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Business acquisition

12 Months Ended

Dec. 31, 2024

Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]

On December 14, 2021, the Company purchased 100% of the issued and outstanding shares of KCS with the objective of creating the only single-line railroad linking the U.S., Mexico and Canada, and the Company placed the shares of KCS in a voting trust. On March 15, 2023, the U.S. Surface Transportation Board (the “STB”) approved the Company and KCS’s joint merger application, and the Company assumed control of KCS on April 14, 2023 (the "Control Date"). From December 14, 2021 to April 13, 2023, the Company recorded its investment in KCS using the equity method of accounting.

Accordingly, the Company commenced consolidation of KCS on the Control Date, accounting for the acquisition as a business combination achieved in stages. The results from operations and cash flows have been consolidated prospectively from the Control Date. The Company derecognized its previously held equity method investment in KCS of $44,402 million as at April 13, 2023 and remeasured the investment at its Control Date fair value of $37,227 million, which formed part of the purchase consideration, resulting in a remeasurement loss of $7,175 million recorded in the second quarter of 2023. In addition, and on the same date, a deferred income tax recovery of $7,832 million was recognized upon the derecognition of the deferred income tax liability computed on the outside basis that the Company had recognized in relation to its investment in KCS while accounted for using the equity method. The fair value of the previously held equity interest in KCS was determined by a discounted cash flow approach, which incorporated the Company’s best estimates of long-term growth rates, tax rates, discount rates, and terminal multiples.

The identifiable assets acquired, and liabilities and non-controlling interest assumed were measured at their fair values at the Control Date, with certain exceptions, including income taxes, certain contingent liabilities and contract liabilities. The fair values of the tangible assets were determined using valuation techniques including, but not limited to, the market approach and the cost approach. The significant assumptions used to determine the fair value of the tangible assets included, but were not limited to, a selection of comparable assets and an appropriate inflation rate. Presented with the acquired Properties are concession and related assets held under the terms of the Concession. The Concession term ends in June 2047, but is renewable under certain conditions, for additional periods, each up to 50 years.

The fair values of the intangible assets were determined using valuation techniques including, but not limited to, the multi-period excess earnings method, the replacement cost method, the relief from royalty method and the income approach. The significant assumptions used to determine the fair values of the intangible assets included, but were not limited to, the renewal probability and term of the Mexican concession extension, discount rates, earnings before interest, tax, depreciation, and amortization ("EBITDA") margins and terminal growth rates.

The fair value of the non-controlling interest was determined using a combination of the income and market approaches to determine the fair value of Meridian Speedway LLC in which Norfolk Southern Corporation ("NSC") owns a non-controlling interest, and this fair value was allocated proportionately between KCS and NSC.

The accounting for the acquisition of KCS was completed on April 13, 2024, with the end of the measurement period and the final validation of the fair values assigned to acquired assets and assumed liabilities. This validation was completed using additional information about facts and circumstances as of the Control Date, that was obtained during the measurement period.

The following table summarizes the final purchase price allocation with the amounts recognized in respect of the identifiable assets acquired and liabilities and non-controlling interest assumed on the Control Date, as well as the fair value of the previously held equity interest in KCS and the measurement period adjustments recorded:


(in millions of Canadian dollars)	Preliminary allocation - April 14, 2023		Measurement period adjustments		Final allocation
Net assets acquired:
Cash and cash equivalents	$	298	$	—	$	298
Net working capital	51		(161)		(110)
Properties	28,748		1		28,749
Intangible assets	3,022		—		3,022
Other long-term assets	496		(6)		490
Debt including debt maturing within one year	(4,545)		—		(4,545)
Deferred income taxes	(6,984)		62		(6,922)
Other long-term liabilities	(406)		(37)		(443)
Total identifiable net assets	$	20,680	$	(141)	$	20,539
Goodwill	17,491		141		17,632
	$	38,171	$	—	$	38,171
Consideration:
Fair value of previously held equity method investment	$	37,227	$	—	$	37,227
Intercompany payable balance, net acquired	12		—		12
Fair value of non-controlling interest	932		—		932
Total	$	38,171	$	—	$	38,171

During the measurement period, adjustments were recorded as a result of new information that was obtained about facts and circumstances of certain KCS assets and liabilities as of the Control Date. New information obtained during 2023 was primarily in relation to CPKCM's value added tax assets and liabilities, as well as income and other tax positions. New information obtained during the first quarter of 2024 was primarily in relation to KCS's environmental liabilities, certain liabilities for other taxes in Mexico and legal and personal injury claims. Other adjustments recorded in relation to assets and liabilities were not significant in value. These adjustments to the Company's December 31, 2023 Consolidated Balance Sheet and March 31, 2024 Interim Consolidated Balance Sheet had a negligible impact to the Company's net income in 2023 and in the year ended December 31, 2024.

The net working capital acquired included trade receivables of $697 million and accounts payable and accrued liabilities of $1,014 million.

Intangible assets of $3,022 million consisted of contracts and customer relationships with amortization periods of nine to 22 years as well as U.S. trackage rights and the KCS brand with indefinite estimated useful lives. Included in the acquired Properties are concession rights and related assets held under the terms of a concession from the Mexican government, which have fair values totalling $9,176 million. The Concession rights and related assets are amortized over the shorter of the underlying asset lives and the estimated concession term, including one renewal period, of 74 years.

Net working capital and Other long-term liabilities included environmental liabilities of $15 million and $160 million, respectively, and legal and personal injury claims of $44 million and $40 million, respectively, which are contingent on the outcome of uncertain future events. The values are measured at estimated cost and evaluated for changes in facts at the end of the reporting period.

