~~Termination and change in control~~

~~Termination of employment~~

~~We have policies to cover different kinds of termination of employment.~~

~~Mr. Creel is covered under the terms of the new employment agreement effective January 31, 2017 that includesnon-competition,non-solicitation~~ ~~and confidentiality restrictions. Mr. Ellis has an agreement for termination without cause which also includesnon-competition,non-solicitation~~ ~~and confidentiality restrictions. Mr. Velani, Mr. Johnson and Mr. Pitz are subject to the same terms as all other employees for voluntary termination, retirement and termination for cause.~~


•	Total revenues– CP’s Total revenues increased by 7% to $7,792 million in 2019 from $7,316 million in 2018, driven primarily by higher freight rates.

•

Operating performance – CP's average train speed increased by 3% to 22.2 miles per hour and average dwell time decreased by 6% to 6.4 hours in 2019 primarily due to the completion of network infrastructure projects which improved network fluidity. Average train weight remained relatively unchanged at 9,129 tons and average train length increased by 1% to 7,388 feet due to improvements in operating plan efficiency, in each case compared to 2018. These metrics are discussed further in Performance Indicators of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following table compares 2019 outlook to actual results:



	RTM growth	~~Resignation~~ Adjusted diluted EPS⁽¹⁾	Capital expenditures
Outlook	Mid-single digits Revised at the end of the third quarter to low-single digits	Double-digit Adjusted diluted EPS growth from full-year 2018 Adjusted diluted EPS of $14.51	Approximately $1.60 billion
Actual outcomes	Revenue ton-miles ("RTMs") increased by 171 million, or 0.1%	Adjusted diluted EPS growth of 13% to $16.44	$1.65 billion

⁽¹⁾ Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As described in the 2020 Outlook section below, CP had not calculated an outlook for Diluted EPS in 2019.

The update in RTM volume expectations was due to delays in the Canadian grain harvest and export potash volumes, as well as general macroeconomic softness. During the fourth quarter of 2019, CP's volumes were lower primarily due to decreased shipments of export potash, Coal and Metals, minerals and consumer products. This decrease was partially offset by increased volumes of crude, and Intermodal.

2020 Outlook

With a 2020 plan that encompasses profitable sustainable growth, CP expects RTM growth to be in the mid-single digit and Adjusted diluted EPS growth to be in the high single-digit to low double-digits. CP’s expectations for Adjusted diluted EPS growth in 2020 are based on Adjusted diluted EPS of $16.44 in 2019. For the purposes of this outlook, CP assumes an effective tax rate of 25 percent. CP estimates other components of net periodic benefit recovery to decrease by approximately $40 million versus 2019. As CP continues to invest in service, productivity and safety, the Company plans to invest approximately $1.6 billion in capital programs in 2020. Capital programs are defined and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adjusted diluted EPS is defined and discussed further in Non-GAAP Measures and in Forward-Looking Statements of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although CP has provided a forward-looking Non-GAAP measure (Adjusted diluted EPS), management is unable to reconcile, without unreasonable efforts, the forward-looking Adjusted diluted EPS to the most comparable GAAP measure, due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In past years, CP has recognized significant asset impairment charges, management transition costs related to senior executives and discrete tax items. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the U.S.-to-Canadian dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted diluted EPS. In particular, CP excludes the foreign exchange ("FX") impact of translating the Company’s debt and lease liabilities, the impact from changes in income tax rates and a provision for uncertain tax item from Adjusted diluted EPS. Please see Forward-Looking Statements of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

CP 2019 ANNUAL REPORT/ 34

Performance Indicators

The following table lists the key measures of the Company’s operating performance:



				% Change
For the year ended December 31	2019	2018⁽¹⁾	2017⁽¹⁾	2019 vs. 2018		2018 vs. 2017
Operations Performance
Gross ton-miles (“GTMs”) (millions)	280,724	275,362	252,195	2		9
Train miles (thousands)	32,924	32,312	30,632	2		5
Average train weight – excluding local traffic (tons)	9,129	9,100	8,806	—		3
Average train length – excluding local traffic (feet)	7,388	7,313	7,214	1		1
Average terminal dwell (hours)	6.4	6.8	6.6	(6	)	3
Average train speed (miles per hour, or "mph")	22.2	21.5	22.6	3		(5	)
Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs)	0.955	0.953	0.980	—		(3	)
Total employees (average)	13,103	12,756	12,083	3		6
Total employees (end of period)	12,694	12,840	12,215	(1	)	5
Workforce (end of period)	12,732	12,866	12,294	(1	)	5
Safety Indicators
FRA personal injuries per 200,000 employee-hours	1.42	1.48	1.65	(4	)	(10	)
FRA train accidents per million train-miles	1.06	1.10	0.99	(4	)	11

⁽¹⁾ Certain figures have been updated to reflect new information or have been revised to conform with current presentation.

Operations Performance

These key measures of operating performance reflect how effective CP's management is at controlling costs and executing the Company's operating plan and strategy. CP continues to drive further productivity improvements in its operations, allowing the Company to deliver superior service and grow its business at low incremental cost.

A GTM is defined as the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs for 2019 were 280,724 million, a 2% increase compared with 275,362 million in 2018. This increase was primarily driven by increased volumes of Energy, chemicals and plastics and Intermodal. This increase was partially offset by decreased volumes of Potash, frac sand and Coal.

GTMs in 2018 were 275,362 million, a 9% increase compared with 252,195 million in 2017. This increase was primarily driven by increased volumes of Energy, chemicals and plastics, Potash, and Intermodal, partially offset by decreased shipments of U.S. grain.

Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles for 2019 were 32,924 thousands, an increase of 2% compared with 32,312 thousands in 2018. This reflects the impact of higher GTMs in 2019.

Train miles in 2018 were 32,312, an increase of 5% compared with 30,632 thousands in 2017. This reflects the impact of higher volumes partially offset by continuous improvements in train weights as evident in the relative comparison to GTMs, which grew by 9% in 2018.

Average train weight is defined as the average gross weight of CP trains, both loaded and empty. This excludes trains in short-haul service, work trains used to move CP’s track equipment and materials, and the haulage of other railways’ trains on CP’s network. Average train weight of 9,129 tons in 2019 increased by 29 tons compared with 9,100 tons in 2018. This slight increase was a result of improvements in operating plan efficiency. This increase was partially offset by the implementation of CP's winter contingency plan in the first quarter of 2019 resulting in shorter and lighter trains within the operating plan.

Average train weight of 9,100 tons in 2018 increased by 294 tons, or 3%, from 8,806 tons in 2017. This increase was due to continuous improvements in operating plan efficiency, as well as higher volumes of heavier commodities, such as crude and Potash, compared to the same period in 2017.

Average train length is defined as the average total length of CP trains, both loaded and empty. This includes all cars and locomotives on the train and is calculated as the sum of each car or locomotive's length multiplied by the distance travelled, divided by train miles. Local trains are excluded from this measure.

35 /SERVICE EXCELLENCE

Average train length of 7,388 feet in 2019 increased by 75 feet, or 1%, compared with 7,313 feet in 2018. This was a result of improvements in operating plan efficiency and increased Intermodal volumes which move on longer trains. This increase was partially offset by the implementation of CP's winter contingency plan in the first quarter of 2019 resulting in shorter and lighter trains within the operating plan.

Average train length of 7,313 feet in 2018 increased by 99 feet, or 1%, from 7,214 feet in 2017. This was a result of improvements in operating plan efficiency and increased Intermodal and Potash volumes, which move in longer trains.

Average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving at the terminal, a customer releasing the car to the Company, or a car arriving at interchange from another railway. The timing ends when the train leaves, a customer receives the car from CP, or the freight car is transferred to another railway. Freight cars are excluded if they are being stored at the terminal or used in track repairs. Average terminal dwell of 6.4 hours in 2019 decreased by 6% from 6.8 hours in 2018. This favourable decrease was due to improved network fluidity.

Average terminal dwell of 6.8 hours in 2018 increased by 3% from 6.6 hours in 2017. This unfavourable increase was primarily due to:

network disruptions from labour negotiations in the second quarter of 2018;

harsher weather conditions and increased network disruptions in the first quarter of 2018; and

higher volumes in the second half of the year and increased delays from accelerated track and roadway capital programs in the third quarter of 2018.

Average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It is calculated by dividing the total train miles travelled by the total train hours operated. This calculation does not include delay time related to customers or foreign railways and excludes the time and distance travelled by: i) trains used in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing track. Average train speed was 22.2 mph in 2019, an increase of 3%, from 21.5 mph in 2018. This increase in speed was due to the completion of network infrastructure projects, partially offset by the impact of harsh winter operating conditions and network disruptions in the first quarter of 2019.

Average train speed in 2018 was 21.5 mph, a decrease of 5%, from 22.6 mph in 2017. This decrease was primarily due to:

network disruptions from labour negotiations in the second quarter of 2018;

harsher weather conditions and increased network disruptions in the first quarter of 2018; and

higher volumes and increased delays from accelerated track and roadway capital programs in the third quarter of 2018.

This decrease was partially offset by the completion of roadway capital programs, resulting in improved network fluidity in the fourth quarter of 2018.

Fuel efficiencyis defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs.Fuel consumed includes gallons used in freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. Fuel efficiency for 2019 of 0.955 U.S. gallons/1,000 GTMs was flat compared to 2018, and improved by 3% in 2018 compared to 2017. The improvement in fuel efficiency in 2018 compared to 2017 was primarily due to improved productivity from running longer trains.

Total Employees and Workforce

Anemployeeis defined by the Company as an individual currently engaged in full-time, part-time or seasonal employment with CP. The average number of total employees for 2019 increased by 347 compared with 2018. This increase was primarily due to growth in workload as measured in GTMs. The total number of employees as at December 31, 2019 was 12,694, a decrease of 146, or 1%, compared to 12,840 as at December 31, 2018, due to more efficient resource planning and reduced workload in the fourth quarter, partially offset by the addition of CMQ Canada employees.

The average number of total employees for 2018 increased by 673, compared to 2017. This increase was primarily due to growth in volumes. The total number of employees as at December 31, 2018 was 12,840, an increase of 625, or 5%, compared to 12,215 as at December 31, 2017, which was in line with volume growth and volume growth expectations.

Workforceis defined as total employees plus contractors and consultants. The total workforce as at December 31, 2019 was 12,732, a decrease of 134, or 1%, compared to 12,866 as at December 31, 2018, due to more efficient resource planning.

The workforce as at December 31, 2018 was 12,866, an increase of 572, or 5%, compared to 12,294 as at December 31, 2017, which was in line with volume growth and volume growth expectations.

Safety Indicators

Safety is a key priority and core strategy for CP’s management, employees and Board of Directors. The Company’s two main safety indicators – personal injuries and train accidents – follow strict U.S. Federal Railroad Administration ("FRA") reporting guidelines.

The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties or obtain medical treatment

CP 2019 ANNUAL REPORT/ 36

beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 1.42 in 2019, compared with 1.48 in 2018 and 1.65 in 2017.

TheFRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold of U.S. $10,700 in damage. The FRA train accidents per million train-miles frequency for CP was 1.06 in 2019 , compared with 1.10 in 2018 and 0.99 in 2017.

Results of Operations

Income

* Adjusted operating income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating income was $3,124 million in 2019, an increase of $293 million, or 10%, from $2,831 million in 2018. This increase was primarily due to:

higher freight rates;

the efficiencies generated from improved operating performance and asset utilization;


•	the favourable impact of change in FX of $39 million; and


•	the favourable impact from changes in fuel prices of $38 million.

This increase was partially offset by:


•	increased operating expense associated with higher casualty costs in 2019 of $76 million (excluding FX);


•	higher stock-based compensation of $58 million;

cost inflation; and

increased weather related costs as a result of harsh winter operating conditions in the first quarter of 2019.

There were no adjustments to operating income in 2019 and 2018.

Operating income was $2,831 million in 2018, an increase of $312 million, or 12%, from $2,519 million in 2017. This increase was primarily due to higher volumes and the efficiencies generated from improved operating performance and asset utilization.

This increase was partially offset by:

cost inflation;


•	management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017; and

higher depreciation and amortization driven primarily from a higher asset base as a result of capital program spending in 2018.

Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $2,831 million in 2018, an increase of $363 million, or 15%, from $2,468 million in 2017. This increase was primarily due to the same factors discussed above for the increase in Operating income, except that Adjusted operating income in 2017 excludes the management transition recovery of $51 million.

37 /SERVICE EXCELLENCE

*Adjusted income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net income was $2,440 million in 2019, an increase of $489 million, or 25%, from $1,951 million in 2018. This increase was primarily due to:

higher Operating income;

FX translation gains on debt and lease liabilities in 2019 compared to FX translation losses on debt in 2018; and

a higher income tax recovery associated with changes in tax rates.

This increase was partially offset by higher income taxes due to higher taxable income and a provision for an uncertain tax item of a prior period.

Net income was $1,951 million in 2018, a decrease of $454 million, or 19%, from $2,405 million in 2017. This decrease was primarily due to a lower income tax recovery associated with changes in tax rates and FX translation losses on debt in 2018 compared to gains in 2017. This decrease was partially offset by higher Operating income and higher Other components of net periodic benefit recovery.

Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $2,290 million in 2019, an increase of $210 million, or 10%, from $2,080 million in 2018. This increase was due to the same factors discussed above for the increase in Net income, except that Adjusted income excludes FX translation gains and losses on debt and lease liabilities, income tax recoveries associated with changes in tax rates, and a provision for an uncertain tax item of a prior period.

Adjusted income was $2,080 million in 2018, an increase of $414 million, or 25%, from $1,666 million in 2017. This increase was primarily due to higher Adjusted operating income and higher Other components of net periodic benefit recovery. This increase was partially offset by higher income taxes due to higher taxable income.

CP 2019 ANNUAL REPORT/ 38

Diluted Earnings per Share

*Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Diluted EPS was $17.52 in 2019, an increase of $3.91, or 29%, from $13.61 in 2018. This increase was due to higher Net income and lower average number of outstanding Common Shares due to the Company's share repurchase program.

Diluted EPS was $13.61 in 2018, a decrease of $2.83, or 17%, from $16.44 in 2017. This decrease was due to lower Net income, partially offset by lower average number of outstanding Common Shares due to the Company's share repurchase program.

Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $16.44 in 2019, an increase of $1.93, or 13%, from $14.51 in 2018. Adjusted diluted EPS was $14.51 in 2018, an increase of $3.12, or 27%, from $11.39 in 2017. These increases were due to higher Adjusted income and lower average number of outstanding Common Shares due to the Company's share repurchase program.

Operating Ratio

* Adjusted operating ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

39 /SERVICE EXCELLENCE

The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s Operating ratio was 59.9% in 2019, a 140 basis point improvement from 61.3% in 2018. This improvement was primarily due to:

higher freight rates;

the favourable impact of changes in fuel prices; and

the efficiencies generated from improved operating performance and asset utilization.

This improvement was partially offset by:

increased operating expense associated with higher casualty costs in 2019;

higher stock-based compensation; and

cost inflation.

There were no adjustments to the operating ratio in 2019 and 2018.

The Company’s Operating ratio was 61.3% in 2018, a 30 basis point improvement from 61.6% in 2017. This improvement was primarily due to higher volumes and the efficiencies generated from improved operating performance and asset utilization.

This improvement was partially offset by:

the unfavourable impact of changes in fuel prices;

cost inflation; and


•	management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017.

Adjusted operating ratio was 61.3% in 2018, a 110 basis point improvement from 62.4% in 2017. This improvement reflects the same factors discussed above for the improvement in Operating ratio, except that Adjusted operating ratio in 2017 excludes the $51 million management transition recovery.

Return on Invested Capital

Return on invested capital ("ROIC") is a measure of how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions made by management, and is an important performance criteria in determining certain elements of the Company's long-term incentive plan.

ROIC was 17.9% in 2019, a 260 basis point increase compared to 15.3% in 2018, primarily due to higher Operating income and FX translation gains on debt and lease liabilities in 2019 compared to FX translation losses on debt in 2018.

This increase was partially offset by a higher average invested capital base due to higher Retained earnings from Net income, partially offset by lower Common Shares due to the Company's share repurchase program.

ROIC was 15.3% in 2018, a 520 basis point decrease compared to 20.5% in 2017 primarily due to:

a higher average invested capital base due to higher Retained earnings from Net income;

higher Income tax expense due to a lower income tax recovery associated with changes in tax rates; and

the unfavourable impact of FX translation losses on debt in 2018 compared to FX translation gains in 2017.

This decrease was partially offset by higher Operating income and higher Other components of net periodic benefit recoveries.

Adjusted ROIC was 16.9% in 2019, a 70 basis point increase compared to 16.2% in 2018, primarily due to higher Operating income. This increase was partially offset by the increase in adjusted average invested capital primarily due to higher Adjusted income, partially offset by by lower Common Shares due to the Company's share repurchase program.

Adjusted ROIC was 16.2% in 2018, a 150 basis point increase compared to 14.7% in 2017 due to higher Adjusted operating income and higher Other components of net periodic benefit recoveries. This increase was partially offset by the increase in adjusted average invested capital primarily due to higher Adjusted income, partially offset by by lower Common Shares due to the Company's share repurchase program.

ROIC and Adjusted ROIC are defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Impact of Foreign Exchange on Earnings

Fluctuations in FX affect the Company’s results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses increase (decrease) when the Canadian dollar weakens (strengthens) in relation to the U.S. dollar. In 2019, the impact of a stronger U.S. dollar resulted in an increase in total revenues of $87 million, an increase in total operating expenses of $48 million and an increase in interest

CP 2019 ANNUAL REPORT/ 40

expense of $10 million. In 2018, the impact of a weaker U.S. dollar resulted in a decrease in total revenues of $8 million, a decrease in total operating expenses of $4 million and no change to interest expense.

On February 14, 2020, noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was U.S. $1.00 = $1.33 Canadian dollars.

The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and the U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, the high and low exchange rates and period end exchange rates for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board.



Average exchange rates (Canadian/U.S. dollar)	2019		2018		2017		2016		2015
For the year ended – December 31	$	1.33	$	1.30	$	1.30	$	1.33	$	1.28
For the three months ended – December 31	$	1.32	$	1.32	$	1.27	$	1.33	$	1.34



Exchange rates (Canadian/U.S. dollar)	2019		2018		2017		2016		2015
Beginning of year – January 1	$	1.36	$	1.25	$	1.34	$	1.38	$	1.16
Beginning of quarter – April 1	$	1.33	$	1.29	$	1.33	$	1.30	$	1.27
Beginning of quarter – July 1	$	1.31	$	1.32	$	1.30	$	1.29	$	1.25
Beginning of quarter – October 1	$	1.32	$	1.29	$	1.25	$	1.31	$	1.33
End of year – December 31	$	1.30	$	1.36	$	1.25	$	1.34	$	1.38



High/Low exchange rates (Canadian/U.S. dollar)	2019		2018		2017		2016		2015
High	$	1.36	$	1.37	$	1.37	$	1.46	$	1.40
Low	$	1.30	$	1.23	$	1.21	$	1.25	$	1.17

In 2020, CP expects that for every $0.01 the U.S. dollar appreciates (depreciates) relative to the Canadian dollar, it will increase (decrease) revenues by $30 million, operating expenses by $15 million and net interest expense by $3 million on an annualized basis.

Impact of Fuel Price on Earnings

Fluctuations in fuel prices affect the Company’s results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be a timing impact on earnings, as discussed further in Item 1. Business, Operations, Fuel Cost Adjustment Program and Item 1A. Risk Factors, Fuel Cost Volatility.



Average Fuel Price (U.S. dollars per U.S. gallon)	2019		2018		2017⁽¹⁾
For the year ended – December 31	$	2.49	$	2.72	$	2.16
For the three months ended – December 31	$	2.53	$	2.71	$	2.43

⁽¹⁾Average fuel prices for 2017 exclude the effects of an $8 million fuel tax recovery related to prior periods.

The impact of fuel price on earnings includes the impacts of provincial and federal carbon taxes and levies recovered and paid, on revenues and expenses, respectively.

In 2019, the favourable impact of fuel prices on Operating income was $38 million. Lower fuel prices resulted in a decrease in total operating expenses of $77 million. Lower fuel prices, partially offset by the timing of recoveries from CP's fuel cost adjustment program and increased carbon tax recoveries, resulted in a decrease in total revenues of $39 million from 2018. In 2018, the impact of higher fuel prices resulted in an increase in total revenues of $212 million and an increase in total operating expenses of $197 million.

41 /SERVICE EXCELLENCE

Impact of Share Price on Earnings

Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for each quarter and the change in the price of the Common Shares on the TSX and the NYSE for the years ended December 31, 2019, 2018 and 2017:



Toronto Stock Exchange (in Canadian dollars)	2019		2018		2017
Opening Common Share price, as at January 1	$	242.24	$	229.66	$	191.56
Ending Common Share price, as at March 31	$	275.34	$	227.20	$	195.35
Ending Common Share price, as at June 30	$	308.43	$	240.92	$	208.65
Ending Common Share price, as at September 30	$	294.42	$	273.23	$	209.58
Ending Common Share price, as at December 31	$	331.03	$	242.24	$	229.66
Change in Common Share price for the year ended December 31	$	88.79	$	12.58	$	38.10



New York Stock Exchange (in U.S. dollars)	2019		2018			2017
Opening Common Share price, as at January 1	$	177.62	$	182.76		$	142.77
Ending Common Share price, as at March 31	$	206.03	$	176.50		$	146.92
Ending Common Share price, as at June 30	$	235.24	$	183.02		$	160.81
Ending Common Share price, as at September 30	$	222.46	$	211.94		$	168.03
Ending Common Share price, as at December 31	$	254.95	$	177.62		$	182.76
Change in Common Share price for the year ended December 31	$	77.33	$	(5.14	)	$	39.99

In 2019, the impact of the change in Common Share prices resulted in an increase in stock-based compensation expense of $42 million compared to $2 million in 2018, and $18 million in 2017.

The impact of share price on stock-based compensation is discussed further in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Share Price Impact on Stock-Based Compensation.

