Leases

9 Months Ended

Sep. 30, 2019

The Company has leases for rolling stock, buildings, vehicles, railway equipment, and roadway machines. CP has entered into rolling stock leases that are fully variable or contain both fixed and variable components. Variable components are dependent on the hours and miles that the underlying equipment has been used. Fixed term, short-term, and variable operating lease costs are recorded in Equipment rents and Purchased services and other on the Company's Interim Consolidated Income Statements. Components of finance lease costs are recorded in Depreciation and amortization and Net interest expense on the Company's Interim Consolidated Income Statements.

The Company determines lease existence and classification at the lease inception date. Leases are identified when an agreement conveys the right to control identified property for a period of time in exchange for consideration. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments include fixed and variable payments that are based on an index or a rate. If the Company's leases do not provide a readily determinable implicit interest rate, the Company uses internal incremental secured borrowing rates for comparable tenor in the same currency at the commencement date in determining the present value

of lease payments. Operating and finance lease ROU assets also include lease prepayments and initial direct costs, but are reduced by lease incentives. The lease term may include periods associated with options to extend or exclude periods associated with options to terminate the lease when it is reasonably certain that the Company will exercise these options. The Company’s leases have remaining terms from one to 12 years, some of which include options to extend for up to an additional 10 years and some of which include options to terminate within one year.

The Company has short-term operating leases with terms of 12 months or less, some of which include options to purchase that the Company is not reasonably certain to exercise. The Company has elected to apply the recognition exemption and, as such, accounts for leases with a term of 12 months or less off-balance sheet. Therefore, lease payments on these short-term operating leases are not included in operating lease ROU assets and liabilities, but are recognized as an expense in the Company's Consolidated Statements of Income on a straight-line basis over the term of the lease. Further, the Company has elected to combine lease and non-lease components for all leases, except for leases of roadway machines.

Residual value guarantees are provided on certain rolling stock and vehicle operating leases. Cumulatively, these guarantees are limited to $2 million and are not included in lease liabilities as it is not currently probable that any amounts will be owed under these residual value guarantees.

The components of lease expense are as follows:



	For the three months ended September 30			For the nine months ended September 30
(in millions of Canadian dollars)	2019			2019
Operating lease cost	$	22		$	67
Short-term lease cost	1			3
Variable lease cost	3			9
Sublease income	(1		)	(2		)

Finance Lease Cost
Amortization of right-of use-assets	2			7
Interest on lease liabilities	3			8
Total lease costs	$	30		$	92

Supplemental balance sheet information related to leases is as follows:



		As at September 30
(in millions of Canadian dollars)	Classification	2019
Assets
Operating	Other assets	$	376
Finance	Properties, net book value	179

Liabilities
Current
Operating	Accounts payable and accrued liabilities	73
Finance	Long-term debt maturing within one year	7
Long-term
Operating	Other long-term liabilities	297
Finance	Long-term debt	148

The following table provides the Company's weighted average remaining lease terms and discount rates:



	As at September 30
(in millions of Canadian dollars)	2019
Weighted Average Remaining Lease Term
Operating leases	7 years
Finance leases	4 years

Weighted Average Discount Rate
Operating leases	3.46	%
Finance leases	7.05	%

Supplemental information related to leases is as follows:



	For the three months ended September 30		For the nine months ended September 30
(in millions of Canadian dollars)	2019		2019
Cash paid for amounts included in measurement of lease liabilities
Operating cash outflows from operating leases	$	20	$	66
Operating cash outflows from finance leases	5		10
Financing cash outflows from finance leases	2		4

Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	8	$	31
Finance leases	—		4

Maturities of lease liabilities are as follows:



	As at September 30, 2019
(in millions of Canadian dollars)	Finance Leases		Operating Leases
2019	$	3	$	28
2020	11		69
2021	10		54
2022	110		52
2023	9		40
Thereafter	29		178
Total lease payments	$	172	$	421
Less: Imputed interest	17		51
Present value of lease payments	$	155	$	370