10-Q 1 cp-20220331.htm 10-Q cp-20220331
CANADIAN PACIFIC RAILWAY 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission File Number 001-01342
Canadian Pacific Railway Limited
(Exact name of registrant as specified in its charter)
Canada 98-0355078
(State or Other Jurisdiction
of Incorporation or Organization)
 (IRS Employer
Identification No.)
  
7550 Ogden Dale Road S.E. 
CalgaryABT2C 4X9
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (403) 319-7000
Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class Trading Symbol(s)  Name of Each Exchange on which Registered 
Common Shares, without par value, of
Canadian Pacific Railway Limited
CP New York Stock Exchange
Toronto Stock Exchange
Perpetual 4% Consolidated Debenture Stock of Canadian Pacific Railway CompanyCP/40New York Stock Exchange
BC87London Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 þ
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No þ
As of the close of business on April 26, 2022, there were 929,873,437 of the registrant’s Common Shares issued and outstanding.




CANADIAN PACIFIC RAILWAY LIMITED
FORM 10-Q
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Page
Item 1.Financial Statements:
Interim Consolidated Statements of Income
For the Three Months Ended March 31, 2022 and 2021
Interim Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2022 and 2021
Interim Consolidated Balance Sheets
As at March 31, 2022 and December 31, 2021
Interim Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2022 and 2021
Interim Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2022 and 2021
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Performance Indicators
Financial Highlights
Results of Operations
Liquidity and Capital Resources
Share Capital
Non-GAAP Measures
Critical Accounting Estimates
Forward-Looking Statements
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4.Controls and Procedures
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5. Other Information
Item 6.Exhibits
Signature






PART I

ITEM 1. FINANCIAL STATEMENTS

INTERIM CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the three months ended March 31
(in millions of Canadian dollars, except share and per share data)20222021
Revenues (Note 3)
Freight$1,796 $1,918 
Non-freight42 41 
Total revenues1,838 1,959 
Operating expenses
Compensation and benefits413 405 
Fuel273 206 
Materials62 59 
Equipment rents35 33 
Depreciation and amortization210 202 
Purchased services and other (Note 10)
310 274 
Total operating expenses1,303 1,179 
Operating income535 780 
Less:
Equity earnings of Kansas City Southern (Note 10)
(198) 
Other income (Note 4, 10)(1)(28)
Other components of net periodic benefit recovery (Note 15)(101)(95)
Net interest expense160 110 
Income before income tax expense675 793 
Income tax expense (Note 5)
85 191 
Net income$590 $602 
Earnings per share (Note 1, 6)
Basic earnings per share$0.63 $0.90 
Diluted earnings per share$0.63 $0.90 
Weighted-average number of shares (millions) (Note 1, 6)
Basic929.7 666.5 
Diluted932.7 669.6 
Dividends declared per share (Note 1)
$0.190 $0.190 
See Notes to Interim Consolidated Financial Statements.
2


INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
For the three months ended March 31
(in millions of Canadian dollars)20222021
Net income$590 $602 
Net (loss) gain in foreign currency translation adjustments, net of hedging activities(336)10 
Change in derivatives designated as cash flow hedges1 25 
Change in pension and post-retirement defined benefit plans39 53 
Equity accounted investments62  
Other comprehensive (loss) income before income taxes(234)88 
Income tax expense on above items(36)(30)
Other comprehensive (loss) income (Note 7)(270)58 
Comprehensive income$320 $660 
See Notes to Interim Consolidated Financial Statements.
3


INTERIM CONSOLIDATED BALANCE SHEETS AS AT
(unaudited)
March 31December 31
(in millions of Canadian dollars)20222021
Assets
Current assets
Cash and cash equivalents $85 $69 
Restricted cash and cash equivalents13 13 
Accounts receivable, net (Note 8)
818 819 
Materials and supplies251 235 
Other current assets240 216 
1,407 1,352 
Investment in Kansas City Southern (Note 11)
41,626 42,309 
Investments201 209 
Properties21,120 21,200 
Goodwill and intangible assets366 371 
Pension asset2,428 2,317 
Other assets444 419 
Total assets$67,592 $68,177 
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities$1,445 $1,609 
Long-term debt maturing within one year (Note 12, 13)
1,746 1,550 
3,191 3,159 
Pension and other benefit liabilities 715 718 
Other long-term liabilities521 542 
Long-term debt (Note 12, 13)
17,917 18,577 
Deferred income taxes11,263 11,352 
Total liabilities33,607 34,348 
Shareholders’ equity
Share capital 25,486 25,475 
Additional paid-in capital68 66 
Accumulated other comprehensive loss (Note 7)(2,373)(2,103)
Retained earnings10,804 10,391 
33,985 33,829 
Total liabilities and shareholders’ equity$67,592 $68,177 
See Contingencies (Note 17).
See Notes to Interim Consolidated Financial Statements.
4


INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended March 31
(in millions of Canadian dollars)20222021
Operating activities
Net income$590 $602 
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization210 202 
Deferred income tax (recovery) expense (Note 5)(1)51 
Pension recovery and funding (Note 15)(72)(61)
Equity earnings of Kansas City Southern (Note 10)
(198) 
Foreign exchange gain on debt and lease liabilities (Note 4) (33)
Dividend from Kansas City Southern (Note 10)
334  
Other operating activities, net(83)(88)
Change in non-cash working capital balances related to operations(167)(91)
Cash provided by operating activities613 582 
Investing activities
Additions to properties(226)(323)
Proceeds from sale of properties and other assets15 37 
Other5  
Cash used in investing activities(206)(286)
Financing activities
Dividends paid(177)(127)
Issuance of CP Common Shares8 8 
Repayment of long-term debt, excluding commercial paper (Note 12)
(542)(21)
Net issuance of commercial paper (Note 12)320 93 
Acquisition-related financing fees (Note 10)
 (33)
Cash used in financing activities(391)(80)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents (3)
Cash position
Increase in cash, cash equivalents, and restricted cash16 213 
Cash, cash equivalents, and restricted cash at beginning of period82 147 
Cash, cash equivalents, and restricted cash at end of period$98 $360 
Supplemental disclosures of cash flow information:
Income taxes paid $159 $133 
Interest paid$150 $155 
See Notes to Interim Consolidated Financial Statements.
5


INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
For the three months ended March 31
(in millions of Canadian dollars except per share data)Common Shares (in millions)Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders’
equity
Balance at January 1, 2022929.7 $25,475 $66 $(2,103)$10,391 $33,829 
Net income    590 590 
Other comprehensive loss (Note 7)   (270) (270)
Dividends declared ($0.190 per share)    (177)(177)
Effect of stock-based compensation expense  7   7 
Shares issued for Kansas City Southern acquisition  (2)  (2)
Shares issued under stock option plan0.2 11 (3)  8 
Balance at March 31, 2022929.9 $25,486 $68 $(2,373)$10,804 $33,985 
Balance at January 1, 2021666.3 $1,983 $55 $(2,814)$8,095 $7,319 
Net income—    602 602 
Other comprehensive income (Note 7)—   58  58 
Dividends declared ($0.190 per share) (Note 1)
—    (126)(126)
Effect of stock-based compensation expense—  5   5 
Shares issued under stock option plan0.3 10 (2)  8 
Balance at March 31, 2021666.6 $1,993 $58 $(2,756)$8,571 $7,866 
See Notes to Interim Consolidated Financial Statements.
6


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(unaudited)

1    Basis of presentation

These unaudited Interim Consolidated Financial Statements ("Interim Consolidated Financial Statements") of Canadian Pacific Railway Limited ("CPRL") and its subsidiaries (collectively, “CP”, or “the Company”), expressed in Canadian dollars, reflect management’s estimates and assumptions that are necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America (“GAAP”). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2021 annual Consolidated Financial Statements and notes included in CP's 2021 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 2021 annual Consolidated Financial Statements.

On April 21, 2021, the Company's shareholders approved a five-for-one share split of the Company's issued and outstanding Common Shares. On May 13, 2021, the Company's shareholders of record, as of May 5, 2021 received four additional shares for every Common Share held. Ex-distribution trading in the Company’s Common Shares on a split-adjusted basis commenced on May 14, 2021. Proportional adjustments were also made to outstanding awards under the Company's stock-based compensation plans in order to reflect the share split. All outstanding Common Shares, stock-based compensation awards, and per share amounts herein have been retrospectively adjusted to reflect the share split.

CP's operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons.

In management’s opinion, the Interim Consolidated Financial Statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

2    Accounting changes

Implemented in 2022

Government Assistance

On January 1, 2022, the Company adopted the new Accounting Standards Update ("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 will be 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 9 for further discussion on government assistance.

All other accounting pronouncements that became effective during the period covered by the Interim 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 is currently assessing the impact of this amendment.

All other recently issued accounting pronouncements issued, but not effective until after March 31, 2022 have been assessed and are not expected to have a material impact on the Company's Consolidated Financial Statements and related disclosures.


7


3    Revenues

The following table disaggregates the Company’s revenues from contracts with customers by major source:

For the three months ended March 31
(in millions of Canadian dollars)20222021
Freight
Grain$360 $448 
Coal139 163 
Potash104 101 
Fertilizers and sulphur78 77 
Forest products86 80 
Energy, chemicals and plastics310 388 
Metals, minerals and consumer products181 159 
Automotive91 108 
Intermodal447 394 
Total freight revenues1,796 1,918 
Non-freight excluding leasing revenues22 24 
Revenues from contracts with customers1,818 1,942 
Leasing revenues20 17 
Total revenues$1,838 $1,959 

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 Interim Consolidated Balance Sheets.

The following table summarizes the changes in contract liabilities:
For the three months ended March 31
(in millions of Canadian dollars)20222021
Opening balance$67 $61 
Revenue recognized that was included in the contract liability balance at the beginning of the period(7)(11)
Increase due to consideration received, net of revenue recognized during the period7 64 
Closing balance$67 $114 

4    Other income

For the three months ended March 31
(in millions of Canadian dollars)20222021
Foreign exchange gain on debt and lease liabilities$ $(33)
Other foreign exchange (gains) losses(2)1 
Acquisition-related costs (Note 10)
 3 
Other1 1 
Other income$(1)$(28)

8


5    Income taxes

For the three months ended March 31
(in millions of Canadian dollars)20222021
Current income tax expense$86 $140 
Deferred income tax (recovery) expense (1)51 
Income tax expense$85 $191 

The effective tax rates including discrete items for the three months ended March 31, 2022 was 12.67%, compared to 24.05% for the same period of 2021.

For the three months ended March 31, 2022, the effective tax rate was 24.25%, excluding equity earnings of Kansas City Southern ("KCS"), acquisition-related costs incurred by CP of $20 million, and an outside basis deferred tax recovery of $32 million arising from the difference between the carrying amount of CP's investment in KCS for financial reporting, and the underlying tax basis of this investment.

For the three months ended March 31, 2021, the effective tax rate was 24.60%, excluding acquisition-related costs incurred by CP of $36 million and the FX gain of $33 million on debt and lease liabilities.

6    Earnings per share

Basic earnings per share has been calculated using Net income for the period divided by the weighted-average number of shares outstanding during the period. The number of shares used in the earnings per share calculations are reconciled as follows:
For the three months ended March 31
(in millions)20222021
Weighted-average basic shares outstanding929.7 666.5 
Dilutive effect of stock options3.0 3.1 
Weighted-average diluted shares outstanding932.7 669.6 

For the three months ended March 31, 2022, there were nil options excluded from the computation of diluted earnings per share because their effects were not dilutive (three months ended March 31, 2021 - nil).

9


7    Changes in Accumulated other comprehensive loss ("AOCL") by component

For the three months ended March 31
(in millions of Canadian dollars)
Foreign currency net of hedging activities(1)
Derivatives(1)(2)
Pension and post-
retirement defined
benefit plans
(1)
Equity accounted investments(1)(2)
Total(1)
Opening balance, January 1, 2022$(182)$(4)$(1,915)$(2)$(2,103)
Other comprehensive (loss) income before reclassifications(349)  46 (303)
Amounts reclassified from accumulated other comprehensive loss 1 31 1 33 
Net other comprehensive (loss) income(349)1 31 47 (270)
Closing balance, March 31, 2022$(531)$(3)$(1,884)$45 $(2,373)
Opening balance, January 1, 2021$112 $(40)$(2,878)$(8)$(2,814)
Other comprehensive income before reclassifications 17   17 
Amounts reclassified from accumulated other comprehensive loss 2 39  41 
Net other comprehensive income 19 39  58 
Closing balance, March 31, 2021$112 $(21)$(2,839)$(8)$(2,756)
(1)Amounts are presented net of tax.
(2) Comparative figures have been reclassified to conform with current period presentation.