Operating Revenues



							2019 vs. 2018				2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change		% Change	FX Adjusted % Change⁽²⁾	Total Change			% Change		FX Adjusted % Change⁽²⁾
Freight revenues (in millions)⁽¹⁾	$	7,613	$	7,152	$	6,375	$	461	6	5	$	777		12		12
Non-freight revenues (in millions)	179		164		179		15		9	8	(15		)	(8	)	(8	)
Total revenues (in millions)	$	7,792	$	7,316	$	6,554	$	476	7	5	$	762		12		12
Carloads (in thousands)	2,766.4		2,739.8		2,634.2		26.6		1	N/A	105.6			4		N/A
Revenue ton-miles (in millions)	154,378		154,207		142,540		171		—	N/A	11,667			8		N/A
Freight revenue per carload (in dollars)	$	2,752	$	2,611	$	2,420	$	141	5	4	$	191		8		8
Freight revenue per revenue ton-mile (in cents)	4.93		4.64		4.47		0.29		6	5	0.17			4		4

⁽¹⁾Freight revenues include fuel surcharge revenues of $464 million in 2019, $492 million in 2018 and $242 million in 2017. Fuel surcharge revenues include recoveries of carbon taxes, levies, and obligations under cap-and-trade programs.

⁽²⁾FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company’s revenues are primarily derived from transporting freight. Changes in freight volumes generally contribute to corresponding changes in freight revenues and certain variable expenses, such as fuel, crew costs, and equipment rents. Non-freight revenue is generated from leasing of certain assets; other arrangements, including logistical services and contracts with passenger service operators; and switching fees.

CP 2019 ANNUAL REPORT/ 42

Freight Revenues

Freight revenues were $7,613 million in 2019, an increase of $461 million, or 6%, from $7,152 million in 2018. This increase was primarily due to higher freight revenue per revenue ton-mile and the favourable impact of the change in FX of $86 million. This increase was partially offset by the unfavourable impact of lower fuel surcharge revenue, as a result of lower fuel prices of $39 million.

Freight revenues were $7,152 million in 2018, an increase of $777 million, or 12%, from $6,375 million in 2017. This increase was primarily due to higher volumes, as measured by RTMs, and the favourable impact of higher fuel surcharge revenue, as a result of higher fuel prices of $212 million. This increase was partially offset by lower volumes of U.S. grain, and the unfavourable impact of the change in FX of $8 million.

RTMs

RTMs are defined as the movement of one revenue-producing ton of freight over a distance of one mile. RTMs measure the relative weight and distance of rail freight moved by the Company. RTMs for 2019 were 154,378 million, an increase of 171 million, compared with 154,207 million in 2018. This increase was mainly attributable to increased shipments of Energy, chemicals and plastics and Intermodal, partially offset by decreased shipments of Potash, frac sand and Coal.

RTMs for 2018 were 154,207 million, an increase of 8% compared with 142,540 million in 2017. This increase was mainly attributable to increased shipments of Energy, chemicals and plastics, Potash, and Intermodal, partially offset by decreased shipments of U.S. grain.

Non-freight Revenues

Non-freight revenues were $179 million in 2019, an increase of $15 million, or 9%, from $164 million in 2018. This increase was primarily due to higher switching fees and logistical services revenue.

Non-freight revenues were $164 million in 2018, a decrease of $15 million, or 8%, from $179 million in 2017. This decrease was primarily due to the recovery of prior costs following the expiration of a passenger service contract in 2017 and lower passenger revenues in 2018.

Lines of Business

Grain



							2019 vs. 2018				2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change		% Change	FX Adjusted % Change⁽¹⁾	Total Change			% Change		FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	1,684	$	1,566	$	1,532	$	118	8	6	$	34		2		2
Carloads (in thousands)	431.4		429.4		440.7		2.0		—	N/A	(11.3		)	(3	)	N/A
Revenue ton-miles (in millions)	36,941		36,856		37,377		85		—	N/A	(521		)	(1	)	N/A
Freight revenue per carload (in dollars)	$	3,904	$	3,645	$	3,477	$	259	7	6	$	168		5		5
Freight revenue per revenue ton-mile (in cents)	4.56		4.25		4.10		0.31		7	6	0.15			4		4

⁽¹⁾FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Grain revenue was $1,684 million in 2019, an increase of $118 million, or 8%, from $1,566 million in 2018. This increase was primarily due to increased freight revenue per revenue ton-mile, higher volumes of regulated Canadian grain, and the favourable impact of the change in FX. This increase was partially offset by lower volumes of U.S. grain, primarily corn, to the U.S. Pacific Northwest. Freight revenue per revenue ton-mile increased due to higher freight rates, primarily for regulated Canadian grain.

Grain revenue was $1,566 million in 2018, an increase of $34 million, or 2%, from $1,532 million in 2017. This increase was primarily due to higher freight revenue per revenue ton-mile, higher fuel surcharge as a result of higher fuel prices, and higher volumes of Canadian grain. This increase was partially offset by decreased volumes of U.S. grain, primarily wheat, and soybeans to the Pacific Northwest, and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates, primarily for regulated Canadian grain. RTMs decreased less than carloads due to moving proportionately more Canadian grain, which has a longer length of haul compared to U.S. grain.

43 /SERVICE EXCELLENCE

Coal



							2019 vs. 2018						2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change			% Change		FX Adjusted % Change⁽¹⁾	Total Change			% Change		FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	682	$	673	$	631	$	9		1		1	$	42		7		7
Carloads (in thousands)	304.3		304.3		306.0		—			—		N/A	(1.7		)	(1	)	N/A
Revenue ton-miles (in millions)	21,820		22,443		22,660		(623		)	(3	)	N/A	(217		)	(1	)	N/A
Freight revenue per carload (in dollars)	$	2,241	$	2,211	$	2,061	$	30		1		1	$	150		7		7
Freight revenue per revenue ton-mile (in cents)	3.13		3.00		2.78		0.13			4		4	0.22			8		8

Coal revenue was $682 million in 2019, an increase of $9 million, or 1%, from $673 million in 2018. This increase was primarily due to higher freight revenue per revenue ton-mile. This increase was partially offset by lower volumes of Canadian coal, driven by supply chain challenges at both the mines and the ports. Freight revenue per revenue ton-mile increased due to higher freight rates. RTMs decreased while carloads remained flat due to moving proportionately higher volumes of short haul U.S. coal.

Coal revenue was $673 million in 2018, an increase of $42 million, or 7%, from $631 million in 2017. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices, and higher freight revenue per revenue ton-mile, partially offset by lower volumes of Canadian coal, and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates.

Potash



							2019 vs. 2018							2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change			% Change		FX Adjusted % Change⁽¹⁾		Total Change		% Change	FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	462	$	486	$	411	$	(24	)	(5	)	(6	)	$	75	18	19
Carloads (in thousands)	149.3		158.4		137.4		(9.1		)	(6	)	N/A		21.0		15	N/A
Revenue ton-miles (in millions)	17,297		18,371		15,751		(1,074		)	(6	)	N/A		2,620		17	N/A
Freight revenue per carload (in dollars)	$	3,094	$	3,071	$	2,988	$	23		1		—		$	83	3	3
Freight revenue per revenue ton-mile (in cents)	2.67		2.65		2.61		0.02			1		—		0.04		2	2

Potash revenue was $462 million in 2019, a decrease of $24 million, or 5%, from $486 million in 2018. This decrease was primarily due to lower volumes of domestic potash driven by poor weather affecting the application seasons, and lower volumes of export potash driven by unresolved international contract negotiations. This decrease was partially offset by the favourable impact of the change in FX.

Potash revenue was $486 million in 2018, an increase of $75 million, or 18%, from $411 million in 2017. This increase was primarily due to higher volumes of export potash, as well as higher fuel surcharge revenue as a result of higher fuel prices, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving proportionately more export potash to Vancouver, which has a longer length of haul.

CP 2019 ANNUAL REPORT/ 44

Fertilizers and Sulphur



							2019 vs. 2018						2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change			% Change		FX Adjusted % Change⁽¹⁾	Total Change			% Change		FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	250	$	243	$	241	$	7		3		1	$	2		1		1
Carloads (in thousands)	57.0		58.1		57.7		(1.1		)	(2	)	N/A	0.4			1		N/A
Revenue ton-miles (in millions)	3,846		4,051		3,849		(205		)	(5	)	N/A	202			5		N/A
Freight revenue per carload (in dollars)	$	4,386	$	4,186	$	4,178	$	200		5		3	$	8		—		1
Freight revenue per revenue ton-mile (in cents)	6.50		6.00		6.27		0.50			8		7	(0.27		)	(4	)	(4	)

Fertilizers and sulphur revenue was $250 million in 2019, an increase of $7 million, or 3%, from $243 million in 2018. This increase was primarily due to higher freight revenue per revenue ton-mile, the favourable impact of the change in FX, and higher volumes of wet fertilizer. This increase was partially offset by lower volumes of sulphur and dry fertilizer. Freight revenue per revenue ton-mile increased due to higher freight rates. RTMs decreased more than carloads due to moving proportionately less wet fertilizer to the U.S. Midwest, which has a longer length of haul.

Fertilizers and sulphur revenue was $243 million in 2018, an increase of $2 million, or 1%, from $241 million in 2017. This increase was primarily due to increased volumes of dry fertilizer and sulphur, and higher fuel surcharge revenue as a result of higher fuel prices, partially offset by lower freight revenue per revenue ton-mile, and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile decreased due to moving proportionately less wet fertilizer, which has higher freight rates, and increased volumes of longer haul sulphur from Canada to the U.S.

Forest Products



							2019 vs. 2018				2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change		% Change	FX Adjusted % Change⁽¹⁾	Total Change		% Change	FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	304	$	284	$	265	$	20	7	5	$	19	7	8
Carloads (in thousands)	71.5		68.6		65.8		2.9		4	N/A	2.8		4	N/A
Revenue ton-miles (in millions)	4,974		4,763		4,484		211		4	N/A	279		6	N/A
Freight revenue per carload (in dollars)	$	4,252	$	4,139	$	4,036	$	113	3	1	$	103	3	3
Freight revenue per revenue ton-mile (in cents)	6.11		5.96		5.92		0.15		3	1	0.04		1	1

Forest products revenue was $304 million in 2019, an increase of $20 million, or 7%, from $284 million in 2018. This increase was primarily due to higher volumes of wood pulp, newsprint, and lumber, increased freight revenue per revenue ton-mile, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates.

Forest products revenue was $284 million in 2018, an increase of $19 million, or 7%, from $265 million in 2017. This increase was primarily due to increased volumes of wood pulp and paper products, and higher fuel surcharge revenue as a result of higher fuel prices, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to increased volumes of longer haul wood pulp from eastern Canada to the U.S.

45 /SERVICE EXCELLENCE

Energy, Chemicals and Plastics



							2019 vs. 2018				2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change		% Change	FX Adjusted % Change⁽¹⁾	Total Change		% Change	FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	1,534	$	1,243	$	898	$	291	23	22	$	345	38	39
Carloads (in thousands)	358.1		334.6		269.5		23.5		7	N/A	65.1		24	N/A
Revenue ton-miles (in millions)	29,356		27,830		21,327		1,526		5	N/A	6,503		30	N/A
Freight revenue per carload (in dollars)	$	4,284	$	3,715	$	3,333	$	569	15	14	$	382	11	12
Freight revenue per revenue ton-mile (in cents)	5.23		4.47		4.21		0.76		17	15	0.26		6	6

Energy, chemicals and plastics revenue was $1,534 million in 2019, an increase of $291 million, or 23%, from $1,243 million in 2018. This increase was primarily due to increased freight revenue per revenue ton-mile, higher volumes of crude, liquefied petroleum gas ("LPG"), fuel oil, and other refined products, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased primarily due to liquidated damages, including customer volume commitments, and higher freight rates. Carloads increased more than RTMs due to moving proportionately less long haul crude to Kansas City, Missouri, and proportionately more short haul crude to Chicago, Illinois and Noyes, Minnesota.

Energy, chemicals and plastics revenue was $1,243 million in 2018, an increase of $345 million, or 38%, from $898 million in 2017. This increase was primarily due to increased volumes of crude and LPG, and higher fuel surcharge revenue as a result of higher fuel prices, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving proportionately more crude, which has a longer length of haul.

Metals, Minerals and Consumer Products



							2019 vs. 2018							2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change			% Change		FX Adjusted % Change⁽¹⁾		Total Change			% Change		FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	752	$	797	$	739	$	(45	)	(6	)	(8	)	$	58		8		8
Carloads (in thousands)	234.3		252.2		255.3		(17.9		)	(7	)	N/A		(3.1		)	(1	)	N/A
Revenue ton-miles (in millions)	10,684		11,858		11,468		(1,174		)	(10	)	N/A		390			3		N/A
Freight revenue per carload (in dollars)	$	3,210	$	3,161	$	2,894	$	49		2		—		$	267		9		9
Freight revenue per revenue ton-mile (in cents)	7.04		6.72		6.44		0.32			5		3		0.28			4		4

Metals, minerals and consumer products revenue was $752 million in 2019, a decrease of $45 million, or 6%, from $797 million in 2018. This decrease was primarily due to lower volumes of frac sand and steel. This decrease was partially offset by increased freight revenue per revenue ton-mile, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates. Carloads decreased less than RTMs due to increased volumes of short haul metallic ore.

Metals, minerals and consumer products revenue was $797 million in 2018, an increase of $58 million, or 8%, from $739 million in 2017. This increase was primarily due to higher freight revenue per revenue ton-mile, higher fuel surcharge revenue as a result of higher fuel prices, and increased volumes of steel and aggregate products. The increase was partially offset by the unfavourable impact of the change in FX. RTMs increased while carloads decreased due to a decrease in volumes of short haul metallic ore traffic. Freight revenue per revenue ton-mile increased due to higher freight rates.

CP 2019 ANNUAL REPORT/ 46

Automotive



							2019 vs. 2018				2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change		% Change	FX Adjusted % Change⁽¹⁾	Total Change		% Change	FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	352	$	322	$	293	$	30	9	7	$	29	10	11
Carloads (in thousands)	114.4		108.3		105.1		6.1		6	N/A	3.2		3	N/A
Revenue ton-miles (in millions)	1,427		1,347		1,321		80		6	N/A	26		2	N/A
Freight revenue per carload (in dollars)	$	3,077	$	2,975	$	2,785	$	102	3	1	$	190	7	7
Freight revenue per revenue ton-mile (in cents)	24.67		23.92		22.15		0.75		3	1	1.77		8	8

Automotive revenue was $352 million in 2019, an increase of $30 million, or 9%, from $322 million in 2018. This increase was primarily due to higher volumes from Vancouver to eastern Canada, higher volumes from the U.S. to CP's new Vancouver Automotive Compound, increased freight revenue per revenue ton-mile, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates.

Automotive revenue was $322 million in 2018, an increase of $29 million, or 10% from $293 million in 2017. This increase was primarily due to higher freight revenue per revenue ton-mile, higher fuel surcharge revenue as a result of higher fuel prices, and higher volumes of machinery. This increase was partially offset by the unfavourable change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates.

Intermodal



							2019 vs. 2018							2018 vs. 2017
For the year ended December 31	2019		2018		2017		Total Change			% Change		FX Adjusted % Change⁽¹⁾		Total Change		% Change	FX Adjusted % Change⁽¹⁾
Freight revenues (in millions)	$	1,593	$	1,538	$	1,365	$	55		4		3		$	173	13	13
Carloads (in thousands)	1,046.1		1,025.9		996.7		20.2			2		N/A		29.2		3	N/A
Revenue ton-miles (in millions)	28,033		26,688		24,303		1,345			5		N/A		2,385		10	N/A
Freight revenue per carload (in dollars)	$	1,523	$	1,499	$	1,370	$	24		2		1		$	129	9	9
Freight revenue per revenue ton-mile (in cents)	5.68		5.76		5.62		(0.08		)	(1	)	(2	)	0.14		2	2

Intermodal revenue was $1,593 million in 2019, an increase of $55 million, or 4%, from $1,538 million in 2018. This increase was primarily due to higher international volumes through the Port of Vancouver, the onboarding of a new domestic retail customer, and the favourable impact of the change in FX. This increase was partially offset by a decrease in freight revenue per revenue ton-mile. RTMs increased more than carloads due to discontinuing expressway service in the second quarter of 2018, which had a shorter length of haul. Freight revenue per revenue ton-mile decreased due to lower fuel surcharge revenue as a result of lower fuel prices.

Intermodal revenue was $1,538 million in 2018, an increase of $173 million, or 13%, from $1,365 million in 2017. This increase was primarily due to higher international volumes through the Port of Vancouver, higher domestic wholesale volumes, as well as higher fuel surcharge revenue as a result of higher fuel prices. This was partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to discontinuing expressway service, and an increased length of haul for international intermodal volume moving through the Port of Vancouver.

47 /SERVICE EXCELLENCE

Operating Expenses



2019 Operating Expenses	2018 Operating Expenses	2017 Operating Expenses



							2019 vs. 2018							2018 vs. 2017
For the year ended December 31 (in millions)	2019		2018		2017		Total Change			% Change		FX Adjusted % Change⁽¹⁾		Total Change			% Change		FX Adjusted % Change⁽¹⁾
Compensation and benefits	$	1,540	$	1,468	$	1,309	$	72		5		4		$	159		12		12
Fuel	882		918		677		(36		)	(4	)	(6	)	241			36		36
Materials	210		201		190		9			4		4		11			6		6
Equipment rents	137		130		142		7			5		3		(12		)	(8	)	(8	)
Depreciation and amortization	706		696		661		10			1		1		35			5		5
Purchased services and other	1,193		1,072		1,056		121			11		10		16			2		2
Total operating expenses	$	4,668	$	4,485	$	4,035	$	183		4		3		$	450		11		11

⁽¹⁾ FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operating expenses were $4,668 million in 2019, an increase of $183 million, or 4%, from $4,485 million in 2018. This increase was primarily due to:


•	increased operating expense associated with higher casualty costs incurred in 2019 of $76 million (excluding FX);


•	higher stock-based compensation primarily driven by an increase in stock price of $58 million;

cost inflation;


•	the unfavourable impact of the change in FX of $48 million;

increased weather related costs as a result of harsh winter operating conditions in the first quarter of 2019; and

higher volume variable expenses.

This increase was partially offset by the favourable impact from changes in fuel prices of $77 million and the efficiencies generated from improved operating performance and asset utilization.

Operating expenses were $4,485 million in 2018, an increase of $450 million, or 11%, from $4,035 million in 2017. This increase was primarily due to:


•	the unfavourable impact from changes in fuel prices of $197 million;

higher volume variable expenses;

cost inflation;


•	management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017;

higher depreciation and amortization due to a higher asset base as a result of the capital program spending in 2018;


•	a charge associated with a loss contingency of $20 million;

increased weather related costs as a result of harsh winter operating conditions in the first quarter of 2018;

higher stock-based compensation of primarily driven by stronger performance against targets, partially offset by the changes in share price; and

higher incentive compensation.

CP 2019 ANNUAL REPORT/ 48

This increase was partially offset by the efficiencies generated from improved operating performance and asset utilization and higher gains on land sales of $26 million mainly from the sale of Bass Lake railway line in the fourth quarter of 2018.

Compensation and Benefits

Compensation and benefits expense includes employee wages, salaries, fringe benefits and stock-based compensation. Compensation and benefits expense was $1,540 million in 2019, an increase of $72 million, or 5%, from $1,468 million in 2018. This increase was primarily due to:


•	higher stock-based compensation primarily driven by an increase in stock price of $58 million;

the impact of wage and benefit inflation;

the impact of harsher winter operating conditions driven by operational inefficiencies and increased track labour and overtime;


•	the unfavourable impact of the change in FX of $11 million; and

higher volume variable expenses as a result of an increase in workload as measured by GTMs.

This increase was partially offset by:

lower incentive compensation;


•	lower pension current service cost of $14 million; and

labour efficiencies.

Compensation and benefits expense was $1,468 million in 2018, an increase of $159 million, or 12% from $1,309 million in 2017. This increase was primarily due to:

higher volume variable expenses as a result of an increase in workload as measured by GTMs;


•	management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP;

the impact of wage and benefit inflation;

higher stock-based compensation of primarily driven by stronger performance against targets, partially offset by the changes in share price;

higher incentive compensation;

an increase in training programs; and

harsher winter operating conditions.

This increase was partially offset by lower labour expenses due to operational efficiencies.

Fuel

Fuel expense consists mainly of fuel used by locomotives and includes provincial, state and federal fuel taxes. Fuel expense was $882 million in 2019, a decrease of $36 million, or 4%, from $918 million in 2018. This decrease was primarily due to the favourable impact of lower fuel prices of $77 million.

This decrease was partially offset by an increase in workload, as measured by GTMs, and the unfavourable impact of the change in FX of $18 million.

Fuel expense was $918 million in 2018, an increase of $241 million, or 36%, from $677 million in 2017. This increase was primarily due to:


•	the unfavourable impact from higher fuel prices of $197 million;

an increase in workload, as measured by GTMs; and


•	a fuel tax recovery received in 2017 that related to prior periods of $8 million.

This increase was partially offset by improvements in fuel efficiency of approximately 3%.

Materials

Materials expense includes the cost of material used for maintenance of track, locomotives, freight cars and buildings as well as software sustainment. Materials expense was $210 million in 2019, an increase of $9 million, or 4%, from $201 million in 2018. This increase was primarily due to:

higher spending on locomotive maintenance and overhauls;

weather related materials;

cost inflation; and


•	the unfavourable impact of the change in FX of $1 million.

This increase was partially offset by higher recoveries from foreign freight car maintenance.

Materials expense was $201 million in 2018, an increase of $11 million, or 6%, from $190 million in 2017. This increase was primarily due to higher locomotive maintenance and higher non-locomotive fuel costs.

49 /SERVICE EXCELLENCE

Equipment Rents

Equipment rents expense includes the cost associated with using other companies’ freight cars, intermodal equipment and locomotives, net of rental income received from other railways for the use of CP’s equipment. Equipment rents expense was $137 million in 2019, an increase of $7 million, or 5%, from $130 million in 2018. This increase was primarily due to greater usage of pooled freight cars and the unfavourable impact of the change in FX of $3 million.

