Exhibit 99.1

 

 

Release:

March 20, 2023

Canadian Pacific commences offers to exchange and consent solicitations for seven series of Kansas City Southern notes for new Canadian Pacific Railway Company notes

Calgary — Canadian Pacific (TSX: CP) (NYSE: CP) today announced the commencement of offers to exchange any and all validly tendered (and not validly withdrawn) and accepted notes of seven series, each previously issued by Kansas City Southern (“KCS” and such notes, the “Old Notes”), for notes to be issued by Canadian Pacific Railway Company (“CPRC” and such notes, the “CPRC Notes”), a subsidiary of Canadian Pacific Railway Limited, a Canadian corporation (“CPRL”, and, together with CPRC, “Canadian Pacific”) and to be unconditionally guaranteed on an unsecured basis by CPRL, as described in the table below.

A Registration Statement on Form F-4 (the “Registration Statement”) relating to the issuance of the CPRC Notes was filed with the Securities and Exchange Commission (“SEC”) today but has not yet been declared effective.

 

Title of Series of Old Notes		CUSIP/ISIN No.		Aggregate Principal Amount				Title of Series of CPRC Notes to be Issued by CPRC		Exchange Consideration (1)								Early Participation Premium (1)				Total Consideration (1)(3)
										CPRC Notes (Principal Amount) (2)				Cash				CPRC Notes (Principal Amount) (2)				CPRC Notes (Principal Amount) (2)				Cash
3.125% Senior Notes due 2026		485170 BA1 / US485170BA12		$	250,000,000			3.125% Notes due 2026		$	970			$	1.00			$	30			$	1,000			$	1.00
2.875% Senior Notes due 2029		485170 BD5 / US485170BD50		$	425,000,000			2.875% Notes due 2029		$	970			$	1.00			$	30			$	1,000			$	1.00
4.300% Senior Notes due 2043		485170AQ7 / US485170AQ72		$	448,651,000			4.300% Notes due 2043		$	970			$	1.00			$	30			$	1,000			$	1.00
4.950% Senior Notes due 2045		485170AS3 / US485170AS39		$	499,165,000			4.950% Notes due 2045		$	970			$	1.00			$	30			$	1,000			$	1.00
4.700% Senior Notes due 2048		485170 BB9 / US485170BB94		$	500,000,000			4.700% Notes due 2048		$	970			$	1.00			$	30			$	1,000			$	1.00
3.500% Senior Notes due 2050		485170 BE3 / US485170BE34		$	550,000,000			3.500% Notes due 2050		$	970			$	1.00			$	30			$	1,000			$	1.00
4.200% Senior Notes due 2069		485170 BC7 / US485170BC77		$	425,000,000			4.200 % Notes due 2069		$	970			$	1.00			$	30			$	1,000			$	1.00

 

(1)	Consideration per $1,000 principal amount of Old Notes validly tendered and accepted for exchange, subject to any rounding as described herein.

(2)	The term “CPRC Notes” in this column refers, in each case, to the series of CPRC Notes corresponding to the series of Old Notes of like tenor and coupon.

(3)	Includes the Early Participation Premium (as defined below) for Old Notes validly tendered prior to the Early Participation Date described below and not validly withdrawn.

In connection with the exchange offers, Canadian Pacific is also soliciting consents from holders of the Old Notes, on behalf of KCS, to certain proposed amendments to the corresponding KCS indentures governing the Old Notes (the “Old Notes Indentures”). These amendments, will, among other things, cause the Old Notes and the Old Notes Indentures to have fewer restrictive terms and afford reduced protection to the remaining holders of the Old Notes compared to those currently in the Old Notes Indentures or those applicable to the Old Notes. If the proposed amendments become effective with respect to any series of Old Notes, the amendments will apply to all Old Notes of such series not tendered in the applicable exchange offer.

In exchange for each $1,000 principal amount of Old Notes that is validly tendered prior to 5:00 p.m., New York City time, on March 31, 2023 (the “Early Participation Date”) and not validly withdrawn, holders will receive the total consideration set out in the table above (the “Total Consideration”), which consists of $1,000 principal amount of CPRC Notes and a cash amount of $1.00.

The Total Consideration includes an early participation premium set out in the table above (the “Early Participation Premium”), which consists of $30 principal amount of CPRC Notes per $1,000 principal amount of Old Notes validly tendered and not validly withdrawn.

Each CPRC Note in a series will contain the same interest rates, interest payment dates, maturity dates and substantively the same redemption provisions as the corresponding series of Old Notes.

In exchange for each $1,000 principal amount of Old Notes that is validly tendered after the Early Participation Date but prior to the Expiration Date (as defined below) and not validly withdrawn, holders will receive only the exchange consideration set out in the table above (the “Exchange Consideration”), which is equal to the Total Consideration less the Early Participation Premium and so consists of $970 principal amount of CPRC Notes and a cash amount of $1.00.

In addition to the Total Consideration and the Exchange Consideration, as applicable, an amount will be paid, by or on behalf of KCS, equal to any accrued and unpaid interest up to, but not including, the Settlement Date (as defined below) on the Old Notes which are validly tendered (and not validly withdrawn) and accepted in the exchange offers. The CPRC Notes received in exchange for Old Notes will accrue interest from and including the Settlement Date. Subject to the minimum denominations as described in the Registration Statement, the principal amount of each CPRC Note will be rounded down, if necessary, to the nearest whole multiple of $1,000 in excess of $2,000, and Canadian Pacific will pay a cash amount equal to the difference between the principal amount of the CPRC Notes the holder would otherwise be entitled to and the principal amount of the CPRC Note actually issued.

 

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The exchange offers and consent solicitations (together, the “Exchange Offers”) commenced on March 20, 2023 and expire at 5:00 p.m., New York City time, on April 17, 2023 (the “Expiration Date”), unless extended or terminated. The CPRC Notes are expected to be issued promptly on or about the second business day following the Expiration Date (the “Settlement Date”).

Unless otherwise provided with respect to a series of CPRC Notes, the CPRC Notes will be unsubordinated and unsecured obligations of CPRC and will rank equally with all of CPRC’s other unsecured, unsubordinated obligations. The CPRC Notes will be structurally subordinated to all existing and future indebtedness and liabilities of any of CPRC’s corporate and partnership subsidiaries. The guarantee of the CPRC Notes by CPRL will be CPRL’s unsubordinated and unsecured obligation and, unless otherwise provided with respect to a series of CPRC Notes, will rank equally with all of CPRL’s other unsecured, unsubordinated obligations. CPRL’s obligations under the guarantee will be structurally subordinated to all existing and future indebtedness and liabilities of any of CPRL’s subsidiaries.

The Exchange Offers are being made pursuant to the terms and conditions set forth in CPRC’s preliminary prospectus, dated as of March 20, 2023 (the “Preliminary Prospectus”), which forms a part of the Registration Statement. Canadian Pacific reserves the right to terminate, withdraw or amend each exchange offer and each consent solicitation independently of the other exchange offers and consent solicitations at any time and from time to time, as described in the Registration Statement.

The consummation of each Exchange Offer is subject to, and conditional upon, the satisfaction or, where permitted, the waiver, of the conditions described in the Registration Statement. Canadian Pacific may, at its option, waive any such conditions, except the condition that Canadian Pacific, in its reasonable judgment, is permitted to dissolve the voting trust and exercise control of KCS (the “Control Condition”) and the condition that the Registration Statement has been declared effective by the SEC. All conditions to the Exchange Offers, except the Control Condition, must be satisfied or, where permitted, waived, at or by the Expiration Date, unless extended. CPRL’s exercise of control of KCS is not conditioned upon the commencement or completion of the Exchange Offers.

This press release is not an offer to sell or a solicitation of an offer to buy any of the securities described herein and is also not a solicitation of the related consents. The Exchange Offers may be made solely pursuant to the terms and conditions of the Registration Statement and the other related materials. The Registration Statement relating to the CPRC Notes has been filed with the SEC but has not yet become effective. The CPRC Notes may not be sold, nor may offers to buy be accepted, prior to the time the Registration Statement is declared effective by the SEC.

Holders of Old Notes are urged to read the exchange offer materials, when available, including the Registration Statement filed with the SEC, as amended from time to time, the related prospectus, and the other materials related to the proposed exchange offer filed with the SEC, because they contain important information. These and other documents relating to the Exchange Offers, when they are filed with the SEC, may be obtained, free of

 

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charge, on the SEC’s web site at www.sec.gov, or may be obtained, free of charge, from Canadian Pacific by requesting them by mail at Canadian Pacific Railway Limited, 7550 Ogden Dale Road S.E. Calgary, Alberta, T2C 4X9, Attention: Office of the Corporate Secretary or by telephone at +1 (403) 319-7000. A copy of the Preliminary Prospectus for the Exchange Offers also is available, free of charge.

In connection with the launch of the Exchange Offers, Canadian Pacific has filed a current report on Form 8-K with the SEC and applicable securities commissions and regulatory authorities in Canada (filed as an “Other” document on SEDAR) that includes, among other items, unaudited pro forma condensed consolidated financial information of Canadian Pacific Kansas City Limited (currently CPRL) as at and for the year ended December 31, 2022.

The CPRC Notes have not been qualified for sale or exchange in Canada. The distribution of the CPRC Notes in exchange for the Old Notes in Canada is being made only on a private placement basis exempt from the requirement that CPRC prepare and file a prospectus with the applicable securities regulatory authorities in Canada. To validly tender the Old Notes, holders of Old Notes in Canada must complete, sign and submit to the exchange agent a Canadian eligibility statement in the form appended to the Canadian offering memorandum.

Notice to Retail Investors in the EEA. The CPRC Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area (“EEA”). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or (ii) a customer within the meaning of Directive (EU) 2016/97 (as amended), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; or (iii) not a qualified investor as defined in Regulation (EU) 2017/1129 (as amended). Consequently, no key information document required by Regulation (EU) No. 1286/2014 (the “PRIIPs Regulation”) for offering or selling the CPRC Notes or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the CPRC Notes or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPs Regulation.

