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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 September 30, 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. | | |
| Calgary | AB | | T2C 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 Company | | CP/40 | | New York Stock Exchange |
| BC87 | | London 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 October 25, 2022, there were 930,123,568 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 and Nine Months Ended September 30, 2022 and 2021 | |
| | |
| Interim Consolidated Statements of Comprehensive Income | |
| For the Three and Nine Months Ended September 30, 2022 and 2021 | |
| | |
| Interim Consolidated Balance Sheets | |
| As at September 30, 2022 and December 31, 2021 | |
| | |
| Interim Consolidated Statements of Cash Flows | |
| For the Three and Nine Months Ended September 30, 2022 and 2021 | |
| | |
| Interim Consolidated Statements of Changes in Shareholders' Equity | |
| For the Three and Nine Months Ended September 30, 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 September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars, except share and per share data) | 2022 | 2021 | 2022 | 2021 |
Revenues (Note 3) | | | | |
| Freight | $ | 2,264 | | $ | 1,896 | | $ | 6,214 | | $ | 5,822 | |
| Non-freight | 48 | | 46 | | 138 | | 133 | |
| Total revenues | 2,312 | | 1,942 | | 6,352 | | 5,955 | |
| Operating expenses | | | | |
| Compensation and benefits | 393 | | 381 | | 1,154 | | 1,165 | |
| Fuel | 358 | | 199 | | 1,001 | | 623 | |
| Materials | 66 | | 51 | | 191 | | 164 | |
| Equipment rents | 33 | | 31 | | 97 | | 92 | |
| Depreciation and amortization | 213 | | 203 | | 634 | | 605 | |
Purchased services and other (Note 10) | 312 | | 303 | | 935 | | 932 | |
| Total operating expenses | 1,375 | | 1,168 | | 4,012 | | 3,581 | |
| | | | |
| Operating income | 937 | | 774 | | 2,340 | | 2,374 | |
| Less: | | | | |
Equity earnings of Kansas City Southern (Note 10) | (221) | | — | | (627) | | — | |
| Other expense (Note 4, 10) | 7 | | 124 | | 13 | | 253 | |
Merger termination fee (Note 10) | — | | — | | — | | (845) | |
| Other components of net periodic benefit recovery (Note 15) | (102) | | (95) | | (304) | | (286) | |
| Net interest expense | 166 | | 104 | | 486 | | 315 | |
| Income before income tax expense | 1,087 | | 641 | | 2,772 | | 2,937 | |
Income tax expense (Note 5) | 196 | | 169 | | 526 | | 617 | |
| Net income | $ | 891 | | $ | 472 | | $ | 2,246 | | $ | 2,320 | |
| | | | |
Earnings per share (Note 6) | | | | |
| Basic earnings per share | $ | 0.96 | | $ | 0.71 | | $ | 2.42 | | $ | 3.48 | |
| Diluted earnings per share | $ | 0.96 | | $ | 0.70 | | $ | 2.41 | | $ | 3.46 | |
| | | | |
Weighted-average number of shares (millions) (Note 6) | | | | |
| Basic | 930.0 | | 666.9 | | 929.9 | | 666.7 | |
| Diluted | 932.9 | | 669.8 | | 932.8 | | 669.8 | |
| | | | |
| Dividends declared per share | $ | 0.190 | | $ | 0.190 | | $ | 0.570 | | $ | 0.570 | |
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| | | | | | | | | | | | | | |
| For the three months ended September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| Net income | $ | 891 | | $ | 472 | | $ | 2,246 | | $ | 2,320 | |
| Net gain (loss) in foreign currency translation adjustments, net of hedging activities | 1,565 | | (17) | | 1,948 | | 3 | |
| Change in derivatives designated as cash flow hedges | 2 | | 141 | | 5 | | 69 | |
| Change in pension and post-retirement defined benefit plans | 22 | | 53 | | 99 | | 158 | |
| Equity accounted investments | 47 | | — | | 182 | | — | |
| Other comprehensive income before income taxes | 1,636 | | 177 | | 2,234 | | 230 | |
| Income tax recovery (expense) on above items | 36 | | (29) | | 2 | | (59) | |
| Other comprehensive income (Note 7) | 1,672 | | 148 | | 2,236 | | 171 | |
| Comprehensive income | $ | 2,563 | | $ | 620 | | $ | 4,482 | | $ | 2,491 | |
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED BALANCE SHEETS AS AT
