Canadian Pacific Railway Limited — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; amounts are Canadian dollars unless stated otherwise. This is the annual report of Canadian Pacific Railway Limited, before the proposed combined railway was named Canadian Pacific Kansas City.
Business context
CP operated an approximately 13,000-mile freight railway in Canada and the United States, with connections extending into Mexico. Its single reportable segment is rail transportation. Freight includes bulk commodities, merchandise and intermodal traffic.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $7.995 billion | $7.710 billion |
| Operating income | $3.206 billion | $3.311 billion |
| Net income | $2.852 billion | $2.444 billion |
| Diluted EPS | $4.18 | $3.59 |
| Adjusted diluted EPS (non-GAAP) | $3.76 | $3.53 |
| Operating ratio | 59.9% | 57.1% |
| Adjusted operating ratio (non-GAAP) | 57.6% | 57.1% |
| Cash provided by operating activities | $3.688 billion | $2.802 billion |
| Capital expenditures, cash basis | $1.532 billion | $1.671 billion |
| Free cash (non-GAAP) | $1.793 billion | $1.157 billion |
Freight revenue rose 4%, while revenue ton-miles fell 1% to 149.686 billion. Higher rates and fuel surcharges supported revenue; drought-related Canadian grain weakness and lower potash volumes weighed on traffic. Full-year operating expenses increased 9% to $4.789 billion, including higher fuel costs and KCS transaction expenses. Reported EPS and free cash include significant transaction-related items; adjusted measures are non-GAAP and should be considered alongside GAAP results.
Fourth-quarter revenue was $2.040 billion, operating income $832 million and net income $532 million, compared with $2.012 billion, $928 million and $802 million, respectively, in fourth-quarter 2020.
Debt, liquidity and acquisition
- Long-term debt, including amounts due within one year, was $20.127 billion at year-end, versus $9.771 billion a year earlier. Cash and cash equivalents were $69 million; the $1.3 billion revolving credit facility was undrawn. The company also had $634 million drawn under a term facility due March 2022 and $336 million of commercial paper outstanding.
- Adjusted net debt to adjusted EBITDA, a non-GAAP leverage measure, was 4.8x, compared with 2.5x in 2020. Management’s long-term target is 2.0x–2.5x. Moody’s downgraded CP to Baa2 in 2021 following the KCS transaction; the outlook was stable.
- CP completed its acquisition of KCS on December 14, 2021, but placed KCS shares in a voting trust pending U.S. Surface Transportation Board (STB) control approval. CP reported a $42.309 billion investment in KCS and accounted for it under the equity method rather than consolidating KCS. The transaction involved approximately $36 billion in share consideration, cash consideration and related payments; CP issued 262.6 million shares.
Changes, outlook and key risks
- Reported net income included an $845 million KCS merger termination fee received in 2021. CP also recorded $599 million in KCS acquisition-related costs. These items, alongside other adjustments, substantially affect comparisons of reported earnings with underlying performance.
- The operating ratio worsened 280 basis points year over year; the adjusted operating ratio worsened 50 basis points. Severe winter weather, B.C. wildfires and November floods disrupted operations and contributed to weaker operating metrics. Average train speed fell 2%, while terminal dwell increased 11%.
- Management expected 2022 capital expenditures of approximately $1.55 billion and an effective tax rate of 24%–24.5%, excluding specified KCS-related effects. The filing provides no clear 2022 revenue or EPS guidance. CP estimated 2022 pension contributions of $25 million–$35 million.
- STB approval of CP’s control of KCS remained pending, expected by CP in fourth-quarter 2022, with final approval required by December 31, 2023 under the disclosed terms. Approval could be delayed, denied or conditioned; CN had indicated it would seek divestiture conditions. Failure to obtain approval could require divestiture of KCS, potentially at a loss. Certain acquisition notes also have special mandatory redemption provisions.
- Other material risks include acquisition integration and elevated leverage, fuel and foreign-exchange volatility, severe weather and climate-transition exposure, labour negotiations, hazardous-material incidents, cybersecurity, and the unresolved Lac-Mégantic litigation. CP denied liability in that matter; potential responsibility and losses were not determinable.
Investor verification priorities
- Track STB review, any imposed conditions, approval timing and the resulting KCS accounting, integration and synergy outlook.
- Assess debt service capacity, refinancing needs, covenant headroom and progress toward the stated leverage target after the acquisition.
- Separate recurring operating performance from the merger termination fee, acquisition costs, KCS equity-method results, tax effects and other non-GAAP adjustments.
- Monitor traffic, pricing and operating recovery after drought, fires and floods, including grain and potash volumes and service measures.
- Review the status and potential exposure of Lac-Mégantic claims, environmental obligations and other contingencies; the filing does not quantify a reliable ultimate loss for the major litigation.