets with finite lives are amortized on a straight-line basis over the estimated useful lives of the respective assets. Favourable leases, customer relationships, and interline contracts have amortization periods up to 20 years. When there is a change in the estimated useful life of an intangible asset with a finite life, amortization is adjusted prospectively.
The Company tests the recoverability of its intangible assets whenever future undiscounted cash flows indicate that the carrying amount may not be recoverable. If the carrying amount of an intangible asset exceeds the fair value, an impairment loss will be recognized in the Company's Consolidated Statements of Income for the difference between the carrying amount of the asset and fair value.
Pensions and other benefits
Pension costs are actuarially determined using the projected benefit method pro-rated over the credited service periods of employees. This method incorporates management’s best estimates of expected plan investment performance, salary escalation, and retirement ages of employees. The expected return on plan assets is calculated using market-related asset values developed from a five-year average of market values for the fund’s public equity securities and absolute return strategies (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the fund’s fixed income, real estate, infrastructure, and private debt securities, subject to the market-related asset value not being greater than 120% of the market value nor being less than 80% of the market value. The discount rate used to determine the projected benefit obligation is based on blended market interest rates on high-quality debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation and the market-related value of plan assets are amortized over the expected average remaining service period of active employees expected to receive benefits under the plan (approximately 13 years). Prior service costs arising from collectively bargained amendments to pension plan benefit provisions are amortized over the term of the applicable union agreement. Prior service costs arising from all other sources are amortized over the expected average remaining service period of active employees who are expected to receive benefits under the plan at the date of amendment.
Costs for post-retirement and post-employment benefits other than pensions, including post-retirement health care and life insurance and some workers’ compensation and long-term disability benefits in Canada, are actuarially determined on a basis similar to pension costs.
The over or under funded status of defined benefit pension and other post-retirement benefit plans are measured as the difference between the fair value of the plan assets and the benefit obligation, and are recognized on the consolidated balance sheets. In addition, any unrecognized actuarial gains and losses and prior service costs that arise during the period are recognized as a component of “Other comprehensive income (loss)”, net of tax.
Gains and losses on post-employment benefits that do not vest or accumulate, including some workers’ compensation and long-term disability benefits in Canada, are included immediately on the Company's Consolidated Statements of Income as "Other components of net periodic benefit recovery".
The current service cost component of net periodic benefit cost is reported in "Compensation and benefits" for pensions and post-retirement benefits, and in "Purchased services and other" for self-insured workers' compensation and long-term disability benefits on the Company's Consolidated Statements of Income. Other components of net periodic benefit cost or recovery are reported in "Other components of net periodic benefit recovery" outside of Operating income on the Company's Consolidated Statements of Income.
Capitalization of pension costs, when applicable, is restricted to the current service cost component of net periodic benefit cost.
Financial instruments
Financial instruments are contracts that give rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial instruments are recognized initially at fair value, which is the amount of consideration that would be agreed upon in an arm’s-length transaction between willing parties.
Subsequent measurement depends on how the financial instruments have been classified. Accounts receivable and other investments, classified as loans and receivables, are measured at amortized cost, using the effective interest method. Cash and cash equivalents and derivatives are classified as held for trading and are measured at fair value. Accounts payable, accrued liabilities, short-term borrowings, other long-term liabilities, and long-term debt are also measured at amortized cost.
Derivative financial instruments
Derivative financial and commodity instruments may be used from time to time by the Company to manage its exposure to risks relating to foreign currency exchange rates, stock-based compensation, interest rates, and fuel prices. When the Company utilizes derivative instruments in hedging relationships, the Company identifies, designates, and documents those hedging transactions and regularly tests the transactions to demonstrate effectiveness in order to continue hedge accounting.
All derivative instruments are classified as held for trading and recorded at fair value. Any change in the fair value of derivatives that are not designated as hedges is recognized in the period in which the change occurs in the Company's Consolidated Statements of Income in the line item to which the derivative instrument is related.
For fair value hedges, the periodic changes in value are recognized in income, on the same line as the changes in value of the hedged items are also recorded. For designated cash flow hedges, the changes in value of the hedging instrument is recognized in “Other comprehensive income (loss)” and remains in “Accumulated other comprehensive income (loss)” until the related hedged item settles, at which time amounts recognized in “Accumulated other comprehensive income (loss)” are reclassified to the same income or balance sheet account that records the hedged item. The changes in value of the hedging instrument is recognized in the Company's Consolidated Statements of Income if derivatives designated as cash flow hedges are subsequently de-designated.
Cash flows relating to derivative instruments designated as hedges are included in the same category as the related hedged items on the Company's Consolidated Statements of Cash Flows.
Environmental remediation
Environmental remediation accruals, recorded on an undiscounted basis unless a reliably determinable estimate as to amount and timing of costs can be established, cover site-specific remediation programs. The accruals are recorded when the costs to remediate are probable and reasonably estimable. Certain future costs to monitor sites are discounted at an adjusted risk-free rate. Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion, which is recorded in “Accounts payable and accrued liabilities”.
Stock-based compensation
The Company follows the fair value based approach to account for stock options. Compensation expense and an increase in “Additional paid-in capital” are recognized for stock options over their vesting period or over the period from the grant date to the date employees become eligible to retire, when this is shorter than the vesting period, based on their fair values on the grant date as determined using the Black-Scholes option-pricing model. Forfeitures are estimated at issuance and monitored on a periodic basis. Any consideration paid by employees on exercise of stock options is credited to “Share capital” when the option is exercised and the recorded fair value of the option is removed from “Additional paid-in capital" and credited to “Share capital”.
Compensation expense is also recognized for performance share units (“PSUs”), performance deferred share units ("PDSUs"), deferred share units ("DSUs"), and restricted share units (“RSUs”) that settle in cash using the fair value method. Compensation expense is recognized over the vesting period or over the period from the grant date to the date employees become eligible to retire, when this is shorter than the vesting period where applicable. Forfeitures are estimated at issuance and monitored on a periodic basis.
The employee share purchase plan gives rise to compensation expense that is recognized using the issue price by amortizing the cost over the vesting period.
2. Accounting changes
Implemented in 2022
Government Assistance
On January 1, 2022, the Company adopted the new ASU 2021-10, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 832, Government Assistance. The amendment is made to increase transparency by introducing specific disclosure requirements for entities who apply a grant or contribution model by analogy to account for transactions with a government. This update is applied to government assistance transactions within the scope of this amendment that are in the financial statements at the date of initial application and prospectively to new transactions entered into after initial application. See Note 1 and Note 12 for further discussion on government assistance.
All other accounting pronouncements that became effective during the period covered by the Consolidated Financial Statements did not have a material impact on the Company's Consolidated Financial Statements and related disclosures.
Future Changes
Contract Assets and Contract Liabilities Acquired in a Business Combination
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This amendment introduces the requirement for an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the requirements of FASB ASC Topic 606, Revenue from Contracts with Customers, rather than at fair value. This amendment will be effective prospectively from January 1, 2023, with early adoption permitted. The Company plans to adopt this update from January 1, 2023, with anticipation that upon obtaining effective control of Kansas City Southern ("KCS") following approval by the Surface Transportation Board ("STB"), any contract assets and liabilities of KCS will be recorded in the purchase price allocation in compliance with the update.
All other recently issued accounting pronouncements have been assessed and are not expected to have a significant impact on the Company's consolidated financial statements and related disclosures.
3. Revenues
The following table disaggregates the Company’s revenues from contracts with customers by major source:
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | | 2021 | 2020 | |
Freight | | | |
Grain | $ | 1,776 | | $ | 1,684 | | $ | 1,829 | |
Coal | 577 | | 625 | | 566 | |
Potash | 581 | | 463 | | 493 | |
Fertilizers and sulphur | 332 | | 305 | | 290 | |
Forest products | 403 | | 348 | | 328 | |
Energy, chemicals and plastics | 1,394 | | 1,563 | | 1,519 | |
Metals, minerals and consumer products | 884 | | 728 | | 629 | |
Automotive | 438 | | 376 | | 324 | |
Intermodal | 2,242 | | 1,724 | | 1,563 | |
Total freight revenues | 8,627 | | 7,816 | | 7,541 | |
Non-freight excluding leasing revenues | 103 | | 100 | | 107 | |
Revenues from contracts with customers | 8,730 | | 7,916 | | 7,648 | |
Leasing revenues | 84 | | 79 | | 62 | |
Total revenues | $ | 8,814 | | $ | 7,995 | | $ | 7,710 | |
Contract liabilities
Contract liabilities represent payments received for performance obligations not yet satisfied and relate to deferred revenue and are presented as components of "Accounts payable and accrued liabilities" and "Other long-term liabilities" on the Company's Consolidated Balance Sheets.
The following table summarizes the changes in contract liabilities for the years ended December 31, 2022 and 2021:
| | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | |
Opening balance | $ | 67 | | $ | 61 | | |
Revenue recognized that was included in the contract liability balance at the beginning of the period | (21) | | (48) | | |
Increase due to consideration received, net of revenue recognized during the period | 18 | | 54 | | |
Closing balance | $ | 64 | | $ | 67 | | |
4. Other expense (income)
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Foreign exchange gain on debt and lease liabilities | $ | — | | $ | (7) | | $ | (14) | |
Other foreign exchange gains | — | | (4) | | (1) | |
Acquisition-related costs (Note 10) | — | | 247 | | — | |
Other | 17 | | 1 | | 8 | |
Other expense (income) | $ | 17 | | $ | 237 | | $ | (7) | |
5. Income taxes
The following is a summary of the major components of the Company’s income tax expense:
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Current income tax expense | $ | 492 | | $ | 526 | | $ | 537 | |
Deferred income tax expense | | | |
Origination and reversal of temporary differences | 101 | | 259 | | 277 | |
Effect of tax rate decrease | (25) | | (11) | | (32) | |
Effect of hedge of net investment in foreign subsidiaries (Note 7)
| 59 | | (3) | | (18) | |
Other | 1 | | (3) | | (6) | |
Total deferred income tax expense | 136 | | 242 | | 221 | |
Total income taxes | $ | 628 | | $ | 768 | | $ | 758 | |
Income before income tax expense | | | |
Canada | $ | 2,236 | | $ | 2,899 | | $ | 2,518 | |
Foreign | 1,909 | | 721 | | 684 | |
Total income before income tax expense | $ | 4,145 | | $ | 3,620 | | $ | 3,202 | |
Income tax expense | | | |
Current | | | |
Canada | $ | 333 | | $ | 404 | | $ | 412 | |
Foreign | 159 | | 122 | | 125 | |
Total current income tax expense | 492 | | 526 | | 537 | |
Deferred | | | |
Canada | 177 | | (179) | | 231 | |
Foreign | (41) | | 421 | | (10) | |
Total deferred income tax expense | 136 | | 242 | | 221 | |
Total income taxes | $ | 628 | | $ | 768 | | $ | 758 | |
The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carryforwards. The items comprising the deferred income tax assets and liabilities are as follows:
| | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 |
Deferred income tax assets | | |
Tax losses and other attributes carried forward(1) | $ | 70 | | $ | 19 | |
Liabilities carrying value in excess of tax basis | 108 | | 124 | |
Unrealized foreign exchange losses | 50 | | — | |
Environmental remediation costs | 22 | | 22 | |
Other(1) | 5 | | 5 | |
| | |
| | |
Total deferred income tax assets | 255 | | 170 | |
Valuation allowance | (4) | | — | |
Total net deferred income tax assets | $ | 251 | | $ | 170 | |
Deferred income tax liabilities | | |
Investment in Kansas City Southern (Note 10) | 7,526 | | 7,079 | |
Properties carrying value in excess of tax basis | 4,149 | | 3,887 | |
Pensions carrying value in excess of tax basis | 691 | | 441 | |
Unrealized foreign exchange gains | — | | 13 | |
Other | 82 | | 102 | |
Total deferred income tax liabilities | 12,448 | | 11,522 | |
Total net deferred income tax liabilities | $ | 12,197 | | $ | 11,352 | |
(1) 2021 comparative figures have been reclassified to conform with current period presentation.
The Company’s consolidated effective income tax rate differs from the expected Canadian statutory tax rates. Expected income tax expense at statutory rates is reconciled to income tax expense as follows:
| | | | | | | | | | | |
(in millions of Canadian dollars, except percentage) | 2022 | 2021 | 2020 |
Statutory federal and provincial income tax rate (Canada) | 26.12 | % | 26.12 | % | 26.31 | % |
Expected income tax expense at Canadian enacted statutory tax rates | $ | 1,083 | | $ | 946 | | $ | 842 | |
(Decrease) increase in taxes resulting from: | | | |
Gains not subject to tax | (9) | | (116) | | (23) | |
Canadian tax rate differentials | (12) | | (22) | | (3) | |
Foreign tax rate differentials | (94) | | (37) | | (32) | |
Effect of tax rate decrease | (25) | | (11) | | (32) | |
Deduction for dividends taxed on outside basis | (270) | | — | | — | |
Unrecognized tax benefits | (24) | | (2) | | (7) | |
Other | (21) | | 10 | | 13 | |
Income tax expense | $ | 628 | | $ | 768 | | $ | 758 | |
In 2022, the Company recorded a deferred tax recovery of $19 million (U.S. $15 million) on the outside basis difference of the change in the equity investment in KCS from December 31, 2021. The outside basis difference is the excess of the carrying amount of the Company’s investment in KCS for financial reporting over the tax basis of this investment. Reversal of this deferred tax liability is expected to be recognized through income tax expense.
