Notes to Consolidated Financial Statements
December 31, 2017
Canadian Pacific Railway Limited (“CPRL”), through its subsidiaries (collectively referred to as “CP” or “the Company”), operates a transcontinental railway in Canada and the United States ("U.S."). CP provides rail and intermodal transportation services over a network of approximately
12,500
miles, serving the principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. CP’s railway network feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend the Company’s market reach east of Montreal in Canada, throughout the U.S. and into Mexico. CP transports bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, fertilizers and sulphur. Merchandise freight consists of finished vehicles and automotive parts, as well as forest, industrial and consumer products. Intermodal traffic consists largely of retail goods in overseas containers that can be transported by train, ship and truck, and in domestic containers and trailers that can be moved by train and truck.
1 Summary of significant accounting policies
Accounting principles generally accepted in the United States of America (“GAAP”)
These Consolidated Financial Statements are expressed in Canadian dollars and have been prepared in accordance with GAAP.
Principles of consolidation
These Consolidated Financial Statements include the accounts of CP and all its subsidiaries. The Company’s investments in which it has significant influence are accounted for using the equity method. All intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of these Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the year, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates, including those related to environmental liabilities, pensions and other benefits, depreciable lives of properties, deferred income tax assets and liabilities, as well as legal and personal injury liabilities based upon currently available information. Actual results could differ from these estimates.
Principal subsidiaries
The following list sets out CPRL’s principal railway operating subsidiaries, including the jurisdiction of incorporation. All of these subsidiaries are wholly owned, directly or indirectly, by CPRL as at
December 31, 2017
.
|
|
|
Principal subsidiary
|
Incorporated under
the laws of
|
Canadian Pacific Railway Company
|
Canada
|
Soo Line Railroad Company (“Soo Line”)
|
Minnesota
|
Delaware and Hudson Railway Company, Inc. (“D&H”)
|
Delaware
|
Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”)
|
Delaware
|
Mount Stephen Properties Inc. (“MSP”)
|
Canada
|
Revenue recognition
Railway freight revenues are recognized based on the percentage of completed service method. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred. Volume rebates to customers are accrued as a reduction of freight revenues based on estimated volume and contract terms as freight service is provided. Other revenues, including passenger revenue, revenue from leasing certain assets, switching fees, and revenue from logistics services, are recognized as service is performed or contractual obligations are met. Revenues are presented net of taxes collected from customers and remitted to government authorities.
Cash and cash equivalents
Cash and cash equivalents include highly liquid short-term investments that are readily convertible to cash with original maturities of
3 months
or less, but exclude cash and cash equivalents subject to restrictions.
Restricted cash and cash equivalents
Cash and cash equivalents that are restricted as to withdrawal or usage, in accordance with specific agreements, are presented as restricted cash and cash equivalents on the balance sheets when applicable. In the Consolidated Statements of Cash Flow, these balances, if any, are included with cash and cash equivalents.
Foreign currency translation
Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into Canadian dollars at the year-end exchange rate for monetary items and at the historical exchange rates for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rates in effect on the dates of the related transactions. Foreign exchange ("FX") gains and losses, other than those arising from the translation of the Company’s net investment in foreign subsidiaries, are included in income.
The accounts of the Company’s foreign subsidiaries are translated into Canadian dollars using the year-end exchange rate for assets and liabilities and the average exchange rates during the year for revenues, expenses, gains and losses. FX gains and losses arising from the translation of the foreign subsidiaries’ assets and liabilities are included in “Other comprehensive income (loss)”. A portion of U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. As a result, unrealized FX gains and losses on U.S. dollar-denominated long-term debt, designated as a hedge, are offset against FX gains and losses arising from the translation of foreign subsidiaries’ accounts in “Other comprehensive income (loss)”.
Pensions and other benefits
Pension costs are actuarially determined using the projected-benefit method pro-rated over the credited service periods of employees. This method incorporates management’s best estimates of expected plan investment performance, salary escalation and retirement ages of employees. The expected return on fund assets is calculated using market-related asset values developed from a
five-year average of market values
for the fund’s public equity securities and absolute return strategies (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the fund’s fixed income, real estate and infrastructure securities, subject to the market-related asset value not being greater than
120%
of the market value nor being less than
80%
of the market value. The discount rate used to determine the projected-benefit obligation is based on blended market interest rates on high-quality corporate debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of
10%
of the greater of the benefit obligation and the market-related value of plan assets are amortized over the expected average remaining service period of active employees expected to receive benefits under the plan (approximately
12
years). Prior service costs arising from collectively bargained amendments to pension plan benefit provisions are amortized over the term of the applicable union agreement. Prior service costs arising from all other sources are amortized over the expected average remaining service period of active employees who are expected to receive benefits under the plan at the date of amendment.
Costs for post-retirement and post-employment benefits other than pensions, including post-retirement health care and life insurance and some workers’ compensation and long-term disability benefits in Canada, are actuarially determined on a basis similar to pension costs.
The over or under funded status of defined benefit pension and other post-retirement benefit plans are measured as the difference between the fair value of the plan assets and the benefit obligation, and are recognized on the balance sheets. In addition, any unrecognized actuarial gains and losses and prior service costs and credits that arise during the period are recognized as a component of “Other comprehensive income (loss)”, net of tax.
Gains and losses on post-employment benefits that do not vest or accumulate, including some workers’ compensation and long-term disability benefits in Canada, are included immediately in income as “Compensation and benefits”.
Materials and supplies
Materials and supplies are carried at the lower of average cost or market value and consist primarily of fuel and parts used in the repair and maintenance of track structures, equipment, locomotives and freight cars.
Properties
Fixed asset additions and major renewals are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated depreciation and any impairment. When there is a legal obligation associated with the retirement of property, a liability is initially recognized at its fair value and a corresponding asset retirement cost is added to the gross book value of the related asset and amortized to expense over the estimated term to retirement. The Company reviews the carrying amounts of its properties whenever changes in circumstances indicate that such carrying amounts may not be recoverable based on future
undiscounted cash flows. When such properties are determined to be impaired, recorded asset values are revised to their fair value and an impairment loss is recognized.
The Company recognizes expenditures as additions to properties or operating expenses based on whether the expenditures increase the output or service capacity, lower the associated operating costs or extend the useful life of the properties and whether the expenditures exceed minimum physical and financial thresholds.
Much of the additions to properties, both new and replacement properties, are self-constructed. These are initially recorded at cost, including direct costs and attributable indirect costs, overheads and carrying costs. Direct costs include, among other things, labour costs, purchased services, equipment costs and material costs. Attributable indirect costs and overheads include incremental long-term variable costs resulting from the execution of capital projects. Indirect costs mainly include work trains, material distribution, highway vehicles and work equipment. Overheads primarily include a portion of the engineering department’s costs, which plans, designs and administers these capital projects. These costs are allocated to projects by applying a measure consistent with the nature of the cost, based on cost studies. For replacement properties, the project costs are allocated to dismantling and installation based on cost studies. Dismantling work is performed concurrently with the installation.
Ballast programs including undercutting, shoulder ballasting and renewal programs that form part of the annual track program are capitalized as this work, and the related added ballast material, significantly improves drainage, which in turn extends the life of ties and other track materials. These costs are tracked separately from the underlying assets and depreciated over the period to the next estimated similar ballast program. Spot replacement of ballast is considered a repair which is expensed as incurred.
The costs of large refurbishments are capitalized and locomotive overhauls are expensed as incurred, except where overhauls represent a betterment of the locomotive in which case costs are capitalized.
The Company capitalizes development costs for major new computer systems.
The Company follows group depreciation, which groups assets which are similar in nature and have similar economic lives. The property groups are depreciated on a straight-line basis reflecting their expected economic lives determined by depreciation studies. Depreciation studies are regular reviews of asset service lives, salvage values, accumulated depreciation and other related factors. Depreciation rates are established through these studies. Actual use and retirement of assets may vary from current estimates, and would be identified in the next study. These changes in expected economic lives would impact the amount of depreciation expense recognized in future periods. All track assets are depreciated using a straight-line method which recognizes the value of the asset consumed as a percentage of the whole life of the asset.
When depreciable property is retired or otherwise disposed of in the normal course of business, the book value, less net salvage proceeds, is charged to accumulated depreciation and if different than the assumptions under the depreciation study could potentially result in adjusted depreciation expense over a period of years. However, when removal costs exceed the salvage value on assets and the Company has no legal obligation to remove the assets, the removal costs incurred are charged to income in the period in which the assets are removed and are not charged to accumulated depreciation.
For certain asset classes, the historical cost of the asset is separately recorded in the Company’s property records. This amount is retired from the property records upon retirement of the asset. For assets for which the historical cost cannot be separately identified the amount of the gross book value to be retired is estimated using either an indexation methodology, whereby the current replacement cost of the asset is indexed to the estimated year of installation for the asset, or a first-in, first-out approach, or statistical analysis is used to determine the age of the retired asset. CP uses indices that closely correlate to the principal costs of the assets.
There are a number of estimates inherent in the depreciation and retirement processes and as it is not possible to precisely estimate each of these variables until a group of property is completely retired, CP regularly monitors the estimated service lives of assets and the associated accumulated depreciation for each asset class to ensure depreciation rates are appropriate. If the recorded amounts of accumulated depreciation are greater or less than the amounts indicated by the depreciation studies then the excess or deficit is amortized as a component of depreciation expense over the remaining service lives of the applicable asset classes.
For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in the Company’s depreciation studies, CP records a gain or loss for the difference between net proceeds and net book value of the assets sold or retired. The accumulated depreciation to be retired includes asset-specific accumulated depreciation, when known, and an appropriate portion of the accumulated depreciation recorded for the relevant asset class as a whole, calculated using a cost-based allocation.
Revisions to the estimated useful lives and net salvage projections constitute a change in accounting estimate and are addressed prospectively by amending depreciation rates.
Equipment under capital lease is included in Properties and depreciated over the period of expected use.
Assets held for sale
Assets to be disposed that meet the held for sale criteria are reported at the lower of their carrying amount and fair value, less costs to sell, and are no longer depreciated.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets upon acquisition of a business. Goodwill is assigned to the reporting units that are expected to benefit from the business acquisition which, after integration of operations with the railway network, may be different than the acquired business.
The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year as at October 1st, or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors (“Step 0”) to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test (“Step 1”). Qualitative factors include but are not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If Step 0 indicates that the carrying value is less than the fair value, then performing the two-step impairment test is unnecessary. Under Step 1, the fair value of the reporting unit is compared to its carrying value, including goodwill. If the fair value of the reporting unit is less than its carrying value, goodwill is potentially impaired. The impairment charge that would be recognized is the excess of the carrying value of the goodwill over the fair value of the goodwill, determined in the same manner as in a business combination.
Intangible assets with finite lives are amortized on a straight-line basis over the estimated useful lives of the respective assets. Favourable leases, customer relationships and interline contracts have amortization periods ranging from
15
to
20
years. When there is a change in the estimated useful life of an intangible asset with a finite life, amortization is adjusted prospectively.
Financial instruments
Financial instruments are contracts that give rise to a financial asset of one party and a financial liability or equity instrument of another party.
Financial instruments are recognized initially at fair value, which is the amount of consideration that would be agreed upon in an arm’s-length transaction between willing parties.
Subsequent measurement depends on how the financial instruments have been classified. Accounts receivable and investments, classified as loans and receivables, are measured at amortized cost, using the effective interest method. Cash and cash equivalents and derivatives are classified as held for trading and are measured at fair value. Accounts payable, accrued liabilities, short-term borrowings, dividends payable, other long-term liabilities and long-term debt, classified as other liabilities, are also measured at amortized cost.
Derivative financial instruments
Derivative financial and commodity instruments may be used from time to time by the Company to manage its exposure to risks relating to foreign currency exchange rates, stock-based compensation, interest rates and fuel prices. When CP utilizes derivative instruments in hedging relationships, CP identifies, designates and documents those hedging transactions and regularly tests the transactions to demonstrate effectiveness in order to continue hedge accounting.
All derivative instruments are classified as held for trading and recorded at fair value. Any change in the fair value of derivatives not designated as hedges is recognized in the period in which the change occurs in the Consolidated Statements of Income in the line item to which the derivative instrument is related. On the Consolidated Balance Sheets they are classified in “Other assets”, “Other long-term liabilities”, “Other current assets” or “Accounts payable and accrued liabilities” as applicable. Gains and losses arising from derivative instruments may affect the following lines on the Consolidated Statements of Income: “Revenues”, “Compensation and benefits”, “Fuel”, “Other income and charges”, and “Net interest expense”.
For fair value hedges, the periodic changes in values are recognized in income, on the same line as the changes in values of the hedged items are also recorded. For a cash flow hedge, the change in value of the effective portion is recognized in “Other comprehensive income (loss)”. Any ineffectiveness within an effective cash flow hedge is recognized in income as it arises in the same income account as the hedged item. Should a cash flow hedging relationship become ineffective, previously unrealized gains and losses remain within “Accumulated other comprehensive loss” until the hedged item is settled and, prospectively, future changes in value of the derivative are recognized in income. The change in value of the effective portion of a cash flow hedge remains in “Accumulated other comprehensive loss” until the related hedged item settles, at which time amounts recognized in “Accumulated other comprehensive loss” are reclassified to the same income or balance sheet account that records the hedged item.
In the Consolidated Statements of Cash Flows, cash flows relating to derivative instruments designated as hedges are included in the same line as the related hedged items.
Environmental remediation
Environmental remediation accruals, recorded on an undiscounted basis unless a reliably determinable estimate as to amount and timing of costs can be established, cover site-specific remediation programs. The accruals are recorded when the costs to remediate are probable and reasonably estimable. Certain future costs to monitor sites are discounted at an adjusted risk-free rate. Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion, which is recorded in “Accounts payable and accrued liabilities”.
Income taxes
The Company follows the liability method of accounting for income taxes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period during which the change occurs.
When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, CP considers whether it is more likely than not that all or some portion of CP’s deferred tax assets will not be realized, based on management’s judgment using available evidence about future events.
At times, tax benefit claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are more likely than not sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than
50%
likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in CP’s tax returns that do not meet these recognition and measurement standards.
Investment and other similar tax credits are deferred on the Consolidated Balance Sheets and amortized to “Income tax expense” as the related asset is recognized in income.
Earnings per share
Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method for determining the dilutive effect of options.
Stock-based compensation
CP follows the fair value based approach to account for stock options. Compensation expense and an increase in “Additional paid-in capital” are recognized for stock options over their vesting period, or over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period, based on their estimated fair values on the grant date, as determined using the Black-Scholes option-pricing model.
Any consideration paid by employees on exercise of stock options is credited to “Share capital” when the option is exercised and the recorded fair value of the option is removed from “Additional paid-in capital" and credited to “Share capital”.
Compensation expense is also recognized for deferred share units (“DSUs”), performance share units (“PSUs”) and restricted share units (“RSUs”) using the fair value method. Compensation expense is recognized over the vesting period, or for PSUs and DSUs only, over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period. Forfeitures of DSUs, PSUs and RSUs are estimated at issuance and subsequently at the balance sheet date.
The employee share purchase plan (“ESPP”) gives rise to compensation expense that is recognized using the issue price by amortizing the cost over the vesting period or over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period.
2 Accounting changes
Implemented in
2017
Compensation
–
Stock Compensation
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-based Payment Accounting, under FASB Accounting Standards Codification ("ASC") Topic 718. The amendments clarify the guidance relating to treatment of excess tax benefits and deficiencies, acceptable forfeiture rate policies, and treatment of cash paid by an employer when directly withholding shares for tax-withholding purposes and the requirement to treat such cash flows as a financing activity. As a result of this ASU, excess tax benefits are no longer recorded in additional paid-
in capital and instead are applied against taxes payable or recognized in the Consolidated Statement of Income. This ASU was effective for CP beginning on January 1, 2017. The Company has determined that there were no significant changes to disclosure, financial statement presentation, and no material changes to accounting as a result of adoption.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory under FASB ASC Topic 330. The amendments require that reporting entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using the first-in, first-out or average cost basis. This ASU was effective for CP beginning on January 1, 2017 and was applied prospectively. The Company determined there were no changes to disclosure, financial statement presentation, or valuation of inventory as a result of adoption.
Future changes
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers under FASB ASC Topic 606. The FASB has also issued several updates to ASU 2014-09. The guidance in Topic 606, as amended, will be effective for CP for interim and annual periods commencing January 1, 2018. CP will adopt the new standard by using the modified retrospective approach.
CP has analyzed contracts and public tariffs for a significant proportion of the Company’s annual rail freight revenue, which represents greater than 95% of CP’s annual revenues, and has identified the distinct services provided to customers that represent performance obligations under contracts and public tariffs. CP has also assessed key contracts with customers that generate non-freight revenues. CP has concluded that recognizing rail freight revenues over time as performance obligations related to rail freight services are satisfied continues to be appropriate. Certain other services provided to customers are satisfied at a point in time and will continue to be recognized in this manner.