Amounts in Pension and post-retirement defined benefit plans reclassified from AOCL are as follows:

For the three months ended March 31
(in millions of Canadian dollars)20222021
Recognition of net actuarial loss(1)
$39 $53 
Income tax recovery(8)(14)
Total net of income tax$31 $39 
(1)Impacts "Other components of net periodic benefit recovery" on the Interim Consolidated Statements of Income.

8    Accounts receivable, net

As at March 31, 2022As at December 31, 2021
(in millions of Canadian dollars)FreightNon-freightTotalFreightNon-freightTotal
Total accounts receivable$599 $255 $854 $614 $239 $853 
Allowance for credit losses(22)(14)(36)(20)(14)(34)
Total accounts receivable, net$577 $241 $818 $594 $225 $819 

For the three months ended March 31, 2022For the three months ended March 31, 2021
(in millions of Canadian dollars)FreightNon-freightTotalFreightNon-freightTotal
Allowance for credit losses, opening balance$(20)$(14)$(34)$(25)$(15)$(40)
Current period credit loss provision, net(2) (2)1  1 
Allowance for credit losses, closing balance$(22)$(14)$(36)$(24)$(15)$(39)

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9   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, CP records government assistance from various levels of 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 have as a primary condition that CP should purchase, construct, or otherwise acquire property, plant and equipment. Under certain government assistance arrangements, there is a secondary condition which requires CP 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 CP's intention to comply with all conditions imposed by the terms of the government assistance. Government assistance received or receivable related to CP's property assets are deducted from the cost of the assets in the Consolidated Balance Sheets and amortized over the same period as the related assets in "Depreciation and amortization" in the Consolidated Statements of Income.

During the three months ended March 31, 2022, the Company received $13 million of government assistance towards the purchase and construction of properties. Government assistance received is netted against "Properties" in the Company's Interim Consolidated Balance Sheets.
As of March 31, 2022, the total Properties balance of $21,120 million is net of $269 million of unamortized government assistance (December 31, 2021 - $259 million), primarily related to the enhancement of CP's track and roadway infrastructure. Amortization expense related to government assistance for the three months ended March 31, 2022 was $3 million (three months ended March 31, 2021 - $3 million).

10    Business acquisition

Kansas City Southern

The Company accounts for its investment in KCS using the equity method of accounting while the United States Surface Transportation Board's ("STB") considers the Company's application to control KCS. The STB review of CP's proposed control of KCS while KCS is in the voting trust is expected to be completed in the first quarter of 2023. The investment in KCS of $41,626 million at March 31, 2022 includes $198 million of equity earnings of KCS for the first quarter of 2022, offset by a dividend received of $334 million on January 27, 2022. Included within the $198 million of equity earnings of KCS in the first quarter of 2022 is $40 million amortization (net of tax) of the approximately $30 billion basis difference, representing the 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 CP. The basis difference is related to depreciable property, plant and equipment, intangible assets with definite lives, and long-term debt, and is amortized over the related assets' remaining useful lives, and the remaining terms to maturity of the debt instruments.

During the three months ended March 31, 2022, the Company incurred $20 million in acquisition-related costs, recorded within "Purchased services and other" in the Company's Interim Consolidated Statements of Income. Acquisition-related costs of $13 million incurred by KCS during the three months ended March 31, 2022 are included within "Equity earnings of Kansas City Southern" in the Company's Interim Consolidated Statements of Income.

During the three months ended March 31, 2021, the Company incurred $36 million in acquisition-related costs, of which $33 million was recorded within "Purchased services and other" and $3 million was recorded within "Other income" including the amortization of financing fees associated with new credit facilities. Total financing fees paid for a bridge facility associated with the KCS acquisition during the three months ended March 31, 2021 were $33 million, presented under Cash used in financing activities in the Company's Interim Consolidated Statements of Cash Flows.

11    Investment in KCS

The KCS investment carrying cost of $41,626 million reported on the Company's Interim Consolidated Balance Sheets as at March 31, 2022 reflects the consideration paid to acquire KCS, the asset recorded upon recognition of a deferred tax liability computed on an outside basis (see Note 5), the subsequent recognition of equity earnings, the dividend received from KCS, and foreign currency translation based on the quarter-end exchange rate.









11


The following table presents summarized financial information for KCS, on its historical cost basis:

Statement of Income

(in millions of Canadian dollars)(1)
For the three months ended March 31, 2022
Total revenues$986 
Total operating expenses617 
Operating Income369 
Less: Other(2)
39 
Income before income taxes330 
Net Income$238 
(1) Amounts translated at the average FX rate for the three months ended March 31, 2022 of $1.00 USD = $1.27 CAD.
(2) Includes Equity in net earnings of KCS's affiliates, Interest expense, FX loss, and Other income, net.

12    Debt

During the three months ended March 31, 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.

Credit Facility

Effective March 14, 2022, the Company extended the maturity date of the U.S. $500 million unsecured non-revolving term credit facility (the "term facility") to September 15, 2022. As at March 31, 2022, the Company had borrowings of U.S. $500 million ($625 million) under this term facility (December 31, 2021 - U.S. $500 million) at a weighted-average interest rate of 1.55% (December 31, 2021 - 1.38%).

Commercial paper program

The Company 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 U.S. $1.3 billion revolving credit facility. As at March 31, 2022, the Company had total commercial paper borrowings of U.S. $520 million ($650 million), included in "Long-term debt maturing within one year" on the Company's Interim Consolidated Balance sheets (December 31, 2021 - U.S. $265 million). The weighted-average interest rate on these borrowings was 0.82% (December 31, 2021 - 0.32%). The Company presents issuances and repayments of commercial paper, all of which have a maturity of less than 90 days, in the Company's Interim Consolidated Statements of Cash Flows on a net basis.

13    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 values of short-term financial instruments approximate their fair values.