The excess of the total consideration, over the amounts allocated to acquired assets and assumed liabilities and non-controlling interest recognized, has been recognized as goodwill of $17,632 million. Goodwill represents future synergies and an acquired assembled workforce. All of the goodwill has been assigned to the Company's single, rail transportation operating segment. None of the goodwill is expected to be deductible for income tax purposes.

During the year ended December 31, 2024, in relation to certain Mexican tax liabilities identified and recorded through Goodwill during the measurement period, the Company also recorded further adjustments to provisions and settlements of Mexican taxes of $4 million net recovery recognized within "Compensation and benefits". This comprises $10 million for liabilities incurred since the Control Date recognized in the first quarter of 2024 and a $14 million related recovery.

On a pro forma basis, if the Company had consolidated KCS beginning on January 1, 2022, the revenue and net income attributable to controlling shareholders of the combined entity would be as follows for the years ended December 31, 2023 and December 31, 2022:


	For the year ended December 31, 2023				For the year ended December 31, 2022
(in millions of Canadian dollars)	KCS Historical(1)		Pro Forma CPKC		KCS Historical(1)		Pro Forma CPKC
Revenue	$	1,351	$	13,909	$	4,390	$	13,217
Net income attributable to controlling shareholders	280		3,174		1,287		4,153

(1) KCS's historical amounts in U.S. dollars were translated into Canadian dollars at the Bank of Canada average exchange rate for the period from January 1 to April 13, 2023 and year ended December 31, 2022 with effective exchange rates of $1.35 and $1.30, respectively.

For the years ended December 31, 2023 and December 31, 2022, the supplemental pro forma Net income attributable to controlling shareholders for the combined entity were adjusted for:

•the removal of the remeasurement loss of $7,175 million upon the derecognition of CPRL's previously held equity method investment in KCS from the year ended December 31, 2023, which included the reclassification of associated AOCI to retained earnings; and recognition of this remeasurement loss in the year ended December 31, 2022;

•depreciation and amortization of differences between the historic carrying value and the fair value of tangible and intangible assets and investments prior to the Control Date;

•amortization of differences between the carrying amount and the fair value of debt through net interest expense prior to the Control Date;

•the elimination of intercompany transactions prior to the Control Date between the Company and KCS;

•miscellaneous amounts reclassified across revenue, operating expenses, and non-operating income or expense, consistent with CPKC's financial statement captions;

•the removal of equity earnings from KCS, previously recognized as an equity method investment prior to the Control Date, of $230 million and $1,074 million for the years ended December 31, 2023 and December 31, 2022, respectively;

•transaction costs incurred by the Company; and

•income tax adjustments including:

◦the derecognition of a deferred income tax recovery of $7,832 million for the year ended December 31, 2023 related to the elimination of the deferred income tax liability on the outside basis difference of the investment in KCS; and recognition of this deferred income tax recovery in the year ended December 31, 2022;

◦the derecognition of a deferred income tax recovery for the year ended December 31, 2023 on CPKC unitary state apportionment changes; and recognition of these CPKC unitary state apportionment changes in the year ended December 31, 2022;

◦a deferred income tax recovery prior to the Control Date on amortization of fair value adjustments to investments, properties, intangible assets, and debt; and

◦a current income tax recovery on transaction costs expected to be incurred by CPKC.

During the year ended December 31, 2024, the Company incurred $112 million in acquisition-related costs, of which:

•$18 million were recognized in "Compensation and benefits" primarily related to retention and synergy related incentive compensation costs;

•$6 million were recognized in "Materials"; and

•$88 million were recognized in "Purchased services and other" primarily related to system migration, relocation expenses, legal and consulting fees.

During the year ended December 31, 2023, the Company incurred $190 million in acquisition-related costs, of which:

•$71 million were recognized in "Compensation and benefits" primarily related to restructuring costs, retention and synergy related incentive compensation costs;

•$2 million were recognized in "Materials";

•$111 million were recognized in "Purchased services and other" primarily related to third party purchased services, and payments made to certain communities across the combined network to address the environmental and social impacts of increased traffic as required by voluntary agreements with communities and conditions imposed by the STB pursuant to the STB's final decision approving the Company and KCS's joint merger application, including, but not limited to, payments related to new crossings, closure of existing crossings and other infrastructure projects; and

•$6 million were recognized in "Other (income) expense".

KCS incurred acquisition-related costs of $11 million (net of tax) between January 1, 2023 and April 13, 2023, which were included within "Equity earnings of Kansas City Southern".

During the year ended December 31, 2022, the Company incurred $74 million in acquisition-related costs recognized within "Purchased services and other". Acquisition-related costs of $49 million (net of tax) incurred by KCS during the year ended December 31, 2022, were included in "Equity earnings of Kansas City Southern".

During the year ended December 31, 2024, the Company recognized $352 million of KCS purchase accounting (see Note 11 for further discussion), representing incremental expenses associated with the amortization of fair value adjustments associated with purchase accounting, as follows:

•$333 million recognized in "Depreciation and amortization";

•$3 million recognized in "Purchased services and others";

•$3 million recognized in "Other (income) expense";

•$20 million recognized in "Net interest expense"; and

•a recovery of $7 million recognized in "Net loss attributable to non-controlling interest".

During the year ended December 31, 2023, the Company recognized $297 million of KCS purchase accounting, as follows:

•$234 million recognized in "Depreciation and amortization";

•$1 million recognized in "Purchased services and others";

•$48 million (net of tax) recognized in "Equity earnings of Kansas City Southern";

•$2 million recognized in "Other (income) expense";

•$17 million recognized in "Net interest expense"; and

•a recovery of $5 million recognized in "Net loss attributable to non-controlling interest".

During the year ended December 31, 2022, the Company recognized $163 million (net of tax) of KCS purchase accounting in "Equity earnings of Kansas City Southern".