In 2022, the Company revalued its deferred income tax balances as a result of a corporate income tax rate decrease in the state of Iowa, resulting in a net recovery of $12 million.
In 2021, the Company recorded a deferred tax liability of $7.2 billion (U.S. $5.6 billion) on the outside basis difference of its investment in KCS. This balance is held in a U.S. functional currency entity and subsequently revalued to $7.5 billion at December 31, 2022 ($7.1 billion at December 31, 2021) due to changes in FX.
In 2021, the Company recorded a deferred tax recovery of $33 million (U.S. $26 million) on the outside basis difference of the change in the equity investment in KCS from initial recognition on December 14, 2021.
In 2020, the Company revalued its deferred income tax balances as a result of a tax filing election for the state of North Dakota resulting in a lower corporate income tax rate and a net recovery of $29 million.
With the exception of the deferred tax liability recorded on the outside basis difference of its investment in KCS, the Company has not provided a deferred liability for the income taxes, if any, which might become payable on any temporary difference associated with its foreign investments because the Company intends to indefinitely reinvest in its foreign investments and has no intention to realize this difference by a sale of its interest in foreign investments. It is not practical to calculate the amount of the deferred tax liability.
It is more likely than not that the Company will realize the majority of its deferred income tax assets from the generation of future taxable income, as the payments for provisions, reserves, and accruals are made and losses and tax credits carried forward are utilized.
As at December 31, 2022, the Company had tax effected operating losses carried forward of $22 million (2021 – $15 million), which have been recognized as a deferred tax asset. The losses carried forward will begin to expire in 2034. The Company expects to fully utilize these tax effected operating losses before their expiry. The Company did not have any minimum tax credits or investment tax credits carried forward.
As at December 31, 2022, the Company had $2 million (2021 – $2 million) in tax effected capital losses carried forward recognized as a deferred tax asset. The Company has no unrecognized tax benefits from capital losses as at December 31, 2022 and 2021.
The following table provides a reconciliation of uncertain tax positions in relation to unrecognized tax benefits for Canada and the U.S. for the year ended December 31:
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Unrecognized tax benefits at January 1 | $ | 49 | | $ | 55 | | $ | 52 | |
Increase in unrecognized: | | | |
Tax benefits related to the current year | 1 | | — | | — | |
Tax benefits related to prior years | — | | — | | 10 | |
Dispositions: | | | |
Gross uncertain tax benefits related to prior years | (30) | | (6) | | (9) | |
Settlements with taxing authorities | — | | — | | 2 | |
Unrecognized tax benefits at December 31 | $ | 20 | | $ | 49 | | $ | 55 | |
If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2022 would impact the Company’s effective tax rate.
During the fourth quarter of 2019, a tax authority proposed an adjustment for a prior tax year without assessing taxes. Although the Company had commenced action to have the proposal removed, an increase in uncertain tax position was recorded on deferred income tax liability and expense in the amount of $24 million. While the proposed adjustment was withdrawn during 2020, the ultimate resolution of this matter was not previously determinable. During the fourth quarter of 2022, the Company recorded a deferred tax recovery of $24 million to reverse this uncertain tax position as the amount is no longer expected to be realized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of "Income tax expense" in the Company’s Consolidated Statements of Income. The net amount of accrued interest and penalties in 2022 was a $5 million expense (2021 – $4 million expense; 2020 – $1 million recovery). The total amount of accrued interest and penalties associated with unrecognized tax benefits as at December 31, 2022 was $18 million (2021 – $13 million; 2020 – $9 million).
The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, or the relevant income tax in other international jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax matters for the
years through 2017. The federal and provincial income tax returns filed for 2018 and subsequent years remain subject to examination by the Canadian taxation authorities. The Canadian international audit for 2014 and subsequent years is ongoing. The income tax returns for 2019 and subsequent years continue to remain subject to examination by the IRS and U.S. state tax jurisdictions. The Company believes that it has recorded sufficient income tax reserves as at December 31, 2022, with respect to these income tax examinations.
6. Earnings per share
| | | | | | | | | | | |
(in millions of Canadian dollars, except per share data) | 2022 | 2021 | 2020 |
Net income | $ | 3,517 | | $ | 2,852 | | $ | 2,444 | |
Weighted-average basic shares outstanding (millions) | 930.0 | | 679.7 | | 677.2 | |
Dilutive effect of stock options (millions) | 2.9 | | 3.1 | | 2.7 | |
Weighted-average diluted shares outstanding (millions) | 932.9 | | 682.8 | | 679.9 | |
Earnings per share – basic | $ | 3.78 | | $ | 4.20 | | $ | 3.61 | |
Earnings per share – diluted | $ | 3.77 | | $ | 4.18 | | $ | 3.59 | |
In 2022, there were 0.3 million options excluded from the computation of diluted earnings per share because their effects were not dilutive (2021 – 0.1 million; 2020 – nil).
7. Other comprehensive income (loss) and accumulated other comprehensive income (loss)
The components of Other comprehensive income (loss) and the related tax effects are as follows:
| | | | | | | | | | | |
(in millions of Canadian dollars) | Before tax amount | Income tax (expense) recovery | Net of tax amount |
For the year ended December 31, 2022 | | | |
Unrealized foreign exchange gain (loss) on: | | | |
Translation of the net investment in U.S. subsidiaries and equity method investees | $ | 2,099 | | $ | — | | $ | 2,099 | |
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries and equity method investees (Note 16) | (471) | | 59 | | (412) | |
Realized loss on derivatives designated as cash flow hedges recognized in income | 6 | | (2) | | 4 | |
Change in pension and other benefits actuarial gains and losses | 706 | | (182) | | 524 | |
Change in prior service pension and other benefit costs | (26) | | 7 | | (19) | |
Equity accounted investments | (5) | | 3 | | (2) | |
Other comprehensive income | $ | 2,309 | | $ | (115) | | $ | 2,194 | |
For the year ended December 31, 2021 | | | |
Unrealized foreign exchange (loss) gain on: | | | |
Translation of the net investment in U.S. subsidiaries and equity method investees | $ | (316) | | $ | — | | $ | (316) | |
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries and equity method investees (Note 16) | 25 | | (3) | | 22 | |
Change in derivatives designated as cash flow hedges: | | | |
Realized loss on derivatives designated as cash flow hedges recognized in income | 10 | | (3) | | 7 | |
Unrealized gain on cash flow hedges | 38 | | (9) | | 29 | |
Change in pension and other benefits actuarial gains and losses | 1,286 | | (323) | | 963 | |
Equity accounted investments | 9 | | (3) | | 6 | |
Other comprehensive income | $ | 1,052 | | $ | (341) | | $ | 711 | |
For the year ended December 31, 2020 | | | |
Unrealized foreign exchange (loss) gain on: | | | |
Translation of the net investment in U.S. subsidiaries | $ | (118) | | $ | — | | $ | (118) | |
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 16) | 136 | | (18) | | 118 | |
Realized loss on derivatives designated as cash flow hedges recognized in income | 10 | | (3) | | 7 | |
Change in pension and other benefits actuarial gains and losses | (403) | | 108 | | (295) | |
Change in prior service pension and other benefit costs | (4) | | 1 | | (3) | |
Equity accounted investments | (1) | | — | | (1) | |
Other comprehensive loss | $ | (380) | | $ | 88 | | $ | (292) | |
Changes in Accumulated other comprehensive (loss) income by component are as follows:
| | | | | | | | | | | | | | | | | |
(in millions of Canadian dollars) | Foreign currency net of hedging activities(1) | Derivatives(1) | Pension and post- retirement defined benefit plans(1) | Equity accounted investments(1) | Total(1) |
Opening balance, January 1, 2022 | $ | (182) | | $ | (4) | | $ | (1,915) | | $ | (2) | | $ | (2,103) | |
Other comprehensive income before reclassifications | 1,687 | | — | | 387 | | 164 | | 2,238 | |
Amounts reclassified from accumulated other comprehensive loss | — | | 4 | | 118 | | (166) | | (44) | |
Net other comprehensive income (loss) | 1,687 | | 4 | | 505 | | (2) | | 2,194 | |
Closing balance, December 31, 2022 | $ | 1,505 | | $ | — | | $ | (1,410) | | $ | (4) | | $ | 91 | |
Opening balance, January 1, 2021 | $ | 112 | | $ | (40) | | $ | (2,878) | | $ | (8) | | $ | (2,814) | |
Other comprehensive (loss) income before reclassifications | (294) | | 28 | | 808 | | 6 | | 548 | |
Amounts reclassified from accumulated other comprehensive loss | — | | 8 | | 155 | | — | | 163 | |
Net other comprehensive (loss) income | (294) | | 36 | | 963 | | 6 | | 711 | |
Closing balance, December 31, 2021 | $ | (182) | | $ | (4) | | $ | (1,915) | | $ | (2) | | $ | (2,103) | |
(1) Amounts are presented net of tax.
8. Accounts receivable, net
| | | | | | | | | | | | | | | | | | | | |
| As at December 31, 2022 | As at December 31, 2021 |
(in millions of Canadian dollars) | Freight | Non-Freight | Total | Freight | Non-Freight | Total |
Total accounts receivable | $ | 785 | | $ | 272 | | $ | 1,057 | | $ | 614 | | $ | 239 | | $ | 853 | |
Allowance for credit losses | (27) | | (14) | | (41) | | (20) | | (14) | | (34) | |
Total accounts receivable, net | $ | 758 | | $ | 258 | | $ | 1,016 | | $ | 594 | | $ | 225 | | $ | 819 | |
9. Property sale
During the first quarter of 2021, the Company exchanged property and property easements in Chicago with a government agency for proceeds of $103 million including cash of $61 million and property and permanent easement assets at a fair value of $33 million and $9 million, respectively. Fair value was determined based on comparable market transactions. The Company recorded a gain within "Purchased services and other" of $50 million ($38 million after tax) from the transaction, and a deferred gain of $53 million, which is being recognized in income over the period of use of certain easements. The Company recognized $14 million of the deferred gain into income in 2022 (2021 – $13 million).
10. Business acquisitions
KCS
On March 21, 2021, the Company entered into an Agreement and Plan of Merger (the "Original Merger Agreement") with KCS, under which CP agreed to acquire KCS in a stock and cash transaction. KCS is a U.S. Class I railway with approximately 7,100 route miles extending from the midwest and southeast portions of the United States south into Mexico and connects with all Class I railways. KCS is connected to the CP network at Kansas City.
On May 21, 2021, KCS terminated the Original Merger Agreement in order to enter into a merger agreement with Canadian National Railway Company ("CN") (the "CN Merger Agreement"). As a result, and under the terms of the Original Merger Agreement, KCS concurrently paid a merger termination fee of $845 million (U.S. $700 million) to the Company, recorded as "Merger termination fee" in the Company's Consolidated Statements of Income.
On August 10, 2021, CP submitted a proposal to acquire KCS in a stock and cash transaction representing an enterprise value of approximately U.S. $31 billion, based on the CP closing price on August 9, 2021, which included the assumption of U.S. $3.8 billion of outstanding KCS debt. The terms of the proposal were very similar in nearly every respect to those in the Original Merger Agreement, except for an increase in the share exchange ratio from 2.445 to 2.884. Following the Surface Transportation Board's ("STB") decision on August 31, 2021 to refuse CN and KCS's joint motion for voting trust approval in respect of the CN Merger Agreement, and after renewed negotiations with CP, KCS's Board of Directors deemed CP's proposal a "Company Superior Proposal", as defined in the CN Merger Agreement, and terminated the CN Merger Agreement.
On September 15, 2021, upon KCS's termination of the CN Merger Agreement, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with KCS. Pursuant to the terms of the CN Merger Agreement, KCS paid a merger termination fee of U.S. $700 million and refunded the CP merger termination fee of U.S. $700 million to CN (together, the "CN merger termination fees"). In connection with the Merger Agreement, the Company remitted $1,773 million (U.S. $1,400 million) to KCS on September 15, 2021 in connection with KCS's payment of the CN merger termination fees, included as part of the cost of the acquisition of KCS within "Investment in Kansas City Southern" in the Company's Consolidated Balance Sheets. This payment is included in "Investment in Kansas City Southern" on the Company's Consolidated Statements of Cash Flows.
On December 14, 2021, following approval of the transaction by the shareholders of both the Company and KCS, receipt of Mexican regulatory approvals, satisfaction or waiver of customary closing conditions and pursuant to the terms set forth in the Merger Agreement, the acquisition of KCS was consummated and all outstanding stock of KCS was deposited into a voting trust and held by a single trustee as trust stock. 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. Under the terms of the Merger Agreement, the Company issued approximately 262.6 million Common Shares to existing KCS common stockholders at the exchange ratio of 2.884 Common Shares per share of KCS common stock (valued at $23.5 billion (U.S. $18.3 billion)) and paid cash consideration to existing KCS stockholders of U.S. $90 per share of KCS common stock and U.S. $37.50 per share of KCS preferred stock for a total of approximately $10.5 billion (U.S. $8.2 billion). Share consideration, cash consideration, and the above described payments to KCS totalled approximately $36 billion (U.S. $28 billion). The cash consideration paid was financed by issuances of long-term debt of approximately $2.2 billion and $8.6 billion (U.S. $6.7 billion) on November 24, 2021 and December 2, 2021, respectively (see Note 15).