Notice to Retail Investors in the United Kingdom. The CPRC Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the United Kingdom (“UK”). For these purposes, a retail investor means a person who is one (or more) of the following: a retail client, as defined in point (8) of Article 2 of Regulation (EU) No 2017/565 as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018 (the “EUWA”), (ii) a customer within the meaning of the provisions of the Financial Services and Markets Act 2000 (as amended, the “FSMA”) and any rules or regulations made thereunder to implement Directive (EU) 2016/97, where that customer would not qualify as a professional client, as defined in point (8) of Article 2(1) of Regulation (EU) No 600/2014 as it forms part of domestic law by virtue of the EUWA; or (iii) not a qualified investor as defined in Article 2 of Regulation (EU) 2017/1129 as it forms part of domestic law by virtue of the EUWA. Consequently no key information document required by Regulation (EU) No 1286/2014 as it forms part of domestic law by virtue of the EUWA (the “UK PRIIPs Regulation”) for offering or selling the CPRC Notes or otherwise making them available to retail investors in the UK has been prepared and therefore offering or selling the CPRC Notes or otherwise making them available to any retail investor in the UK may be unlawful under the UK PRIIPs Regulation.

 

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In the UK, the communication of this press release and any other document or materials relating to the issue of the CPRC Notes is not being made, and such documents and/or materials have not been approved, by an authorized person for the purposes of Section 21 of the FSMA. Accordingly, such documents and materials are only being distributed to, and are only directed at: (i) persons who are outside the UK; (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”); or (iii) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “Relevant Persons”). In the UK, this press release is only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire the CPRC Notes to which this press release and any other document or materials relating to the issue of the CPRC Notes relates, will be engaged in only with, Relevant Persons. Any person in the UK that is not a Relevant Person should not act or rely on this prospectus or any of its contents.

The dealer managers for the Exchange Offers relating to the Old Notes are:

 

BofA Securities, Inc. 620 South Tryon Street, 20th Floor Charlotte, NC 28255 Toll Free: (888) 292-0070 Collect: (980) 387-3907 Email: [email protected]   Attention: Liability Management		Citigroup Global Markets Inc. 388 Greenwich Street, Trading 4th Floor New York, NY 10013 Toll Free: (800) 558-3745 Collect: (212) 723-6106 Email: [email protected]   Attention: Liability Management Group
Morgan Stanley & Co. LLC 1585 Broadway, 6th Floor New York, NY 10036 Toll Free: (800) 624-1808 Collect: (212) 761-1057   Email: [email protected]   Attention: Debt Advisory Group		Wells Fargo Securities, LLC 550 South Tryon Street, 5th Floor Charlotte, NC 28202 Toll Free: (866) 309-6316 Collect: (704) 410-4759   Email: [email protected]   Attention: Liability Management Group

The exchange agent and information agent for the Exchange Offers relating to the Old Notes is:

Global Bondholder Services

Corporation

 

By Phone:		By E-Mail:		By Mail or Hand:
Bank and Brokers Call Collect:		[email protected]		65 Broadway—Suite 404
+1 (212) 430-3774				New York, New York
All Others, Please Call Toll- Free:				10006
+1 (866) 470-3900				ATTN: Corporate Actions

 

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Forward Looking Information

This news release contains certain forward looking statements and forward looking information (collectively, “FLI”) to provide CP shareholders and potential investors with information about CP, KCS and their respective subsidiaries and affiliates, which FLI may not be appropriate for other purposes. FLI is typically identified by words such as “anticipate”, “expect”, “project”, “estimate”, “forecast”, “plan”, “intend”, “will”, “target”, “believe”, “likely” and similar words suggesting future outcomes or statements regarding an outlook. All statements other than statements of historical fact may be FLI.

Although we believe that FLI is reasonable based on the information available today and processes used to prepare it, such statements are not guarantees of future performance and you are cautioned against placing undue reliance on FLI. By its nature, FLI involves a variety of assumptions, which are based upon factors that may be difficult to predict and that may involve known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by FLI, including, but not limited to, the following: the realization of anticipated benefits and synergies of the CP-KCS transaction and the timing thereof; the success of integration plans; the focus of management time and attention on the CP-KCS transaction and other disruptions arising from the CP-KCS transaction; changes in business strategy and strategic opportunities; estimated future dividends; financial strength and flexibility; debt and equity market conditions, including the ability to access capital markets on favourable terms or at all; cost of debt and equity capital; the ability of management of CP, its subsidiaries and affiliates to execute key priorities, including those in connection with the CP-KCS transaction; general Canadian, U.S., Mexican and global social, economic, political, credit and business conditions; risks associated with agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures, including competition from other rail carriers, trucking companies and maritime shippers in Canada, the U.S. and Mexico; North American and global economic growth; industry capacity; shifts in market demand; changes in commodity prices and commodity demand; uncertainty surrounding timing and volumes of commodities being shipped; inflation; geopolitical instability; changes in laws, regulations and government policies, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; changes in fuel prices; disruption in fuel supplies; uncertainties of investigations, proceedings or other types of claims and litigation; compliance with environmental regulations; labour disputes; changes in labour costs and labour difficulties; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; sufficiency of budgeted capital expenditures in carrying out business plans; services and infrastructure; the satisfaction by third parties of their obligations; currency and interest rate fluctuations; exchange rates; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; trade restrictions or other changes to international trade arrangements; the effects of current and future multinational trade agreements on the level of trade among Canada, the U.S. and Mexico; climate change and the market and regulatory responses to climate change; ability to achieve commitments and aspirations relating to reducing greenhouse gas emissions and other climate-related objectives; anticipated in-service dates; success of hedging activities; operational performance and reliability; customer and other stakeholder approvals and support; regulatory and legislative decisions and actions; the adverse impact of any termination or revocation by the Mexican government of Kansas City Southern de Mexico, S.A. de C.V.’s Concession; public opinion; various events that could disrupt operations, including severe weather events, such as droughts, floods, avalanches and earthquakes, and cybersecurity attacks, as well as security threats and governmental response to them, and technological changes; acts of terrorism, war or other acts of violence or crime or risk of such activities; insurance coverage limitations; material adverse changes in economic and industry

 

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conditions, including the availability of short and long-term financing; and the pandemic created by the outbreak of COVID-19 and its variants, and resulting effects on economic conditions, the demand environment for logistics requirements and energy prices, restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and financial institutions, and disruptions to global supply chains.

We caution that the foregoing list of factors is not exhaustive and is made as of the date hereof. Additional information about these and other assumptions, risks and uncertainties can be found in reports and filings by CP with Canadian and U.S. securities regulators, including any prospectus, material change report, management information circular or registration statement that have been or will be filed in connection with the transaction. Reference should be made to “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward Looking Statements” in CP’s annual and interim reports on Form 10-K and 10-Q. Due to the interdependencies and correlation of these factors, as well as other factors, the impact of any one assumption, risk or uncertainty on FLI cannot be determined with certainty.

Except to the extent required by law, we assume no obligation to publicly update or revise any FLI, whether as a result of new information, future events or otherwise. All FLI in this news release is expressly qualified in its entirety by these cautionary statements.

About Canadian Pacific

Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts. CP provides North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. CP-IR

Contacts:

Media

[email protected]

Investment Community

Maeghan Albiston

403-319-3591

[email protected]

 

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Exhibit 99.2

The following sets forth portions of the risk factors discussion of Kansas City Southern (“KCS”) and its subsidiaries as described in (i) Part I, Item 1A of KCS’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 3, 2023. Capitalized terms not otherwise defined herein have the meanings given to them in such Annual Report.

In this Exhibit 99.2, the “Company,” “we,” “our” and “us” refer to KCS and its subsidiaries.

Risks Related to KCS’s Operations and Business

Public health threats or outbreaks of communicable diseases could have a material adverse effect on the Company’s operations and financial results.

The Company may face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease, could adversely affect the global economy and the Company’s and its business partners’ ability to conduct business in the U.S. and Mexico for an indefinite period of time. The novel coronavirus and its variants (“COVID-19”) negatively impacted the global economy and disrupted financial markets and international trade, which resulted in increased unemployment levels and significantly negatively impacted global supply chains, the rail transportation industry, and the Company’s business. In both the U.S. and Mexico, local, state, and federal governments implemented various measures in an effort to halt the further spread of COVID-19, including, but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, border closings, limitations on gatherings of people, and extended closures of nonessential businesses.

COVID-19 has caused and may continue to cause decreased customer demand for the Company’s transportation services, increased costs as a result of the Company’s emergency measures, delayed payments from customers, delays and disruptions in supply chain, and other unpredictable events. Other future public health threats or outbreaks of communicable diseases may have these same or similar consequences.

The future impacts of COVID-19, other public health threats or outbreaks of communicable disease depend on the severity, magnitude and duration of the outbreak, as well as the U.S., Mexico, local, state and federal governments and the business community’s response. The ultimate impact of COVID-19, other public health threats or outbreaks of communicable diseases on the Company’s business or operating and financial results are difficult to predict with any degree of certainty.

Capacity constraints could materially adversely affect service and operating efficiency.

KCS may experience capacity constraints due to increased demand for rail services, unavailability of equipment, crew shortages, or extreme weather. Also, due to the interconnectivity between all railroads, especially in the U.S., congestion on other railroads could result in operational inefficiencies for KCS. Traffic congestion experienced in the U.S. or Mexican railroad system may result in overall traffic congestion which would impact the ability to move traffic to and from Mexico, which could result in operational inefficiencies for KCS and could have a material adverse effect on KCS’s operations.

Significant expansions in the capacity of the Company’s network can require a substantial amount of time and investment. Although KCS constantly monitors its network in an effort to optimize its rail services, there can be no assurance that such measures will adequately address capacity constraints on a timely basis.

KCS competes against other railroads and other transportation providers.

The Company’s domestic and international operations are subject to competition from other railroads, as well as from truck carriers, barge lines, and other maritime shippers. Many of KCS’s rail competitors are much larger and have significantly greater financial and other resources than KCS, which may enable rail competitors to reduce rates and make KCS’s freight services less competitive. KCS’s ability to respond to competitive pressures by matching rate reductions and decreasing rates without adversely affecting gross margins and operating results will depend on, among other things, the ability to reduce operating costs. KCS’s failure to respond to competitive pressures, and particularly rate competition, in a timely manner could have a material adverse effect on the Company’s consolidated financial statements.

The railroad industry is dominated by a few large carriers. These larger railroads could attempt to use their size and pricing power to block other railroads’ access to gateways and routing options that are currently and have historically been available. In addition, if there is future consolidation in the railroad industry in the United States or Mexico, there can be no assurance that it will not have a material adverse effect on the Company’s consolidated financial statements.