Equipment rents expense was $130 million in 2018, a decrease of $12 million, or 8%, from $142 million in 2017. This decrease was primarily due to the purchase or return of leased freight cars and lower usage of pooled intermodal containers reducing rental expenses by $7 million, and a $4 million increase in receipts from other railways' use of CP equipment.

Depreciation and Amortization

Depreciation and amortization expense represents the charge associated with the use of track and roadway, buildings, rolling stock, information systems and other depreciable assets. Depreciation and amortization expense was $706 million for 2019, an increase of $10 million, or 1%, from $696 million in 2018. This increase was primarily due to a higher asset base, as a result of the capital program spending in 2019, and the unfavourable impact of the change in FX of $4 million, partially offset by the impact of depreciation studies and other adjustments.

Depreciation and amortization expense was $696 million for 2018, an increase of $35 million, or 5%, from $661 million in 2017. This increase was primarily due to higher asset base as a result of higher capital program spending in 2018.

Purchased Services and Other



										2019 vs. 2018					2018 vs. 2017
For the year ended December 31 (in millions)	2019			2018			2017			Total Change			% Change		Total Change			% Change
Support and facilities	$	278		$	264		$	266		$	14		5		$	(2	)	(1	)
Track and operations	278			268			251			10			4		17			7
Intermodal	222			221			197			1			—		24			12
Equipment	125			143			157			(18		)	(13	)	(14		)	(9	)
Casualty	149			73			72			76			104		1			1
Property taxes	133			124			121			9			7		3			2
Other	29			20			7			9			45		13			186
Land sales	(21		)	(41		)	(15		)	20			(49	)	(26		)	173
Total Purchased services and other	$	1,193		$	1,072		$	1,056		$	121		11		$	16		2

Purchased services and other expense encompasses a wide range of third-party costs, including contractor and consulting fees, locomotive and freight car repairs performed by third parties, property and other taxes, intermodal pickup and delivery services, casualty expense, expenses for joint facilities and gains on land sales. Purchased services and other expense was $1,193 million in 2019, an increase of $121 million, or 11%, from $1,072 million in 2018. This increase was primarily due to:


•	an increase in number and severity of casualty incidents of $73 million (excluding FX), which were the result of difficult operating conditions due to weather in the first half of 2019, reported in Casualty;


•	lower gains on land sales of $20 million mainly as a result of the sale of the Bass Lake railway line in 2018;


•	the unfavourable impact of the change in FX of $11 million;

an increase in legal fees, reported in Support and facilities;

higher snow removal and other weather related costs; and

higher property taxes due to higher tax rates.

This increase was partially offset by:


•	a decrease in charges associated with contingencies of $10 million, reported in Other;

a decrease in costs for locomotive warranty service agreements due to the insourcing of maintenance of certain locomotives in the company's fleet, reported in Equipment; and

costs related to labour disruptions in the second quarter of 2018, reported in Track and operations.

Purchased services and other expense was $1,072 million in 2018, an increase of $16 million, or 2%, from $1,056 million in 2017. This increase was primarily due to:


•	a charge associated with a loss contingency of $20 million, reported in Other;

higher intermodal expenses related to pickup and delivery, reported in Intermodal; and

higher costs due to winter weather related impacts and costs related to labour disruptions, reported primarily in Track and operations.

CP 2019 ANNUAL REPORT/ 50

This increase was partially offset by higher gains on land sales of $26 million mainly from the sale of Bass Lake railway line, in the fourth quarter of 2018, and lower locomotive engine overhaul expenses as a greater proportion of this work was capital in nature in 2018, reported in Equipment.

Other Income Statement Items

Other (Income) Expense

Other (income) expense consists of gains and losses from the change in FX on long-term debt and lease liabilities, working capital, costs related to financing, shareholder costs, equity income, and other non-operating expenditures. Other income was $89 million in 2019, a change of $263 million, or 151%, compared to an expense of $174 million in 2018. This change was primarily due to an FX translation gain on U.S. dollar-denominated debt and lease liabilities of $94 million, compared to an FX translation loss on U.S. dollar-denominated debt of $168 million in 2018.

Other expense was $174 million in 2018, a change of $352 million, or 198%, compared to an income of $178 million in 2017. This change was primarily due to an FX translation loss on U.S. dollar-denominated debt of $168 million, compared to a gain of $186 million, and a $10 million insurance recovery of legal costs in 2017. These unfavourable changes were partially offset by a $13 million charge on the settlement and roll of forward starting swaps in 2017 and higher equity income in 2018.

FX translation gains and losses on debt and lease liabilities are discussed further in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Other Components of Net Periodic Benefit Recovery

Other components of net periodic benefit recovery were $381 million in 2019, a decrease of $3 million, or 1%, from $384 million in 2018. This decrease was primarily due to higher interest cost on the benefit obligation. Other components of net periodic benefit recovery were $384 million in 2018, an increase of $110 million or 40%, from $274 million in 2017. This increase was primarily due to the 7.75% expected rate of return in each of 2017 and 2018 being applied to a greater asset value, and a decrease in the recognized net actuarial loss.

Net Interest Expense

Net interest expense includes interest on long-term debt and finance leases. Net interest expense was $448 million in 2019, a decrease of $5 million, or 1%, from $453 million in 2018. This was primarily due to a net reduction in interest charges of $21 million as a result of a lower effective interest rate following the Company's refinancing of debt in 2018 and 2019, partially offset by the unfavourable impact from the change in FX of $10 million and an increase in commercial paper interest of $6 million.

Net interest expense was $453 million in 2018, a decrease of $20 million, or 4%, from $473 million in 2017. This decrease was primarily due to a favourable impact of $15 million as a result of a lower effective interest rate and lower debt levels following the Company's refinancing of debt in 2018, as well as higher capitalized interest.

Income Tax Expense

Income tax expense was $706 million in 2019, an increase of $69 million, or 11%, from $637 million in 2018. The increase was due to:

higher taxable earnings;


•	an increase in unrecognized tax benefits of $24 million; and


•	net income tax recoveries in 2018 of $21 million as a result of the Iowa and Missouri corporate tax rate decreases.

This increase was partially offset by net income tax recoveries in 2019 of $88 million as a result of an Alberta corporate tax rate decrease.

Income tax expense was $637 million in 2018, an increase of $544 million, or 585%, from $93 million in 2017. The increase is due to net income tax recoveries in 2017 of $541 million, primarily as a result of U.S. tax reform, and higher 2018 taxable earnings, partially offset by other tax rate changes discussed above in 2018.

The effective income tax rate for 2019 was 22.43% on reported income and 24.96% on Adjusted income. The effective income tax rate for 2018 was 24.64% on reported income and 24.55% on Adjusted income. Adjusted income is a Non-GAAP measure, which is discussed further in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company expects a 2020 effective tax rate of 25.00% . The Company’s 2020 outlook for its effective tax rate is based on certain assumptions about events and developments that may or may not materialize, or that may be offset entirely or partially by new events and developments. These assumptions are discussed further in Item 1A. Risk Factors.

Liquidity and Capital Resources

The Company believes adequate amounts of Cash and cash equivalents are available in the normal course of business to provide for ongoing operations, including the obligations identified in the tables in Contractual Commitments of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company is not aware of any trends or expected fluctuations in the Company's liquidity that would create any deficiencies. The Company's primary sources of liquidity include its Cash and cash equivalents, its commercial paper program, its bilateral letter of credit facilities, and its revolving credit facility.

51 /SERVICE EXCELLENCE

As at December 31, 2019, the Company had $133 million of Cash and cash equivalents, U.S. $1.3 billion available under its revolving credit facility, and up to $220 million available under its letter of credit facilities. As at December 31, 2018, the Company had $61 million of Cash and cash equivalents, U.S. $1.0 billion available under its revolving credit facility, and up to $540 million available under its letter of credit facilities.

Effective September 27, 2019, the Company amended and restated its revolving credit facility agreement in order to extend the maturity date of the five year facility from June 28, 2023 to September 27, 2024, and to establish a new U.S. $300 million facility maturing September 27, 2021, increasing the total amount available to U.S. $1.3 billion (2018 – U.S. $1.0 billion). As at December 31, 2019, the Company's revolving credit facility was undrawn (December 31, 2018 – undrawn) and the Company did not draw from its revolving credit facility during the year ended December 31, 2019. The agreement requires the Company to maintain a financial covenant in conjunction with the facility. As at December 31, 2019, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenant.

The Company has a commercial paper program that enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As at December 31, 2019, total commercial paper borrowings were U.S. $397 million (December 31, 2018 – $nil).

Effective September 27, 2019, the Company also reduced its bilateral letter of credit facilities to $300 million. As at December 31, 2019, under its bilateral letter of credit facilities, the Company had letters of credit drawn of $80 million. This compares to letters of credit drawn of $60 million from a total available amount of $600 million as at December 31, 2018. Under the bilateral letter of credit facilities, the Company has the option to post collateral in the form of Cash or cash equivalents, equal at least to the face value of the letter of credit issued. As at December 31, 2019, the Company did not have any collateral posted on its bilateral letter of credit facilities (December 31, 2018 – $nil).

The following discussion of operating, investing, and financing activities describes the Company’s indicators of liquidity and capital resources.

Operating Activities

Cash provided by operating activities was $2,990 million in 2019, an increase of $278 million compared to $2,712 million in 2018. This increase was primarily due to advance receipts of consideration for service under freight contracts as well as higher cash generating income, compared to 2018.

Cash provided by operating activities was $2,712 million in 2018, an increase of $530 million compared to $2,182 million in 2017. This increase was primarily due to higher cash generating income and a favourable change in working capital mainly due to decreased income taxes payable in 2017.

Investing Activities

Cash used in investing activities was $1,803 million in 2019, an increase of $345 million from $1,458 million in 2018. This increase was primarily due to the acquisition of Central Maine & Québec Railway (“CMQ”), higher additions to properties as discussed further below in Capital Programs, and lower proceeds from the sale of properties and other assets during 2019.

Cash used in investing activities was $1,458 million in 2018, an increase of $163 million from $1,295 million in 2017. This increase was primarily due to higher additions to properties during 2018.

CP 2019 ANNUAL REPORT/ 52

Capital Programs



For the year ended December 31 (in millions, except for track miles and crossties)	2019		2018		2017
Additions to capital
Track and roadway	$	1,004	$	965	$	958
Rolling stock and containers	426		401		198
Information systems⁽¹⁾	70		86		78
Buildings and other	164		122		132
Total – accrued additions to capital	1,664		1,574		1,366
Less:
Non-cash transactions	17		23		26
Cash invested in additions to properties (per Consolidated Statements of Cash Flows)	$	1,647	$	1,551	$	1,340
Track installation capital programs
Track miles of rail laid (miles)	246		281		313
Track miles of rail capacity expansion (miles)	11		4		4
Crossties installed (thousands)	1,122		1,015		1,138

⁽¹⁾ Information systems include hardware and software.

Track and roadway expenditures include the replacement and enhancement of the Company’s track infrastructure. Of the $1,004 million additions in 2019 (2018 – $965 million), approximately $918 million (2018 – $847 million) was invested in the renewal of depleted assets, namely rail, ties, ballast, signals and bridges. Approximately $27 million (2018 – $47 million) was spent on PTC compliance requirements and $59 million (2018 – $71 million) was invested in network improvements and growth initiatives.

Rolling stock investments encompass locomotives, railcars and containers. In 2019, expenditures on locomotives were approximately $174 million (2018 – $218 million) and were focused on the continued re-investment in CP's existing locomotive fleet. Railcar and container investments of approximately $252 million (2018 – $183 million) were largely focused on renewal of depleted assets, including the acquisition of covered hoppers for grain transportation, and the acquisition of existing units previously held under operating leases.

In 2019, CP invested approximately $70 million (2018 – $86 million) in information systems primarily focused on rationalizing and enhancing business systems, providing real-time data, and modernizing core hardware and applications. Investments in buildings and other items were $164 million (2018 – $122 million), and included items such as facility upgrades and renovations, vehicles and shop equipment.

For 2020, CP expects to invest approximately $1.6 billion in its capital program, which will be financed with cash generated from operations. Approximately 60% to 70% of the planned capital program is for track and roadway, including PTC. Approximately 15% to 20% is expected to be allocated to rolling stock, including railcars and locomotive improvements. Approximately 5% is expected to be allocated to information services, and 10% to 15% is expected to be allocated to buildings and other.

Free Cash

CP generated positive Free cash of $1,357 million in 2019, an increase of $68 million from $1,289 million in 2018. This increase was primarily due to an increase in cash provided by operating activities, partially offset by higher additions to properties and lower proceeds from the sale of properties and other assets during 2019.

CP generated positive Free cash of $1,289 million in 2018, an increase of $415 million from $874 million in 2017. This increase was primarily due to an increase in cash provided by operating activities, partially offset by higher additions to properties during 2018.

Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's capital programs. The 2019 capital programs are discussed above. Free cash is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financing Activities

Cash used in financing activities was $1,111 million in 2019, a decrease of $431 million from $1,542 million in 2018. This decrease was primarily due to the net issuance of commercial paper in 2019 and a lower principal repayment of U.S. $350 million of the Company's 7.250% notes maturing May 2019, compared

53 /SERVICE EXCELLENCE

to the principal repayments in 2018 of U.S. $275 million of the Company's 6.500% notes maturing May 2018 and $375 million of the Company's 6.250% medium term notes maturing June 2018. This was partially offset by the issuance of $400 million 3.150% notes due March 13, 2029 in 2019 compared to the issuance of U.S. $500 million 4.000% notes due June 1, 2028 in 2018, and higher dividends paid during 2019.

Cash used in financing activities was $1,542 million in 2018, an increase of $842 million from $700 million in 2017. This increase was primarily due to the principal repayments of U.S. $275 million of the Company's 6.500% notes maturing May 2018 and $375 million of the Company's 6.250% medium term notes maturing June 2018, and an increase in payments to buy back shares under the Company's share repurchase program, partially offset by the issuance of U.S. $500 million 4.000% notes due June 1, 2028 in 2018.

Credit Measures

Credit ratings provide information relating to the Company’s operations and liquidity, and affect the Company’s ability to obtain short-term and long-term financing and/or the cost of such financing.

A mid-investment grade credit rating is an important measure in assessing the Company’s ability to maintain access to public financing and to minimize the cost of capital. It also affects the ability of the Company to engage in certain collateralized business activities on a cost-effective basis.

Credit ratings and outlooks are based on the rating agencies’ methodologies and can change from time to time to reflect their views of CP. Their views are affected by numerous factors including, but not limited to, the Company’s financial position and liquidity along with external factors beyond the Company’s control.

As at December 31, 2019, CP's credit ratings from Standard & Poor's Rating Services ("Standard & Poor's") and Moody's Investor Service ("Moody's") remain unchanged from December 31, 2018.

Credit ratings as at December 31, 2019⁽¹⁾



Long-term debt			Outlook
Standard & Poor's
	Long-term corporate credit	BBB+	stable
	Senior secured debt	A	stable
	Senior unsecured debt	BBB+	stable
Moody's
	Senior unsecured debt	Baa1	stable

Commercial paper program
Standard & Poor's		A-2	N/A
Moody's		P-2	N/A

⁽¹⁾Credit ratings are not recommendations to purchase, hold, or sell securities and do not address the market price or suitability of a specific security for a particular investor. Credit ratings are based on the rating agencies' methodologies and may be subject to revision or withdrawal at any time by the rating agencies.

The Long-term debt to Net income ratio was 3.6 in 2019, compared with 4.5 in 2018 and 3.4 in 2017. The decrease in the ratio from 2018 to 2019 was primarily due to higher Net income, partially offset by higher debt. The increase in the ratio from 2017 to 2018 was due to lower Net income and higher debt.

The Adjusted net debt to Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio was 2.4 in 2019, compared with 2.6 in 2018 and 2.6 in 2017. The decrease in ratio from 2018 to 2019 was primarily due to an increase in Adjusted EBITDA. The ratio remained unchanged between 2017and2018 as higher Adjusted EBITDA was offset by a higher debt balance as a result of the weakening of the Canadian dollar. Adjusted net debt to Adjusted EBITDA ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted net debt to Adjusted EBITDA ratio of 2.0 to 2.5.

Although CP has provided a target Non-GAAP measure (Adjusted net debt to Adjusted EBITDA ratio), management is unable to reconcile, without unreasonable efforts, the target Adjusted net debt to Adjusted EBITDA ratio to the most comparable GAAP measure (Long-term debt to Net income ratio), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In past years, CP has recognized significant asset impairment charges, management transition costs related to senior executives and discrete tax items. These or other similar, large unforeseen transactions affect Net income but may be excluded from CP’s Adjusted EBITDA. Additionally, the U.S.-to-Canada dollar exchange rate is unpredictable

CP 2019 ANNUAL REPORT/ 54

and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted EBITDA. In particular, CP excludes the FX impact of translating the Company’s debt and lease liabilities, interest and taxes from Adjusted EBITDA. Please see Forward-Looking Statements in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Dividend Payout Ratio

The dividend payout ratio was 17.9% in 2019, compared with 18.5% in 2018 and 13.3% in 2017. The decrease in the ratio from 2018 to 2019 was due to higher diluted EPS, partially offset by higher dividends declared per share. The increase in the ratio from 2017 to 2018 was primarily due to lower diluted EPS.

The Adjusted dividend payout ratio was 19.1% in 2019, compared with 17.3% in 2018 and 19.2% in 2017. The increase in the ratio from 2018 to 2019 was due to higher dividends declared per share, partially offset by higher Adjusted diluted EPS. The decrease in the ratio from 2017 to 2018 was primarily due to higher Adjusted diluted EPS. Adjusted dividend payout ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted dividend payout ratio of 25.0% to 30.0%.

Although CP has provided a target Non-GAAP measure (Adjusted dividend payout ratio), management is unable to reconcile, without unreasonable efforts, the target Adjusted dividend payout ratio to the most comparable GAAP measure (Dividend payout ratio), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In past years, CP has recognized significant asset impairment charges, management transition costs related to senior executives and discrete tax items. These or other similar, large unforeseen transactions affect Diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the U.S.-to-Canada dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted diluted EPS. In particular, CP excludes the FX impact of translating the Company’s debt and lease liabilities, the impact from changes in income tax rates and a provision for uncertain tax item from Adjusted diluted EPS. Please see Forward-Looking Statements in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Share Capital

At February 18, 2020, the latest practicable date prior to the date of this Annual Report on Form 10-K, there were 136,748,767 Common Shares and no preferred shares issued and outstanding, which consists of 13,928 holders of record of the Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase the Common Shares. Each option granted can be exercised for one Common Share. At February 18, 2020, 1,569,063 options were outstanding under the MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 895,948 options available to be issued by the Company’s MSOIP in the future. CP has a Director's Stock Option Plan (“DSOP”), under which directors are granted options to purchase Common Shares. There are no outstanding options under the DSOP, which has 340,000 options available to be issued in the future.

Non-GAAP Measures

The Company presents Non-GAAP measures to provide a basis for evaluating underlying earnings and liquidity trends in the Company’s business that can be compared with the results of operations in prior periods. In addition, these Non-GAAP measures facilitate a multi-period assessment of long-term profitability, allowing management and other external users of the Company’s consolidated financial information to compare profitability on a long-term basis, including assessing future profitability, with that of the Company’s peers.

These Non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies. The presentation of these Non-GAAP measures is not intended to be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with GAAP.

Non-GAAP Performance Measures

The Company uses Adjusted income, Adjusted diluted earnings per share, Adjusted operating income and Adjusted operating ratio to evaluate the Company’s operating performance and for planning and forecasting future business operations and future profitability. These Non-GAAP measures are presented in Item 6. Selected Financial Data and discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These Non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance, allocation of resources and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets, the FX impact of translating the Company's debt and lease liabilities, discrete tax items, and certain items outside the control of management. These items may not be non-recurring. However, excluding these significant items from GAAP results allows for a consistent understanding of the Company's consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results. Accordingly, these Non-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information.

In 2019, there were three significant items included in Net income as follows:


•	in the fourth quarter, a deferred tax expense of $24 million as a result of a provision for an uncertain tax item of a prior period that unfavourably impacted Diluted EPS by 17 cents;

55 /SERVICE EXCELLENCE


•	in the second quarter, a deferred tax recovery of $88 million due to the change in the Alberta provincial corporate income tax rate that favourably impacted Diluted EPS by 63 cents; and


•	during the course of the year, a net non-cash gain of $94 million ($86 million after deferred tax) due to FX translation of debt and lease liabilities as follows:


–	in the fourth quarter, a $37 million gain ($32 million after deferred tax) that favourably impacted Diluted EPS by 22 cents;


–	in the third quarter, a $25 million loss ($22 million after deferred tax) that unfavourably impacted Diluted EPS by 15 cents;


–	in the second quarter, a $37 million gain ($34 million after deferred tax) that favourably impacted Diluted EPS by 24 cents; and


–	in the first quarter, a $45 million gain ($42 million after deferred tax) that favourably impacted Diluted EPS by 30 cents.

In 2018, there were two significant items included in Net income as follows:


•	in the second quarter, a deferred tax recovery of $21 million due to reductions in the Missouri and Iowa state tax rates that favourably impacted Diluted EPS by 15 cents; and


•	during the course of the year, a net non-cash loss of $168 million ($150 million after deferred tax) due to FX translation of debt as follows:


–	in the fourth quarter, a $113 million loss ($103 million after deferred tax) that unfavourably impacted Diluted EPS by 72 cents;


–	in the third quarter, a $38 million gain ($33 million after deferred tax) that favourably impacted Diluted EPS by 23 cents;


–	in the second quarter, a $44 million loss ($38 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents; and


–	in the first quarter, a $49 million loss ($42 million after deferred tax) that unfavourably impacted Diluted EPS by 29 cents.

