CPKC(CP) - 2023 Q4 - Annual Report

Part I Business CPKC, formed by the KCS acquisition, is the sole single-line freight railway connecting Canada, the U.S., and Mexico, with 2023 freight revenues of $12.3 billion and a strategy based on precision scheduled railroading - On April 14, 2023, Canadian Pacific Railway Limited acquired Kansas City Southern, forming CPKC, the sole freight railway spanning Canada, the U.S., and Mexico with a 20,000-mile network[17] - The company's strategy is built on five foundations of precision scheduled railroading: Service, Cost Control, Asset Optimization, Safety, and People Development[20][21] - CPKCM, CPKC's Mexican subsidiary, holds a government concession until June 2047, renewable for up to 50 years[58] - In 2023, the reportable personal injury incident rate increased by 15% to 1.16 per 200,000 employee-hours, and the reportable train accident rate increased by 14% to 1.06 per million train-miles[81] 2023 Freight Revenue Breakdown | Business Line | Percentage of Total Freight Revenue | | :--- | :--- | | Merchandise | 45% | | Bulk | 35% | | Intermodal | 20% | Human Capital Overview (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Total Employees | 19,927 | | Total Workforce (incl. contractors) | 20,038 | | Unionized Workforce Percentage | ~74% | Risk Factors The company faces operational, human capital, regulatory, and climate-related risks, alongside specific challenges from the KCS acquisition and Mexican operations - The company's legal obligation to transport hazardous materials exposes it to substantial accident-related costs and claims potentially exceeding insurance coverage[93] - A majority of unionized employees creates risk of strikes or work stoppages from contract disputes, potentially disrupting operations significantly[101] - The KCS acquisition presents risks including adverse STB conditions, integration challenges, and substantial indebtedness[110][111][116] - Mexican operations face political and economic risks, including potential revocation of CPKCM's government concession, which would materially impact financial statements[117][124] - Climate change poses physical risks from severe weather and transition risks like reputational damage from unmet GHG targets or market shifts away from energy commodities[133][136][140] Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - None[147] Cybersecurity CPKC's cybersecurity program, based on the NIST Framework and overseen by the Board's Risk and Sustainability Committee, has not materially impacted operations or financial condition - The company's cybersecurity program, based on the NIST Cybersecurity Framework, includes periodic risk assessments and third-party penetration testing[148] - The Board's Risk and Sustainability Committee provides oversight, with the CIO and CISO leading cybersecurity strategy implementation[151][152] - Cybersecurity threats have not materially affected the company's operations or financial condition to date[150] Properties CPKC operates a 20,000-mile main track network across North America, with 2023 capital expenditures of $2.47 billion, a 59% increase due to the KCS acquisition - The company operates a 20,000-mile main track network, including 8,400 miles in Canada, 8,800 miles in the U.S., and 3,100 miles in Mexico[154][155] - Capital expenditures in 2023 totaled $2.47 billion, a 59% increase from $1.56 billion in 2022, primarily due to the KCS acquisition[167] Equipment Fleet (as of Dec 31, 2023) | Equipment Type | Owned | Leased | Total | Average Age (Years) | | :--- | :--- | :--- | :--- | :--- | | Locomotives | 2,258 | 61 | 2,319 | 23 | | Freight Cars | 39,335 | 14,458 | 53,793 | 22 | Legal Proceedings The company is in ongoing discussions with the DOJ to resolve EPA-issued Notices of Violations regarding Clean Air Act compliance, with potential penalties currently unevaluable - The company is in ongoing discussions with the Department of Justice to resolve EPA-issued Notices of Violations concerning Clean Air Act compliance, following a September 2020 information request[170] Mine Safety Disclosures This item is not applicable to the company - Not applicable[171] Information about our Executive Officers This section details the business experience of the company's executive officers, including President and CEO Keith Creel, who are appointed by the Board of Directors - The report details the names, ages, and business experience of executive officers, who are appointed by the Board of Directors[172] - Keith Creel became the first President and CEO of CPKC on April 14, 2023, after serving as President and CEO of CP since 2017[173] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities CPKC common shares trade on the TSX and NYSE under "CP", with 932.4 million shares outstanding as of February 26, 2024, and no active share repurchase program - The company's common shares are listed on the TSX and NYSE under the symbol "CP"[179] - As of February 26, 2024, 932,428,454 common shares were outstanding[180] - Share repurchases were suspended due to the KCS transaction, with no active program at year-end 2023[182] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations CPKC's 2023 financial performance, significantly impacted by the KCS acquisition, saw total revenues increase 42% to $12.6 billion, diluted EPS rise 12% to $4.21, and a $7.2 billion non-cash remeasurement loss, offset by a $7.0 billion income tax recovery - Total revenues increased primarily due to the KCS acquisition, contributing $3.41 billion to freight revenues