Trucking, maritime, and barge competitors provide rate and service competition to the railroad industry. These competitors are able to use public rights-of-way, require substantially smaller capital investment and maintenance expenditures than railroads and allow for more frequent and flexible scheduling. Continuing competitive pressures, any reduction in margins due to competitive pressures, developments that increase the quality or decrease the cost of alternative modes of transportation in the locations in which the Company operates, or legislation or regulations that provide motor carriers with additional advantages, such as increased size of vehicles and reduced weight restrictions, could result in downward pressure on freight rates, which in turn could have a material adverse effect on the Company’s consolidated financial statements. KCS may also experience operational or service difficulties related to network capacity, fluctuations in customers’ demand for rail service, or other events that could have a material adverse effect on KCS’s consolidated financial statements.

A key part of KCS’s growth strategy is based upon the conversion of truck traffic to rail. There can be no assurance the Company will succeed in its efforts to convert traffic from truck to rail transport or that the customers already converted will be retained. If the railroad industry in general is unable to preserve its competitive advantages vis-à-vis the trucking industry, revenue growth could be adversely affected. Additionally, revenue growth could be affected by, among other factors, an expansion in the availability, or an improvement in the quality, of the trucking services offered by carriers resulting from regulatory and administrative interpretations and implementation of certain provisions of current or future multinational trade agreements that are favorable to the trucking industry or unfavorable to the rail industry or KCS. Such actions may negatively impact KCS’s ability to grow its existing customer base and capture additional cargo transport market share because of competition from the shipping industry and other railroads.

KCS’s business strategy, operations and growth rely significantly on agreements with other railroads and third parties.

Operation of KCS’s rail network and its plans for growth and expansion rely significantly on agreements with other railroads and third parties, including joint ventures and other strategic alliances, as well as interchange, trackage rights, haulage rights and marketing agreements with other railroads and third parties that enable KCS to exchange traffic and utilize trackage the Company does not own. KCS’s ability to provide comprehensive rail service to its customers depends in large part upon its ability to maintain these agreements with other railroads and third parties, and upon the performance of the obligations under the agreements by the other railroads and third parties. The termination of, or the failure to renew, these agreements could have a material adverse effect on KCS’s consolidated financial statements. KCS is also dependent in part upon the financial strength and efficient performance of other railroads. There can be no assurance that KCS would not be materially adversely affected by operational or financial difficulties of other railroads.

KCS depends on the stability, availability and security of its information technology systems to operate its business. Disruptions in KCS’s information technology (“IT”) systems could materially adversely affect the Company’s business and operating results.

KCS relies on information technology in all aspects of its business, including operating PTC, dispatching trains, and the revenue waybill system. A significant disruption or failure of its IT systems, including its computer hardware, software, communications equipment, wayside equipment or locomotive onboard equipment could result in service interruptions, safety failures, security failures, regulatory compliance failures or other operational difficulties. Moreover, if KCS is not able to acquire new technology or to develop or implement new technology, KCS may suffer a competitive disadvantage, which could have a material adverse effect on KCS’s consolidated financial statements.

The security risks associated with IT systems have increased in recent years because of the increased sophistication, activities and evolving techniques of perpetrators of cyber attacks from state actor or others abroad. A failure in, or breach of, KCS’s IT security systems, or those of its third party service providers, as a result of cyber attacks or unauthorized access to its network could disrupt KCS’s business, result in the disclosure or misuse of confidential or proprietary information, increase its costs and/or cause losses and reputational damage. KCS also confronts the risk that a terrorist or nation-state sponsored group may seek to use its property, including KCS’s information technology systems, to inflict major harm.

Although KCS has a comprehensive cyber security program designed to protect and preserve the integrity of its information technology systems, KCS has experienced and expects to continue to experience cyber attacks of its IT systems or networks. However, none of these cyber attacks to date has had a material impact on KCS’s operations or financial condition. While KCS devotes significant resources to network security, data encryption and other security measures to protect its systems and data, including its own proprietary information and the confidential and personally identifiable information of its customers, employees, and business partners, these measures cannot provide absolute security. The costs to eliminate or alleviate network security problems, bugs, viruses, ransomware, worms, malicious software programs and security vulnerabilities could be significant, and KCS’s efforts to address these problems may not be successful, resulting potentially in the theft, loss, destruction or corruption of information that KCS stores electronically, as well as unexpected interruptions, delays or cessation of service, any of which could cause harm to KCS’s business operations. Moreover, if a computer security breach or cyber attack affects KCS’s systems or results in the unauthorized release of proprietary or personally identifiable information, the Company’s reputation could be materially damaged, customer confidence could be diminished, and KCS’s operations could be impaired.

A significant disruption, failure or unauthorized access of KCS’s information technology system could expose the Company to a risk of legal proceedings and potential liability and have a material adverse effect on KCS’s consolidated financial statements. Further, legislative or regulatory action in these areas is evolving, and KCS may be unable to adapt its IT systems or to manage the IT systems of third parties to accommodate these changes.

Severe weather or other natural disasters could result in significant business interruptions that impact KCS’s railroad operations and expenditures, and KCS’s insurance coverage may not be sufficient to cover damages to KCS or all of KCS’s liabilities.

The Company’s railroad operations may be affected by severe weather or other natural disasters. The Company operates in and along the Gulf of Mexico, and its facilities, equipment, and railroad infrastructure may be materially adversely affected by hurricanes, floods, fires, earthquakes and other extreme weather conditions in the regions where the Company operates, and this could also adversely affect the Company’s shipping, agricultural, chemical and other customers. Severe weather or other natural disasters could result in significant business interruption due to an increase in events such as train derailments or wash outs of track structure that could have a material adverse effect on KCS’s consolidated financial statements. The Company’s revenues can also be adversely affected by severe weather that causes damage and disruptions to the Company’s customers. Insurance to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations and may not be sufficient to cover all of KCS’s damages or damages to others. This insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of services, this could have a material adverse effect on KCS’s consolidated financial statements.

KCS’s business may be adversely affected by changes in general economic or other market conditions.

KCS’s operations may be materially adversely affected by changes in the economic conditions of the industries and geographic areas that produce and consume the freight that KCS transports. The relative strength or weakness of the United States and Mexican economies affects the businesses served by KCS. Prolonged negative changes in domestic and global economic conditions, such as those caused by increasing inflation and inflationary factors, such as interest rates, supply chain constraints, consequences associated with COVID-19, the ongoing invasion of Ukraine by Russia, and employee availability, may affect KCS, as well as the producers and consumers of the commodities that KCS transports and may have a material adverse effect on KCS’s consolidated financial statements.

The transportation industry is highly cyclical, generally tracking the cycles of the world economy. Although transportation markets are affected by general economic conditions, there are numerous specific factors within each particular market that may influence operating results. Some of KCS’s customers do business in industries that are highly cyclical, including the energy, automotive, housing and agriculture industries. Any downturn or change in government policy in these industries could have a material adverse effect on operating results. Also, some of the products transported have had a historical pattern of price cyclicality which has typically been influenced by the general economic environment and by industry capacity and demand. KCS cannot assure that prices and demand for these products will not decline in the future, adversely affecting those industries and, in turn, this could have a material adverse effect on the Company’s consolidated financial statements.

KCS may be subject to various claims and litigation that could have a material adverse effect on KCS’s consolidated financial statements.

The Company is exposed to the potential of various claims and litigation related to labor and employment, personal injury, environmental, climate change, commercial disputes, freight loss and other property damage, and other matters that arise in the normal course of business. The Company may experience material judgments or incur significant costs to defend existing and future lawsuits. Although the Company maintains insurance to cover some of these types of claims and establishes reserves when appropriate, final amounts determined to be due on any outstanding matters may exceed the Company’s insurance coverage or differ materially from the recorded reserves. Additionally, the Company could be impacted by adverse developments not currently reflected in the Company’s reserve estimates. The Company is also subject to job-related personal injury and occupational claims associated with the Federal Employer’s Liability Act (“FELA”), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault worker’s compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. Any material changes to litigation trends or a catastrophic rail accident or series of accidents involving any or all of property damage, personal injury, and environmental liability could have a material adverse effect on KCS’s consolidated financial statements.

A majority of KCS’s employees belong to labor unions. Strikes or work stoppages could adversely affect operations.

The Company is a party to collective bargaining agreements with various labor unions in the United States and Mexico. As of December 31, 2022, approximately 71% and 76% of KCSR and KCSM employees, respectively, were covered by labor contracts subject to collective bargaining. The Company may be subject to, among other things, strikes, work stoppages or work slowdowns as a result of disputes under these collective bargaining agreements and labor contracts or KCS’s potential inability to negotiate acceptable contracts with these unions. In the United States, because such agreements are generally negotiated on an industry-wide basis, determination of the terms and conditions of labor agreements have been and could continue to be beyond KCS’s control. KCS is, therefore, subject to terms and conditions in industry-wide labor agreements that could have a material adverse effect on its consolidated financial statements. In the United States and Mexico, KCS is seeking to modernize its collective bargaining agreements and benefit from technological advancements in the industry. If the unionized workers in the United States or Mexico were to engage in a strike, work stoppage or other slowdown; if other employees were to become unionized or if KCS and its unions were unable to agree on the terms and conditions in future labor agreements, KCS could experience a significant disruption of its operations and higher ongoing labor costs. Although the U.S. Railway Labor Act imposes restrictions on the right of United States railway workers to strike, there is no law in Mexico imposing similar restrictions on the right of railway workers in that country to strike. Additionally, labor law reform adopted by Mexico introduces uncertainty into the existing union structure in Mexico, which may affect the risk of disruption in KCSM’s operations.

KCS is dependent on certain key suppliers of core rail equipment.

KCS relies on a limited number of suppliers of core rail equipment (including locomotives, rolling stock equipment, rail and ties). The capital intensive nature and complexity of such equipment creates high barriers of entry for any potential new suppliers. If any of KCS’s suppliers discontinue production or experience capacity or supply shortages, this could result in increased costs or difficulty in obtaining rail equipment and materials, which could have a material adverse effect on KCS’s consolidated financial statements.

KCS’s business is vulnerable to fluctuations in fuel costs and disruptions in fuel supplies.

KCS incurs substantial fuel costs in its railroad operations and these costs represent a significant portion of its transportation expenses. Significant price increases for fuel may have a material adverse effect on operating results. If KCS is unable to recapture its costs of fuel from its customers, operating results could be materially adversely affected. In addition, a severe disruption of fuel supplies resulting from supply shortages, political unrest, a disruption of oil imports, weather events, war, or otherwise, and the resulting impact on fuel prices could have a material adverse effect on KCS’s consolidated financial statements.