In 2017, there were five significant items included in Net income as follows:


•	in the second quarter, a charge on hedge roll and de-designation of $13 million ($10 million after deferred tax) that unfavourably impacted Diluted EPS by 7 cents;


•	in the second quarter, an insurance recovery of a legal settlement of $10 million ($7 million after current tax) that favourably impacted Diluted EPS by 5 cents;


•	in the first quarter, a management transition recovery of $51 million related to the retirement of Mr. E. Hunter Harrison as CEO of CP ($39 million after deferred tax) that favourably impacted Diluted EPS by 27 cents;


•	during the course of the year, a net deferred tax recovery of $541 million as a result of changes in income tax rates as follows:


–	in the fourth quarter, a deferred tax recovery of $527 million, primarily due to the U.S. tax reform, that favourably impacted Diluted EPS by $3.63;


–	in the third quarter, a deferred tax expense of $3 million as a result of the change in the Illinois state corporate income tax rate change that unfavourably impacted Diluted EPS by 2 cents;


–	in the second quarter, a deferred tax recovery of $17 million as a result of the change in the Saskatchewan provincial corporate income tax rate that favourably impacted Diluted EPS by 12 cents; and


•	during the course of the year, a net non-cash gain of $186 million ($162 million after deferred tax) due to FX translation of debt as follows:


–	in the fourth quarter, a $14 million loss ($12 million after deferred tax) that unfavourably impacted Diluted EPS by 8 cents;


–	in the third quarter, a $105 million gain ($91 million after deferred tax) that favourably impacted Diluted EPS by 62 cents;


–	in the second quarter, a $67 million gain ($59 million after deferred tax) that favourably impacted Diluted EPS by 40 cents; and


–	in the first quarter, a $28 million gain ($24 million after deferred tax) that favourably impacted Diluted EPS by 16 cents.

In 2016, there were two significant items included in Net income as follows:


•	in the third quarter, a $25 million expense ($18 million after current tax) related to a legal settlement that unfavourably impacted Diluted EPS by 12 cents; and


•	during the course of the year, a net non-cash gain of $79 million ($68 million after deferred tax) due to FX translation of debt as follows:


–	in the fourth quarter, a $74 million loss ($64 million after deferred tax) that unfavourably impacted Diluted EPS by 43 cents;


–	in the third quarter, a $46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents;


–	in the second quarter, an $18 million gain ($16 million after deferred tax) that favourably impacted Diluted EPS by 10 cents; and


–	in the first quarter, a $181 million gain ($156 million after deferred tax) that favourably impacted Diluted EPS by $1.01.

In 2015, there were four significant items included in Net income as follows:


•	in the third quarter, a $68 million gain ($42 million after current tax) related to the sale of Delaware & Hudson Railway Company, Inc. ("D&H") South that favourably impacted Diluted EPS by 26 cents;


•	in the third quarter, a $47 million charge ($35 million after deferred tax) related to the early redemption premium on notes that unfavourably impacted Diluted EPS by 22 cents;


•	in the second quarter, a deferred income tax expense of $23 million as a result of the change in the Alberta provincial corporate income tax rate that unfavourably impacted Diluted EPS by 14 cents; and


•	during the course of the year, a net non-cash loss of $297 million ($257 million after deferred tax) due to FX translation of debt as follows:


–	in the fourth quarter, a $115 million loss ($100 million after deferred tax) that unfavourably impacted Diluted EPS by 64 cents;


–	in the third quarter, a $128 million loss ($111 million after deferred tax) that unfavourably impacted Diluted EPS by 69 cents;


–	in the second quarter, a $10 million gain ($9 million after deferred tax) that favourably impacted Diluted EPS by 5 cents; and


–	in the first quarter, a $64 million loss ($55 million after deferred tax) that unfavourably impacted Diluted EPS by 34 cents.

CP 2019 ANNUAL REPORT/ 56

Reconciliation of GAAP Performance Measures to Non-GAAP Performance Measures

The following tables reconcile the most directly comparable measures presented in accordance with GAAP to the Non-GAAP measures presented in Item 6. Selected Financial Data and discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Adjusted income is calculated as Net income reported on a GAAP basis adjusted for significant items.



	For the year ended December 31
(in millions)	2019			2018			2017			2016			2015
Net income as reported	$	2,440		$	1,951		$	2,405		$	1,599		$	1,352
Less significant items (pre-tax):
Legal settlement charge	—			—			—			(25		)	—
Insurance recovery of legal settlement	—			—			10			—			—
Charge on hedge roll and de-designation	—			—			(13		)	—			—
Gain on sale of D&H South	—			—			—			—			68
Management transition recovery	—			—			51			—			—
Impact of FX translation gain (loss) on debt and lease liabilities	94			(168		)	186			79			(297		)
Early redemption premium on notes	—			—			—			—			(47		)
Add:
Tax effect of adjustments⁽¹⁾	8			(18		)	36			4			(26		)
Income tax rate changes	(88		)	(21		)	(541		)	—			23
Provision for uncertain tax item	24			—			—			—			—
Adjusted income	$	2,290		$	2,080		$	1,666		$	1,549		$	1,625

⁽¹⁾ The tax effect of adjustments was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of 8.55%, 10.64%, 15.27%, 7.17% and 9.29% for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

Adjusted diluted earnings per share is calculated using Adjusted income, as defined above, divided by the weighted-average diluted number of Common Shares outstanding during the period as determined in accordance with GAAP.



	For the year ended December 31
	2019			2018			2017			2016			2015
Diluted earnings per share as reported	$	17.52		$	13.61		$	16.44		$	10.63		$	8.40
Less significant items (pre-tax):
Legal settlement charge	—			—			—			(0.17		)	—
Insurance recovery of legal settlement	—			—			0.07			—			—
Charge on hedge roll and de-designation	—			—			(0.09		)	—			—
Gain on sale of D&H South	—			—			—			—			0.42
Management transition recovery	—			—			0.35			—			—
Impact of FX translation gain (loss) on debt and lease liabilities	0.67			(1.17		)	1.27			0.53			(1.84		)
Early redemption premium on notes	—			—			—			—			(0.30		)
Add:
Tax effect of adjustments⁽¹⁾	0.05			(0.12		)	0.25			0.02			(0.16		)
Income tax rate changes	(0.63		)	(0.15		)	(3.70		)	—			0.14
Provision for uncertain tax item	0.17			—			—			—			—
Adjusted diluted earnings per share	$	16.44		$	14.51		$	11.39		$	10.29		$	10.10

57 /SERVICE EXCELLENCE

Adjusted operating income is calculated as Operating income reported on a GAAP basis less significant items.



	For the year ended December 31
(in millions)	2019		2018		2017		2016		2015
Operating income as reported	$	3,124	$	2,831	$	2,519	$	2,411	$	2,618
Less significant items:
Gain on sale of D&H South	—		—		—		—		68
Management transition recovery	—		—		51		—		—
Adjusted operating income	$	3,124	$	2,831	$	2,468	$	2,411	$	2,550

Adjusted operating ratio excludes those significant items that are reported within Operating income.



	For the year ended December 31
	2019		2018		2017		2016		2015
Operating ratio as reported	59.9	%	61.3	%	61.6	%	61.3	%	61.0	%
Less significant items:
Gain on sale of D&H South	—		—		—		—		(1.0	)
Management transition recovery	—		—		(0.8	)	—		—
Adjusted operating ratio	59.9	%	61.3	%	62.4	%	61.3	%	62.0	%

ROIC and Adjusted ROIC

ROIC is calculated as Operating income less Other (income) expense and Other components of net periodic benefit recovery, tax effected at the Company's annualized effective tax rate, divided by Average invested capital. Average invested capital is defined as the sum of total Shareholders' equity, Long-term debt, Long-term debt maturing within one year and Short-term borrowing, as presented in the Company's Consolidated Financial Statements, averaged between the beginning and ending balance over a rolling 12-month period. Adjusted ROIC excludes significant items reported in Operating income, Other (income) expense, and Other components of net periodic benefit recovery in the Company's Consolidated Financial Statements, as these significant items are not considered indicative of future financial trends either by nature or amount. Adjusted average invested capital is similarly adjusted for the impact of these significant items, net of tax, on closing balances as part of this average. ROIC and Adjusted ROIC are performance measures that measure how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions made by management and are important performance criteria in determining certain elements of the Company's long-term incentive plan. ROIC and Adjusted ROIC are presented in Item 6. Selected Financial Data and discussed further in Results of Operations of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Calculation of ROIC



	For the year ended December 31
(in millions, except for percentages)	2019			2018			2017			2016			2015
Operating income	$	3,124		$	2,831		$	2,519		$	2,411		$	2,618
Less:
Other (income) expense	(89		)	174			(178		)	(45		)	335
Other components of net periodic benefit recovery	(381		)	(384		)	(274		)	(167		)	(70		)
Tax⁽¹⁾	806			749			111			675			728
	$	2,788		$	2,292		$	2,860		$	1,948		$	1,625
Average invested capital	$	15,579		$	14,964		$	13,961		$	13,532		$	12,561
ROIC	17.9		%	15.3		%	20.5		%	14.4		%	12.9		%

⁽¹⁾ Tax was calculated at the annualized effective tax rate of 22.43%, 24.64%, 3.74%, 25.72%, and 30.95% for each of the above items for the years presented, respectively.

CP 2019 ANNUAL REPORT/ 58

Calculation of Adjusted ROIC



	For the year ended December 31
(in millions, except for percentages)	2019			2018			2017			2016			2015
Adjusted operating income	$	3,124		$	2,831		$	2,468		$	2,411		$	2,550
Less:
Other (income) expense	(89		)	174			(178		)	(45		)	335
Other components of net periodic benefit recovery	(381		)	(384		)	(274		)	(167		)	(70		)
Significant items (pre-tax):
Legal settlement charge	—			—			—			(25		)	—
Insurance recovery of legal settlement	—			—			10			—			—
Charge on hedge roll and de-designation	—			—			(13		)	—			—
Impact of FX translation gain (loss) on debt and lease liabilities	94			(168		)	186			79			(297		)
Early redemption premium on notes	—			—			—			—			(47		)
Tax⁽¹⁾	874			788			724			673			716
	$	2,626		$	2,421		$	2,013		$	1,896		$	1,913
Average invested capital	$	15,579		$	14,964		$	13,961		$	13,532		$	12,561
Less impact of periodic significant items net of tax on the above average:
Income tax recovery from income tax rate changes	44			11			270			—			(11		)
Provision for uncertain tax item	(12		)	—			—			—			—
Legal settlement charge	—			—			—			(9		)	—
Insurance recovery of legal settlement	—			—			4			—			—
Charge on hedge roll and de-designation	—			—			(5		)	—			—
Gain on sale of D&H South	—			—			—			—			21
Early redemption premium on notes	—			—			—			—			(18		)
Management transition recovery	—			—			20			—			—
Adjusted average for the 12 months of total shareholders' equity, long-term debt, long-term debt maturing within one year and short-term borrowing	$	15,547		$	14,953		$	13,672		$	13,541		$	12,569
Adjusted ROIC	16.9		%	16.2		%	14.7		%	14.0		%	15.2		%

⁽¹⁾ Tax was calculated at the adjusted annualized effective tax rate of 24.96%, 24.55% 26.42% 26.20% and 27.25% for each of the above items for the years presented, respectively.

Free Cash

Free cash is calculated as Cash provided by operating activities, less Cash used in investing activities, adjusted for changes in cash and cash equivalents balances resulting from FX fluctuations, the cash settlement of hedges settled upon issuance of debt, and the acquisition of CMQ. Free cash is a measure that management considers to be an indicator of liquidity. Free cash is useful to investors and other external users of the Company's Consolidated Financial Statements as it assists with the evaluation of the Company's ability to generate cash from its operations without incurring additional external financing. The cash settlement of forward starting swaps that occurred in the second quarter of 2018 in conjunction with the issuance of long-term debt is not an indicator of CP's ongoing cash generating ability and therefore has been excluded from Free cash. Similarly, the acquisition of CMQ that occurred in the fourth quarter of 2019 is not indicative of investment trends and has also been excluded from Free cash. Positive Free cash indicates the amount of cash available for reinvestment in the business, or cash that can be returned to investors through dividends, stock repurchase programs, debt retirements or a combination of these. Conversely, negative Free cash indicates the amount of cash that must be raised from investors through new debt or equity issues, reduction in available cash balances or a combination of these. Free cash should be considered in addition to, rather than as a substitute for, Cash provided by operating activities. Free cash is presented in Item 6. Selected Financial Data and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

59 /SERVICE EXCELLENCE

Reconciliation of Cash Provided by Operating Activities to Free Cash



	For the year ended December 31
(in millions)	2019			2018			2017			2016			2015
Cash provided by operating activities	$	2,990		$	2,712		$	2,182		$	2,089		$	2,459
Cash used in investing activities	(1,803		)	(1,458		)	(1,295		)	(1,069		)	(1,123		)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	(4		)	11			(13		)	(13		)	45
Less:
Settlement of forward starting swaps on debt issuance	—			(24		)	—			—			—
Investment in Central Maine & Québec Railway	(174		)	—			—			—			—
Free cash	$	1,357		$	1,289		$	874		$	1,007		$	1,381

Foreign Exchange Adjusted % Change

FX adjusted % change allows certain financial results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Financial result variances at constant currency are obtained by translating the comparable period of the prior year results denominated in U.S. dollars at the foreign exchange rates of the current period.

FX adjusted % changes in revenues are further used in calculating FX adjusted % change in freight revenue per carload and RTM. These items are presented in Operating Revenues of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.



							2019 vs. 2018						2018 vs. 2017
(in millions)	Reported 2019		Reported 2018		Reported 2017		Variance due to FX		FX Adjusted 2018		FX Adj. % Change		Variance due to FX			FX Adjusted 2017		FX Adj. % Change
Freight revenues by line of business
Grain	$	1,684	$	1,566	$	1,532	$	19	$	1,585	6		$	—		$	1,532	2
Coal	682		673		631		2		675		1		—			631		7
Potash	462		486		411		6		492		(6	)	(1		)	410		19
Fertilizers and sulphur	250		243		241		4		247		1		(1		)	240		1
Forest products	304		284		265		5		289		5		(1		)	264		8
Energy, chemicals and plastics	1,534		1,243		898		17		1,260		22		(1		)	897		39
Metals, minerals, and consumer products	752		797		739		16		813		(8	)	(1		)	738		8
Automotive	352		322		293		7		329		7		(2		)	291		11
Intermodal	1,593		1,538		1,365		10		1,548		3		(1		)	1,364		13
Freight revenues	7,613		7,152		6,375		86		7,238		5		(8		)	6,367		12
Non-freight revenues	179		164		179		1		165		8		—			179		(8	)
Total revenues	$	7,792	$	7,316	$	6,554	$	87	$	7,403	5		$	(8	)	$	6,546	12

CP 2019 ANNUAL REPORT/ 60

FX adjusted % changes in operating expenses are discussed in Operating Expenses of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.



							2019 vs. 2018						2018 vs. 2017
(in millions)	Reported 2019		Reported 2018		Reported 2017		Variance due to FX		FX Adjusted 2018		FX Adj. % Change		Variance due to FX			FX Adjusted 2017		FX Adj. % Change
Compensation and benefits	$	1,540	$	1,468	$	1,309	$	11	$	1,479	4		$	(1	)	$	1,308	12
Fuel	882		918		677		18		936		(6	)	—			677		36
Materials	210		201		190		1		202		4		—			190		6
Equipment rents	137		130		142		3		133		3		—			142		(8	)
Depreciation and amortization	706		696		661		4		700		1		—			661		5
Purchased services and other	1,193		1,072		1,056		11		1,083		10		(3		)	1,053		2
Total operating expenses	$	4,668	$	4,485	$	4,035	$	48	$	4,533	3		$	(4	)	$	4,031	11

Dividend Payout Ratio and Adjusted Dividend Payout Ratio

Dividend payout ratio is calculated as dividends declared per share divided by Diluted EPS. Adjusted dividend payout ratio is calculated as dividends declared per share divided by Adjusted diluted EPS, as defined above. These ratios are measures of shareholder return and provide information on the Company's ability to declare dividends on an ongoing basis. Dividend payout ratio and Adjusted dividend payout ratio are presented in Item 6. Selected Financial Data and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Calculation of Dividend Payout Ratio



	For the year ended December 31
(in dollars, except for percentages)	2019			2018			2017			2016			2015
Dividends declared per share	$	3.1400		$	2.5125		$	2.1875		$	1.8500		$	1.4000
Diluted EPS	17.52			13.61			16.44			10.63			8.40
Dividend payout ratio	17.9		%	18.5		%	13.3		%	17.4		%	16.7		%

Calculation of Adjusted Dividend Payout Ratio



	For the year ended December 31
(in dollars, except for percentages)	2019			2018			2017			2016			2015
Dividends declared per share	$	3.1400		$	2.5125		$	2.1875		$	1.8500		$	1.4000
Adjusted diluted EPS	16.44			14.51			11.39			10.29			10.10
Adjusted dividend payout ratio	19.1		%	17.3		%	19.2		%	18.0		%	13.9		%

Long-term Debt to Net Income and Adjusted Net Debt to Adjusted EBITDA Ratios

Long-term debt to Net income ratio is defined as Long-term debt, including Long-term debt maturing within one year, divided by Net income. Adjusted net debt to Adjusted EBITDA ratio is calculated as Adjusted net debt divided by Adjusted EBITDA. The Adjusted net debt to Adjusted EBITDA ratio is a key credit measure used to assess the Company’s financial capacity. The ratio provides information on the Company’s ability to service its debt and other long-term obligations. Long-term debt to Net income and Adjusted net debt to Adjusted EBITDA ratio are presented in Item 6. Selected Financial Data and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

61 /SERVICE EXCELLENCE

Calculation of Long-term Debt to Net Income Ratio



(in millions, except for ratios)	2019		2018		2017		2016		2015
Long-term debt including long-term debt maturing within one year as at December 31	$	8,757	$	8,696	$	8,159	$	8,684	$	8,957
Net income for the year ended December 31	2,440		1,951		2,405		1,599		1,352
Long-term debt to Net income ratio	3.6		4.5		3.4		5.4		6.6

Reconciliation of Long-term Debt to Adjusted Net Debt

Adjusted net debt is defined as Long-term debt, Long-term debt maturing within one year and Short-term borrowing as reported on the Company’s Consolidated Balance Sheets adjusted for pension plans deficit, operating lease liabilities recognized on the Company's Consolidated Balance Sheets, and Cash and cash equivalents.



(in millions)	2019		2018		2017		2016		2015
Long-term debt including long-term debt maturing within one year as at December 31	$	8,757	$	8,696	$	8,159	$	8,684	$	8,957
Add:
Pension plans deficit⁽¹⁾	294		266		278		273		295
Operating lease liabilities⁽²⁾	354		387		281		361		439
Less:
Cash and cash equivalents	133		61		338		164		650
Adjusted net debt as at December 31	$	9,272	$	9,288	$	8,380	$	9,154	$	9,041

⁽¹⁾Pension plans deficit is the total funded status of the Pension plans in deficit only.

⁽²⁾ Current period amount is as reported in compliance with GAAP following the adoption of Accounting Standards Update ("ASU") 2016-02 under the cumulative-effect adjustment transition approach, discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The comparative periods' amounts have not been restated and were calculated as the net present value of operating leases discounted by the Company's effective interest rate for the period presented.

CP 2019 ANNUAL REPORT/ 62

Reconciliation of Net Income to EBIT, Adjusted EBIT and Adjusted EBITDA

Earnings before interest and tax ("EBIT") is calculated as Net income before Net interest expense and Income tax expense. Adjusted EBIT excludes significant items reported in both Operating income and Other (income) expense. Adjusted EBITDA is calculated as Adjusted EBIT plus operating lease expense and Depreciation and amortization, less Other components of net periodic benefit recovery.



	For the year ended December 31
(in millions)	2019		2018			2017			2016			2015
Net income as reported	$	2,440	$	1,951		$	2,405		$	1,599		$	1,352
Add:
Net interest expense	448		453			473			471			394
Income tax expense	706		637			93			553			607
EBIT	3,594		3,041			2,971			2,623			2,353
Less significant items (pre-tax):
Legal settlement charge	—		—			—			(25		)	—
Insurance recovery of legal settlement	—		—			10			—			—
Charge on hedge roll and de-designation	—		—			(13		)	—			—
Gain on sale of D&H South	—		—			—			—			68
Management transition recovery	—		—			51			—			—
Impact of FX translation gain (loss) on debt and lease liabilities	94		(168		)	186			79			(297		)
Early redemption premium on notes	—		—			—			—			(47		)
Adjusted EBIT	3,500		3,209			2,737			2,569			2,629
Add:
Operating lease expense	83		97			104			111			127
Depreciation and amortization	706		696			661			640			595
Less:
Other components of net periodic benefit recovery	381		384			274			167			70
Adjusted EBITDA	$	3,908	$	3,618		$	3,228		$	3,153		$	3,281

Calculation of Adjusted Net Debt to Adjusted EBITDA Ratio



(in millions, except for ratios)	2019		2018		2017		2016		2015
Adjusted net debt as at December 31	$	9,272	$	9,288	$	8,380	$	9,154	$	9,041
Adjusted EBITDA for the year ended December 31	3,908		3,618		3,228		3,153		3,281
Adjusted net debt to Adjusted EBITDA ratio	2.4		2.6		2.6		2.9		2.8

Off-Balance Sheet Arrangements

Guarantees

Refer to Item 8. Financial Statements and Supplementary Data, Note 27 Guarantees for details.

63 /SERVICE EXCELLENCE

Contractual Commitments

The accompanying table indicates the Company’s obligations and commitments to make future payments for contracts, such as debt, leases, and commercial arrangements as at December 31, 2019.



Payments due by period (in millions)	Total		2020		2021 & 2022		2023 & 2024		Thereafter
Contractual commitments
Interest on long-term debt and finance leases	$	11,117	$	431	$	804	$	690	$	9,192
Long-term debt	8,692		592		842		568		6,690
Finance leases	151		7		113		13		18
Operating leases⁽¹⁾	395		80		106		79		130
Supplier purchase	3,090		699		1,295		727		369
Other long-term liabilities⁽²⁾	495		53		102		99		241
Total contractual commitments	$	23,940	$	1,862	$	3,262	$	2,176	$	16,640

⁽¹⁾ Residual value guarantees on certain leased equipment with a maximum exposure of $2 million are not included in the minimum payments shown above, as management believes that CP will not be required to make payments under these residual guarantees.