The carrying value of the Company’s long-term debt and finance lease liabilities does not approximate their fair value. Their 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 and finance lease liabilities, including current maturities, with a carrying value of $18,389 million at March 31, 2022 (December 31, 2021 - $19,151 million), had a fair value of $18,699 million (December 31, 2021 - $21,265 million).





12


B. Financial risk management

FX management

Net investment hedge
The effect of the Company's net investment hedge for the three months ended March 31, 2022 was an unrealized FX gain of $98 million (three months ended March 31, 2021 - unrealized FX gain of $76 million) recognized in “Other comprehensive (loss) income”.

14    Shareholders' equity

On January 27, 2021, the Company announced a normal course issuer bid ("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. Upon expiry of this NCIB, the Company had not purchased any Common Shares under this NCIB.

15    Pension and other benefits

In the three months ended March 31, 2022, the Company made contributions to its defined benefit pension plans of $3 million (three months ended March 31, 2021 - $4 million).

Net periodic benefit costs for defined benefit pension plans and other benefits included the following components:        

For the three months ended March 31
PensionsOther benefits
(in millions of Canadian dollars)2022202120222021
Current service cost (benefits earned by employees)$37 $43 $2 $3 
Other components of net periodic benefit (recovery) cost:
Interest cost on benefit obligation96 88 4 4 
Expected return on fund assets(240)(240)  
Recognized net actuarial loss38 52 1 1 
Total other components of net periodic benefit (recovery) cost(106)(100)5 5 
Net periodic benefit (recovery) cost$(69)$(57)$7 $8 

16    Stock-based compensation

At March 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 for the three months ended March 31, 2022 of $44 million (three months ended March 31, 2021 - expense of $24 million).

Stock option plan

In the three months ended March 31, 2022, under CP’s stock option plans, the Company issued 819,760 options at the weighted-average price of $90.86 per share, based on the closing price on the grant date. Pursuant to the employee plan, these options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years.

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Under the fair value method, the fair value of the stock options at grant date was approximately $15 million. The weighted-average fair value assumptions were approximately:

For the three months ended March 31, 2022
Expected option life (years)(1)
4.75
Risk-free interest rate(2)
1.59%
Expected share price volatility(3)
26.84%
Expected annual dividends per share(4)
$0.760
Expected forfeiture rate(5)
2.98%
Weighted-average grant date fair value per option granted during the period$18.69
(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 share price over a period commensurate with the expected term of the option.
(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. This rate is monitored on a periodic basis.

Performance share unit plans

During the three months ended March 31, 2022, the Company issued 411,999 Performance Share Units ("PSUs") with a grant date fair value of approximately $36 million and 13,506 Performance Deferred Share Units ("PDSUs") with a grant date fair value, including the value of expected future matching units, of approximately $2 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. Vested PSUs are settled in cash. Vested PDSUs are settled in cash pursuant to the Deferred Share Unit ("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 the three months ended March 31, 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 S&P 500 Industrials Index.

The performance period for PSUs issued in 2019 was January 1, 2019 to December 31, 2021. The performance factors for 668,405 PSUs were Return on Invested Capital ("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.

Deferred share unit plan

During the three months ended March 31, 2022, the Company granted 39,409 DSUs with a grant date fair value of approximately $4 million. DSUs vest over various periods of up to 36 months and are only redeemable for a specified period after employment is terminated. The expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.

17    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 March 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.

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.
14


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 CP and others:

(1)Québec's Minister of Sustainable Development, Environment, Wildlife and Parks ordered various parties, including CP, to remediate the derailment site (the "Cleanup Order") and served CP with a Notice of Claim for $95 million for those costs. CP 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 CP 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) CP was responsible for the petroleum crude oil from its point of origin until its delivery to Irving Oil Ltd.; and (ii) CP 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 CP 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 CP 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 CP 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 and will be followed by a damages trial, if necessary.

(5)Forty-eight plaintiffs (all individual claims joined in one action) sued CP, 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 CP, 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 CP in November 2014 in the Maine Bankruptcy Court claiming that CP 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 CP knew or ought to have known that the shipper misclassified the petroleum crude oil and therefore should have refused to transport it.
(7)The class and mass tort action commenced against CP 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 CP 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 CP negligently misclassified and improperly packaged the petroleum crude oil. On CP’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. CP filed its opposition to the appeal on April 20, 2022.

(8)The trustee for the wrongful death trust commenced Carmack Amendment claims against CP in North Dakota Federal Court, seeking to recover approximately U.S. $6 million for damaged rail cars and lost crude 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 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. This action is scheduled for trial on July 11 to 14, 2022.

At this stage of the proceedings, any potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, CP denies liability and is vigorously defending these proceedings.


15


Environmental liabilities

Environmental remediation accruals, recorded on an undiscounted basis unless a reliable, determinable estimate as to an amount and timing of costs can be established, cover site-specific remediation programs.

The accruals for environmental remediation represent CP’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 CP’s best estimate of all probable costs, CP’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, and as 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.

The expense included in “Purchased services and other” in the Company's Interim Consolidated Statements of Income for the three months ended March 31, 2022 was $2 million (three months ended March 31, 2021 - $2 million). Provisions for environmental remediation costs are recorded in the Company's Interim Consolidated Balance Sheets in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities”. The total amount provided at March 31, 2022 was $79 million (December 31, 2021 - $79 million). Payments are expected to be made over 10 years through 2031.

16


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to enhance a reader’s understanding of the Company’s results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with the Company's Interim Consolidated Financial Statements and the related notes for the three months ended March 31, 2022 in Item 1. Financial Statements, other information in this report, and Item 8. Financial Statements and Supplementary Data of the Company's 2021 Annual Report on Form 10-K. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

For purposes of this report, all references herein to “CP”, “the Company”, “we”, “our” and “us” refer to Canadian Pacific Railway Limited ("CPRL"), CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL's subsidiaries, as the context may require.

Available Information

CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). Our website also contains charters for our Board of Directors and each of its committees, our corporate governance guidelines and our Code of Business Ethics. SEC filings made by CP are also accessible through the SEC’s website at www.sec.gov. The information on our website is not part of this quarterly report on Form 10-Q.

The Company has included the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits to this report.