KCS’s business may be affected by future acts of terrorism, war or other acts of violence or crime.

Terrorist attacks and any government response thereto, and war or risk of war could have a material adverse effect on KCS’s consolidated financial statements. KCS is involved in the transport of hazardous materials, which could result in KCS’s rail lines, facilities, or equipment being direct targets or indirect casualties of acts of terror, which could cause significant business interruption and damage to KCS’s property. As a result, acts of terrorism or war or acts of crime or violence could result in increased costs and liabilities and decreased revenues for KCS. In addition, insurance premiums charged for some or all of the applicable coverage currently maintained by KCS could increase dramatically or certain coverage may not be adequate to cover losses or may not be available in the future.

Risks Related to Laws and Regulations

KCS U.S. and Mexico rail common carrier subsidiaries are required by United States and Mexican laws, respectively, to transport hazardous materials, which could expose KCS to significant costs and claims.

Under United States federal statutes and applicable Mexican laws, KCS’s common carrier responsibility requires it to transport hazardous materials. Any rail accident or other incident or accident on KCS’s network, facilities, or at the facilities of KCS’s customers involving the release of hazardous materials, including toxic inhalation hazard materials, could involve significant costs and claims for personal injury, property or natural resource damage, and environmental penalties and remediation in excess of the Company’s insurance coverage for these risks, which could have a material adverse effect on KCS’s consolidated financial statements. KCS is also required to comply with rules and regulations regarding the handling of hazardous materials. Noncompliance with these rules and regulations could subject KCS to significant penalties or other costs and exposure to litigation. Changes to these rules and regulations could also increase operating costs and negatively impact KCS’s consolidated financial statements.

KCS’s business is subject to regulation by federal, state and local legislatures and agencies that could impose significant costs on the Company’s business operations.

KCS rail subsidiaries are subject to legislation and regulation enacted by federal, state and local legislatures and agencies in the U.S. and Mexico with respect to commercial terms with its customers and railroad operations, including with respect to health, safety, labor, environmental and other areas. Government regulation of the railroad industry is a significant determinant of the competitiveness and profitability of railroads. Changes in legislation or regulation could have a negative impact on KCS’s ability to negotiate prices for rail services, could negatively affect competition among rail carriers, or could negatively impact operating practices, resulting in reduced efficiency, increased operating costs or increased capital investment, all of which could result in a material adverse effect on KCS’s consolidated financial statements.

New economic regulation in the U.S. or Mexico in current or future proceedings could change the regulatory framework within which the Company operates which could materially change the Company’s business and have a material adverse effect on the Company’s consolidated financial statements. For example, in Mexico, the Company implemented changes to several processes and systems to ensure compliance with new regulations and enforcement of existing regulations, including labor reform, the hydrocarbons law, inspections related to imports and terminals, value-added tax law changes, and bill of lading requirements (referred to in Mexico as Carta Porte). Ensuring compliance with these requirements resulted in increased operating expense and reduced revenue. See Mexico Regulatory and Legal Updates in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

KCS’s failure or inability to comply with applicable laws and regulations could have a material adverse effect on the Company’s consolidated financial statements and operations, including fines, penalties, or limitations on operating activities until compliance with applicable requirements is achieved. Congress and government agencies may change the legislative or regulatory framework within which the Company operates without providing any recourse for any adverse effects on the Company’s business that occur as a result of such change. Additionally, some of the regulations require KCS to obtain and maintain various licenses, permits and other authorizations. Any failure to obtain or maintain these licenses, permits, and other authorizations could have a material adverse effect on KCS’s business operations.

KCS is subject to environmental regulations, which may impose significant costs on the Company’s business operations.

KCS subsidiaries’ operations are subject to environmental regulation enacted by federal, state and local legislatures in the U.S. and Mexico. Environmental liability under federal and state law in the United States can also extend to previously owned or operated properties, leased properties and properties owned by third parties, as well as to properties currently owned and used by the Company. Environmental liabilities may also arise from claims asserted by adjacent landowners or other third parties. Given the nature of its business, the Company incurs, and expects to continue to incur, environmental compliance costs, including, in particular, costs necessary to maintain compliance with requirements governing chemical and hazardous material shipping operations, refueling operations and repair facilities. KCS presently has environmental investigation and remediation obligations at certain sites, and will likely incur such obligations at additional sites in the future.

The Company’s Mexican subsidiaries’ operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment, including standards for, among other things, water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. Under applicable Mexican law and regulations, administrative and criminal proceedings may be brought and economic sanctions imposed against companies that violate environmental laws, and non-complying facilities may be temporarily or permanently closed. KCSM is also subject to the laws of various jurisdictions with respect to the discharge of materials into the environment and to environmental laws and regulations issued by the governments of each of the Mexican states in which KCSM’s facilities are located. The terms of KCSM’s Concession from the Mexican government also impose environmental compliance obligations on KCSM. Failure to comply with any environmental laws or regulations may result in the termination of KCSM’s Concession or in fines or penalties that may affect profitability.

Liabilities accrued for environmental costs represent the Company’s best estimate of the probable future obligation for the remediation and settlement of matters related to these sites. However, remediation costs may exceed such estimates, due to various factors such as evolving environmental laws and regulations, changes in technology, the extent of other parties’ participation, discovery of unidentified environmental conditions and matters, developments in environmental surveys and studies, and the extent of corrective action that may ultimately be required. The Company cannot predict the effect, if any, that unidentified environmental matters or the adoption of unknown additional or more stringent environmental laws and regulations would have on KCS’s consolidated financial statements.

KCS’s failure or inability to comply with applicable environmental laws and regulations could have a material adverse effect on the Company’s consolidated financial statements and operations, including fines, penalties, or limitations on operating activities until compliance with applicable requirements is achieved. Government entities may change the legislative or regulatory framework within which the Company operates that could result in adverse effects on the Company’s business that occur as a result of such change. Additionally, some of the regulations require KCS to obtain and maintain various licenses, permits and other authorizations. Any failure to obtain or maintain these licenses, permits, and other authorizations could have a material adverse effect on KCS’s business operations.

KCS’s business may be affected by climate change and the market and regulatory responses to climate change.

Climate change could have a material adverse effect on KCS’s operations and KCS’s consolidated financial statements. Restrictions, caps, taxes, or other controls on emissions of greenhouse gases, including diesel exhaust, could significantly impact operations and increase operating costs. Restrictions on emissions could also affect KCS’s customers that use commodities that KCS transports to produce energy, use significant amounts of energy in producing or delivering the commodities KCS transports, or manufacture or produce goods that consume significant amounts of energy or burn fossil fuels, including coal-fired power plants, chemical producers, farmers and food producers, and automakers and other manufacturers. Significant cost increases, government regulation, or changes of consumer preferences for goods or services relating to alternative sources of energy or emissions reductions could materially affect the markets for the commodities KCS transports, which in turn could have a material adverse effect on KCS’s consolidated financial statements. Government incentives encouraging the use of alternative sources of energy could also affect certain customers and their respective markets for certain commodities KCS transports in an unpredictable manner that could alter traffic patterns, including, for example, the impacts of ethanol incentives on farming and ethanol producers. Moreover, increasing frequency, intensity and duration of extreme weather events such as flooding, storms and fires may result in substantial costs, including costs associated with KCS’s response during the event, KCS’s recovery from the event and preventive measures. Any of these factors, individually or in conjunction with one or more of the other aforementioned factors, or other unforeseen impacts of climate change could have a material adverse effect on KCS’s consolidated financial statements.

The Company has established greenhouse gas (GHG) emission reduction targets. KCS’s inability to achieve GHG emissions reduction targets could negatively impact both the Company’s reputation and financial results. KCS has established science-based GHG emissions reduction targets to address a substantial portion of the Company’s Scope 1 and Scope 2 emissions by 2034. The primary risks associated with achieving these commitments include, but are not limited to, not achieving targets set for fuel efficiency improvements, future investments in and the availability of GHG emissions-reduction tools and technologies, KCS’s ability to work with governments and third parties to mitigate the impacts of climate change, domestic and international economic conditions, the effects of competition and

regulation, capital spending, the willingness of customers to acquire the Company’s services, cost of network expansion, maintenance and retrofits. The Company’s targets are subject to the accuracy of the assumptions in the science-based methodology used to calculate these targets. The Company cannot assure that KCS’s plans to reduce GHG emissions will be viable or successful. Inability to meet GHG emissions reduction targets could have a material adverse effect on KCS’s results of operations or financial position.

Risks Related to the Company’s Merger with CP

During the pendency of the Voting Trust, KCS is subject to business uncertainties and contractual restrictions that could materially adversely affect KCS’s operating results, financial position and/or cash flows or result in a loss of employees, suppliers, vendors or customers.

The Merger Agreement generally requires KCS to use commercially reasonable efforts to conduct its business in all material respects in the ordinary course prior to the date CP is permitted to assume control over KCS’s railroad operations following receipt of STB Final Approval and exit from the Voting Trust. In addition, the Merger Agreement includes a variety of specified restrictions on the conduct of KCS’s business during the pendency of the Voting Trust. These contractual restrictions in the Merger Agreement may delay or prevent KCS from making certain changes, or limit its ability to make certain changes during such period, even if KCS’s management believes that making certain changes may be advisable. The pendency of the Voting Trust may also divert management’s attention and KCS’s resources from ongoing business operations.

KCS’s employees, suppliers, vendors or customers may experience uncertainties about the effects of the transaction. It is possible that some employees, suppliers, vendors, or customers and other parties with whom KCS has a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with KCS as a result of the proposed acquisition. Similarly, current and prospective employees may experience uncertainty about their future roles with KCS following completion of the transaction, which may materially and adversely affect KCS’s ability to attract and retain key employees. If any of these effects were to occur, it could materially and adversely impact KCS’s operating results, financial position, and cash flows.

On March 15, 2023, the STB issued a decision approving the CP and KCS joint merger application, subject to certain conditions. The decision authorizes CP to exercise control of KCS as early as April 14, 2023. On March 17, 2023, CP announced that it will exercise the authority granted in the STB decision to dissolve the Voting Trust and exercise control of KCS on April 14, 2023, but there can be no assurance that this will occur. Any delay in completing, or the failure to complete, the combination could divert management’s attention and KCS’s resources from ongoing business operations and materially and adversely impact KCS’s operating results, financial position, and cash flows.