⁽²⁾ Includes expected cash payments for environmental remediation, post-retirement benefits, workers’ compensation benefits, long-term disability benefits, pension benefit payments for the Company’s non-registered supplemental pension plan, and certain other long-term liabilities. Projected payments for post-retirement benefits, workers’ compensation benefits, and long-term disability benefits include the anticipated payments for years 2020 to 2029. Pension contributions for the Company’s registered pension plans are not included due to the volatility in calculating them. Pension payments are discussed further in Critical Accounting Estimates of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain Other Financial Commitments

In addition to the financial commitments mentioned above, the Company is party to certain other financial commitments discussed below.

Letters of Credit

Letters of credit are obtained mainly to provide security to third parties under the terms of various agreements, including the supplemental pension plan. CP is liable for these contractual amounts in the case of non-performance under these agreements. Letters of credit are accommodated through a revolving credit facility and the Company’s bilateral letter of credit facilities.

Capital Commitments

The Company remains committed to maintaining the current high level of quality of our capital assets in pursuing sustainable growth. As part of this commitment, CP has entered into contracts with suppliers to make various capital purchases related to track and rolling stock programs. Payments for these commitments are due in 2020 through 2032. These expenditures are expected to be financed by cash generated from operations or by issuing new debt.

The accompanying table indicates the Company’s commitments to make future payments for letters of credit and capital expenditures as at December 31, 2019.



Payments due by period (in millions)	Total		2020		2021 & 2022		2023 & 2024		Thereafter
Certain other financial commitments
Letters of credit	$	80	$	80	$	—	$	—	$	—
Capital commitments	664		332		200		61		71
Total certain other financial commitments	$	744	$	412	$	200	$	61	$	71

Critical Accounting Estimates

To prepare the Consolidated Financial Statements that conform with GAAP, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reported periods. Using the most current information available, the Company reviews estimates on an ongoing basis, including those related to environmental liabilities, pensions and other benefits, property, plant and equipment, deferred income taxes, and personal injury and other claims liabilities.

The development, selection and disclosure of these estimates, and this Management's Discussion and Analysis of Financial Condition and Results of Operations, have been reviewed by the Board of Directors’ Audit and Finance Committee, which is composed entirely of independent directors.

CP 2019 ANNUAL REPORT/ 64

Environmental Liabilities

Environmental remediation accruals cover site-specific remediation programs. CP estimates of the probable costs to be incurred in the remediation of properties contaminated by past railway use reflect the nature of contamination at individual sites according to typical activities and scale of operations conducted. The Company screens and classifies sites according to typical activities and scale of operations conducted. CP has developed remediation strategies for each property based on the nature and extent of the contamination, as well as the location of the property and surrounding areas that may be adversely affected by the presence of contaminants. CP also considers available technologies, treatment and disposal facilities and the acceptability of site-specific plans based on the local regulatory environment. Site-specific plans range from containment and risk management of the contaminants through to the removal and treatment of the contaminants and affected soils and groundwater. The details of the estimates reflect the environmental liability at each property. The Company is committed to fully meeting regulatory and legal obligations with respect to environmental matters.

Some sites include remediation activities that are projected beyond the 10-year period, which CP is unable to reasonably estimate and determine. Therefore, CP's accruals of the environmental liabilities is based on an estimate of costs for a rolling 10-year period covered by the environmental program. Payments are expected to be made over 10 years to 2029. A limited portion of the environmental accruals, the stable Perpetual Care for the environmental program, are fixed and reliably determined. This portion of the environmental liabilities is discounted using a risk-free rate, adjusted by inflation and productivity improvements.

Provisions for environmental remediation costs are recorded in “Other long-term liabilities” (refer to Item 8. Financial Statements and Supplementary Data, Note 20 Other long-term liabilities), except for the current portion which is recorded in “Accounts payable and accrued liabilities” (refer to Item 8. Financial Statements and Supplementary Data, Note 17 Accounts payable and accrued liabilities). The accruals for environmental remediation represent CP’s best estimate of its probable future obligations and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include CP’s best estimate of all probable costs, CP’s total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, are not expected to be material to the Company’s financial position, but may materially affect income in the period in which a charge is recognized.

The environmental liabilities are also sensitive to the increase in cost of materials which would be reflected as increases to "Other long-term liabilities" and "Accounts payable and accrued liabilities" on the Company’s Consolidated Balance Sheets and to "Purchased services and other" within Operating expenses on the Company's Consolidated Statements of Income. CP's cash payments for environmental initiatives are estimated to be approximately $7 million in 2020, $8 million in 2021, $9 million in 2022 and a total of approximately $55 million over the remaining years through 2029. All payments will be funded from general operations.

Pensions and Other Benefits

CP has defined benefit and defined contribution pension plans. Other benefits include post-retirement medical and life insurance for pensioners, and some post-employment workers’ compensation and long-term disability benefits in Canada. Workers’ compensation and long-term disability benefits are discussed in the Personal Injury and Other Claims Liabilities section below. Pension and post-retirement benefits liabilities are subject to various external influences and uncertainties.

Information concerning the measurement of costs for pensions and other benefits is discussed in Item 8. Financial Statements and Supplementary Data, Note 1 Summary of significant accounting policies.

Net Periodic Benefit Costs

The Company reports the current service cost component of net periodic benefit cost in "Compensation and benefits" for pensions and post-retirement benefits and in "Purchased services and other" for self-insured workers' compensation and long-term disability benefits on the Company's Consolidated Statements of Income. The Other components of net periodic benefit recovery are reported as a separate line item outside of Operating income on the Company's Consolidated Statements of Income. Components of the net periodic benefit costs (credits) are as follows:



	2019								2018
(in millions of Canadian dollars)	Current service cost		Other components			Total			Current service cost		Other components			Total
Defined benefit pensions	$	107	$	(414	)	$	(307	)	$	120	$	(405	)	$	(285	)
Defined contribution pensions	11		—			11			10		—			10
Post-retirement benefits	4		16			20			5		18			23
Self-insured workers' compensation and long-term disability benefits	7		17			24			7		3			10
All plans	$	129	$	(381	)	$	(252	)	$	142	$	(384	)	$	(242	)

65 /SERVICE EXCELLENCE

CP estimates net periodic benefit credits for defined benefit pensions to be approximately $224 million in 2020 ($140 million in current service cost and $364 million in other components of net periodic recovery), and net periodic benefit costs for defined contribution pensions to be approximately $12 million in 2020. Net periodic benefit costs for post-retirement benefits in 2020 are not expected to differ materially from the 2019 costs. Total net periodic benefit credits for all plans are estimated to be approximately $178 million in 2020 (2019 – $252 million), comprising $165 million (2019 – $129 million) in current service cost and $343 million (2019 – $381 million) in other components of net periodic recovery. The expected rate of return on the market-related asset value used to compute the net periodic benefit credit was 7.75% in 2018 and 7.50% in 2019. For computing the net periodic benefit credit in 2020, the Company is reducing this rate to 7.25% to reflect CP's current view of future long-term investment returns. Net periodic benefit costs and credits are discussed further in Item 8. Financial Statements and Supplementary Data, Note 23 Pensions and other benefits.

Pension Plan Contributions

The Company made contributions of $53 million to the defined benefit pension plans in 2019, compared with $36 million, which is net of a $10 million refund of plan surplus in 2018. The Company’s main Canadian defined benefit pension plan accounts for nearly all of CP’s pension obligation and can produce significant volatility in pension funding requirements, given the pension fund’s size, the many factors that drive the pension plan’s funded status and Canadian statutory pension funding requirements. The Company made voluntary prepayments of $600 million in 2011, $650 million in 2010 and $500 million in 2009 to the Company’s main Canadian defined benefit pension plan. CP has applied $1,324 million of these voluntary prepayments to reduce its pension funding requirements in 2012–2019, leaving $426 million of the voluntary prepayments still available at December 31, 2019 to reduce CP’s pension funding requirements in 2020 and future years. CP continues to have significant flexibility with respect to the rate at which the remaining voluntary prepayments are applied to reduce future years’ pension contribution requirements, which allows CP to manage the volatility of future pension funding requirements. At this time, CP estimates it will not apply any of the remaining voluntary prepayments against its 2020 pension funding requirements.

CP estimates its aggregate pension contributions, including its defined benefit and defined contribution plans, to be in the range of $65 million to $75 million in 2020, and in the range of $50 million to $100 million per year from 2021 to 2023. These estimates reflect the Company’s current intentions with respect to the rate at which CP will apply the remaining voluntary prepayments against contribution requirements in the next few years.

Future pension contributions will be highly dependent on the Company’s actual experience with such variables as investment returns, interest rate fluctuations and demographic changes, on the rate at which previous years’ voluntary prepayments are applied against pension contribution requirements, and on any changes in the regulatory environment. CP will continue to make contributions to the pension plans that, at a minimum, meet pension legislative requirements.

Pension Plan Risks

Fluctuations in the liability and net periodic benefit costs for pensions result from favourable or unfavourable investment returns and changes in long-term interest rates. The impact of favourable or unfavourable investment returns is moderated by the use of a market-related asset value for the main Canadian defined benefit pension plan’s public equity securities and absolute return strategies. The impact of changes in long-term interest rates on pension obligations is partially offset by their impact on the pension funds’ investments in fixed income assets.

The plans’ investment policy provides a target allocation of approximately 45% of the plans’ assets to be invested in public equity securities. As a result, stock market performance is a key driver in determining the pension funds’ asset performance. If the rate of investment return on the plans’ public equity securities in 2019 had been 10% higher (or lower) than the actual 2019 rate of investment return on such securities, 2020 net periodic benefit costs for pensions would be lower (or higher) by approximately $25 million.

Changes in bond yields can result in changes to discount rates and to changes in the value of fixed income assets. If the discount rate as at December 31, 2019 had been higher (or lower) by 0.1% with no related changes in the value of the pension funds’ investment in fixed income assets, 2020 net periodic benefit costs for pensions would be lower (or higher) by approximately $13 million and 2020 current service costs for pensions would be lower (or higher) by approximately $5 million. However, a change in bond yields would also lead to a change in the value of the pension funds’ investment in fixed income assets, and this change would partially offset the impact on net periodic benefit costs noted above.

The Company estimates that an increase in the discount rate of 0.1% would decrease the defined benefit pension plans’ projected benefit obligations by approximately $176 million, and that a decrease in the discount rate of 0.1% would increase the defined benefit pension plans’ projected benefit obligations by approximately $178 million. Similarly, for every 0.1% the actual return on assets varies above (or below) the estimated return for the year, the value of the defined benefit pension plans’ assets would increase (or decrease) by approximately $13 million.

Adverse experience with respect to these factors could eventually increase funding and pension expense significantly, while favourable experience with respect to these factors could eventually decrease funding and pension expense significantly.

Fluctuations in the post-retirement benefit obligation also can result from changes in the discount rate used. A 0.1% increase (decrease) in the discount rate would decrease (increase) the obligation by approximately $6 million.

CP reviews its pensioner mortality experience to ensure that the mortality assumption continues to be appropriate, or to determine what changes to the assumption are needed.

CP 2019 ANNUAL REPORT/ 66

Property, Plant and Equipment

The Company follows the group depreciation method under which a single depreciation rate is applied to the total cost in a particular class of property, despite differences in the service life or salvage value of individual properties within the same class. CP performs depreciation studies of each property asset class approximately every three years to update depreciation rates. The studies are conducted with assistance from third-party specialists and analyzed and reviewed by the Company's management. Depreciation studies for U.S. assets are reviewed and approved by the Surface Transportation Board ("STB"). Depreciation studies for Canadian assets are provided to the Canadian Transportation Agency (the "Agency"), but the Agency does not approve depreciation rates. In determining appropriate depreciation rates, management is required to make judgments and assumptions about a variety of key factors that are subject to future variability due to inherent uncertainties. These include the following:



Key Assumptions	Assessments
• Whole and remaining asset lives	• Statistical analysis of historical retirement patterns; • Evaluation of management strategy and its impact on operations and the future use of specific property assets; • Assessment of technological advances; • Engineering estimates of changes in current operations and analysis of historic, current and projected future usage; • Additional factors considered for track assets: density of traffic and whether rail is new or has been re-laid in a subsequent position; • Assessment of policies and practices for the management of assets including maintenance; and • Comparison with industry data.
• Salvage values	• Analysis of historical, current and estimated future salvage values.

CP depreciates the cost of properties, net of salvage, on a straight-line basis over the estimated useful life of the class of property. The estimates of economic lives are uncertain and can vary due to changes in any of the assessed factors noted in the table above for whole and remaining asset lives. Additionally, the depreciation rates are updated to reflect the change in residual values of the assets in the class.

It is anticipated that there will be changes in the estimates of weighted-average useful lives and net salvage for each property asset class as assets are acquired, used and retired. Substantial changes in either the useful lives of properties or the salvage assumptions could result in significant changes to depreciation expense. For example, if the estimated average life of track assets, including rail, ties, ballast and other track material, increased (or decreased) by one year, annual depreciation expense would decrease (or increase) by approximately $17 million.

Due to the capital intensive nature of the railway industry, depreciation represents a significant part of operating expenses. The estimated useful lives of properties have a direct impact on the amount of depreciation recorded as a component of "Properties" on the Company’s Consolidated Balance Sheets. At December 31, 2019 and 2018, accumulated depreciation was $8,099 million and $7,964 million, respectively.

Deferred Income Taxes

CP accounts for deferred income taxes based on the liability method. This method focuses on the Company’s balance sheet and the temporary differences otherwise calculated from the comparison of book versus tax values. The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carry forwards. It is assumed that such temporary differences will be settled in the deferred income tax assets and liabilities at the balance sheet date.

In determining deferred income taxes, the Company makes estimates and assumptions regarding deferred tax matters, including estimating the timing of the realization and settlement of deferred income tax assets (including the benefit of tax losses) and liabilities, and estimating unrecognized tax benefits for uncertain tax positions. Deferred income taxes are calculated using enacted federal, provincial, and state future income tax rates, which may differ in future periods.

Deferred income tax expense is included in "Income tax expense" on the Company's Consolidated Statements of Income. Additional disclosures are provided in Item 8. Financial Statements and Supplementary Data, Note 6 Income taxes.

Personal Injury and Other Claims Liabilities

CP estimates the potential liability arising from incidents, claims and pending litigations relating to personal injury claims by employees, third-party claims, certain occupation-related claims and property damage claims.

Personal Injury

In Canada, employee occupational injuries are governed by provincial workers' compensation legislation. Occupational injury claims in the provinces of Québec, Ontario, Manitoba and B.C. are self-insured and administered through each Worker's Compensation Board ("WCB"). The future costs related to occupation-related injuries are actuarially determined based on past experience and assumptions associated with the injury, compensation, income replacement, health care and administrative costs. In the four provinces where the Company is self-insured, a discount rate is applied to the future estimated costs based on market

67 /SERVICE EXCELLENCE

rates for investment grade corporate bonds to determine the liability. An actuarial study is performed on an annual basis. In the provinces of Saskatchewan and Alberta, the Company is assessed an annual WCB contribution on a premium basis and this amount is not subject to estimation by management. At December 31, 2019 and 2018, respectively, the WCB liability was $85 million and $81 million in "Pension and other benefit liabilities"; $11 million and $12 million in "Accounts payable and accrued liabilities", offset by deposits paid to WCB of $1 million and $1 million in "Other assets" on the Company's Consolidated Balance Sheets.

U.S. railway employees are covered by federal law under the Federal Employers' Liability Act ("FELA") rather than workers' compensation programs. Accruals are set for individual cases based on facts, legal opinion and statistical analysis. U.S. accruals are also set and include alleged occupational exposure or injury.

Other Claims

A provision for litigation matters, equipment damages or other claims will be accrued according to applicable accounting standards and any such accrual will be based on an ongoing assessment of the strengths and weaknesses of the litigation or claim and its likelihood of success, together with an evaluation of the damages or other monetary relief sought. CP accrues for probable claims when the facts of an incident become known and investigation results provide a reasonable basis for estimating the liability. The lower end of the range is accrued if the facts and circumstances permit only a range of reasonable estimates and no single amount in that range is a better estimate than any other. Facts and circumstances related to asserted claims can change, and a process is in place to monitor accruals for changes in accounting estimates.

Forward-Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other relevant securities legislation, including applicable securities laws in Canada. Forward-looking statements typically include words such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”, “plan”, “will”, “outlook”, “should” or similar words suggesting future outcomes. To the extent that CP has provided guidance using Non-GAAP financial measures, the Company may not be able to provide a reconciliation to a GAAP measure without unreasonable efforts, due to unknown variables and uncertainty related to future results.

This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K includes forward-looking statements relating, but not limited to statements concerning the Company’s defined benefit pension expectations for 2020 and through 2023, our expectations for 2020 financial and operational performance, including our full-year guidance for expected RTM and adjusted diluted EPS growth, planned capital expenditures (including how such capital expenditures are expected to be financed), expected impacts resulting from changes in the U.S.-to-Canadian dollar exchange rate, and the effective tax rate, as well as statements concerning the Company’s operations, anticipated financial performance, business prospects and strategies, including statements concerning the anticipation that cash flow from operations and various sources of financing will be sufficient to meet debt repayments and obligations in the foreseeable future and concerning anticipated capital programs, and statements regarding future payments including income taxes and pension contributions. The purpose of the 2020 Adjusted diluted EPS growth projection is to assist readers in understanding our expected and targeted financial results, and this information may not be appropriate for other purposes.

The forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K are based on current expectations, estimates, projections and assumptions, having regarding to the Company's experience and its perception of historical trends, and includes, but is not limited to, expectations, estimates, projections and assumptions relating to: North American and global economic growth; commodity demand growth; sustainable industrial and agricultural production; commodity prices and interest rates; foreign exchange rates (as specified herein); effective tax rates (as specified herein); performance of our assets and equipment; sufficiency of our budgeted capital expenditures in carrying out our business plan; applicable laws, regulations and government policies; the availability and cost of labour, services and infrastructure; and the satisfaction by third parties of their obligations to the Company. Although the Company believes the expectations, estimates, projections and assumptions reflected in the forward-looking statements presented herein are reasonable as of the date hereof, there can be no assurance that they will prove to be correct. Current economic conditions render assumptions, although reasonable when made, subject to greater uncertainty.

Undue reliance should not be placed on forward-looking statements as actual results may differ materially from those expressed or implied by forward-looking statements. By their nature, forward-looking statements involve numerous inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking statements, including but not limited to the following factors: changes in business strategies; general North American and global economic, 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; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; 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; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; 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; climate change; and various events that could disrupt operations, including severe weather, such as droughts, floods, avalanches and earthquakes, and cybersecurity attacks, as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive.

CP 2019 ANNUAL REPORT/ 68

There are more specific factors that could cause actual results to differ materially from those described in the forward-looking statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K. These more specific factors are identified and discussed in Item 1A. Risk Factors. Other risks are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States.

The forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K are made as of the date hereof. Except as required by applicable law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking statements, or the foregoing assumptions and risks affecting such forward-looking information, whether as a result of new information, future events or otherwise.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Although CP conducts business primarily in Canada, a significant portion of its revenues, expenses, assets and liabilities including debt are denominated in U.S. dollars. The value of the Canadian dollar is affected by a number of domestic and international factors, including, without limitation, economic performance, and Canadian, U.S. and international monetary policies. Consequently, the Company’s results are affected by fluctuations in the exchange rate between these currencies. On an annualized basis, a $0.01 weakening (or strengthening) of the Canadian dollar relative to the U.S. dollar positively (or negatively) impacts Total revenues by approximately $30 million (2018 – approximately $28 million), negatively (or positively) impacts Operating expenses by approximately $15 million (2018 – approximately $15 million), and negatively (or positively) impacts Net interest expense by approximately $3 million (2018 – approximately $3 million).

CP uses U.S. dollar-denominated debt to hedge its net investment in U.S. operations. As at December 31, 2019, the net investment in U.S. operations is less than the total U.S. dollar-denominated debt. Consequently, FX translation on the Company’s undesignated debt and lease liabilities causes additional impacts on earnings in Other (income) expense.

To manage its exposure to fluctuations in exchange rates between Canadian and U.S. dollars, CP may sell or purchase U.S. dollar forwards at fixed rates in future periods. In addition, changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar) make the goods transported by the Company more or less competitive in the world marketplace and may in turn positively or negatively affect revenues.

Share Price Impact on Stock-Based Compensation

Based on information available at December 31, 2019, and expectations for 2020 grants, for every $1.00 change in share price, stock-based compensation expense has a corresponding change of approximately $0.4 million to $0.6 million (2018 – approximately $0.4 million to $0.6 million). This excludes the impact of changes in share price relative to the S&P/TSX 60 Index, Class I railways, S&P/TSX Capped Industrial Index, and S&P 1500 Road and Rail index, which may trigger different performance share unit payouts. Stock-based compensation may also be impacted by non-market performance conditions.

Additional information concerning stock-based compensation is included in Item 8. Financial Statements and Supplementary Data, Note 24 Stock-based compensation.

Interest Rate Risk

Debt financing forms part of the Company's capital structure. The debt agreements entered into expose CP to increased interest costs on future fixed debt instruments and existing variable rate debt instruments, should market rates increase. In addition, the present value of the Company’s assets and liabilities will also vary with interest rate changes. To manage interest rate exposure, CP may enter into forward rate agreements such as treasury rate locks or bond forwards that lock in rates for a future date, thereby protecting against interest rate increases. CP may also enter into swap agreements whereby one party agrees to pay a fixed rate of interest while the other party pays a floating rate. Contingent on the direction of interest rates, the Company may incur higher costs depending on the contracted rate.

Information concerning market risks is supplemented in Item 8. Financial Statements and Supplementary Data, Note 19 Financial instruments.