CP has substantially completed its assessment of its revenues earned from contracts with customers and does not expect any significant adjustment to be required upon adoption of the standard. Additional disclosures will be provided in CP's first quarter 2018 financial statements.
Compensation
–
Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost under FASB ASC Topic 715. The amendments clarify presentation requirements for net periodic pension cost and net periodic post-retirement benefit cost and require that an employer report the current service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the Consolidated Statement of Income separately from the current service cost component and outside a subtotal of income from operations. The amendments also restrict capitalization to the current service cost component when applicable. The amendments are effective for CP beginning on January 1, 2018. The amendments related to presentation are required to be applied retrospectively and the restrictions on capitalization of the current service cost component are applicable prospectively on the date of adoption. The impacts of the reclassification are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
(in millions of Canadian dollars)
|
2017
|
2016
|
2015
|
Decrease in operating income
|
$
|
274
|
|
$
|
167
|
|
$
|
70
|
|
There will be no change to Net income or earnings per share as a result of adoption of this new standard. The new guidance restricting capitalization of pensions to the current service cost component of net periodic benefit cost will have no impact to operating income or amounts capitalized because the Company currently only capitalizes an appropriate portion of current service cost for self-constructed properties. CP is currently assessing the disclosure requirements of this ASU.
Derivatives and Hedging
In August 2017, the FASB issued Accounting Standards Update ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, under FASB ASC Topic 815. This is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These amendments also make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments require the entire change in the fair value of the hedging instrument to be recorded in other comprehensive income for effective cash flow hedges. Consequently, any ineffective portion of the change in fair value will, therefore, no longer be recorded to the Consolidated Statement of Income as it arises. The amendments are effective for CP beginning on January 1, 2019, although early adoption is permitted.
Entities are required to apply the amendments in this update to hedging relationships existing on the date of adoption, reflected as a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. Other amendments to presentation and disclosure are applied prospectively. The Company will early adopt this ASU effective January 1, 2018 and no significant cumulative-effect adjustment will be required.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases under FASB ASC Topic 842. This new standard requires recognition of right-of-use assets and lease liabilities by lessees for those leases classified as finance and operating leases with a maximum term exceeding 12 months. For CP this new standard will be effective for interim and annual periods commencing January 1, 2019. Entities are required to use a modified retrospective approach to adopt this new standard. The Company has a detailed plan to implement the new standard and is assessing contractual arrangements, through a cross-functional team, that may qualify as leases under the new standard. CP is also working with a vendor to implement a lease management system which will assist in delivering the required accounting changes. CP's cross-functional team and the vendor finalized system requirements and developed work flows and testing scenarios that will permit system implementation and parallel testing in 2018 for CP's lease system solution. The impact of the new standard will be a material increase to right of use assets and lease liabilities on the Company's Consolidated Balance Sheets, primarily, as a result of operating leases currently not recognized on the balance sheet. The Company does not anticipate a material impact to Net income and is currently evaluating the impact adoption of this new standard will have on disclosure.
Intangibles
–
Goodwill and Other
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment under FASB ASC Topic 350. This is intended to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments are effective for CP beginning on January 1, 2020. Entities are required to apply the amendments in this update prospectively from the date of adoption. The Company does not anticipate that the adoption of this ASU will impact CP's financial statements as there is a sufficient excess between the fair value and carrying value of CP's goodwill. Furthermore CP expects to continue to apply the Step 0 qualitative assessment when testing for goodwill impairment.
3 Other income and charges
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Foreign exchange (gain) loss on long-term debt
|
$
|
(186
|
)
|
$
|
(79
|
)
|
$
|
297
|
|
Other foreign exchange gains
|
(7
|
)
|
(5
|
)
|
(24
|
)
|
Early redemption premium on notes (Note 16)
|
—
|
|
—
|
|
47
|
|
Insurance recovery of legal settlement
|
(10
|
)
|
—
|
|
—
|
|
Legal settlement
|
—
|
|
25
|
|
—
|
|
Charge on hedge roll and de-designation
|
13
|
|
—
|
|
—
|
|
Other
|
12
|
|
14
|
|
15
|
|
Total other income and charges
|
$
|
(178
|
)
|
$
|
(45
|
)
|
$
|
335
|
|
4 Net interest expense
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Interest cost
|
$
|
491
|
|
$
|
497
|
|
$
|
409
|
|
Interest capitalized to Properties
|
(16
|
)
|
(25
|
)
|
(14
|
)
|
Interest expense
|
475
|
|
472
|
|
395
|
|
Interest income
|
(2
|
)
|
(1
|
)
|
(1
|
)
|
Net interest expense
|
$
|
473
|
|
$
|
471
|
|
$
|
394
|
|
Interest expense includes interest on capital leases of
$11 million
for the year ended December 31, 2017
(
2016
–
$11 million
;
2015
–
$11 million
).
5 Income taxes
The following is a summary of the major components of the Company’s income tax expense:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Current income tax expense
|
$
|
303
|
|
$
|
233
|
|
$
|
373
|
|
Deferred income tax expense
|
|
|
|
Origination and reversal of temporary differences
|
371
|
|
336
|
|
105
|
|
Effect of tax rate (decrease) increase
|
(541
|
)
|
—
|
|
23
|
|
Effect of hedge of net investment in foreign subsidiaries
|
(42
|
)
|
(20
|
)
|
100
|
|
Other
|
2
|
|
4
|
|
6
|
|
Total deferred income tax (recovery) expense
|
(210
|
)
|
320
|
|
234
|
|
Total income taxes
|
$
|
93
|
|
$
|
553
|
|
$
|
607
|
|
Income before income tax expense
|
|
|
|
Canada
|
$
|
1,829
|
|
$
|
1,513
|
|
$
|
1,099
|
|
Foreign
|
669
|
|
639
|
|
860
|
|
Total income before income tax expense
|
$
|
2,498
|
|
$
|
2,152
|
|
$
|
1,959
|
|
Income tax expense
|
|
|
|
Current
|
|
|
|
Canada
|
$
|
257
|
|
$
|
165
|
|
$
|
173
|
|
Foreign
|
46
|
|
68
|
|
200
|
|
Total current income tax expense
|
303
|
|
233
|
|
373
|
|
Deferred
|
|
|
|
Canada
|
256
|
|
207
|
|
163
|
|
Foreign
|
(466
|
)
|
113
|
|
71
|
|
Total deferred income tax (recovery) expense
|
(210
|
)
|
320
|
|
234
|
|
Total income taxes
|
$
|
93
|
|
$
|
553
|
|
$
|
607
|
|
The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carry forwards. The items comprising the deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Deferred income tax assets
|
|
|
Amount related to tax losses carried forward
|
$
|
12
|
|
$
|
18
|
|
Liabilities carrying value in excess of tax basis
|
88
|
|
149
|
|
Environmental remediation costs
|
16
|
|
30
|
|
Other
|
11
|
|
58
|
|
Total deferred income tax assets
|
127
|
|
255
|
|
Deferred income tax liabilities
|
|
|
Properties carrying value in excess of tax basis
|
3,181
|
|
3,796
|
|
Pensions carrying value in excess of tax basis
(1)
|
226
|
|
—
|
|
Other
|
41
|
|
30
|
|
Total deferred income tax liabilities
|
3,448
|
|
3,826
|
|
Total net deferred income tax liabilities
|
$
|
3,321
|
|
$
|
3,571
|
|
(1)
Balance previously included as part of "Liabilities carrying value in excess of tax basis" as a component of deferred income tax assets.
The Company’s consolidated effective income tax rate differs from the expected Canadian statutory tax rates. Expected income tax expense at statutory rates is reconciled to income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars, except percentage)
|
2017
|
|
2016
|
|
2015
|
|
Statutory federal and provincial income tax rate (Canada)
|
26.56
|
%
|
26.65
|
%
|
26.47
|
%
|
Expected income tax expense at Canadian enacted statutory tax rates
|
$
|
663
|
|
$
|
573
|
|
$
|
519
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
(Gains) losses not subject to tax
|
(27
|
)
|
(23
|
)
|
28
|
|
Canadian tax rate differentials
|
1
|
|
—
|
|
1
|
|
Foreign tax rate differentials
|
(9
|
)
|
—
|
|
39
|
|
Effect of tax rate (decrease) increase
|
(541
|
)
|
—
|
|
23
|
|
Other
|
6
|
|
3
|
|
(3
|
)
|
Income tax expense
|
$
|
93
|
|
$
|
553
|
|
$
|
607
|
|
The Company has
no
unrecognized tax benefits from capital losses at
December 31, 2017
and
2016
.
On December 22, 2017, the U.S. enacted the “Tax Cuts and Jobs Act” which has been commonly referred to as U.S. tax reform. A significant change under this reform is the reduction of U.S. federal statutory corporate income tax rate from 35% to 21% beginning in 2018. As a result of this and other tax rate increases in the province of British Columbia and the state of Illinois, the Company revalued its deferred income tax balances accordingly. For the full year 2017, revaluations of deferred tax balances associated with changes in rates total a net recovery of
$541 million
(2016 – $
nil
).
These recoveries are estimated based on the Company's analysis of the Tax Cuts and Jobs Act. These estimates may be impacted as U.S. authorities issue additional regulations and interpretations in the future.
The Company has not provided a deferred liability for the income taxes, if any, which might become payable on any temporary difference associated with its foreign investments because the Company intends to indefinitely reinvest in its foreign investments and has no intention to realize this difference by a sale of its interest in foreign investments. It is not practical to calculate the amount of the deferred tax liability.
At
December 31, 2017
, the Company had income tax operating losses carried forward of
$11 million
, which have been recognized as a deferred tax asset. Certain of these losses carried forward will begin to expire in 2027, with the majority expiring between 2029 and 2035. The Company did
no
t have any minimum tax credits or investment tax credits carried forward.
It is more likely than not that the Company will realize the majority of its deferred income tax assets from the generation of future taxable income, as the payments for provisions, reserves and accruals are made and losses and tax credits carried forward are utilized.
The following table provides a reconciliation of uncertain tax positions in relation to unrecognized tax benefits for Canada and the U.S.
for the year ended December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Unrecognized tax benefits at January 1
|
$
|
13
|
|
$
|
15
|
|
$
|
17
|
|
Increase in unrecognized:
|
|
|
|
Tax benefits related to the current year
|
—
|
|
—
|
|
4
|
|
Dispositions:
|
|
|
|
Gross uncertain tax benefits related to prior years
|
—
|
|
(2
|
)
|
(6
|
)
|
Unrecognized tax benefits at December 31
|
$
|
13
|
|
$
|
13
|
|
$
|
15
|
|
If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at
December 31, 2017
would impact the Company’s effective tax rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Company’s Consolidated Statements of Income. The total amount of accrued interest and penalties in
2017
was
$1 million
(
2016
–
$1 million
;
2015
–
$4 million
). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at
December 31, 2017
was
$11 million
(
2016
–
$10 million
;
2015
–
$9 million
).
The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, or the relevant income tax in other international jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax matters for the years through 2012. The federal and provincial income tax returns filed for 2013
and subsequent years remain subject to examination by the Canadian taxation authorities. The Internal Revenue Service ("IRS") of the United States has completed their examinations and issued notices of deficiency for the tax years 2012 and 2013. The Company disagrees with many of their proposed adjustments, and is at the IRS Appeals for those years. The income tax returns for 2014 and subsequent years continue to remain subject to examination by the IRS. Additionally, various U.S. state tax authorities are examining the Company's state income tax returns for the years 2011 through 2015. The Company believes that it has recorded sufficient income tax reserves at
December 31, 2017
with respect to these income tax examinations.
The Company does not anticipate any material changes to the unrecognized tax benefits previously disclosed within the next twelve months as at
December 31, 2017
.
6 Earnings per share
Basic earnings per share have been calculated using Net income for the year divided by the weighted average number of shares outstanding during the year.
Diluted earnings per share have been calculated using the treasury stock method which assumes that any proceeds received from the exercise of in-the-money options would be used to purchase CP Common Shares at the average market price for the period. For purposes of this calculation, at
December 31, 2017
, there were
1.4 million
dilutive options outstanding (
2016
–
2.2 million
;
2015
–
2.5 million
).
The number of shares used and the earnings per share calculations are reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars, except per share data)
|
2017
|
|
2016
|
|
2015
|
|
Net income
|
$
|
2,405
|
|
$
|
1,599
|
|
$
|
1,352
|
|
Weighted average basic shares outstanding (millions)
|
145.9
|
|
149.6
|
|
159.7
|
|
Dilutive effect of weighted average number of stock options (millions)
|
0.4
|
|
0.9
|
|
1.3
|
|
Weighted average diluted shares outstanding (millions)
|
146.3
|
|
150.5
|
|
161.0
|
|
Earnings per share – basic
|
$
|
16.49
|
|
$
|
10.69
|
|
$
|
8.47
|
|
Earnings per share – diluted
|
$
|
16.44
|
|
$
|
10.63
|
|
$
|
8.40
|
|
In
2017
, the number of options excluded from the computation of diluted earnings per share because their effect was not dilutive was
0.3 million
(
2016
–
0.4 million
;
2015
–
0.2 million
).
7 Other comprehensive income (loss) and accumulated other comprehensive loss
The components of Other comprehensive income (loss) and the related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Before
tax amount
|
|
Income tax (expense) recovery
|
|
Net of tax
amount
|
|
For the year ended December 31, 2017
|
|
|
|
Unrealized foreign exchange (loss) gain on:
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
$
|
(295
|
)
|
$
|
—
|
|
$
|
(295
|
)
|
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 17)
|
319
|
|
(42
|
)
|
277
|
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
Realized loss on cash flow hedges recognized in income
|
25
|
|
(6
|
)
|
19
|
|
Unrealized loss on cash flow hedges
|
(6
|
)
|
2
|
|
(4
|
)
|
Change in pension and other benefits actuarial gains and losses
|
84
|
|
(20
|
)
|
64
|
|
Change in prior service pension and other benefit costs
|
(4
|
)
|
1
|
|
(3
|
)
|
Other comprehensive income
|
$
|
123
|
|
$
|
(65
|
)
|
$
|
58
|
|
For the year ended December 31, 2016
|
|
|
|
Unrealized foreign exchange (loss) gain on:
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
$
|
(132
|
)
|
$
|
—
|
|
$
|
(132
|
)
|
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 17)
|
150
|
|
(20
|
)
|
130
|
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
Realized loss on cash flow hedges recognized in income
|
10
|
|
(2
|
)
|
8
|
|
Unrealized loss on cash flow hedges
|
(12
|
)
|
2
|
|
(10
|
)
|
Change in pension and other benefits actuarial gains and losses
|
(422
|
)
|
113
|
|
(309
|
)
|
Change in prior service pension and other benefit costs
|
(12
|
)
|
3
|
|
(9
|
)
|
Other comprehensive loss
|
$
|
(418
|
)
|
$
|
96
|
|
$
|
(322
|
)
|
For the year ended December 31, 2015
|
|
|
|
Unrealized foreign exchange gain (loss) on:
|
|
|
|
Translation of the net investment in U.S. subsidiaries
|
$
|
671
|
|
$
|
—
|
|
$
|
671
|
|
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 17)
|
(757
|
)
|
100
|
|
(657
|
)
|
Change in derivatives designated as cash flow hedges:
|
|
|
|
Realized loss on cash flow hedges recognized in income
|
7
|
|
(2
|
)
|
5
|
|
Unrealized loss on cash flow hedges
|
(76
|
)
|
21
|
|
(55
|
)
|
Change in pension and other benefits actuarial gains and losses
|
1,058
|
|
(281
|
)
|
777
|
|
Change in prior service pension and other benefit costs
|
1
|
|
—
|
|
1
|
|
Other comprehensive income
|
$
|
904
|
|
$
|
(162
|
)
|
$
|
742
|
|
The components of Accumulated other comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Unrealized foreign exchange gain on translation of the net investment in U.S. subsidiaries
|
$
|
443
|
|
$
|
738
|
|
Unrealized foreign exchange loss on translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries
|
(334
|
)
|
(611
|
)
|
Net deferred and unrealized losses on derivatives
|
(88
|
)
|
(102
|
)
|
Amounts for defined benefit pension and other post-retirement plans not recognized in income (Note 20)
|
(1,761
|
)
|
(1,822
|
)
|
Equity accounted investments
|
(1
|
)
|
(2
|
)
|
Accumulated other comprehensive loss
|
$
|
(1,741
|
)
|
$
|
(1,799
|
)
|
Changes in Accumulated other comprehensive loss by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Foreign currency
net of hedging
activities
(1)
|
|
Derivatives and
other
(1)
|
|
Pension and post-
retirement defined
benefit plans
(1)
|
|
Total
(1)
|
|
Opening balance, 2017
|
$
|
127
|
|
$
|
(104
|
)
|
$
|
(1,822
|
)
|
$
|
(1,799
|
)
|
Other comprehensive loss before reclassifications
|
(17
|
)
|
(4
|
)
|
(50
|
)
|
(71
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(1
|
)
|
19
|
|
111
|
|
129
|
|
Net current-period other comprehensive (loss) income
|
(18
|
)
|
15
|
|
61
|
|
58
|
|
Closing balance, 2017
|
$
|
109
|
|
$
|
(89
|
)
|
$
|
(1,761
|
)
|
$
|
(1,741
|
)
|
Opening balance, 2016
|
$
|
129
|
|
$
|
(102
|
)
|
$
|
(1,504
|
)
|
$
|
(1,477
|
)
|
Other comprehensive loss before reclassifications
|
(2
|
)
|
(10
|
)
|
(456
|
)
|
(468
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
8
|
|
138
|
|
146
|
|
Net current-period other comprehensive loss
|
(2
|
)
|
(2
|
)
|
(318
|
)
|
(322
|
)
|
Closing balance, 2016
|
$
|
127
|
|
$
|
(104
|
)
|
$
|
(1,822
|
)
|
$
|
(1,799
|
)
|
(1)
Amounts are presented net of tax.