The Company accounts for its investment in KCS using the equity method of accounting while the STB considers the Company's application to control KCS. The investment in KCS of $45,091 million as at December 31, 2022, included $1,074 million of equity earnings of KCS and foreign currency translation of $2,891 million offset by dividends of $1,157 million received in the year ended December 31, 2022. Included within the $1,074 million of equity earnings of KCS recognized for the year ended December 31, 2022, was amortization (net of tax) of $163 million of basis differences (see Note 11). These basis differences relate to depreciable property, plant and equipment, intangible assets with definite lives, and long-term debt, and are amortized over the related assets' remaining useful lives, and the remaining terms to maturity of the debt instruments.
During the year ended December 31, 2022, the Company incurred $74 million in acquisition-related costs, recorded within "Purchased services and other" in the Company's Consolidated Statements of Income. Acquisition-related costs of $49 million, incurred by KCS during the year ended December 31, 2022, are included within "Equity (earnings) loss of Kansas City Southern" in the Company's Consolidated Statements of Income. Equity earnings of KCS recognized for the year ended December 31, 2022, also included KCS's gain on the unwinding of interest rate hedges of $212 million, which was net of CP's associated purchase accounting basis differences and tax.
During the year ended December 31, 2021, the Company incurred $599 million in acquisition-related costs associated with the KCS acquisition, of which $183 million were recorded within "Purchased services and other"and $247 million were recorded within "Other expense (income)" in the Company's Consolidated Statements of Income. Acquisition-related costs of $169 million, incurred by KCS during the 18 days from the date the acquisition closed into the voting trust, are included within "Equity (earnings) loss of Kansas City Southern" in the Company's Consolidated Statements of Income. The acquisition-related costs recorded within "Other expense (income)" include the changes in fair value and realized gain from settlement of the FX forward contracts, changes in fair value and realized loss of the bond locks and forward starting floating-to-fixed interest rate swaps associated with the debt issuances (see Note 15), amortization of financing fees associated with the credit facilities (see Note 15), and FX gains on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition. Total financing fees paid for a bridge facility associated with the KCS acquisition for the year ended December 31, 2021 were $51 million , presented under "Cash (used in) provided by financing activities" in the Company's Consolidated Statements of Cash Flows.
DRTP
On December 22, 2020, CP completed its acquisition of the 83.5% ownership of the Detroit River Tunnel Partnership (“DRTP”) held by OMERS Infrastructure Management Inc. (“OMERS”) for cash, net of cash acquired, of $398 million. The purchase price was subject to customary closing adjustments, including any final adjustment for closing working capital and certain closing costs. With this acquisition CP obtained 100% ownership of DRTP. The acquisition of DRTP will reduce CP’s operating costs related to movements through the tunnel which amounted to approximately $34 million in 2020, and better integrate the eastern part of the network. DRTP owns a 1.6-mile rail tunnel linking Windsor, Ontario, and Detroit, Michigan and additional, separate lands in both cities. The acquisition was funded with cash from operations and CP's commercial paper program.
The acquisition of DRTP was accounted for as a business combination under the acquisition method of accounting. The acquired assets and assumed liabilities were recorded at their estimated fair values at the date of acquisition. The fair values were estimated by applying an income approach using the discounted cash flow method of future cash flows, appraised land values reflecting a corridor enhancement factor where appropriate, and depreciated replacement cost for depreciable assets including the tunnel, track, signaling systems, and other railway related infrastructure assets.
Prior to the close of the transaction, CP owned a 16.5% interest in DRTP, which was accounted for as an equity method investment. The previously held equity investment was remeasured to fair value which was determined from the negotiated purchase price that reflected a market value established in a competitive bid process. As a result of the acquisition, in 2020, the Company recognized a before-tax gain of $68 million on the remeasurement to fair value of its equity interest within "Purchased services and other", calculated as the difference between the fair value of CP's 16.5% interest in DRTP of $81 million and the book value of the interest of $13 million. The following summarizes the fair values of the acquired assets and liabilities of DRTP:
| | | | | |
(in millions of Canadian dollars) | December 22, 2020 |
Fair value of net assets acquired: | |
Accounts receivable, net | $ | 5 | |
Properties | 436 | |
Intangible assets (Note 13) | 4 | |
Accounts payable and accrued liabilities | (1) | |
Deferred taxes | (55) | |
Total identifiable assets and liabilities | $ | 389 | |
Goodwill (Note 13) | 90 | |
| $ | 479 | |
Consideration: | |
Cash, net of cash acquired | $ | 398 | |
Fair value of previously held equity method investment | 81 | |
Total consideration | $ | 479 | |
The goodwill of $90 million relates primarily to the contract that DRTP has for CP’s use of the tunnel and deferred taxes recognized as a result of the purchase price allocation. The goodwill recognized is not deductible for tax purposes.
Prior to the acquisition of DRTP, CP had pre-existing agreements to use the tunnel and to operate and manage the tunnel on behalf of DRTP. On acquisition, no gain or loss was recognized in respect of the effective settlement of these pre-existing relationships as they were determined to be at fair market value based on an assessment of current market conditions and market participants.
Acquired cash and cash equivalents of $6 million is presented as a reduction of cash used in investing activities in the Company's 2020 Consolidated Statements of Cash Flows.
CP has not provided pro forma information relating to the pre-acquisition period as it is not material.
11. Investment in KCS
On December 14, 2021, the Company acquired KCS and deposited 100% of the outstanding KCS common stock into a voting trust. The Company recorded its investment in KCS at its acquisition cost under the equity method of accounting pending approval from the STB of the Company's application for control of KCS.
The investment carrying cost of $45,091 million reported on the Company's Consolidated Balance Sheets as at December 31, 2022 (December 31, 2021 - $42,309 million) reflects the total of the consideration paid to acquire KCS, the offsetting asset recorded on recognition of a deferred tax liability computed on an outside basis (see Note 5), the subsequent recognition of equity income recorded in Equity (earnings) loss of KCS and Other Comprehensive Income of KCS, the receipt of dividends from KCS, and foreign currency translation based on the year-end exchange rate.
The approximate $30 billion difference in value between the consideration paid to acquire KCS and the underlying carrying value of the net assets of KCS as at December 14, 2021, immediately prior to the acquisition by the Company, is the basis difference. The Company has estimated the fair value of KCS and its underlying net assets for the purposes of amortizing the basis difference, as required by the equity method of accounting. The fair value of KCS's underlying net assets, including property, plant and equipment, identifiable intangible assets, and other assets and liabilities, have been estimated on a preliminary basis and may be subject to change as additional information becomes available.
The basis differences that relate to depreciable property, plant and equipment, intangible assets with definite lives, and long-term debt are amortized over the related assets' remaining useful lives, and the remaining terms to maturity of the debt instruments. The basis difference that related to interest rate
hedges was reversed upon derecognition by KCS. The remainder of the basis difference, relating to non-depreciable property, plant and equipment, intangible assets with indefinite lives, and equity method goodwill, is not amortized and is carried at cost subject to an assessment for impairment.
Subject to final approval by the STB, the Company would obtain control of KCS and would account for its acquisition of KCS as a business combination using the acquisition method of accounting. As a result, the Company would be required to remeasure the carrying value of its equity method investment in KCS to fair value. Any resultant change in the value of the investment in KCS would be recognized as a gain or loss in the Company’s Consolidated Statements of Income, including the write-down of that portion of the carrying value of the investment in KCS recorded as an offsetting asset to the outside basis deferred tax liability (see Note 5).
The following tables present summarized financial information for KCS, on its historical cost basis:
Statement of Income
| | | | | | | | |
(in millions of Canadian dollars)(1) | For the year ended December 31, 2022 | For the period December 14 to December 31, 2021 |
Total revenues | $ | 4,387 | | $ | 178 | |
Total operating expenses | 2,790 | | 287 | |
Operating income (loss) | 1,597 | | (109) | |
Less: Other(2) | (108) | | 12 | |
Income (loss) before income taxes | 1,705 | | (121) | |
Net income (loss) | $ | 1,278 | | $ | (106) | |
(1) Amounts translated at the average FX rate for the year ended December 31, 2022 of $1.00 USD = $1.30 CAD and for the period from December 14 to 31, 2021 of $1.00 USD = $1.28 CAD.
(2) Includes Equity in net earnings of KCS's affiliates, Interest expense, FX loss, Gain on settlement of treasury lock agreements, and Other income, net.
Balance Sheet
| | | | | | | | |
(in millions of Canadian dollars)(1) | As at December 31, 2022 | As at December 31, 2021 |
Assets | | |
Current assets | $ | 1,441 | | $ | 1,120 | |
Properties | 12,680 | | 11,676 | |
Other non-current assets | 340 | | 425 | |
| | |
Liabilities | | |
Current liabilities | $ | 1,748 | | $ | 619 | |
Long-term debt | 4,232 | | 4,778 | |
Other non-current liabilities | 1,987 | | 1,823 | |
Non-controlling interest | 448 | | 416 | |
(1) Amounts translated at the December 31, 2022 and 2021 year-end at FX rate of $1.00 USD = $1.35 CAD and $1.27, respectively.
12. Properties
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | 2022 | | 2021 |
(in millions of Canadian dollars except percentages) | Weighted-average annual depreciation rate | Cost | | Accumulated depreciation | | Net book value | | Cost | | Accumulated depreciation | | Net book value |
Track and roadway | 2.8 | % | $ | 22,488 | | | $ | 6,308 | | | $ | 16,180 | | | $ | 21,210 | | | $ | 5,893 | | | $ | 15,317 | |
Buildings | 2.7 | % | 1,069 | | | 254 | | | 815 | | | 1,022 | | | 266 | | | 756 | |
Rolling stock | 2.8 | % | 5,085 | | | 1,523 | | | 3,562 | | | 4,793 | | | 1,419 | | | 3,374 | |
| | | | | | | | | | | | |
Other(1) | 5.8 | % | 3,038 | | | 1,210 | | | 1,828 | | | 2,826 | | | 1,073 | | | 1,753 | |
Total | $ | 31,680 | | | $ | 9,295 | | | $ | 22,385 | | | $ | 29,851 | | | $ | 8,651 | | | $ | 21,200 | |
(1) Comparative figures have been reclassified to conform with current period presentation.
Finance leases included in properties
| | | | | | | | | | | | | | | | | | | | |
| 2022 | 2021 |
(in millions of Canadian dollars) | Cost | Accumulated depreciation | Net book value | Cost | Accumulated depreciation | Net book value |
| | | | | | |
Rolling stock | $ | 170 | | $ | 75 | | $ | 95 | | $ | 291 | | $ | 133 | | $ | 158 | |
Other | 10 | | 3 | | 7 | | 9 | | 1 | | 8 | |
Total assets held under finance lease | $ | 180 | | $ | 78 | | $ | 102 | | $ | 300 | | $ | 134 | | $ | 166 | |
Government assistance
During the year ended December 31, 2022, the Company received $32 million of government assistance towards the purchase and construction of properties.
As of December 31, 2022, the total Properties balance of $22,385 million is net of $285 million of unamortized government assistance, primarily related to the enhancement of the Company's track and roadway infrastructure. Amortization expense related to government assistance for the year ended December 31, 2022, was $11 million.
13. Goodwill and intangible assets
| | | | | | | | | | | | | | | | | | | | |
| Goodwill | | Intangible assets | |
(in millions of Canadian dollars) | Net carrying amount | | Cost | Accumulated amortization | Net carrying amount | Total goodwill and intangible assets |
Balance as at December 31, 2020 | $ | 329 | | | $ | 55 | | $ | (18) | | $ | 37 | | $ | 366 | |
Additions (Note 9) | — | | | 9 | | — | | 9 | | 9 | |
Amortization | — | | | — | | (3) | | (3) | | (3) | |
Foreign exchange impact | (1) | | | — | | — | | — | | (1) | |
Balance as at December 31, 2021 | 328 | | | 64 | | (21) | | 43 | | 371 | |
Amortization | — | | | — | | (3) | | (3) | | (3) | |
Foreign exchange impact | 16 | | | 2 | | — | | 2 | | 18 | |
Balance as at December 31, 2022 | $ | 344 | | | $ | 66 | | $ | (24) | | $ | 42 | | $ | 386 | |
14. Accounts payable and accrued liabilities
| | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 |
Trade payables | $ | 503 | | $ | 432 | |
Accrued charges | 284 | | 286 | |
Income and other taxes payable | 177 | | 164 | |
Dividends payable | 177 | | 177 | |
Accrued interest | 143 | | 141 | |
Stock-based compensation liabilities | 84 | | 126 | |
Payroll-related accruals | 79 | | 65 | |
Operating lease liabilities (Note 18) | 68 | | 59 | |
Accrued vacation | 62 | | 60 | |
Personal injury and other claims provision | 53 | | 49 | |
Other(1) | 73 | | 50 | |
Total accounts payable and accrued liabilities | $ | 1,703 | | $ | 1,609 | |
(1) 2021 comparative figures have been reclassified to conform with current period presentation.