Executive Summary

First Quarter of 2022 Results

Financial performance - In the first quarter of 2022, CP reported Diluted earnings per share ("EPS") of $0.63 and Adjusted diluted EPS of $0.63, both a decrease of 30% compared to the same period in 2021. Core adjusted diluted EPS, which excludes the impact of Kansas City Southern ("KCS") purchase accounting, was $0.67 in the first quarter of 2022, a decrease of 26% compared to the same period of 2021. These decreases were primarily due to a higher average number of shares outstanding due to shares issued for the KCS acquisition and lower volumes as measured by revenue ton-miles ("RTM"), partially offset by equity earnings of KCS.

CP reported Net income of $590 million and Adjusted income was $588 million in the first quarter of 2022, both a decrease of 2% compared to the same period in 2021. These decreases were primarily due to lower volumes as measured by RTMs and lower gains on land sales, partially offset by equity earnings of KCS. Core adjusted income, which excludes the impact of KCS purchase accounting from Adjusted income, was $628 million in the first quarter of 2022, an increase of 5% compared to the same period of 2021. This increase was due to equity earnings of KCS, adjusted for acquisition-related costs incurred by KCS and the impact of KCS purchase accounting, partially offset by lower volumes as measured by RTMs.

CP reported an Operating ratio of 70.9% in the first quarter of 2022, a 1,070 basis point increase compared to the same period of 2021. Adjusted operating ratio was 69.8%, a 1,130 basis point increase compared to the same period of 2021. These increases were primarily due to lower volumes as measured by RTMs, lower gains on land sale, cost inflation and the unfavourable impact of changes in fuel prices, net of recoveries.

Adjusted diluted EPS, Core adjusted diluted EPS, Adjusted income, Core adjusted income, and Adjusted Operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Total revenues - Total revenues decreased by 6% in the first quarter of 2022 to $1,838 million compared to the same period of 2021. This decrease was primarily due to lower volumes as measured by RTMs, partially offset by increased freight revenue per RTM.

Operating performance - CP's average train weight was flat at 9,757 tons as a result of lower volumes of heavier commodities such as Canadian Grain and Coal, offset by improvements in operating plan efficiency. CP's average train length increased by 1% to 8,050 feet, compared to the same period in 2021. This increase was a result of improvements in operating plan efficiency. These metrics are discussed further in Performance Indicators of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.




17


Recent Developments

On March 16, 2022, CP issued a 72-hour notice to the Teamsters Canada Rail Conference ("TCRC") - Train & Engine, of its plan to lock-out employees at 00:01 Eastern Time on March 20, 2022 if the TCRC leadership and the Company were unable to come to a negotiated settlement or agree to binding arbitration. The TCRC represents approximately 3,000 locomotive engineers, conductors, and train and yard workers across Canada. On March 19, 2022, while the Company was still engaged in ongoing negotiations facilitated by federal mediators, the TCRC withdrew its services in the final hours before the deadline for a legal strike or lockout to potentially occur. On March 22, 2022, CP reached an agreement with the TCRC Negotiating Committee to enter into binding arbitration. This agreement enabled CP employees to return to work effective noon March 22, 2022 local time to resume our essential services for our customers and the North American supply chain.

The work stoppage resulted in lower volumes during the first quarter. Once the TCRC members returned to work on March 22, 2022, the Company quickly re-established service.

The United States Surface Transportation Board's ("STB") review of CP's proposed control of KCS while KCS is in the voting trust is expected to be completed in the first quarter of 2023. Prior to obtaining STB control approval, KCS's management and Board of Directors will continue to steward KCS while it is in trust, pursuing its independent business plan and growth strategies.

Specific risk factors related to the KCS acquisition and pending KCS business combination are provided in Part I, Item 1A. Risk Factors of the Company's 2021 Annual Report on Form 10-K.

In the first quarter of 2022, CP’s Pandemic Team continued to proactively monitor guidance and orders from governments, public health authorities, and regulatory agencies.

Additional information concerning the impact that COVID-19 may have to our future business and results of operations is provided in Part I, Item 1A. Risk Factors of the Company's 2021 Annual Report on Form 10-K.

Performance Indicators

The following table lists the key measures of the Company’s operating performance:
For the three months ended March 31
20222021% Change
Operations Performance
Gross ton-miles (“GTMs”) (millions)62,182 71,326 (13)
Train miles (thousands)6,893 7,803 (12)
Average train weight - excluding local traffic (tons)9,757 9,795 — 
Average train length - excluding local traffic (feet)8,050 7,972 
Average terminal dwell (hours)8.7 7.4 18 
Average train speed (miles per hour, or "mph")21.2 20.9 
Locomotive productivity (GTMs / operating horsepower)178201(11)
Fuel efficiency (U.S. gallons of locomotive fuel consumed / 1,000 GTMs)0.994 0.958 
Total Employees and Workforce
Total employees (average)11,767 12,061 (2)
Total employees (end of period)11,942 12,398 (4)
Workforce (end of period)11,977 12,426 (4)
Safety Indicators(1)
FRA personal injuries per 200,000 employee-hours1.31 1.16 13 
FRA train accidents per million train-miles1.04 1.39 (25)
(1)Federal Railroad Administration ("FRA") personal injuries per 200,000 employee-hours for the three months ended March 31, 2021, previously reported as 1.20, was restated to 1.16 in this Earnings Release. FRA train accidents per million train-miles for the three months ended March 31, 2021, previously reported as 1.28, was restated to 1.39 in this Earnings Release. These restatements reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline.

For key measures of the Company's revenue performance, refer to Operating Revenues of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
18


Operations Performance

These key measures are used by management as comparisons to historical operating results and in the planning process to facilitate decisions that continue to drive further productivity improvements in the Company's operations. Results of these key measures reflect how effective CP’s management is at controlling costs and executing the Company’s operating plan and strategy. Continued monitoring of these key measures ensures that the Company can take appropriate actions to ensure the delivery of superior service and be able to grow its business at low incremental cost.
Three months ended March 31, 2022 compared to the three months ended March 31, 2021

A GTM is defined as the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs decreased by 13% in the first quarter of 2022 compared to the same period of 2021. This decrease was primarily driven by lower volumes of Canadian grain, Energy, chemicals and plastics, and Coal. This decrease was partially offset by higher volumes of U.S. grain.

Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles provide a measure of the productive utilization of our network. A smaller increase in train miles relative to increases in volumes, as measured by RTMs, and/or workload, as measured by GTMs, indicate improved train productivity. Train miles decreased by 12% in the first quarter of 2022 compared to the same period of 2021. This decrease was driven by a 13% decrease in GTMs.

Average train weight is defined as the average gross weight of CP trains, both loaded and empty. This excludes trains in short-haul service, work trains used to move CP’s track equipment and materials, and the haulage of other railroads’ trains on CP’s network. An increase in average train weight indicates improved asset utilization and may also be the result of moving heavier commodities. Average train weight was flat in the first quarter of 2022 compared to the same period of 2021.

Average train length is defined as the average total length of CP trains, both loaded and empty. This includes all cars and locomotives on the train and is calculated as the sum of each car or locomotive's length multiplied by the distance travelled, divided by train miles. This excludes trains in short-haul service, work trains used to move CP’s track equipment and materials, and the haulage of other railroads’ trains on CP’s network. An increase in average train length indicates improved asset utilization. Average train length increased by 1% in the first quarter of 2022 compared to the same period of 2021. This increase was a result of improvements in operating plan efficiency.

Average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving at the terminal, a customer releasing the car to the Company, or a car arriving at interchange from another railroad. The timing ends when the train leaves, a customer receives the car from CP, or the freight car is transferred to another railroad. Freight cars are excluded if they are being stored at the terminal or used in track repairs. A decrease in average terminal dwell indicates improved terminal performance resulting in faster cycle times and improved railcar utilization. Average terminal dwell increased by 18% in the first quarter of 2022 compared to the same period of 2021, primarily as a result of proportionally lower volumes of bulk commodities which require less processing time in yards, and harsher winter operating conditions.

Average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It is calculated by dividing the total train miles travelled by the total train hours operated. This calculation does not include delay time related to customers or foreign railroads and excludes the time and distance travelled by: i) trains used in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing track. An increase in average train speed indicates improved on-time performance resulting in improved asset utilization. Average train speed increased by 1% in the first quarter of 2022 compared to the same period of 2021 primarily as a result of lower volumes of Canadian grain and Coal trains through western Canada, which generally have lower train speeds.

Locomotive productivity is defined as the daily average GTMs divided by daily average operating horsepower. Operating horsepower excludes units offline, tied up or in storage, or in use on other railways, and includes foreign units online. An increase in locomotive productivity indicates more efficient locomotive utilization and may also be the result of moving heavier commodities. Locomotive productivity decreased by 11% in the first quarter of 2022 compared to the same period of 2021 as a result of harsher winter operating conditions.

Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs. Fuel consumed includes gallons from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. An improvement in fuel efficiency indicates operational cost savings and CP's commitment to corporate sustainability through a reduction of greenhouse gas emissions intensity. Fuel efficiency decreased by 4% in the first quarter of 2022 compared to the same period of 2021. This decrease in efficiency was due to lower locomotive productivity and harsher winter operating conditions.


19


Total Employees and Workforce

An employee is defined as an individual currently engaged in full-time, part-time, or seasonal employment with CP while workforce is defined as total employees plus contractors and consultants. The Company monitors employment and workforce levels in order to efficiently meet service and strategic requirements. The number of employees is a key driver to total compensation and benefits costs.

The average number of total employees was 11,767 for the three months ended March 31, 2022, a decrease of 294 or 2% for the three months ended March 31, 2022, compared to 12,061 for the same period of 2021. The total number of employees as at March 31, 2022 was 11,942, a decrease of 456, or 4%, compared to 12,398 as at March 31, 2021. The total workforce as at March 31, 2022 was 11,977, a decrease of 449 or 4%, compared to 12,426 as at March 31, 2021. The decrease in total employees (average), total employees (end of period) and workforce is to accommodate a decrease in workload.
Safety Indicators

Safety is a key priority and core strategy for CP’s management, employees, and Board of Directors. Personal injuries and train accidents are indicators of the effectiveness of the Company's safety systems, and are used by management to evaluate and, as necessary, alter the Company's safety systems, procedures, and protocols. Each measure follows U.S. FRA reporting guidelines, which can result in restatement after initial publication to reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline.

The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties, or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 1.31 in the first quarter of 2022, an increase from 1.16 in the same period of 2021.

The FRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold of U.S. $11,300 in 2022 and U.S. $11,200 in damage for 2021. The FRA train accidents per million train-miles was 1.04 in the first quarter of 2022, a decrease from 1.39 in the same period of 2021.

20


Financial Highlights

The following table presents selected financial data related to the Company’s financial results as of, and for the three months ended, March 31, 2022 and the comparative figures in 2021. The financial highlights should be read in conjunction with Item 1. Financial Statements and this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For the three months ended March 31
(in millions, except per share data, percentages and ratios)20222021
Financial Performance and Liquidity
Total revenues$1,838 $1,959 
Operating income535 780 
Adjusted operating income(1)
555 813 
Net income590 602 
Adjusted income(1)
588 600 
Core adjusted income(1)
628 600 
Basic EPS0.63 0.90 
Diluted EPS0.63 0.90 
Adjusted diluted EPS(1)
0.63 0.90 
Core adjusted diluted EPS(1)
0.67 0.90 
Dividends declared per share0.190 0.190 
Cash provided by operating activities613 582 
Cash used in investing activities (206)(286)
Cash used in financing activities(391)(80)
Free cash(1)
424 296 
Financial PositionAs at March 31, 2022As at December 31, 2021
Total assets
$67,592 $68,177 
Total long-term debt, including current portion19,663 20,127 
Total shareholders’ equity33,985 33,829 
For the three months ended March 31
Financial Ratios20222021
Operating ratio(2)
70.9 %60.2 %
Adjusted operating ratio(1)
69.8 %58.5 %
For the twelve months ended March 31
20222021
Return on average shareholders' equity(3)
13.6 %35.6 %
Adjusted return on invested capital ("Adjusted ROIC")(1)
8.2 %15.8 %
Long-term debt to Net income ratio(4)
6.93.7
Adjusted net debt to adjusted EBITDA ratio(1)
4.72.4
Pro-forma adjusted Net Debt to Pro-forma adjusted EBITDA Ratio(1)
4.1N/A
(1)These measures have no standardized meanings prescribed by accounting principles generally accepted in the United States of America ("GAAP") and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)Operating ratio is defined as operating expenses divided by revenues, further discussed in Results of Operations of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(3)Return on average shareholders' equity is defined as Net income divided by average shareholders' equity, averaged between the beginning and ending balance over a trailing twelve month period, further discussed in Results of Operations of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(4)Long-term debt to Net income ratio is defined as long-term debt, including long-term debt maturing within one year, divided by Net income, further discussed in Liquidity and Capital Resources of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.