KCS may have difficulty attracting, motivating and retaining executives and other key employees in light of the combination of CP and KCS.

Uncertainty about the effect of the transaction on KCS and CP employees may have an adverse effect on KCS and consequently the combined company. This uncertainty may impair KCS’s ability to attract, retain and motivate key personnel. Employee retention may be particularly challenging during the pendency of the Voting Trust, as employees of KCS may experience uncertainty about their future roles in the combined company. No assurance can be given that the combined company will be able to attract or retain key employees to the same extent that KCS has been able to attract or retain employees in the past.

Significant demands will be placed on KCS as a result of the combination of the two companies.

As a result of the combination of KCS and CP following receipt of STB Final Approval, significant demands will be placed on the managerial, operational and financial personnel and systems of KCS. KCS cannot provide assurance that its systems, procedures and controls will be adequate to support the expansion of operations following and resulting from the combination of the two companies. The future operating results of the combined company will be affected by the ability of its officers and key employees to manage changing business conditions and to implement and expand the Company’s operational and financial controls and reporting systems in response to the transaction.

Risks Related to KCS’s Foreign Operations

KCSM’s Mexican Concession is subject to revocation or termination in certain circumstances, which would prevent KCSM from conducting rail operations under the Concession and would have a material adverse effect on the Company’s consolidated financial statements.

KCSM operates under the Concession granted by the Mexican government until June 2047, which is renewable for an additional period of up to 50 years, subject to certain conditions. The Concession gives KCSM exclusive rights to provide freight transportation services over its rail lines through 2037 (the first 40 years of the 50-year Concession), subject to certain trackage and haulage rights granted to other concessionaires. The SICT and ARTF, which are principally responsible for regulating railroad services in Mexico, have broad powers to monitor KCSM’s compliance with the Concession, and they can require KCSM to supply them with any technical, administrative, operative, and financial information they request. Among other obligations, KCSM must comply with the investment commitments established in its business plan, which forms an integral part of the Concession, and must update the plan every three years. The SICT treats KCSM’s business plans confidentially. The SICT and ARTF also monitor KCSM’s compliance with efficiency and safety standards established in the Concession. The SICT and ARTF review, and may amend, these standards from time to time.

Under the Concession, KCSM has the right to operate its rail lines, but it does not own the land, roadway, or associated structures. If the Mexican government legally terminates the Concession, it would own, control, and manage such public domain assets used in the operation of KCSM’s rail lines. All other property not covered by the Concession, including all locomotives and railcars, otherwise acquired, would remain KCSM’s property. In the event of early termination, or total or partial revocation of the Concession, the Mexican government would have the right to cause the Company to lease all service-related assets to it for a term of at least one year, automatically renewable for additional one-year terms for up to five years. The amount of rent would be determined by experts appointed by KCSM and the Mexican government. The Mexican government must exercise this right within four months after early termination or revocation of the Concession. In addition, the Mexican government would also have a right of first refusal with respect to certain transfers by KCSM of railroad equipment within 90 days after revocation of the Concession.

The Mexican government may also temporarily seize control of KCSM’s rail lines and its assets in the event of a natural disaster, war, significant public disturbance, or imminent danger to the domestic peace or economy. In such a case, the SICT may restrict KCSM’s ability to operate under the Concession in such manner as the SICT deems necessary under the circumstances, but only for the duration of any of the foregoing events. Mexican law requires that the Mexican government pay compensation if it effects a statutory appropriation for reasons of the public interest. With respect to a temporary seizure due to any cause other than international war, the Mexican Regulatory Railroad Service Law and regulations provide that the Mexican government will indemnify an affected concessionaire for an amount equal to damages caused and losses suffered. However, these payments may not be sufficient to compensate KCSM for its losses and may not be made timely.

The SICT may revoke the Concession if KCSM is sanctioned for the same cause at least three times within a period of five years for any of the following: unjustly interrupting the operation of its rail lines or for charging rates higher than those it has registered with the ARTF; unlawfully restricting the ability of other Mexican rail operators to use its rail lines; failing to make payments for damages caused during the performance of services; failing to comply with any term or condition of the Mexican Regulatory Railroad Service Law and regulations or the Concession; failing to make the capital investments required under its three-year business plan filed with the SICT; or failing to maintain an obligations compliance bond and insurance coverage as specified in the Mexican Regulatory Railroad Service Law and regulations. In addition, the Concession would terminate automatically if KCSM changes its nationality or assigns or creates any lien on the Concession, or if there is a change in control of KCSM without the SICT’s approval. The SICT may also terminate the Concession as a result of KCSM’s surrender of its rights under the Concession, for reasons of public interest, or upon KCSM’s liquidation or bankruptcy. If the Concession is terminated or revoked by the SICT for any reason, KCSM would receive no compensation and its interest in its rail lines, and all other fixtures covered by the Concession, as well as all improvements made by it, would revert to the Mexican government. Revocation or termination of the Concession could have a material adverse effect on the Company’s consolidated financial statements.

KCS’s ownership of KCSM and operations in Mexico subject it to Mexican economic and political risks.

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities in general and on KCSM’s operations in particular. For example, KCSM operations could be impacted by the introduction of new legislation or policies to regulate the railway industry, the energy market, or labor and tax conditions. KCS cannot predict the impact that the political landscape, including multiparty rule, social unrest and civil disobedience, will have on the Mexican economy or KCSM’s operations. For example, from time to time, social unrest in Mexico has resulted in service interruptions on KCSM’s right of ways due to blockages from teachers’ protests. KCS’s consolidated financial statements and prospects may be adversely affected by currency fluctuations, inflation, interest rates, regulation, taxation and other political, social and economic developments in or affecting Mexico. For example, the Company has several tax contingencies including, multiple tax periods subject to current examination, audit assessments for the KCSM 2009, 2010, 2013, and 2014 Mexico tax returns, and a receivable for refundable value added tax (“VAT”). Tax contingencies are further discussed with Item 8, Financial Statements and Supplemental Data.

The social and political situation in Mexico could adversely affect the Mexican economy and KCSM’s operations, and changes in laws, public policies and government programs could be enacted, each of which could also have a material adverse effect on KCS’s consolidated financial statements.

The Mexican economy in the past has suffered a balance of payment deficits and shortages in foreign exchange reserves. Although Mexico has imposed foreign exchange controls in the past, there are currently no exchange controls in Mexico. Any restrictive exchange control policy could adversely affect KCS’s ability to obtain U.S. dollars or convert Mexican pesos into dollars for purposes of making payments. This could have a material adverse effect on KCS’s consolidated financial statements.

Downturns in the United States economy or in trade between the United States and Asia or Mexico and fluctuations in the peso-dollar exchange rates could have material adverse effects on KCS’s consolidated financial statements.

The level and timing of KCS’s Mexican business activity are heavily dependent upon the level of United States-Mexican trade and the effects of current or future multinational trade agreements on such trade. The Mexican operations depend on the United States and Mexican markets for the products KCSM transports, the relative position of Mexico and the United States in these markets at any given time, and tariffs or other barriers to trade. Failure to preserve trade provisions conducive to trade, or any other action imposing import duties or border taxes, could negatively impact KCS customers and the volume of rail shipments, and could have a material adverse effect on KCS’s consolidated financial statements.

Downturns in the United States or Mexican economies or in trade between the United States and Mexico could have material adverse effects on KCS’s consolidated financial statements and the Company’s ability to meet debt service obligations. In addition, KCS has invested significant amounts in developing its intermodal operations, including the Port of Lazaro Cardenas, in part to provide Asian importers with an alternative to the west coast ports of the United States, and the level of intermodal traffic depends, to an extent, on the volume of Asian shipments routed through Lazaro Cardenas. Reductions in trading volumes, which may be caused by factors beyond KCS’s control, including increased government regulations regarding the safety and quality of Asian-manufactured products, could have a material adverse effect on KCS’s consolidated financial statements.

Additionally, fluctuations in the peso-dollar exchange rates could lead to shifts in the types and volumes of Mexican imports and exports. Although a decrease in the level of exports of some of the commodities that KCSM transports to the United States may be offset by a subsequent increase in imports of other commodities KCSM hauls into Mexico and vice versa, any offsetting increase might not occur on a timely basis, if at all. Future developments in United States-Mexican trade beyond the Company’s control may result in a reduction of freight volumes or in an unfavorable shift in the mix of products and commodities KCSM carries.

Extreme volatility in the peso-dollar exchange rate may result in disruption of the international foreign exchange markets and may limit the ability to transfer or convert Mexican pesos into U.S. dollars. Although the Mexican government currently does not restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer foreign currencies out of Mexico, the Mexican government could, as in the past, institute restrictive exchange rate policies that could limit the ability to transfer or convert pesos into U.S. dollars or other currencies for the purpose of making timely payments and meeting contractual commitments.

Fluctuations in the peso-dollar exchange rates also have an effect on KCS’s consolidated financial statements. A weakening of the peso against the U.S. dollar would cause reported peso-denominated revenues and expenses to decrease, and could increase reported foreign exchange loss due to the Company’s net monetary assets that are peso-denominated. Exchange rate variations also affect the calculation of taxes under Mexican income tax law, and a strengthening of the peso against the U.S. dollar could cause an increase in the Company’s cash tax obligation and effective income tax rate.

General Risk Factors

The unavailability of qualified personnel could adversely affect KCS’s operations.

Changes in demographics, training requirements and the unavailability of qualified personnel could negatively affect KCS’s ability to meet demand for rail service. Unforeseen increases in demand for rail services may exacerbate such risks, which could have a negative impact on KCS’s operational efficiency and otherwise have a material adverse effect on KCS’s consolidated financial statements.

Weaknesses in the short and long-term debt markets could negatively impact the Company’s access to capital.

Due to the significant capital expenditures required to operate and maintain a safe and efficient railroad, the Company regularly obtains financing through the issuance of long-term debt instruments and commercial paper from time-to-time, as well as credit facilities provided by financial institutions. Significant, sustained instability or disruptions of the capital markets, including credit markets, or the deterioration of the Company’s financial condition due to internal or external factors, could restrict or prohibit access and could increase the cost of financing sources. A significant deterioration of the Company’s financial condition could also reduce credit ratings to below investment grade, limiting its access to external sources of capital, and increasing the costs of short and long-term debt financing, and could have a material adverse effect on KCS’s consolidated financial statements.