Amounts in Pension and post-retirement defined benefit plans reclassified from Accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Amortization of prior service costs
(1)
|
$
|
(4
|
)
|
$
|
(6
|
)
|
Recognition of net actuarial loss
(1)
|
154
|
|
194
|
|
Total before income tax
|
$
|
150
|
|
$
|
188
|
|
Income tax recovery
|
(39
|
)
|
(50
|
)
|
Net of income tax
|
$
|
111
|
|
$
|
138
|
|
(1)
Impacts Compensation and benefits on the Consolidated Statements of Income.
8 Change in non-cash working capital balances related to operations
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
(Use) source of cash:
|
|
|
|
Accounts receivable, net
|
$
|
(91
|
)
|
$
|
44
|
|
$
|
80
|
|
Materials and supplies
|
9
|
|
14
|
|
15
|
|
Other current assets
|
(26
|
)
|
(18
|
)
|
55
|
|
Accounts payable and accrued liabilities
|
(30
|
)
|
(95
|
)
|
125
|
|
Change in non-cash working capital
|
$
|
(138
|
)
|
$
|
(55
|
)
|
$
|
275
|
|
9 Accounts receivable, net
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Freight
|
$
|
536
|
|
$
|
461
|
|
Non-freight
|
176
|
|
162
|
|
|
712
|
|
623
|
|
Allowance for doubtful accounts
|
(25
|
)
|
(32
|
)
|
Total accounts receivable, net
|
$
|
687
|
|
$
|
591
|
|
The Company maintains an allowance for doubtful accounts based on expected collectability of accounts receivable. Credit losses are based on specific identification of uncollectable accounts, the application of historical percentages by aging category and an assessment of the current economic environment. At
December 31, 2017
, allowances of
$25 million
(
2016
–
$32 million
) were recorded in “Accounts receivable, net”. During
2017
, provisions of
$3 million
of accounts receivable (
2016
–
$7 million
;
2015
–
$7 million
) were recorded within “Purchased services and other”.
10 Dispositions of properties
Gain on sale of Obico
During the fourth quarter of 2016, the Company completed the sale of its Obico rail yard, for gross proceeds of
$38 million
. The Company recorded a gain on sale of
$37 million
(
$33 million
after tax) within "Purchased services and other" from the transaction.
Gain on sale of Arbutus Corridor
In March 2016, the Company completed the sale of CP’s Arbutus Corridor (the “Arbutus Corridor”) to the City of Vancouver for gross proceeds of
$55 million
. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor. The Company recorded a gain on sale of
$50 million
(
$43 million
after tax) within "Purchased services and other" from the transaction during the first quarter of 2016.
Gain on sale of Delaware & Hudson South
During the first quarter of 2015, the Company finalized a sales agreement with Norfolk Southern Corporation ("NS") for approximately 283 miles of the Delaware and Hudson Railway Company, Inc.'s line between Sunbury, Pennsylvania, and Schenectady, New York ("D&H South"). The sale, which received approval by the U.S. Surface Transportation Board (“STB”) on May 15, 2015, was completed on September 18, 2015 for proceeds of
$281 million
(U.S.
$214 million
). The Company recorded a gain on sale of
$68 million
(
$42 million
after tax) from the transaction during the third quarter of 2015.
Gain on settlement of legal proceedings related to the purchase and sale of a building
In 2013, CP provided an interest-free loan pursuant to a court order to a corporation owned by a court appointed trustee (“the judicial trustee”) to facilitate the acquisition of a building. The building was held in trust during the legal proceedings with regard to CP’s entitlement to an exercised purchase option of the building (“purchase option”). As at December 31, 2014, the loan of
$20 million
and the purchase option with a carrying value of
$8 million
, were recorded as “Other assets” in the Company’s Consolidated Balance Sheets.
In the first quarter of 2015, CP reached a settlement with a third party that, following the sale of the building to an arm’s-length third party, resulted in resolution of legal proceedings. CP received
$59 million
for the sale of the building which included repayment of the aforementioned loan to the judicial trustee. A gain of
$31 million
(
$27 million
after tax) was recorded as a credit within “Purchased services and other”.
11 Investments
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Rail investments accounted for on an equity basis
|
$
|
144
|
|
$
|
136
|
|
Other investments
|
38
|
|
58
|
|
Total investments
|
$
|
182
|
|
$
|
194
|
|
12 Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars except percentages)
|
|
2017
|
|
2017
|
|
2016
|
|
|
Weighted average annual depreciation rate
|
|
|
Cost
|
|
|
Accumulated
depreciation
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
depreciation
|
|
|
Net book
value
|
|
Track and roadway
|
|
2.8
|
%
|
|
$
|
17,285
|
|
|
$
|
4,814
|
|
|
$
|
12,471
|
|
|
$
|
16,817
|
|
|
$
|
4,573
|
|
|
$
|
12,244
|
|
Buildings
|
|
3.0
|
%
|
|
719
|
|
|
196
|
|
|
523
|
|
|
662
|
|
|
178
|
|
|
484
|
|
Rolling stock
|
|
2.9
|
%
|
|
4,114
|
|
|
1,557
|
|
|
2,557
|
|
|
4,060
|
|
|
1,524
|
|
|
2,536
|
|
Information systems
(1)
|
|
11.4
|
%
|
|
551
|
|
|
264
|
|
|
287
|
|
|
584
|
|
|
299
|
|
|
285
|
|
Other
|
|
5.1
|
%
|
|
1,760
|
|
|
582
|
|
|
1,178
|
|
|
1,691
|
|
|
551
|
|
|
1,140
|
|
Total
|
|
$
|
24,429
|
|
|
$
|
7,413
|
|
|
$
|
17,016
|
|
|
$
|
23,814
|
|
|
$
|
7,125
|
|
|
$
|
16,689
|
|
(1)
During
2017
, CP capitalized costs attributable to the design and development of internal-use software in the amount of
$49 million
(
2016
–
$46 million
;
2015
–
$42 million
). Current year depreciation expense related to internal use software was
$55 million
(
2016
–
$63 million
;
2015
–
$69 million
).
Capital leases included in properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
2016
|
|
Cost
|
|
Accumulated
depreciation
|
|
Net book
value
|
|
Cost
|
|
Accumulated
depreciation
|
|
Net book
value
|
|
Buildings
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
Rolling stock
|
311
|
|
115
|
|
196
|
|
311
|
|
105
|
|
206
|
|
Total assets held under capital lease
|
$
|
312
|
|
$
|
116
|
|
$
|
196
|
|
$
|
312
|
|
$
|
106
|
|
$
|
206
|
|
13 Goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Intangible assets
|
|
(in millions of Canadian dollars)
|
Net
carrying
amount
|
|
|
Cost
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
|
Total goodwill and intangible assets
|
|
Balance at December 31, 2015
|
$
|
198
|
|
|
$
|
22
|
|
$
|
(9
|
)
|
$
|
13
|
|
$
|
211
|
|
Amortization
|
—
|
|
|
—
|
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
Foreign exchange impact
|
(7
|
)
|
|
—
|
|
(1
|
)
|
(1
|
)
|
(8
|
)
|
Balance at December 31, 2016
|
$
|
191
|
|
|
$
|
22
|
|
$
|
(11
|
)
|
$
|
11
|
|
$
|
202
|
|
Amortization
|
—
|
|
|
—
|
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
Foreign exchange impact
|
(13
|
)
|
|
—
|
|
(1
|
)
|
(1
|
)
|
(14
|
)
|
Balance at December 31, 2017
|
$
|
178
|
|
|
$
|
22
|
|
$
|
(13
|
)
|
$
|
9
|
|
$
|
187
|
|
14 Other assets
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Long-term materials
|
$
|
24
|
|
$
|
22
|
|
Prepaid leases
|
5
|
|
6
|
|
Unamortized fees on credit facility
|
5
|
|
7
|
|
Contracted customer incentives
|
11
|
|
2
|
|
Long-term receivables
|
1
|
|
2
|
|
Other
|
23
|
|
18
|
|
Total other assets
|
$
|
69
|
|
$
|
57
|
|
Fees on credit facility and contracted customer incentives are amortized to income over the term of the related facility and over the term of the related revenue contract, respectively.
15 Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Trade payables
|
$
|
402
|
|
$
|
352
|
|
Accrued charges
|
256
|
|
282
|
|
Income and other taxes payable
|
72
|
|
146
|
|
Accrued interest
|
128
|
|
137
|
|
Financial derivative liability (Note 17)
|
55
|
|
69
|
|
Payroll-related accruals
|
72
|
|
73
|
|
Accrued vacation
|
59
|
|
65
|
|
Dividends payable
|
82
|
|
73
|
|
Personal injury and other claims provision
|
28
|
|
26
|
|
Provision for environmental remediation (Note 18)
|
8
|
|
9
|
|
Stock-based compensation liabilities
|
32
|
|
40
|
|
Other
|
44
|
|
50
|
|
Total accounts payable and accrued liabilities
|
$
|
1,238
|
|
$
|
1,322
|
|
16 Debt
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars except percentages)
|
|
|
Maturity
|
Currency
in which
payable
|
2017
|
|
2016
|
|
6.500%
|
10-year Notes
|
(A)
|
May 2018
|
U.S.$
|
$
|
345
|
|
$
|
369
|
|
6.250%
|
10-year Medium Term Notes
|
(A)
|
Jun 2018
|
CDN$
|
375
|
|
375
|
|
7.250%
|
10-year Notes
|
(A)
|
May 2019
|
U.S.$
|
439
|
|
469
|
|
9.450%
|
30-year Debentures
|
(A)
|
Aug 2021
|
U.S.$
|
314
|
|
336
|
|
5.100%
|
10-year Medium Term Notes
|
(A)
|
Jan 2022
|
CDN$
|
125
|
|
125
|
|
4.500%
|
10-year Notes
|
(A)
|
Jan 2022
|
U.S.$
|
311
|
|
333
|
|
4.450%
|
12.5-year Notes
|
(A)
|
Mar 2023
|
U.S.$
|
438
|
|
469
|
|
2.900%
|
10-year Notes
|
(A)
|
Feb 2025
|
U.S.$
|
878
|
|
940
|
|
3.700%
|
10.5-year Notes
|
(A)
|
Feb 2026
|
U.S.$
|
313
|
|
335
|
|
7.125%
|
30-year Debentures
|
(A)
|
Oct 2031
|
U.S.$
|
439
|
|
470
|
|
5.750%
|
30-year Debentures
|
(A)
|
Mar 2033
|
U.S.$
|
307
|
|
328
|
|
4.800%
|
20-year Notes
|
(A)
|
Sep 2035
|
U.S.$
|
375
|
|
401
|
|
5.950%
|
30-year Notes
|
(A)
|
May 2037
|
U.S.$
|
558
|
|
597
|
|
6.450%
|
30-year Notes
|
(A)
|
Nov 2039
|
CDN$
|
400
|
|
400
|
|
5.750%
|
30-year Notes
|
(A)
|
Jan 2042
|
U.S.$
|
308
|
|
330
|
|
4.800%
|
30-year Notes
|
(A)
|
Aug 2045
|
U.S.$
|
687
|
|
736
|
|
6.125%
|
100-year Notes
|
(A)
|
Sep 2115
|
U.S.$
|
1,129
|
|
1,208
|
|
5.41%
|
Senior Secured Notes
|
(B)
|
Mar 2024
|
U.S.$
|
111
|
|
126
|
|
6.91%
|
Secured Equipment Notes
|
(C)
|
Oct 2024
|
CDN$
|
120
|
|
133
|
|
7.49%
|
Equipment Trust Certificates
|
(D)
|
Jan 2021
|
U.S.$
|
52
|
|
56
|
|
Obligations under capital leases
|
|
|
|
|
6.57% – 6.99%
|
|
(E)
|
2022 – 2026
|
U.S.$
|
148
|
|
163
|
|
12.77%
|
|
(E)
|
Jan 2031
|
CDN$
|
3
|
|
3
|
|
|
|
|
8,175
|
|
8,702
|
|
Perpetual 4% Consolidated Debenture Stock
|
(F)
|
|
U.S.$
|
38
|
|
41
|
|
Perpetual 4% Consolidated Debenture Stock
|
(F)
|
|
G.B.£
|
6
|
|
6
|
|
|
|
|
8,219
|
|
8,749
|
|
Less: Unamortized fees on long-term debt
|
|
|
60
|
|
65
|
|
|
|
|
8,159
|
|
8,684
|
|
Less: Long-term debt maturing within one year
|
|
|
746
|
|
25
|
|
|
|
|
|
|
$
|
7,413
|
|
$
|
8,659
|
|
At
December 31, 2017
, the gross amount of long-term debt denominated in U.S. dollars was U.S.
$5,755
million (
2016
– U.S.
$5,763
million).
Annual maturities and principal repayment requirements, excluding those pertaining to capital leases, for each of the five years following
2017
are (in millions):
2018
–
$742
;
2019
–
$462
;
2020
–
$63
;
2021
–
$353
;
2022
–
$466
.
Fees on long-term debt are amortized to income over the term of the related debt.
A. These debentures and notes pay interest semi-annually and are unsecured, but carry a negative pledge.
B. The
5.41%
Senior Secured Notes are collateralized by specific locomotive units with a carrying value of
$118 million
at December 31,
2017
. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of U.S.
$44 million
is due in March 2024.
C. The
6.91%
Secured Equipment Notes are full recourse obligations of the Company collateralized by a first charge on specific locomotive units with a carrying value of
$107 million
at December 31,
2017
. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of
$11 million
is due in October 2024.
D. The
7.49%
Equipment Trust Certificates are secured by specific locomotive units with a carrying value of
$104 million
at December 31,
2017
. The Company makes semi-annual payments that vary in amount and are interest-only payments or blended principal and interest payments. Final repayment of the remaining principal of U.S.
$11 million
is due in January 2021.
E. At
December 31, 2017
, capital lease obligations included in long-term debt were as follows:
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Year
|
Capital leases
|
|
Minimum lease payments in:
|
|
|
|
2018
|
$
|
15
|
|
|
2019
|
15
|
|
|
2020
|
15
|
|
|
2021
|
15
|
|
|
2022
|
105
|
|
|
Thereafter
|
37
|
|
Total minimum lease payments
|
|
202
|
|
Less: Imputed interest
|
|
(51
|
)
|
Present value of minimum lease payments
|
|
151
|
|
Less: Current portion
|
|
(4
|
)
|
Long-term portion of capital lease obligations
|
|
$
|
147
|
|
During the years ended
2017
,
2016
, and
2015
, the Company had
no
additions to property, plant and equipment under capital lease obligations.
The carrying value of the assets collateralizing the capital lease obligations was
$196 million
at
December 31, 2017
.
F. The Consolidated Debenture Stock, authorized by an Act of Parliament of 1889, constitutes a first charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property and effects of the Company, with certain exceptions.
Credit facility
CP has a revolving credit facility (the “facility”) agreement with 16 highly rated financial institutions for a commitment amount of U.S.
$2.0 billion
. The facility includes a U.S.
$1.0 billion
one-year plus one-year term-out portion and a U.S.
$1.0 billion
five-year portion. The facility can accommodate draws of cash and/or letters of credit at market competitive pricing. The agreement requires the Company not to exceed a maximum debt to earnings before interest, tax, depreciation, and amortization ratio. As at December 31,
2017
and
2016
, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the threshold stipulated in this financial covenant.
Effective June 23, 2017, the Company extended the maturity date by one year on its existing revolving U.S.
$2.0 billion
credit facility, which includes a U.S.
$1.0 billion
five-year portion and U.S.
$1.0 billion
one-year plus one-year term-out portion. The maturity date on the first U.S.
$1.0 billion
tranche was extended to
June 27, 2019
; the maturity date on the second U.S.