21


Results of Operations

Three months ended March 31, 2022 compared to the three months ended March 31, 2021

Income

Operating income was $535 million in the first quarter of 2022, a decrease of $245 million, or 31%, from $780 million in the same period of 2021. This decrease was primarily due to:
lower freight volumes as measured by RTMs;
a gain on exchange of property and easements in Chicago of $50 million in 2021;
cost inflation; and
higher operating costs primarily driven by harsher winter operating conditions.

This decrease was partially offset by higher freight rates and lower casualty costs incurred in 2022.

Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $555 million in the first quarter of 2022, a decrease of $258 million, or 32%, from $813 million in the same period of 2021. This decrease reflected the same factors discussed above except that Adjusted operating income excludes the acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other in both periods.

Net income was $590 million in the first quarter of 2022, a decrease of $12 million, or 2%, from $602 million in the same period of 2021. This decrease was primarily due to lower Operating income and higher interest expense primarily due to debt issued related to the KCS acquisition, partially offset by equity earnings of KCS and lower income tax expense due to lower taxable earnings.

Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $588 million in the first quarter of 2022, a decrease of $12 million, or 2%, from $600 million in the same period of 2021. This decrease was primarily due to lower Adjusted operating income, partially offset by equity earnings of KCS excluding acquisition-related costs incurred by KCS.

Core adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, was $628 million in the first quarter of 2022, an increase of $28 million, or 5%, from $600 million in the same period of 2021. This increase was due to equity earnings of KCS excluding acquisition-related costs and the impact of KCS purchase accounting and lower income tax expense on taxable earnings, partially offset by lower Adjusted operating income and higher interest expense due to debt issued related to the KCS acquisition.

Diluted Earnings per Share

Diluted EPS was $0.63 in the first quarter of 2022, a decrease of $0.27, or 30%, from $0.90 in the same period of 2021. This decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition and lower Net income.

Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $0.63 in the first quarter of 2022, a decrease of $0.27, or 30%, from $0.90 in the same period of 2021. This decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition and lower Adjusted income.

Core adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $0.67 in the first quarter of 2022, a decrease of $0.23, or 26%, from $0.90 in the same period of 2021. The decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition, partially offset by higher Core adjusted income.

Operating Ratio

The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s Operating ratio was 70.9% in the first quarter of 2022, a 1,070 basis point increase from 60.2% in the same period of 2021. This increase was primarily due to:
lower freight volumes as measured by RTMs;
a gain on exchange of property and easements in Chicago in 2021;
cost inflation;
the unfavourable impact of changes in fuel prices, net of recoveries; and
higher operating costs primarily driven by harsher winter operating conditions.

This increase was partially offset by higher freight rates.
22


Adjusted operating ratio, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which excludes the acquisition-related costs associated with the KCS transaction, was 69.8% in the first quarter of 2022, a 1,130 basis points increase from the same period of 2021. This increase was due to the same factors discussed above for the increase in Operating ratio.

Return on Average Shareholders' Equity and Adjusted Return on Invested Capital

Return on average shareholders' equity and Adjusted ROIC are measures used by management to determine how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions. Adjusted ROIC is also an important performance criteria in determining certain elements of the Company's long-term incentive plan.

Return on average shareholders' equity was 13.6% for the twelve months ended March 31, 2022, a 2,200 basis point decrease compared to 35.6% for the twelve months ended March 31, 2021, primarily due to higher average shareholder's equity driven by shares issued for the KCS acquisition and accumulated Net income.

Adjusted ROIC was 8.2% for the twelve months ended March 31, 2022, a 760 basis point decrease compared to 15.8% for the twelve months ended March 31, 2021, primarily due to the shares issued for the KCS acquisition and higher average long-term debt, and accumulated Adjusted income. Adjusted ROIC is a Non-GAAP measure, which is defined and reconciled from Return on average shareholders' equity, the most comparable measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Impact of FX on Earnings

Fluctuations in FX affect the Company’s results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses increase (decrease) when the Canadian dollar weakens (strengthens) in relation to the U.S. dollar.

On April 22, 2022, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was U.S. $1.00 = $1.27 Canadian dollar.

The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and the U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, the high and low exchange rates and period end exchange rates for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board.

Average exchange rates (Canadian/U.S. dollar)20222021
For the three months ended - March 31$1.27 $1.27 

Ending exchange rates (Canadian/U.S. dollar)20222021
Beginning of year - January 1$1.28 $1.28 
End of quarter - March 31$1.25 $1.26 

For the three months ended March 31
High/Low exchange rates (Canadian/U.S. dollar)20222021
High$1.29 $1.28 
Low$1.25 $1.24 

In the first quarter of 2022, the impact of a slightly stronger U.S. dollar resulted in an increase in total revenues of $1 million. There was no impact on total operating expenses or net interest expense from the same period of 2021.

The impact of FX on total revenues and operating expenses is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the Foreign Exchange Risk section.




23


Impact of Fuel Price on Earnings

Fluctuations in fuel prices affect the Company’s results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be an impact on earnings due to the timing of recoveries from CP's fuel cost adjustment program. The following table indicates the average fuel price for the three months ended March 31, 2022 and the comparative periods of 2021.

Average Fuel Price (U.S. dollars per U.S. gallon)20222021
For the three months ended - March 31$3.49 $2.39 

The impact of fuel prices on earnings includes the impacts of carbon taxes, levies, and obligations under cap-and-trade programs recovered and paid, on revenues and expenses, respectively.

In the first quarter of 2022, the favourable impact of fuel prices on Operating income was $17 million. Higher fuel prices and increased carbon tax recoveries resulted in an increase in Total revenues of $113 million from the same period of 2021. Higher fuel prices resulted in an increase in Total operating expenses of $96 million.