Exhibit 99.3

Unaudited Pro Forma Condensed Consolidated Financial Information of

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

As at and for the year ended December 31, 2022

 

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Pro forma condensed consolidated balance sheet (unaudited)

As at December 31, 2022

 

 

 

(in millions of Canadian dollars)		Historical Canadian Pacific Railway Limited				Adjusted Historical Kansas City Southern (Note 3)				Transaction Accounting adjustments				Notes				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	451			$	281			$	—							$	732
Accounts receivable, net			1,016				736				(32	)			5	(g)			1,720
Materials and supplies			284				236				(141	)			5	(a)			379
Other current assets			138				188				—								326
			1,889				1,441				(173	)							3,157
Investment in Kansas City Southern			45,091				—				(45,091	)			4	(a)			—
Investments			223				76				211				4	(b)			510
Properties			22,385				12,680				15,380				4	(c)			50,586
											141				5	(a)
Goodwill and intangible assets			386				—				21,103				4	(d)			21,490
											(18	)			4	(e)
											19				5	(a)
Pension asset			3,101				—				2				5	(a)			3,103
Other assets			420				127				(14	)			4	(f)			638
											116				5	(a)
											(11	)			5	(g)
Operating lease right-of-use assets			—				137				(137	)			5	(a)			—
Total assets		$	73,495			$	14,461			$	(8,472	)						$	79,484
Liabilities and Equity
Current liabilities:
Accounts payable and accrued liabilities		$	1,703			$	860			$	24				5	(c)		$	2,555
											(32	)			5	(g)
Long-term debt maturing within one year			1,510				887				(10	)			4	(g)			2,387
			3,213				1,747				(18	)							4,942
Pension and other benefit liabilities			538				—				25				5	(a)			563
Other long-term liabilities			520				215				(14	)			4	(f)			904
											122				4	(i)
											72				5	(a)
											(11	)			5	(g)
Long-term debt			18,141				4,232				(631	)			4	(g)			21,742
Deferred income taxes			12,197				1,676				(3,049	)			4	(h)			10,824
Long-term operating lease liabilities			—				97				(97	)			5	(a)			—
Total liabilities			34,609				7,967				(3,601	)							38,975
Shareholders’ equity:
Share capital			25,516				—				—								25,516
Additional paid-in capital			78				1,166				(1,166	)			4	(j)			78
Accumulated other comprehensive income (loss)			91				(32	)			(1	)			4	(a)			90
											32				4	(j)
Retained earnings			13,201				4,912				(7,348	)			4	(a)			13,841
											7,964				4	(h)
											48				4	(h)
											(4,912	)			4	(j)
											(24	)			5	(c)
			38,886				6,046				(5,407	)							39,525
Non-controlling interest			—				448				536				4	(k)			984
Total equity			38,886				6,494				(4,871	)							40,509
Total liabilities and shareholders’ equity		$	73,495			$	14,461			$	(8,472	)						$	79,484

See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

 

1

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Pro forma condensed consolidated statement of income (unaudited)

For the year ended December 31, 2022

 

 

 

 

(in millions of Canadian dollars, except per share data)		Historical Canadian Pacific Railway Limited				Adjusted Historical Kansas City Southern (Note 3)				Transaction Accounting Adjustments				Notes				Consolidated
Revenues
Freight		$	8,627			$	—			$	4,314				5	(a)		$	12,945
											4				5	(g)
Non-freight			187				—				89				5	(a)			272
											(4	)			5	(g)
Revenues			—				4,390				(4,390	)			5	(a)			—
Total revenues			8,814				4,390				13								13,217
Operating expenses
Compensation and benefits			1,570				738				22				5	(a)			2,330
Fuel			1,400				602				—								2,002
Materials			260				—				91				5	(a)			351
Materials and other			—				470				(470	)			5	(a)			—
Equipment rents			140				119				5				5	(a)			264
Depreciation and amortization			853				509				297				5	(f)			1,659
Purchased services and other			1,262				295				426				5	(a)			2,015
											32				5	(c)
Merger costs, net			—				61				(61	)			5	(a)			—
Total operating expenses			5,485				2,794				342								8,621
Operating income			3,329				1,596				(329	)							4,596
Less:
Equity earnings of Kansas City Southern			(1,074	)			—				1,074				5	(b)			—
Other expense (income)			17				(6	)			(309	)			5	(a)			(295	)
											3				5	(f)
Other components of net periodic benefit recovery			(411	)			—				(3	)			5	(a)			(414	)
Net interest expense			652				204				(7	)			5	(a)			882
											33				5	(d)
Remeasurement loss of Kansas City Southern			—				—				7,348				4	(a)			7,348
Equity in net earnings of affiliates			—				(12	)			12				5	(a)			—
Gain on settlement of treasury lock agreements			—				(349	)			349				5	(a)			—
Foreign exchange loss			—				44				(44	)			5	(a)			—
Income (loss) before income tax expense (recovery)			4,145				1,715				(8,785	)							(2,925	)
Less:
Current income tax expense			492				380				2				5	(a)			866
											(8	)			5	(e)
Deferred tax expense (recovery)			136				46				(8,105	)			5	(e)			(7,923	)
Income tax expense (recovery)			628				426				(8,111	)							(7,057	)
Net income		$	3,517			$	1,289			$	(674	)						$	4,132
Less: Net income attributable to non-controlling interest			—				2				—								2
Net income attributable to controlling shareholders		$	3,517			$	1,287			$	(674	)						$	4,130
Earnings per share
Basic		$	3.78												6			$	4.44
Diluted		$	3.77												6			$	4.43

See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

 

2

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

1.	Background and basis of presentation:

Background:

On September 15, 2021, Canadian Pacific Railway Limited, a Canadian corporation (“CPRL”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Kansas City Southern, a Delaware corporation (“KCS”).

On December 14, 2021, following approval of the transaction by the shareholders of both CPRL and KCS, receipt of Mexican regulatory approvals, and satisfaction or waiver of customary closing conditions and pursuant to the terms set forth in the Merger Agreement, CPRL completed the indirect acquisition of KCS (the “transaction”). However, pending regulatory approval from the U.S. Surface Transportation Board (the “STB”), the shares of KCS common stock were deposited by a subsidiary of CPRL into a voting trust to ensure that KCS operates independently of CPRL during the regulatory review process. On March 15, 2023, the STB issued a decision approving the CPRL and KCS joint merger application, subject to certain conditions. The decision authorizes CPRL to exercise control of KCS as early as April 14, 2023. On March 17, 2023, CPRL announced that it will exercise the authority granted in the STB decision to dissolve the voting trust and exercise control of KCS (which, together with the transaction, we refer to as the “acquisition”) on April 14, 2023 (or such other date that CPRL exercises control of KCS, the “Control Date”). CPRL continues to record its investment in KCS using the equity method of accounting up to the date effective control of KCS is obtained.

Accordingly, CPRL will consolidate KCS effective the Control Date, accounting for the acquisition as a business combination achieved in stages. In accounting for the business combination, CPRL’s previously held interest in KCS will be remeasured to its Control Date fair value. The identifiable assets acquired, and liabilities and non-controlling interest assumed will be measured at their fair value at the Control Date, with certain exceptions. CPRL will change its name to Canadian Pacific Kansas City Limited (“CPKC”) on or following the Control Date.

CPRL and Canadian Pacific Railway Company (“CPRC”), a consolidated, wholly-owned subsidiary of CPRL/CPKC, on or about the date hereof, intend to launch exchange offers, pursuant to a registration statement on Form F-4 filed with the U.S. Securities and Exchange Commission (“SEC”) (the “exchange offers”). In the exchange offers, CPRC is offering to exchange certain existing series of KCS notes for new CPRC notes on substantially the same terms. The new CPRC notes will be unconditionally guaranteed on an unsecured basis by CPRL. The exchange offers are not expected to have a material impact on CPKC’s consolidated financial statements.

Basis of presentation:

The unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2022 (the “pro forma statement of income”) combine the historical consolidated statements of income of CPRL and KCS, after giving effect to the acquisition and other adjustments described below as if they had occurred on January 1, 2022. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2022 (the “pro forma balance sheet”) combines the historical consolidated balance sheets of CPRL and KCS, after giving effect to the acquisition and other adjustments described below as if they had occurred on December 31, 2022. We refer to these Unaudited Pro Forma Condensed Consolidated Statements of Income and Unaudited Pro Forma Condensed Consolidated Balance Sheet as the “pro forma financial information.”

The pro forma financial information has been prepared using:

 

•

The consolidated financial statements of CPRL as of and for the year ended December 31, 2022 as included in CPRL’s Annual Report on Form 10-K for the year ended December 31, 2022; and

 

•

The consolidated financial statements of KCS as of and for the year ended December 31, 2022 as included as Exhibit 99.1 to CPRL’s Annual Report on Form 10-K for the year ended December 31, 2022.

CPRL will consolidate KCS effective the Control Date and will remeasure the equity method investment to fair value immediately before KCS is consolidated, with the resulting loss recognized as a separate line on the income statement after operating income, as “Remeasurement loss of Kansas City Southern” and recognize the reversal of the deferred tax liability related to the outside basis difference of the investment in KCS in Deferred tax recovery. The pro forma financial information has been prepared on the basis of a business combination achieved in stages.

 

3

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

1.	Background and basis of presentation (continued):

 

The pro forma financial information has been prepared for incorporation by reference into the prospectus, which forms a part of the registration statement on Form F-4 with respect to the exchange offers to be filed on or about the date hereof by CPRL and CPRC (the “Prospectus”).

Adjustments in the pro forma financial information to align KCS’s income statement and balance sheet amounts to CPRL’s presentation, to recognize CPRL’s transaction costs expected to be incurred, and the associated income tax impacts of recognizing these costs are defined here as “other adjustments”. For the purposes of the pro forma financial information, all of the transaction costs incurred and expected to be incurred by CPRL to effect the acquisition have been included as “other adjustments” on the basis that all such costs are incurred to achieve the acquisition.

The pro forma financial information has been prepared for illustrative and informational purposes only, in accordance with Regulation S-X Article 11, to illustrate the estimated effects of the acquisition and certain other related transactions and adjustments described below (collectively, the “adjustments” or “transaction accounting adjustments”).