$1.0 billion
tranche was extended to
June 28, 2022
.
As at December 31,
2017
and
2016
, the facility was undrawn. The amount available under the terms of the credit facility was U.S.
$2.0 billion
at December 31,
2017
(December 31,
2016
– U.S.
$2.0 billion
).
The Company also has a commercial paper program which enables it to issue commercial paper up to a maximum aggregate principal amount of U.S.
$1.0 billion
in the form of unsecured promissory notes. The commercial paper program is backed by the U.S.
$1.0 billion
one-year plus one-year term-out portion of the revolving credit facility. As at December 31,
2017
, the Company had
no
commercial paper borrowings outstanding (December 31,
2016
– $
nil
).
CP has bilateral letter of credit facilities with six highly rated financial institutions to support its requirement to post letters of credit in the ordinary course of business. Under these agreements, the Company has the option to post collateral in the form of cash or cash equivalents, equal at least to the face value of the letter of credit issued. These agreements permit CP to withdraw amounts posted as collateral at any time; therefore, the amounts posted as collateral are presented as “Cash and cash equivalents” on the Company’s Consolidated Balance Sheets. As at December 31, 2017, the Company had
$150 million
posted as collateral on its bilateral letters of credit facility (December 31, 2016 – $
nil
). At
December 31, 2017
, under its bilateral facilities the Company had letters of credit drawn of
$319 million
(
December 31, 2016
–
$320 million
) from a total available amount of
$600 million
(
December 31, 2016
–
$600 million
).
17 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.
When possible, the estimated fair value is based on quoted market prices and, if not available, it is based on estimates from third-party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, FX and commodity) and volatility, depending on the type of derivative and nature of the underlying risk. The Company uses inputs and data used by willing market participants when valuing derivatives and considers its own credit default swap spread as well as those of its counterparties in its determination of fair value. All derivatives and long-term debt are classified as Level 2.
The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
December 31, 2017
|
|
December 31, 2016
|
|
Long-term debt (including current maturities):
|
|
|
Fair value
|
$
|
9,680
|
|
$
|
9,981
|
|
Carrying value
|
8,159
|
|
8,684
|
|
The estimated fair value of current and long-term borrowings 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. As at
December 31, 2017
and
2016
, the Company did not have any deposits in the form of short-term investments with financial institutions.
B. Financial risk management
Derivative financial instruments
Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheets, commitments or forecasted transactions. At the time a derivative contract is entered into and at least quarterly thereafter, an assessment is made as to whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.
It is not the Company’s intent to use financial derivatives or commodity instruments for trading or speculative purposes.
Credit risk management
Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations under a contract and as a result create a financial loss for the Company.
The railway industry predominantly serves financially established customers, and the Company has experienced limited financial losses with respect to credit risk. The credit worthiness of customers is assessed using credit scores supplied by a third party, and through direct monitoring of their financial well-being on a continual basis. The Company establishes guidelines for customer credit limits and should thresholds in these areas be reached, appropriate precautions are taken to improve collectability.
Counterparties to financial instruments expose the Company to credit losses in the event of non-performance. Counterparties for derivative and cash transactions are limited to high credit quality financial institutions, which are monitored on an ongoing basis. Counterparty credit assessments are based on the financial health of the institutions and their credit ratings from external agencies. The Company does not anticipate non-performance that would materially impact the Company’s financial statements. In addition, the Company believes there are no significant concentrations of credit risk.
FX management
The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in the value of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.
Occasionally the Company may enter into short-term FX forward contracts as part of its cash management strategy.
Net investment hedge
The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar-denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majority of the Company’s U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on Net income by offsetting long-term FX gains and losses on U.S. dollar-denominated long-term debt and gains and losses on its net investment. The effective portion recognized in “Other comprehensive income” in
2017
was an FX gain of
$319 million
, the majority of which was unrealized (
2016
– unrealized gain of
$150 million
;
2015
– unrealized loss of
$757 million
) (see Note 7). There was
no
ineffectiveness during
2017
(
2016
– $
nil
;
2015
– $
nil
).
FX forward contracts
The Company may enter into FX forward contracts to lock-in the amount of Canadian dollars it has to pay on U.S. dollar-denominated debt maturities.
At
December 31, 2017
, the Company had a negligible amount of net unamortized gains related to FX forward contracts to fix the exchange rate on U.S. dollar-denominated debt maturities settled in previous years (
December 31, 2016
–
$1 million
). During
2017
,
$1 million
of pretax gain related to these previously settled derivatives has been amortized from "Accumulated other comprehensive loss" to “Other income and charges” (
December 31, 2016
–
$1 million
). The Company expects that during the next 12 months, a negligible amount of pretax gain will be reclassified to “Other income and charges”.
At
December 31, 2017
and
2016
, the Company had no remaining FX forward contracts to fix the exchange rate on U.S. dollar-denominated debt maturities.
Interest rate management
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a result of changes in market interest rates. In order to manage funding needs or capital structure goals, the Company enters into debt or capital lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.
To manage interest rate exposure, the Company accesses diverse sources of financing and manages borrowings in line with a targeted range of capital structure, debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles. In anticipation of future debt issuances, the Company may enter into forward rate agreements, that are designated as cash flow hedges, to substantially lock in all or a portion of the effective future interest expense. The Company may also enter into swap agreements, designated as fair value hedges, to manage the mix of fixed and floating rate debt.
Forward starting swaps
As at
December 31, 2017
, the Company had forward starting floating-to-fixed interest rate swap agreements (“forward starting swaps”) totalling a notional amount of U.S.
$500 million
to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes (December 31,
2016
– U.S.
$700 million
). The effective portion of changes in fair value on the forward starting swaps is recorded in “Accumulated other comprehensive loss”, net of tax, as cash flow hedges until the highly probable forecasted notes are issued. Subsequent to the notes issuance, amounts in “Accumulated other comprehensive loss” are reclassified to “Net interest expense”.
During the second quarter of 2016, the Company de-designated a notional amount of U.S.
$700 million
of forward starting swaps. The Company did not cash settle these swaps, and there was no ineffectiveness to record upon de-designation. Concurrently, the Company re-designated and rolled the forward starting swaps totalling U.S.
$700 million
to fix the benchmark rate on cash flows associated with a highly probable forecasted debt issuance of long-term notes.
During the second quarter of 2017, the Company de-designated the hedging relationship for U.S.
$700 million
of forward starting swaps. The Company settled a notional amount of U.S.
$200 million
of forward starting swaps for a cash payment of
U.S.
$16 million
(
$22 million
). The Company rolled the remaining notional amount of U.S.
$500 million
of forward starting swaps and did not cash settle these swaps. The impact of the U.S.
$200 million
settlement and U.S.
$500 million
roll of the forward starting swaps was a charge of
$13 million
to "Other income and charges" on the Company's Consolidated Statements of Income. Concurrently, the Company re-designated the forward starting swaps totalling U.S.
$500 million
to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes.
As at
December 31, 2017
, the total fair value loss of
$55 million
(
December 31, 2016
– fair value loss of
$69 million
) derived from the forward starting swaps was included in “Accounts payable and accrued liabilities”. Changes in fair value from the forward starting swaps
for the year ended December 31, 2017
was a loss of
$8 million
(
2016
– a loss of
$9 million
). The effective portion
for the year ended December 31, 2017
was a loss of
$7 million
(
2016
– loss of
$12 million
) and was recorded in “Other comprehensive income”. In addition to the charge on hedge roll and de-designation, for the year ended
December 31, 2017
, an ineffectiveness loss of
$1 million
(
2016
– gain of
$3 million
) was recorded in “Net interest expense” on the Consolidated Statements of Income.
For the year ended December 31, 2017
, a loss of
$11 million
related to previous forward starting swap hedges has been amortized to “Net interest expense” (
2016
– a loss of
$11 million
). The Company expects that during the next 12 months,
$12 million
of losses will be amortized to “Net interest expense”.
Treasury rate locks
At
December 31, 2017
, the Company had net unamortized losses related to interest rate locks, which are accounted for as cash flow hedges, settled in previous years totalling
$20 million
(
December 31, 2016
–
$21 million
). This amount is composed of various unamortized gains and losses related to specific debts which are reflected in “Accumulated other comprehensive loss” and are amortized to “Net interest expense” in the period that interest on the related debt is charged. The amortization of these gains and losses resulted in a
$1 million
increase to “Net interest expense” and “Other comprehensive income” in
2017
(
2016
– negligible;
2015
– negligible). The Company expects that during the next 12 months, a net loss of
$1 million
related to these previously settled derivatives will be reclassified to “Net interest expense”.
Fuel price management
The Company is exposed to commodity risk related to purchases of diesel fuel and the potential reduction in Net income due to increases in the price of diesel. Fuel expense constitutes a large portion of the Company’s operating costs and volatility in diesel fuel prices can have a significant impact on the Company’s income. Items affecting volatility in diesel prices include, but are not limited to, fluctuations in world markets for crude oil and distillate fuels, which can be affected by supply disruptions and geopolitical events.
The impact of variable fuel expense is mitigated substantially through fuel cost adjustment programs, which apportion incremental changes in fuel prices to shippers through price indices, tariffs, and by contract, within agreed-upon guidelines. While these programs provide effective and meaningful coverage, residual exposure remains as the fuel expense risk may not be completely recovered from shippers due to timing and volatility in the market.
18 Other long-term liabilities
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
Provision for environmental remediation, net of current portion
(1)
|
$
|
70
|
|
$
|
76
|
|
Stock-based compensation liabilities, net of current portion
|
67
|
|
72
|
|
Deferred revenue on rights-of-way license agreements, net of current portion
(2)
|
26
|
|
29
|
|
Deferred retirement compensation
|
4
|
|
29
|
|
Deferred gains on sale leaseback transactions
(2)
|
16
|
|
19
|
|
Other, net of current portion
|
48
|
|
59
|
|
Total other long-term liabilities
|
$
|
231
|
|
$
|
284
|
|
(1)
As at December 31, 2017
, the aggregate provision for environmental remediation, including the current portion was
$78 million
(
2016
–
$85 million
).
(2)
The deferred revenue on rights-of-way license agreements, and deferred gains on sale leaseback transactions are being amortized to income on a straight-line basis over the related lease terms.
Environmental remediation accruals
Environmental remediation accruals cover site-specific remediation programs. The estimate of the probable costs to be incurred in the remediation of properties contaminated by past railway use reflects the nature of contamination at individual sites according to typical activities and scale of operations conducted. CP has developed remediation strategies for each property based on the nature and extent of the contamination, as well as the location of the property and surrounding areas that may be adversely affected by the presence of contaminants, considering available technologies, treatment and disposal facilities and the acceptability of site-specific plans based on the local regulatory environment. Site-specific plans range from containment and risk management of the
contaminants through to the removal and treatment of the contaminants and affected soils and groundwater. The details of the estimates reflect the environmental liability at each property. Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities” (see Note 15). Payments are expected to be made over
10
years to 2027.
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, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable. Changes to costs are reflected as changes to “Other long-term liabilities” or “Accounts payable and accrued liabilities” on the Company's Consolidated Balance Sheets and to “Purchased services and other” within operating expenses on the Company's Consolidated Statements of Income. The amount charged to income in
2017
was
$5 million
(
2016
–
$6 million
;
2015
–
$7 million
).
19 Shareholders’ equity
Authorized and issued share capital
The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of First Preferred Shares and an unlimited number of Second Preferred Shares. At
December 31, 2017
,
no
First or Second Preferred Shares had been issued.
The following table summarizes information related to Common Share balances as at December 31:
|
|
|
|
|
|
|
|
(number of shares in millions)
|
2017
|
|
2016
|
|
2015
|
|
Share capital, January 1
|
146.3
|
|
153.0
|
|
166.1
|
|
CP Common Shares repurchased
|
(1.9
|
)
|
(6.9
|
)
|
(13.7
|
)
|
Shares issued under stock option plan
|
0.5
|
|
0.2
|
|
0.6
|
|
Share capital, December 31
|
144.9
|
|
146.3
|
|
153.0
|
|
The change in the “Share capital” balances includes $
nil
related to the cancellation of the tandem share appreciation rights liability on exercise of tandem stock options (
2016
–
$1 million
;
2015
–
$2 million
), and
$12 million
of stock-based compensation transferred from “Additional paid-in capital” (
2016
–
$5 million
;
2015
–
$10 million
).
Share repurchase
On March 11, 2014, the Company announced a new share repurchase program to implement a normal course issuer bid (“NCIB”) to purchase, for cancellation, up to
5.3 million
Common Shares before
March 16, 2015
. On September 29, 2014, the Company announced the amendment of the bid to increase the maximum number of its Common Shares that may be purchased from
5.3 million
to
12.7 million
of its outstanding Common Shares. The Company completed the purchase of
10.5
million Common Shares in 2014. An additional
2.2 million
Common Shares were purchased for
$490 million
in the first quarter of 2015 prior to the March 16, 2015 expiry date of the program.
On March 16, 2015, the Company announced the renewal of its NCIB, commencing March 18, 2015, to purchase up to
9.1
million of its outstanding Common Shares for cancellation before
March 17, 2016
. On August 31, 2015, the Company amended the NCIB to increase the maximum number of its Common Shares that may be purchased from
9.1 million
to
11.9 million
of its outstanding Common Shares. As at December 31, 2015, the Company had purchased
11.3 million
Common Shares for
$2,258
million
under this NCIB program.
On April 20, 2016, the Company announced a new NCIB, commencing May 2, 2016 to
May 1, 2017
, to purchase up to
6.9 million
of its outstanding Common Shares for cancellation. The Company completed this NCIB on September 28, 2016.
On May 10, 2017, the Company announced a new NCIB, commencing May 15, 2017, to purchase up to
4.38 million
Common Shares for cancellation before
May 14, 2018
. As at December 31, 2017, the Company had purchased
1.9 million
Common Shares for
$381 million
under this NCIB program.
All purchases are made in accordance with the respective NCIB at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to "Retained earnings".
The following table provides the activities under the share repurchase programs:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Number of Common Shares repurchased
|
1,888,100
|
|
6,910,000
|
|
13,549,977
|
|
Weighted-average price per share
(1)
|
$
|
201.53
|
|
$
|
175.08
|
|
$
|
202.79
|
|
Amount of repurchase (in millions)
(1)
|
$
|
381
|
|
$
|
1,210
|
|
$
|
2,748
|
|
(1)
Includes brokerage fees.
20 Pensions and other benefits
The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At
December 31, 2017
, the Canadian pension plans represent approximately
99%
of total combined pension plan assets and approximately
98%
of total combined pension plan obligations.
The DB plans provide for pensions based principally on years of service and compensation rates near retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer contributions to the DB plans, which are actuarially determined, are made on the basis of being not less than the minimum amounts required by federal pension supervisory authorities.
The Company has other benefit plans including post-retirement health and life insurance for pensioners, and post-employment long-term disability and workers’ compensation benefits, which are based on Company-specific claims. At
December 31, 2017
, the Canadian other benefits plans represent approximately
96%
of total combined other plan obligations.
The Finance Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets which take into account the Company’s expected risk tolerances. Pension plan assets are managed by a suite of independent investment managers, with the allocation by manager reflecting these asset mix targets. Most of the assets are actively managed with the objective of outperforming applicable benchmarks. In accordance with the investment policy, derivative instruments may be used to hedge or adjust existing or anticipated exposures.
To develop the expected long-term rate of return assumption used in the calculation of net periodic benefit cost applicable to the market-related value of assets, the Company considers the expected composition of the plans’ assets, past experience and future estimates of long-term investment returns. Future estimates of investment returns reflect the expected annual yield on applicable fixed income capital market indices, and the long-term return expectation for public equity, real estate, infrastructure and absolute return investments and the expected added value (relative to applicable benchmark indices) from active management of pension fund assets.
The Company has elected to use a market-related value of assets for the purpose of calculating net periodic benefit cost, developed from a
five years
average of market values for the plans’ public equity and absolute return investments (with each prior year’s market value adjusted to the current date for assumed investment income during the intervening period) plus the market value of the plans’ fixed income, real estate and infrastructure securities.
The benefit obligation is discounted using a discount rate that is a blended yield to maturity for a hypothetical portfolio of high-quality corporate debt instruments with cash flows matching projected benefit payments. The discount rate is determined by management.