15. Debt
The following table outlines the Company's outstanding long-term debt as at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
(in millions of Canadian dollars except percentages) | | Maturity | Currency in which payable | 2022 | 2021 |
5.100% | 10-year Medium Term Notes | (A) | Jan 2022 | CDN$ | — | | 125 | |
4.500% | 10-year Notes | (A) | Jan 2022 | U.S.$ | — | | 317 | |
4.450% | 12.5-year Notes | (A) | Mar 2023 | U.S.$ | 474 | | 444 | |
1.589% | 2-year Notes | (A) | Nov 2023 | CDN$ | 1,000 | | 1,000 | |
1.350% | 3-year Notes | (A) | Dec 2024 | U.S.$ | 2,030 | | 1,899 | |
2.900% | 10-year Notes | (A) | Feb 2025 | U.S.$ | 948 | | 887 | |
3.700% | 10.5-year Notes | (A) | Feb 2026 | U.S.$ | 338 | | 317 | |
1.750% | 5-year Notes | (A) | Dec 2026 | U.S.$ | 1,353 | | 1,266 | |
2.540% | 6.3-year Notes | (A) | Feb 2028 | CDN$ | 1,200 | | 1,200 | |
4.000% | 10-year Notes | (A) | Jun 2028 | U.S.$ | 677 | | 634 | |
3.150% | 10-year Notes | (A) | Mar 2029 | CDN$ | 399 | | 399 | |
2.050% | 10-year Notes | (A) | Mar 2030 | U.S.$ | 676 | | 633 | |
7.125% | 30-year Debentures | (A) | Oct 2031 | U.S.$ | 474 | | 444 | |
2.450% | 10-year Notes | (A) | Dec 2031 | U.S.$ | 1,896 | | 1,774 | |
5.750% | 30-year Debentures | (A) | Mar 2033 | U.S.$ | 333 | | 311 | |
4.800% | 20-year Notes | (A) | Sep 2035 | U.S.$ | 405 | | 379 | |
5.950% | 30-year Notes | (A) | May 2037 | U.S.$ | 603 | | 564 | |
6.450% | 30-year Notes | (A) | Nov 2039 | CDN$ | 400 | | 400 | |
3.000% | 20-year Notes | (A) | Dec 2041 | U.S.$ | 1,348 | | 1,261 | |
5.750% | 30-year Notes | (A) | Jan 2042 | U.S.$ | 334 | | 312 | |
4.800% | 30-year Notes | (A) | Aug 2045 | U.S.$ | 743 | | 695 | |
3.050% | 30-year Notes | (A) | Mar 2050 | CDN$ | 298 | | 298 | |
| | | | | | | | | | | | | | | | | | | | |
3.100% | 30-year Notes | (A) | Dec 2051 | U.S.$ | 2,422 | | 2,266 | |
6.125% | 100-year Notes | (A) | Sep 2115 | U.S.$ | 1,219 | | 1,141 | |
5.41% | Senior Secured Notes | (B) | Mar 2024 | U.S.$ | 76 | | 80 | |
6.91% | Secured Equipment Notes | (C) | Oct 2024 | CDN$ | 40 | | 58 | |
Obligations under finance leases | | | | |
Various | | (D) | Various | CDN$/U.S.$ | 2 | | 2 | |
6.99% | | (D) | Mar 2022 | U.S.$ | — | | 97 | |
6.57% | | (D) | Dec 2026 | U.S.$ | 29 | | 33 | |
12.77% | | (D) | Jan 2031 | CDN$ | 3 | | 4 | |
1.93% | | (D) | Feb 2041 | U.S.$ | 4 | | 4 | |
Commercial Paper | | | Dec 2022 | U.S.$ | — | | 336 | |
Term Credit Facility | | | Sep 2022 | U.S.$ | — | | 634 | |
Demand Promissory Note | | | | CDN$ | — | | 6 | |
| | | 19,724 | | 20,220 | |
Perpetual 4% Consolidated Debenture Stock | (E) | | U.S.$ | 41 | | 38 | |
Perpetual 4% Consolidated Debenture Stock | (E) | | G.B.£ | 6 | | 6 | |
| | | 19,771 | | 20,264 | |
Unamortized fees on long-term debt | | | (120) | | (137) | |
| | | 19,651 | | 20,127 | |
Less: Long-term debt maturing within one year | | | 1,510 | | 1,550 | |
| | | $ | 18,141 | | $ | 18,577 | |
As at December 31, 2022, the gross amount of long-term debt denominated in U.S. dollars was U.S. $12,161 million (December 31, 2021 – U.S. $13,265 million).
Annual maturities and principal repayment requirements, excluding those pertaining to finance leases, for each of the five years following 2022 are (in millions): 2023 – $1,504; 2024 – $2,118; 2025 – $948; 2026 – $1,693; 2027 – $nil; thereafter – $13,520.
Fees on long-term debt are amortized to income over the term of the related debt.
A. These debentures and notes are presented net of unamortized discounts, pay interest semi-annually, and are unsecured but carry a negative pledge.
In 2022, the Company repaid at maturity $125 million 5.100% 10-year Medium Term Notes, U.S. $250 million ($313 million) 4.500% 10-year Notes, and a U.S. $76 million ($97 million) 6.99% finance lease.
In 2021, the Company issued the following securities for total net proceeds of $10.7 billion to fund the cash consideration component of the KCS acquisition:
| | | | | | | | | | | |
Date Issued | Description of Securities | Maturity | Net Proceeds |
November 24, 2021 | $1.0 billion 1.589% Notes | Nov 2023 | $1.00 billion |
| $1.2 billion 2.540% Notes | Feb 2028 | $1.20 billion |
December 2, 2021 | U.S. $1.5 billion 1.350% Notes | Dec 2024 | $1.91 billion (U.S. $1.49 billion) |
| U.S. $1.0 billion 1.750% Notes | Dec 2026 | $1.27 billion (U.S. $0.99 billion) |
| U.S. $1.4 billion 2.450% Notes | Dec 2031 | $1.78 billion (U.S. $1.39 billion) |
| U.S. $1.0 billion 3.000% Notes | Dec 2041 | $1.26 billion (U.S. $0.99 billion) |
| U.S. $1.8 billion 3.100% Notes | Dec 2051 | $2.26 billion (U.S. $1.77 billion) |
The U.S. $1.4 billion 2.450% Notes and the U.S. $1.0 billion 3.000% Notes include a special mandatory redemption provision which provides that if STB final approval of the Company's application to control KCS is not received prior to March 25, 2023 or, if in the Company's judgment, STB final approval will not be sought or received by this date, the Company will be required to redeem all of such outstanding notes at a price equal to 101% of the aggregate principal amount of the applicable notes plus accrued and unpaid interest.
In conjunction with the above debt issuances, the Company cash settled a notional $600 million of interest rate bond locks and a notional U.S. $2.4 billion of forward starting floating-to-fixed interest rate swap agreements ("forward starting swaps") for a payment of $226 million during 2021. This payment was included in cash provided by operating activities consistent with the location of the related hedged item on the Company's Consolidated Statements of Cash Flows.
In 2021, the Company also repaid U.S. $250 million 9.450% 30-year debentures at maturity for a total of U.S. $250 million ($312 million).
B. The 5.41% senior secured notes are collateralized by specific locomotive units with a carrying value of $89 million at December 31, 2022. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of U.S. $44 million is due in March 2024.
C. The 6.91% secured equipment notes are full recourse obligations of the Company collateralized by a first charge on specific locomotive units with a carrying value of $31 million as at December 31, 2022. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of $11 million is due in October 2024.
D. The carrying value of the assets collateralizing finance lease obligations was $102 million at December 31, 2022.
E. The Consolidated Debenture Stock, authorized by an Act of Parliament of 1889, constitutes a first charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property and effects of the Company, with certain exceptions.
Credit facility
The Company has a revolving credit facility (the “facility”) agreement with 14 highly rated financial institutions for a commitment amount of U.S. $1.3 billion. The facility can accommodate draws of cash and/or letters of credit at market competitive pricing. Effective September 24, 2021, the Company extended the maturity dates of the U.S. $1.0 billion tranche to September 27, 2026 and the U.S. $300 million tranche to September 27, 2023. During 2021, the Company amended the financial covenant within the facility agreement to provide flexibility upon closing of the KCS acquisition. As at December 31, 2022 and 2021, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenant. As at December 31, 2022 and 2021, the facility was undrawn.
In 2021, the Company entered into a U.S. $500 million unsecured non-revolving term credit facility (the "term facility") with an initial due date of March 15, 2022. Effective March 14, 2022, the Company extended the maturity date of the U.S. $500 million term facility to September 15, 2022. During the year ended December 31, 2022, the Company repaid in full the outstanding borrowings of U.S. $500 million ($636 million) on the term facility. The facility was automatically terminated on September 15, 2022 following the final principal repayment.
The Company also has a commercial paper program, which enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As at December 31, 2022, theCompany had no commercial paper borrowings outstanding (December 31, 2021 – $336 million).
The Company has bilateral letter of credit facilities with six highly rated financial institutions to support its requirement to post letters of credit in the ordinary course of business. Under these agreements, 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. These agreements permit the Company to withdraw amounts posted as collateral at any time; therefore, the amounts posted as collateral are presented as “Cash and cash equivalents” on the Company’s Consolidated Balance Sheets. As at December 31, 2022 and 2021, the Company did not have any collateral posted on its bilateral letter of credit facilities but had letters of credit drawn of $75 million (December 31, 2021 – $58 million) from a total available amount of $300 million.
16. Financial instruments
A. Fair values of financial instruments
The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy established by GAAP that prioritizes those inputs to valuation techniques used to measure fair value based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs, other than quoted prices included within Level 1, are observable for the asset or liability either directly or indirectly; and Level 3 inputs are not observable in the market.
The Company’s short-term financial instruments include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and short-term borrowings including commercial paper and term loans. The carrying value of short-term financial instruments approximate their fair values.
The carrying value of the Company’s long-term debt does not approximate its fair value. The estimated fair value has been determined based on market information where available, or by discounting future payments of principal and interest at estimated interest rates expected to be available to the Company at period end. All measurements are classified as Level 2. The Company’s long-term debt, including current maturities, with a carrying value of $19,651 million as at December 31, 2022 (December 31, 2021 - $19,151 million), had a fair value of $17,720 million (December 31, 2021 - $21,265 million).
B. Financial risk management
Derivative financial instruments
Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel, and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Company's Consolidated Balance Sheets, commitments, or forecasted transactions. At the time a derivative contract is entered into and at least quarterly thereafter, an assessment is made as to whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.
It is not the Company’s intent to use financial derivatives or commodity instruments for trading or speculative purposes.
Credit risk management
Credit risk refers to the possibility that a customer or counterparty will fail to fulfil its obligations under a contract and as a result create a financial loss for the Company.
The railway industry predominantly serves financially established customers, and the Company has experienced limited financial losses with respect to credit risk. The credit worthiness of customers is assessed using credit scores supplied by a third party and through direct monitoring of their financial well-being on a continual basis. The Company establishes guidelines for customer credit limits and should thresholds in these areas be reached, appropriate precautions are taken to improve collectability.
Counterparties to financial instruments expose the Company to credit losses in the event of non-performance. Counterparties for derivative and cash transactions are limited to high credit quality financial institutions, which are monitored on an ongoing basis. Counterparty credit assessments are based on the financial health of the institutions and their credit ratings from external agencies. The Company does not anticipate non-performance that would materially impact the Company’s Consolidated financial statements. In addition, the Company believes there are no significant concentrations of credit risk.
FX management
The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in the value of financial commitments, assets, liabilities, income, or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures, and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.
Net investment hedge
The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar-denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in foreign subsidiaries with a U.S. dollar functional currency. The majority of the Company’s U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in these foreign subsidiaries. This designation has the effect of mitigating volatility on Net income by offsetting long-term FX gains and losses on U.S. dollar-denominated long-term debt and gains and losses on its net investment. The effect of the net investment hedge recognized in “Other comprehensive income (loss)” in 2022 was an FX loss of $471 million, the majority of which was unrealized (2021 – unrealized gain of $25 million; 2020 – unrealized gain of $136 million) (see Note 7).
FX forward contracts
During 2021, the Company entered into various FX forward contracts totalling a notional U.S. $1.0 billion to fix the FX rate and lock-in a portion of the amount of Canadian dollars it could have borrowed to finance the U.S. dollar-denominated cash portion of the total consideration payable pursuant to the Original Merger Agreement with KCS. During the third quarter of 2021, the Company settled the FX forward contracts and did not have any such contracts remaining as at December 31, 2021. The realized gain from settlement of the FX forward contracts was $13 million and was recorded in "Other expense (income)" on the Company's Consolidated Statements of Income (2022 - $nil).
Interest rate management
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a result of changes in market interest rates. In order to manage funding needs or capital structure goals, the Company enters into debt or finance lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.
To manage interest rate exposure, the Company accesses diverse sources of financing and manages borrowings in line with a targeted range of capital structure, debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles. In anticipation of future debt issuances, the Company may enter into forward rate agreements that are designated as cash flow hedges, to substantially lock in all or a portion of the effective future interest expense. The Company may also enter into swap and lock agreements, designated as fair value hedges, to manage the mix of fixed and floating rate debt.
Forward starting swaps
In the first half of 2021, the Company entered into forward starting swaps with terms of up to 30 years, totalling a notional U.S. $2.4 billion to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes.
On May 21, 2021, the Original Merger Agreement with KCS was terminated which resulted in the Company ceasing hedge accounting for the U.S. $2.4 billion of forward starting swaps. However, as the note issuances were still reasonably possible to occur, fair value losses of $73 million prior to this determination remained in “Accumulated other comprehensive loss”, net of tax. Fair value losses of $251 million during the period from May 21, 2021 through to the roll and re-designation described below were recorded within “Other expense (income)" on the Company’s Consolidated Statements of Income for twelve months ended December 31, 2021.