(unaudited)
| | | | | | | | |
| September 30 | December 31 |
| (in millions of Canadian dollars) | 2022 | 2021 |
| Assets | | |
| Current assets | | |
| Cash and cash equivalents | $ | 138 | | $ | 69 | |
| Restricted cash and cash equivalents | — | | 13 | |
Accounts receivable, net (Note 8) | 1,053 | | 819 | |
| Materials and supplies | 267 | | 235 | |
| Other current assets | 186 | | 216 | |
| 1,644 | | 1,352 | |
Investment in Kansas City Southern (Note 11) | 45,964 | | 42,309 | |
| Investments | 230 | | 209 | |
| Properties | 22,150 | | 21,200 | |
| Goodwill and intangible assets | 390 | | 371 | |
| Pension asset | 2,631 | | 2,317 | |
| Other assets | 426 | | 419 | |
| Total assets | $ | 73,435 | | $ | 68,177 | |
| Liabilities and shareholders’ equity | | |
| Current liabilities | | |
| Accounts payable and accrued liabilities | $ | 1,575 | | $ | 1,609 | |
Long-term debt maturing within one year (Note 12, 13) | 1,236 | | 1,550 | |
| 2,811 | | 3,159 | |
| Pension and other benefit liabilities | 726 | | 718 | |
| Other long-term liabilities | 519 | | 542 | |
Long-term debt (Note 12, 13) | 19,339 | | 18,577 | |
| Deferred income taxes | 12,226 | | 11,352 | |
| Total liabilities | 35,621 | | 34,348 | |
| Shareholders’ equity | | |
| Share capital | 25,498 | | 25,475 | |
| Additional paid-in capital | 77 | | 66 | |
| Accumulated other comprehensive income (loss) (Note 7) | 133 | | (2,103) | |
| Retained earnings | 12,106 | | 10,391 | |
| 37,814 | | 33,829 | |
| Total liabilities and shareholders’ equity | $ | 73,435 | | $ | 68,177 | |
See Contingencies (Note 17).
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | | | | | | | | | |
| For the three months ended September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| Operating activities | | | | |
| Net income | $ | 891 | | $ | 472 | | $ | 2,246 | | $ | 2,320 | |
| Reconciliation of net income to cash provided by operating activities: | | | | |
| Depreciation and amortization | 213 | | 203 | | 634 | | 605 | |
| Deferred income tax expense (Note 5) | 38 | | 130 | | 151 | | 190 | |
| Pension recovery and funding (Note 15) | (74) | | (62) | | (218) | | (188) | |
Equity earnings of Kansas City Southern (Note 10) | (221) | | — | | (627) | | — | |
| Foreign exchange loss (gain) on debt and lease liabilities (Note 4) | — | | 46 | | — | | (39) | |
Dividend from Kansas City Southern (Note 10) | 259 | | — | | 593 | | — | |
| Other operating activities, net | (3) | | (14) | | (102) | | (50) | |
| Change in non-cash working capital balances related to operations | (1) | | (227) | | (255) | | 246 | |
| Cash provided by operating activities | 1,102 | | 548 | | 2,422 | | 3,084 | |
| Investing activities | | | | |
| Additions to properties | (422) | | (372) | | (1,018) | | (1,111) | |
| | | | |
| | | | |
| | | | |
Payment to Kansas City Southern (Note 10) | — | | (1,773) | | — | | (1,773) | |
| Proceeds from sale of properties and other assets | 11 | | 16 | | 37 | | 65 | |
| Other | 1 | | — | | 3 | | (1) | |
| Cash used in investing activities | (410) | | (2,129) | | (978) | | (2,820) | |
| Financing activities | | | | |
| Dividends paid | (177) | | (127) | | (530) | | (380) | |
| Issuance of CP Common Shares | 9 | | 4 | | 18 | | 20 | |
| | | | |
| | | | |
Repayment of long-term debt, excluding commercial paper (Note 12) | (7) | | (318) | | (559) | | (349) | |
Repayment of term loan (Note 12) | (504) | | — | | (636) | | — | |
Proceeds from term loan | — | | 633 | | — | | 633 | |
| Net (repayment) issuance of commercial paper (Note 12) | (42) | | 713 | | 298 | | (66) | |
| | | | |
Acquisition-related financing fees (Note 10) | — | | — | | — | | (45) | |
| Other | — | | (3) | | — | | (7) | |
| Cash (used in) provided by financing activities | (721) | | 902 | | (1,409) | | (194) | |
| Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents | 13 | | 10 | | 21 | | 6 | |
| Cash position | | | | |