The pro forma financial information reflects pro forma adjustments CPRL believes are necessary to present fairly CPKC’s pro forma results of income and financial position following the completion of the acquisition as of and for the periods indicated. The pro forma adjustments are based on currently available information and assumptions CPRL believes are, under the circumstances and given the information available at this time, reasonable, directly attributable to the acquisition, and reflective of adjustments necessary to report CPKC’s financial condition and results of operations as if CPRL completed the acquisition. The pro forma financial information does not include adjustments to reflect any potential revenue or operational synergies, cost savings that may be achievable in connection with the acquisition, normalization to eliminate transaction costs recognized by CPRL and KCS for the year ended December 31, 2022, incremental estimated integration costs, or transaction costs associated with the exchange offers. In addition, the pro forma financial information does not reflect any actions that may be required by regulatory or governmental authorities in connection with obtaining regulatory approvals and clearances for the acquisition. In its decision, the STB imposed a number of conditions, including among others (i) commitments by the Company and KCS to keep gateways open on commercially reasonable terms and create no new bottlenecks, (ii) environmental-related conditions, (iii) data reporting and retention requirements, and (iv) a seven year oversight period for the STB to monitor adherence to these conditions. The pro forma financial information presented herein does not give effect to any costs that may be associated with compliance with such conditions.

The pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what CPKC’s consolidated statement of income or consolidated balance sheet actually would have been, had the acquisition and other adjustments been completed as of the dates indicated, or will be, for any future periods. The pro forma financial information does not purport to project the future financial position or operating results of CPKC following the completion of the acquisition. The pro forma financial information should be read in conjunction with the consolidated financial statements of CPRL and KCS referred to above.

 

2.	Principles of consolidation:

The pro forma financial information has been prepared to reflect CPRL’s accounting for the acquisition as a purchase of KCS using the acquisition method pursuant to Accounting Standards Codification 805 “Business Combinations” (“ASC 805”). Under the acquisition method, CPRL’s previously held interests in KCS are remeasured to its Control Date fair value on the Control Date, and the identifiable assets acquired and liabilities and non-controlling interest assumed are measured at their fair value at the Control Date, with certain exceptions. The total consideration is allocated to the tangible and intangible assets acquired, and liabilities and non-controlling interest assumed.

 

4

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

2.	Principles of consolidation (continued):

 

The adjustments to the pro forma financial information are preliminary and have been made solely for the purpose of presenting the pro forma financial information, which are necessary to comply with applicable disclosure and reporting requirements. The purchase price allocation is pending finalization of various estimates, inputs and analyses. Since this pro forma financial information has been prepared based on preliminary estimates of fair values attributable to the purchase of KCS, the actual amounts eventually recorded for the remeasurement of CPRL’s equity investment in KCS and purchase accounting, including the identifiable intangibles and goodwill, may differ materially from the information presented. In addition, as CPRL will not obtain control of KCS until the Control Date, CPRL has been required to estimate the purchase price allocation based on preliminary fair values of the underlying assets acquired and liabilities assumed, and these preliminary values may be revised as a result of additional information obtained following the Control Date regarding, but not limited to, properties, inventories, intangible assets, other assets, contingent liabilities, including legal claims and environmental remediation, tax positions, other liabilities, goodwill, and non-controlling interest. For this pro forma information, the purchase price allocation has been prepared using information available to CPRL under the terms of the STB protective order in force until CPRL obtains control of KCS. Following control, CPRL will have access to all KCS information necessary to finalize the purchase price allocation during a measurement period not to exceed 12 months from the Control Date. Until the purchase price allocation is finalized it is preliminary.

 

3.	Presentation currency:

CPRL’s consolidated financial statements are presented in Canadian dollars, while the consolidated financial statements of KCS are presented in U.S. dollars. For purposes of the pro forma financial information, the balance sheet of KCS has been translated to Canadian dollars at the December 31, 2022 foreign exchange rate of $1.3544 and the statement of income for the year ended December 31, 2022 has been translated to Canadian dollars at the daily exchange rate for revenues and the average monthly exchange rate for all remaining expenses and income.

A summary of the translation of KCS’s financial statements is as follows:

 

Balance Sheet As at December 31, 2022
(in millions)		Historical Kansas City Southern as reported in U.S. dollars				Adjusted Historical Kansas City Southern in Canadian dollars translated at 1.3544
Cash and cash equivalents		$	208			$	281
Accounts receivable, net			543				736
Materials and supplies			174				236
Other current assets			139				188
Investments			56				76
Properties			9,362				12,680
Other assets			94				127
Operating lease right-of-use assets			101				137
Accounts payable and accrued liabilities			636				860
Long-term debt maturing within one year			655				887
Long-term debt			3,124				4,232
Deferred income taxes			1,237				1,676
Other long-term liabilities			159				215
Long-term operating lease liabilities			71				97
Additional paid-in capital			861				1,166
Accumulated other comprehensive loss			(24	)			(32	)
Retained earnings			3,627				4,912
Non-controlling interest			331				448

 

5

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

3.	Presentation currency (continued):

 

 

 

Statement of income Year ended December 31, 2022
(in millions)		Historical Kansas City Southern as reported in U.S. dollars				Translated adjusted Historical Kansas City Southern in Canadian dollars (1)
Revenues		$	3,370			$	4,390
Operating expenses
Compensation and benefits			567				738
Fuel			462				602
Materials and other			360				470
Equipment costs			91				119
Depreciation and amortization			391				509
Purchased services			226				295
Merger costs, net			46				61
Total operating expenses			2,143				2,794
Operating income			1,227				1,596
Less:
Other income, net			(4	)			(6	)
Interest expense			156				204
Equity in net earnings of affiliates			(9	)			(12	)
Gain on settlement of treasury lock agreements			(259	)			(349	)
Foreign exchange loss			33				44
Income before income tax			1,310				1,715
Current income tax expense			291				380
Deferred tax expense			35				46
Net income			984				1,289
Less: Net income attributable to NCI			2				2
Net income attributable to controlling shareholders		$	982			$	1,287

 

(1)	Revenues are translated into Canadian dollars at the Bank of Canada daily exchange rate for 2022 with effective exchange rate of $1.3025 and all remaining expenses and income are translated at the Bank of Canada monthly average exchange rate for 2022 with effective exchange rate of $1.2993.

 

6

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

 

4.	Preliminary purchase price calculation:

The acquisition described in Note 1 “Background and basis of presentation” of this pro forma financial information is anticipated to result in the following estimated purchase price allocation:

 

(in millions of Canadian dollars)
Consideration
(i) Fair value of previously held equity method investment			37,742
(ii) Estimated fair value of non-controlling interest			984
Total		$	38,726

 

(i)	CPRL’s previously held equity interest in KCS remeasured to its estimated Control Date fair value (see Note 4(a)).

(ii)	Refer to 4(k) for a description of the non-controlling interest.

Under the acquisition method, the assets acquired and liabilities and non-controlling interest assumed are measured at their estimated fair value at the date of acquisition with the exception of income tax, operating lease right-of-use assets, operating lease liabilities, and contract liabilities with customers. Purchase price adjustments in relation to the assets acquired and liabilities assumed are summarized below:

 

(in millions of Canadian dollars)		Adjusted Historical Kansas City Southern (Note 3)				Purchase Price Adjustments				Notes				Estimated Purchase Price Allocation
Cash and cash equivalents		$	281			$	—							$	281
Accounts receivable, net			736				—								736
Materials and supplies			236				—								236
Other current assets			188				—								188
Investments			76				211				4	(b)			287
Properties			12,680				15,380				4	(c)			28,060
Goodwill and intangible assets			—				21,103				4	(d)			21,103
Other assets			127				(18	)			4	(e)			109
Operating lease right-of-use asset			137				(14	)			4	(f)			123
Accounts payable and accrued liabilities			(860	)			—								(860	)
Long-term debt maturing within one year			(887	)			10				4	(g)			(877	)
Long-term debt			(4,232	)			631				4	(g)			(3,601	)
Deferred income taxes			(1,676	)			(4,963	)			4	(h)			(6,639	)
Other long-term liabilities			(215	)			(122	)			4	(i)			(337	)
Long-term operating lease liabilities			(97	)			14				4	(f)			(83	)
Total identifiable net assets		$	6,494			$	32,232							$	38,726

The purchase price allocation is preliminary and will change as a result of several factors discussed further in Note 2.

 

7

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

4.	Preliminary purchase price calculation (continued):

 

a.

Consideration

On December 14, 2021, CPRL indirectly acquired KCS for total consideration of approximately C$36 billion (U.S. $28 billion) and all outstanding stock of KCS was deposited into a voting trust. CPRL recorded its investment in KCS using the equity method of accounting while the STB considered CPRL’s application to control KCS while KCS remains in trust.

In connection with the receipt of regulatory approvals and subject to the resolution of the appeal period, on the Control Date, CPRL expects to obtain control of KCS, triggering a business combination. CPRL will remeasure its equity method investment in KCS to the Control Date fair value.

Pro forma adjustments to derecognize CPRL’s previously held equity method investment in KCS of approximately C$45,091 million and remeasure at its Control Date fair value, which is estimated for the purposes of this pro forma financial information to be C$37,742 million, which forms part of the purchase consideration, have been recorded, resulting in an estimated loss of C$7,349 million. The remeasurement loss is primarily related to the deferred tax liability recognized on the outside basis difference of the investment in KCS. The associated accumulated other comprehensive income of C$1 million has been reclassified to Retained earnings and is included in the calculation of loss on remeasurement resulting in a net remeasurement loss of C$7,348 million.

In calculating the estimated remeasurement loss the Company used an exchange rate of $1.3544. The actual exchange rate will fluctuate between December 31, 2022 and the Control Date. Every $0.01 weakening (strengthening) of the Canadian dollar relative to the U.S. dollar will increase (decrease) the remeasurement loss by C$54 million.

 

b.

Investments

The fair value of Investments has been estimated through the use of the net asset value approach and represents a pro forma adjustment of C$211 million related to investments of KCS that are accounted for using either the equity method or the cost method.

 

c.

Properties

The fair value of properties of KCS have been estimated through the use of market approach and cost approach valuation techniques and is reflected by an increase to Properties of C$15,380 million in this pro forma financial information. When CPRL has finalized its determination of the fair value of properties, the value ultimately determined could be materially different, with a corresponding impact on the amount of Goodwill and intangible assets.

 

d.