Following CP entering into the Merger Agreement with KCS, the Company rolled the notional U.S. $2.4 billion of forward starting swaps but did not effect a cash settlement. Concurrently, the Company re-designated the forward starting swaps totalling U.S. $2.4 billion to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes. The changes in fair value on the forward starting swaps were recorded in “Accumulated other comprehensive loss”, net of tax, as cash flow hedges until the notes were issued. Fair value gains subsequent to re-designation of $94 million were recorded within “Other comprehensive income” on the Company’s Consolidated Statements of Comprehensive Income for the twelve months ended December 31, 2021.
During the fourth quarter of 2021, the Company cash settled all outstanding forward starting swaps related to debt issuances that occurred in the same period. The fair value of these derivative instruments at the time of settlement was a loss of $230 million. The related $21 million gain within "Accumulated other comprehensive loss" will be reclassified to "Net interest expense" ratably over the duration of the notes' hedged interest payments.
Bond locks
In the first quarter of 2021, the Company entered into seven-year interest rate bond locks totalling a notional $600 million to fix the benchmark rate on cash flows associated with a highly probable forecasted issuance of long-term notes.
On May 21, 2021, the Original Merger Agreement with KCS was terminated which resulted in the Company ceasing hedge accounting for the $600 million of bond locks. However, as the note issuances were still reasonably possible to occur, fair value losses of $2 million prior to this determination remained in “Accumulated other comprehensive loss”, net of tax. Fair value losses of $10 million during the period from May 21, 2021 through to the roll and re-designation described below were recorded within “Other expense (income)" on the Company’s Consolidated Statements of Income for the twelve months ended December 31, 2021.
Following CP entering into the Merger Agreement with KCS, the Company rolled the notional $600 million of bond locks but did not effect a cash settlement. Concurrently, the Company re-designated the bond locks totalling $600 million to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes. The changes in fair value on the bond locks are recorded in “Accumulated other comprehensive loss”, net of tax, as cash flow hedges until the notes were issued. Fair value gains subsequent to re-designation of $19 million were recorded within “Other comprehensive income” on the Company’s Consolidated Statements of Comprehensive Income for the twelve months ended December 31, 2021.
During the fourth quarter of 2021, the Company cash settled all outstanding bond locks related to debt issuances that occurred in the same period. The fair value of these derivative instruments at the time of settlement was a gain of $7 million. The related $17 million gain within "Accumulated other comprehensive loss" will be reclassified to "Net interest expense" ratably over the duration of the notes' hedged interest payments.
Designated hedges that were previously settled were amortized from “Accumulated other comprehensive income (loss)" to "Net interest expense" for a total of $6 million in the year ended December 31, 2022 (2021 - $10 million; 2020 - $10 million). The Company expects that during the next 12 months, $6 million of net losses will be reclassified to “Net interest expense”.
17. Other long-term liabilities
| | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 |
Operating lease liabilities, net of current portion (Note 18) | $ | 202 | | $ | 224 | |
Stock-based compensation liabilities, net of current portion | 125 | | 125 | |
Provision for environmental remediation, net of current portion(1) | 71 | | 68 | |
Deferred revenue, net of current portion (Note 3) | 39 | | 47 | |
Deferred lease and license revenue, net of current portion(2) | 15 | | 14 | |
Other, net of current portion | 68 | | 64 | |
Total other long-term liabilities | $ | 520 | | $ | 542 | |
(1) As at December 31, 2022, the aggregate provision for environmental remediation, including the current portion was $83 million (2021 – $79 million).
(2) The deferred lease and license revenue is being amortized to income on a straight-line basis over the related lease terms. Comparative figures have been reclassified to conform with current period presentation.
Environmental remediation accruals
Environmental remediation accruals cover site-specific remediation programs. The estimate of the probable costs to be incurred in the remediation of properties contaminated by past activities reflects the nature of contamination at individual sites according to typical activities and scale of operations conducted. The Company has developed remediation strategies for each property based on the nature and extent of the contamination, as well as the location of the property and surrounding areas that may be adversely affected by the presence of contaminants, considering available technologies, treatment and disposal facilities and the acceptability of site-specific plans based on the local regulatory environment. Site-specific plans range from containment and risk management of the contaminants through to the removal and treatment of the contaminants and affected soils and groundwater. The details of the estimates reflect the environmental liability at each property. Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities” (see Note 14). Payments are expected to be made over 10 years to 2032.
The accruals for environmental remediation represent the Company’s best estimate of its probable future obligation and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include the Company’s best estimate of all probable costs, the Company’s total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable. Changes to costs are reflected as changes to “Other long-term liabilities” or “Accounts payable and accrued liabilities” on the Company's Consolidated Balance Sheets and to “Purchased services and other” within operating expenses on the Company's Consolidated Statements of Income. The amount charged to income in 2022 was $8 million (2021 – $10 million; 2020 – $10 million).
18. Leases
The Company’s leases have remaining terms of less than one year to 18 years, some include options to extend up to an additional 10 years, and some include options to terminate within one year.
Residual value guarantees are provided on certain vehicle operating leases. Cumulatively, these guarantees are limited to $1 million and are not included in lease liabilities as it is not currently probable that any amounts will be owed.
Components of lease expense for the year ended December 31 are as follows:
| | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 |
Operating lease cost | $ | 77 | | $ | 74 | |
Short-term lease cost | 17 | | 16 | |
Variable lease cost | 9 | | 5 | |
Sublease income | (2) | | (3) | |
| | |
Finance Lease Cost | | |
Amortization of right-of-use assets | 6 | | 10 | |
Interest on lease liabilities | 4 | | 10 | |
Total lease costs | $ | 111 | | $ | 112 | |
Supplemental balance sheet information related to leases is as follows:
| | | | | | | | | | | |
(in millions of Canadian dollars) | Classification | 2022 | 2021 |
Assets | | | |
Operating | Other assets | $ | 267 | | $ | 287 | |
Finance | Properties, net book value | 102 | | 166 | |
| | | |
Liabilities | | | |
Current | | | |
Operating | Accounts payable and accrued liabilities | 68 | | 59 | |
Finance | Long-term debt maturing within one year | 8 | | 104 | |
Long-term | | | |
Operating | Other long-term liabilities | 202 | | 224 | |
Finance | Long-term debt | 30 | | 36 | |
The following table provides the Company's weighted-average remaining lease terms and discount rates:
| | | | | | | | |
| 2022 | 2021 |
Weighted-Average Remaining Lease Term | | |
Operating leases | 5 years | 6 years |
Finance leases | 6 years | 2 years |
| | |
Weighted-Average Discount Rate | | |
Operating leases | 3.20 | % | 3.18 | % |
Finance leases | 6.89 | % | 6.96 | % |
Supplemental information related to leases is as follows:
| | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 |
Cash paid for amounts included in measurement of lease liabilities | | |
Operating cash outflows from operating leases | $ | 64 | | $ | 64 | |
Operating cash outflows from finance leases | 6 | | 10 | |
Financing cash outflows from finance leases | 104 | | 8 | |
| | |
Right-of-use assets obtained in exchange for lease liabilities | | |
Operating leases | 34 | | 36 | |
Finance leases | — | | 5 | |
The following table provides the maturities of lease liabilities for the next five years and thereafter as at December 31, 2022:
| | | | | | | | |
(in millions of Canadian dollars) | Finance Leases | Operating Leases |
2023 | $ | 10 | | $ | 75 | |
2024 | 10 | | 62 | |
2025 | 9 | | 49 | |
2026 | 9 | | 42 | |
2027 | — | | 28 | |
Thereafter | 7 | | 37 | |
Total lease payments | 45 | | 293 | |
Imputed interest | (7) | | (23) | |
Present value of lease payments | $ | 38 | | $ | 270 | |
19 . Shareholders’ equity
Authorized and issued share capital
The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of First Preferred Shares, and an unlimited number of Second Preferred Shares. As at December 31, 2022, no First or Second Preferred Shares had been issued.
The following table summarizes information related to Common Share balances as at December 31:
| | | | | | | | | | | |
(number of shares in millions) | 2022 | 2021 | 2020 |
Share capital, January 1 | 929.7 | | 666.3 | | 685.0 | |
Common Shares repurchased | — | | — | | (20.4) | |
Shares issued under stock option plan | 0.8 | | 0.8 | | 1.7 | |
Shares issued for KCS acquisition (Note 10) | — | | 262.6 | | — | |
Share capital, December 31 | 930.5 | | 929.7 | | 666.3 | |
The change in the “Share capital” balance includes $9 million of stock-based compensation transferred from “Additional paid-in capital” (2021 – $7 million; 2020 – $10 million).
Share repurchases
In connection with the KCS transaction, the Company suspended share repurchases and did not have an active program as at December 31, 2022.
On January 27, 2021, the Company announced a NCIB, commencing January 29, 2021, to purchase up to 16.7 million Common Shares in the open market for cancellation on or before January 28, 2022. The Company did not purchase any Common Shares under this NCIB.
On December 17, 2019, the Company announced a NCIB, commencing December 20, 2019, to purchase up to 24.0 million Common Shares in the open market for cancellation on or before December 19, 2020. Upon expiry of this NCIB, the Company had purchased 21.4 million Common Shares for $1,577 million.
The following table provides activities under the share repurchase programs for each of the years ended December 31:
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
Number of Common Shares repurchased(1) | — | | — | | 19,865,380 | |
Weighted-average price per share(2) | $ | — | | $ | — | | $ | 74.35 | |
Amount of repurchase (in millions)(2) | $ | — | | $ | — | | $ | 1,477 | |
(1) Includes shares repurchased but not yet cancelled at year end.
(2) Includes brokerage fees.
20. Change in non-cash working capital balances related to operations
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 |
(Use) source of cash: | | | |
Accounts receivable, net | $ | (147) | | $ | 32 | | $ | (61) | |
Materials and supplies | (27) | | (14) | | (15) | |
Other current assets | (13) | | 24 | | (5) | |
Accounts payable and accrued liabilities | 95 | | (108) | | (308) | |
Change in non-cash working capital balances related to operations | $ | (92) | | $ | (66) | | $ | (389) | |
21. Pensions and other benefits
The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At December 31, 2022, the Canadian pension plans represent nearly all of total combined pension plan assets and nearly all of total combined pension plan obligations.
The DB plans provide for pensions based principally on years of service and compensation rates near retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer contributions to the DB plans, which are actuarially determined, are made on the basis of being not less than the minimum amounts required by federal pension supervisory authorities.
The Company has other benefit plans including post-retirement health and life insurance for pensioners, and post-employment long-term disability and workers’ compensation benefits, which are based on Company-specific claims. At December 31, 2022, the Canadian other benefits plans represent nearly all of total combined other plan obligations.
The Audit and Finance Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets, which take into account the Company’s expected risk tolerances. Pension plan assets are managed by a suite of independent investment managers, with the allocation by manager reflecting these asset mix targets. Most of the assets are actively managed with the objective of outperforming applicable benchmarks. In accordance with the investment policy, derivative instruments may be used by investment managers to hedge or adjust existing or anticipated exposures.
To develop the expected long-term rate of return assumption used in the calculation of net periodic benefit cost applicable to the market-related value of plan assets, the Company considers the expected composition of the plans’ assets, past experience, and future estimates of long-term investment returns. Future estimates of investment returns reflect the long-term return expectation for fixed income, public equity, real estate, infrastructure, private debt, and absolute return investments, and the expected added value (relative to applicable benchmark indices) from active management of pension plan assets.
CP 2022 ANNUAL REPORT 100
The Company has elected to use a market-related value of assets for the purpose of calculating net periodic benefit cost, developed from a five-year average of market values for the plans’ public equity and absolute return investments (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the plans’ fixed income, real estate, infrastructure, and private debt securities.
The benefit obligation is discounted using a discount rate that is a blended yield to maturity for a hypothetical portfolio of high-quality debt instruments with cash flows matching projected benefit payments. The discount rate is determined by management.
Net periodic benefit cost
The elements of net periodic benefit cost for DB pension plans and other benefits recognized in the year include the following components:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pensions | | Other benefits |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
Current service cost (benefits earned by employees) | $ | 148 | | $ | 171 | | $ | 140 | | | $ | 11 | | $ | 13 | | $ | 12 | |
Other components of net periodic benefit (recovery) cost: | | | | | | | |
Interest cost on benefit obligation | 383 | | 351 | | 406 | | | 16 | | 16 | | 17 | |
Expected return on plan assets | (959) | | (959) | | (945) | | | — | | — | | — | |
Recognized net actuarial loss (gain) | 153 | | 206 | | 177 | | | (5) | | (1) | | 4 | |
Amortization of prior service costs (recoveries) | 1 | | — | | (1) | | | — | | — | | — | |
Total other components of net periodic benefit (recovery) cost | (422) | | (402) | | (363) | | | 11 | | 15 | | 21 | |
Net periodic benefit (recovery) cost | $ | (274) | | $ | (231) | | $ | (223) | | | $ | 22 | | $ | 28 | | $ | 33 | |
Projected benefit obligation, plan assets, and funded status
Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:
| | | | | | | | | | | | | | | | | |
| Pensions | | Other benefits |
(in millions of Canadian dollars) | 2022 | 2021 | | 2022 | 2021 |
Change in projected benefit obligation: | | | | | |
Projected benefit obligation at January 1 | $ | 12,884 | | $ | 13,799 | | | $ | 503 | | $ | 553 | |
Current service cost | 148 | | 171 | | | 11 | | 13 | |
Interest cost | 383 | | 351 | | | 16 | | 16 | |
Employee contributions | 42 | | 42 | | | — | | — | |
Benefits paid | (680) | | (667) | | | (22) | | (31) | |
Foreign currency changes | 16 | | — | | | — | | — | |
Plan amendments and other | 27 | | — | | | — | | — | |
Actuarial gain | (2,884) | | (812) | | | (97) | | (48) | |
Projected benefit obligation at December 31 | $ | 9,936 | | $ | 12,884 | | | $ | 411 | | $ | 503 | |
The net actuarial gains for Pensions and Other benefits in 2022 and 2021 were primarily due to the increase in discount rate from 3.01% to 5.01% and from 2.58% to 3.01%, respectively.