| (Decrease) increase in cash, cash equivalents, and restricted cash | (16) | | (669) | | 56 | | 76 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 154 | | 892 | | 82 | | 147 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 138 | | $ | 223 | | $ | 138 | | $ | 223 | |
| | | | |
| Supplemental disclosures of cash flow information: | | | | |
| Income taxes paid | $ | 67 | | $ | 129 | | $ | 319 | | $ | 401 | |
| Interest paid | $ | 148 | | $ | 153 | | $ | 467 | | $ | 365 | |
See Notes to Interim Consolidated Financial Statements.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30 |
| (in millions of Canadian dollars except per share data) | | Common Shares (in millions) | | Share
capital | Additional
paid-in
capital | Accumulated
other
comprehensive
income (loss) | Retained
earnings | Total
shareholders’
equity |
Balance as at July 1, 2022 | | 930.0 | | | $ | 25,488 | | $ | 73 | | $ | (1,539) | | $ | 11,392 | | $ | 35,414 | |
| Net income | | — | | | — | | — | | — | | 891 | | 891 | |
| Other comprehensive income (Note 7) | | — | | | — | | — | | 1,672 | | — | | 1,672 | |
Dividends declared ($0.190 per share) | | — | | | — | | — | | — | | (177) | | (177) | |
| Effect of stock-based compensation expense | | — | | | — | | 5 | | — | | — | | 5 | |
| | | | | | | | |
| | | | | | | | |
| Shares issued under stock option plan | | 0.1 | | | 10 | | (1) | | — | | — | | 9 | |
Balance as at September 30, 2022 | | 930.1 | | | $ | 25,498 | | $ | 77 | | $ | 133 | | $ | 12,106 | | $ | 37,814 | |
Balance as at July 1, 2021 | | 666.8 | | | $ | 2,003 | | $ | 63 | | $ | (2,791) | | $ | 9,690 | | $ | 8,965 | |
| Net income | | — | | | — | | — | | — | | 472 | | 472 | |
| Other comprehensive income (Note 7) | | — | | | — | | — | | 148 | | — | | 148 | |
Dividends declared ($0.190 per share) | | — | | | — | | — | | — | | (127) | | (127) | |
| Effect of stock-based compensation expense | | — | | | — | | 6 | | — | | — | | 6 | |
| | | | | | | | |
| | | | | | | | |
| Shares issued under stock option plan | | 0.1 | | | 5 | | (1) | | — | | — | | 4 | |
Balance as at September 30, 2021 | | 666.9 | | | $ | 2,008 | | $ | 68 | | $ | (2,643) | | $ | 10,035 | | $ | 9,468 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30 |
| (in millions of Canadian dollars except per share data) | | Common Shares (in millions) | | Share
capital | Additional
paid-in
capital | Accumulated
other
comprehensive
income (loss) | Retained
earnings | Total
shareholders’
equity |
| Balance as at January 1, 2022 | | 929.7 | | | $ | 25,475 | | $ | 66 | | $ | (2,103) | | $ | 10,391 | | $ | 33,829 | |
| Net income | | — | | | — | | — | | — | | 2,246 | | 2,246 | |
| Other comprehensive income (Note 7) | | — | | | — | | — | | 2,236 | | — | | 2,236 | |
Dividends declared ($0.570 per share) | | — | | | — | | — | | — | | (531) | | (531) | |
| Effect of stock-based compensation expense | | — | | | — | | 17 | | — | | — | | 17 | |
| | | | | | | | |
| Shares issued for Kansas City Southern acquisition | | — | | | — | | (2) | | — | | — | | (2) | |
| Shares issued under stock option plan | | 0.4 | | | 23 | | (4) | | — | | — | | 19 | |
Balance as at September 30, 2022 | | 930.1 | | | $ | 25,498 | | $ | 77 | | $ | 133 | | $ | 12,106 | | $ | 37,814 | |
| Balance as at January 1, 2021 | | 666.3 | | | $ | 1,983 | | $ | 55 | | $ | (2,814) | | $ | 8,095 | | $ | 7,319 | |
| Net income | | — | | | — | | — | | — | | 2,320 | | 2,320 | |
| Other comprehensive income (Note 7) | | — | | | — | | — | | 171 | | — | | 171 | |
Dividends declared ($0.570 per share) | | — | | | — | | — | | — | | (380) | | (380) | |
| Effect of stock-based compensation expense | | — | | | — | | 18 | | — | | — | | 18 | |
| | | | | | | | |
| | | | | | | | |
| Shares issued under stock option plan | | 0.6 | | | 25 | | (5) | | — | | — | | 20 | |
Balance as at September 30, 2021 | | 666.9 | | | $ | 2,008 | | $ | 68 | | $ | (2,643) | | $ | 10,035 | | $ | 9,468 | |
See Notes to Interim Consolidated Financial Statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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.