Goodwill and intangible assets

At the date of preparation of this pro forma financial information, certain fair value adjustments have been made as identified in the table above; however, the fair values of the identifiable assets acquired and liabilities and non-controlling interest assumed of KCS, and the impact of applying acquisition accounting have not been fully determined. After reflecting the fair value adjustments made herein, the excess of the total estimated consideration, over the recognized amounts, has been recognized as goodwill for C$18,495 million. Once detailed valuations and related calculations are completed, a material portion of this amount could be attributable to Properties, Goodwill and intangible assets, Investments, Other assets, Long-term debt, Non-controlling interest, Other long-term liabilities, and the related Deferred income tax balances.

The estimated fair value and useful lives of the intangible assets acquired is as follows:

 

(in millions of Canadian dollars, except years)		Estimated fair value				Estimated useful lives in years
Contracts and customer relationships		$	1,063				9-22
United States trackage rights and KCS brand			1,545				indefinite
		$	2,608

Included in the acquired Properties are concession rights and related assets held under the terms of a concession from the Mexican government, which have estimated fair values totalling C$8,352 million. The concession expires in June 2047 and is renewable under certain conditions for additional periods of up to 50 years.

 

8

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

4.	Preliminary purchase price calculation (continued):

 

e.

Historical goodwill

KCS’s historical goodwill will be eliminated as part of the acquisition.

 

f.

Operating lease right of use assets and liabilities

The value of Operating lease right of use assets and lease liabilities has been reduced by C$14 million to reflect the market incremental borrowing rates at the control date and exclusion of right of use assets and lease liabilities recognition from short-term leases (less than 12 months), in accordance with the requirements of ASC 805.

 

g.

Long-term debt

The change in value of Long-term debt reflects the adjustment to record the debt at its estimated fair value.

 

h.

Deferred income taxes

The pro forma adjustments resulting in a net decrease of C$3,049 million to Deferred income taxes relate to:

 

•

the elimination of the deferred tax liability on the outside basis difference of the investment in KCS of C$7,964 million;

 

•

the recognition of a deferred tax liability of C$4,963 million on the estimated fair value adjustments to the identifiable assets acquired and liabilities assumed; and

 

•

the reduction of deferred tax liability of C$48 million on the revaluation of deferred income tax balances on unitary state apportionment changes.

The tax effect of the pro forma adjustments are calculated based on the statutory rates in effect in the underlying taxation jurisdiction during the period and are between 23% and 30% for CPKC for 2022.

 

i.

Other long-term liabilities

The pro forma adjustment to Other long-term liabilities reflects the adjustment to recognize obligations at estimated acquisition date fair value considering a market participant perspective. When CPRL has finalized its determination of the fair value of the Other long-term liabilities, the value ultimately determined could be materially different, with a corresponding impact on the amount of Goodwill and intangible assets.

 

j.

Historical shareholders’ equity

KCS’s historical shareholders’ equity will be eliminated as part of the acquisition.

 

k.

Fair value of non-controlling interest

The fair value of the interest held by KCS in Meridian Speedway LLC has been estimated using the income approach and is reflected by an increase to Non-controlling interest of C$536 million in this pro forma financial information. When CPRL has finalized its determination of the fair value of the non-controlling interest, the value ultimately determined could be materially different, with a corresponding impact on the amount of Goodwill and intangible assets.

 

5.	Other transaction accounting adjustments:

Explanations of the other transaction accounting adjustments to the pro forma financial information are as follows:

 

a.

Reclassification adjustments

Certain reclassification adjustments have been made to the pro forma financial information to conform to the presentation adopted by CPRL. At this time, CPRL is not aware of any differences in accounting policies that would have a material impact on the pro forma financial information.

 

9

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

5.	Other transaction accounting adjustments (continued):

 

Following the acquisition, CPRL will continue to review KCS’s accounting policies in an effort to determine if there are any additional material differences that require reclassification of KCS’s revenues, expenses, assets or liabilities to conform to CPRL’s accounting policies and classifications. As a result of that review, CPRL may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the pro forma financial information.

The following reclassification adjustments have been made in the pro forma financial information:

Pro forma balance sheet

 

•

CPRL includes right-of-use assets and lease liabilities in Other assets and Other liabilities respectively. KCS’s operating lease right-of-use assets and the related lease liabilities have been reclassified into the financial statement captions used by CPRL.

 

•

CPRL separately presents Pension asset and Pension and other benefit liabilities. A portion of KCS’s other assets and other non-current liabilities and deferred credits has been reclassified to Pension asset and Pension and other benefit liabilities respectively to classify the amounts into the financial statement caption used by CPRL.

 

•

CPRL includes capital inventory in Properties. A portion of KCS’s Materials and supplies has been reclassified into the financial statement caption used by CPRL.

 

•

CPRL separately presents Goodwill & intangible assets and Other assets. A portion of KCS’s other assets has been reclassified in the financial statement caption used by CPRL. The fair value of KCS’s historical goodwill included in acquired other assets has been estimated to be nil and has been adjusted in the preliminary purchase price calculation (see Note 4(e)).

Pro forma statement of income

 

•

KCS’s revenue has been bifurcated into Freight and Non-freight revenue, consistent with CPRL’s financial statement captions.

 

•

CPRL does not present a financial statement caption representing materials and other. Amounts classified in this caption by KCS have been reclassified into Materials and Purchased services and other, consistent with CPRL’s financial statement captions.

 

•

CPRL includes billings to third parties for the recovery of costs incurred for freight car repairs in Compensation and Benefits and Materials. The cost recoveries recognized by KCS in Purchased services have been reclassified into these captions.

 

•

CPRL does not present a financial statement caption representing merger costs. Amounts classified in this captions by KCS have been reclassified into Compensation and benefits and Purchased services and other, consistent with CPRL’s financial statement captions.

 

•

CPRL includes foreign exchange gains and losses in the financial statement caption titled Other expense (income). The foreign exchange gains and losses incurred by KCS have been reclassified into this caption.

 

•

CPRL includes gains and losses on interest rate hedges in the financial statement caption titled Other expense (income). KCS’s gain on interest rate hedge unwind has been reclassified into this caption.

 

•

Additional miscellaneous amounts associated with items of lower value presented by KCS, have been reclassified across Non-freight revenue, Operating expenses, and non-operating income or expense, consistent with CPRL’s financial statement captions.

 

b.

Previously held equity method investment

The pro forma derecognition of CPRL’s previously held equity method investment in KCS is described in Note 4(a).

For the year ended December 31, 2022, C$1,074 million of equity earnings from KCS were recognized in Equity earnings in Kansas City Southern. This has been removed from the pro forma statement of income for the year ended December 31, 2022.

 

10

CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

5.	Other transaction accounting adjustments (continued):

 

c.

Transaction and merger costs

For the year ended December 31, 2022, C$57 million of transaction costs were recognized within Purchased services and other by CPRL and C$61 million were recognized within Merger costs, net by KCS. Additionally, the pro forma balance sheet as at December 31, 2022 has been adjusted to include transaction costs expected to be incurred as at that date of C$32 million by CPRL and the associated current tax recovery on transaction costs of C$8 million as described in Note 5(e) below. The amount of transaction costs expected to be incurred by CPRL of C$32 million to complete the acquisition of KCS have been recognized in the pro forma statement of income for the year ended December 31, 2022 in Purchased services and other. This recognition reflects the acquisition as if it occurred on January 1, 2022.

The estimated transaction costs and related tax deductibility are preliminary and may change. The costs incurred are non-recurring in nature.

 

d.

Debt and finance expenses

The debt of KCS assumed at the Control Date is recorded in the purchase price allocation at fair value. The change in fair value is amortized into Net interest expense over the remaining term of the underlying debt instrument using the effective interest method. As a result, an adjustment of C$33 million has been recorded as an increase to Net interest expense in the pro forma statement of income for the year ended December 31, 2022.

 

e.

Income tax expense (recovery)

The adjustment to Deferred tax expense (recovery) totalling C$8,105 million relates to:

 

•

a deferred tax recovery related to the elimination of the deferred tax liability on the outside basis difference of the investment in KCS of C$7,964 million;

 

•

a deferred tax recovery on CPRL unitary state apportionment changes totalling C$48 million; and

 

•

a deferred tax recovery on amortization of fair value adjustments to investments, properties, intangible assets and debt totalling C$93 million.

The adjustment to Current income tax expense includes a current tax recovery on transaction costs expected to be incurred by CPRL of C$8 million as noted in Note 5(c) above.

In calculating the deferred tax recovery related to the elimination of the deferred tax liability on the outside basis difference of the investment in KCS the Company used an exchange rate of $1.3544. The actual exchange rate will fluctuate between December 31, 2022 and the Control Date. Every $0.01 weakening (strengthening) of the Canadian dollar relative to the U.S. dollar will increase (decrease) the deferred tax recovery by C$59 million.

The tax effect is calculated based on the statutory rates in effect in the underlying taxation jurisdiction during the period, which are estimated between 23% and 30% for CPKC for 2022. The tax treatment and applicable tax rates of the pro forma adjustments are preliminary and may change.

 

f.

Depreciation and amortization expense

The excess of the total purchase consideration over the recognized amounts of net assets is represented by goodwill in Goodwill and intangible assets in the pro forma balance sheet as noted in 4(d) above. An adjustment to Depreciation and amortization in the pro forma statement of income for the year ended December 31, 2022 of C$297 million has been recorded to reflect incremental depreciation and amortization in relation to fair value adjustments to properties and intangible assets as described in Note 4 above. In addition, C$3 million has been recorded in Other expense (income) to reflect incremental amortization in relation to fair value adjustments to KCS’s investments.

For every C$1 billion recorded as depreciable and amortizable assets, CPRL’s annual depreciation and amortization expense would increase by C$30 million, assuming a 3% depreciation and amortization rate. The depreciation and amortization rate of 3% approximates CPRL’s and KCS’s estimated annual rates of depreciation and amortization. (See the section entitled “Forward-Looking Information” in the Current Report on Form 8-K in which this pro forma financial information has been filed)

 

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CANADIAN PACIFIC KANSAS CITY LIMITED

(currently Canadian Pacific Railway Limited)

Notes to Pro Forma Condensed Consolidated Financial Information (unaudited)

As at and for the year ended December 31, 2022

 

 

5.	Other transaction accounting adjustments (continued):

 

 

g.

Intercompany transactions and balances

Intercompany balances and transactions between CPRL and KCS have been eliminated at the date and for the period of this pro forma financial information.

 

6.	Pro forma earnings per share:

No additional shares of CPRL were issued to effect the transactions reflected in the pro forma financial information, and therefore the number of weighted average shares outstanding in the calculation of Earnings per share, both basic and diluted, is unchanged.

 

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