Net periodic benefit cost
The elements of net periodic benefit cost for DB pension plans and other benefits recognized in the year include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current service cost (benefits earned by employees in the year)
|
$
|
103
|
|
|
$
|
106
|
|
|
$
|
126
|
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
12
|
|
Other components of net periodic benefit (recovery) cost:
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on benefit obligation
|
451
|
|
|
467
|
|
|
463
|
|
|
20
|
|
|
21
|
|
|
21
|
|
Expected return on fund assets
|
(893
|
)
|
|
(846
|
)
|
|
(816
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
153
|
|
|
190
|
|
|
265
|
|
|
(1
|
)
|
|
7
|
|
|
2
|
|
Amortization of prior service costs
|
(5
|
)
|
|
(7
|
)
|
|
(6
|
)
|
|
1
|
|
|
1
|
|
|
1
|
|
Total other components of net periodic benefit (recovery) cost
|
(294
|
)
|
|
(196
|
)
|
|
(94
|
)
|
|
20
|
|
|
29
|
|
|
24
|
|
Net periodic benefit (recovery) cost
|
$
|
(191
|
)
|
|
$
|
(90
|
)
|
|
$
|
32
|
|
|
$
|
32
|
|
|
$
|
40
|
|
|
$
|
36
|
|
Projected benefit obligation, fund assets, and funded status
Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
Benefit obligation at January 1
|
$
|
11,399
|
|
$
|
11,194
|
|
|
$
|
510
|
|
$
|
513
|
|
Current service cost
|
103
|
|
106
|
|
|
12
|
|
11
|
|
Interest cost
|
451
|
|
467
|
|
|
20
|
|
21
|
|
Employee contributions
|
44
|
|
40
|
|
|
1
|
|
1
|
|
Benefits paid
|
(648
|
)
|
(645
|
)
|
|
(35
|
)
|
(31
|
)
|
Foreign currency changes
|
(15
|
)
|
(7
|
)
|
|
(3
|
)
|
—
|
|
Plan amendments and other
|
1
|
|
6
|
|
|
—
|
|
—
|
|
Actuarial loss (gain)
|
344
|
|
238
|
|
|
13
|
|
(5
|
)
|
Projected benefit obligation at December 31
|
$
|
11,679
|
|
$
|
11,399
|
|
|
$
|
518
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Change in fund assets:
|
|
|
|
|
|
Fair value of fund assets at January 1
|
$
|
12,196
|
|
$
|
12,300
|
|
|
$
|
5
|
|
$
|
6
|
|
Actual return on fund assets
|
1,183
|
|
461
|
|
|
(1
|
)
|
(1
|
)
|
Employer contributions
|
46
|
|
48
|
|
|
34
|
|
30
|
|
Employee contributions
|
44
|
|
40
|
|
|
1
|
|
1
|
|
Benefits paid
|
(648
|
)
|
(645
|
)
|
|
(35
|
)
|
(31
|
)
|
Foreign currency changes
|
(13
|
)
|
(8
|
)
|
|
—
|
|
—
|
|
Fair value of fund assets at December 31
|
$
|
12,808
|
|
$
|
12,196
|
|
|
$
|
4
|
|
$
|
5
|
|
Funded status – plan surplus (deficit)
|
$
|
1,129
|
|
$
|
797
|
|
|
$
|
(514
|
)
|
$
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(in millions of Canadian dollars)
|
Pension
plans in
surplus
|
|
Pension
plans in
deficit
|
|
|
Pension
plans in
surplus
|
|
Pension
plans in
deficit
|
|
Projected benefit obligation at December 31
|
$
|
(11,174
|
)
|
$
|
(505
|
)
|
|
$
|
(10,902
|
)
|
$
|
(497
|
)
|
Fair value of fund assets at December 31
|
12,581
|
|
227
|
|
|
11,972
|
|
224
|
|
Funded Status
|
$
|
1,407
|
|
$
|
(278
|
)
|
|
$
|
1,070
|
|
$
|
(273
|
)
|
All Other benefits plans were in a deficit position at
December 31, 2017
and
2016
.
Pension asset and liabilities in the Company’s Consolidated Balance Sheets
Amounts recognized in the Company’s Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Pension asset
|
$
|
1,407
|
|
$
|
1,070
|
|
|
$
|
—
|
|
$
|
—
|
|
Accounts payable and accrued liabilities
|
(10
|
)
|
(10
|
)
|
|
(33
|
)
|
(34
|
)
|
Pension and other benefit liabilities
|
(268
|
)
|
(263
|
)
|
|
(481
|
)
|
(471
|
)
|
Total amount recognized
|
$
|
1,129
|
|
$
|
797
|
|
|
$
|
(514
|
)
|
$
|
(505
|
)
|
The defined benefit pension plans’ accumulated benefit obligation as at
December 31, 2017
was
$11,273 million
(
2016
–
$11,143 million
). The accumulated benefit obligation is calculated on a basis similar to the projected benefit obligation, except no future salary increases are assumed in the projection of future benefits.
The measurement date used to determine the plan assets and the accrued benefit obligation is
December 31
. The most recent actuarial valuation for pension funding purposes for the Company’s main Canadian pension plan was performed as at January 1, 2017. During
2018
, the Company expects to file a new valuation with the pension regulator.
Accumulated other comprehensive loss
Amounts recognized in accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Other benefits
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Net actuarial loss:
|
|
|
|
|
|
Other than deferred investment gains
|
$
|
2,555
|
|
$
|
2,842
|
|
|
$
|
81
|
|
$
|
66
|
|
Deferred investment gains
|
(178
|
)
|
(366
|
)
|
|
—
|
|
—
|
|
Prior service cost
|
(2
|
)
|
(7
|
)
|
|
2
|
|
3
|
|
Deferred income tax
|
(676
|
)
|
(699
|
)
|
|
(21
|
)
|
(17
|
)
|
Total (Note 7)
|
$
|
1,699
|
|
$
|
1,770
|
|
|
$
|
62
|
|
$
|
52
|
|
The unamortized actuarial loss and the unamortized prior service cost included in “Accumulated other comprehensive loss” that are expected to be recognized in net periodic benefit cost during
2018
are
$114 million
and a recovery of
$3 million
, respectively, for pensions and
$3 million
and $
nil
, respectively, for other post-retirement benefits.
Actuarial assumptions
Weighted-average actuarial assumptions used were approximately:
|
|
|
|
|
|
|
|
(percentages)
|
2017
|
|
2016
|
|
2015
|
|
Benefit obligation at December 31:
|
|
|
|
|
|
|
Discount rate
|
3.80
|
|
4.02
|
|
4.22
|
|
Projected future salary increases
|
2.75
|
|
2.75
|
|
3.00
|
|
Health care cost trend rate
|
7.00
|
(1)
|
7.00
|
(1)
|
7.00
|
(2)
|
Benefit cost for year ended December 31:
|
|
|
|
|
|
|
Discount rate
|
4.02
|
|
4.22
|
|
4.09
|
|
Expected rate of return on fund assets
|
7.75
|
|
7.75
|
|
7.75
|
|
Projected future salary increases
|
2.75
|
|
3.00
|
|
3.00
|
|
Health care cost trend rate
|
7.00
|
(1)
|
7.00
|
(2)
|
7.00
|
(2)
|
(1)
The health care cost trend rate is assumed to be
7.00%
in 2017 and 2018, and then decreasing by
0.50%
per year to an ultimate rate of
5.00%
per year in 2022 and thereafter.
(2)
The health care cost trend rate was previously assumed to be
6.50%
in
2017
(
7.00%
in
2016
and
2015
), and then decreasing by
0.50%
per year to an ultimate rate of
5.00%
per year in 2020 and thereafter.
Assumed health care cost trend rates affect the amounts reported for the health care plans. A one-percentage-point increase in the assumed health care cost trend rate would increase the post-retirement benefit obligation by
$6 million
, and a one-percentage-point decrease in the assumed health care cost trend rate would decrease the post-retirement benefit obligation by
$6 million
. A one-percentage-point increase or decrease in the assumed health care cost trend rate would have no material effect on the total of service and interest costs.
Plan assets
Plan assets are recorded at fair value. The major asset categories are public equity securities, fixed income securities, real estate, infrastructure and absolute return investments. The fair values of the public equity and fixed income securities are primarily based on quoted market prices. Real estate values are based on annual valuations performed by external parties, taking into account current market conditions and recent sales transactions where practical and appropriate. Infrastructure values are based on the fair value of each fund’s assets as calculated by the fund manager, generally using a discounted cash flow analysis that takes into account current market conditions and recent sales transactions where practical and appropriate. Absolute return investments are a portfolio of units of externally managed hedge funds and are valued by the fund administrators.
The Company’s pension plan asset allocation, the current weighted average asset allocation targets and the current weighted average policy range for each major asset class, were as follows:
|
|
|
|
|
|
|
Current
asset
allocation
target
|
Current
policy
range
|
Percentage of plan assets
at December 31
|
Asset allocation (percentage)
|
2017
|
2016
|
Cash and cash equivalents
|
0.5
|
0 – 5
|
1.4
|
1.1
|
Fixed income
|
29.5
|
20 – 40
|
26.1
|
21.4
|
Public equity
|
46.0
|
35 – 55
|
53.3
|
53.8
|
Real estate and infrastructure
|
12.0
|
4 – 20
|
6.2
|
7.5
|
Absolute return
|
12.0
|
0 – 18
|
13.0
|
16.2
|
Total
|
100.0
|
|
100.0
|
100.0
|
Summary of the assets of the Company’s DB pension plans at fair values
The following is a summary of the assets of the Company’s DB pension plans at fair values at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Quoted prices in
active markets
for identical assets (Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable inputs
(Level 3)
|
|
Investments
measured at
NAV
(1)
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
165
|
|
$
|
11
|
|
$
|
—
|
|
$
|
—
|
|
$
|
176
|
|
Fixed income
|
|
|
|
|
|
• Government bonds
(2)
|
—
|
|
2,087
|
|
—
|
|
—
|
|
2,087
|
|
• Corporate bonds
(2)
|
—
|
|
1,215
|
|
—
|
|
—
|
|
1,215
|
|
• Mortgages
(3)
|
—
|
|
45
|
|
—
|
|
—
|
|
45
|
|
Public equities
|
|
|
|
|
|
• Canada
|
1,467
|
|
62
|
|
—
|
|
—
|
|
1,529
|
|
• U.S. and international
|
5,254
|
|
42
|
|
—
|
|
—
|
|
5,296
|
|
Real estate
(4)
|
—
|
|
—
|
|
—
|
|
622
|
|
622
|
|
Derivative assets
(5)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Absolute return
(6)
|
|
|
|
|
|
• Funds of hedge funds
|
—
|
|
—
|
|
—
|
|
681
|
|
681
|
|
• Multi-strategy funds
|
—
|
|
—
|
|
—
|
|
515
|
|
515
|
|
• Credit funds
|
—
|
|
—
|
|
—
|
|
252
|
|
252
|
|
• Equity funds
|
—
|
|
—
|
|
—
|
|
214
|
|
214
|
|
Infrastructure
(7)
|
—
|
|
—
|
|
—
|
|
176
|
|
176
|
|
|
$
|
6,886
|
|
$
|
3,462
|
|
$
|
—
|
|
$
|
2,460
|
|
$
|
12,808
|
|
December 31, 2016
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
121
|
|
$
|
11
|
|
$
|
—
|
|
$
|
—
|
|
$
|
132
|
|
Fixed income
|
|
|
|
|
|
• Government bonds
(2)
|
—
|
|
1,357
|
|
—
|
|
—
|
|
1,357
|
|
• Corporate bonds
(2)
|
—
|
|
1,186
|
|
—
|
|
—
|
|
1,186
|
|
• Mortgages
(3)
|
—
|
|
71
|
|
—
|
|
—
|
|
71
|
|
Public equities
|
|
|
|
|
|
• Canada
|
1,480
|
|
57
|
|
—
|
|
—
|
|
1,537
|
|
• U.S. and international
|
4,985
|
|
36
|
|
—
|
|
—
|
|
5,021
|
|
Real estate
(4)
|
—
|
|
—
|
|
437
|
|
188
|
|
625
|
|
Derivative assets
(5)
|
—
|
|
7
|
|
—
|
|
—
|
|
7
|
|
Absolute return
(6)
|
|
|
|
|
|
• Funds of hedge funds
|
—
|
|
—
|
|
—
|
|
668
|
|
668
|
|
• Multi-strategy funds
|
—
|
|
—
|
|
—
|
|
502
|
|
502
|
|
• Credit funds
|
—
|
|
—
|
|
—
|
|
505
|
|
505
|
|
• Equity funds
|
—
|
|
—
|
|
—
|
|
300
|
|
300
|
|
Infrastructure
(7)
|
—
|
|
—
|
|
—
|
|
285
|
|
285
|
|
|
$
|
6,586
|
|
$
|
2,725
|
|
$
|
437
|
|
$
|
2,448
|
|
$
|
12,196
|
|
(1)
Investments measured at net asset value ("NAV"):
Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.
(2)
Government & Corporate Bonds:
Fair values for bonds are based on market prices supplied by independent sources as of the last trading day.
(3)
Mortgages:
The fair value of mortgages of
$45 million
(
2016
–
$71 million
) is based on current market yields of financial instruments of similar maturity, coupon and risk factors.
(4)
Real estate:
Real estate fund values of
$622 million
(2016 –
$188 million
) are based on the NAV of the funds that invest directly in real estate investments. The fair values of the investments have been estimated using the capital accounts representing the plan’s ownership interest in the funds. Of the total,
$542 million
(2016 –
$134 million
) is subject to redemption frequencies ranging from monthly to annually and a redemption notice period
of 90 days. The remaining
$80 million
(2016 –
$54 million
) is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying real estate investments. There are
$53 million
of unfunded commitments for real estate investments as at
December 31, 2017
(
2016
–
$81 million
).
The fair value of real estate investments of $
nil
(
2016
–
$437 million
) is based on property appraisals which use a number of approaches that typically include a discounted cash flow analysis, a direct capitalization income method and/or a direct comparison approach. Appraisals of real estate investments are generally performed semi-annually by qualified external accredited appraisers.
(5)
Derivatives:
The Company’s pension funds may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and interest rate risk (Level 2); credit default swaps to manage credit risk (Level 2); and options to manage interest rate risk and volatility (Level 2). There are currency forwards with a notional value of $
nil
(2016 –
$937 million
) and a fair value of $
nil
(2016 –
$7 million
) as at December 31, 2017.
(6)
Absolute return:
The fair value of absolute return fund investments of
$1,662 million
(
2016
–
$1,975 million
) is based on the NAV reported by the fund administrators. The funds have different redemption policies and periods.
|
|
|
-
|
Funds of hedge funds invest in a portfolio of hedge funds that allocate capital across a broad array of funds and/or investment managers, with monthly redemptions upon 95 days' notice.
|
-
|
Multi-strategy funds include funds that invest in broadly diversified portfolios of equity, fixed income and derivative instruments with quarterly redemptions upon 60 days' notice.
|
-
|
Credit funds invest in an array of fixed income securities with quarterly redemptions upon 60 days' notice.
|
-
|
Equity funds invest primarily in U.S. and global equity securities. Redemptions range from quarterly upon 60 days' notice to triennially upon 45 days' notice.
|
(7)
Infrastructure:
Infrastructure fund values of
$176 million
(
2016
–
$285 million
) are based on the NAV of the funds that invest directly in infrastructure investments. The fair values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. The investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments. It was estimated that the investments in these funds will be liquidated over the weighted-average period of approximately one year.
Portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3)
During
2016
and
2017
the portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3) changed as follows:
|
|
|
|
|
(in millions of Canadian dollars)
|
Real Estate
|
|
As at January 1, 2016
|
$
|
451
|
|
Disbursements
|
(36
|
)
|
Net realized gains
|
24
|
|
Decrease in net unrealized gains
|
(2
|
)
|
As at December 31, 2016
|
$
|
437
|
|
Disbursements
|
(43
|
)
|
Net realized gains
|
7
|
|
Decrease in net unrealized gains
|
(7
|
)
|
Net transfers (out of) Level 3
|
(394
|
)
|
As at December 31, 2017
|
$
|
—
|
|
Additional plan assets information
The Company’s expected long-term target return is
7.75%
, net of all fees and expenses. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return expectations and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation and interest rates. When advantageous and with due consideration, derivative instruments may be utilized, provided the total value of the underlying assets represented by financial derivatives, excluding currency forwards, is limited to
30%
of the market value of the fund.
When investing in foreign securities, the plans are exposed to foreign currency risk; the effect of which is included in the valuation of the foreign securities. At
December 31, 2017
the plans were
40%
exposed to the U.S. dollar,
11%
exposed to European currencies, and
7%
exposed to various other currencies.
At
December 31, 2017
, fund assets consisted primarily of listed stocks and bonds, including
107,330
of the Company’s Common Shares (
2016
–
109,630
) at a market value of
$25 million
(
2016
–
$21 million
) and
Unsecured Notes issued by the Company at a par value of
$1 million
(
2016
–
$3 million
) and a market value of
$1 million
(
2016
–
$3 million
).