and $62 million to non-freight revenues[196] - Total operating expenses increased 49% to $8.17 billion, largely driven by the KCS acquisition, adding $645 million in compensation, $441 million in fuel, and $629 million in depreciation[208][209][211] - A non-cash remeasurement loss of $7.18 billion was recognized on the KCS equity investment upon assuming control on April 14, 2023[222] - The company recorded an income tax recovery of $6.98 billion in 2023, compared to an expense of $628 million in 2022, primarily due to a $7.83 billion deferred tax recovery from the KCS investment[223] - For 2024, the company anticipates investing approximately $2.75 billion in capital programs, financed by cash from operations[249] 2023 Key Financial Results | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $12,555 M | $8,814 M | +42% | | Operating Income | $4,388 M | $3,329 M | +32% | | Net Income | $3,923 M | $3,517 M | +12% | | Diluted EPS | $4.21 | $3.77 | +12% | | Operating Ratio | 65.0% | 62.2% | +280 bps | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign exchange fluctuations, with a 1% interest rate decrease potentially increasing debt fair value by $1.9 billion, managed through derivatives - The company faces interest rate risk from debt financing; a hypothetical 1% decrease in interest rates would increase the fair value of debt by approximately $1.9 billion as of December 31, 2023[344] - To manage interest rate exposure, the company may utilize derivative instruments like forward rate agreements and swaps[343] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023, detailing the KCS acquisition's impact, including $17.6 billion in goodwill and a $7.2 billion remeasurement loss - The KCS acquisition, a business combination achieved in stages, resulted in $17.6 billion in goodwill and a $7.2 billion remeasurement loss on the prior equity investment[470][477] - As of December 31, 2023, total long-term debt, including the current portion, amounted to $22.5 billion[502][503] - The company is involved in ongoing legal proceedings concerning the 2013 Lac-Mégantic rail accident and a contract dispute with Remington Development Corporation, with undetermined potential liabilities[616][628] Consolidated Statement of Income Highlights (in millions CAD) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | 12,555 | 8,814 | 7,995 | | Operating Income | 4,388 | 3,329 | 3,206 | | Remeasurement loss of KCS | 7,175 | - | - | | Income Tax (Recovery) Expense | (6,976) | 628 | 768 | | Net Income | 3,923 | 3,517 | 2,852 | Consolidated Balance Sheet Highlights (in millions CAD) | Line Item | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 79,902 | 73,495 | | Goodwill | 17,729 | 344 | | Total Liabilities | 37,491 | 34,609 | | Total Equity | 42,411 | 38,886 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[639] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, excluding the KCS acquisition from the current assessment - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[640] - Management's assessment of internal control over financial reporting excluded the newly acquired KCS subsidiary, which represented 41% of total assets and 28% of revenues for the year, as permitted by SEC rules[643][648] - No material changes to internal control over financial reporting were identified during the fourth quarter of 2023[645] Other Information The company reports no other information for this item - None[654] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[654] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance will be provided in the company's Form 10-K/A, to be filed within 120 days of fiscal year-end - Required information will be filed in the Company's Form 10-K/A no later than 120 days after December 31, 2023[657] Executive Compensation Executive compensation information will be provided in the company's Form 10-K/A, to be filed within 120 days of fiscal year-end - Required information will be filed in the Company's Form 10-K/A no later than 120 days after December 31, 2023[659] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information will be provided in the company's Form 10-K/A, to be filed within 120 days of fiscal year-end - Required information will be filed in the Company's Form 10-K/A no later than 120 days after December 31, 2023[659] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence will be provided in the company's Form 10-K/A, to be filed within 120 days of fiscal year-end - Required information will be filed in the Company's Form 10-K/A no later than 120 days after December 31, 2023[660] Principal Accounting Fees and Services Principal accounting fees and services information will be provided in the company's Form 10-K/A, to be filed within 120 days of fiscal year-end - Required information will be filed in the Company's Form 10-K/A no later than 120 days after December 31, 2023[661] Part IV Exhibits, Financial Statement Schedule This section lists all documents filed as part of the annual report, including financial statements, schedules, and a comprehensive list of exhibits - This item lists the financial statements, financial statement schedules, and exhibits included in the annual report[663] Schedule II – Valuation and Qualifying Accounts (in millions CAD) | Description | 2021 Balance | 2022 Balance | 2023 Balance | | :--- | :--- | :--- | :--- | | Accruals for personal injury and other claims | 123 | 132 | 187 | | Provision for environmental remediation | 79 | 83 | 220 | Form 10-K Summary This item is not applicable - Not applicable[675]