CP 2019 ANNUAL REPORT/ 70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	~~Retirement~~		~~Termination~~ ~~with cause~~		~~Termination without cause~~		~~Change in control~~Page
~~Severance~~		~~None~~		~~None~~		~~None~~		~~Mr. Creel: 24 months of base salary Mr. Ellis: 12 months of base salary Other named executives: per legislative requirements~~	~~None~~
~~Short-term~~ ~~incentive~~		~~Forfeited~~		~~Award for current year ispro-rated~~ ~~to retirement date~~		~~Forfeited~~		~~Equal to the target award for severance period for Mr. Creel Equal to target bonus for 12 months for Mr. Ellis. Other named executives: award for current year ispro-rated~~ ~~to termination date as per plan~~	~~None~~
~~DSUs~~		~~Unvested DSUs are forfeited~~		~~Unvested DSUs are forfeited~~		~~Unvested DSUs are forfeited~~		~~Unvested DSUs are forfeited~~	~~Unvested units vest early if the holder is terminated following change of control~~
~~Performance~~ ~~share units~~		~~Forfeited~~		Award continues to vest based on performance factors and executive is entitled to receive the full value as long as they have worked for six months of the performance period, otherwise the award is forfeited		~~Forfeited~~		~~Pro-rated~~ ~~based on active service within the performance period~~	~~Only vest if the executive is terminated following a change of control PSUs vest at target,pro-rated~~ ~~based on active service within the performance period~~
~~Stock options~~		~~Vested options are exercisable for 30 days or until the expiry date, whichever comes first. Unvested options are forfeited Performance stock options are forfeited~~		~~Options continue to vest Award expires five years after the retirement date or the normal expiry date, whichever is earlier Performance stock options are forfeited~~		~~Forfeited~~		~~Vested options are exercisable for six months as well as any options that vest during thesix-month~~ ~~period Performance stock options are forfeited~~	~~Options only vest early if the option holder is terminated following the change of control. Performance stock options are forfeited~~
~~Pension~~		~~No additional value~~		~~No additional value~~		~~No additional value~~		~~No additional value~~	~~No additional value~~
~~ESPP shares~~		~~Unvested shares are forfeited~~		~~Unvested shares vest~~
Report of Independent Registered Public Accounting Firm	71
	~~Unvested shares vest if holder is terminated without cause~~
Consolidated Statements of Income
~~Unvested shares vest~~For the Year Ended December 31, 2019, 2018, and 2017	73
~~Benefits~~
~~End on resignation~~Consolidated Statements of Comprehensive Income
~~Post-retirement life insurance of $50,000~~For the Year Ended December 31, 2019, 2018, and ~~a health spending account based on years of service (same for all employees)~~ 2017	74

~~End on resignation~~Consolidated Balance Sheets
~~12 months health~~As at December 31, 2019 and ~~dental for Mr. Ellis~~2018	75

~~None~~Consolidated Statements of Cash Flows
~~Perquisites~~For the Year Ended December 31, 2019, 2018, and 2017	76

~~Any unused flex perquisite dollars are forfeited~~ Consolidated Statements of Changes in Shareholders' Equity
~~Any unused flex perquisite dollars are forfeited~~For the Year Ended December 31, 2019, 2018, and 2017	77

~~Any unused flex perquisite dollars are forfeited~~Notes to Consolidated Financial Statements		~~Any unused flex perquisite dollars are forfeited~~		~~Any unused flex perquisite dollars are forfeited~~ 78

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Canadian Pacific Railway Limited

Opinion on the Financial Statements

We ~~entered into a separation agreement with Mr. Harrison on January 18, 2017, under which he resigned from CP~~have audited the accompanying consolidated balance sheets of Canadian Pacific Railway Limited and subsidiaries (the "Company") as ~~CEO effective January 31, 2017. He was the only named executive with a change in control agreement with CP.~~

The investment managers may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and ~~CEO (see pages 27~~interest rate risk (Level 2); credit default swaps to manage credit risk (Level 2); and 41options to manage interest rate risk and volatility (Level 2). The Company may utilize derivatives directly, but only for ~~details)~~the purpose of hedging foreign currency exposures. As at December 31, 2019, there are currency forwards with a notional value of $334 million (December 31, 2018 – $1,226 million) and a fair value of $13 million (December 31, 2018 – $(7) million). ~~Former director Hunter Harrison also received no director compensation as he was compensated as CEO during his tenure.~~

Name    Fees
earned
($)    Share-based
awards
($)    Option-based
awards
($)    Non-equity incentive
plan compensation
($)
Pension
value
($)
   All other
compensation
($)    Total
($)
John Baird
   -    235,987    -    -    -    1,000    236,987
Isabelle Courville
   132,500    133,056    -    -    -    1,000    266,556
Jill Denham
   -    235,987    -    -    -    1,000    236,987
William Fatt
   -    228,846    -    -    -    1,000    229,846
Rebecca MacDonald
   -    266,113    -    -    -    1,000    267,113
Matthew Paull
   -    326,824    -    -    -    1,000    327,824
Jane Peverett
   -    255,391    -    -    -    1,000    256,391
Andrew Reardon
   -    518,392    -    -    -    1,000    519,392
Gordon Trafton
   -    308,410    -    -    -    1,000    309,410

~~Ms. Courville elected to receive 50%~~The fixed income investment manager utilizes a portfolio of ~~her annual director compensation in DDSUs~~bond forwards for the purpose of reducing asset/liability interest rate exposure. As at December 31, 2019, there are bond forwards with ~~the remaining 50% paid in cash.~~a notional value of $3,269 million and a negative fair value of $72 million (December 31, 2018 – $nil).

⁽⁸⁾ Absolute return:

The value of absolute return fund investments is based on the NAV reported by the fund administrators. The funds have different redemption policies with redemption notice periods varying from 60 to 95 days and frequencies ranging from monthly to triennially.

Additional plan assets information

The Company's primary investment objective for pension plan assets is to achieve a long–term return, net of all fees and expenses, that is sufficient for the plan's assets to satisfy the current and future obligations to plan beneficiaries, while minimizing the financial impact on the Company. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return expectations and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation and interest rates. When advantageous and with due consideration, derivative instruments may be utilized by investment managers, provided the total value of the underlying assets represented by financial derivatives (excluding currency forwards, liability hedging derivatives in fixed income portfolios and derivatives held by absolute return funds) is limited to 30% of the market value of the fund.

The funded status of the plans is exposed to fluctuations in interest rates, which affects the relative values of the plans' liabilities and assets. In order to mitigate interest rate risk, the Company's main Canadian defined benefit pension plan utilizes a liability driven investment strategy in its fixed income portfolio, which uses a combination of long duration bonds and derivatives to hedge interest rate risk, managed by the investment manager. At December 31, 2019, the plan's solvency funded position was 45% hedged against interest rate risk (2018 – 11%).

When investing in foreign securities, the plans are exposed to foreign currency risk; the effect of which is included in the valuation of the foreign securities. At December 31, 2019, the plans were 39% exposed to the U.S. dollar net of currency forwards (41% excluding the currency forwards), 6% exposed to the Euro, and 14% exposed to various other currencies. At December 31, 2018, the plans were 33% exposed to the U.S. dollar net of currency forwards (43% excluding the currency forwards), 4% exposed to the Euro, and 13% exposed to various other currencies.

At December 31, 2019, fund assets consisted primarily of listed stocks and bonds, including 119,758 of the Common Shares (2018 – 86,084) at a market value of $40 million (2018 – $21 million) and Unsecured Notes issued by the Company at a par value of $nil (2018 – $1 million) and a market value of $nil (2018 – $1 million).

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Estimated future benefit payments

The estimated future DB pension and other benefit payments to be paid by the plans for each of the next five years and the subsequent five-year period are as follows:



(in millions of Canadian dollars)	Pensions		Other benefits
2020	$	620	$	34
2021	623		32
2022	627		31
2023	630		30
2024	633		30
2025 – 2029	3,203		144

The benefit payments from the Canadian registered and U.S. qualified DB pension plans are payable from their respective pension funds. Benefit payments from the supplemental pension plan and from the other benefits plans are payable directly from the Company.

Defined contribution plan

Canadian non-unionized employees hired prior to July 1, 2010 had the option to participate in the Canadian DC plan. All Canadian non-unionized employees hired after such date must participate in this plan. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year.

Effective July 1, 2010, a new U.S. DC plan was established. All U.S. non-unionized employees hired after such date must participate in this plan. Employees do not contribute to the plan. The Company annually contributes a percentage of salary.

The DC plans provide a pension based on total employee, where appropriate, and employer contributions plus investment income earned on those contributions.

In 2019, the net cost of the DC plans, which generally equals the employer’s required contribution, was $11 million (2018 – $10 million; 2017 – $9 million).

Contributions to multi-employer plans

Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the Company to this plan in 2019 in respect of post-retirement medical benefits were $3 million (2018 – $3 million; 2017 – $5 million).

24. Stock-based compensation

At December 31, 2019, the Company had several stock-based compensation plans including stock option plans, various cash-settled liability plans, and an employee share purchase plan. These plans resulted in an expense of $133 million in 2019 (2018 – $75 million; 2017 – $35 million).

Effective January 31, 2017, Mr. E. Hunter Harrison resigned from all positions held by him at the Company, including as the Company’s Chief Executive Officer and as a member of the Board of Directors of the Company. In connection with Mr. Harrison’s resignation, the Company entered into a separation agreement with Mr. Harrison. Under the terms of the separation agreement, the Company agreed to a limited waiver of Mr. Harrison’s non-competition and non-solicitation obligations.

Effective January 31, 2017, pursuant to the separation agreement, Mr. Harrison forfeited certain pension and post-retirement benefits and agreed to the surrender for cancellation of 22,514 PSUs, 68,612 DSUs, and 752,145 stock options. As a result of this agreement, the Company recognized a recovery of $51 million in "Compensation and benefits" in the first quarter of 2017. Of this amount, $27 million related to a recovery from cancellation of certain pension benefits.

CP 2019 ANNUAL REPORT/ 108

A. Stock option plan

The following table summarizes the Company’s stock option plan as at December 31, 2019:



	Options outstanding				Non-vested options
	Number of options		Weighted-average exercise price		Number of options		Weighted-average grant date fair value
Outstanding, January 1, 2019	1,533,598		$	176.02	714,102		$	48.94
Granted	224,730		$	269.99	224,730		$	63.69
Exercised	(334,127	)	$	125.12	N/A		N/A
Vested	N/A		N/A		(169,193	)	$	47.59
Forfeited	(7,855	)	$	234.59	(7,855	)	$	54.75
Outstanding, December 31, 2019	1,416,346		$	199.12	761,784		$	53.54
Vested or expected to vest at December 31, 2019⁽¹⁾	1,385,626		$	197.89	N/A		N/A
Exercisable, December 31, 2019	654,562		$	162.59	N/A		N/A

⁽¹⁾As at December 31, 2019, the weighted-average remaining term of vested or expected to vest options was 4.9 years with an aggregate intrinsic value of $184 million.

The following table provides the number of stock options outstanding and exercisable as at December 31, 2019 by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on December 31, 2019 at the Company’s closing stock price of $331.03.



	Options outstanding						Options exercisable
Range of exercise prices	Number of options	Weighted-average years to expiration	Weighted-average exercise price		Aggregate intrinsic value (millions)		Number of options	Weighted-average exercise price		Aggregate intrinsic value (millions)
$51.17 – $167.50	354,357	4.1	$	123.00	$	74	303,455	$	116.84	$	65
$167.51 – $197.05	355,040	4.1	$	188.53	$	51	135,532	$	175.30	$	21
$197.06– $247.87	376,654	4.8	$	222.75	$	41	215,465	$	218.98	$	24
$247.88 – $313.16	330,295	5.9	$	265.23	$	22	110	$	260.52	$	—
Total⁽¹⁾	1,416,346	4.7	$	199.12	$	187	654,562	$	162.59	$	110

⁽¹⁾ As at December 31, 2019, the total number of in-the-money stock options outstanding was 1,416,346 with a weighted-average exercise price of $199.12. The weighted-average years to expiration of exercisable stock options is 4.2 years.

Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years. Certain stock options granted in 2019 and 2018 vest upon the achievement of specific performance criteria. Under the fair value method, the fair value of the stock options at grant date was approximately $14 million for options issued in 2019 (2018 – $16 million; 2017 – $17 million). The weighted-average fair value assumptions were approximately:



	2019			2018			2017
Expected option life (years)⁽¹⁾	5.00			5.00			5.48
Risk-free interest rate⁽²⁾	2.22		%	2.22		%	1.85		%
Expected stock price volatility⁽³⁾	25.04		%	24.81		%	26.94		%
Expected annual dividends per share⁽⁴⁾	$	2.6191		$	2.3854		$	2.0010
Expected forfeiture rate⁽⁵⁾	6.05		%	4.70		%	2.80		%
Weighted-average grant date fair value of options granted during the year	$	63.69		$	55.63		$	45.78

⁽¹⁾ Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option.

⁽²⁾ Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the option.

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⁽³⁾ Based on the historical volatility of the Company’s stock price over a period commensurate with the expected term of the option.

⁽⁴⁾ Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option. On May 6, 2019, the Company announced an increase in its quarterly dividend to $0.8300 per share, representing $3.3200 on an annual basis.

⁽⁵⁾ The Company estimates forfeitures based on past experience. The rate is monitored on a periodic basis.

In 2019, the expense for stock options (regular and performance) was $14 million (2018 – $10 million; 2017 – $3 million). At December 31, 2019, there was $14 million of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average period of approximately 1.3 years.

The total fair value of shares vested for the stock option plan during 2019 was $8 million (2018 – $11 million; 2017 – $14 million).

The following table provides information related to all options exercised in the stock option plan during the years ended December 31:



(in millions of Canadian dollars)	2019		2018		2017
Total intrinsic value	$	63	$	17	$	36
Cash received by the Company upon exercise of options	26		24		45

B. Other share-based plans

Performance share unit plan

During 2019, the Company issued 134,260 PSUs with a grant date fair value of approximately $36 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company's Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately three years after the grant date, contingent upon CP’s performance ("performance factor"). The fair value of these PSUs is measured periodically until settlement, using either a lattice-based valuation model or a Monte Carlo simulation model.

The performance period for 133,681 PSUs issued in 2019 is January 1, 2019 to December 31, 2021, and the performance factors for these PSUs are Return on Invested Capital ("ROIC"), Total Shareholder Return ("TSR") compared to the S&P/TSX 60 Index, and TSR compared to Class I railways. The performance factors for the remaining 579 PSUs are annual revenue for the fiscal year 2020, diluted earnings per share for the fiscal year 2020, and share price appreciation.

The performance period for 125,280 PSUs issued in 2018 is January 1, 2018 to December 31, 2020, and the performance factors for these PSUs are ROIC, TSR compared to the S&P/TSX Capped Industrial Index, and TSR compared to S&P 1500 Road and Rail Index. The performance factors for the remaining 36,975 PSUs are annual revenue for the fiscal year 2020, diluted earnings per share for the fiscal year 2020, and share price appreciation.

The performance period for PSUs issued in 2017 was January 1, 2017 to December 31, 2019, and the performance factors for these PSUs were ROIC, TSR compared to the S&P/TSX Capped Industrial Index, and TSR compared to S&P 1500 Road and Rail Index. The resulting estimated payout was 193% on 121,098 total outstanding awards representing a total fair value of $75 million at December 31, 2019, calculated using the Company's average share price using the last 30 trading days preceding December 31, 2019.

The performance period for PSUs issued in 2016 was January 1, 2016 to December 31, 2018, and the performance factors for these PSUs were Operating ratio, ROIC, TSR compared to the S&P/TSX 60 Index, and TSR compared to Class I railways. The resulting payout was 177% of the outstanding units multiplied by the Company's average share price that was calculated using the last 30 trading days preceding December 31, 2018. In the first quarter of 2019, payouts occurred on the total outstanding awards, including dividends reinvested, totalling $54 million on 117,228 outstanding awards.

The following table summarizes information related to the Company’s PSUs as at December 31:



	2019		2018
Outstanding, January 1	395,048		334,028
Granted	134,260		162,255
Units, in lieu of dividends	4,032		3,643
Settled	(117,228	)	(66,243	)
Forfeited	(12,976	)	(38,635	)
Outstanding, December 31	403,136		395,048

In 2019, the expense for PSUs was $89 million (2018 – $54 million; 2017 – $30 million). At December 31, 2019, there was $42 million of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of approximately 1.5 years.

CP 2019 ANNUAL REPORT/ 110

Deferred share unit plan

The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated.

Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a 25% company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have five years to meet their ownership targets.

The expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.

The following table summarizes information related to the DSUs as at December 31:



	2019		2018
Outstanding, January 1	152,760		156,547
Granted	19,912		16,481
Units, in lieu of dividends	1,608		1,551
Settled	(12,110	)	(20,072	)
Forfeited	(951	)	(1,747	)
Outstanding, December 31	161,219		152,760

During 2019, the Company granted 19,912 DSUs with a grant date fair value of approximately $5 million. In 2019, the expense for DSUs was $20 million (2018 – $4 million expense; 2017 – $3 million recovery). At December 31, 2019, there was $0.7 million of total unrecognized compensation related to DSUs which is expected to be recognized over a weighted-average period of approximately 1.2 years.

Summary of share-based liabilities paid

The following table summarizes the total share-based liabilities paid for each of the years ended December 31:



(in millions of Canadian dollars)	2019		2018		2017
Plan
PSUs	$	54	$	30	$	31
DSUs	4		6		6
Other	—		1		2
Total	$	58	$	37	$	39

C. Employee share purchase plan

The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the one year vesting period. Under the plan, the Company matches $1 for every $3 contributed by employees up to a maximum employee contribution of 6% of annual salary.

The total number of shares purchased in 2019 on behalf of participants, including the Company's contributions, was 137,942 (2018 – 118,865; 2017 – 130,041). In 2019, the Company’s contributions totalled $8 million (2018 – $6 million; 2017 – $5 million) and the related expense was $6 million (2018 – $5 million; 2017 – $4 million).

25. Variable interest entities

The Company leases equipment from certain trusts, which have been ~~calculated~~determined to be variable interest entities financed by a combination of debt and equity provided by unrelated third parties. The lease agreements, which are classified as operating leases, have fixed price purchase options which create the Company’s variable interests and result in the trusts being considered variable interest entities.

111 /SERVICE EXCELLENCE

Maintaining and operating the leased assets according to specific contractual obligations outlined in the terms of the lease agreements and industry standards is the Company’s responsibility. The rigour of the contractual terms of the lease agreements and industry standards are such that the Company has limited discretion over the maintenance activities associated with these assets. As such, the Company concluded these terms do not provide the Company with the power to direct the activities of the variable interest entities in a way that has a significant impact on the entities’ economic performance.

The financial exposure to the Company as a result of its involvement with the variable interest entities is equal to the fixed lease payments due to the trusts. In 2019, lease payments after tax were $15 million. Future minimum lease payments, before tax, of $138 million will be payable over the next 11 years.

The Company does not guarantee the residual value of the assets to the lessor; however, it must deliver to the lessor the assets in good operating condition, subject to normal wear and tear, at the end of the lease term.

As the Company’s actions and decisions do not significantly affect the variable interest entities’ performance, and the Company’s fixed price purchase option is not considered to be potentially significant to the variable interest entities, the Company is not considered to be the primary beneficiary, and does not consolidate these variable interest entities.

Additionally, the Company is the sole beneficiary of an independent voting trust that holds 100% of the equity interest in CMQ U.S. The trust is governed by a single trustee who is responsible for all day-to-day decisions of CMQ U.S. The Company has no substantive participating or kick-out rights and therefore lacks the power to direct the activities of CMQ U.S. As a result, CMQ U.S. is considered to be a variable interest entity, however, the Company is not considered to be the primary beneficiary and, therefore, does not consolidate this variable interest entity.

26. Commitments and contingencies

In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at December 31, 2019 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s business, financial position or results of operations. However, an unexpected adverse resolution of one or more of these legal actions could have a material adverse effect on the Company's business, financial position, results of operations or liquidity in a particular quarter or fiscal year.

Commitments

At December 31, 2019, the Company had committed to total future capital expenditures amounting to $664 million and operating expenditures relating to supplier purchase obligations, such as locomotive maintenance and overhaul agreements, as well as agreements to purchase other goods and services amounting to approximately $3.1 billion for the years 2020–2032, of which CP estimates approximately $2.7 billion will be incurred in the next five years.

Commitments related to leases, including minimum annual payments for the next five years and thereafter, are included in Note 21.

Legal proceedings related to Lac-Mégantic rail accident

On July 6, 2013, a train carrying petroleum crude oil operated by Montréal Maine and Atlantic Railway (“MMAR”) or a subsidiary, Montréal Maine & Atlantic Canada Co. (“MMAC” and collectively the “MMA Group”), derailed in Lac-Mégantic, Québec. The derailment occurred on a section of railway owned and operated by the MMA Group and while the MMA Group had custody and control of the train.

Following the derailment, MMAC sought court protection in Canada under the Companies’ Creditors Arrangement Act and MMAR filed for bankruptcy in the U.S. Plans of arrangement were approved in both Canada and the U.S. (the “Plans”), providing for the distribution of approximately $440 million amongst those claiming derailment damages.

A number of legal proceedings, set out below, were commenced in Canada and the U.S. against CP and others:

(1)

Québec's Minister of Sustainable Development, Environment, Wildlife and Parks ordered various parties, including CP, to clean up the derailment site and served CP with a Notice of Claim for $95 million for those cleanup costs. CP appealed the cleanup order and contested the Notice of Claim with the Administrative Tribunal of Québec. These proceedings are stayed pending determination of the Attorney General of Québec (“AGQ”) action (paragraph 2 below).

(2)

The AGQ sued CP in the Québec Superior Court claiming $409 million in damages, which was amended and reduced to $315 million (the “AGQ Action”). The AGQ Action alleges that: (i) CP exercised custody or control over the petroleum crude oil until its delivery to Irving Oil and was negligent in that custody and control; and (ii) CP is vicariously liable for the acts and omissions of the MMA Group.

(3)

A class action in the Québec Superior Court on behalf of persons and entities residing in, owning or leasing property in, operating a business in, or physically present in Lac-Mégantic at the time of the derailment was certified against CP on May 8, 2015 (the "Class Action"). Other defendants including MMAC and, Mr. Thomas Harding ("Harding") were added to the Class Action on January 25, 2017. The Class Action seeks unquantified damages, including for wrongful death, personal injury, and property damage.

(4)

NaN subrogated insurers sued CP in the Québec Superior Court claiming approximately $16 million in damages, which was amended and reduced to $14 million (the “Promutuel Action”), and 2 additional subrogated insurers sued CP claiming approximately $3 million in damages (the “Royal Action”). Both actions contain similar allegations as the AGQ Action. The actions do not identify the subrogated parties, and therefore overlap with the claims process under the Plans is unclear. The Royal Action is stayed pending determination of the consolidated proceedings described below.