Cash flows
The Company contributed the following to its different pension plans:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Canadian registered and U.S. qualified DB pension plans
|
$
|
33
|
|
$
|
36
|
|
$
|
69
|
|
Canadian non-registered supplemental pension plan
|
13
|
|
12
|
|
12
|
|
DC plans
|
9
|
|
9
|
|
9
|
|
Total Company pension contribution
|
$
|
55
|
|
$
|
57
|
|
$
|
90
|
|
In addition, the Company made payments directly to employees, their beneficiaries or estates or to third-party benefit administrators of
$34 million
in 2017 (2016 –
$30 million
; 2015 –
$33 million
) with respect to other benefits.
Estimated future benefit payments
The estimated future defined benefit pension and other benefit payments to be paid by the plans for each of the next five years and the subsequent five-year period are as follows:
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Pensions
|
|
Other benefits
|
|
2018
|
$
|
609
|
|
$
|
33
|
|
2019
|
614
|
|
31
|
|
2020
|
620
|
|
31
|
|
2021
|
625
|
|
31
|
|
2022
|
631
|
|
30
|
|
2023 – 2027
|
3,220
|
|
146
|
|
The benefit payments from the Canadian registered and U.S. qualified DB pension plans are payable from their respective pension funds. Benefit payments from the supplemental pension plan and from the other benefits plans are payable directly from the Company.
Defined contribution plan
Canadian non-unionized employees hired prior to July 1, 2010 had the option to participate in the Canadian DC plan. All Canadian non-unionized employees hired after such date must participate in this plan. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year.
Effective July 1, 2010, a new U.S. DC plan was established. All U.S. non-unionized employees hired after such date must participate in this plan. Employees do not contribute to the plan. The Company annually contributes a percentage of salary.
The DC plans provide a pension based on total employee and employer contributions plus investment income earned on those contributions.
In
2017
, the net cost of the DC plans, which generally equals the employer’s required contribution, was
$9 million
(
2016
–
$9 million
;
2015
–
$9 million
).
Contributions to multi-employer plans
Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the Company to this plan in
2017
in respect of post-retirement medical benefits were
$5 million
(
2016
–
$4 million
;
2015
–
$4 million
).
21 Stock-based compensation
At
December 31, 2017
, the Company had several stock-based compensation plans, including a stock option plan, various cash settled liability plans and an employee share purchase plan. These plans resulted in an expense in
2017
of
$35 million
(
2016
–
$51 million
;
2015
–
$66 million
).
Effective January 31, 2017, Mr. E. Hunter Harrison resigned from all positions held by him at the Company, including as the Company’s Chief Executive Officer and as a member of the Board of Directors of the Company. In connection with Mr. Harrison’s resignation, the Company entered into a separation agreement with Mr. Harrison. Under the terms of the separation agreement, the Company agreed to a limited waiver of Mr. Harrison’s non-competition and non-solicitation obligations.
Effective January 31, 2017, pursuant to the separation agreement, Mr. Harrison forfeited certain pension and post-retirement benefits and agreed to the surrender for cancellation of
22,514
performance share units ("PSU"),
68,612
deferred share units ("DSU"), and
752,145
stock options.
As a result of this agreement, the Company recognized a recovery of
$51 million
in "Compensation and benefits" in the first quarter of 2017. Of this amount,
$27 million
related to a recovery from cancellation of certain pension benefits.
A. Stock Option Plan
The following table summarizes the Company’s stock option plan as at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Nonvested options
|
|
Number of
options
|
|
Weighted
average
exercise price
|
|
|
Number of
options
|
|
Weighted
average
grant date
fair value
|
|
Outstanding, January 1, 2017
|
2,450,082
|
|
$
|
121.95
|
|
|
850,167
|
|
$
|
44.49
|
|
Granted
|
369,980
|
|
$
|
193.13
|
|
|
369,980
|
|
$
|
45.78
|
|
Exercised
|
(536,291
|
)
|
$
|
84.93
|
|
|
N/A
|
|
N/A
|
|
Vested
|
N/A
|
|
N/A
|
|
|
(328,265
|
)
|
$
|
42.97
|
|
Forfeited
|
(803,796
|
)
|
$
|
120.97
|
|
|
(208,955
|
)
|
$
|
47.21
|
|
Expired
|
(700
|
)
|
$
|
62.56
|
|
|
N/A
|
|
N/A
|
|
Outstanding, December 31, 2017
|
1,479,275
|
|
$
|
150.64
|
|
|
682,927
|
|
$
|
45.46
|
|
Vested or expected to vest at December 31, 2017
(1)
|
1,419,564
|
|
$
|
149.05
|
|
|
N/A
|
|
N/A
|
|
Exercisable, December 31, 2017
|
796,348
|
|
$
|
119.32
|
|
|
N/A
|
|
N/A
|
|
(1)
As at December 31, 2017
, the weighted average remaining term of vested or expected to vest options was
7.0 years
with an aggregate intrinsic value of
$114 million
.
The following table provides the number of stock options outstanding and exercisable
as at December 31, 2017
by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on
December 31, 2017
at the Company’s closing stock price of
$229.66
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Options exercisable
|
Range of exercise prices
|
Number of
options
|
|
Weighted
average
years to
expiration
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic
value
(millions)
|
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
Aggregate
intrinsic
value
(millions)
|
|
$36.29 – $117.48
|
416,270
|
|
3.7
|
$
|
84.50
|
|
$
|
60
|
|
|
416,270
|
|
$
|
84.50
|
|
$
|
60
|
|
$117.49 – $165.95
|
359,997
|
|
6.8
|
$
|
141.38
|
|
$
|
32
|
|
|
200,362
|
|
$
|
128.43
|
|
$
|
20
|
|
$165.96 – $190.42
|
415,914
|
|
6.1
|
$
|
182.48
|
|
$
|
20
|
|
|
106,458
|
|
$
|
169.28
|
|
$
|
6
|
|
$190.43 – $222.88
|
287,094
|
|
6.7
|
$
|
212.05
|
|
$
|
5
|
|
|
73,258
|
|
$
|
219.60
|
|
$
|
1
|
|
Total
(1)
|
1,479,275
|
|
5.7
|
$
|
150.64
|
|
$
|
117
|
|
|
796,348
|
|
$
|
119.32
|
|
$
|
87
|
|
(1)
As at December 31, 2017
, the total number of in-the-money stock options outstanding was
1,479,275
with a weighted-average exercise price of
$150.64
. The weighted-average years to expiration of exercisable stock options is
4.9 years
.
Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 60 months after the grant date, and will expire after seven years. Certain stock options granted in 2017 vest upon the achievement of specific performance criteria.
Under the fair value method, the fair value of options at the grant date was approximately
$17 million
for options issued in
2017
(
2016
–
$16 million
;
2015
–
$18 million
). The weighted average fair value assumptions were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected option life (years)
(1)
|
5.48
|
|
5.25
|
|
5.25
|
|
Risk-free interest rate
(2)
|
1.85
|
%
|
1.21
|
%
|
1.10
|
%
|
Expected stock price volatility
(3)
|
27
|
%
|
27
|
%
|
26
|
%
|
Expected annual dividends per share
(4)
|
$
|
2.0010
|
|
$
|
1.4000
|
|
$
|
1.4000
|
|
Estimated forfeiture rate
(5)
|
2.8
|
%
|
2.0
|
%
|
1.2
|
%
|
Weighted average grant date fair value of options granted during the year
|
$
|
45.78
|
|
$
|
39.01
|
|
$
|
55.28
|
|
(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 remaining term at the time of the grant.
(3)
Based on the historical stock price volatility of the Company’s stock 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. On May 10, 2017, the Company announced an increase in its quarterly dividend to
$0.5625
per share, representing
$2.2500
on an annual basis.
(5)
The Company estimated forfeitures based on past experience. The rate is monitored on a periodic basis.
In
2017
, the expense for stock options (regular and performance) was
$3 million
(
2016
–
$14 million
;
2015
–
$15 million
). At
December 31, 2017
, there was
$9 million
of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average period of approximately
1.3
years.
The total fair value of shares vested for the stock option plan during
2017
was
$14 million
(
2016
–
$15 million
;
2015
–
$17 million
).
The following table provides information related to all options exercised in the stock option plan during the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Total intrinsic value
|
$
|
36
|
|
$
|
30
|
|
$
|
72
|
|
Cash received by the Company upon exercise of options
|
$
|
45
|
|
$
|
21
|
|
$
|
43
|
|
B. Other Share-based Plans
Performance share units plan
During
2017
, the Company issued
134,991
PSUs with a grant date fair value of approximately
$27 million
. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately
3 years
after the grant date, contingent upon CP’s performance (performance factor). Grant recipients who are eligible to retire and have provided six months of service during the performance period are entitled to the full award. The fair value of PSUs is measured periodically until settlement, using a lattice-based valuation model.
The performance period for PSUs issued in 2017 is January 1, 2017 to December 31, 2019, and the performance factors for these PSUs are Return on Invested Capital ("ROIC"), Total Shareholder Return ("TSR") compared to the S&P/TSX Capped Industrial index, and TSR compared to S&P 1500 Road and Rail index.
The performance period for PSUs issued in 2016 is January 1, 2016 to December 31, 2018, and the performance factors for these PSUs are Operating Ratio, ROIC, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways.
The performance period for the PSUs issued in 2015 was January 1, 2015 to December 31, 2017. The performance factors for these PSUs were Operating Ratio, ROIC, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting estimated payout was
160%
on
82,673
total outstanding awards representing a total fair value of
$30 million
at
December 31, 2017
, calculated using the Company's average share price using the last
30
trading days preceding
December 31, 2017
.
The performance period for the PSUs issued in 2014 was January 1, 2014 to December 31, 2016. The performance factors for these PSUs were Operating Ratio, Free cash flow, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting payout was
118%
of the Company's average share price that was calculated using the last
30
trading days preceding December 31, 2016. In the first quarter of 2017, payouts occurred on the total outstanding awards, including dividends reinvested, totalling
$31 million
on
133,728
outstanding awards.
The following table summarizes information related to the Company’s PSUs as at
December 31
:
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Outstanding, January 1
|
373,593
|
|
348,276
|
|
Granted
|
134,991
|
|
147,157
|
|
Units, in lieu of dividends
|
3,571
|
|
4,010
|
|
Settled
|
(133,728
|
)
|
(83,466
|
)
|
Forfeited
|
(44,399
|
)
|
(42,384
|
)
|
Outstanding, December 31
|
334,028
|
|
373,593
|
|
In
2017
, the expense for PSUs was
$30 million
(
2016
–
$29 million
;
2015
–
$55 million
). At
December 31, 2017
, there was
$20 million
of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of approximately
1.5
years.
Deferred share units plan
The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to
48 months
and are only redeemable for a specified period after employment is terminated.
Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a
25%
company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have
5 years
to meet their ownership targets.
An expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.
The following table summarizes information related to the DSUs as at
December 31
:
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Outstanding, January 1
|
234,036
|
|
318,176
|
|
Granted
|
23,932
|
|
31,069
|
|
Units, in lieu of dividends
|
1,969
|
|
2,798
|
|
Settled
|
(33,682
|
)
|
(87,996
|
)
|
Forfeited
|
(69,708
|
)
|
(30,011
|
)
|
Outstanding, December 31
|
156,547
|
|
234,036
|
|
During
2017
, the Company granted
23,932
DSUs with a grant date fair value of approximately
$5 million
. In
2017
, the recovery for DSUs was
$3 million
(
2016
–
$2 million
expense;
2015
–
$10 million
recovery). At
December 31, 2017
, there was
$1 million
of total unrecognized compensation related to DSUs which is expected to be recognized over a weighted-average period of approximately
1.4
years.
Summary of share based liabilities paid
The following table summarizes the total share based liabilities paid for each of the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
2017
|
|
2016
|
|
2015
|
|
Plan
|
|
|
|
DSUs
|
$
|
6
|
|
$
|
17
|
|
$
|
3
|
|
PSUs
|
31
|
|
31
|
|
79
|
|
Other
|
2
|
|
—
|
|
8
|
|
Total
|
$
|
39
|
|
$
|
48
|
|
$
|
90
|
|
C. Employee share purchase plan
The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the
one year
vesting period. Under the plan, the Company matches
$1 for every $3 contributed by employees
up to a maximum employee contribution of
6%
of annual salary.
The total number of shares purchased in
2017
on behalf of participants, including the Company's contributions, was
130,041
(
2016
–
140,560
;
2015
–
131,703
). In
2017
, the Company’s contributions totalled
$5 million
(
2016
–
$5 million
;
2015
–
$5 million
) and the related expense was
$4 million
(
2016
–
$5 million
;
2015
–
$4 million
).
22 Variable interest entities
The Company leases equipment from certain trusts, which have been determined to be variable interest entities financed by a combination of debt and equity provided by unrelated third parties. The lease agreements, which are classified as operating leases, have fixed price purchase options which create the Company’s variable interests and result in the trusts being considered variable interest entities.
Maintaining and operating the leased assets according to specific contractual obligations outlined in the terms of the lease agreements and industry standards is the Company’s responsibility. The rigor of the contractual terms of the lease agreements and industry standards are such that the Company has limited discretion over the maintenance activities associated with these assets. As such, the Company concluded these terms do not provide the Company with the power to direct the activities of the variable interest entities in a way that has a significant impact on the entities’ economic performance.
The financial exposure to the Company as a result of its involvement with the variable interest entities is equal to the fixed lease payments due to the trusts. In
2017
, lease payments after tax were
$10 million
. Future minimum lease payments, before tax, of
$177 million
will be payable over the next
13 years
.
The Company does not guarantee the residual value of the assets to the lessor; however, it must deliver to the lessor the assets in good operating condition, subject to normal wear and tear, at the end of the lease term.
As the Company’s actions and decisions do not significantly affect the variable interest entities’ performance, and the Company’s fixed price purchase option is not considered to be potentially significant to the variable interest entities, the Company is not considered to be the primary beneficiary, and does not consolidate these variable interest entities.
23 Commitments and contingencies
In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at
December 31, 2017
, 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 financial position or results of operations.
Commitments
At
December 31, 2017
, the Company had committed to total future capital expenditures amounting to
$632 million
and operating expenditures relating to supplier purchase obligations, such as locomotive maintenance and overhaul agreements, as well as agreements to purchase other goods and services amounting to approximately
$1.7 billion
for the years
2018
–
2032
, of which CP estimates approximately
$1.4 billion
will be incurred in the next five years.
As at December 31, 2017
, the Company’s commitments under operating leases were estimated at
$351 million
in aggregate, with minimum annual payments in each of the next five years and thereafter as follows:
|
|
|
|
|
(in millions of Canadian dollars)
|
Operating
leases
|
|
2018
|
$
|
71
|
|
2019
|
57
|
|
2020
|
45
|
|
2021
|
38
|
|
2022
|
31
|
|
Thereafter
|
109
|
|
Total minimum lease payments
|
$
|
351
|
|
Expenses for operating leases
for the year ended December 31, 2017
, were
$104 million
(
2016
–
$111 million
;
2015
–
$127 million
).
Legal proceedings related to Lac-Mégantic rail accident
On July 6, 2013, a train carrying petroleum crude oil operated by Montreal Maine and Atlantic Railway (“MMAR”) or a subsidiary, Montreal 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. The previous day CP had interchanged the train to the MMA Group, and after the interchange, the MMA Group exclusively controlled the train.
In the wake of the derailment, MMAC sought court protection in Canada under the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 and MMAR filed for bankruptcy in the United States. Plans of arrangement have been approved in both Canada and the U.S. (the “Plans”). These Plans provide for the distribution of a fund of approximately
$440 million
amongst those claiming derailment damages.