101 CP 2022 ANNUAL REPORT
| | | | | | | | | | | | | | | | | |
| Pensions | | Other benefits |
(in millions of Canadian dollars) | 2022 | 2021 | | 2022 | 2021 |
Change in plan assets: | | | | | |
Fair value of plan assets at January 1 | $ | 14,938 | | $ | 14,365 | | | $ | 5 | | $ | 5 | |
Actual return on plan assets | (1,464) | | 1,180 | | | — | | — | |
Employer contributions | 14 | | 18 | | | 22 | | 31 | |
Employee contributions | 42 | | 42 | | | — | | — | |
Benefits paid | (680) | | (667) | | | (22) | | (31) | |
Foreign currency changes | 12 | | — | | | — | | — | |
Fair value of plan assets at December 31 | $ | 12,862 | | $ | 14,938 | | | $ | 5 | | $ | 5 | |
Funded status – plan surplus (deficit) | $ | 2,926 | | $ | 2,054 | | | $ | (406) | | $ | (498) | |
The table below shows the aggregate pension projected benefit obligation and aggregate fair value of plan assets for pension plans with fair value of plan assets in excess of projected benefit obligations (i.e. surplus), and for pension plans with projected benefit obligations in excess of fair value of plan assets (i.e. deficit):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
(in millions of Canadian dollars) | Pension plans in surplus | Pension plans in deficit | | Pension plans in surplus | Pension plans in deficit |
Projected benefit obligation at December 31 | $ | (9,512) | | $ | (424) | | | $ | (12,346) | | $ | (538) | |
Fair value of plan assets at December 31 | 12,613 | | 249 | | | 14,663 | | 275 | |
Funded status | $ | 3,101 | | $ | (175) | | | $ | 2,317 | | $ | (263) | |
The DB pension plans’ accumulated benefit obligation as at December 31, 2022 was $9,747 million (2021 – $12,591 million). The accumulated benefit obligation is calculated on a basis similar to the projected benefit obligation, except no future salary increases are assumed in the projection of future benefits. For pension plans with accumulated benefit obligations in excess of fair value of plan assets (i.e. deficit), the aggregate pension accumulated benefit obligation as at December 31, 2022 was $332 million (2021 – $410 million) and the aggregate fair value of plan assets as at December 31, 2022 was $186 million (2021 –$201 million).
All Other benefits plans were in a deficit position as at December 31, 2022 and 2021.
Pension asset and liabilities in the Company’s Consolidated Balance Sheets
Amounts recognized in the Company’s Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | | | | |
| Pensions | | Other benefits |
(in millions of Canadian dollars) | 2022 | 2021 | | 2022 | 2021 |
Pension asset | $ | 3,101 | | $ | 2,317 | | | $ | — | | $ | — | |
Accounts payable and accrued liabilities | (10) | | (11) | | | (33) | | (32) | |
Pension and other benefit liabilities | (165) | | (252) | | | (373) | | (466) | |
Total amount recognized | $ | 2,926 | | $ | 2,054 | | | $ | (406) | | $ | (498) | |
The measurement date used to determine the plan assets and the benefit obligation is December 31. The most recent actuarial valuation for pension funding purposes for the Company’s main Canadian pension plan was performed as at January 1, 2022. During 2023, the Company expects to file with the pension regulator a new valuation performed as at January 1, 2023.
CP 2022 ANNUAL REPORT 102
Accumulated other comprehensive (loss) income
Amounts recognized in accumulated other comprehensive (loss) income are as follows:
| | | | | | | | | | | | | | | | | |
| Pensions | | Other benefits |
(in millions of Canadian dollars) | 2022 | 2021 | | 2022 | 2021 |
Net actuarial (loss) gain: | | | | | |
Other than deferred investment (losses) gains | $ | (1,711) | | $ | (3,298) | | | $ | 35 | | $ | (57) | |
Deferred investment (losses) gains | (301) | | 672 | | | — | | — | |
Prior service cost | (31) | | (5) | | | (1) | | (1) | |
Deferred income tax | 608 | | 759 | | | (9) | | 15 | |
Total (Note 7) | $ | (1,435) | | $ | (1,872) | | | $ | 25 | | $ | (43) | |
Actuarial assumptions
Weighted-average actuarial assumptions used were approximately:
| | | | | | | | | | | | | | | | | | | | |
(percentages) | 2022 | | 2021 | | 2020 | |
Benefit obligation at December 31: | | | | | | |
Discount rate | 5.01 | | | 3.01 | | | 2.58 | | |
Projected future salary increases | 2.75 | | | 2.75 | | | 2.75 | | |
Health care cost trend rate (1) | 5.00 | | | 5.00 | | | 5.00 | | |
Benefit cost for year ended December 31: | | | | | | |
Discount rate | 3.01 | | | 2.58 | | | 3.25 | | |
Expected rate of return on plan assets (2) | 6.90 | | | 6.90 | | | 7.25 | | |
Projected future salary increases | 2.75 | | | 2.75 | | | 2.75 | | |
Health care cost trend rate (1) | 5.00 | | | 5.00 | | | 5.50 | | |
(1) The health care cost trend rate was assumed to be 5.50% in 2020 and 5.00% in 2021 and is assumed to be 5.00% per year in 2022 and thereafter.
(2) The expected rate of return on plan assets that will be used to compute the 2023 net periodic benefit recovery is 6.90%.
Plan assets
Plan assets are recorded at fair value. The major asset categories are public equity securities, fixed income securities, real estate, infrastructure, absolute return investments, and private debt. The fair values of the public equity and fixed income securities are primarily based on quoted market prices. Real estate and infrastructure values are based on the value of each fund’s assets as calculated by the fund manager, generally using third party appraisals or discounted cash flow analysis and taking into account current market conditions and recent sales transactions where practical and appropriate. Private debt values are based on the value of each fund’s assets as calculated by the fund manager taking into account current market conditions and reviewed annually by external parties. Absolute return investments are a portfolio of units of externally managed hedge funds and are valued by the fund administrators.
103 CP 2022 ANNUAL REPORT
The Company’s pension plan asset allocation, the weighted-average asset allocation targets, and the weighted average policy range for each major asset class at year-end were as follows:
| | | | | | | | | | | | | | |
| | | Percentage of plan assets at December 31 |
Asset allocation (percentage) | Asset allocation target | Policy range | 2022 | 2021 |
Cash and cash equivalents | 1.2 | | 0 – 10 | 1.1 | | 3.1 | |
Fixed income | 24.4 | | 20 – 40 | 20.5 | | 24.1 | |
Public equity | 45.0 | | 35 – 55 | 46.4 | | 50.5 | |
Real estate and infrastructure | 9.8 | | 4 – 13 | 11.4 | | 6.7 | |
Private debt | 9.8 | | 4 – 13 | 7.7 | | 4.6 | |
Absolute return | 9.8 | | 4 – 13 | 12.9 | | 11.0 | |
Total | 100.0 | | | 100.0 | | 100.0 | |
CP 2022 ANNUAL REPORT 104
Summary of the assets of the Company’s DB pension plans
The following is a summary of the assets of the Company’s DB pension plans at December 31, 2022 and 2021. As at December 31, 2022 and 2021, there were no plan assets classified as Level 3 valued investments.
| | | | | | | | | | | | | | | |
| Assets Measured at Fair Value | | Investments measured at NAV(1) | Total Plan Assets |
(in millions of Canadian dollars) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | |
December 31, 2022 | | | | | |
Cash and cash equivalents | $ | 218 | | $ | — | | | $ | — | | $ | 218 | |
Fixed income | | | | | |
Government bonds(2) | 180 | | 1,125 | | | — | | 1,305 | |
Corporate bonds(2) | 432 | | 724 | | | — | | 1,156 | |
Mortgages(3) | 182 | | 2 | | | — | | 184 | |
Public equities | | | | | |
Canada | 769 | | — | | | — | | 769 | |
U.S. and international | 5,195 | | — | | | — | | 5,195 | |
Real estate(4) | — | | — | | | 722 | | 722 | |
Infrastructure(5) | — | | — | | | 744 | | 744 | |
Private debt(6) | — | | — | | | 992 | | 992 | |
Derivative instruments(7) | — | | (81) | | | — | | (81) | |
Absolute return(8) | | | | | |
Funds of hedge funds | — | | — | | | 1,658 | | 1,658 | |
| | | | | |
| $ | 6,976 | | $ | 1,770 | | | $ | 4,116 | | $ | 12,862 | |
December 31, 2021 | | | | | |
Cash and cash equivalents | $ | 363 | | $ | — | | | $ | — | | $ | 363 | |
Fixed income | | | | | |
Government bonds(2) | 232 | | 1,704 | | | — | | 1,936 | |
Corporate bonds(2) | 569 | | 868 | | | — | | 1,437 | |
Mortgages(3) | 230 | | 4 | | | — | | 234 | |
Public equities | | | | | |
Canada | 1,004 | | — | | | — | | 1,004 | |
U.S. and international | 6,536 | | — | | | — | | 6,536 | |
Real estate(4) | — | | — | | | 732 | | 732 | |
Infrastructure(5) | — | | — | | | 263 | | 263 | |
Private debt(6) | — | | — | | | 682 | | 682 | |
Derivative instruments(7) | — | | 106 | | | — | | 106 | |
Absolute return(8) | | | | | |
Funds of hedge funds | — | | — | | | 1,621 | | 1,621 | |
Multi-strategy funds | — | | — | | | 24 | | 24 | |
| | | | | |
| | | | | |
| $ | 8,934 | | $ | 2,682 | | | $ | 3,322 | | $ | 14,938 | |
(1) Investments measured at net asset value ("NAV"):
Amounts are comprised of certain investments measured using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.
(2) Government & Corporate Bonds:
Fair values for bonds are based on market prices supplied by independent sources as of the last trading day.
105 CP 2022 ANNUAL REPORT
(3) Mortgages:
The fair values of mortgages are based on current market yields of financial instruments of similar maturity, coupon and risk factors.
(4) Real estate:
Real estate fund values are based on the NAV of the funds that invest directly in real estate investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. Of the total, $595 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2021 – $613 million). The remaining $127 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying real estate investments (2021 – $119 million). As at December 31, 2022, there are $40 million of unfunded commitments for real estate investments (December 31, 2021 – $32 million).
(5) Infrastructure:
Infrastructure fund values are based on the NAV of the funds that invest directly in infrastructure investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. Of the total, $356 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2021 – $107 million). The remaining $388 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments (2021 – $156 million). As at December 31, 2022, there are $356 million of unfunded commitments for infrastructure investments (December 31, 2021 – $814 million).
(6) Private debt:
Private debt fund values are based on the NAV of the funds that invest directly in private debt investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. Of the total, $160 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2021 – $152 million). The remaining $832 million is not subject to redemption and is normally returned through distributions as a result of the repayment of the underlying loans (2021 - $530 million). As at December 31, 2022, there are $747 million of unfunded commitments for private debt investments (December 31, 2021 – $774 million).
(7) Derivatives:
The investment managers may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and interest rate risk (Level 2); credit default swaps to manage credit risk (Level 2); and options to manage interest rate risk and volatility (Level 2). The Company may utilize derivatives directly, but only for the purpose of hedging foreign currency exposures. As at December 31, 2022, there are currency forwards with a notional value of $nil (December 31, 2021 – $nil) and a fair value of $nil (December 31, 2021 – $6 million). The fixed income investment manager utilizes a portfolio of bond forwards for the purpose of reducing asset/liability interest rate exposure. As at December 31, 2022, there are bond forwards with a notional value of $1,745 million (December 31, 2021 – $2,967 million) and a fair value of $(81) million (December 31, 2021 – $100 million).
(8) Absolute return:
The value of absolute return fund investments is based on the NAV reported by the fund administrators. The funds have different redemption policies with redemption notice periods varying from 30 to 120 days and frequencies ranging from monthly to triennially.
Additional plan assets information
The Company's primary investment objective for pension plan assets is to achieve a long–term return, net of all fees and expenses, that is sufficient for the plan's assets to satisfy the current and future obligations to plan beneficiaries, while minimizing the financial impact on the Company. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return expectations, and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation, and interest rates. When advantageous and with due consideration, derivative instruments may be utilized by investment managers, provided the total value of the underlying assets represented by financial derivatives (excluding currency forwards, liability hedging derivatives in fixed income portfolios, and derivatives held by absolute return funds) is limited to 30% of the market value of the fund.
The funded status of the plans is exposed to fluctuations in interest rates, which affects the relative values of the plans' liabilities and assets. In order to mitigate interest rate risk, the Company's main Canadian defined benefit pension plan utilizes a liability driven investment strategy in its fixed income portfolio, which uses a combination of long duration bonds and derivatives to hedge interest rate risk, managed by the investment manager. As at December 31, 2022, the plan's solvency funded position was 45% hedged against interest rate risk (2021 – 47%).