Impact of Share Price on Earnings

Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") with ticker symbol "CP". The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for the three months ended March 31, 2022 and the comparative period in 2021.

TSX (in Canadian dollars)20222021
Opening Common Share price, as at January 1$90.98 $88.31 
Ending Common Share price, as at March 31$103.18 $96.00 
Change in Common Share price for the three months ended March 31$12.20 $7.69 

NYSE (in U.S. dollars)20222021
Opening Common Share price, as at January 1$71.94 $69.34 
Ending Common Share price, as at March 31$82.54 $75.86 
Change in Common Share price for the three months ended March 31$10.60 $6.52 

In the first quarter of 2022, the impact of the change in Common Share prices resulted in an increase in stock-based compensation expense of $21 million compared to an increase of $17 million in the same period of 2021.

The impact of share price on stock-based compensation is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, Share Price Impact on Stock-Based Compensation.

Operating Revenues

The Company’s revenues are primarily derived from transporting freight. Changes in freight volumes generally contribute to corresponding changes in freight revenues and certain variable expenses, such as fuel, equipment rents, and crew costs. Non-freight revenue is generated from leasing of certain assets; other arrangements, including contracts with passenger service operators and logistical services; and switching fees.
24


For the three months ended March 3120222021Total Change% Change
FX Adjusted
% Change
(2)
Freight revenues (in millions)(1)
$1,796 $1,918 $(122)(6)(6)
Non-freight revenues (in millions)42 41 
Total revenues (in millions)$1,838 $1,959 $(121)(6)(6)
Carloads (in thousands)625.7 691.4 (65.7)(10)N/A
Revenue ton-miles (in millions)33,693 39,273 (5,580)(14)N/A
Freight revenue per carload (in dollars)$2,870 $2,774 $96 
Freight revenue per revenue ton-mile (in cents)5.33 4.88 0.45 
(1)Freight revenues include fuel surcharge revenues of $189 million in 2022 and $85 million in 2021. Fuel surcharge revenues include recoveries of carbon taxes, levies, and obligations under cap-and-trade programs.
(2)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Freight revenues were $1,796 million in the first quarter of 2022, a decrease of $122 million, or 6%, from $1,918 million in the same period of 2021. This decrease was primarily due to lower volumes as measured by RTMs, partially offset by increased freight revenue per RTM.

RTMs are defined as the movement of one revenue-producing ton of freight over a distance of one mile. RTMs measure the relative weight and distance of rail freight moved by the Company. RTMs for the first quarter of 2022 were 33,693 million, a decrease of 5,580 million, or 14%, compared with 39,273 million in the same period of 2021. This decrease was mainly attributable to lower volumes of Canadian grain, Coal, and Energy, chemicals and plastics. This decrease was partially offset by higher volumes of U.S. grain. The work stoppage contributed to the reduction in volumes during the first quarter. Once the TCRC members returned to work on March 22, 2022, the Company quickly re-established service.

Freight revenue per RTM is defined as freight revenue per revenue-producing ton of freight over a distance of one mile. This is an indicator of yield. Freight revenue per RTM was 5.33 cents in the first quarter of 2022, an increase of 0.45 cents, or 9%, from 4.88 cents in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $113 million and higher freight rates. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts.

Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 625.7 thousand in the first quarter of 2022, a decrease of 65.7 thousand, or 10%, from 691.4 thousand in the same period of 2021. This decrease was primarily due to lower volumes of Canadian grain, Energy, chemicals and plastics, and Automotive. This decrease was partially offset by higher volumes of U.S. grain.

Freight revenue per carload is defined as freight revenue per revenue-generating shipment of containers or freight cars. This is an indicator of yield. Freight revenue per carload was $2,870 in the first quarter of 2022, an increase of $96, or 3%, from $2,774 in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $113 million and higher freight rates. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts.

Non-freight revenues were $42 million in the first quarter of 2022, an increase of $1 million, or 2%, from $41 million in the same period of 2021. This increase was primarily due to revenue recognized for construction easements in Chicago of $3 million, higher revenue from passenger service operators, and higher leasing revenues, partially offset by lower revenue from logistical services and switching fees.

Fuel Cost Adjustment Program

Freight revenues include fuel surcharge revenues associated with CP's fuel cost adjustment program, which is designed to respond to fluctuations in fuel prices and help reduce exposure to changing fuel prices. The surcharge is applied to shippers through tariffs and by contract, within agreed-upon guidelines. This program includes recoveries of carbon taxes, levies, and obligations under cap-and-trade programs. Freight revenues included fuel surcharge revenues of $189 million in the first quarter of 2022, an increase of $104 million, or 122%, from $85 million in the same period of 2021. This increase was primarily due to higher fuel prices and increased carbon tax recoveries, partially offset by lower volumes.






25


Lines of Business

Grain
For the three months ended March 3120222021Total Change% Change
FX Adjusted
% Change
(1)
Freight revenues (in millions)$360 $448 $(88)(20)(20)
Carloads (in thousands)83.7 116.4 (32.7)(28)N/A
Revenue ton-miles (in millions)7,974 10,773 (2,799)(26)N/A
Freight revenue per carload (in dollars)$4,301 $3,849 $452 12 12 
Freight revenue per revenue ton-mile (in cents)4.51 4.16 0.35 
(1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX Adjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Grain revenue was $360 million in the first quarter of 2022, a decrease of $88 million, or 20%, from $448 million in the same period of 2021. This decrease was primarily due to lower volumes of Canadian grain to Vancouver and eastern Canada due to drought conditions that impacted the Canadian crop size. This decrease was partially offset by higher volumes of U.S. corn from the U.S. Midwest to western Canada and increased freight revenue per RTM. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. Carloads decreased more than RTMs due to moving higher volumes of U.S. corn from the U.S. Midwest to western Canada, which has a longer length of haul.

Coal
For the three months ended March 3120222021Total Change% Change
FX Adjusted
% Change
(1)
Freight revenues (in millions)$139 $163 $(24)(15)(15)
Carloads (in thousands)69.9 72.0 (2.1)(3)N/A
Revenue ton-miles (in millions)3,997 5,280 (1,283)(24)N/A