A number of legal proceedings, set out below, were commenced after the derailment in Canada and/or in the U.S. against CP and others:
|
|
(1)
|
Québec's Minister of Sustainable Development, Environment, Wildlife and Parks (the "Minister") ordered various parties, including CP, to clean up the derailment site (the “Cleanup Order”). CP appealed the Cleanup Order to the Administrative Tribunal of Québec (the “TAQ”). The Minister subsequently served a Notice of Claim seeking
$95 million
for compensation spent on cleanup. CP filed a contestation of the Notice of Claim with the TAQ (the “TAQ Proceeding”). CP and the Minister agreed to stay the TAQ Proceedings pending the outcome of the Province of Québec's action, described in item #2 below.
|
|
|
(2)
|
Québec’s Attorney General sued CP in the Québec Superior Court initially claiming
$409 million
in damages, which claim was amended and reduced to
$315 million
(the “Province’s Action”). The Province’s Action alleges that CP exercised custody or control over the petroleum crude oil until its delivery to Irving Oil, that CP was negligent in its custody and control of the petroleum crude oil and that therefore CP is jointly and severally liable with third parties responsible for the derailment and vicariously liable for the acts and omissions of MMAC.
|
|
|
(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 (the “Class Action”) was certified against CP, MMAC and the train conductor, Mr. Thomas Harding. The Class Action seeks unquantified damages, including for wrongful death, personal injury, and property damage arising from the derailment. All known wrongful death claimants in the Class Action have opted out and, by court order, cannot re-join the Class Action.
|
|
|
(4)
|
Eight
subrogated insurers sued CP in the Québec Superior Court initially claiming approximately
$16 million
in damages, which claim was amended and reduced to
$14 million
(the “Promutuel Action”) and
two
additional subrogated insurers sued CP in the Québec Superior Court claiming approximately
$3 million
in damages (the “Royal Action”). Both Actions contain essentially the same allegations as the Province’s Action. The lawsuits do not identify the parties to which the insurers are subrogated, and therefore the extent to which these claims overlap with the proof of claims process under the Plans is difficult to determine at this stage. The Royal Action has been stayed pending the determination of the consolidated proceedings described below.
|
The Province’s Action, the Class Action and the Promutuel Action have been consolidated and will proceed together through the litigation process in the Québec Superior Court. While each Action will remain a separate legal proceeding, there will be a trial to determine liability issues commencing mid-September 2019, and subsequently, if necessary, a trial to determine damages issues.
|
|
(5)
|
An adversary proceeding filed by the MMAR U.S. estate representative (“Estate Representative”) in Maine accuses CP of failing to abide by certain regulations (the “Adversary Proceeding”). The Estate Representative alleges that CP should not have moved the petroleum crude oil train because an inaccurate classification by the shipper was or should have been known. The Estate Representative seeks damages for MMAR’s business value (as yet unquantified) allegedly destroyed by the derailment.
|
|
|
(6)
|
A class action and mass tort action on behalf of Lac-Mégantic residents and wrongful death representatives commenced in Texas and wrongful death and personal injury actions commenced in Illinois and Maine against CP were all removed to and consolidated in Maine (the “Maine Actions”). The Maine Actions allege that CP negligently misclassified and mis-packaged the petroleum crude oil being shipped. On CP’s motion, the Maine Actions were dismissed by the Court on several grounds. The plaintiffs are appealing the dismissal decision.
|
|
|
(7)
|
The Trustee (the “WD Trustee”) for the wrongful death trust (the “WD Trust”), as defined and established by the Estate Representative under the Plans, asserts Carmack Amendment claims against CP in North Dakota federal court (the “Carmack Claims”). The WD Trustee seeks to recover approximately
$6 million
for damaged rail cars, and the settlement amounts the consignor and the consignee paid to the bankruptcy estates, alleged to be
$110 million
and
$60 million
, respectively. On CP’s motion, the federal court in North Dakota dismissed the Carmack Claims. The WD Trustee is appealing the dismissal decision.
|
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 the above noted proceedings.
24 Guarantees
In the normal course of operating the railway, the Company enters into contractual arrangements that involve providing certain guarantees, which extend over the term of the contracts. These guarantees include, but are not limited to:
|
|
•
|
residual value guarantees on operating lease commitments of
$6 million
at
December 31, 2017
;
|
|
|
•
|
guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in the operation of the railway through operating leases, rental agreements, easements, trackage, and interline agreements; and
|
|
|
•
|
indemnifications of certain tax-related payments incurred by lessors and lenders.
|
The maximum amount that could be payable under these guarantees, excluding residual value guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or a portion of amounts paid under guarantees to other parties in the event of the occurrence of specified events could be recoverable from other parties or through insurance. The Company has accrued for all guarantees that it expects to pay. At
December 31, 2017
, these accruals amounted to
$9 million
(
2016
–
$5 million
), and are recorded in “Accounts payable and accrued liabilities”.
Indemnifications
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Plan, the Company has undertaken to indemnify and save harmless the trustee, to the extent not paid by the fund, from any and all taxes,
claims, liabilities, damages, costs, and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The indemnity includes liabilities, costs, or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined benefit and defined contribution options of the pension plans, or otherwise with respect to the assets of the pension plans that are not part of the fund. The indemnity survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry. At
December 31, 2017
, the Company had not recorded a liability associated with this indemnification, as it does not expect to make any payments pertaining to it.
25 Segmented and geographic information
Operating segment
The Company operates in only
one
operating segment: rail transportation. Operating results by geographic areas, railway corridors or other lower-level components or units of operation are not reviewed by the Company’s chief operating decision-maker to make decisions about the allocation of resources to, or the assessment of performance of, such geographic areas, corridors, components or units of operation.
In the years ended
December 31, 2017
,
2016
, and
2015
,
no
one customer comprised more than 10% of total revenues and accounts receivable.
Geographic information
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
Canada
|
|
United States
|
|
Total
|
|
2017
|
|
|
|
Revenues
|
$
|
4,667
|
|
$
|
1,887
|
|
$
|
6,554
|
|
Long-term assets excluding financial instruments and pension assets
|
$
|
11,505
|
|
$
|
5,947
|
|
$
|
17,452
|
|
2016
|
|
|
|
Revenues
|
$
|
4,473
|
|
$
|
1,759
|
|
$
|
6,232
|
|
Long-term assets excluding financial instruments and pension assets
|
$
|
11,000
|
|
$
|
6,121
|
|
$
|
17,121
|
|
2015
|
|
|
|
Revenues
|
$
|
4,662
|
|
$
|
2,050
|
|
$
|
6,712
|
|
Long-term assets excluding financial instruments and pension assets
|
$
|
10,630
|
|
$
|
6,068
|
|
$
|
16,698
|
|
26 Selected quarterly data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
2017
|
|
2016
|
(in millions of Canadian dollars, except per share data)
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Total revenues
|
$
|
1,713
|
|
$
|
1,595
|
|
$
|
1,643
|
|
$
|
1,603
|
|
|
$
|
1,637
|
|
$
|
1,554
|
|
$
|
1,450
|
|
$
|
1,591
|
|
Operating income
|
753
|
|
690
|
|
679
|
|
671
|
|
|
717
|
|
657
|
|
551
|
|
653
|
|
Net income
|
984
|
|
510
|
|
480
|
|
431
|
|
|
384
|
|
347
|
|
328
|
|
540
|
|
Basic earnings per share
(1)
|
$
|
6.79
|
|
$
|
3.50
|
|
$
|
3.28
|
|
$
|
2.94
|
|
|
$
|
2.63
|
|
$
|
2.35
|
|
$
|
2.16
|
|
$
|
3.53
|
|
Diluted earnings per share
(1)
|
6.77
|
|
3.50
|
|
3.27
|
|
2.93
|
|
|
2.61
|
|
2.34
|
|
2.15
|
|
3.51
|
|
(1)
Per share Net income for the four quarters combined may not equal the per share Net income for the year due to rounding.
27 Condensed consolidating financial information
Canadian Pacific Railway Company, a 100%-owned subsidiary of Canadian Pacific Railway Limited (“CPRL”), is the issuer of certain debt securities, which are fully and unconditionally guaranteed by CPRL. The following tables present condensed consolidating financial information (“CCFI”) in accordance with Rule 3-10(c) of Regulation S-X.
Investments in subsidiaries are accounted for under the equity method when presenting the CCFI.
The tables include all adjustments necessary to reconcile the CCFI on a consolidated basis to CPRL’s Consolidated Financial Statements for the periods presented.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Revenues
|
|
|
|
|
|
Freight
|
$
|
—
|
|
$
|
4,516
|
|
$
|
1,859
|
|
$
|
—
|
|
$
|
6,375
|
|
Non-freight
|
—
|
|
140
|
|
372
|
|
(333
|
)
|
179
|
|
Total revenues
|
—
|
|
4,656
|
|
2,231
|
|
(333
|
)
|
6,554
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
—
|
|
601
|
|
427
|
|
7
|
|
1,035
|
|
Fuel
|
—
|
|
522
|
|
155
|
|
—
|
|
677
|
|
Materials
|
—
|
|
134
|
|
41
|
|
15
|
|
190
|
|
Equipment rents
|
—
|
|
143
|
|
(1
|
)
|
—
|
|
142
|
|
Depreciation and amortization
|
—
|
|
400
|
|
261
|
|
—
|
|
661
|
|
Purchased services and other
|
—
|
|
826
|
|
585
|
|
(355
|
)
|
1,056
|
|
Total operating expenses
|
—
|
|
2,626
|
|
1,468
|
|
(333
|
)
|
3,761
|
|
Operating income
|
—
|
|
2,030
|
|
763
|
|
—
|
|
2,793
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and charges
|
(33
|
)
|
(149
|
)
|
4
|
|
—
|
|
(178
|
)
|
Net interest (income) expense
|
(12
|
)
|
517
|
|
(32
|
)
|
—
|
|
473
|
|
Income before income tax expense and equity in net earnings of subsidiaries
|
45
|
|
1,662
|
|
791
|
|
—
|
|
2,498
|
|
Less: Income tax expense (recovery)
|
7
|
|
475
|
|
(389
|
)
|
—
|
|
93
|
|
Add: Equity in net earnings of subsidiaries
|
2,367
|
|
1,180
|
|
—
|
|
(3,547
|
)
|
—
|
|
Net income
|
$
|
2,405
|
|
$
|
2,367
|
|
$
|
1,180
|
|
$
|
(3,547
|
)
|
$
|
2,405
|
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Revenues
|
|
|
|
|
|
Freight
|
$
|
—
|
|
$
|
4,332
|
|
$
|
1,728
|
|
$
|
—
|
|
$
|
6,060
|
|
Non-freight
|
—
|
|
134
|
|
386
|
|
(348
|
)
|
172
|
|
Total revenues
|
—
|
|
4,466
|
|
2,114
|
|
(348
|
)
|
6,232
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
—
|
|
749
|
|
434
|
|
6
|
|
1,189
|
|
Fuel
|
—
|
|
458
|
|
109
|
|
—
|
|
567
|
|
Materials
|
—
|
|
130
|
|
32
|
|
18
|
|
180
|
|
Equipment rents
|
—
|
|
204
|
|
(31
|
)
|
—
|
|
173
|
|
Depreciation and amortization
|
—
|
|
422
|
|
218
|
|
—
|
|
640
|
|
Purchased services and other
|
—
|
|
673
|
|
604
|
|
(372
|
)
|
905
|
|
Total operating expenses
|
—
|
|
2,636
|
|
1,366
|
|
(348
|
)
|
3,654
|
|
Operating income
|
—
|
|
1,830
|
|
748
|
|
—
|
|
2,578
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and charges
|
(40
|
)
|
(34
|
)
|
29
|
|
—
|
|
(45
|
)
|
Net interest expense (income)
|
1
|
|
493
|
|
(23
|
)
|
—
|
|
471
|
|
Income before income tax expense and equity in net earnings of subsidiaries
|
39
|
|
1,371
|
|
742
|
|
—
|
|
2,152
|
|
Less: Income tax expense
|
6
|
|
337
|
|
210
|
|
—
|
|
553
|
|
Add: Equity in net earnings of subsidiaries
|
1,566
|
|
532
|
|
—
|
|
(2,098
|
)
|
—
|
|
Net income
|
$
|
1,599
|
|
$
|
1,566
|
|
$
|
532
|
|
$
|
(2,098
|
)
|
$
|
1,599
|
|
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Revenues
|
|
|
|
|
|
Freight
|
$
|
—
|
|
$
|
4,532
|
|
$
|
2,020
|
|
$
|
—
|
|
$
|
6,552
|
|
Non-freight
|
—
|
|
128
|
|
363
|
|
(331
|
)
|
160
|
|
Total revenues
|
—
|
|
4,660
|
|
2,383
|
|
(331
|
)
|
6,712
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
—
|
|
943
|
|
428
|
|
—
|
|
1,371
|
|
Fuel
|
—
|
|
549
|
|
159
|
|
—
|
|
708
|
|
Materials
|
—
|
|
148
|
|
36
|
|
—
|
|
184
|
|
Equipment rents
|
—
|
|
181
|
|
(7
|
)
|
—
|
|
174
|
|
Depreciation and amortization
|
—
|
|
411
|
|
184
|
|
—
|
|
595
|
|
Purchased services and other
|
—
|
|
711
|
|
680
|
|
(331
|
)
|
1,060
|
|
Gain on sale of Delaware & Hudson South
|
—
|
|
—
|
|
(68
|
)
|
—
|
|
(68
|
)
|
Total operating expenses
|
—
|
|
2,943
|
|
1,412
|
|
(331
|
)
|
4,024
|
|
Operating income
|
—
|
|
1,717
|
|
971
|
|
—
|
|
2,688
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Other income and charges
|
84
|
|
322
|
|
(71
|
)
|
—
|
|
335
|
|
Net interest (income) expense
|
(5
|
)
|
447
|
|
(48
|
)
|
—
|
|
394
|
|
(Loss) income before income tax expense and equity in net earnings of subsidiaries
|
(79
|
)
|
948
|
|
1,090
|
|
—
|
|
1,959
|
|
Less: Income tax (recovery) expense
|
(21
|
)
|
303
|
|
325
|
|
—
|
|
607
|
|
Add: Equity in net earnings of subsidiaries
|
$
|
1,410
|
|
$
|
765
|
|
$
|
—
|
|
$
|
(2,175
|
)
|
$
|
—
|
|
Net income
|
$
|
1,352
|
|
$
|
1,410
|
|
$
|
765
|
|
$
|
(2,175
|
)
|
$
|
1,352
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Net income
|
$
|
2,405
|
|
$
|
2,367
|
|
$
|
1,180
|
|
$
|
(3,547
|
)
|
$
|
2,405
|
|
Net gain (loss) in foreign currency translation adjustments, net of hedging activities
|
—
|