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 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 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 accounting pronouncements recently issued, but not effective until after September 30, 2022, have been assessed and are not expected to have a material 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:
| | | | | | | | | | | | | | |
| For the three months ended September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| Freight | | | | |
| Grain | $ | 391 | | $ | 352 | | $ | 1,121 | | $ | 1,244 | |
| Coal | 156 | | 158 | | 458 | | 491 | |
| Potash | 170 | | 113 | | 445 | | 348 | |
| Fertilizers and sulphur | 81 | | 72 | | 244 | | 227 | |
| Forest products | 109 | | 89 | | 299 | | 259 | |
| Energy, chemicals and plastics | 360 | | 392 | | 1,010 | | 1,149 | |
| Metals, minerals and consumer products | 246 | | 196 | | 655 | | 535 | |
| Automotive | 111 | | 83 | | 322 | | 289 | |
| Intermodal | 640 | | 441 | | 1,660 | | 1,280 | |
| Total freight revenues | 2,264 | | 1,896 | | 6,214 | | 5,822 | |
| Non-freight excluding leasing revenues | 28 | | 25 | | 77 | | 75 | |
| Revenues from contracts with customers | 2,292 | | 1,921 | | 6,291 | | 5,897 | |
| Leasing revenues | 20 | | 21 | | 61 | | 58 | |
| Total revenues | $ | 2,312 | | $ | 1,942 | | $ | 6,352 | | $ | 5,955 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
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 September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| Opening balance | $ | 69 | | $ | 245 | | $ | 67 | | $ | 61 | |
| Revenue recognized that was included in the contract liability balance at the beginning of the period | (8) | | (93) | | (16) | | (36) | |
| Increase due to consideration received, net of revenue recognized during the period | 4 | | 4 | | 14 | | 131 | |
| Closing balance | $ | 65 | | $ | 156 | | $ | 65 | | $ | 156 | |
4 Other expense
| | | | | | | | | | | | | | |
| For the three months ended September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| Foreign exchange loss (gain) on debt and lease liabilities | $ | — | | $ | 46 | | $ | — | | $ | (39) | |
| Other foreign exchange losses (gains) | 2 | | (7) | | 1 | | (9) | |
Acquisition-related costs (Note 10) | — | | 83 | | — | | 295 | |
| Other | 5 | | 2 | | 12 | | 6 | |
| Other expense | $ | 7 | | $ | 124 | | $ | 13 | | $ | 253 | |
5 Income taxes
| | | | | | | | | | | | | | |
| For the three months ended September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| Current income tax expense | $ | 158 | | $ | 39 | | $ | 375 | | $ | 427 | |
| Deferred income tax expense | 38 | | 130 | | 151 | | 190 | |
| Income tax expense | $ | 196 | | $ | 169 | | $ | 526 | | $ | 617 | |
During the three months ended September 30, 2022, legislation was enacted to decrease the Iowa state corporate income tax rate. As a result of this change, the Company recorded a deferred tax recovery of $12 million related to the revaluation of deferred income tax balances as at January 1, 2022.
The effective tax rates including discrete items for the three and nine months ended September 30, 2022 were 18.01% and 18.97%, respectively, compared to 26.36% and 21.00%, respectively for the same periods of 2021.
For the three months ended September 30, 2022, the effective tax rate was 24.25%, excluding the discrete items of the equity earnings of Kansas City Southern ("KCS") of $221 million, acquisition-related costs incurred by CP of $18 million, the deferred tax recovery of $12 million described above, and an outside basis deferred tax recovery of $9 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 September 30, 2021, the effective tax rate was 24.60%, excluding the discrete items of acquisition-related costs incurred by CP of $98 million, and a foreign exchange ("FX") loss of $46 million on debt and lease liabilities.