On December 11, 2017, the AGQ Action, the Class Action and the Promutuel Action were consolidated. These consolidated claims are currently scheduled for a joint liability trial commencing September 28, 2020, followed by a damages trial, if necessary.

(5)

NaN plaintiffs (all individual claims joined in one action) sued CP, MMAC and Harding in the Québec Superior Court claiming approximately U.S. $5 million in damages for economic loss and pain and suffering, and asserting similar allegations as in the Class Action and the AGQ Action. The plaintiffs opted-out of the Class Action and all but two are also plaintiffs in litigation against CP, described in paragraph 7 below. This action is stayed pending determination of the consolidated claims described above.

(6)

The MMAR U.S. estate representative commenced an action against CP in November 2014 in the Maine Bankruptcy Court claiming that CP failed to abide by certain regulations and seeking damages for MMAR’s loss in business value (as yet unquantified). This action asserts that CP knew or ought to have known that the shipper misclassified the petroleum crude oil and therefore should have refused to transport it.


(7)	The class and mass tort action commenced against CP in June 2015 in Texas (on behalf of Lac-Mégantic residents and wrongful death representatives) and the wrongful death and personal injury actions commenced against CP in June 2015 in Illinois and Maine, were all transferred and consolidated in

CP 2019 ANNUAL REPORT/ 112

Federal District Court in Maine (the “Maine Actions”). The Maine Actions allege that CP negligently misclassified and improperly packaged the petroleum crude oil. On CP’s motion, the Maine Actions were dismissed. The plaintiffs are appealing the dismissal decision, which may be heard in April 2020.

(8)

The trustee for the wrongful death trust commenced Carmack Amendment claims against CP in North Dakota Federal Court, seeking to recover approximately U.S. $6 million for damaged rail cars and lost crude and reimbursement for the settlement paid by the consignor and the consignee under the Plans (alleged to be U.S. $110 million and U.S. $60 million, respectively). This action is scheduled for trial in August 2020.

At this stage of the proceedings, any potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, CP denies liability and is vigorously defending these proceedings.

27. Guarantees

In the normal course of operating the railway, the Company enters into contractual arrangements that involve providing certain guarantees, which extend over the term of the contracts. These guarantees include, but are not limited to:


•	a guarantee to uphold an equity investee's credit facility of $19 million at December 31, 2019;

guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in the operation of the railway through operating leases, rental agreements, easements, trackage, and interline agreements; and

indemnifications of certain tax-related payments incurred by lessors and lenders.

The maximum amount that could be payable under these guarantees, excluding residual value guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or a portion of amounts paid under guarantees to other parties in the event of the occurrence of specified events could be recoverable from other parties or through insurance. The Company has accrued for all guarantees that it expects to pay. At December 31, 2019, these accruals amounted to $10 million (2018 – $10 million), and are recorded in “Accounts payable and accrued liabilities".

Indemnifications

Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Plan, the Company has undertaken to indemnify and save harmless the trustee, to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs, and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The indemnity includes liabilities, costs, or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined benefit and defined contribution options of the pension plans, or otherwise with respect to the assets of the pension plans that are not part of the fund. The indemnity survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry.

Pursuant to the voting trust agreement executed as part of the CMQ U.S. acquisition, the Company has undertaken to indemnify and save harmless the trustee from any loss, cost, or expense in connection with the independent voting trust and any suit or litigation, except as a result of willful misconduct or gross negligence by the trustee.

At December 31, 2019, the Company had not recorded any liabilities associated with the above indemnifications, as it does not expect to make any payments pertaining to them.

113 /SERVICE EXCELLENCE

28. Segmented and geographic information

Operating segment

The Company operates in only 1 operating segment: rail transportation. Operating results by geographic areas, railway corridors, or other lower-level components or units of operation are not reviewed by the Company’s chief operating decision-maker to make decisions about the allocation of resources to, or the assessment of performance of, such geographic areas, corridors, components, or units of operation.

In the years ended December 31, 2019, 2018, and 2017, no one customer comprised more than 10% of total revenues and accounts receivable.

Geographic information



(in millions of Canadian dollars)	Canada		United States		Total
2019
Revenues	$	5,675	$	2,117	$	7,792
Long-term assets excluding financial instruments and pension assets	13,131		7,020		20,151
2018
Revenues	5,232		2,084		7,316
Long-term assets excluding financial instruments and pension assets	12,133		6,759		18,892
2017
Revenues	4,667		1,887		6,554
Long-term assets excluding financial instruments and pension assets	11,505		5,947		17,452

29. Selected quarterly data (unaudited)



For the quarter ended	2019								2018
(in millions of Canadian dollars, except per share data)	Dec. 31		Sep. 30		Jun. 30		Mar. 31		Dec. 31		Sep. 30		Jun. 30		Mar. 31
Total revenues	$	2,069	$	1,979	$	1,977	$	1,767	$	2,006	$	1,898	$	1,750	$	1,662
Operating income	890		869		822		543		874		790		627		540
Net income	664		618		724		434		545		622		436		348
Basic earnings per share⁽¹⁾	$	4.84	$	4.47	$	5.19	$	3.10	$	3.84	$	4.36	$	3.05	$	2.41
Diluted earnings per share⁽¹⁾	4.82		4.46		5.17		3.09		3.83		4.35		3.04		2.41

⁽¹⁾Earnings per share for the four quarters combined may not equal earnings per share for the year due to rounding.

30. Condensed consolidating financial information

Canadian Pacific Railway Company, a 100%-owned subsidiary of CPRL, is the issuer of certain debt securities, which are fully and unconditionally guaranteed by CPRL. The following tables present condensed consolidating financial information (“CCFI”) in accordance with Rule 3-10(c) of Regulation S-X.

Investments in subsidiaries are accounted for under the equity method when presenting the CCFI.

The tables include all adjustments necessary to reconcile the CCFI on a consolidated basis to CPRL’s Consolidated Financial Statements for the years presented.

CP 2019 ANNUAL REPORT/ 114

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31, 2019



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Revenues
Freight	$	—		$	5,527		$	2,084		$	2		$	7,613
Non-freight	—			135			570			(526		)	179
Total revenues	—			5,662			2,654			(524		)	7,792
Operating expenses
Compensation and benefits	—			1,042			490			8			1,540
Fuel	—			695			187			—			882
Materials	—			142			53			15			210
Equipment rents	—			177			(9		)	(31		)	137
Depreciation and amortization	—			423			283			—			706
Purchased services and other	—			967			742			(516		)	1,193
Total operating expenses	—			3,446			1,746			(524		)	4,668
Operating income	—			2,216			908			—			3,124
Less:
Other (income) expense	(12		)	(86		)	9			—			(89		)
Other components of net periodic benefit (recovery) cost	—			(388		)	7			—			(381		)
Net interest (income) expense	(1		)	474			(25		)	—			448
Income before income tax expense and equity in net earnings of subsidiaries	13			2,216			917			—			3,146
Less: Income tax expense	3			522			181			—			706
Add: Equity in net earnings of subsidiaries	2,430			736			—			(3,166		)	—
Net income	$	2,440		$	2,430		$	736		$	(3,166	)	$	2,440

115 /SERVICE EXCELLENCE

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31, 2018



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Revenues
Freight	$	—		$	5,098		$	2,054		$	—		$	7,152
Non-freight	—			120			361			(317		)	164
Total revenues	—			5,218			2,415			(317		)	7,316
Operating expenses
Compensation and benefits	—			996			466			6			1,468
Fuel	—			716			202			—			918
Materials	—			139			49			13			201
Equipment rents	—			137			(7		)	—			130
Depreciation and amortization	—			424			272			—			696
Purchased services and other	—			886			522			(336		)	1,072
Total operating expenses	—			3,298			1,504			(317		)	4,485
Operating income	—			1,920			911			—			2,831
Less:
Other expense (income)	19			193			(38		)	—			174
Other components of net periodic benefit (recovery) cost	—			(386		)	2			—			(384		)
Net interest expense (income)	3			478			(28		)	—			453
(Loss) income before income tax (recovery) expense and equity in net earnings of subsidiaries	(22		)	1,635			975			—			2,588
Less: Income tax (recovery) expense	(4		)	469			172			—			637
Add: Equity in net earnings of subsidiaries	1,969			803			—			(2,772		)	—
Net income	$	1,951		$	1,969		$	803		$	(2,772	)	$	1,951

CP 2019 ANNUAL REPORT/ 116

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Revenues
Freight	$	—		$	4,516		$	1,859		$	—		$	6,375
Non-freight	—			140			372			(333		)	179
Total revenues	—			4,656			2,231			(333		)	6,554
Operating expenses
Compensation and benefits	—			879			423			7			1,309
Fuel	—			522			155			—			677
Materials	—			134			41			15			190
Equipment rents	—			143			(1		)	—			142
Depreciation and amortization	—			400			261			—			661
Purchased services and other	—			826			585			(355		)	1,056
Total operating expenses	—			2,904			1,464			(333		)	4,035
Operating income	—			1,752			767			—			2,519
Less:
Other (income) expense	(33		)	(149		)	4			—			(178		)
Other components of net periodic benefit (recovery) cost	—			(278		)	4			—			(274		)
Net interest (income) expense	(12		)	517			(32		)	—			473
Income before income tax expense (recovery) and equity in net earnings of subsidiaries	45			1,662			791			—			2,498
Less: Income tax expense (recovery)	7			475			(389		)	—			93
Add: Equity in net earnings of subsidiaries	2,367			1,180			—			(3,547		)	—
Net income	$	2,405		$	2,367		$	1,180		$	(3,547	)	$	2,405

117 /SERVICE EXCELLENCE

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2019



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Net income	$	2,440		$	2,430		$	736		$	(3,166	)	$	2,440
Net gain (loss) in foreign currency translation adjustments, net of hedging activities	—			288			(251		)	—			37
Change in derivatives designated as cash flow hedges	—			10			—			—			10
Change in pension and post-retirement defined benefit plans	—			(651		)	(10		)	—			(661		)
Other comprehensive loss before income taxes	—			(353		)	(261		)	—			(614		)
Income tax recovery on above items	—			132			3			—			135
Equity accounted investments	(479		)	(258		)	—			737			—
Other comprehensive loss	(479		)	(479		)	(258		)	737			(479		)
Comprehensive income	$	1,961		$	1,951		$	478		$	(2,429	)	$	1,961

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2018



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Net income	$	1,951		$	1,969		$	803		$	(2,772	)	$	1,951
Net (loss) gain in foreign currency translation adjustments, net of hedging activities	—			(479		)	419			—			(60		)
Change in derivatives designated as cash flow hedges	—			38			—			—			38
Change in pension and post-retirement defined benefit plans	—			(455		)	6			—			(449		)
Other comprehensive (loss) income before income taxes	—			(896		)	425			—			(471		)
Income tax recovery (expense) on above items	—			171			(2		)	—			169
Equity accounted investments	(302		)	423			—			(121		)	—
Other comprehensive (loss) income	(302		)	(302		)	423			(121		)	(302		)
Comprehensive income	$	1,649		$	1,667		$	1,226		$	(2,893	)	$	1,649

CP 2019 ANNUAL REPORT/ 118

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)		CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Net income	$	2,405	$	2,367		$	1,180		$	(3,547	)	$	2,405
Net gain (loss) in foreign currency translation adjustments, net of hedging activities	—		318			(294		)	—			24
Change in derivatives designated as cash flow hedges	—		19			—			—			19
Change in pension and post-retirement defined benefit plans	—		82			(2		)	—			80
Other comprehensive income (loss) before income taxes	—		419			(296		)	—			123
Income tax (expense) recovery on above items	—		(66		)	1			—			(65		)
Equity accounted investments	58		(295		)	—			237			—
Other comprehensive income (loss)	58		58			(295		)	237			58
Comprehensive income	$	2,463	$	2,425		$	885		$	(3,310	)	$	2,463

119 /SERVICE EXCELLENCE

CONDENSED CONSOLIDATING BALANCE SHEETS

AS AT DECEMBER 31, 2019



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries		Consolidating Adjustments and Eliminations			CPRL Consolidated
Assets
Current assets
Cash and cash equivalents	$	—		$	37		$	96	$	—		$	133
Accounts receivable, net	24			597			184		—			805
Accounts receivable, intercompany	164			313			249		(726		)	—
Short-term advances to affiliates	—			1,387			3,700		(5,087		)	—
Materials and supplies	—			144			38		—			182
Other current assets	—			41			49		—			90
	188			2,519			4,316		(5,813		)	1,210
Long-term advances to affiliates	1,090			7			84		(1,181		)	—
Investments	—			32			309		—			341
Investments in subsidiaries	10,522			11,165			—		(21,687		)	—
Properties	—			10,287			8,869		—			19,156
Goodwill and intangible assets	—			—			206		—			206
Pension asset	—			1,003			—		—			1,003
Other assets	—			173			278		—			451
Deferred income taxes	4			—			—		(4		)	—
Total assets	$	11,804		$	25,186		$	14,062	$	(28,685	)	$	22,367
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities	$	146		$	1,189		$	358	$	—		$	1,693
Accounts payable, intercompany	6			402			318		(726		)	—
Short-term advances from affiliates	4,583			490			14		(5,087		)	—
Long-term debt maturing within one year	—			548			51		—			599
	4,735			2,629			741		(5,813		)	2,292
Pension and other benefit liabilities	—			698			87		—			785
Long-term advances from affiliates	—			1,174			7		(1,181		)	—
Other long-term liabilities	—			206			356		—			562
Long-term debt	—			8,145			13		—			8,158
Deferred income taxes	—			1,812			1,693		(4		)	3,501
Total liabilities	4,735			14,664			2,897		(6,998		)	15,298
Shareholders’ equity
Share capital	1,993			538			4,610		(5,148		)	1,993
Additional paid-in capital	48			406			265		(671		)	48
Accumulated other comprehensive (loss) income	(2,522		)	(2,522		)	581		1,941			(2,522		)
Retained earnings	7,550			12,100			5,709		(17,809		)	7,550
	7,069			10,522			11,165		(21,687		)	7,069
Total liabilities and shareholders’ equity	$	11,804		$	25,186		$	14,062	$	(28,685	)	$	22,367

CP 2019 ANNUAL REPORT/ 120

CONDENSED CONSOLIDATING BALANCE SHEETS

AS AT DECEMBER 31, 2018



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries		Consolidating Adjustments and Eliminations			CPRL Consolidated
Assets
Current assets
Cash and cash equivalents	$	—		$	42		$	19	$	—		$	61
Accounts receivable, net	—			629			186		—			815
Accounts receivable, intercompany	125			167			224		(516		)	—
Short-term advances to affiliates	—			1,602			4,651		(6,253		)	—
Materials and supplies	—			136			37		—			173
Other current assets	—			39			29		—			68
	125			2,615			5,146		(6,769		)	1,117
Long-term advances to affiliates	1,090			5			93		(1,188		)	—
Investments	—			24			179		—			203
Investments in subsidiaries	11,443			12,003			—		(23,446		)	—
Properties	—			9,579			8,839		—			18,418
Goodwill and intangible assets	—			—			202		—			202
Pension asset	—			1,243			—		—			1,243
Other assets	—			57			14		—			71
Deferred income taxes	6			—			—		(6		)	—
Total assets	$	12,664		$	25,526		$	14,473	$	(31,409	)	$	21,254
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities	$	115		$	1,017		$	317	$	—		$	1,449
Accounts payable, intercompany	4			344			168		(516		)	—
Short-term advances from affiliates	5,909			341			3		(6,253		)	—
Long-term debt maturing within one year	—			506			—		—			506
	6,028			2,208			488		(6,769		)	1,955
Pension and other benefit liabilities	—			639			79		—			718
Long-term advances from affiliates	—			1,182			6		(1,188		)	—
Other long-term liabilities	—			120			117		—			237
Long-term debt	—			8,135			55		—			8,190
Deferred income taxes	—			1,799			1,725		(6		)	3,518
Total liabilities	6,028			14,083			2,470		(7,963		)	14,618
Shareholders’ equity
Share capital	2,002			538			5,946		(6,484		)	2,002
Additional paid-in capital	42			1,656			92		(1,748		)	42
Accumulated other comprehensive (loss) income	(2,043		)	(2,043		)	839		1,204			(2,043		)
Retained earnings	6,635			11,292			5,126		(16,418		)	6,635
	6,636			11,443			12,003		(23,446		)	6,636
Total liabilities and shareholders’ equity	$	12,664		$	25,526		$	14,473	$	(31,409	)	$	21,254

121 /SERVICE EXCELLENCE

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2019



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Cash provided by operating activities	$	1,601		$	2,133		$	1,026		$	(1,770	)	$	2,990
Investing activities
Additions to properties	—			(1,243		)	(404		)	—			(1,647		)
Investment in Central Maine & Québec Railway	—			(47		)	(127		)	—			(174		)
Proceeds from sale of properties and other assets	—			21			5			—			26
Advances to affiliates	—			(263		)	(396		)	659			—
Repayment of advances to affiliates	—			468			1,350			(1,818		)	—
Capital contributions to affiliates	—			(125		)	—			125			—
Repurchase of share capital from affiliates	1,246			1,345			—			(2,591		)	—
Other	—			1			(9		)	—			(8		)
Cash provided by (used in) investing activities	1,246			157			419			(3,625		)	(1,803		)
Financing activities
Dividends paid	(412		)	(1,612		)	(158		)	1,770			(412		)
Issuance of share capital	—			—			125			(125		)	—
Return of share capital to affiliates	—			(1,246		)	(1,345		)	2,591			—
Issuance of CP Common Shares	26			—			—			—			26
Purchase of CP Common Shares	(1,132		)	(2		)	—			—			(1,134		)
Issuance of long-term debt, excluding commercial paper	—			397			—			—			397
Repayment of long-term debt, excluding commercial paper	—			(500		)	—			—			(500		)
Net issuance of commercial paper	—			524			—			—			524
Advances from affiliates	495			151			13			(659		)	—
Repayment of advances from affiliates	(1,813		)	(5		)	—			1,818			—
Other	(11		)	(1		)	—			—			(12		)
Cash used in financing activities	(2,847		)	(2,294		)	(1,365		)	5,395			(1,111		)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	—			(1		)	(3		)	—			(4		)
Cash position
(Decrease) increase in cash and cash equivalents	—			(5		)	77			—			72
Cash and cash equivalents at beginning of year	—			42			19			—			61
Cash and cash equivalents at end of year	$	—		$	37		$	96		$	—		$	133

CP 2019 ANNUAL REPORT/ 122

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2018



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Cash provided by operating activities	$	316		$	1,968		$	1,128		$	(700	)	$	2,712
Investing activities
Additions to properties	—			(971		)	(580		)	—			(1,551		)
Proceeds from sale of properties and other assets	—			35			43			—			78
Advances to affiliates	—			(611		)	(209		)	820			—
Repayment of advances to affiliates	—			—			866			(866		)	—
Repurchase of share capital from affiliates	500			964			—			(1,464		)	—
Other	—			18			(3		)	—			15
Cash provided by (used in) investing activities	500			(565		)	117			(1,510		)	(1,458		)
Financing activities
Dividends paid	(348		)	(348		)	(352		)	700			(348		)
Return of share capital to affiliates	—			(500		)	(964		)	1,464			—
Issuance of CP Common Shares	24			—			—			—			24
Purchase of CP Common Shares	(1,103		)	—			—			—			(1,103		)
Issuance of long-term debt, excluding commercial paper	—			638			—			—			638
Repayment of long-term debt, excluding commercial paper	—			(753		)	—			—			(753		)
Advances from affiliates	820			—			—			(820		)	—
Repayment of advances from affiliates	(209		)	(657		)	—			866			—
Cash used in financing activities	(816		)	(1,620		)	(1,316		)	2,210			(1,542		)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	—			18			(7		)	—			11
Cash position
Decrease in cash and cash equivalents	—			(199		)	(78		)	—			(277		)
Cash and cash equivalents at beginning of year	—			241			97			—			338
Cash and cash equivalents at end of year	$	—		$	42		$	19		$	—		$	61

123 /SERVICE EXCELLENCE

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Cash provided by operating activities	$	338		$	1,334		$	989		$	(479	)	$	2,182
Investing activities
Additions to properties	—			(950		)	(390		)	—			(1,340		)
Proceeds from sale of properties and other assets	—			29			13			—			42
Advances to affiliates	(590		)	(550		)	(1,528		)	2,668			—
Repayment of advances to affiliates	—			242			243			(485		)	—
Capital contributions to affiliates	—			(1,039		)	—			1,039			—
Repurchase of share capital from affiliates	—			156			—			(156		)	—
Other	—			5			(2		)	—			3
Cash used in investing activities	(590		)	(2,107		)	(1,664		)	3,066			(1,295		)
Financing activities
Dividends paid	(310		)	(310		)	(169		)	479			(310		)
Issuance of share capital	—			—			1,039			(1,039		)	—
Return of share capital to affiliates	—			—			(156		)	156			—
Issuance of CP Common Shares	45			—			—			—			45
Purchase of CP Common Shares	(381		)	—			—			—			(381		)
Repayment of long-term debt, excluding commercial paper	—			(32		)	—			—			(32		)
Advances from affiliates	1,383			1,285			—			(2,668		)	—
Repayment of advances from affiliates	(485		)	—			—			485			—
Settlement of forward starting swaps	—			(22		)	—			—			(22		)
Cash provided by (used in) financing activities	252			921			714			(2,587		)	(700		)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	—			(7		)	(6		)	—			(13		)
Cash position
Increase in cash and cash equivalents	—			141			33			—			174
Cash and cash equivalents at beginning of year	—			100			64			—			164
Cash and cash equivalents at end of year	$	—		$	241		$	97		$	—		$	338

CP 2019 ANNUAL REPORT/ 124

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2019, an evaluation was carried out under the supervision of and with the participation of CP's management, including CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures were effective as of December 31, 2019, to ensure that information required to be disclosed by the Company in reports that they file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

Management is responsible for the financial statements and for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2019 has been audited by Deloitte LLP, the Company's independent registered public accounting firm who audited the Company's Consolidated Financial Statements included in this Form 10-K, as stated in their report, which is included herein.