|
318
|
|
(294
|
)
|
—
|
|
24
|
|
Change in derivatives designated as cash flow
hedges
|
—
|
|
19
|
|
—
|
|
—
|
|
19
|
|
Change in pension and post-retirement defined
benefit plans
|
—
|
|
82
|
|
(2
|
)
|
—
|
|
80
|
|
Other comprehensive income (loss) before income taxes
|
—
|
|
419
|
|
(296
|
)
|
—
|
|
123
|
|
Income tax (expense) recovery on above items
|
—
|
|
(66
|
)
|
1
|
|
—
|
|
(65
|
)
|
Equity accounted investments
|
58
|
|
(295
|
)
|
—
|
|
237
|
|
—
|
|
Other comprehensive income (loss)
|
58
|
|
58
|
|
(295
|
)
|
237
|
|
58
|
|
Comprehensive income
|
$
|
2,463
|
|
$
|
2,425
|
|
$
|
885
|
|
$
|
(3,310
|
)
|
$
|
2,463
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Net income
|
$
|
1,599
|
|
$
|
1,566
|
|
$
|
532
|
|
$
|
(2,098
|
)
|
$
|
1,599
|
|
Net gain (loss) in foreign currency translation adjustments, net of hedging activities
|
—
|
|
149
|
|
(131
|
)
|
—
|
|
18
|
|
Change in derivatives designated as cash flow
hedges
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
(2
|
)
|
Change in pension and post-retirement defined
benefit plans
|
—
|
|
(443
|
)
|
9
|
|
—
|
|
(434
|
)
|
Other comprehensive loss before income taxes
|
—
|
|
(296
|
)
|
(122
|
)
|
—
|
|
(418
|
)
|
Income tax recovery (expense) on above items
|
—
|
|
99
|
|
(3
|
)
|
—
|
|
96
|
|
Equity accounted investments
|
(322
|
)
|
(125
|
)
|
—
|
|
447
|
|
—
|
|
Other comprehensive loss
|
(322
|
)
|
(322
|
)
|
(125
|
)
|
447
|
|
(322
|
)
|
Comprehensive income
|
$
|
1,277
|
|
$
|
1,244
|
|
$
|
407
|
|
$
|
(1,651
|
)
|
$
|
1,277
|
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Net income
|
$
|
1,352
|
|
$
|
1,410
|
|
$
|
765
|
|
$
|
(2,175
|
)
|
$
|
1,352
|
|
Net (loss) gain in foreign currency translation adjustments, net of hedging activities
|
—
|
|
(757
|
)
|
671
|
|
—
|
|
(86
|
)
|
Change in derivatives designated as cash flow
hedges
|
—
|
|
(69
|
)
|
—
|
|
—
|
|
(69
|
)
|
Change in pension and post-retirement defined
benefit plans
|
—
|
|
1,061
|
|
(2
|
)
|
—
|
|
1,059
|
|
Other comprehensive income before income taxes
|
—
|
|
235
|
|
669
|
|
—
|
|
904
|
|
Income tax (expense) recovery on above items
|
—
|
|
(163
|
)
|
1
|
|
—
|
|
(162
|
)
|
Equity accounted investments
|
742
|
|
670
|
|
—
|
|
(1,412
|
)
|
—
|
|
Other comprehensive income
|
742
|
|
742
|
|
670
|
|
(1,412
|
)
|
742
|
|
Comprehensive income
|
$
|
2,094
|
|
$
|
2,152
|
|
$
|
1,435
|
|
$
|
(3,587
|
)
|
$
|
2,094
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
AS AT DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
241
|
|
$
|
97
|
|
$
|
—
|
|
$
|
338
|
|
Accounts receivable, net
|
—
|
|
508
|
|
179
|
|
—
|
|
687
|
|
Accounts receivable, intercompany
|
97
|
|
153
|
|
215
|
|
(465
|
)
|
—
|
|
Short-term advances to affiliates
|
500
|
|
1,004
|
|
4,996
|
|
(6,500
|
)
|
—
|
|
Materials and supplies
|
—
|
|
120
|
|
32
|
|
—
|
|
152
|
|
Other current assets
|
—
|
|
31
|
|
66
|
|
—
|
|
97
|
|
|
597
|
|
2,057
|
|
5,585
|
|
(6,965
|
)
|
1,274
|
|
Long-term advances to affiliates
|
590
|
|
—
|
|
410
|
|
(1,000
|
)
|
—
|
|
Investments
|
—
|
|
27
|
|
155
|
|
—
|
|
182
|
|
Investments in subsidiaries
|
10,623
|
|
12,122
|
|
—
|
|
(22,745
|
)
|
—
|
|
Properties
|
—
|
|
8,982
|
|
8,034
|
|
—
|
|
17,016
|
|
Goodwill and intangible assets
|
—
|
|
—
|
|
187
|
|
—
|
|
187
|
|
Pension asset
|
—
|
|
1,407
|
|
—
|
|
—
|
|
1,407
|
|
Other assets
|
—
|
|
56
|
|
13
|
|
—
|
|
69
|
|
Deferred income taxes
|
3
|
|
—
|
|
—
|
|
(3
|
)
|
—
|
|
Total assets
|
$
|
11,813
|
|
$
|
24,651
|
|
$
|
14,384
|
|
$
|
(30,713
|
)
|
$
|
20,135
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
82
|
|
$
|
844
|
|
$
|
312
|
|
$
|
—
|
|
$
|
1,238
|
|
Accounts payable, intercompany
|
3
|
|
309
|
|
153
|
|
(465
|
)
|
—
|
|
Short-term advances from affiliates
|
5,291
|
|
1,185
|
|
24
|
|
(6,500
|
)
|
—
|
|
Long-term debt maturing within one year
|
—
|
|
746
|
|
—
|
|
—
|
|
746
|
|
|
5,376
|
|
3,084
|
|
489
|
|
(6,965
|
)
|
1,984
|
|
Pension and other benefit liabilities
|
—
|
|
672
|
|
77
|
|
—
|
|
749
|
|
Long-term advances from affiliates
|
—
|
|
1,000
|
|
—
|
|
(1,000
|
)
|
—
|
|
Other long-term liabilities
|
—
|
|
108
|
|
123
|
|
—
|
|
231
|
|
Long-term debt
|
—
|
|
7,362
|
|
51
|
|
—
|
|
7,413
|
|
Deferred income taxes
|
—
|
|
1,802
|
|
1,522
|
|
(3
|
)
|
3,321
|
|
Total liabilities
|
5,376
|
|
14,028
|
|
2,262
|
|
(7,968
|
)
|
13,698
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
2,032
|
|
1,037
|
|
6,730
|
|
(7,767
|
)
|
2,032
|
|
Additional paid-in capital
|
43
|
|
1,643
|
|
259
|
|
(1,902
|
)
|
43
|
|
Accumulated other comprehensive (loss) income
|
(1,741
|
)
|
(1,742
|
)
|
417
|
|
1,325
|
|
(1,741
|
)
|
Retained earnings
|
6,103
|
|
9,685
|
|
4,716
|
|
(14,401
|
)
|
6,103
|
|
|
6,437
|
|
10,623
|
|
12,122
|
|
(22,745
|
)
|
6,437
|
|
Total liabilities and shareholders’ equity
|
$
|
11,813
|
|
$
|
24,651
|
|
$
|
14,384
|
|
$
|
(30,713
|
)
|
$
|
20,135
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
AS AT DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
100
|
|
$
|
64
|
|
$
|
—
|
|
$
|
164
|
|
Accounts receivable, net
|
—
|
|
435
|
|
156
|
|
—
|
|
591
|
|
Accounts receivable, intercompany
|
90
|
|
113
|
|
206
|
|
(409
|
)
|
—
|
|
Short-term advances to affiliates
|
500
|
|
692
|
|
4,035
|
|
(5,227
|
)
|
—
|
|
Materials and supplies
|
—
|
|
150
|
|
34
|
|
—
|
|
184
|
|
Other current assets
|
—
|
|
38
|
|
32
|
|
—
|
|
70
|
|
|
590
|
|
1,528
|
|
4,527
|
|
(5,636
|
)
|
1,009
|
|
Long-term advances to affiliates
|
1
|
|
—
|
|
91
|
|
(92
|
)
|
—
|
|
Investments
|
—
|
|
47
|
|
147
|
|
—
|
|
194
|
|
Investments in subsidiaries
|
8,513
|
|
10,249
|
|
—
|
|
(18,762
|
)
|
—
|
|
Properties
|
—
|
|
8,756
|
|
7,933
|
|
—
|
|
16,689
|
|
Goodwill and intangible assets
|
—
|
|
—
|
|
202
|
|
—
|
|
202
|
|
Pension asset
|
—
|
|
1,070
|
|
—
|
|
—
|
|
1,070
|
|
Other assets
|
1
|
|
48
|
|
8
|
|
—
|
|
57
|
|
Deferred income taxes
|
11
|
|
—
|
|
—
|
|
(11
|
)
|
—
|
|
Total assets
|
$
|
9,116
|
|
$
|
21,698
|
|
$
|
12,908
|
|
$
|
(24,501
|
)
|
$
|
19,221
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
73
|
|
$
|
945
|
|
$
|
304
|
|
$
|
—
|
|
$
|
1,322
|
|
Accounts payable, intercompany
|
14
|
|
292
|
|
103
|
|
(409
|
)
|
—
|
|
Short-term advances from affiliates
|
4,403
|
|
816
|
|
8
|
|
(5,227
|
)
|
—
|
|
Long-term debt maturing within one year
|
—
|
|
25
|
|
—
|
|
—
|
|
25
|
|
|
4,490
|
|
2,078
|
|
415
|
|
(5,636
|
)
|
1,347
|
|
Pension and other benefit liabilities
|
—
|
|
658
|
|
76
|
|
—
|
|
734
|
|
Long-term advances from affiliates
|
—
|
|
92
|
|
—
|
|
(92
|
)
|
—
|
|
Other long-term liabilities
|
—
|
|
152
|
|
132
|
|
—
|
|
284
|
|
Long-term debt
|
—
|
|
8,605
|
|
54
|
|
—
|
|
8,659
|
|
Deferred income taxes
|
—
|
|
1,600
|
|
1,982
|
|
(11
|
)
|
3,571
|
|
Total liabilities
|
4,490
|
|
13,185
|
|
2,659
|
|
(5,739
|
)
|
14,595
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
2,002
|
|
1,037
|
|
5,823
|
|
(6,860
|
)
|
2,002
|
|
Additional paid-in capital
|
52
|
|
1,638
|
|
298
|
|
(1,936
|
)
|
52
|
|
Accumulated other comprehensive (loss) income
|
(1,799
|
)
|
(1,799
|
)
|
712
|
|
1,087
|
|
(1,799
|
)
|
Retained earnings
|
4,371
|
|
7,637
|
|
3,416
|
|
(11,053
|
)
|
4,371
|
|
|
4,626
|
|
8,513
|
|
10,249
|
|
(18,762
|
)
|
4,626
|
|
Total liabilities and shareholders’ equity
|
$
|
9,116
|
|
$
|
21,698
|
|
$
|
12,908
|
|
$
|
(24,501
|
)
|
$
|
19,221
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Cash provided by operating activities
|
$
|
338
|
|
$
|
1,334
|
|
$
|
989
|
|
$
|
(479
|
)
|
$
|
2,182
|
|
Investing activities
|
|
|
|
|
|
Additions to properties
|
—
|
|
(950
|
)
|
(390
|
)
|
—
|
|
(1,340
|
)
|
Proceeds from sale of properties and other assets
|
—
|
|
29
|
|
13
|
|
—
|
|
42
|
|
Advances to affiliates
|
(590
|
)
|
(550
|
)
|
(1,528
|
)
|
2,668
|
|
—
|
|
Repayment of advances to affiliates
|
—
|
|
242
|
|
243
|
|
(485
|
)
|
—
|
|
Capital contributions to affiliates
|
—
|
|
(1,039
|
)
|
—
|
|
1,039
|
|
—
|
|
Repurchase of share capital from affiliates
|
—
|
|
156
|
|
—
|
|
(156
|
)
|
—
|
|
Other
|
—
|
|
5
|
|
(2
|
)
|
—
|
|
3
|
|
Cash used in investing activities
|
(590
|
)
|
(2,107
|
)
|
(1,664
|
)
|
3,066
|
|
(1,295
|
)
|
Financing activities
|
|
|
|
|
|
Dividends paid
|
(310
|
)
|
(310
|
)
|
(169
|
)
|
479
|
|
(310
|
)
|
Issuance of share capital
|
—
|
|
—
|
|
1,039
|
|
(1,039
|
)
|
—
|
|
Return of share capital to affiliates
|
—
|
|
—
|
|
(156
|
)
|
156
|
|
—
|
|
Issuance of CP Common Shares
|
45
|
|
—
|
|
—
|
|
—
|
|
45
|
|
Purchase of CP Common Shares
|
(381
|
)
|
—
|
|
—
|
|
—
|
|
(381
|
)
|
Repayment of long-term debt, excluding commercial paper
|
—
|
|
(32
|
)
|
—
|
|
—
|
|
(32
|
)
|
Advances from affiliates
|
1,383
|
|
1,285
|
|
—
|
|
(2,668
|
)
|
—
|
|
Repayment of advances from affiliates
|
(485
|
)
|
—
|
|
—
|
|
485
|
|
—
|
|
Settlement of forward starting swaps
|
—
|
|
(22
|
)
|
—
|
|
—
|
|
(22
|
)
|
Cash provided by (used in) financing activities
|
252
|
|
921
|
|
714
|
|
(2,587
|
)
|
(700
|
)
|
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
|
—
|
|
(7
|
)
|
(6
|
)
|
—
|
|
(13
|
)
|
Cash position
|
|
|
|
|
|
Increase in cash and cash equivalents
|
—
|
|
141
|
|
33
|
|
—
|
|
174
|
|
Cash and cash equivalents at beginning of year
|
—
|
|
100
|
|
64
|
|
—
|
|
164
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
$
|
241
|
|
$
|
97
|
|
$
|
—
|
|
$
|
338
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Cash provided by operating activities
|
$
|
255
|
|
$
|
1,424
|
|
$
|
879
|
|
$
|
(469
|
)
|
$
|
2,089
|
|
Investing activities
|
|
|
|
|
|
Additions to properties
|
—
|
|
(728
|
)
|
(454
|
)
|
—
|
|
(1,182
|
)
|
Proceeds from sale of properties and other assets
|
—
|
|
102
|
|
14
|
|
—
|
|
116
|
|
Advances to affiliates
|
—
|
|
(664
|
)
|
(539
|
)
|
1,203
|
|
—
|
|
Repayment of advances to affiliates
|
—
|
|
222
|
|
—
|
|
(222
|
)
|
—
|
|
Capital contributions to affiliates
|
—
|
|
(472
|
)
|
—
|
|
472
|
|
—
|
|
Repurchase of share capital from affiliates
|
—
|
|
8
|
|
—
|
|
(8
|
)
|
—
|
|
Other
|
—
|
|
—
|
|
(3
|
)
|
—
|
|
(3
|
)
|
Cash used in investing activities
|
—
|
|
(1,532
|
)
|
(982
|
)
|
1,445
|
|
(1,069
|
)
|
Financing activities
|
|
|
|
|
|
Dividends paid
|
(255
|
)
|
(255
|
)
|
(214
|
)
|
469
|
|
(255
|
)
|
Issuance of share capital
|
—
|
|
—
|
|
472
|
|
(472
|
)
|
—
|
|
Return of share capital to affiliates
|
—
|
|
—
|
|
(8
|
)
|
8
|
|
—
|
|
Issuance of CP Common Shares
|
21
|
|
—
|
|
—
|
|
—
|
|
21
|
|
Purchase of CP Common Shares
|
(1,210
|
)
|
—
|
|
—
|
|
—
|
|
(1,210
|
)
|
Repayment of long-term debt, excluding commercial paper
|
—
|
|
(24
|
)
|
(14
|
)
|
—
|
|
(38
|
)
|
Net repayment of commercial paper
|
—
|
|
(8
|
)
|
—
|
|
—
|
|
(8
|
)
|
Advances from affiliates
|
1,189
|
|
—
|
|
14
|
|
(1,203
|
)
|
—
|
|
Repayment of advances from affiliates
|
—
|
|
—
|
|
(222
|
)
|
222
|
|
—
|
|
Other
|
—
|
|
(3
|
)
|
—
|
|
—
|
|
(3
|
)
|
Cash (used in) provided by financing activities
|
(255
|
)
|
(290
|
)
|
28
|
|
(976
|
)
|
(1,493
|
)
|
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
|
—
|
|
(4
|
)
|
(9
|
)
|
—
|
|
(13
|
)
|
Cash position
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
—
|
|
(402
|
)
|
(84
|
)
|
—
|
|
(486
|
)
|
Cash and cash equivalents at beginning of year
|
—
|
|
502
|
|
148
|
|
—
|
|
650
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
$
|
100
|
|
$
|
64
|
|
$
|
—
|
|
$
|
164
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Canadian dollars)
|
CPRL (Parent Guarantor)
|
|
CPRC (Subsidiary Issuer)
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments and Eliminations
|
|
CPRL Consolidated
|
|
Cash provided by operating activities
|
$
|
2,283
|
|
$
|
1,650
|
|
$
|
1,074
|
|
$
|
(2,548
|
)
|
$
|
2,459
|
|
Investing activities
|
|
|
|
|
|
Additions to properties
|
—
|
|
(766
|
)
|
(756
|
)
|
—
|
|
(1,522
|
)
|
Proceeds from the sale of Delaware & Hudson South
|
—
|
|
—
|
|
281
|
|
—
|
|
281
|
|
Proceeds from sale of properties and other assets
|
—
|
|
103
|
|
11
|
|
—
|
|
114
|
|
Advances to affiliates
|
(1,133
|
)
|
(311
|
)
|
(1,820
|
)
|
3,264
|
|
—
|
|
Repayment of advances to affiliates
|
—
|
|
804
|
|
1,000
|
|
(1,804
|
)
|
—
|
|
Capital contributions to affiliates
|
—
|
|
(1,655
|
)
|
—
|
|
1,655
|
|
—
|
|
Repurchase of share capital from affiliates
|
—
|
|
1,210
|
|
—
|
|
(1,210
|
)
|
—
|
|
Other
|
—
|
|
6
|
|
(2
|
)
|
—
|
|
4
|
|
Cash used in investing activities
|
(1,133
|
)
|
(609
|
)
|
(1,286
|
)
|
1,905
|
|
(1,123
|
)
|
Financing activities
|
|
|
|
|
|
Dividends paid
|
(226
|
)
|
(2,272
|
)
|
(276
|
)
|
2,548
|
|
(226
|
)
|
Issuance of share capital
|
—
|
|
—
|
|
1,655
|
|
(1,655
|
)
|
—
|
|
Return of share capital to affiliates
|
—
|
|
—
|
|
(1,210
|
)
|
1,210
|
|
—
|
|
Issuance of CP Common Shares
|
43
|
|
—
|
|
—
|
|
—
|
|
43
|
|
Purchase of CP Common Shares
|
(2,787
|
)
|
—
|
|
—
|
|
—
|
|
(2,787
|
)
|
Issuance of long-term debt, excluding commercial paper
|
—
|
|
3,411
|
|
—
|
|
—
|
|
3,411
|
|
Repayment of long-term debt, excluding commercial paper
|
—
|
|
(461
|
)
|
(44
|
)
|
—
|
|
(505
|
)
|
Net repayment of commercial paper
|
—
|
|
(893
|
)
|
—
|
|
—
|
|
(893
|
)
|
Advances from affiliates
|
1,820
|
|
500
|
|
944
|
|
(3,264
|
)
|
—
|
|
Repayment of advances from affiliates
|
—
|
|
(1,000
|
)
|
(804
|
)
|
1,804
|
|
—
|
|
Cash (used in) provided by financing activities
|
(1,150
|
)
|
(715
|
)
|
265
|
|
643
|
|
(957
|
)
|
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents
|
—
|
|
24
|
|
21
|
|
—
|
|
45
|
|
Cash position
|
|
|
|
|
|
Increase in cash and cash equivalents
|
—
|
|
350
|
|
74
|
|
—
|
|
424
|
|
Cash and cash equivalents at beginning of year
|
—
|
|
152
|
|
74
|
|
—
|
|
226
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
$
|
502
|
|
$
|
148
|
|
$
|
—
|
|
$
|
650
|
|