For the nine months ended September 30, 2022, the effective tax rate was 24.25%, excluding the discrete items of the equity earnings of KCS of $627 million, acquisition-related costs incurred by CP of $57 million, the deferred tax recovery of $12 million described above, and an outside basis deferred tax expense of $8 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 nine months ended September 30, 2021, the effective tax rate was 24.60%, excluding the discrete items of acquisition-related costs incurred by CP of $442 million, the merger termination payment received in connection with KCS's termination of the Agreement and Plan of Merger (the "Original Merger Agreement") of $845 million (U.S. $700 million), and an FX gain of $39 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 September 30 | For the nine months ended September 30 | |
| (in millions) | 2022 | 2021 | 2022 | 2021 | | |
| Weighted-average basic shares outstanding | 930.0 | | 666.9 | | 929.9 | | 666.7 | | | |
| Dilutive effect of stock options | 2.9 | | 2.9 | | 2.9 | | 3.1 | | | |
| Weighted-average diluted shares outstanding | 932.9 | | 669.8 | | 932.8 | | 669.8 | | | |
For the three and nine months ended September 30, 2022, there were nil and 0.3 million options, respectively, excluded from the computation of diluted earnings per share because their effects were not dilutive (three and nine months ended September 30, 2021 - 0.2 million and 0.1 million, respectively).
7 Changes in Accumulated other comprehensive income (loss) ("AOCI") by component
| | | | | | | | | | | | | | | | | |
| For the three months ended September 30 |
| (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,
July 1, 2022 | $ | 217 | | $ | (2) | | $ | (1,856) | | $ | 102 | | $ | (1,539) | |
| Other comprehensive income (loss) before reclassifications | 1,618 | | — | | (14) | | 37 | | 1,641 | |
| Amounts reclassified from accumulated other comprehensive income | — | | 1 | | 30 | | — | | 31 | |
| Net other comprehensive income | 1,618 | | 1 | | 16 | | 37 | | 1,672 | |
Closing balance,
September 30, 2022 | $ | 1,835 | | $ | (1) | | $ | (1,840) | | $ | 139 | | $ | 133 | |
| Opening balance, July 1, 2021 | $ | 110 | | $ | (91) | | $ | (2,800) | | $ | (10) | | $ | (2,791) | |
| Other comprehensive income before reclassifications | 6 | | 101 | | — | | — | | 107 | |
| Amounts reclassified from accumulated other comprehensive loss | — | | 2 | | 39 | | — | | 41 | |
| Net other comprehensive income | 6 | | 103 | | 39 | | — | | 148 | |
Closing balance,
September 30, 2021 | $ | 116 | | $ | 12 | | $ | (2,761) | | $ | (10) | | $ | (2,643) | |
(1)Amounts are presented net of tax.
(2) Comparative figures have been reclassified to conform with current period presentation.
| | | | | | | | | | | | | | | | | |
| For the nine months ended September 30 |
| (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 income (loss) before reclassifications | 2,017 | | — | | (14) | | 140 | | 2,143 | |
| Amounts reclassified from accumulated other comprehensive income | — | | 3 | | 89 | | 1 | | 93 | |
| Net other comprehensive income | 2,017 | | 3 | | 75 | | 141 | | 2,236 | |
| Closing balance, September 30, 2022 | $ | 1,835 | | $ | (1) | | $ | (1,840) | | $ | 139 | | $ | 133 | |
| Opening balance, January 1, 2021 | $ | 112 | | $ | (40) | | $ | (2,878) | | $ | (8) | | $ | (2,814) | |
| Other comprehensive income (loss) before reclassifications | 4 | | 46 | | — | | (2) | | 48 | |
| Amounts reclassified from accumulated other comprehensive loss | — | | 6 | | 117 | | — | | 123 | |
| Net other comprehensive income (loss) | 4 | | 52 | | 117 | | (2) | | 171 | |
| Closing balance, September 30, 2021 | $ | 116 | | $ | 12 | | $ | (2,761) | | $ | (10) | | $ | (2,643) | |
(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 AOCI are as follows:
| | | | | | | | | | | | | | |
| For the three months ended September 30 | For the nine months ended September 30 |
| (in millions of Canadian dollars) | 2022 | 2021 | 2022 | 2021 |
| | | | |
Recognition of net actuarial loss(1) | $ | 39 | | $ | 53 | | $ | 116 | | $ | 158 | |
| | | | |
| Income tax recovery | (9) | | (14) | | ( |