When investing in foreign securities, the plans are exposed to foreign currency risk; the effect of which is included in the valuation of the foreign securities. At December 31, 2022, the plans were 50% exposed to the U.S. dollar, 6% exposed to the Euro, and 10% exposed to various other currencies. At December 31, 2021, the plans were 43% exposed to the U.S. dollar, 5% exposed to the Euro, and 10% exposed to various other currencies.
At December 31, 2022, plan assets included 570,074 of the Common Shares of the Company (2021 – 426,304) at a market value of $58 million (2021 – $39 million) and Fixed Income securities of the Company at a market value of $5 million (2021 – $5 million).
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Estimated future benefit payments
The estimated future DB pension and other benefit payments to be paid by the plans for each of the next five years and the subsequent five-year period are as follows:
| | | | | | | | |
(in millions of Canadian dollars) | Pensions | Other benefits |
2023 | $ | 652 | | $ | 33 | |
2024 | 648 | | 31 | |
2025 | 649 | | 30 | |
2026 | 648 | | 29 | |
2027 | 649 | | 29 | |
2028-2032 | 3,234 | | 137 | |
The benefit payments from the Canadian registered and U.S. qualified DB pension plans are payable from their respective pension funds. Benefit payments from the supplemental pension plan and from the other benefits plans are payable directly by the Company.
Defined contribution plan
Canadian non-unionized employees hired prior to July 1, 2010 had the option to participate in the Canadian DC plan. All Canadian non-unionized employees hired after such date must participate in this plan. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year.
Effective July 1, 2010, a new U.S. DC plan was established. All U.S. non-unionized employees hired after such date must participate in this plan. Employees do not contribute to the plan. The Company annually contributes a percentage of salary.
The DC plans provide a pension based on total employee and employer contributions plus investment income earned on those contributions.
In 2022, the net cost of the DC plans, which generally equals the employer’s required contribution, was $12 million (2021 – $13 million; 2020 – $12 million).
Contributions to multi-employer plans
Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the Company to this plan in 2022 in respect of post-retirement medical benefits were $2 million (2021 – $3 million; 2020 – $3 million).
22. Stock-based compensation.
At December 31, 2022, the Company had several stock-based compensation plans including stock option plans, various cash-settled liability plans, and an employee share purchase plan. These plans resulted in an expense of $113 million in 2022 (2021 – $131 million; 2020 – $170 million) and the total tax benefit related to these plans was $26 million in 2022 (2021 – $29 million; 2020 – $42 million).
107 CP 2022 ANNUAL REPORT
A. Stock option plan
The following table summarizes information related to the stock option plan as at December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Options outstanding | | Non-vested options |
| Number of options | Weighted-average exercise price | | Number of options | Weighted-average grant date fair value |
Outstanding, January 1, 2022 | 7,392,188 | | $ | 53.36 | | | 3,748,983 | | $ | 14.25 | |
Granted | 839,108 | | $ | 94.18 | | | 839,108 | | $ | 21.33 | |
Exercised | (840,795) | | $ | 38.46 | | | N/A | N/A |
Vested | N/A | N/A | | (1,953,715) | | $ | 12.10 | |
Forfeited | (37,368) | | $ | 84.78 | | | (37,368) | | $ | 17.94 | |
| | | | | |
Outstanding, December 31, 2022 | 7,353,133 | | $ | 61.69 | | | 2,597,008 | | $ | 18.09 | |
Vested or expected to vest at December 31, 2022(1) | 7,304,289 | | $ | 61.51 | | | N/A | N/A |
Exercisable, December 31, 2022 | 4,756,125 | | $ | 49.02 | | | N/A | N/A |
(1) As at December 31, 2022, the weighted-average remaining term of vested or expected to vest options was 3.3 years with an aggregate intrinsic value of $288 million.
The following table provides the number of stock options outstanding and exercisable as at December 31, 2022 by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on December 31, 2022 at the Company’s closing stock price of $100.95.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options outstanding | | Options exercisable |
Range of exercise prices | Number of options | Weighted-average years to expiration | Weighted-average exercise price | Aggregate intrinsic value (millions) | | Number of options | Weighted-average exercise price | Aggregate intrinsic value (millions) |
$23.84 - $41.51 | 2,105,506 | | 1.6 | $ | 36.62 | | $ | 135 | | | 2,105,506 | | $ | 36.62 | | $ | 135 | |
$41.52 - $55.48 | 1,655,284 | | 2.3 | $ | 49.09 | | $ | 86 | | | 1,526,734 | | $ | 48.64 | | $ | 80 | |
$55.49 - $90.81 | 1,795,994 | | 4.0 | $ | 70.03 | | $ | 56 | | | 883,395 | | $ | 66.85 | | $ | 30 | |
$90.82 - $111.52 | 1,796,349 | | 5.6 | $ | 94.35 | | $ | 12 | | | 240,490 | | $ | 94.49 | | $ | 2 | |
Total(1) | 7,353,133 | | 3.3 | $ | 61.69 | | $ | 289 | | | 4,756,125 | | $ | 49.02 | | $ | 247 | |
(1) As at December 31, 2022, the total number of in-the-money stock options outstanding was 7,339,374 with a weighted-average exercise price of $61.60. The weighted-average years to expiration of exercisable stock options is 2.4 years.
Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years. Under the fair value method, the fair value of the stock options at grant date was approximately $16 million for options issued in 2022 (2021 – $26 million; 2020 – $15 million). The weighted-average fair value assumptions were approximately:
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
Expected option life (years)(1) | 4.75 | 4.75 | 4.75 |
Risk-free interest rate(2) | 1.62 | % | 0.53 | % | 1.28 | % |
Expected stock price volatility(3) | 26.85 | % | 27.14 | % | 23.14 | % |
Expected annual dividends per share(4) | $ | 0.760 | | $ | 0.760 | | $ | 0.664 | |
Expected forfeiture rate(5) | 3.01 | % | 2.62 | % | 4.41 | % |
Weighted-average grant date fair value of options granted during the year | $ | 21.33 | | $ | 19.06 | | $ | 13.80 | |
(1) Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option.
(2) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the option.
(3) Based on the historical volatility of the Company’s stock price over a period commensurate with the expected term of the option.
CP 2022 ANNUAL REPORT 108
(4) Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option.
(5) The Company estimates forfeitures based on past experience. The rate is monitored on a periodic basis.
In 2022, the expense for stock options (regular and performance) was $23 million (2021 – $23 million; 2020 – $16 million). At December 31, 2022, there was $17 million of total unrecognized compensation related to stock options, which is expected to be recognized over a weighted-average period of approximately 0.9 years.
The total fair value of shares vested for the stock option plan during 2022 was $24 million (2021 – $18 million; 2020 – $10 million).
The following table provides information related to all options exercised in the stock option plan during the years ended December 31:
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Total intrinsic value | $ | 53 | | $ | 43 | | $ | 52 | |
Cash received by the Company upon exercise of options | 32 | | 25 | | 52 | |
B. Other share-based plans
Performance share unit plans
During 2022, the Company issued 415,660 PSUs with a grant date fair value of approximately $38 million and 13,506 PDSUs with a grant date fair value, including value of expected future matching units, of approximately $1 million. PSUs and PDSUs attract dividend equivalents in the form of additional units based on dividends paid on the Company's Common Shares, and vest approximately three years after the grant date, contingent upon CP’s performance ("performance factor"). The fair value of these PSUs and PDSUs is measured periodically until settlement using closing share price on the date of measurement. The fair value of units that are probable of vesting based on forecasted performance factors over the three-year performance period is recognized as expense in the Consolidated Statements of Income. Vested PSUs are settled in cash. Vested PDSUs are settled in cash pursuant to the DSU plan and are eligible for a 25% match if the holder has not exceeded their share ownership requirements, and are paid out only when the holder ceases their employment with CP.
The performance period for PSUs and PDSUs issued in 2022 is January 1, 2022 to December 31, 2024, and the performance factors are Free Cash Flow ("FCF"), Adjusted net debt to Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") Modifier, Total Shareholder Return ("TSR") compared to the S&P/TSX 60 Index, and TSR compared to the S&P 500 Industrials Index.
The performance period for 431,430 PSUs and 12,694 PDSUs issued in 2021 is January 1, 2021 to December 31, 2023, and the performance factors for these PSUs are Return on Invested Capital ("ROIC"), TSR compared to the S&P/TSX 60 Index, and TSR compared to Class I railways.
The performance period for 489,990 PSUs and 50,145 PDSUs issued in 2020 was January 1, 2020 to December 31, 2022, and the performance factors for these PSUs were ROIC, TSR compared to the S&P/TSX 60 Index, and TSR compared to Class I Railways. The estimated payout on these awards is 180% on 459,358 PSUs and 45,058 PDSUs outstanding (including expected future matching units) representing fair values of $87 million and $11 million respectively as at December 31, 2022, calculated using the Company's average share price of the last 30 trading days preceding December 31, 2022.
The performance period for 668,405 PSUs issued in 2019 was January 1, 2019 to December 31, 2021, and the performance factors were ROIC, TSR compared to the S&P/TSX 60 Index, and TSR compared to Class I Railways. The resulting payout was 200% of the outstanding units multiplied by the Company's average share price calculated using the last 30 trading days preceding December 31, 2021. In the first quarter of 2022, payouts occurred on 631,457 total outstanding awards, including dividends reinvested, totalling $116 million.
The following table summarizes information related to PSUs and PDSUs as at December 31:
| | | | | | | | |
| 2022 | 2021 |
Outstanding, January 1 | 1,577,781 | | 1,909,345 | |
Granted | 429,166 | | 444,124 | |
Units in lieu of dividends | 11,207 | | 14,668 | |
Settled | (637,073) | | (743,512) | |
Forfeited | (44,723) | | (46,844) | |
Outstanding, December 31 | 1,336,358 | | 1,577,781 | |
109 CP 2022 ANNUAL REPORT
In 2022, the expense for PSUs and PDSUs was $69 million (2021 – $91 million; 2020 – $121 million). At December 31, 2022, there was $32 million of total unrecognized compensation related to these awards which, is expected to be recognized over a weighted-average period of approximately 1.6 years.
Deferred share unit plan
The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to 36 months and are only redeemable for a specified period after employment is terminated.
Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a 25% company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have five years to meet their ownership targets.
The expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.
The following table summarizes information related to DSUs as at December 31:
| | | | | | | | |
| 2022 | 2021 |
Outstanding, January 1 | 841,333 | | 774,053 | |
Granted | 60,262 | | 70,112 | |
Units in lieu of dividends | 6,510 | | 6,753 | |
Settled | (162,319) | | (6,677) | |
Forfeited | (1,256) | | (2,908) | |
Outstanding, December 31 | 744,530 | | 841,333 | |
During 2022, the Company granted 60,262 DSUs with a grant date fair value of approximately $6 million. In 2022, the expense for DSUs was $10 million (2021 – $6 million; 2020 – $21 million). At December 31, 2022, there was $1 million of total unrecognized compensation related to DSUs, which is expected to be recognized over a weighted-average period of approximately 1.7 years.
Summary of share-based liabilities paid
The following table summarizes the total share-based liabilities paid for each of the years ended December 31:
| | | | | | | | | | | |
(in millions of Canadian dollars) | 2022 | 2021 | 2020 |
Plan | | | |
PSUs | $ | 116 | | $ | 119 | | $ | 76 | |
DSUs | 16 | | 1 | | 9 | |
Other | 5 | | 6 | | 1 | |
Total | $ | 137 | | $ | 126 | | $ | 86 | |
C. Employee share purchase plan
The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the one year vesting period. Under the plan, the Company matches $1 for every $3 contributed by employees up to a maximum employee contribution of 6% of annual salary.
The total number of shares purchased in 2022 on behalf of participants, including the Company's contributions, was 566,902 (2021 – 538,022; 2020 – 576,720). In 2022, the Company’s contributions totalled $11 million (2021 – $11 million; 2020 – $9 million) and the related expense was $9 million (2021 – $8 million; 2020 – $7 million).
CP 2022 ANNUAL REPORT 110
23. Variable interest entities
The Company leases equipment from certain trusts, which have been determined to be variable interest entities financed by a combination of debt and equity provided by unrelated third parties. The lease agreements, which are classified as operating leases, have fixed price purchase options that create the Company’s variable interests and result in the trusts being considered variable interest entities.
Maintaining and operating the leased assets according to specific contractual obligations outlined in the terms of the lease agreements and industry standards is the Company’s responsibility. The rigour of the contractual terms of the lease agreements and industry standards are such that the Company has limited discretion over the maintenance activities associated with these assets. As such, the Company concluded these terms do not provide the Company with the power to direct the activities of the variable interest entities in a way that has a significant impact on the entities’ economic performance.
The financial exposure to the Company as a result of its involvement with the variable interest entities is equal to the fixed lease payments due to the trusts. In 2022, lease payments after tax were $15 million. Future minimum lease payments, before tax, of $94 million will be payable over the next eight years. The Company does not guarantee the residual value of the assets to the lessor; however, it must deliver to the lessor the assets in good operating condition, subject to normal wear and tear, at the end of the lease term.
As the Company’s actions and decisions do not significantly affect the variable interest entities’ performance, and the Company’s fixed price purchase option is not considered to be potentially significant to the variable interest entities, the Company is not considered to be the primary beneficiary, and does not consolidate these variable interest entities.
Additionally, as further discussed in Note 10, as at December 31, 2022, an indirect wholly owned subsidiary of the Company is the sole beneficiary of an independent voting trust that holds 100% of the equity interest in KCS. The trust is governed by a single trustee who is responsible to act in the interest of the Company as the beneficial owner of the shares of KCS. As a result of KCS's equity being held in trust, the Company's interest in KCS does not have the attributes of a typical equity holder as the Company has no power to direct KCS’s activities during the trust period and therefore the trust is considered to be a variable interest entity that the Company cannot consolidate.