Changes in Internal Control over Financial Reporting

During the three months ended December 31, 2019, the Company has not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

125 /SERVICE EXCELLENCE

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Canadian Pacific Railway Limited

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Canadian Pacific Railway Limited and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 20, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards ~~Board Accounting Standards Codification Topic 718 (FASB ASC 718) using~~Update 2016-02, Leases (Topic 842) and related amendments.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the ~~grant date fair value.~~

•

~~Each director was provided with a $1,000 donation to the charity of their choice in December 2017 in gratitude for their year of service. This amount appears under~~~~All other compensation~~.

~~Mr. Paull, Mr. Reardon~~effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and ~~Mr. Trafton were paid~~are required to be independent with respect to the Company in accordance with the U.S. ~~dollars~~federal securities laws and ~~their share-based awards have been converted~~the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to ~~Canadian dollars using~~obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the ~~2017 average exchange rate~~risk that a material weakness exists, testing and evaluating the design and operating effectiveness of ~~$1.2986.~~

~~The Governance Committee reviews director compensation every two to three years~~internal control based on the ~~directors’ responsibilities~~assessed risk, and ~~time commitment~~performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



Canada		98-0355078
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

7550 Ogden Dale Road S.E.,
Calgary ~~Alberta, Canada~~	AB	T2C 4X9
(Address of Principal Executive Offices)		(Zip Code)



	Title of ~~each class~~ Each Class	Trading Symbol(s)		Name of ~~each exchange~~Each Exchange on which ~~registered~~ Registered
Common Shares, without par value, of Canadian Pacific Railway Limited		CP	New York Stock Exchange
		CP	Toronto Stock Exchange
Perpetual 4% Consolidated Debenture Stock of Canadian Pacific Railway Company		CP/40	New York Stock Exchange
		BC87	London Stock Exchange



Large accelerated filer	☒	þ	Accelerated filer	☐	Non-accelerated filer	☐

~~Non-accelerated~~ ~~filer~~	☐ ~~(Do not check if a smaller reporting company)~~		Smaller reporting company		☐

			Emerging growth company		☐



PART I		~~PART III~~Page
Item 1.	Business	3
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	21
Item 3.	Legal Proceedings	25
Item 4.	Mine Safety Disclosures	25
	Information about our Executive Officers	26

~~Item 10~~ PART II
Item 5.	Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data	31
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 8.	Financial Statements and Supplementary Data	70
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	124
Item 9A.	Controls and Procedures	124
Item 9B.	Other Information	126

PART III
Item 10.	Directors, Executive Officers and Corporate Governance		1 128
Item 11 11.		Executive Compensation		5 128
Item 12 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		53 128
Item 13 13.		Certain Relationships and Related Transactions, and Director Independence		53 128
Item 14 14.		Principal Accounting Fees and Services		54 128

		~~PART IV~~
~~Item 15~~		~~Exhibits, Financial Statement Schedules~~		55
		~~Signatures~~		56


	~~Ownership requirement~~ ~~(as a multiple of base salary)~~
~~CEO~~		6x
~~Executive Vice-President~~		3x
~~Senior Vice-President~~		2x
~~Vice-President~~		~~1.5 to 2x~~
~~Senior management~~		1x



☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


~~Compensation discussion and analysis~~		7
~~Our approach to executive compensation~~		7
~~Compensation governance~~		10
~~Compensation program~~		15
~~2017 Executive compensation~~		16
~~Executive profiles~~		27
~~Share performance and cost of management~~		40
~~Executive compensation details~~		41
~~Summary compensation table~~		41
~~Incentive plan awards~~		44
~~Retirement plans~~		47
~~Termination and change in control~~		49


~~Committee advisor~~•		~~Management advisor~~
~~• The Compensation Committee retained Meridian Compensation Partners LLC (Meridian) as its independent compensation consultant~~ Provide Service:Providing efficient and consistent transportation solutions for ~~early 2017~~ ~~• In 2017 Meridian advised~~ the ~~Compensation Committee on various matters relating~~Company’s customers. “Doing what we say we are going to ~~executive compensation~~do” is what drives CP in providing a reliable product with a lower cost operating model. Centralized planning aligned with local execution is bringing the Company closer to the customer and ~~assisted the Compensation Committee with the 2016 compensation risk review~~ ~~• The Compensation Committee has also engaged Kingsdale Advisors as a compensation consultant on an as needed basis~~ ~~• The Compensation Committee chair approves all fees and work performed by the external consultant~~		~~• Management engages Willis Towers Watson to provide market survey data and advice relating to executive compensation~~ accelerating decision-making.


	2017				2016
	Meridian		Willis Towers Watson		Meridian		Willis Towers Watson
Executive compensation-related fees	$	50,751	$	78,923	$	170,267	$	59,264
Other fees		-	$	1,975,629		-	$	2,215,142
Total fees	$	50,751	$	2,054,552	$	170,267	$	2,274,406


~~1. Plan design~~•		~~• We use a mix of fixed~~ Control Costs:Controlling and ~~variable(at-risk)~~ ~~compensation~~removing unnecessary costs from the organization, eliminating bureaucracy and ~~a significant proportion is~~~~at-risk~~ ~~pay~~ ~~• Short and long-term incentive plans have specific performance measures that~~continuing to identify productivity enhancements are ~~closely aligned with~~ the ~~achievement of our business strategy and performance required~~keys to ~~achieve results in accordance with guidance provided to the market~~ ~~• The payout curve for the short-term incentive plan is designed asymmetrically to reflect the significant stretch in target performance~~ ~~• The payout under the short-term incentive plan is capped and not guaranteed, and the Compensation Committee has discretion to reduce the awards~~ • The long-term incentive plan has overlapping vesting periods to address longer-term risks and maintain executives’ exposure to the risks of their decision-making through unvested share based awards
~~2. Policies~~		~~• We promote an ethical culture and everyone is subject to a code of business ethics~~ ~~• We have share ownership requirements for executives and senior management so they have a stake in our future success~~ ~~• We have a disclosure and insider trading/reporting policy to protect our interests and ensure high business standards and appropriate conduct~~ ~~• Our anti-hedging policy prohibits directors, officers and employees from hedging our shares and share-based awards~~ ~~• Our anti-pledging policy prohibits directors and senior officers from holding our shares in a margin account or otherwise pledging them as security~~ • We also have a policy that prohibits employees from forward selling shares that may be delivered on the future exercise of stock options, or otherwise monetizing their option awards, other than through exercising the options and subsequently selling the shares through a public venue or the company’s cashless exercise option ~~• Our clawback policy allows us to recoup incentive pay from current and former senior executives as appropriate (see below)~~ ~~• DSUs held by the CEO and executives are not settled for cash until six months after leaving the company~~ ~~• Our whistleblower policy applies to all employees and prohibits retaliation against anyone who makes a complaint acting in good faith~~
~~3. Mitigation measures~~		~~• More senior roles have a significant portion of their compensation deferred~~ ~~• We must achieve a specific threshold of operating income, otherwise no short-term incentive awards are granted~~ ~~• Financial performance is verified by our external auditor (completion of annual financial statement audit) before the Board makes any decisions about short-term incentive~~ • The Compensation Committee adopted principles for adjusting payout under the short-term incentive plan, and provides them to the Board as part of their review of the Compensation Committee’s recommendations and performance overall • Environmental principles are fundamental to how we achieve our financial and operational objectives, and the Compensation Committee takes them into account when exercising discretion and determining the short-term incentive awards ~~• Safety is considered as part of individual performance under the short-term incentive for the CEO and executives in operations roles in addition to being a specific STIP measure~~ ~~• We regularly benchmark executive compensation against our comparator group of companies~~ ~~• Different performance scenarios are stress tested and back tested to understand possible outcomes~~ success.


•	~~Element~~	~~Purpose~~	~~Risk mitigating features~~	~~Link to business~~ Optimize Assets:Through longer and ~~talent strategies~~	~~New in 2017~~
	~~Salary~~ ~~Cash~~ ~~(see page 16)~~	~~• competitive level of fixed pay~~ ~~• reviewed annually~~	~~• external advisor benchmarks against our comparator group to ensure appropriate levels~~ heavier trains, and ~~fairness~~	~~• attract~~improved asset utilization, the Company is moving increased volumes with fewer locomotives and ~~retain talent~~ ~~• no automatic or guaranteed increases to promote a performance culture~~
	~~Short-term incentive~~ ~~Cash bonus~~ ~~(see page 16)~~	~~• annual performance incentive to attract and retain highly qualified leaders~~ ~~• set target awards based on level~~	~~• set target performance at the beginning of the year to assess actual performance at the end of the year~~ ~~• actual payouts are based on the achievement ofpre-determined~~ ~~corporate and individual objectives~~ ~~• corporate performance has an operating income hurdle~~ ~~• payouts are capped~~ ~~• no guarantee of a minimum payout~~	~~• attract and retain highly qualified leaders~~ ~~• motivate high corporate and individual performance~~ ~~• use metrics that are based on the strategic plan and approved annually~~ ~~• align personal objectives with area of responsibility and role in achieving operating results~~	~~New measures and weightings:~~ • ~~operating ratio reduced from 50% to 40%~~ • ~~operating income increased from 25% to 40%~~ • ~~added a safety measure at 10%~~ • ~~added an operational~~ ~~measure at 10%~~
	~~Deferred compensation~~ ~~Deferred share units~~ ~~(see page 48)~~	~~• encourages share ownership~~ ~~• executives can elect to receive the short-term incentive in DSUs if they have not yet met their share ownership requirement~~ ~~• company provides a 25% match of the deferral amount in DSUs~~	~~• deferral limited to the amount needed to meet the executive’s share ownership guidelines~~ ~~• aligns management interests with~~cars while unlocking capacity for future growth ~~in shareholder value~~ ~~• helps retain key talent~~ ~~• company contributions vest after three years~~	~~• sustained alignment of executive and shareholder interests because the value of DSUs is tied directly to our share price~~ ~~• cannot be redeemed for cash until six months after the executive leaves CP~~
	~~Long-term incentive (LTIP)~~ ~~(see page 20)~~				~~New allocation~~
	~~Performance share units~~ ~~(see page 22)~~	~~• equity-based incentive aligns with shareholder interests and focuses on three-year performance~~ ~~• accounts for 60% of an executive’s long-term incentive award (up from 50% in 2016)~~	~~• usepre-defined~~ ~~market and financial metrics~~ ~~• the number of units that vest is based on a performance multiplier that is capped~~ ~~• no guarantee of a minimum payout~~	~~• focuses the leadership team on achieving challenging performance goals~~ ~~• ultimate value based on share price and company performance~~ ~~• attract and retain highly qualified leaders~~	~~Represents 60% of LTIP award for executives (100% for other levels of management)~~ ~~New measures and weightings:~~ • ~~return on invested capital replaces operating ratio~~ • ~~update of peer group for assessing relative TSR~~ • ~~increased the weighting of TSR from 20% to 40%~~
	~~Stock options~~ ~~(see page 23)~~	~~• accounts for 40% of an executive’s long-term incentive award (down from 50% in 2016)~~ ~~• vest over four years, term is now seven years~~	~~• focuses on appreciation in our share price, aligning with shareholder interests~~ ~~• only granted to executives~~	~~• focuses the leadership team on creating sustainable long-term value~~	~~Represents 40% of LTIP award for executives~~ ~~Grants in 2017 and later have a seven-year term, down from~~ ~~10 years~~
	~~Pension~~ ~~Defined contribution pension plan~~ ~~(see page 47)~~	~~• pension benefit based on pay and service and competitive with the market~~ ~~• supplemental plan for executives and senior managers~~	~~• balances risk management of highly performance-focused pay package~~	~~• attract and retain highly qualified leaders~~
	~~Perquisites~~ ~~Flexible spending account~~ ~~(see page 42)~~	~~• competitive with the market~~	~~• new restrictions for the CEO~~	~~• attract and retain highly qualified leaders~~	~~No tax equalization for the CEO~~ ~~Use of aircraft limited to corporate travel and family visits within North America~~ potential.


	2017	% change from 2016
Keith Creel	US$1,125,000		17.6%
Nadeem Velani	$460,000		10.8%
Robert Johnson	US$435,000		0%
Laird Pitz	US$366,000		4.6%
Jeff Ellis	$445,000		0%


~~Payout~~•		~~• Corporate performance~~ Develop People:CP recognizes that none of the other foundations can be achieved without its people. Every CP employee is ~~assessed against financial, safety~~a railroader and ~~operational measures~~ ~~• Individual performance is assessed against individual performance objectives~~ ~~• No guarantee~~the Company has established a culture focused on our values of ~~a minimum payout~~
~~Restrictions~~		~~• Must meet minimum level of performance~~ ~~• Must achieve corporate operating income hurdle for any payout on individual or corporate performance~~accountability, diversity and pride, in everything we do. Coaching and mentoring all employees into becoming leaders will continue to ~~occur~~ ~~• Performance multiplier is capped for exceptional performance~~ ~~• Actual award is capped as a percentage of base salary~~
~~If the executive retires~~		~~• Executive must give three months’ notice~~ ~~• Award for the current year ispro-rated~~ ~~to the retirement date~~ drive CP forward.


	Payout as a % of base salary
Level	Below hurdle			Minimum			Target			Maximum
CEO		0	%		60	%		120	%		240	%
Other named executives		0	%		30-37.5	%		60-75	%		120-150	%


Performance measure	Why it’s important	Threshold (50%)			Target (100%)			Exceptional (200%)			2017 reported result			2017 STIP result			Weighting		Score
Financial measures
STIP Operating ratio Operating expenses divided by total revenues based on an assumed fuel price and foreign exchange rate	Continues our focus on driving down costs while focusing on growth strategy		57.50	%		57.25	%		56.75	%		57.4	%		adj. 57.1	%		40% (new) (reduced from 50% in 2016)		137	%
STIP Operating income ($ millions) Total revenues less total operating expenses based on an assumed foreign exchange rate	Highlights the importance of revenue growth to our corporate strategy		2,705			2,745			2,865			2,793			adj. 2,816			40%(new) (increased from 25% in 2016)		159	%
Safety measure(new)
Federal Railroad Administration’s (FRA) frequency of train accidents per million train miles relative to Class 1 railroads	Safety is our top priority, and the measure pays out at maximum only if we achieve the stretch target and remain the best in the industry Introducing this measure recognizes the feedback we received from shareholders who asked for safety to be explicitly included as a performance measure		1.30			1.19			1.15			0.99			0.99			10%		200	%
Operating measure(new)
Train speed measures the time and movement of trains in miles per hour from origin to destination It is a key component oftrip plan compliance and critical to the service we provide customers and to our growth strategy. Trip plan compliance, as a stand-alone measure, is a relatively new measure at CP. In 2018, now that we have built up enough historical data, we plan to use it as an operating performance measure for STIP rewards.	Train speed reflects our operating performance and is a key measure for improved asset utilization and delivery times, leading to an enhanced customer experience Introducing this measure incorporates feedback from shareholders and provides a more balanced scorecard of performance criteria		23.7			24.0			24.6			23.4			23.4			10%		0	%
Corporate performance factor																				138	%


	~~Performance share units (60%)~~	~~Stock options (40%)~~
~~What they are~~	~~• Notional share units that vest at the end of three years based on absolute and relative performance and the price of CP common shares~~	~~• Rights to buy CP shares at a specified price in the future~~
~~Vesting and~~ ~~payout~~	~~• Cliff vest at the end of three years based on performance against threepre-defined~~ ~~financial and market metrics~~ ~~• No guarantee of a minimum payout~~	~~• Vest 25% every year beginning on the anniversary of the grant date~~ ~~• Expire at the end of seven years (down from ten years)~~ ~~• Only have value if our share price increases above the exercise price~~
~~Dividend equivalents~~	~~• Earned quarterly and compound over the three-year period~~	~~• Do not earn dividend equivalents~~
~~Restrictions~~	~~• Must meet minimum level of performance~~ ~~• Performance multiplier is capped for exceptional performance~~	~~• Cannot be exercised during a blackout period~~
~~If the~~ ~~executive retires~~	~~• Must give three months’ notice~~ ~~• Award continues to vest and executive is entitled to receive the full value as long as they have worked for six months of the performance period, otherwise the award is forfeited~~	~~• Must give three months’ notice~~ ~~• Options continue to vest, but expire five years after the retirement date or on the normal expiry date, whichever is earlier~~


	~~Target as a % of base salary~~
~~Keith Creel~~		~~400%~~
~~Nadeem Velani~~		~~225%~~
~~Robert Johnson~~		~~225%~~
~~Laird Pitz~~		~~115%~~
~~Jeffery Ellis~~		~~115%~~


	2017 long-term
	incentive		>	Allocation
	award			Performance share units				Stock options
	(grant value)			$		#		$		#

Keith Creel		14,924,418			4,407,788		22,294		10,516,630		229,871
Nadeem Velani		985,045			782,395		3,903		202,650		4,644
Robert Johnson		1,514,778			958,705		4,849		556,073		11,557
Laird Pitz		622,931			394,237		1,994		228,694		4,753
Jeffrey Ellis		604,199			386,888		1,930		217,311		4,980


	Grant value ($)		# of options		Grant price
Keith Creel		1,630,352		33,884		US$150.99 (NYSE)
Keith Creel		896,816		18,762		US$151.14 (NYSE)
Nadeem Velani		202,650		4,644		$201.49 (TSX)
Robert Johnson		556,073		11,557		US$150.99 (NYSE)
Laird Pitz		228,694		4,753		US$150.99 (NYSE)
Jeffrey Ellis		217,311		4,980		$201.49 (TSX)



	2019 Freight Revenues	~~As a % of the number of shares outstanding~~


~~Maximum number of shares that may be reserved for issuance to insiders as options~~		~~10%~~
~~Maximum number of options that may be granted to insiders in aone-year~~ ~~period~~ 2018 Freight Revenues		~~10%~~
~~Maximum number of options that may be granted to any insider in aone-year~~ ~~period~~		5%
		~~As a % of the number of shares outstanding at~~ ~~the time the shares were reserved~~
~~Maximum number of options that may be granted to any person~~		5%2017 Freight Revenues


(as at December 31)	2015		2016		2017
Number of options granted		317,202		403,740		396,980
Weighted number of shares outstanding		159,733,222		149,565,498		145,863,318
Burn rate		0.20%		0.27%		0.25%


	Number of options/shares		Percentage of outstanding shares
Options outstanding (as at December 31, 2017)		1,361,950		0.94
Options available to grant (as at December 31, 2017)		1,555,922		1.07
Shares issued on exercise of options in 2017		319,403		0.22
Options granted in 2017		369,980		0.26


PSU measures	Threshold 50%		Target 100%		Maximum 200%		PSU Result		Weighting		Factor
PSU Operating ratio Operating expenses divided by total revenues		64%		62%		60%		adj. 57.1%		50%		200%
PSU 2015 to 2017 average ROIC Net operating profit after tax divided by average invested capital		13%		14%		15%		adj. 15.1%		30%		200%
Total shareholder return Three-year CAGR relative to the S&P/TSX 60 Index		0%		1%		5%		-5.6%		10%		0%
Total shareholder return Ranking at the end of the three years relative to Class 1 Railroads		4		3		1		5		10%		0%
PSU performance factor												160%



2019 Bulk Revenues	2018 Bulk Revenues	2017 Bulk Revenues
(40% of Freight Revenues)	(41% of Freight Revenues)	(44% of Freight Revenues)



2019 Grain Revenues	2018 Grain Revenues	2017 Grain Revenues
(55% of Bulk Revenues; 22% of Freight Revenues)	(53% of Bulk Revenues; 22% of Freight Revenues)	(54% of Bulk Revenues; 24% of Freight Revenues)



2019 Coal Revenues	2018 Coal Revenues	2017 Coal Revenues
(22% of Bulk Revenues; 9% of Freight Revenues)	(23% of Bulk Revenues; 9% of Freight Revenues)	(22% of Bulk Revenues; 10% of Freight Revenues)



2019 Potash Revenues	2018 Potash Revenues	2017 Potash Revenues
(15% of Bulk Revenues; 6% of Freight Revenues)	(16% of Bulk Revenues; 7% of Freight Revenues)	(15% of Bulk Revenues; 6% of Freight Revenues)



2019 Fertilizers & Sulphur Revenues	2018 Fertilizers & Sulphur Revenues	2017 Fertilizers & Sulphur Revenues
(8% of Bulk Revenues; 3% of Freight Revenues)	(8% of Bulk Revenues; 3% of Freight Revenues)	(9% of Bulk Revenues; 4% of Freight Revenues)



2019 Merchandise Revenues	2018 Merchandise Revenues	2017 Merchandise Revenues
(39% of Freight Revenues)	(37% of Freight Revenues)	(35% of Freight Revenues)



2019 Forest Products Revenues	2018 Forest Products Revenues	2017 Forest Products Revenues
(10% of Merchandise Revenues; 4% of Freight Revenues)	(11% of Merchandise Revenues; 4% of Freight Revenues)	(12% of Merchandise Revenues; 4% of Freight Revenues)



2019 Energy, Chemicals & Plastics Revenues	2018 Energy, Chemicals & Plastics Revenues	2017 Energy, Chemicals & Plastics Revenues
(52% of Merchandise Revenues; 20% of Freight Revenues)	(47% of Merchandise Revenues; 17% of Freight Revenues)	(41% of Merchandise Revenues; 14% of Freight Revenues)



2019 Metals, Minerals & Consumer Products Revenues	2018 Metals, Minerals & Consumer Products Revenues	2017 Metals, Minerals & Consumer Products Revenues
(26% of Merchandise Revenues; 10% of Freight Revenues)	(30% of Merchandise Revenues; 11% of Freight Revenues)	(34% of Merchandise Revenues; 12% of Freight Revenues)



2019 Automotive Revenues	2018 Automotive Revenues	2017 Automotive Revenues
(12% of Merchandise Revenues; 5% of Freight Revenues)	(12% of Merchandise Revenues; 5% of Freight Revenues)	(13% of Merchandise Revenues; 5% of Freight Revenues)