The risks associated with the Company's investment in KCS include normal corporate and business risks associated with railroad operations. During the trust period, KCS is subject to contractual restrictions related to acquiring assets, entering into material contracts, or making certain additional capital expenditures that could have a negative impact on their operations. The Company's investment in KCS is also subject to the risk that the STB will not approve the Company’s application to control KCS by December 31, 2023, or by a final and non-appealable order, refuse to provide final approval in which cases the Company would be required to dispose of its investment in KCS. Similarly, if the STB imposes onerous conditions on its final approval, the Company may choose to dispose of its initial investment in KCS rather than agreeing to the conditions imposed by the STB. The Company may not be able to sell its investment at a price that recovers its initial investment and may incur a loss up to the full carrying value of its investment in KCS, in addition to incurring significant expenses in connection to such transaction. All of these risks can impact the overall value of the Company’s investment in KCS.
24. Commitments and contingencies
In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at December 31, 2022, cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s business, financial position, or results of operations. However, an unexpected adverse resolution of one or more of these legal actions could have a material adverse effect on the Company's business, financial position, results of operations, or liquidity in a particular quarter or fiscal year.
Commitments
At December 31, 2022, the Company had committed to total future capital expenditures amounting to $389 million and operating expenditures relating to supplier purchase obligations, such as bulk fuel purchase agreements, locomotive maintenance and overhaul agreements, as well as agreements to purchase other goods and services amounting to approximately $1.4 billion for the years 2023–2035.
Commitments related to leases, including minimum annual payments for the next five years and thereafter, are included in Note 18.
Legal proceedings related to Lac-Mégantic rail accident
On July 6, 2013, a train carrying petroleum crude oil operated by Montréal Maine and Atlantic Railway (“MMAR”) or a subsidiary, Montréal Maine & Atlantic Canada Co. (“MMAC” and collectively the “MMA Group”), derailed in Lac-Mégantic, Québec. The derailment occurred on a section of railway owned and operated by the MMA Group and while the MMA Group exclusively controlled the train.
111 CP 2022 ANNUAL REPORT
Following the derailment, MMAC sought court protection in Canada under the Companies’ Creditors Arrangement Act and MMAR filed for bankruptcy in the U.S. Plans of arrangement were approved in both Canada and the U.S. (the “Plans”), providing for the distribution of approximately $440 million amongst those claiming derailment damages.
A number of legal proceedings, set out below, were commenced in Canada and the U.S. against the Company and others:
(1)Québec's Minister of Sustainable Development, Environment, Wildlife and Parks ordered various parties, including the Company, to remediate the derailment site (the "Cleanup Order") and served the Company with a Notice of Claim for $95 million for those costs. The Company appealed the Cleanup Order and contested the Notice of Claim with the Administrative Tribunal of Québec. These proceedings are stayed pending determination of the Attorney General of Québec (“AGQ”) action (paragraph 2 below).
(2)The AGQ sued the Company in the Québec Superior Court claiming $409 million in damages, which was amended and reduced to $315 million (the “AGQ Action”). The AGQ Action alleges that: (i) the Company was responsible for the petroleum crude oil from its point of origin until its delivery to Irving Oil Ltd.; and (ii) the Company is vicariously liable for the acts and omissions of the MMA Group.
(3)A class action in the Québec Superior Court on behalf of persons and entities residing in, owning or leasing property in, operating a business in, or physically present in Lac-Mégantic at the time of the derailment was certified against the Company on May 8, 2015 (the "Class Action"). Other defendants including MMAC and Mr. Thomas Harding ("Harding") were added to the Class Action on January 25, 2017. On November 28, 2019, the plaintiffs' motion to discontinue their action against Harding was granted. The Class Action seeks unquantified damages, including for wrongful death, personal injury, property damage, and economic loss.
(4)Eight subrogated insurers sued the Company in the Québec Superior Court claiming approximately $16 million in damages, which was amended and reduced to approximately $15 million (the “Promutuel Action”), and two additional subrogated insurers sued the Company claiming approximately $3 million in damages (the “Royal Action”). Both actions contain similar allegations as the AGQ Action. The actions do not identify the subrogated parties. As such, the extent of any overlap between the damages claimed in these actions and under the Plans is unclear. The Royal Action is stayed pending determination of the consolidated proceedings described below.
On December 11, 2017, the AGQ Action, the Class Action and the Promutuel Action were consolidated. The joint liability trial of these consolidated claims commenced on September 21, 2021, with oral arguments ending on June 15, 2022. The Québec Superior Court issued a decision on December 14, 2022 dismissing all claims as against the Company, finding that the Company’s actions were not the direct and immediate cause of the accident and the damages suffered by the plaintiffs. All three plaintiffs filed a declaration of appeal on January 13, 2023. A damages trial will follow after the disposition of all appeals, if necessary.
(5)Forty-eight plaintiffs (all individual claims joined in one action) sued the Company, MMAC, and Harding in the Québec Superior Court claiming approximately $5 million in damages for economic loss and pain and suffering, and asserting similar allegations as in the Class Action and the AGQ Action. The majority of the plaintiffs opted-out of the Class Action and all but two are also plaintiffs in litigation against the Company, described in paragraph 7 below. This action is stayed pending determination of the consolidated claims described above.
(6)The MMAR U.S. bankruptcy estate representative commenced an action against the Company in November 2014 in the Maine Bankruptcy Court claiming that the Company failed to abide by certain regulations and seeking approximately U.S. $30 million in damages for MMAR’s loss in business value according to a recent expert report filed by the bankruptcy estate. This action asserts that the Company knew or ought to have known that the shipper misclassified the petroleum crude oil and therefore should have refused to transport it. Summary judgment motion was argued and taken under advisement on June 9, 2022, and decision is pending. In the meantime, the Company has filed a motion for leave to file additional arguments on the effect of the decision of the Québec Superior Court in the consolidated claims and motion is set to be heard on February 28, 2023.
(7)The class and mass tort action commenced against the Company in June 2015 in Texas (on behalf of Lac-Mégantic residents and wrongful death representatives) and the wrongful death and personal injury actions commenced against the Company in June 2015 in Illinois and Maine, were all transferred and consolidated in Federal District Court in Maine (the “Maine Actions”). The Maine Actions allege that the Company negligently misclassified and improperly packaged the petroleum crude oil. On the Company’s motion, the Maine Actions were dismissed. The plaintiffs appealed the dismissal decision to the United States First Circuit Court of Appeals, which dismissed the plaintiffs' appeal on June 2, 2021. The plaintiffs further petitioned the United States First Circuit Court of Appeals for a rehearing, which was denied on September 8, 2021. On January 24, 2022, the plaintiffs further appealed to the U.S. Supreme Court on two bankruptcy procedural grounds. On May 31, 2022, the U.S. Supreme Court denied the petition, thereby rejecting the plaintiffs' appeal.
(8)The trustee for the wrongful death trust commenced Carmack Amendment claims against the Company in North Dakota Federal Court, seeking to recover approximately U.S. $6 million for damaged rail cars and lost crude oil and reimbursement for the settlement paid by the consignor and the consignee under the Plans (alleged to be U.S. $110 million and U.S. $60 million, respectively). The Court issued an Order on August 6, 2020
CP 2022 ANNUAL REPORT 112
granting and denying in parts the parties' summary judgment motions which has been reviewed and confirmed following motions by the parties for clarification and reconsideration. Final briefs of dispositive motions for summary judgment and for reconsideration on tariff applicability were submitted on September 30, 2022. On January 20, 2023, the Court granted in part the Company's summary judgment motion by dismissing all claims for recovery of settlement payments but leaving for trial the determination of the value of the lost crude oil. It also dismissed the Company's motion for reconsideration on tariff applicability. The remaining issue of the value of the lost crude oil is set for trial from February 27 to March 2, 2023.
At this stage of the proceedings, any potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, the Company denies liability and is vigorously defending these proceedings.
Court decision related to Remington Development Corporation legal claim
On October 20, 2022, the Court of King’s Bench of Alberta issued a decision in a claim brought by Remington Development Corporation (“Remington”) against the Company and the Province of Alberta (“Alberta”) with respect to an alleged breach of contract by the Company in relation to the sale of certain properties in Calgary. In its decision, the Court found the Company had breached its contract with Remington and Alberta had induced the contract breach. The Court found the Company and Alberta liable for damages of approximately $164 million plus interest and costs, and subject to an adjustment to the acquisition value of the property. However, the Court has not provided any indication of how the damages, which are currently estimated to total approximately $200 million before Remington’s costs are established, should be apportioned between the Company and Alberta. As a result, at this time, the Company cannot reasonably estimate the amount of damages for which it is liable under the ruling of the Court. The Company has filed an appeal of the Court’s decision.
25. Guarantees
In the normal course of operating the railway, the Company enters into contractual arrangements that involve providing certain guarantees, which extend over the term of the contracts. These guarantees include, but are not limited to:
•guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in the operation of the railway through operating leases, rental agreements, easements, trackage, and interline agreements; and
•indemnifications of certain tax-related payments incurred by lessors and lenders.
The maximum amount that could be payable under these guarantees, excluding residual value guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or a portion of amounts paid under guarantees to other parties in the event of the occurrence of specified events could be recoverable from other parties or through insurance. The Company has accrued for all guarantees that it expects to pay. As at December 31, 2022, these accruals amounted to $5 million (2021 – $14 million), and are recorded in “Accounts payable and accrued liabilities".
Indemnifications
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Plan, the Company has undertaken to indemnify and save harmless the trustee, to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs, and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The indemnity includes liabilities, costs, or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined benefit and defined contribution options of the pension plans, or otherwise with respect to the assets of the pension plans that are not part of the fund. The indemnity survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry.
Pursuant to the voting trust agreement executed as part of the KCS acquisition, the Company has undertaken to protect, indemnify and save harmless the trustee from any loss, damages, liability, cost or expense in connection with the independent voting trust (except those resulting from the gross negligence or wilful misconduct of the trustee), and any cost or expense of any suit or litigation with respect to the trust stock or the voting trust agreement. The Company has also undertaken to pay all costs, damages and expenses of the trustee, where the trustee is made party to or is the subject of any investigation or proceeding by reason of and with respect to the trust stock or voting trust agreement.
As at December 31, 2022, the Company had not recorded a liability associated with this indemnification as it does not expect to make any payments pertaining to it.
26. Segmented and geographic information
Operating segment
The Company operates in only one operating segment: rail transportation. Operating results by geographic areas, railway corridors, or other lower-level components or units of operation are not reviewed by the Company’s chief operating decision-maker to make decisions about the allocation of resources to, or the assessment of performance of, such geographic areas, corridors, components, or units of operation.
In the years ended December 31, 2022, 2021, and 2020, no one customer comprised more than 10% of total revenues and accounts receivable.
113 CP 2022 ANNUAL REPORT
Geographic information
All of the Company's revenues and long-term assets disclosed in the table below are held within Canada and the United States.
| | | | | | | | | | | |
(in millions of Canadian dollars) | Canada | United States | Total |
2022 | | | |
Revenues | $ | 6,423 | | $ | 2,391 | | $ | 8,814 | |
Long-term assets excluding investment in Kansas City Southern, financial instruments, and pension assets | 15,462 | | 7,942 | | 23,404 | |
2021 | | | |
Revenues | 5,992 | | 2,003 | | 7,995 | |
Long-term assets excluding investment in Kansas City Southern, financial instruments, and pension assets | 14,922 | | 7,274 | | 22,196 | |
2020 | | | |
Revenues | 5,829 | | 1,881 | | 7,710 | |
Long-term assets excluding financial instruments and pension assets | 14,258 | | 7,165 | | 21,423 | |
CP 2022 ANNUAL REPORT 114
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2022, an evaluation was carried out under the supervision of and with the participation of the Company's management, including CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures were effective as of December 31, 2022, to ensure that information required to be disclosed by the Company in reports that they file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Management is responsible for the financial statements and for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2022. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2022 has been audited by EY LLP, the Company's independent registered public accounting firm who audited the Company's Consolidated Financial Statements included in this Form 10-K, as stated in their report, which is included herein.
Changes in Internal Control over Financial Reporting
During the three months ended December 31, 2022, the Company has not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
115 CP 2022 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Canadian Pacific Railway Limited
Opinion on Internal Control over Financial Reporting
We have audited Canadian Pacific Railway Limited and subsidiaries’ internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, Canadian Pacific Railway Limited and subsidiaries (“the Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2022, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for the one year ended December 31, 2022, and the related notes and our report dated February 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chartered Professional Accountants
Calgary, Canada
February 24, 2023
CP 2022 ANNUAL REPORT 116
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
117 CP 2022 ANNUAL REPORT
PART III
CP 2022 ANNUAL REPORT 118
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of Registrant
The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2022. This information will also be contained in the management proxy circular that we prepare in accordance with applicable Canadian corporate and securities law requirements.
Executive Officers of Registrant
The information regarding executive officers is included in Part I of this annual report under Information about our Executive Officers, following Item 4. Mine Safety Disclosures.
Compliance with Section 16(a) of the Exchange Act
The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2022.
Code of Ethics for Chief Executive Officer and Senior Financial Officers
The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2022.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2022. This information will also be contained in the management proxy circular that we prepare in accordance with applicable Canadian corporate and securities law requirements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS