UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172022
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission File Number 001-01342
Canadian Pacific Railway Limited
(Exact name of registrant as specified in its charter)
Canada98-0355078
(State or Other Jurisdiction

of Incorporation or Organization)
(IRS Employer

Identification No.)
7550 Ogden Dale Road S.E.
Calgary, Alberta, Canada
T2C 4X9
CalgaryABT2C 4X9
(Address of Principal Executive Offices)(Zip Code)
Registrant’s Telephone Number, Including Area Code: (403) 319-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on which Registered
Common Shares, without par value, of
Canadian Pacific Railway Limited		CPNew York Stock Exchange
Toronto Stock Exchange
Perpetual 4% Consolidated Debenture Stock of Canadian Pacific Railway CompanyCP/40New York Stock Exchange
BC87London Stock Exchange

Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),; and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No o

Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated Filer
 þ
Accelerated Filer
Accelerated filero
☐		Non-accelerated Filer
Non-accelerated filero
☐		Smaller Reporting Company
Smaller reporting companyo
☐		Emerging Growth Company
Emerging growth companyo
☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No þ
As of the close of business on October 16, 2017,25, 2022, there were 144,967,167930,123,568 of the registrant’s Common Shares issued and outstanding.




CANADIAN PACIFIC RAILWAY LIMITED
FORM 10-Q
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Page
Item 1.Financial Statements:


PART I - FINANCIAL INFORMATION


Page
Item 1.
Financial Statements:
Interim Consolidated Statements of Income
32
For the Three and Nine Months Ended September 30, 20172022 and 20162021
Interim Consolidated Statements of Comprehensive Income
43
For the Three and Nine Months Ended September 30, 20172022 and 20162021
Interim Consolidated Balance Sheets
54
As at September 30, 20172022 and December 31, 20162021
Interim Consolidated Statements of Cash Flows
65
For the Three and Nine Months Ended September 30, 20172022 and 20162021
Interim Consolidated Statements of Changes in Shareholders' Equity
76
For the Three and Nine Months Ended September 30, 20172022 and 20162021
Notes to Interim Consolidated Financial Statements
87
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3218
Executive Summary
3218
Performance Indicators
Outlook20
33
Financial Highlights
Performance Indicators23
34
Financial Highlights
36
Results of Operations
3624
Liquidity and Capital Resources
5141
Share Capital
5345
Non-GAAP Measures
5345
Off-Balance Sheet Arrangements
59
Contractual Commitments
59
Critical Accounting Estimates
6055
Forward-Looking Statements
Forward-Looking Information55
62
Item 3.             ��   
Quantitative and Qualitative Disclosures about Market Risk
6457
Item 4.
Controls and Procedures
6558
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
6659
Item 1A.
Risk Factors
6659
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
6759
Item 3.
Defaults Upon Senior Securities
6759
Item 4.
Mine Safety Disclosures
6759
Item 5.
Other Information
6759
Item 6.
Exhibits
60
ExhibitsSignature
6861




Table of Contents


PART I

ITEM 1. FINANCIAL STATEMENTS

INTERIM CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 For the three months ended September 30 For the nine months ended September 30For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars, except share and per share data)(in millions of Canadian dollars, except share and per share data)2017 2016 2017 2016(in millions of Canadian dollars, except share and per share data)2022202120222021
Revenues        
Revenues (Note 3)Revenues (Note 3)
Freight $1,547
 $1,510
 $4,708
 $4,464
Freight$2,264 $1,896 $6,214 $5,822 
Non-freight 48
 44
 133
 131
Non-freight48 46 138 133 
Total revenues 1,595
 1,554
 4,841
 4,595
Total revenues2,312 1,942 6,352 5,955 
Operating expenses        Operating expenses
Compensation and benefits (Note 11) 256
 294
 766
 907
Compensation and benefitsCompensation and benefits393 381 1,154 1,165 
Fuel 150
 138
 480
 394
Fuel358 199 1,001 623 
Materials 45
 39
 142
 133
Materials66 51 191 164 
Equipment rents 35
 43
 108
 132
Equipment rents33 31 97 92 
Depreciation and amortization 162
 155
 493
 478
Depreciation and amortization213 203 634 605 
Purchased services and other (Note 4) 257
 228
 812
 690
Purchased services and other (Note 10)Purchased services and other (Note 10)312 303 935 932 
Total operating expenses 905
 897
 2,801
 2,734
Total operating expenses1,375 1,168 4,012 3,581 
        
Operating income 690
 657
 2,040
 1,861
Operating income937 774 2,340 2,374 
Less:        Less:
Other income and charges (Note 5) (105) 71
 (194) (119)
Equity earnings of Kansas City Southern (Note 10)Equity earnings of Kansas City Southern (Note 10)(221)— (627)— 
Other expense (Note 4, 10)Other expense (Note 4, 10)7 124 13 253 
Merger termination fee (Note 10)Merger termination fee (Note 10)— — — (845)
Other components of net periodic benefit recovery (Note 15)Other components of net periodic benefit recovery (Note 15)(102)(95)(304)(286)
Net interest expense 115
 116
 357
 355
Net interest expense166 104 486 315 
Income before income tax expense 680
 470
 1,877
 1,625
Income before income tax expense1,087 641 2,772 2,937 
Income tax expense (Note 6) 170
 123
 456
 410
Income tax expense (Note 5)Income tax expense (Note 5)196 169 526 617 
Net income $510
 $347
 $1,421
 $1,215
Net income$891 $472 $2,246 $2,320 
        
Earnings per share (Note 7)        
Earnings per share (Note 6)Earnings per share (Note 6)
Basic earnings per share $3.50
 $2.35
 $9.72
 $8.06
Basic earnings per share$0.96 $0.71 $2.42 $3.48 
Diluted earnings per share $3.50
 $2.34
 $9.70
 $8.02
Diluted earnings per share$0.96 $0.70 $2.41 $3.46 
        
Weighted-average number of shares (millions) (Note 7)        
Weighted-average number of shares (millions) (Note 6)Weighted-average number of shares (millions) (Note 6)
Basic 145.5
 147.3
 146.2
 150.7
Basic930.0 666.9 929.9 666.7 
Diluted 145.8
 148.3
 146.6
 151.6
Diluted932.9 669.8 932.8 669.8 
        
Dividends declared per share $0.5625
 $0.5000
 $1.6250
 $1.3500
Dividends declared per share$0.190 $0.190 $0.570 $0.570 
See Notes to Interim Consolidated Financial Statements.


2
Table of Contents


INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
For the three months ended September 30 For the nine months ended September 30For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2017 2016 2017 2016(in millions of Canadian dollars)2022202120222021
Net income$510
 $347
 $1,421
 $1,215
Net income$891 $472 $2,246 $2,320 
Net gain (loss) in foreign currency translation adjustments, net of hedging activities19
 (7) 38
 33
Net gain (loss) in foreign currency translation adjustments, net of hedging activities1,565 (17)1,948 3 
Change in derivatives designated as cash flow hedges2
 1
 11
 (75)Change in derivatives designated as cash flow hedges2 141 5 69 
Change in pension and post-retirement defined benefit plans38
 47
 113
 137
Change in pension and post-retirement defined benefit plans22 53 99 158 
Equity accounted investmentsEquity accounted investments47 — 182 — 
Other comprehensive income before income taxes59
 41
 162
 95
Other comprehensive income before income taxes1,636 177 2,234 230 
Income tax expense on above items(34) (3) (78) (51)
Other comprehensive income (Note 3)25
 38
 84
 44
Income tax recovery (expense) on above itemsIncome tax recovery (expense) on above items36 (29)2 (59)
Other comprehensive income (Note 7)Other comprehensive income (Note 7)1,672 148 2,236 171 
Comprehensive income$535
 $385
 $1,505
 $1,259
Comprehensive income$2,563 $620 $4,482 $2,491 
See Notes to Interim Consolidated Financial Statements.

3
Table of Contents


INTERIM CONSOLIDATED BALANCE SHEETS AS AT
(unaudited)
September 30December 31
(in millions of Canadian dollars)20222021
Assets
Current assets
Cash and cash equivalents$138 $69 
Restricted cash and cash equivalents— 13 
Accounts receivable, net (Note 8)1,053 819 
Materials and supplies267 235 
Other current assets186 216 
1,644 1,352 
Investment in Kansas City Southern (Note 11)45,964 42,309 
Investments230 209 
Properties22,150 21,200 
Goodwill and intangible assets390 371 
Pension asset2,631 2,317 
Other assets426 419 
Total assets$73,435 $68,177 
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities$1,575 $1,609 
Long-term debt maturing within one year (Note 12, 13)1,236 1,550 
2,811 3,159 
Pension and other benefit liabilities726 718 
Other long-term liabilities519 542 
Long-term debt (Note 12, 13)19,339 18,577 
Deferred income taxes12,226 11,352 
Total liabilities35,621 34,348 
Shareholders’ equity
Share capital25,498 25,475 
Additional paid-in capital77 66 
Accumulated other comprehensive income (loss) (Note 7)133 (2,103)
Retained earnings12,106 10,391 
37,814 33,829 
Total liabilities and shareholders’ equity$73,435 $68,177 
 September 30 December 31
(in millions of Canadian dollars)2017 2016
Assets   
Current assets   
Cash and cash equivalents$142
 $164
Accounts receivable, net628
 591
Materials and supplies157
 184
Other current assets65
 70
 992
 1,009
Investments185
 194
Properties16,700
 16,689
Goodwill and intangible assets187
 202
Pension asset1,356
 1,070
Other assets59
 57
Total assets$19,479
 $19,221
Liabilities and shareholders’ equity   
Current liabilities   
Accounts payable and accrued liabilities$1,139
 $1,322
Long-term debt maturing within one year (Notes 8 and 10)749
 25
 1,888
 1,347
Pension and other benefit liabilities726
 734
Other long-term liabilities221
 284
Long-term debt (Note 10)7,384
 8,659
Deferred income taxes3,695
 3,571
Total liabilities13,914
 14,595
Shareholders’ equity   
Share capital2,025
 2,002
Additional paid-in capital42
 52
Accumulated other comprehensive loss (Note 3)(1,715) (1,799)
Retained earnings5,213
 4,371
 5,565
 4,626
Total liabilities and shareholders’ equity$19,479
 $19,221
See Contingencies (Note 13)17).
See Notes to Interim Consolidated Financial Statements.






4
Table of Contents


INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended September 30 For the nine months ended September 30For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2017 2016 2017 2016(in millions of Canadian dollars)2022202120222021
Operating activities       Operating activities
Net income$510
 $347
 $1,421
 $1,215
Net income$891 $472 $2,246 $2,320 
Reconciliation of net income to cash provided by operating activities:       Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization162
 155
 493
 478
Depreciation and amortization213 203 634 605 
Deferred income taxes (Note 6)77
 50
 168
 233
Pension funding in excess of expense (Note 12)(59) (26) (178) (105)
Foreign exchange (gain) loss on long-term debt (Note 5)(105) 46
 (200) (153)
Deferred income tax expense (Note 5)Deferred income tax expense (Note 5)38 130 151 190 
Pension recovery and funding (Note 15)Pension recovery and funding (Note 15)(74)(62)(218)(188)
Equity earnings of Kansas City Southern (Note 10)Equity earnings of Kansas City Southern (Note 10)(221)— (627)— 
Foreign exchange loss (gain) on debt and lease liabilities (Note 4)Foreign exchange loss (gain) on debt and lease liabilities (Note 4)— 46 — (39)
Dividend from Kansas City Southern (Note 10)Dividend from Kansas City Southern (Note 10)259 — 593 — 
Other operating activities, net(1) (17) (88) (130)Other operating activities, net(3)(14)(102)(50)
Change in non-cash working capital balances related to operations(57) 36
 (167) (217)Change in non-cash working capital balances related to operations(1)(227)(255)246 
Cash provided by operating activities527
 591
 1,449
 1,321
Cash provided by operating activities1,102 548 2,422 3,084 
Investing activities       Investing activities
Additions to properties(319) (294) (895) (902)Additions to properties(422)(372)(1,018)(1,111)
Proceeds from sale of properties and other assets (Note 4)13
 16
 29
 87
Payment to Kansas City Southern (Note 10)Payment to Kansas City Southern (Note 10)— (1,773)— (1,773)
Proceeds from sale of properties and other assetsProceeds from sale of properties and other assets11 16 37 65 
Other—
 —
 5
 (2)Other1 — 3 (1)
Cash used in investing activities(306) (278) (861) (817)Cash used in investing activities(410)(2,129)(978)(2,820)
Financing activities       Financing activities
Dividends paid(83) (75) (229) (182)Dividends paid(177)(127)(530)(380)
Issuance of CP Common Shares2
 5
 39
 14
Issuance of CP Common Shares9 4 18 20 
Purchase of CP Common Shares (Note 9)(226) (412) (368) (1,200)
Repayment of long-term debt, excluding commercial paper(3) (12) (17) (30)
Net issuance of commercial paper (Note 8)—
 190
 —
 366
Settlement of forward starting swaps (Note 10)—
 —
 (22) —
Repayment of long-term debt, excluding commercial paper (Note 12)Repayment of long-term debt, excluding commercial paper (Note 12)(7)(318)(559)(349)
Repayment of term loan (Note 12)Repayment of term loan (Note 12)(504)— (636)— 
Proceeds from term loanProceeds from term loan— 633 — 633 
Net (repayment) issuance of commercial paper (Note 12)Net (repayment) issuance of commercial paper (Note 12)(42)713 298 (66)
Acquisition-related financing fees (Note 10)Acquisition-related financing fees (Note 10)— — — (45)
Other—
 —
 —
 (3)Other— (3)— (7)
Cash used in financing activities(310) (304) (597) (1,035)
       
Cash (used in) provided by financing activitiesCash (used in) provided by financing activities(721)902 (1,409)(194)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents(7) 2
 (13) (16)Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents13 10 21 6 
Cash position       Cash position
(Decrease) increase in cash and cash equivalents(96) 11
 (22) (547)
Cash and cash equivalents at beginning of period238
 92
 164
 650
Cash and cash equivalents at end of period$142
 $103
 $142
 $103
(Decrease) increase in cash, cash equivalents, and restricted cash(Decrease) increase in cash, cash equivalents, and restricted cash(16)(669)56 76 
Cash, cash equivalents, and restricted cash at beginning of periodCash, cash equivalents, and restricted cash at beginning of period154 892 82 147 
Cash, cash equivalents, and restricted cash at end of periodCash, cash equivalents, and restricted cash at end of period$138 $223 $138 $223 
       
Supplemental disclosures of cash flow information:       Supplemental disclosures of cash flow information:
Income taxes paid$78
 $17
 $364
 $274
Income taxes paid$67 $129 $319 $401 
Interest paid$140
 $148
 $385
 $395
Interest paid$148 $153 $467 $365 
See Notes to Interim Consolidated Financial Statements.



5
Table of Contents


INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
For the three months ended September 30
(in millions of Canadian dollars except per share data)Common Shares (in millions)Share
capital		Additional
paid-in
capital		Accumulated
other
comprehensive
income (loss)		Retained
earnings		Total
shareholders’
equity
Balance as at July 1, 2022930.0 $25,488 $73 $(1,539)$11,392 $35,414 
Net income— — — — 891 891 
Other comprehensive income (Note 7)— — — 1,672 — 1,672 
Dividends declared ($0.190 per share)— — — — (177)(177)
Effect of stock-based compensation expense— — 5 — — 5 
Shares issued under stock option plan0.1 10 (1)— — 9 
Balance as at September 30, 2022930.1 $25,498 $77 $133 $12,106 $37,814 
Balance as at July 1, 2021666.8 $2,003 $63 $(2,791)$9,690 $8,965 
Net income— — — — 472 472 
Other comprehensive income (Note 7)— — — 148 — 148 
Dividends declared ($0.190 per share)— — — — (127)(127)
Effect of stock-based compensation expense— — 6 — — 6 
Shares issued under stock option plan0.1 5 (1)— — 4 
Balance as at September 30, 2021666.9 $2,008 $68 $(2,643)$10,035 $9,468 
(in millions of Canadian dollars, except common share amounts) Common shares (in millions)
 Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders’
equity
Balance at January 1, 2017 146.3
 $2,002
$52
$(1,799)$4,371
$4,626
Net income —
 —
—
—
1,421
1,421
Other comprehensive income (Note 3) —
 —
—
84
—
84
Dividends declared —
 —
—
—
(237)(237)
CP Common Shares repurchased (Note 9) (1.8) (26)—
—
(342)(368)
Shares issued under stock option plan 0.5
 49
(10)—
—
39
Balance at September 30, 2017 145.0
 $2,025
$42
$(1,715)$5,213
$5,565
Balance at January 1, 2016 153.0
 $2,058
$43
$(1,477)$4,172
$4,796
Net income —
 —
—
—
1,215
1,215
Other comprehensive income (Note 3) —
 —
—
44
—
44
Dividends declared —
 —
—
—
(202)(202)
Effect of stock-based compensation expense —
 —
11
—
—
11
CP Common Shares repurchased (Note 9) (6.9) (84)—
—
(1,126)(1,210)
Shares issued under stock option plan 0.2
 26
(11)—
—
15
Balance at September 30, 2016 146.3
 $2,000
$43
$(1,433)$4,059
$4,669
For the nine months ended September 30
(in millions of Canadian dollars except per share data)Common Shares (in millions)Share
capital		Additional
paid-in
capital		Accumulated
other
comprehensive
income (loss)		Retained
earnings		Total
shareholders’
equity
Balance as at January 1, 2022929.7 $25,475 $66 $(2,103)$10,391 $33,829 
Net income— — — — 2,246 2,246 
Other comprehensive income (Note 7)— — — 2,236 — 2,236 
Dividends declared ($0.570 per share)— — — — (531)(531)
Effect of stock-based compensation expense— — 17 — — 17 
Shares issued for Kansas City Southern acquisition— — (2)— — (2)
Shares issued under stock option plan0.4 23 (4)— — 19 
Balance as at September 30, 2022930.1 $25,498 $77 $133 $12,106 $37,814 
Balance as at January 1, 2021666.3 $1,983 $55 $(2,814)$8,095 $7,319 
Net income— — — — 2,320 2,320 
Other comprehensive income (Note 7)— — — 171 — 171 
Dividends declared ($0.570 per share)— — — — (380)(380)
Effect of stock-based compensation expense— — 18 — — 18 
Shares issued under stock option plan0.6 25 (5)— — 20 
Balance as at September 30, 2021666.9 $2,008 $68 $(2,643)$10,035 $9,468 
See Notes to Interim Consolidated Financial Statements.



6
Table of Contents


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(unaudited)

1    Basis of presentation

These unaudited interim consolidated financial statementsInterim Consolidated Financial Statements ("Interim Consolidated Financial Statements") of Canadian Pacific Railway Limited (“CP”("CPRL") and its subsidiaries (collectively, “CP”, or “the Company”), expressed in Canadian dollars, reflect management’s estimates and assumptions that are necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America (“GAAP”). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 20162021 annual consolidated financial statementsConsolidated Financial Statements and notes included in CP's 20162021 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 20162021 annual consolidated financial statements, except for the newly adopted accounting policies discussed in Note 2.Consolidated Financial Statements.

CP's operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons.

In management’s opinion, the unaudited interim consolidated financial statementsInterim Consolidated Financial Statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

2    Accounting changes

Implemented in 20172022

Compensation - Stock CompensationGovernment Assistance

In March 2016,On January 1, 2022, the Company adopted the new Accounting Standards Update ("ASU") 2021-10, issued by the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-based Payment Accounting,, and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 718.832, Government Assistance. The amendments clarifyamendment is made to increase transparency by introducing specific disclosure requirements for entities who apply a grant or contribution model by analogy to account for transactions with a government. This update is applied to government assistance transactions within the guidance relating to treatment of excess tax benefits and deficiencies, acceptable forfeiture rate policies, and treatment of cash paid by an employer when directly withholding shares for tax-withholding purposes and the requirement to treat such cash flows as a financing activity. As a resultscope of this ASU, excess tax benefitsamendment that are no longer recorded in additional paid-in capital and instead are applied against taxes payable or recognized in the interim consolidated statementfinancial statements at the date of income. This ASU wasinitial application and prospectively to new transactions entered into after initial application. See Note 9 for further discussion on government assistance.

All other accounting pronouncements that became effective for CP beginningduring the period covered by the Interim Consolidated Financial Statements did not have a material impact on January 1, 2017. The Company has determined that there were no significantthe Company's Consolidated Financial Statements and related disclosures.

Future changes to disclosure or financial statement presentation

Contract Assets and changesContract Liabilities Acquired in accounting for excess tax benefits and deficiencies were not material as a result of adoption.Business Combination

Simplifying the Measurement of Inventory

In July 2015,October 2021, the FASB issued ASU 2015-11, Simplifying2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This amendment introduces the Measurementrequirement for an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the requirements of Inventory under FASB ASC Topic 330. The amendments require that reporting entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using the first-in, first-out or average cost basis. This ASU was effective for CP beginning on January 1, 2017 and was applied prospectively. The Company determined there were no changes to disclosure, financial statement presentation, or valuation of inventory as a result of adoption.

Future changes

Leases

In February 2016, the FASB issued ASU 2016-02, Leases under FASB ASC Topic 842 which will supersede the lease recognition and measurement requirements in Topic 840 Leases. This new standard requires recognition of right-of-use assets and lease liabilities by lessees for those leases classified as finance and operating leases with a maximum term exceeding 12 months. For CP this new standard will be effective for interim and annual periods commencing January 1, 2019. Entities are required to use a modified retrospective approach to adopt this new standard meaning there will be no impact to the consolidated statements of income; however, the comparative consolidated balance sheet will be adjusted to reflect the provisions of this standard. The Company has a detailed plan to implement the new standard and is assessing contractual arrangements, through a cross functional team, that may qualify as leases under the new standard. CP is also working with a vendor to implement a lease management system which will assist in delivering the required accounting changes. During the third quarter, CP's cross functional team and the vendor finalized system requirements and developed work flows and testing scenarios that will permit system implementation and parallel testing in 2018 for CP's lease system solution. The impact of the new standard will be a material increase to right of use assets and lease liabilities on the consolidated balance sheet, primarily, as a result of operating leases currently not recognized on the balance sheet. The Company does not anticipate a material impact to the consolidated statement of income and is currently evaluating the impact adoption of this new standard will have on disclosure.

Table of Contents



Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09,606, Revenue from Contracts with Customers, under FASB ASC Topic 606. In March 2016, the FASB issuedrather than at fair value. This amendment ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations as an update under FASB ASC Topic 606. The amendments clarify the principal versus agent guidance in determining whether to recognize revenue on a gross or net basis. The guidance in Topic 606, as amended, will be effective for CP for interim and annual periods commencingprospectively from January 1, 2018, and CP has the option of adopting the new standard by using either a full retrospective or a modified retrospective approach. CP has decided to adopt this new standard using a modified retrospective approach. CP has analyzed contracts for a significant proportion of the Company’s annual rail freight revenue, which represents greater than 95% of CP’s annual revenues, and has concluded that recognizing these revenues over time as rail freight services are performed continues to be appropriate. CP continues to perform detailed reviews of a variety of specific contractual terms. These include assessing potential additional performance obligations, certain arrangements in the context of the new guidance on principal versus agent, contract origination and fulfillment costs, variable compensation and an assessment of required new disclosures. At this time CP does not expect a material change to revenue recognition from adopting this standard.

Intangibles - Goodwill and Other

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment under FASB ASC Topic 350. This is intended to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill2023, with the carrying amount of that goodwill.early adoption permitted. The amendments are effective for CP beginning on January 1, 2020. Entities are required to apply the amendments in this update prospectively from the date of adoption. The Company does not anticipate that the adoption of this ASU will impact CP's financial statements as there is a sufficient excess between the fair value and carrying value of CP's goodwill. Furthermore CP expects to continue to apply the Step 0 qualitative assessment when testing for goodwill impairment.

Compensation - Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost under FASB ASC Topic 715. The amendments clarify presentation requirements for net periodic pension cost and net periodic post-retirement benefit cost and require that an employer report the current service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the consolidated statement of income separately from the current service cost component and outside a subtotal of income from operations if one is presented. The amendments also restrict capitalization to the current service cost component when applicable. The amendments are effective for CP beginning on January 1, 2018. The amendments related to presentation are required to be applied retrospectively and the restrictions on capitalization of the current service cost component are applicable prospectively on the date of adoption. The impacts of the reclassification are detailed as follows:
 For the three months ended September 30For the nine months ended September 30
Year ended December 31(1)
(in millions of Canadian dollars)201720162017201620172016
Decrease in operating income$68
$41
$203
$127
$272
$167
(1) December 31, 2017 figure is an estimate.

There will be no change to net income or earnings per share as a result of adoption of this new standard. The new guidance restricting capitalization of pensions to the current service cost component of net periodic benefit cost will have no impact to operating income or amounts capitalized because the Company currently only capitalizes an appropriate portion of current service cost for self-constructed properties. CP is currently assessing the disclosure requirementsimpact of this ASU.amendment.

DerivativesAll other accounting pronouncements recently issued, but not effective until after September 30, 2022, have been assessed and Hedging

In August 2017, the FASB issued ASU 2017-12, Targeted Improvementsare not expected to Accounting for Hedging Activities, under FASB ASC Topic 815. This is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These amendments also make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments are effective for CP beginning on January 1, 2019, although early adoption is permitted. Entities are required to apply the amendments in this update to hedging relationships existing on the date of adoption, reflected as of the beginning of the fiscal year of adoption. The Company does not anticipatehave a material impact toon the consolidated statement of incomeCompany's Consolidated Financial Statements and is currently evaluating the impact adoption of this new standard will have on disclosure. The Company is evaluating the possibility of early adopting this standard with a January 1, 2018 effective date.related disclosures.

Table of Contents


3    Changes in accumulated other comprehensive loss ("AOCL") by component
 For the three months ended September 30
(in millions of Canadian dollars, net of tax)Foreign currency
net of hedging
activities		Derivatives and otherPension and post-retirement defined benefit plansTotal
Opening balance, July 1, 2017$124
$(97)$(1,767)$(1,740)
Other comprehensive loss before reclassifications(5)—
—
(5)
Amounts reclassified from accumulated other comprehensive loss—
2
28
30
Net current-period other comprehensive (loss) income(5)2
28
25
Closing balance, September 30, 2017$119
$(95)$(1,739)$(1,715)
Opening balance, July 1, 2016$124
$(157)$(1,438)$(1,471)
Other comprehensive income (loss) before reclassifications2
(1)1
2
Amounts reclassified from accumulated other comprehensive loss—
2
34
36
Net current-period other comprehensive income2
1
35
38
Closing balance, September 30, 2016$126
$(156)$(1,403)$(1,433)
 For the nine months ended September 30
(in millions of Canadian dollars, net of tax)Foreign currency
net of hedging
activities		Derivatives and otherPension and post-retirement defined benefit plansTotal
Opening balance, January 1, 2017$127
$(104)$(1,822)$(1,799)
Other comprehensive loss before reclassifications(8)(7)—
(15)
Amounts reclassified from accumulated other comprehensive loss—
16
83
99
Net current-period other comprehensive (loss) income(8)9
83
84
Closing balance, September 30, 2017$119
$(95)$(1,739)$(1,715)
Opening balance, January 1, 2016$129
$(102)$(1,504)$(1,477)
Other comprehensive loss before reclassifications(3)(60)(1)(64)
Amounts reclassified from accumulated other comprehensive loss—
6
102
108
Net current-period other comprehensive (loss) income(3)(54)101
44
Closing balance, September 30, 2016$126
$(156)$(1,403)$(1,433)



Amounts in Pension and post-retirement defined benefit plans reclassified from AOCL:
7

For the three months ended September 30 For the nine months ended September 30
(in millions of Canadian dollars)2017 2016 2017 2016
Amortization of prior service costs(1)
$(1) $(2) $(3) $(5)
Recognition of net actuarial loss(1)
39
 49
 116
 146
Total before income tax38
 47
 113
 141
Income tax recovery(10) (13) (30) (39)
Net of income tax$28
 $34
 $83
 $102

3    Revenues
(1)
The following table disaggregates the Company’s revenues from contracts with customers by major source:
Impacts "Compensation
For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2022202120222021
Freight
Grain$391 $352 $1,121 $1,244 
Coal156 158 458 491 
Potash170 113 445 348 
Fertilizers and sulphur81 72 244 227 
Forest products109 89 299 259 
Energy, chemicals and plastics360 392 1,010 1,149 
Metals, minerals and consumer products246 196 655 535 
Automotive111 83 322 289 
Intermodal640 441 1,660 1,280 
Total freight revenues2,264 1,896 6,214 5,822 
Non-freight excluding leasing revenues28 25 77 75 
Revenues from contracts with customers2,292 1,921 6,291 5,897 
Leasing revenues20 21 61 58 
Total revenues$2,312 $1,942 $6,352 $5,955 

Contract liabilities       
Contract liabilities represent payments received for performance obligations not yet satisfied and benefits"relate to deferred revenue and are presented as components of "Accounts payable and accrued liabilities" and "Other long-term liabilities" on the Company's Interim Consolidated Statements of Income.Balance Sheets.

Table of Contents


4    Disposition of properties

In March 2016, the Company completed the sale of CP’s Arbutus Corridor (the “Arbutus Corridor”) to the City of Vancouver for gross proceeds of $55 million. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor. The Company recorded a gain on sale of $50 million ($43 million after tax) within "Purchased services and other" from the transaction during the first quarter of 2016.

5    Other income and charges

For the three months ended September 30
For the nine months ended September 30
(in millions of Canadian dollars)2017
2016
2017
2016
Foreign exchange (gains) losses on long-term debt
$(105) $46
 $(200) $(153)
Other foreign exchange (gains) losses(3) 2
 (5) (5)
Legal settlement—
 25
 —
 25
Insurance recovery of legal settlement—
 —
 (10) —
Charge on hedge roll and de-designation (Note 10)—
 —
 13
 —
Other3
 (2) 8
 14
Total other income and charges$(105) $71
 $(194) $(119)

The following table summarizes the changes in contract liabilities:

For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2022202120222021
Opening balance$69 $245 $67 $61 
Revenue recognized that was included in the contract liability balance at the beginning of the period(8)(93)(16)(36)
Increase due to consideration received, net of revenue recognized during the period4 4 14 131 
Closing balance$65 $156 $65 $156 
6    Income taxes

For the three months ended September 30
For the nine months ended September 30
(in millions of Canadian dollars)2017
2016
2017
2016
Current income tax expense$93
 $73
 $288
 $177
Deferred income tax expense77
 50
 168
 233
Income tax expense$170
 $123
 $456
 $410

4    Other expense

For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2022202120222021
Foreign exchange loss (gain) on debt and lease liabilities$— $46 $— $(39)
Other foreign exchange losses (gains)2 (7)1 (9)
Acquisition-related costs (Note 10)— 83 — 295 
Other5 2 12 6 
Other expense$7 $124 $13 $253 

8

5    Income taxes

For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2022202120222021
Current income tax expense$158 $39 $375 $427 
Deferred income tax expense38 130 151 190 
Income tax expense$196 $169 $526 $617 

During the three months ended September 30, 2017,2022, legislation was enacted to increasedecrease the IllinoisIowa state corporate income tax rate. As a result of this change, the Company recorded a deferred tax expenserecovery of $3$12 million in the third quarter of 2017 related to the revaluation of its deferred income tax balances as at January 1, 2017.2022.

During the nine months ended September 30, 2017, the Company recorded a net deferred tax recovery of $14 million related to the revaluation of its deferred income tax balances as at January 1, 2017. This was due to legislation enacted in the second quarter to decrease the Saskatchewan provincial corporate income tax rate which resulted in a $17 million recovery, partially offset by the $3 million expense described above.

The effective tax rates including discrete items for the three and nine months ended September 30, 2017,2022 were 24.95%18.01% and 24.28%18.97%, respectively, compared to 26.23%26.36% and 25.26%21.00%, respectively for the same periods in 2016.of 2021.

The estimated 2017 annual effective tax rate forFor the three months ended September 30, 2017,2022, the effective tax rate was 24.25%, excluding the discrete items of the foreign exchange gainequity earnings of $105Kansas City Southern ("KCS") of $221 million, onacquisition-related costs incurred by CP of $18 million, the Company's U.S. dollar-denominated debtdeferred tax recovery of $12 million described above, and an outside basis deferred tax recovery of $9 million arising from the difference between the carrying amount of CP's investment in KCS for financial reporting and the $3 millionunderlying tax expense described above, is 26.50%.basis of this investment.

The estimated 2016 annual effective tax rate forFor the three months ended September 30, 2016,2021, the effective tax rate was 24.60%, excluding the discrete items of acquisition-related costs incurred by CP of $98 million, and a foreign exchange ("FX") loss of $46 million on debt and lease liabilities.

For the nine months ended September 30, 2022, the effective tax rate was 24.25%, excluding the discrete items of the foreign exchange lossequity earnings of $46KCS of $627 million, onacquisition-related costs incurred by CP of $57 million, the Company's U.S. dollar-denominated debt,deferred tax recovery of $12 million described above, and an outside basis deferred tax expense of $8 million arising from the difference between the carrying amount of CP's investment in KCS for financial reporting and the settlement charge in respectunderlying tax basis of a corporate legal claim of $25 million, was 25.17%.this investment.

The estimated 2017 annual effective tax rate forFor the nine months ended September 30, 2017,2021, the effective tax rate was 24.60%, excluding the discrete items of acquisition-related costs incurred by CP of $442 million, the management transition recovery of $51 million related to the retirementmerger termination payment received in connection with KCS's termination of the Company's Chief Executive Officer, the foreign exchangeAgreement and Plan of Merger (the "Original Merger Agreement") of $845 million (U.S. $700 million), and an FX gain of $200$39 million on the Company's U.S. dollar-denominated debt, an insurance recovery of $10 million on a legal settlement, the $13 million charge associated with the hedge roll and de-designation and the $14 million net tax recovery due to tax rate changes described above, is 26.50%.

The estimated 2016 annual effective tax rate for the nine months ended September 30, 2016, excluding the discrete items of the foreign exchange gain of $153 million on the Company's U.S. dollar-denominated debt and the settlement charge in respect of a corporate legal claim of $25 million, was 26.50%.



Table of Contents



lease liabilities.
7
6    Earnings per share

At September 30, 2017, the number of shares outstanding was 145.0 million (September 30, 2016 - 146.3 million).
Basic earnings per share havehas been calculated using netNet income for the period divided by the weighted-average number of shares outstanding during the period.

The number of shares used in the earnings per share calculations isare reconciled as follows:
For the three months ended September 30For the nine months ended September 30
(in millions)2022202120222021
Weighted-average basic shares outstanding930.0 666.9 929.9 666.7 
Dilutive effect of stock options2.9 2.9 2.9 3.1 
Weighted-average diluted shares outstanding932.9 669.8 932.8 669.8 

For the three months ended September 30For the nine months ended September 30
(in millions)2017201620172016
Weighted-average basic shares outstanding145.5
147.3
146.2
150.7
Dilutive effect of stock options0.3
1.0
0.4
0.9
Weighted-average diluted shares outstanding145.8
148.3
146.6
151.6


For the three and nine months ended September 30, 2017,2022, there were 255,928 optionsnil and 342,5950.3 million options, respectively, excluded from the computation of diluted earnings per share because their effects were not dilutive (three and nine months ended September 30, 20162021 - 331,5530.2 million and 405,851,0.1 million, respectively).

9

7    Changes in Accumulated other comprehensive income (loss) ("AOCI") by component
8    Debt

For the three months ended September 30
(in millions of Canadian dollars)
Foreign currency net of hedging activities(1)
Derivatives(1)(2)
Pension and post-
retirement defined
benefit plans(1)
Equity accounted investments(1)(2)
Total(1)
Opening balance,
July 1, 2022		$217 $(2)$(1,856)$102 $(1,539)
Other comprehensive income (loss) before reclassifications1,618 — (14)37 1,641 
Amounts reclassified from accumulated other comprehensive income— 1 30 — 31 
Net other comprehensive income1,618 1 16 37 1,672 
Closing balance,
September 30, 2022		$1,835 $(1)$(1,840)$139 $133 
Opening balance, July 1, 2021$110 $(91)$(2,800)$(10)$(2,791)
Other comprehensive income before reclassifications6 101 — — 107 
Amounts reclassified from accumulated other comprehensive loss— 2 39 — 41 
Net other comprehensive income6 103 39 — 148 
Closing balance,
September 30, 2021		$116 $12 $(2,761)$(10)$(2,643)
Revolving(1)Amounts are presented net of tax.
(2) Comparative figures have been reclassified to conform with current period presentation.

For the nine months ended September 30
(in millions of Canadian dollars)
Foreign currency net of hedging activities(1)
Derivatives(1)(2)
Pension and post-
retirement defined
benefit plans(1)
Equity accounted investments(1)(2)
Total(1)
Opening balance, January 1, 2022$(182)$(4)$(1,915)$(2)$(2,103)
Other comprehensive income (loss) before reclassifications2,017 — (14)140 2,143 
Amounts reclassified from accumulated other comprehensive income— 3 89 1 93 
Net other comprehensive income2,017 3 75 141 2,236 
Closing balance, September 30, 2022$1,835 $(1)$(1,840)$139 $133 
Opening balance, January 1, 2021$112 $(40)$(2,878)$(8)$(2,814)
Other comprehensive income (loss) before reclassifications4 46 — (2)48 
Amounts reclassified from accumulated other comprehensive loss— 6 117 — 123 
Net other comprehensive income (loss)4 52 117 (2)171 
Closing balance, September 30, 2021$116 $12 $(2,761)$(10)$(2,643)
(1)Amounts are presented net of tax.
(2) Comparative figures have been reclassified to conform with current period presentation.

10

Amounts in Pension and post-retirement defined benefit plans reclassified from AOCI are as follows:

For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2022202120222021
Recognition of net actuarial loss(1)
$39 $53 $116 $158 
Income tax recovery(9)(14)(27)(41)
Total net of income tax$30 $39 $89 $117 
(1)Impacts "Other components of net periodic benefit recovery" on the Interim Consolidated Statements of Income.

8    Accounts receivable, net

As at September 30, 2022As at December 31, 2021
(in millions of Canadian dollars)FreightNon-freightTotalFreightNon-freightTotal
Total accounts receivable$835 $257 $1,092 $614 $239 $853 
Allowance for credit losses(26)(13)(39)(20)(14)(34)
Total accounts receivable, net$809 $244 $1,053 $594 $225 $819 

For the three months ended September 30, 2022For the three months ended September 30, 2021
(in millions of Canadian dollars)FreightNon-freightTotalFreightNon-freightTotal
Allowance for credit losses, opening balance$(24)$(15)$(39)$(23)$(15)$(38)
Current period credit loss provision, net(2)2 — 1 (1)— 
Allowance for credit losses, closing balance$(26)$(13)$(39)$(22)$(16)$(38)

For the nine months ended September 30, 2022For the nine months ended September 30, 2021
(in millions of Canadian dollars)FreightNon-freightTotalFreightNon-freightTotal
Allowance for credit losses, opening balance$(20)$(14)$(34)$(25)$(15)$(40)
Current period credit loss provision, net(6)1 (5)3 (1)2 
Allowance for credit losses, closing balance$(26)$(13)$(39)$(22)$(16)$(38)

9   Government assistance

By analogy to the grant model of accounting within International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance, CP records government assistance from various levels of Canadian and U.S. governments and government agencies when the conditions of their receipt are complied with and there is reasonable assurance that the assistance will be received.

Government assistance related to properties has as a primary condition that CP should purchase, construct, or otherwise acquire property, plant and equipment. Under certain government assistance arrangements, there is a secondary condition that requires CP to repay a portion of the assistance if certain conditions related to the assets are not adhered to during a specified period. In these cases, it is CP's intention to comply with all conditions imposed by the terms of the government assistance. Government assistance received or receivable related to CP's property assets is deducted from the cost of the assets in the Interim Consolidated Balance Sheets within "Properties" and amortized over the same period as the related assets in "Depreciation and amortization" in the Interim Consolidated Statements of Income.

During the three and nine months ended September 30, 2022, the Company received $6 million and $25 million, respectively, of government assistance towards the purchase and construction of properties.
As of September 30, 2022, the total Properties balance of $22,150 million is net of $279 million of unamortized government assistance (December 31, 2021 - $259 million), primarily related to the enhancement of CP's track and roadway infrastructure. Amortization expense related to government assistance for the three and nine months ended September 30, 2022 was $3 million and $8 million, respectively.

11

10    Business acquisition

Kansas City Southern

The Company accounts for its investment in KCS using the equity method of accounting while the U.S. Surface Transportation Board ("STB") considers the Company's application to control KCS. The STB review of CP's proposed control of KCS while KCS is in the voting trust is expected to be completed in the first quarter of 2023. The investment in KCS of $45,964 million as at September 30, 2022 includes $627 million of equity earnings of KCS and foreign currency translation of $3,445 million, offset by dividends of $593 million received in the nine months ended September 30, 2022. Included within the $221 million and $627 million of equity earnings of KCS recognized for the three and nine months ended September 30, 2022 was amortization (net of tax), of the approximately $30 billion basis difference, representing the difference in value between the consideration paid to acquire KCS and the underlying carrying value of the net assets of KCS as at December 14, 2021, immediately prior to the acquisition by CP. The amortization (net of tax), recognized for the three and nine months ended September 30, 2022 was $42 million and $121 million, respectively. The basis difference is related to depreciable property, plant and equipment, intangible assets with definite lives, and long-term debt, and is amortized over the related assets' remaining useful lives, and the remaining terms to maturity of the debt instruments.

During the three and nine months ended September 30, 2022, the Company incurred $18 million and $57 million, in acquisition-related costs, respectively, recorded within "Purchased services and other" in the Company's Interim Consolidated Statements of Income. Acquisition-related costs of $12 million and $39 million incurred by KCS during the three and nine months ended September 30, 2022 are included within "Equity earnings of Kansas City Southern" in the Company's Interim Consolidated Statements of Income.

During the three and nine months ended September 30, 2021, the Company incurred $98 million and $442 million, respectively, in acquisition-related costs associated with the Original Merger Agreement and Merger Agreement, of which $15 million and $147 million were recorded within "Purchased services and other" and $83 million and $295 million were recorded within "Other expense", respectively, including the amortization of financing fees associated with new credit facilities. Total financing fees paid for a bridge facility associated with the KCS acquisition during the three and nine months ended September 30, 2021 were $nil and $45 million, respectively, presented under "Cash (used in) provided by financing activities" in the Company's Interim Consolidated Statements of Cash Flows.

On May 21, 2021, KCS terminated the Original Merger Agreement entered into on March 21, 2021 with CP to enter into a definitive agreement with Canadian National Railway ("CN"). At the same time and in accordance with the terms of the Original Merger Agreement, KCS paid CP a termination fee of $845 million (U.S. $700 million). This amount is reported as "Merger termination fee" in the Company's Interim Consolidated Statements of Income for the nine months ended September 30, 2021. No similar items were received in the same period of 2022.

In connection with the Merger Agreement, the Company remitted $1,773 million (U.S. $1,400 million) to KCS on September 15, 2021 in connection with KCS's payment of the CN merger termination fees, recorded within "Investment in KCS" in the Company's Balance Sheets.

11    Investment in KCS

The KCS investment carrying cost of $45,964 million reported on the Company's Interim Consolidated Balance Sheets as at September 30, 2022 reflects the consideration paid to acquire KCS, the asset recorded upon recognition of a deferred tax liability computed on an outside basis (see Note 5), the subsequent recognition of equity earnings, the dividends received from KCS, and foreign currency translation based on the quarter-end exchange rate.

The following table presents summarized financial information for KCS, on its historical cost basis:

Statement of Income

(in millions of Canadian dollars)(1)
For the three months ended September 30, 2022For the nine months ended September 30, 2022
Total revenues$1,152 $3,216 
Total operating expenses728 2,024 
Operating income424 1,192 
Less: Other(2)
67 164 
Income before income taxes357 1,028 
Net income$263 $748 
(1) Amounts translated at the average FX rate for the three and nine months ended September 30, 2022 of $1.00 USD = $1.31 CAD and $1.00 USD = $1.28 CAD, respectively.
(2) Includes Equity in net earnings of KCS's affiliates, Interest expense, FX loss, and Other income, net.
12

12    Debt

During the nine months ended September 30, 2022, the Company repaid at maturity $125 million 5.100% 10-year Medium Term Notes, U.S. $250 million ($313 million) 4.500% 10-year Notes, and a U.S. $76 million ($97 million) 6.99% finance lease.

Credit facility

Effective June 23, 2017,March 14, 2022, the Company extended the maturity date by one year on its existing revolvingof the U.S. $2.0 billion$500 million unsecured non-revolving term credit facility which includes a(the "term facility") to September 15, 2022. During the three months ended June 30, 2022, the Company repaid U.S. $1.0 billion five-year portion and$100 million ($132 million) of the term facility. During the three months ended September 30, 2022, the Company repaid in full the term facility's outstanding borrowings of U.S. $1.0 billion one-year plus one-year term-out portion.$400 million ($504 million). The maturity datefacility was automatically terminated on September 15, 2022 following the U.S. $1.0 billion one-year plus one-year term-out portion has been extended to June 27, 2019; the maturity date on the U.S. $1.0 billion five-year portion was extended to June 28, 2022.final principal repayment.

Commercial paper program

The Company has a commercial paper program which 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. TheThis commercial paper program is backed by the U.S. $1.0$1.3 billion one-year plus one-year term-out portion of the revolving credit facility. As at September 30, 2017 and December 31, 2016,2022, the Company had nototal commercial paper borrowings.

borrowings of U.S. $525 million ($720 million), included in "Long-term debt maturing within one year" on the Company's Interim Consolidated Balance Sheets (December 31, 2021 - U.S. $265 million). The weighted-average interest rate on these borrowings as at September 30, 2022 was 3.48% (December 31, 2021 - 0.32%). The Company presents issuances and repayments of commercial paper, all of which have a maturity of less than 90 days,, in the Company's Interim Consolidated Statements of Cash Flows on a net basis.


13    Financial instruments
9    Shareholders' equity

On May 10, 2017, the Company announced a new normal course issuer bid ("bid"), commencing May 15, 2017, to purchase up to 4.38 million Common Shares for cancellation before May 14, 2018.

All purchases are made in accordance with the bid at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to retained earnings. The following table provides activities under the share repurchase program:

For the three months ended September 30
For the nine months ended September 30

2017
2016
2017
2016
Number of Common Shares repurchased1,145,400
 1,782,200
 1,828,300
 6,910,000
Weighted-average price per share(1)
$196.46
 $192.10
 $201.50
 $175.08
Amount of repurchase (in millions)(1)
$225
 $342
 $368
 $1,210
(1) Includes brokerage fees.


Table of Contents


10    Financial instruments

A. Fair values of financial instruments

The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy established by GAAP that prioritizes those inputs to valuation techniques used to measure fair value based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs, other than quoted prices included within Level 1, are observable for the asset or liability either directly or indirectly; and Level 3 inputs are not observable in the market.

When possible, the estimated fair value is based on quoted market pricesThe Company’s short-term financial instruments may include Cash and if not available, estimates from third party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, foreign exchange ("FX")cash equivalents, Restricted cash and commodity)cash equivalents, accounts receivable, accounts payable and volatility, depending on the type of derivativeaccrued liabilities, and nature of the underlying risk. The Company uses inputsshort-term borrowings including commercial paper and data used by willing market participants when valuing derivatives and considers its own credit default swap spread as well as those of its counterparties in its determination of fair value.

term loans. The carrying values of short-term financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of approximately $9,587 million (December 31, 2016 - $9,981 million) and avalues.

The carrying value of $8,133 million (December 31, 2016 - $8,684 million) as at September 30, 2017. Thethe Company’s long-term debt and finance lease liabilities does not approximate their fair value. Their estimated fair value of current and long-term borrowings has been determined based on market information, where available, or by discounting future payments of interestprincipal and principalinterest at estimated interest rates expected to be available to the Company at period end. All derivatives and long-term debtmeasurements are classified as Level 2. The Company’s long-term debt and finance lease liabilities, including current maturities, with a carrying value of $19,855 million as at September 30, 2022 (December 31, 2021 - $19,151 million), had a fair value of $17,472 million (December 31, 2021 - $21,265 million).

B. Financial risk management

Derivative financial instruments

Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Interim Consolidated Balance Sheets, commitments or forecasted transactions. At the time a derivative contract is entered into, and at least quarterly thereafter, an assessment is made as to whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.

It is not the Company’s intent to use financial derivatives or commodity instruments for trading or speculative purposes.

FX management

The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in value of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.

Net investment hedge

The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar-denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majorityeffect of the Company’s U.S. dollar-denominated long-term debt has been designated as a hedge of theCompany's net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on net income by offsetting long-term FX gains and losses on U.S. dollar-denominated long-term debt and gains and losses on its net investment. The effective portion recognized in “Other comprehensive income”hedge for the three and nine months ended September 30, 20172022 was an unrealized FX gainloss of $180$440 million and $342$558 million, respectively (three and nine months ended September 30, 20162021 - an unrealized FX loss of $72$168 million and an unrealized FX gain$6 million, respectively) recognized in “Other comprehensive income”.

14    Shareholders' equity

On January 27, 2021, the Company announced a normal course issuer bid ("NCIB"), commencing January 29, 2021, to purchase up to 16.7 million Common Shares in the open market for cancellation on or before January 28, 2022. Upon expiry of $260 million, respectively). There was no ineffectiveness duringthis NCIB, the Company had not purchased any Common Shares under this NCIB.

15    Pension and other benefits

In the three and nine months ended September 30, 2017 and September 30, 2016.

Interest rate management

The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a result of changes in market interest rates. In order to manage funding needs or capital structure goals,2022, the Company

Table made contributions to its defined benefit pension plans of Contents


enters into debt or capital lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by on-going market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.

To manage interest rate exposure, the Company accesses diverse sources of financing$5 million and manages borrowings in line with a targeted range of capital structure, debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles. In anticipation of future debt issuances, the Company may enter into forward rate agreements, that are designated as cash flow hedges, to substantially lock in all or a portion of the effective future interest expense. The Company may also enter into swap agreements, designated as fair value hedges, to manage the mix of fixed and floating rate debt.

Forward starting swaps

As at September 30, 2017, the Company had forward starting floating-to-fixed interest rate swap agreements (“forward starting swaps”) totaling a notional U.S. $500 million to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes. The effective portion of changes in fair value on the forward starting swaps is recorded in “Accumulated other comprehensive loss”, net of tax, as cash flow hedges until the highly probable forecasted notes are issued. Subsequent to the notes issuance, amounts in “Accumulated other comprehensive loss” are reclassified to “Net interest expense”.

During the second quarter of 2017, the Company de-designated the hedging relationship for U.S. $700 million of forward starting swaps. The Company settled a notional U.S. $200 million of forward starting swaps for a cash payment of U.S. $16 million ($22 million). The Company rolled the remaining notional U.S. $500 million of forward starting swaps and did not cash settle these swaps. The impact of the U.S. $200 million settlement and U.S. $500 million roll of the forward starting swaps was a charge of $13 million to "Other income and charges" on the Company's Interim Consolidated Statements of Income. Concurrently, the Company re-designated the forward starting swaps totaling U.S. $500 million to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes.

As at September 30, 2017, the total fair value loss of $59 million (December 31, 2016 - fair value loss of $69 million) derived from the forward starting swaps was included in “Accounts payable and accrued liabilities”. Changes in fair value from the forward starting swaps for the three and nine months ended September 30, 2017 was $nil and a loss of $12 million, respectively (three and nine months ended September 30, 20162021 - $nil$4 million and a loss of $84$15 million, respectively). The effective portion
13

Net periodic benefit costs for defined benefit pension plans and other benefits included the three and nine months endedfollowing components:        

For the three months ended September 30
PensionsOther benefits
(in millions of Canadian dollars)2022202120222021
Current service cost (benefits earned by employees)$37 $42 $3 $4 
Other components of net periodic benefit (recovery) cost:
Interest cost on benefit obligation95 88 4 4 
Expected return on fund assets(240)(240)— — 
Recognized net actuarial loss39 52 — 1 
Total other components of net periodic benefit (recovery) cost(106)(100)4 5 
Net periodic benefit (recovery) cost$(69)$(58)$7 $9 

For the nine months ended September 30
PensionsOther benefits
(in millions of Canadian dollars)2022202120222021
Current service cost (benefits earned by employees)$111 $128 $8 $10 
Other components of net periodic benefit (recovery) cost:
Interest cost on benefit obligation287 264 12 12 
Expected return on fund assets(719)(720)— — 
Recognized net actuarial loss115 155 1 3 
Total other components of net periodic benefit (recovery) cost(317)(301)13 15 
Net periodic benefit (recovery) cost$(206)$(173)$21 $25 

16    Stock-based compensation

As at September 30, 2017 was $nil and a loss of $11 million, respectively, (three and nine months ended September 30, 2016 - $nil and a loss of $82 million, respectively) and is recorded in “Other comprehensive income”. In addition to the charge on hedge roll and de-designation, for the three and nine months ended September 30, 2017, an ineffectiveness loss of $nil and $1 million, respectively (three and nine months ended September 30, 2016 - $nil and a loss of $2 million, respectively) is recorded to “Net interest expense”.

For the three and nine months ended September 30, 2017, a loss of $3 million and $8 million, respectively, related to previous forward starting swap hedges have been amortized to “Net interest expense” (three and nine months ended September 30, 2016 - a loss of $3 million and $8 million, respectively). The Company expects that during the next 12 months $12 million of losses will be amortized to “Net interest expense”.

11    Stock-based compensation

At September 30, 2017,2022, the Company had several stock-based compensation plans including stock option plans, various cash settledcash-settled liability plans, and an employee stock savingsshare purchase plan. These plans resulted in an expense for the three and nine months ended September 30, 20172022 of $11$21 million and $16$67 million, respectively (three and nine months ended September 30, 20162021 - expense of $31$26 million and $46$75 million, respectively).

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 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 has 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 performance share units ("PSU"), 68,612 deferred share units ("DSU"), and 752,145 stock options.

As a result of this agreement, the Company has 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.

Stock option planplans

In the nine months ended September 30, 2017,2022, under CP’s stock option plans, the Company issued 369,980 regular836,379 options at the weighted averageweighted-average price of $199.08$90.96 per share, based on the closing price on the grant date.

Table of Contents



Pursuant to the employee plan, these regular options may be exercised upon vesting, which is between 12 months and 6048 months after the grant date, and will expire after 7seven years. Certain stock options granted in 2017 vest upon the achievement of specific performance criteria.

14

Under the fair value method, the fair value of the stock options at the grant date was approximately $17$16 million. The weighted averageweighted-average fair value assumptions were approximately:


For the nine months ended September 30, 2017
Grant price$199.082022
Expected option life (years)(1)
5.484.75
Risk-free interest rate(2)
1.85%1.61%
Expected stockshare price volatility(3)
26.94%26.84%
Expected annual dividends per share(4)
$2.00100.760
Expected forfeiture rate(5)
6.0%3.00%
Weighted-average grant date fair value per option granted during the period$45.7818.79
(1)
(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 option life.
(3)Based on the historical volatility of the Company’s share 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.
(5)The Company estimates forfeitures based on past experience. This rate is monitored on a periodic basis.

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 remaining term at the time of the grant.
(3)
Based on the historical stock price volatility of the Company’s stock 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 10, 2017, the Company announced an increase in its quarterly dividend to $0.5625 per share, representing $2.2500 on an annual basis.
(5)
The Company estimated forfeitures based on past experience. This rate is monitored on a periodic basis.

Performance share unit planplans

InDuring the nine months ended September 30, 2017,2022, the Company issued 134,991 PSUs414,375 Performance Share Units ("PSUs") with a grant date fair value of approximately $27$36 million and 13,506 Performance Deferred Share Units ("PDSUs") with a grant date fair value, including the value of expected future matching units, of approximately $2 million. These unitsPSUs and PDSUs attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. PSUsShares, and vest and are settled in cash, or in CP Common Shares, approximately 3three years after the grant date, contingent upon CP’s performance ("performance factor"). Grant recipients who are eligible to retire and have provided six months of service during the performance period are entitled to the full award. The fair value of these PSUs and PDSUs is measured periodically until settlement, usingsettlement. Vested PSUs are settled in cash. Vested PDSUs are settled in cash pursuant to the Deferred Share Unit ("DSU") Plan and are eligible for a lattice-based valuation model.25% match if the holder has not exceeded their share ownership requirements, and are paid out only when the holder ceases their employment with CP.

The performance period for PSUs and PDSUs issued in the nine months ended September 30, 20172022 is January 1, 20172022 to December 31, 2019. The2024 and the performance factors for these PSUs are Return on Invested Capital,Free Cash Flow ("FCF"), Adjusted Net Debt to Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") Modifier, Total Shareholder Return ("TSR") compared to the S&P/TSX Capped Industrial60 Index, and TSR compared to S&P 1500 Road and Rail500 Industrials Index.

The performance period for the PSUs issued in 20142019 was January 1, 20142019 to December 31, 2016.2021. The performance factors for these668,405 PSUs were Operating Ratio, Free cash flow,Return on Invested Capital ("ROIC"), TSR compared to the S&P/TSX 60 indexIndex, and TSR compared to Class I railways.Railways. The resulting payout was 118%200% of the outstanding units multiplied by the Company's average share price that was calculated using the last 30 trading days preceding December 31, 2016.2021. In the first quarter of 2017,2022, payouts occurred on the631,457 total outstanding awards, including dividends reinvested, totaling $31 million on 133,728 outstanding awards.totalling $116 million.

Deferred share unit plan

InDuring the nine months ended September 30, 2017,2022, the Company granted 20,109 DSUs53,834 Deferred Share Units ("DSUs") with a grant date fair value of approximately $4$5 million. DSUs vest over various periods of up to 4836 months and are only redeemable for a specified period after employment is terminated. AnThe expense to income for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.


Table of Contents


12    Pension and other benefits

In the three and nine months ended September 30, 2017, the Company made contributions of $11 million and $35 million, respectively (three and nine months ended September 30, 2016 - $4 million and $38 million, respectively), to its defined benefit pension plans. Net periodic benefit costs for defined benefit pension plans and other benefits recognized in the three and nine months ended September 30, 2017 included the following components:

For the three months ended September 30

Pensions
Other benefits
(in millions of Canadian dollars)2017
2016
2017
2016
Current service cost (benefits earned by employees in the period)$26

$26

$3

$2
Interest cost on benefit obligation112

117

5

6
Expected return on fund assets(223)
(211)
—

—
Recognized net actuarial loss38

48

1

1
Amortization of prior service costs(1)
(2)
—

—
Net periodic (recovery) benefit cost$(48)
$(22)
$9

$9


17    Contingencies

For the nine months ended September 30

Pensions
Other benefits
(in millions of Canadian dollars)2017
2016
2017
2016
Current service cost (benefits earned by employees in the period)$77

$79

$9

$8
Interest cost on benefit obligation338

350

15

16
Expected return on fund assets(669)
(634)
—

—
Recognized net actuarial loss114

143

2

3
Amortization of prior service costs(3)
(5)
—

—
Net periodic (recovery) benefit cost$(143)
$(67)
$26

$27


13    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 September 30, 20172022 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.

Legal proceedings related to Lac-Mégantic rail accident

On July 6, 2013, a train carrying petroleum crude oil operated by MontrealMontréal Maine and Atlantic Railway (“MMA”MMAR”) or a subsidiary, MontrealMontréal Maine & Atlantic Canada Co. (“MMAC” and collectively the “MMA Group”), derailed and exploded in Lac-Mégantic, Québec. The
15

derailment occurred on a section of railway owned and operated by the MMA Group. The previous day CP had interchanged the train to the MMA Group and after the interchange,while the MMA Group exclusively controlled 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 (the "Minister") ordered the namedvarious parties, including CP, to recover the contaminants and to clean upremediate the derailment site. On August 14, 2013, the Minister addedsite (the "Cleanup Order") and served CP as a party (the “Amended Cleanup Order”). CP appealed the Amended Cleanup Order to the Administrative Tribunal of Québec. On July 5, 2016, the Minister servedwith a Notice of Claim for nearly $95 million of compensation spent on cleanup, alleging thatfor those costs. CP refused or neglected to undertakeappealed the work. On September 6, 2016, CP filed a contestation ofCleanup Order and contested the Notice of Claim with the Administrative Tribunal of Québec. In October 2016, CP and the Minister agreed to stay the tribunalThese proceedings are stayed pending the outcomedetermination of the Province of Québec's action, set out below. The Court's decision to stay the tribunal proceedings is pending, but de facto, the file has been suspended. Directly related to that matter, on July 6, 2015, the ProvinceAttorney General of Québec (“AGQ”) action (paragraph 2 below).

(2)The AGQ sued CP in the Québec Superior Court claiming $409 million in derailment damages, including cleanup costswhich was amended and reduced to $315 million (the “Province’s“AGQ Action”). The ProvinceAGQ Action alleges thatthat: (i) CP exercised custody or control over the crude oil lading and that CP was otherwise negligent. Therefore, CP is said to be solidarily (joint and severally) liable with third parties responsible for the accident. On September 14, 2017, the Province was granted leavepetroleum crude oil from its point of origin until its delivery to amend its claim to allege vicarious liability againstIrving Oil Ltd.; and (ii) CP is vicariously liable for the acts and omissions of MMAC. While the amendment asserts a new cause of action it does not increase the amount of damages sought and should not, based on CP's understanding of Quebec and Canadian law, increase the risk of a finding of liability against CP. On September 28, 2017, the Province served a further motion for leave to amend its claim to, among other things, add MMAC as a defendant and to reduce its claim for damages to $315 million.MMA Group.

Table of Contents(3)


This motion will be heard on October 24, 2017 should CP decide to oppose any of the amendments sought. To date, no timetable governing the conduct of this lawsuit has been ordered by the Quebec Superior Court.

A class action lawsuit has also been filed 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”"Class Action"). That lawsuitOther defendants including MMAC and Mr. Thomas Harding ("Harding") were added to the Class Action on January 25, 2017. On November 28, 2019, the plaintiffs' motion to discontinue their action against Harding was granted. The Class Action seeks derailmentunquantified damages, including for wrongful death, personal injury, property damage, and property harm. On August 16, 2013,economic loss.

(4)Eight subrogated insurers sued CP was added as a defendant. On May 8, 2015,in the Québec Superior Court authorized (certified)claiming approximately $16 million in damages, which was amended and reduced to approximately $15 million (the “Promutuel Action”), and two 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. As such, the extent of any overlap between the damages claimed in these actions and 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 against CP, the shipper - Western Petroleum, and the shipper’s parent - World Fuel Services (collectively,Promutuel Action were consolidated. The joint liability trial of these consolidated claims commenced on September 21, 2021 with oral arguments ending on June 15, 2022. A decision is expected by December 15, 2022. A damages trial will follow if necessary.

(5)Forty-eight plaintiffs (all individual claims joined in one action) sued CP, MMAC, and Harding in the “World Fuel Entities”). The World Fuel Entities have since settled.

On October 24, 2016, the QuebecQuébec Superior Court authorized proceedings against two additional defendantsclaiming approximately $5 million in damages for economic loss and pain and suffering, and asserting similar allegations as in the Class Action i.e. against MMAC and Mr. Thomas Harding. On December 9, 2016, the Quebec Superior Court granted CP’s motion seeking to confirm the validityAGQ Action. The majority of the opt-outs from this Class Action by the estatesplaintiffs opted-out of the deceased parties following the train derailment who had opted out to allow them to sue in the United States instead (i.e. the wrongful death cases, filed in the United States, which are further discussed hereinafter). Accordingly, at present, all known wrongful death claimants in the class action have opted out and cannot re-join the Class Action. In accordance with the initial case protocol set by the Superior Court on March 27, 2017, CP’s statement of defence was delivered on June 2, 2017. A further case conference was held on July 14, 2017 to review the status of the matter and schedule the next steps in the case protocol. As a result, production of documents, examinations for discovery and the exchange of expert reports by the parties are expected to occur between mid-2017 and the end of 2018. A trial date has yet to be fixed. On September 28, 2017, the Class Action and all but two are also plaintiffs served (i) a motion to consolidatein litigation against CP, described in paragraph 7 below. This action is stayed pending determination of the Class Action with the Province’s Action and the two insurance actions (described below); and (ii) a motion to bifurcate the proceedings into a liability phase (first) and a damages phase (afterwards), if necessary. These motions, together with CP’s motion relating to document production, will be heard on October 24, 2017.consolidated claims described above.

On July 4, 2016, eight subrogated insurers served(6)The MMAR U.S. bankruptcy estate representative commenced an action against CP with claims of approximately $16 million (the “Promutuel Action”). On July 11, 2016, two additional subrogated insurers served CP with claims of approximately $3 million, (the “Royal Action”). The lawsuits do not identify the parties to which the insurers are subrogated, and therefore the extent of claim overlap and the extent that claims will be satisfied after proof of claim review and distribution from the Plans, referred to below, is difficult to determine at this stage. On September 28, 2017 the Promutuel Action plaintiffs served (i) a motion to consolidate its proceeding with the Class Action, the Province’s Action and the Royal Action; (ii) a motion to bifurcate the proceedings into a liability phase (first) and a damages phase (thereafter), if necessary; and (iii) a motion to amend their claim to add MMAC as a defendant and to reduce the claim for damages to $15 million. On the same date, the Royal Action plaintiffs served a motion to stay their proceeding pending the outcomein November 2014 in the Class Action, the Province’s ActionMaine Bankruptcy Court claiming that CP failed to abide by certain regulations and the Promutuel Action. These motions will be heard on October 24, 2017.

In the event the Class Action, the Province’s Action, the Promutuel Action and the Royal Action are consolidated, this procedural step should not increase CP’s exposureseeking approximately U.S. $30 million in damages for MMAR’s loss in business value according to a finding of liability or damages.

In the wake of the derailment and ensuing litigation, MMAC filed for bankruptcy in Canada (the “Canadian Proceeding”) and MMA filed for bankruptcy in the United States (the “U.S. Proceeding”). Plans of arrangement have been approved in both the Canadian Proceeding and the U.S. Proceeding (the “Plans”). These Plans provide for the distribution of a fund of approximately $440 million amongst those claiming derailment damages. The Plans also provide settling parties broadly worded third-party releases and injunctions preventing lawsuits against settlement contributors. CP has not settled and therefore will not benefit from those provisions. Both Plans do, however, contain judgment reduction provisions, affording CP a credit for the greater of (i) the settlement monies received by the plaintiff(s), or (ii) the amount, in contribution or indemnity, that CP would have been entitled to charge against third parties other than MMA and MMAC, but for the Plans' releases and injunctions. CP may also have judgment reduction rights, as part of the contribution/indemnification credit, for the fault of the MMA Group. Finally, the Plans provide for a potential re-allocation of the MMA Group’s liability among plaintiffs and CP, the only non-settling party.

An Adversary Proceedingrecent expert report filed by the MMA U.S. bankruptcy trustee (now, estate representative) against CP, Irving Oil, and the World Fuel Entities accuses CP of failing to ensure that World Fuel Entities or Irving Oil properly classified the oil lading and of not refusing to ship the misclassified oil as packaged. By thatestate. This action the estate representative seeks to recover MMA’s going concern value supposedly destroyed by the derailment. The estate representative has since settled with the World Fuel Entities and Irving Oil and now bases CP misfeasance on the railroad’s failure to abide in North Dakota by a Canadian regulation. That regulation supposedly would have caused the railroads to not move the crude oil train because an inaccurate classification was supposedly suspected. In a recently amended complaint, the estate representative named a CP affiliate, Soo Line Railroad Company ("Soo Line"), and asserts that CP knew or ought to have known that the shipper misclassified the petroleum crude oil and Soo Line breached terms or warranties allegedly contained in the bill of lading. CP’stherefore should have refused to transport it. Summary judgment motion to dismiss this amended complaint was heardargued and taken under advisement on December 20, 2016. On July 7, 2017, the Maine bankruptcy court granted CP’s motion in part (by dismissing the contract claim),June 9, 2022, and denied CP’s motion in part (by allowing the negligence claim to proceed). CP’s motion for leave to appeal this decision (relating to the negligence claim) was heard on September 28, 2017 and the decision is under reserve.pending.

In response to one(7)The class and mass tort action commenced against CP in June 2015 in Texas (on behalf of CP’s motions to withdraw the Adversary Proceedings bankruptcy reference, the estate representative maintained that Canadian law rather than U.S. law controlled. The Article III court that heard the motion found that if U.S. federal regulations governed, the case was not complex enough to warrant withdrawal. Before the bankruptcy court, CP moved to dismiss for want of personal jurisdiction, but the court denied the motion because CP had participated in the bankruptcy proceedings.

Table of Contents



Lac-Mégantic residents and wrongful death representatives commenced a class actionrepresentatives) and a mass action in Texas andthe wrongful death and personal injury actions commenced against CP in June 2015 in Illinois and Maine.Maine, were all transferred and consolidated in Federal District Court in Maine (the “Maine Actions”). The Maine Actions allege that CP removed all of these lawsuits to federal court,negligently misclassified and a federal court thereafter consolidated those cases in Maine. These actions generally charge CP with misclassification and mis-packaging (that is, using inappropriate DOT-111 tank cars) negligence.improperly packaged the petroleum crude oil. On CP'sCP’s motion, the Maine courtActions were dismissed. The plaintiffs appealed the dismissal decision to the United States First Circuit Court of Appeals, which dismissed all wrongful death and personal injury actionsthe plaintiffs' appeal on several grounds on September 28, 2016.June 2, 2021. The plaintiffs’ subsequent motionplaintiffs further petitioned the United States First Circuit Court of Appeals for reconsiderationa rehearing, which was denied on September 8, 2021. On January 9, 2017. The24, 2022, the plaintiffs filed a notice of appeal on January 19, 2017. CP filed a motion to dismiss the appeal as untimely on April 20, 2017. Plaintiffs filed their responsefurther appealed to the motion to dismissU.S. Supreme Court on two bankruptcy procedural grounds. On May 1, 2017. 31, 2022, the U.S. Supreme Court denied the petition, thereby rejecting the plaintiffs' appeal.

(8)The decision on this motion is pending, and as a result, appellate briefing on the underlying judgment has not yet commenced. If the ruling is upheld on appeal these cases will be litigated, if anywhere, in Canada. As previously mentioned, these plaintiffs had previously opted-out of the Quebec Class Action in order to bring their claims in the United States. CP brought a motion on December 1, 2016 to seek a declaration from the Quebec Superior Court that the plaintiffs who had opted were precluded from opting back into the Quebec Class Action. CP’s motion was successful. Accordingly, if these plaintiffs seek to sue CP, they would have to do so in Quebec in individual actions (they could also join their individual claims in the same individual action).

CP received two damage to cargo notices of claims from the shipper of the oil, Western Petroleum. Western Petroleum submitted U.S. and Canadian notices of claimstrustee for the same damages and under the Carmack Amendment (49 U.S.C. Section 11706) Western Petroleum seeks to recover for all injuries associated with, and indemnification for, the derailment. Both jurisdictions permit a shipper to recover the value of damaged lading against any carrier in the delivery chain, subject to limitations in the carrier’s tariffs. CP’s tariffs significantly restrict shipper damage claim rights. Western Petroleum is part of the World Fuel Services Entities, and those companies settled with the trustee. In settlements with the estate representative the World Fuel Services Entities and the consignee (Irving Oil) assigned all claims against CP, if any, including Carmack Amendment claims. The estate representative has since designated a trust formed for the benefit of the wrongful death plaintiff to pursue those claims.

On April 12, 2016, the Trustee (the “WD Trustee”) for a wrongful death trust (the “WD Trust”), as defined and established under the confirmed Plans, suedcommenced Carmack Amendment claims against CP in North Dakota federal court, asserting Carmack Amendment claims. The WD Trustee maintains that the estate representative assigned Carmack Amendment claims to the WD Trustee. The Plan supposedly gave the estate representative Carmack Amendment assignment rights. The WD Trustee seeksFederal Court, seeking to recover amountsapproximately U.S. $6 million for damaged rail cars (approximately $6 million) and lost crude and reimbursement for the settlement amountspaid by the consignor (i.e, the shipper, the World Fuel Entities) and the consignee (Irving Oil) paidunder the Plans (alleged to the bankruptcy estates, alleged to be U.S. $110 million and U.S. $60 million, respectively.respectively). The WD Trustee maintains that Carmack Amendment liability extends beyond lading losses to cover all derailment related damages sufferedCourt issued an Order on August 6, 2020 granting and denying in parts the parties' summary judgment motions which has been reviewed and confirmed following motions by the World Fuel Entities or Irving Oil. CP disputesparties for clarification and reconsideration. Final briefs of
16

dispositive motions for summary judgment and for reconsideration on tariff applicability were submitted on September 30, 2022. In the event the dispositive motions are denied, this interpretation of Carmack Amendment exposure and maintains that CP’s tariffs preclude anything except a minimal recovery. CP brought a motionaction is scheduled for trial from February 27 to dismiss the Carmack Amendment claims. On March 24, 2017 the federal court in North Dakota dismissed, with prejudice, these claims. The court determined the claims asserted by the WD Trustee were brought too late. On March 28, 2017, the WD Trustee filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. On May 19, 2017, the WD Trustee filed his appeal brief. On June 19, 2017, CP filed its responding brief. The appeal is pending and no hearing date has yet been set.2, 2023.

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

Court decision related to vigorously defendRemington Development Corporation legal claim

On October 20, 2022, the Court of King’s Bench of Alberta issued a decision in a claim brought by Remington Development Corporation (“Remington”) against all derailment-related proceedings.the Company and the Province of Alberta (“Alberta”) with respect to an alleged breach of contract by the Company in relation to the sale of certain properties in Calgary. In its decision, the Court found the Company had breached its contract with Remington and Alberta had induced the contract breach. The Court found the Company and Alberta liable for damages of approximately $164 million plus interest and costs, and subject to an adjustment to the acquisition value of the property. However, the court has not provided any indication of how the damages, which are currently estimated to total approximately $200 million before Remington’s costs are established, should be apportioned between the Company and Alberta. As a result, at this time, the Company cannot reasonably estimate the amount of damages, or range of damages, for which it is liable under the ruling of the Court and no amount has been accrued in the Company’s financial statements as at September 30, 2022. The Company plans to appeal the Court’s decision.

Environmental liabilities

Environmental remediation accruals, recorded on an undiscounted basis unless a reliable, determinable estimate as to an amount and timing of costs can be established, cover site-specific remediation programs.

The accruals for environmental remediation represent CP’s best estimate of its probable future obligation 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, and as 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, may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable.

The expense included in “Purchased services and other” in the Company's Interim Consolidated Statements of Income for the three and nine months ended September 30, 20172022 was $1 million and $3$5 million, respectively (three and nine months ended September 30, 20162021 - $1$2 million and $3$6 million, respectively). Provisions for environmental remediation costs are recorded in the Company's Interim Consolidated Balance Sheets in “Other long-term liabilities”, except for the current portion, which is recorded in “Accounts payable and accrued liabilities”. The total amount provided as at September 30, 20172022 was $79$85 million (December 31, 20162021 - $85$79 million). Payments are expected to be made over 10 years through 2026.2031.


Table of Contents


14 Condensed consolidating financial information

Canadian Pacific Railway Company, a 100%-owned subsidiary of Canadian Pacific Railway Limited (“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 periods presented.

Table of Contents


Interim Condensed Consolidating Statements of Income
For the three months ended September 30, 2017    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$1,092
$455
$—
$1,547
Non-freight—
38
90
(80)48
Total revenues—
1,130
545
(80)1,595
Operating expenses     
Compensation and benefits—
149
104
3
256
Fuel—
116
34
—
150
Materials—
33
11
1
45
Equipment rents—
35
—
—
35
Depreciation and amortization—
108
54
—
162
Purchased services and other—
195
146
(84)257
Total operating expenses—
636
349
(80)905
Operating income—
494
196
—
690
Less:     
Other income and charges(10)(100)5
—
(105)
Net interest (income) expense(2)126
(9)—
115
Income before income tax expense and equity in net earnings of subsidiaries12
468
200
—
680
Less: Income tax expense
7
99
64
—
170
Add: Equity in net earnings of subsidiaries505
136
—
(641)—
Net income$510
$505
$136
$(641)$510


Table of Contents


Interim Condensed Consolidating Statements of Income
For the three months ended September 30, 2016                    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$1,078
$432
$—
$1,510
Non-freight—
35
95
(86)44
Total revenues—
1,113
527
(86)1,554
Operating expenses     
Compensation and benefits—
181
111
2
294
Fuel—
111
27
—
138
Materials—
30
6
3
39
Equipment rents—
48
(5)—
43
Depreciation and amortization—
102
53
—
155
Purchased services and other—
170
149
(91)228
Total operating expenses—
642
341
(86)897
Operating income—
471
186
—
657
Less:     
Other income and charges12
61
(2)—
71
Net interest (income) expense(9)131
(6)—
116
(Loss) income before income tax expense and equity in net earnings of subsidiaries(3)279
194
—
470
Less: Income tax expense
9
73
41
—
123
Add: Equity in net earnings of subsidiaries359
153
—
(512)—
Net income$347
$359
$153
$(512)$347


Table of Contents


Interim Condensed Consolidating Statements of Income
For the nine months ended September 30, 2017
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$3,310
$1,398
$—
$4,708
Non-freight—
104
278
(249)133
Total revenues—
3,414
1,676
(249)4,841
Operating expenses     
Compensation and benefits—
438
323
5
766
Fuel—
370
110
—
480
Materials—
101
28
13
142
Equipment rents—
110
(2)—
108
Depreciation and amortization—
325
168
—
493
Purchased services and other—
613
466
(267)812
Total operating expenses—
1,957
1,093
(249)2,801
Operating income—
1,457
583
—
2,040
Less:     
Other income and charges(35)(166)7
—
(194)
Net interest (income) expense(9)390
(24)—
357
Income before income tax expense and equity in net earnings of subsidiaries44
1,233
600
—
1,877
Less: Income tax expense
9
259
188
—
456
Add: Equity in net earnings of subsidiaries1,386
412
—
(1,798)—
Net income$1,421
$1,386
$412
$(1,798)$1,421


17
Table of Contents



Interim Condensed Consolidating Statements of Income
For the nine months ended September 30, 2016    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$3,182
$1,282
$—
$4,464
Non-freight—
101
289
(259)131
Total revenues—
3,283
1,571
(259)4,595
Operating expenses     
Compensation and benefits—
563
339
5
907
Fuel—
317
77
—
394
Materials—
95
24
14
133
Equipment rents—
155
(23)—
132
Depreciation and amortization—
316
162
—
478
Purchased services and other—
499
469
(278)690
Total operating expenses—
1,945
1,048
(259)2,734
Operating income—
1,338
523
—
1,861
Less:     
Other income and charges(61)(89)31
—
(119)
Net interest expense (income)—
373
(18)—
355
Income before income tax expense and equity in net earnings of subsidiaries61
1,054
510
—
1,625
Less: Income tax expense
12
254
144
—
410
Add: Equity in net earnings of subsidiaries1,166
366
—
(1,532)—
Net income$1,215
$1,166
$366
$(1,532)$1,215
































Table of Contents



Interim Condensed Consolidating Statements of Comprehensive Income
For the three months ended September 30, 2017                
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$510
$505
$136
$(641)$510
Net gain (loss) in foreign currency translation adjustments, net of hedging activities—
180
(161)—
19
Change in derivatives designated as cash flow
hedges		—
2
—
—
2
Change in pension and post-retirement defined
benefit plans		—
36
2
—
38
Other comprehensive income (loss) before income taxes—
218
(159)—
59
Income tax expense on above items—
(34)—
—
(34)
Equity accounted investments
25
(159)—
134
—
Other comprehensive income (loss)25
25
(159)134
25
Comprehensive income (loss)$535
$530
$(23)$(507)$535


Interim Condensed Consolidating Statements of Comprehensive Income
For the three months ended September 30, 2016    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$347
$359
$153
$(512)$347
Net (loss) gain in foreign currency translation adjustments, net of hedging activities—
(70)63
—
(7)
Change in derivatives designated as cash flow
hedges		—
1
—
—
1
Change in pension and post-retirement defined benefit plans—
45
2
—
47
Other comprehensive (loss) income before income taxes—
(24)65
—
41
Income tax expense on above items—
(3)—
—
(3)
Equity accounted investments
38
65
—
(103)—
Other comprehensive income38
38
65
(103)38
Comprehensive income$385
$397
$218
$(615)$385























Table of Contents



Interim Condensed Consolidating Statements of Comprehensive Income
For the nine months ended September 30, 2017                
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$1,421
$1,386
$412
$(1,798)$1,421
Net gain (loss) in foreign currency translation adjustments, net of hedging activities—
342
(304)—
38
Change in derivatives designated as cash flow
hedges		—
11
—
—
11
Change in pension and post-retirement defined
benefit plans		—
108
5
—
113
Other comprehensive income (loss) before income taxes—
461
(299)—
162
Income tax expense on above items—
(77)(1)—
(78)
Equity accounted investments
84
(300)—
216
—
Other comprehensive income (loss)84
84
(300)216
84
Comprehensive income$1,505
$1,470
$112
$(1,582)$1,505


Interim Condensed Consolidating Statements of Comprehensive Income
For the nine months ended September 30, 2016    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$1,215
$1,166
$366
$(1,532)$1,215
Net gain (loss) in foreign currency translation adjustments, net of hedging activities—
260
(227)—
33
Change in derivatives designated as cash flow
hedges		—
(75)—
—
(75)
Change in pension and post-retirement defined benefit plans—
131
6
—
137
Other comprehensive income (loss) before income taxes—
316
(221)—
95
Income tax expense on above items—
(49)(2)—
(51)
Equity accounted investments
44
(223)—
179
—
Other comprehensive income (loss)44
44
(223)179
44
Comprehensive income$1,259
$1,210
$143
$(1,353)$1,259























Table of Contents



Interim Condensed Consolidating Balance Sheets
As at September 30, 2017
(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$—
$78
$64
$—
$142
Accounts receivable, net—
464
164
—
628
Accounts receivable, inter-company101
139
185
(425)—
Short-term advances to affiliates
500
560
4,869
(5,929)—
Materials and supplies—
124
33
—
157
Other current assets—
40
25
—
65
 601
1,405
5,340
(6,354)992
Long-term advances to affiliates591
—
410
(1,001)—
Investments—
43
142
—
185
Investments in subsidiaries9,746
11,201
—
(20,947)—
Properties—
8,979
7,721
—
16,700
Goodwill and intangible assets—
—
187
—
187
Pension asset—
1,356
—
—
1,356
Other assets—
51
8
—
59
Deferred income taxes3
—
—
(3)—
Total assets$10,941
$23,035
$13,808
$(28,305)$19,479
Liabilities and shareholders’ equity     
Current liabilities     
Accounts payable and accrued liabilities$82
$745
$312
$—
$1,139
Accounts payable, inter-company15
282
128
(425)—
Short-term advances from affiliates5,279
640
10
(5,929)—
Long-term debt maturing within one year—
749
—
—
749
 5,376
2,416
450
(6,354)1,888
Pension and other benefit liabilities—
657
69
—
726
Long-term advances from affiliates—
1,001
—
(1,001)—
Other long-term liabilities—
104
117
—
221
Long-term debt—
7,334
50
—
7,384
Deferred income taxes—
1,777
1,921
(3)3,695
Total liabilities5,376
13,289
2,607
(7,358)13,914
Shareholders’ equity     
Share capital2,025
1,036
6,862
(7,898)2,025
Additional paid-in capital42
1,641
268
(1,909)42
Accumulated other comprehensive (loss) income(1,715)(1,716)411
1,305
(1,715)
Retained earnings5,213
8,785
3,660
(12,445)5,213
 5,565
9,746
11,201
(20,947)5,565
Total liabilities and shareholders’ equity$10,941
$23,035
$13,808
$(28,305)$19,479



Table of Contents


Condensed Consolidating Balance Sheets
As at December 31, 2016                
(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$—
$100
$64
$—
$164
Accounts receivable, net—
435
156
—
591
Accounts receivable, inter-company90
113
206
(409)—
Short-term advances to affiliates
500
692
4,035
(5,227)—
Materials and supplies—
150
34
—
184
Other current assets—
38
32
—
70

590
1,528
4,527
(5,636)1,009
Long-term advances to affiliates1
—
91
(92)—
Investments—
47
147
—
194
Investments in subsidiaries8,513
10,249
—
(18,762)—
Properties—
8,756
7,933
—
16,689
Goodwill and intangible assets—
—
202
—
202
Pension asset—
1,070
—
—
1,070
Other assets1
48
8
—
57
Deferred income taxes11
—
—
(11)—
Total assets$9,116
$21,698
$12,908
$(24,501)$19,221
Liabilities and shareholders’ equity









Current liabilities









Accounts payable and accrued liabilities$73
$945
$304
$—
$1,322
Accounts payable, inter-company14
292
103
(409)—
Short-term advances from affiliates4,403
816
8
(5,227)—
Long-term debt maturing within one year—
25
—
—
25

4,490
2,078
415
(5,636)1,347
Pension and other benefit liabilities—
658
76
—
734
Long-term advances from affiliates—
92
—
(92)—
Other long-term liabilities—
152
132
—
284
Long-term debt—
8,605
54
—
8,659
Deferred income taxes—
1,600
1,982
(11)3,571
Total liabilities4,490
13,185
2,659
(5,739)14,595
Shareholders’ equity









Share capital2,002
1,037
5,823
(6,860)2,002
Additional paid-in capital52
1,638
298
(1,936)52
Accumulated other comprehensive (loss) income(1,799)(1,799)712
1,087
(1,799)
Retained earnings4,371
7,637
3,416
(11,053)4,371

4,626
8,513
10,249
(18,762)4,626
Total liabilities and shareholders’ equity$9,116
$21,698
$12,908
$(24,501)$19,221



Table of Contents


Interim Condensed Consolidating Statements of Cash Flows
For the three months ended September 30, 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$98
$322
$213
$(106)$527
Investing activities









Additions to properties—
(193)(126)—
(319)
Proceeds from sale of properties and other assets—
11
2
—
13
Advances to affiliates—
—
(50)50
—
Repayment of advances to affiliates159
1
—
(160)—
Capital contributions to affiliates—
(26)—
26
—
Repurchase of share capital from affiliates—
32
—
(32)—
Cash provided by (used in) investing activities159
(175)(174)(116)(306)
Financing activities









Dividends paid(83)(83)(23)106
(83)
Return of share capital to affiliates—
—
(32)32
—
Issuance of share capital—
—
26
(26)—
Issuance of CP Common Shares2
—
—
—
2
Purchase of CP Common Shares(226)—
—
—
(226)
Repayment of long-term debt, excluding commercial paper—
(3)—
—
(3)
Advances from affiliates50
—
—
(50)—
Repayment of advances from affiliates—
(159)(1)160
—
Cash used in financing activities(257)(245)(30)222
(310)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
(2)(5)—
(7)
Cash position     
(Decrease) increase in cash and cash equivalents—
(100)4
—
(96)
Cash and cash equivalents at beginning of period—
178
60
—
238
Cash and cash equivalents at end of period$—
$78
$64
$—
$142


Table of Contents


Interim Condensed Consolidating Statements of Cash Flows
For the three months ended September 30, 2016
(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$84
$406
$229
$(128)$591
Investing activities     
Additions to properties—
(238)(56)—
(294)
Proceeds from sale of properties and other assets—
6
10
—
16
Advances to affiliates—
(275)(123)398
—
Repayment of advances to affiliates—
14
—
(14)—
Capital contributions to affiliates—
(46)—
46
—
Cash used in investing activities—
(539)(169)430
(278)
Financing activities     
Dividends paid(75)(75)(53)128
(75)
Issuance of share capital—
—
46
(46)—
Issuance of CP Common Shares5
—
—
—
5
Purchase of CP Common Shares(412)—
—
—
(412)
Repayment of long-term debt, excluding commercial paper—
(5)(7)—
(12)
Net issuance of commercial paper—
190
—
—
190
Advances from affiliates398
—
—
(398)—
Repayment of advances from affiliates—
—
(14)14
—
Cash (used in) provided by financing activities(84)110
(28)(302)(304)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
—
2
—
2
Cash position     
(Decrease) increase in cash and cash equivalents—
(23)34
—
11
Cash and cash equivalents at beginning of period—
47
45
—
92
Cash and cash equivalents at end of period$—
$24
$79
$—
$103



Table of Contents


Interim Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 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$256
$875
$716
$(398)$1,449
Investing activities









Additions to properties—
(494)(401)—
(895)
Proceeds from sale of properties and other assets—
17
12
—
29
Advances to affiliates(1,079)(550)(1,157)2,786
—
Capital contributions to affiliates—
(1,039)—
1,039
—
Repurchase of share capital from affiliates—
32
—
(32)—
Other—
6
(1)—
5
Cash used in investing activities(1,079)(2,028)(1,547)3,793
(861)
Financing activities









Dividends paid(229)(229)(169)398
(229)
Return of share capital to affiliates—
—
(32)32
—
Issuance of share capital—
—
1,039
(1,039)—
Issuance of CP Common Shares39
—
—
—
39
Purchase of CP Common Shares(368)—
—
—
(368)
Repayment of long-term debt, excluding commercial paper—
(17)—
—
(17)
Advances from affiliates1,381
1,405
—
(2,786)—
Settlement of forward starting swaps—
(22)—
—
(22)
Cash provided by financing activities823
1,137
838
(3,395)(597)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
(6)(7)—
(13)
Cash position









Decrease in cash and cash equivalents—
(22)—
—
(22)
Cash and cash equivalents at beginning of period—
100
64
—
164
Cash and cash equivalents at end of period$—
$78
$64
$—
$142



Table of Contents


Interim Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2016    
(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$182
$831
$646
$(338)$1,321
Investing activities     
Additions to properties—
(576)(326)—
(902)
Proceeds from sale of properties and other assets—
74
13
—
87
Advances to affiliates—
(792)(408)1,200
—
Repayment of advances to affiliates—
222
—
(222)—
Capital contributions to affiliates—
(403)—
403
—
Repurchase of share capital from affiliates—
6
—
(6)—
Other—
—
(2)—
(2)
Cash used in investing activities—
(1,469)(723)1,375
(817)
Financing activities     
Dividends paid(182)(182)(156)338
(182)
Return of share capital to affiliates—
—
(6)6
—
Issuance of share capital—
—
403
(403)—
Issuance of CP Common Shares14
—
—
—
14
Purchase of CP Common Shares(1,200)—
—
—
(1,200)
Repayment of long-term debt, excluding commercial paper—
(16)(14)—
(30)
Net issuance of commercial paper—
366
—
—
366
Advances from affiliates1,186
—
14
(1,200)—
Repayment of advances from affiliates—
—
(222)222
—
Other—
(3)—
—
(3)
Cash (used in) provided by financing activities(182)165
19
(1,037)(1,035)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
(5)(11)—
(16)
Cash position     
Decrease in cash and cash equivalents—
(478)(69)—
(547)
Cash and cash equivalents at beginning of period—
502
148
—
650
Cash and cash equivalents at end of period$—
$24
$79
$—
$103


Table of Contents


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionManagement’s Discussion and analysisAnalysis of Financial Condition and Results of Operations (“MD&A”) is intended to enhance a reader’s understanding of the Company’s results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with the Company's Interim Consolidated Financial Statements and the related notes for the three and nine months ended September 30, 20172022 in Item 1. Financial Statements, other information in this report, and Item 8. Financial Statements and Supplementary Data of the Company's 20162021 Annual Report on Form 10-K.10-K. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

For purposes of this report, all references herein to “CP”, “the Company”, “we”, “our” and “us” refer to CPRL,Canadian Pacific Railway Limited ("CPRL"), CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL's subsidiaries, as the context may require.

Available Information

CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). Also, filings made pursuant to Section 16 of the Securities Exchange Act of 1934 (“Exchange Act”) with the SEC by our executive officers, directors and other reporting persons with respect to the Company's Common Shares are made available free of charge, through our website. Our website also contains charters for our Board of Directors and each of its committees, our corporate governance guidelines and our Code of Business Ethics. SEC filings made by CP are also accessible through the SEC’s website at www.sec.gov. The information on our website is not part of this quarterly report on Form 10-Q.

The Company has included the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as an ExhibitExhibits to this report.

Executive Summary

Third Quarter of 20172022 Results

•
•Financial performance - In the third quarter of 2017, CP reported Diluted earnings per share ("EPS") of $3.50, an increaseof50% as compared to 2016 primarily due to increased foreign exchange ("FX") gains on U.S. dollar-denominated debt and increased volumes in 2017. Adjusted diluted EPS, which excludes, amongst other factors, these FX gains, was $2.90 in the third quarter of 2017, an increase of 6% compared to last year.

CP's operating ratio for the third quarter improvedof 2022, CP reported Diluted earnings per share ("EPS") of $0.96, an increase of 37% compared to the same period of 2021. This increase was primarily due to equity earnings of Kansas City Southern ("KCS"), higher volumes as measured by 100 basis pointsrevenue ton-miles ("RTMs"), and the favourable impact of changes in fuel prices, partially offset by a higher average number of shares outstanding due to 56.7%.

Adjustedshares issued related to the KCS acquisition and higher interest expense primarily due to debt issued related to the KCS acquisition. Core adjusted diluted EPS iswas $1.01 in the third quarter of 2022, an increase of 15% compared to the same period of 2021. This increase was due to the same factors discussed above for the increase in Diluted EPS, except that Core adjusted EPS excludes the impact of KCS purchase accounting, acquisition-related costs, deferred tax recovery due to Iowa state tax rate change, deferred tax recovery on the outside basis difference of the investment in KCS, as well as FX loss on debt and lease liabilities recognized in 2021.

CP reported Net income of $891 million in the third quarter of 2022, an increase of 89% compared to the same period of 2021. This increase was primarily due to equity earnings of KCS, higher volumes as measured by RTMs, and the favourable impact of changes in fuel prices, partially offset by higher interest expense primarily due to debt issued related to the KCS acquisition. Core adjusted income was $945 million in the third quarter of 2022, an increase of 60% compared to the same period of 2021. This increase was due to the same factors discussed above for the increase in Net income, except that Core adjusted income excludes the impact of KCS purchase accounting, acquisition-related costs, deferred tax recovery due to Iowa state tax rate change, deferred tax recovery on the outside basis difference of the investment in KCS, as well as FX loss on debt and lease liabilities recognized in 2021.

CP reported an Operating ratio of 59.5% in the third quarter of 2022, a 70 basis point improvement compared to the same period of 2021. Adjusted operating ratio was 58.7%, a 70 basis point improvement compared to the same period of 2021. These improvements were primarily due to higher volumes as measured by RTMs and higher freight rates, partially offset cost inflation.

Core adjusted diluted EPS, Core adjusted income, and Adjusted operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

•Total revenues - Total revenues increased by 19% in the third quarter of 2022 to $2,312 million compared to the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes as measured by RTMs.

•
Total revenues - Total revenues increased by 3% in the third quarter of 2017 to $1,595 million from $1,554 million in the same period in 2016.

•
Operating performance - CP's average train weight increased by 1% to 8,990 tons and terminal dwell time improved by 6% to 6.6 hours. Average train speed decreased by 3% to 23.1 miles per hour and average train length decreased by 1% to 7,301 feet, primarily as a result of CP moving proportionately more frac sand and Potash, and decreases in Intermodal traffic compared to the same period in 2016.•Operating performance - CP's average train weight increased by 3% to 10,247 tons and average train length increased by 4% to 8,578 feet, compared to the same period in 2021. These increases were a result of improvements in operating plan efficiency and continued improvements in bulk train efficiency due to moving heavier and longer Potash trains. These
18

metrics are discussed further in Performance Indicators of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Recent Developments

On October 17, 2017, the Board of Directors appointed Nadeem Velani to the position of Executive Vice-President and Chief Financial Officer from the position of Vice-President and Chief Financial Officer, and Laird Pitz to the position of Senior Vice-President and Chief Risk Officer from the position of Vice-President and Chief Risk Officer.

During the year, CP has become eligible to rely on the "foreign private issuer" exemption pursuant to SEC rules as a result of changes to the Company's Board, as evaluated at June 30, 2017. CP currently intends to continue utilizing U.S. domestic registrant forms 10-K, 10-Q and 8-K for its annual, quarterly and material events filings, respectively, and file its 2018 management proxy circular pursuant to Canadian securities law and regulation. The Company is assessing possible regulatory options with respect to shelf prospectuses and registration statements.

Previous Developments

On July 17, 2017, CP declared a quarterly dividend of $0.5625 per share on the outstanding Common Shares. The dividend is payable on October 30, 2017 to holders of record at the close of business on September 29, 2017.


Table of Contents


On May 10, 2017, CP announced a new normal course issuer bid ("NCIB") to repurchase, for cancellation, up to 4,384,062 of its Common Shares, which received Toronto Stock Exchange ("TSX") approval on May 10, 2017. As at September 30, 2017, CP had repurchased 1.8 million shares under the NCIB.

Also on May 10, 2017, CP announced an increase to the Company's quarterly dividend to $0.5625 per share from $0.50 per share. The dividend was paid on July 31, 2017 to holders of record at the close of business on June 30, 2017.

On May 16, 2017, the Government of Canada introduced the Transportation Modernization Act (Bill C-49) in Parliament. The bill proposes amendments to the Canada Transportation Act and the Railway Safety Act, among others, to (1) replace the 160 kilometre extended interswitching limit and the competitive line rate provisions with a new long-haul interswitching regime; (2) modify the existing Level of Service remedy for shippers by instructing the Canadian Transportation Agency to determine, upon receipt of a complaint, if a railway company is fulfilling its common carrier obligation to provide “adequate and suitable accommodation” of traffic, if it is satisfied that the service provided is the “highest level of service that is reasonable in the circumstances”; (3) allow the existing Service Level Agreement arbitration remedy to include the consideration of reciprocal financial penalties; (4) increase the threshold for summary Final Offer Arbitrations from $750,000 to $2 million; (5) bifurcate the Volume-Related Composite Price Index component of the annual Maximum Revenue Entitlement determination for transportation of regulated grain, to encourage hopper car investment by CP and Canadian National Railway Company ("CN"); and (6) mandate the installation of locomotive voice and video recorders ("LVVRs"), with statutory permission for random access by railway companies and Transport Canada to the LVVR data in order to proactively strengthen railway safety in Canada. The bill is currently being considered by the Parliament of Canada. It is unclear when the proposed legislative amendments will be enacted into law.

2017 Outlook

For the full year 2017, CP expects double-digit percentage growth in Adjusted diluted EPS from full-year 2016 Adjusted diluted EPS of $10.29. The update in guidance is due to strong year-to-date performance and a constructive volume outlook through the remainder of the year. Assumptions underlying CP’s outlook include revenue-ton-miles ("RTM") growth in the mid single-digit percentages and a normalized income tax rate of approximately 26.50% for 2017. As previously disclosed, CP plans to invest approximately $1.25 billion in capital programs in 2017, an increase of 6% over the $1.18 billion spent in 2016.

Adjusted diluted EPS is defined and discussed further in Non-GAAP Measures and in Forward-Looking Information of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although

Recent Developments

•On March 16, 2022, CP issued a 72-hour notice to the Teamsters Canada Rail Conference ("TCRC") - Train & Engine, of its plan to lock-out employees at 00:01 Eastern Time on March 20, 2022 if the TCRC leadership and the Company were unable to come to a negotiated settlement or agree to binding arbitration. The TCRC represents approximately 3,000 locomotive engineers, conductors, and train and yard workers across Canada. On March 19, 2022, while the Company was still engaged in ongoing negotiations facilitated by federal mediators, the TCRC withdrew its services in the final hours before the deadline for a legal strike or lockout to potentially occur. On March 22, 2022, CP reached an agreement with the TCRC Negotiating Committee to enter into binding arbitration. This agreement enabled CP employees to return to work effective noon March 22, 2022 local time to resume our essential services for our customers and the North American supply chain.

The work stoppage resulted in lower volumes during the first quarter. Once the TCRC members returned to work on March 22, 2022, the Company quickly re-established service.

On August 15, 2022, CP entered into a new two-year collective agreement with the TCRC following binding arbitration. The new agreement includes a 3.5 percent wage increase in 2022 and 2023 and increased benefits. Under the arbitration decision, the TCRC will also join a CP pension improvement account. The new collective agreement is effective from January 1, 2022 to December 31, 2023.

Prior Developments

•On July 20, 2022, KCS and its affiliate Kansas City Southern de México, S.A. de C.V. ("KCSM") announced an agreement extending the concession exclusivity rights granted to KCSM for an additional 10 years.

KCSM reached an agreement with the Mexican Ministry of Infrastructure, Communications and Transportation ("SICT") to fund a new investment in the Celaya-NBA Line Railway Bypass and other infrastructure. As part of the agreement, the SICT has provided a forward-looking non-GAAP measure,authorized the amendment of KCSM's Concession Title effective July 14, 2022, to extend the exclusivity rights granted to KCSM for an additional period of 10 years. Under this amendment, KCSM's exclusivity will now expire in 2037.

The U.S. Surface Transportation Board's ("STB") review of CP's proposed control of KCS is expected to be completed in the first quarter of 2023. Prior to obtaining STB control approval, KCS's management and Board of Directors will continue to steward KCS while it is not practicable to provide a reconciliation to a forward-looking reported diluted EPS, the most comparable GAAP measure, due to unknown variablesin trust, pursuing its independent business plan and uncertaintygrowth strategies.

Specific risk factors related to future results. These unknown variables may include unpredicted transactionsthe KCS acquisition and pending KCS business combination are provided in Part I, Item 1A. Risk Factors of significant value. In past years, CP has recognized significant asset impairment chargesthe Company's 2021 Annual Report on Form 10-K.

•On April 27, 2022, at the Company's Annual and management transition costs related to senior executives. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the Canadian-to-U.S. 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 impactSpecial Meeting of translating the Company’s U.S. dollar denominated long-term debt from Adjusted diluted EPS. In 2017, CP has also excluded impacts from changes in income tax rates, insurance recoveries of legal settlements, and charges on hedge roll and de-designations. Please see Forward-Looking Information of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.Shareholders, all nine director nominees were elected.



19

Performance Indicators

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


For the three months ended September 30

For the nine months ended September 30
For the three months ended September 30For the nine months ended September 30

2017
2016(1)
% Change
2017(1)
2016(1)
% Change20222021% Change20222021% Change
Operations Performance
Operations Performance
Gross ton-miles (“GTMs”) (millions)62,311
60,297
3
186,899
180,461
4
Gross ton-miles (“GTMs”) (millions)68,482 64,665 6 199,512 207,347 (4)
Train miles (thousands)7,444
7,305
2
22,786
22,626
1
Train miles (thousands)7,237 6,999 3 21,390 22,406 (5)
Average train weight – excluding local traffic (tons)8,990
8,891
1
8,775
8,623
2
Average train length – excluding local traffic (feet)7,301
7,411
(1)7,193
7,257
(1)
Average train weight - excluding local traffic (tons)Average train weight - excluding local traffic (tons)10,247 9,973 3 10,093 9,953 1 
Average train length - excluding local traffic (feet)Average train length - excluding local traffic (feet)8,578 8,285 4 8,387 8,192 2 
Average terminal dwell (hours)6.6
7.0
(6)6.5
6.8
(4)Average terminal dwell (hours)7.8 7.2 8 8.0 7.1 13 
Average train speed (miles per hour, or "mph")23.1
23.9
(3)22.9
23.8
(4)Average train speed (miles per hour, or "mph")21.5 21.7 (1)21.5 21.4 — 
Locomotive productivity (GTMs / operating horsepower)Locomotive productivity (GTMs / operating horsepower)202 203 — 196 204 (4)
Fuel efficiency (U.S. gallons of locomotive fuel consumed / 1,000 GTMs)0.944
0.940
—
0.978
0.974
—
Fuel efficiency (U.S. gallons of locomotive fuel consumed / 1,000 GTMs)0.927 0.907 2 0.949 0.928 2 
Total Employees and WorkforceTotal Employees and Workforce
Total employees (average)12,149
11,750
3
11,990
12,175
(2)Total employees (average)13,004 12,485 4 12,427 12,411 — 
Total employees (end of period)12,135
11,773
3
12,135
11,773
3
Total employees (end of period)13,087 12,262 7 13,087 12,262 7 
Workforce (end of period)12,219
11,827
3
12,219
11,827
3
Workforce (end of period)13,144 12,301 7 13,144 12,301 7 
Safety Indicators


Safety Indicators(1)
Safety Indicators(1)
FRA personal injuries per 200,000 employee-hours1.63
1.87
(13)1.67
1.55
8
FRA personal injuries per 200,000 employee-hours0.86 0.98 (12)0.96 0.98 (2)
FRA train accidents per million train miles0.95
1.24
(23)1.01
0.97
4
FRA train accidents per million train-milesFRA train accidents per million train-miles0.37 1.54 (76)0.84 1.13 (26)
(1)
(1)Federal Railroad Administration ("FRA") personal injuries per 200,000 employee-hours for the three and nine months ended September 30, 2021, previously reported as 0.97 and 0.97, were restated to 0.98 and 0.98, respectively in this report. FRA train accidents per million train-miles for the nine months ended September 30, 2021, previously reported as 1.09, was restated to 1.13 in this report. These restatements reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline.

Certain figures have been revised to conform with current presentation or have been updated to reflect new information as certain operating statistics are estimated and can continue to be updated as actuals settle.
Operations Performance

These key measures are used by management as comparisons to historical operating results and in the planning process to facilitate decisions that continue to drive further productivity improvements in the Company's operations. Results of these key measures reflect how effective CP’s management is at controlling costs and executing the Company’s operating plan and strategy. Continued monitoring of these key measures ensures that the Company can take appropriate actions to ensure the delivery of superior service and be able to grow its business at low incremental cost.

Three months ended September 30, 20172022 compared to the three months ended September 30, 20162021

•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 increased by 6% in the third quarter of 2022 compared to the same period of 2021. This increase was mainly attributable to higher volumes of Intermodal, Potash and frac sand. This increase was partially offset by lower volumes of Coal and Canadian grain.

•
•Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles provide a measure of the productive utilization of our network. A smaller increase in train miles relative to increases in volumes, as measured by RTMs, and/or workload, as measured by GTMs, indicate improved train productivity. Train miles increased by 3% in the third quarter of 2022 compared to the same period of 2021. This increase reflects the impact of a 6% increase in workload (GTMs), partially offset by a 3% increase in average train weights.

•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. An increase in average train weight indicates improved asset utilization and may also be the result of moving heavier commodities. Average train weight increased by 3% in the third quarter of 2022 compared to the same period of 2021. This increase was a result of improvements in operating plan efficiency and proportionally higher volumes of Potash, which is a heavier commodity.

20

GTM is 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 the third quarter of 2017 were 62,311 million, an increase of 3% compared with 60,297 million in the same period of 2016. This increase was primarily due to increased volumes of Energy, chemicals and plastics, frac sand, and Potash, partially offset by decreased volumes of Grain and Intermodal.

•
Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles increased by 2% for the third quarter of 2017 compared to the same period of 2016. This reflects the impact of higher volumes partly offset by continuous improvements in train weights.

•
The 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 increased by 1% for the third quarter of 2017 compared to the same period of 2016. This increase was due to continuous improvements in bulk train weights and operating plan efficiency, as well as higher frac sand, crude and Potash volumes compared to the same period in 2016.

•
The average train length is the sum of each car multiplied by the distance travelled, divided by train miles. Local trains are excluded from this measure. Average train length decreased by 1% for the third quarter of 2017 compared to the same period of 2016. This is a result of proportionately more shorter and heavier frac sand and crude trains and proportionately fewer longer and lighter intermodal trains, compared to the same period in 2016.

•
The 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 improved by 6% in the third quarter of 2017 compared to the same period of 2016. This favourable decrease was primarily due to continued improvements in yard operating performance and the focus and visibility provided through improved trip planning.

•
The 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


•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. 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. An increase in average train length indicates improved asset utilization. Average train length increased by 4% in the third quarter of 2022 compared to the same period of 2021. This increase was a result of improvements in operating plan efficiency and higher volumes of Intermodal and Potash, 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. A decrease in average terminal dwell indicates improved terminal performance resulting in faster cycle times and improved railcar utilization.Average terminal dwell increased by 8% in the third quarter of 2022 compared to the same period of 2021, primarily as a result of moving proportionally lower volumes of bulk commodities, which require less processing times in yards.

•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 customercustomers or foreign railwaysrailroads 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. An increase in average train speed indicates improved on-time performance resulting in improved asset utilization.Average train speed decreased by 3%1% in the third quarter of 20172022 compared to the same period of 2016.2021. This unfavourable decrease is primarily as a result of increased track and roadway programs.

•Locomotive productivity is defined as the daily average GTMs divided by daily average operating horsepower. Operating horsepower excludes units offline, tied up or in storage, or in use on other railways, and includes foreign units online. An increase in locomotive productivity indicates more efficient locomotive utilization and may also be the result of moving heavier commodities. Locomotive productivity was primarilyflat in the third quarter of 2022 compared to the same period of 2021.

•Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs. Fuel consumed includes gallons from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. An improvement in fuel efficiency indicates operational cost savings and CP's commitment to corporate sustainability through a reduction of greenhouse gas emissions intensity. Fuel efficiency decreased by 2% in the third quarter of 2022 compared to the same period of 2021. This decrease in efficiency was due to increasedhigher volumes of heavier and slower frac sand and Potash trains, as well as decreased volumes of lighter and faster Intermodal, trains.

•
Fuel efficiencywhich has lower horsepower utilization. is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs - freight and yard. Fuel efficiency was essentially unchanged in the third quarter of 2017 compared to the same period of 2016.


Nine months ended September 30, 20172022 compared to the nine months ended September 30, 20162021

•GTMs decreased by 4% for the first nine months of 2022 compared to the same period of 2021. This decrease was mainly attributable to lower volumes of Canadian grain, Coal, and Energy, chemicals and plastics. This decrease was partially offset by higher volumes of U.S. grain, Intermodal, Potash, and frac sand.

•
GTMs
•Train miles decreased by 5%for the first nine months of 2022 compared to the same period of 2021. This decrease reflected the impact of a 4% decrease in workload (GTMs) and a 1% increase in average train weights.

•Average train weight increased by 1% for the first nine months of 2022 compared to the same period of 2021. This increase was a result of improvements in operating plan efficiency and moving longer and heavier Potash trains. This increase was partially offset by moving lower volumes of Canadian grain and Coal, which are heavier commodities.

•Average train length increased by 2% for the first nine months of 2022 from the same period of 2021. This increase was primarily due to improvements in operating plan efficiency and higher volumes of Intermodal and Potash, which move in longer trains.

•Average terminal dwell increased by 13% in the first nine months of 2022 compared to the same period of 2021. This increase was primarily as a result of proportionally lower volumes of bulk commodities, which require less processing time in yards, and harsher winter operating conditions in the first quarter of 2022.

•Average train speed wasflatin the first nine months of 2022 compared to the same period of 2021.

•Locomotive productivity decreased by 4% in the first nine months of 2022 compared to the same period of 2021, as a result of harsher winter operating conditions in the first quarter of 2022.

21

•Fuel efficiency decreased by 2% in the first nine months of 2022 compared to the same period of 2021. This decrease in efficiency was due to lower locomotive productivity and harsher winter operating conditions in the first quarter of 2022, and lower volumes of Canadian grain, which has higher horsepower utilization.

 for the first nine months of 2017 were 186,899 million, an increase of 4% compared with 180,461 million in the same period of 2016. This increase was primarily due to increased volumes of frac sand, Potash, and Energy, chemicals and plastics, partially offset by decreased volumes of Intermodal.

•
Train miles increased by 1% for the first nine months of 2017 compared to the same period of 2016. This reflects the impact of higher volumes partly offset by continuous improvements in train weights.

•
Average train weight increased by 2% for the first nine months of 2017 compared to the same period of 2016. This increase was due to continuous improvements in bulk train weights and operating plan efficiency, as well as higher frac sand and Potash volumes compared to the same period in 2016.

•
Average train length decreased by 1% for the first nine months of 2017 from the same period of 2016. This decrease is primarily due to moving proportionately fewer longer and lighter intermodal trains and proportionately more shorter and heavier frac sand trains compared to the same period in 2016.

•
Average terminal dwell improved by 4% in the first nine months of 2017 compared to the same period of 2016. This favourable decrease was primarily due to continued improvements in yard operating performance and the focus and visibility provided through improved trip planning.

•
Average train speed decreased by 4% in the first nine months of 2017 compared to the same period of 2016. This unfavourable decrease was primarily due to increased volumes of heavier and slower frac sand and Potash trains, as well as decreased volumes of lighter and faster Intermodal trains, and harsher weather conditions in the first quarter of 2017.

•
Fuel efficiency was essentially unchanged in the first nine months of 2017 compared to the same period of 2016.

Total Employees and Workforce

An employee is defined as an individual currently engaged in full-time, part-time, or seasonal employment with CP. The average number of total employees decreased by 2% in the first nine months of 2017, compared to the same periods of 2016, due to improved operational efficiency in the current year. The average number of total employees increased by 3% in the third quarter versus 2016 to accommodate continuing volume growth.

The CP while workforce is defined as total employees plus contractors and consultants. The Company'sCompany monitors employment and workforce levels in order to efficiently meet service and strategic requirements. The number of employees is a key driver to total compensation and benefits costs.

The average number of total employees increased by 4% for the three months ended September 30, 2022 and was flat for the nine months ended, compared to the same periods of 2021. The total number of employees and total workforce as at September 30, 2017, was 12,219, an increase of 521, or 4%, when compared to 11,698 as at December 31, 2016. As at September 30, 2017, the total workforce2022 increased by 392, or 3%,7% compared to September 30, 2016.2021. The increase in average number of employees for the three months ended September 30, 2022, and the increase in total employees and workforce isas at September 30, 2022 were due to accommodate continuing volume growth.increased workload as measured in GTMs.

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 – personalPersonal injuries and train accidents – follow strictare indicators of the effectiveness of the Company's safety systems, and are used by management to evaluate and, as necessary, alter the Company's safety systems, procedures, and protocols. Each measure follows U.S. Federal Railroad Administration (“FRA”)FRA reporting guidelines.guidelines, which can result in restatement after initial publication to reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline.

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 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 1.630.86 in the third quarter of 2017,2022, a decrease from 1.870.98 in the same period of 2016.2021. For the first nine months of 2017,2022, the FRA personal injury rate per 200,000 employee-hours for CP was 1.67, an increase0.96, a decrease from 1.550.98 in the same period of 2016.2021.

The FRA train accidents per million train miles 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 (U.S. $10,500$11,300 in 2016)2022 and U.S. $11,200 in damage.damage for 2021. The FRA train accidents per million train milestrain-miles was 0.950.37 in the third quarter of 2017,2022, a decrease from 1.241.54 in


the same period of 2016.2021. For the first nine months of 2017,2022, the FRA train accidents per million train milestrain-miles was 1.01, an increase0.84, a decrease from 0.971.13 in the same period of 2016.2021.

22

Financial Highlights

The following table presents selected financial data related to the Company’s financial results as of, and for the third quarterthree and nine months ended, September 30, 20172022 and the comparative figures in 2016.2021. The financial highlights should be read in conjunction with Item 1. Financial Statements and this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
For the three months ended September 30For the nine months ended September 30
(in millions, except per share data, percentages and ratios)2022202120222021
Financial Performance and Liquidity
Total revenues$2,312 $1,942 $6,352 $5,955 
Operating income937 774 2,340 2,374 
Adjusted operating income(1)
955 789 2,397 2,521 
Net income891 472 2,246 2,320 
Core adjusted income(1)
945 592 2,455 1,881 
Basic EPS0.96 0.71 2.42 3.48 
Diluted EPS0.96 0.70 2.41 3.46 
Core adjusted diluted EPS(1)
1.01 0.88 2.63 2.81 
Dividends declared per share0.190 0.190 0.570 0.570 
Cash provided by operating activities1,102 548 2,422 3,084 
Cash used in investing activities(410)(2,129)(978)(2,820)
Cash (used in) provided by financing activities(721)902 (1,409)(194)
Free cash(1)
721 203 1,514 1,245 
Financial PositionAs at September 30, 2022As at December 31, 2021
Total assets$73,435 $68,177 
Total long-term debt, including current portion20,575 20,127 
Total shareholders’ equity37,814 33,829 
For the three months ended September 30For the nine months ended September 30
Financial Ratios2022202120222021
Operating ratio(2)
59.5 %60.2 %63.2 %60.1 %
Adjusted operating ratio(1)
58.7 %59.4 %62.3 %57.7 %
For the twelve months ended September 30
20222021
Return on average shareholders' equity(3)
11.8 %36.6 %
Adjusted return on invested capital ("Adjusted ROIC")(1)
8.9 %15.9 %
Long-term debt to Net income ratio(4)
7.43.2
Adjusted net debt to adjusted EBITDA ratio(1)
4.32.4
Pro-forma adjusted Net Debt to Pro-forma adjusted EBITDA Ratio(1)
4.1N/A
(1).These measures have no standardized meanings prescribed by accounting principles generally accepted in the United States of America ("GAAP") and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For the three months ended September 30For the nine months ended September 30
(in millions, except per share data, percentages and ratios)2017201620172016
Financial Performance    
Revenues$1,595
$1,554
$4,841
$4,595
Operating income690
657
2,040
1,861
Adjusted operating income(1)
690
657
1,989
1,861
Net income510
347
1,421
1,215
Adjusted income(1)
422
405
1,197
1,101
Basic EPS3.50
2.35
9.72
8.06
Diluted EPS3.50
2.34
9.70
8.02
Adjusted diluted EPS(1)
2.90
2.73
8.17
7.26
Dividends declared per share0.5625
0.5000
1.6250
1.3500
Cash provided by operating activities527
591
1,449
1,321
Free cash(1)
214
315
575
488
Operating ratio(2)
56.7%57.7%57.9%59.5%
Adjusted operating ratio(1)
56.7%57.7%58.9%59.5%
 As at September 30, 2017As at December 31, 2016
Financial Position    
Total assets$19,479 $19,221 
Total long-term obligations(3)
7,458 8,737 
Shareholders’ equity5,565 4,626 
 For the twelve months ended September 30
 20172016
Financial Ratios    
Return on invested capital ("ROIC")(1)
15.9%14.3%
Adjusted ROIC(1)
14.6%14.2%
(1)
These measures have no standardized meanings prescribed by accounting principles generally accepted in the United States of America ("GAAP") and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)Operating ratio is defined as operating expenses divided by revenues, further discussed in Results of Operations of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(3)Excludes deferredReturn on average shareholders' equity is defined as Net income taxes: $3,695 milliondivided by average shareholders' equity, averaged between the beginning and $3,571 million; and other non-financial deferred liabilities of $873 million and $940 million at September 30, 2017 and December 31, 2016, respectively.


ending balance over a twelve month period, further discussed in Results of Operations

Three months ended September 30, 2017 compared to the three months ended September 30, 2016

Income

Operating income was $690 million in the third quarter of 2017, an increase of $33 million, or 5%, from $657 million in the same period of 2016. This increase was primarily due to:
higher volumes;
higher defined benefit pension plan income of $26 million; and
a decrease in stock-based compensation expense.

Table of Contents


This increase was partially offset by an adjustment reducing discontinuance liabilities for certain branch lines in 2016 and by the unfavourable impact of the change in FX of $12 million.

Net income was $510 million in the third quarter of 2017, an increase of $163 million, or 47%, from $347 million in the same period of 2016. This increase was primarily due to:
the favourable impact of FX translation on U.S. dollar-denominated debt;
higher Operating income; and
a $25 million pre-tax legal settlement charge in 2016.

This increase was partially offset by higher income tax expense associated with higher pre-tax earnings.

Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations, was $422 millionOperations.
(4)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, further discussed in the third quarter of 2017, an increase of $17 million, or 4%, from $405 million in the same period of 2016. This increase was primarily due to higher Operating income, partially offset by higher income tax expense associated with higher pre-tax earnings.

Diluted Earnings per Share

Diluted earnings per share was $3.50 in the third quarter of 2017, an increase of $1.16, or 50%, from $2.34 in the same period of 2016. Adjusted diluted EPS, definedLiquidity and reconciled in Non-GAAP MeasuresCapital Resources of this Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.







23

Results of Operations

Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Income

Operating income was $2.90$937 million in the third quarter of 2017,2022, an increase of $0.17,$163 million, or 6%21%, from $2.73$774 million in the same period of 2016. These increases were2021. This increase was primarily due to:
•higher freight volumes as measured by RTMs;
•the favourable impact of changes in fuel prices of $84 million;
•higher freight rates; and
•lower casualty costs.

This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts and cost inflation.

Adjusted operating income was $955 million in the third quarter of 2022, an increase of $166 million, or 21%, from $789 million in the same period of 2021. This increase was due to the same factors discussed above for the increase in Operating income.

Net income was $891 million in the third quarter of 2022, an increase of $419 million, or 89%, from $472 million in the same period of 2021. This increase was primarily due to:
•equity earnings of KCS of $221 million;
•higher operating income of $163 million;
•lower acquisition-related costs associated with the KCS acquisition of $83 million in Other expense; and
•no FX translation loss on U.S. dollar-denominated debt and lease liabilities compared to $46 million recognized in 2021.

This increase was partially offset by higher interest expense primarily due to debt issued related to the KCS acquisition and higher income tax expense as a result of higher taxable earnings.

Core adjusted income was $945 million in the third quarter of 2022, an increase of $353 million, or 60%, from $592 million in the same period of 2021. This increase was due to equity earnings of KCS, excluding the impact of KCS purchase accounting of $42 million and acquisition-related costs of $12 million and higher Adjusted operating income of $166 million.

This increase was partially offset by higher interest expense primarily due to debt issued related to the KCS acquisition and higher income tax expense due to higher taxable earnings.

Diluted Earnings per Share

Diluted EPS was $0.96 in the third quarter of 2022, an increase of $0.26, or 37%, from $0.70 in the same period of 2021. This increase was due to higher Net income, and Adjusted income, respectively, and lowerpartially offset by a higher average number of outstanding shares due to shares issued for the Company’s share repurchase program.KCS acquisition.

Core adjusted diluted EPS was $1.01 in the third quarter of 2022, an increase of $0.13, or 15%, from $0.88 in the same period of 2021. This increase was due to higher Core adjusted income, partially offset by a higher average number of outstanding shares due to shares issued for the KCS acquisition.

Operating Ratio

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 56.7%59.5% in the third quarter of 2017,2022, a 10070 basis point improvement from 57.7%60.2% in the same period of 2016.2021. This improvement was primarily due to:
•higher defined benefit pension plan income;freight volumes as measured by RTMs;
•higher volumes;freight rates; and
•lower stock-based compensation expense.casualty costs.

This improvement was partially offset by an adjustment reducing discontinuance liabilitiesby:
•cost inflation;
•lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts; and
•a decrease in fuel efficiency of 2% due to higher volumes of Intermodal, which has lower horsepower utilization.

Adjusted operating ratio was 58.7% in the third quarter of 2022, a 70 basis point improvement from 59.4% in the same period of 2021. This improvement was primarily due to the same factors discussed above for certain branch linesthe improvement in 2016.Operating ratio, except that Adjusted operating ratio excludes the acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other in both periods.

24

Adjusted operating income, Core adjusted income, Core adjusted diluted EPS, and Adjusted Operating ratio are defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Return on Average Shareholders' Equity and Adjusted Return on Invested Capital (ROIC)

Return on average shareholders' equity and Adjusted ROIC is a measure ofare measures used by management to determine how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions made by management, anddecisions. Adjusted ROIC is also an important performance criteria in determining certain elements of the Company's long-term incentive plan.

Return on average shareholders' equity was 11.8% for the twelve months ended September 30, 2022, a 2,480 basis point decrease compared to 36.6% for the twelve months ended September 30, 2021. This decrease was primarily due to higher average shareholders' equity driven by shares issued for the KCS acquisition and lower accumulated Net income.

Adjusted ROIC was 8.9% for the twelve months ended September 30, 2022, a 700 basis point decrease compared to 15.9% for the twelve months ended September 30, 2017, a 160 basis point increase compared2021. This decrease was primarily due to 14.3%shares and higher average long-term debt issued for the twelve months ended September 30, 2016. The increase is due to higher operating and other income,KCS acquisition, partially offset by higher income taxes, and a higher invested capital base. The capital base increased primarily due higher retained earnings from net income, partially offset by lower long-term debt outstanding.

Adjusted income. Adjusted ROIC was 14.6% for the twelve months ended September 30, 2017,is a 40 basis point increase compared to 14.2% for the twelve months ended September 30, 2016. This increase was primarily due to higher adjusted operating income, partially offset by the higher invested capital base, as discussed above. ROIC and Adjusted ROIC areNon-GAAP measure, which is defined and reconciled from Return on average shareholders' equity, the most comparable measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Nine months ended September 30, 20172022 compared to the nine months ended September 30, 20162021

Income

Operating income was $2,040$2,340 million in the first nine months of 2017, an increase2022, a decrease of $179$34 million, or 10%1%, from $1,861$2,374 million in the same period of 2016.2021. This increasedecrease was primarily due to:
•lower volumes as measured by RTMs;
•lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts;
•cost inflation; and
•a gain on exchange of property and construction easements in Chicago of $50 million in 2021.

This decrease was partially offset by:
•higher volumes;freight rates;
higher defined benefit pension plan income•the favourable impact of $76changes in fuel prices of $137 million; and
management transition recovery•lower acquisition-related costs of $51$90 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP;the KCS acquisition that were recognized in Purchased services and other.
efficiencies generated from improved operating performance and asset utilization.

This increase was partially offset by the gain on sale of CP's Arbutus Corridor in 2016 of $50 million, the impact of wage and benefit inflation and an adjustment reducing discontinuance liabilities for certain branch lines in 2016.



Table of Contents


Adjusted operating income was $1,989$2,397 million in the first nine months of 2017, an increase2022, a decrease of $128$124 million, or 7%5%, from $1,861$2,521 million in the same period of 2016.2021. This increase reflectsdecrease reflected the same factors discussed above for the decrease in Operating income, except that Adjusted operating income in 2017 excludes the management transition recovery of $51 million.acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other in both periods.

Net income was $1,421$2,246 million in the first nine months of 2017, an increase2022, a decrease of $206$74 million, or 17%3%, from $1,215$2,320 million in the same period of 2016.2021. This increasedecrease was primarily due to:
•the $845 million merger termination payment received in the second quarter of 2021 in connection with KCS's termination of the Agreement and Plan of Merger (the "Original Merger Agreement");
•higher interest expense primarily due to higher Operating income and gains from changes indebt issued related to the KCS acquisition;
•no FX translation gain on U.S. dollar-denominated debt. debt and lease liabilities compared to $39 million recognized in 2021; and
•lower Operating income of $34 million.

This increasedecrease was partially offset by higherby:
•equity earnings of KCS of $627 million;
•lower acquisition-related costs associated with the KCS transaction of $295 million in Other expense; and
•lower income tax expense associated with higher pre-taxdue to lower taxable earnings.

AdjustedCore adjusted income was $1,197$2,455 million in the first nine months of 2017,2022, an increase of $96$574 million, or 9%31%, from $1,101$1,881 million in the same period of 2016.2021. This increase was primarily due to higher Adjusted operatingequity earnings of KCS, excluding the impact of KCS purchase accounting of $121 million and acquisition-related costs of $39 million, and lower income tax expense due to lower taxable earnings, partially offset by higher interest expense primarily due to debt issued related to the KCS acquisition and lower Adjusted operating income tax expense associated with higher pre-tax earnings.of $124 million.



25

Diluted Earnings per Share

Diluted earnings per shareEPS was $9.70$2.41 in the first nine months of 2017, an increase2022, a decrease of $1.68,$1.05, or 21%30%, from $8.02$3.46 in the same period of 2016. Adjusted2021. This decrease was due to a higher average number of outstanding shares driven by shares issued for the KCS acquisition and lower Net income.

Core adjusted diluted EPS was $8.17$2.63 in the first nine months of 2017, an increase2022, a decrease of $0.91,$0.18, or 13%6%, from $7.26$2.81 in the same period of 2016. These increases were primarily2021. This decrease was due to a higher Net income and Adjusted income, respectively, and lower average number of outstanding shares due todriven by shares issued for the Company’s share repurchase program.KCS acquisition, partially offset by higher Core adjusted income.

Operating Ratio

The Company’s Operating ratio was 57.9%63.2% in the first nine months of 2017,2022, a 160310 basis point improvementincrease from 59.5%60.1% in the same period of 2016.2021. This decreaseincrease was primarily due to:
higher volumes;•cost inflation;
higher defined benefit pension plan income;•lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts; and
the management transition recovery; and
efficiencies generated from improved operating performance and asset utilization.

This decrease was partially offset by the gain on sale of CP's Arbutus Corridor in 2016 and •the unfavourable impact of changes in fuel prices.prices, net of fuel recoveries;

•lower volumes as measured by RTMs; and
•a gain on the exchange of property and construction easements in Chicago in 2021.

This increase was partially offset by higher freight rates and lower acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other.

Adjusted operating ratiowas 58.9%62.3% in the first nine months of 2017,2022, a 60460 basis point improvementincrease from 59.5%57.7% in the same period of 2016.2021. This improvementincrease was primarily due to higher volumes, higherthe same factors as discussed above for the increase in operating ratio, except that Adjusted operating ratio excludes the acquisition-related costs associated with the KCS transaction that were recognized in Purchased services and other in both periods.

Adjusted operating income, Core adjusted income, Core adjusted diluted EPS, and Adjusted Operating ratio are defined benefit pension plan income, and efficiencies generated from improved operating performancereconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and asset utilization. This was partially offset by the gain on saleAnalysis of CP's Arbutus Corridor in 2016.Financial Condition and Results of Operations.

Impact of FX 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.

On October 21, 2022, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was U.S. $1.00 = $1.37 Canadian dollar.

The following tables indicateset forth, for the periods indicated, the average exchange rate between the Canadian dollar and periodicthe U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, the high and low exchange rates when converting U.S. dollars to Canadian dollarsand period end exchange rates for the three and nine months ended September 30, 2017 andperiods indicated. Average for year-end periods are calculated by using the comparative periodsexchange 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 2016.the H.10 statistical release of the Federal Reserve Board.
Average exchange rates (Canadian/U.S. dollar)20222021
For the three months ended - September 30$1.31 $1.26 
For the nine months ended - September 30$1.28 $1.25 
Ending exchange rates (Canadian/U.S. dollar)20222021
Beginning of year - January 1$1.28 $1.28 
Beginning of quarter - July 1$1.29 $1.24 
End of quarter - September 30$1.38 $1.27 
For the three months ended September 30For the nine months ended September 30
High/Low exchange rates (Canadian/U.S. dollar)2022202120222021
High$1.38 $1.29 $1.38 $1.29 
Low$1.27 $1.23 $1.25 $1.20 
26





Average exchange rates (Canadian dollar/U.S. dollar)2017
2016
For the three months ended – September 30$1.25
$1.30
For the nine months ended – September 30$1.31
$1.32






Exchange rates (Canadian dollar/U.S. dollar)2017
2016
Beginning of year – January 1$1.34
$1.38
Beginning of quarter – July 1$1.30
$1.29
End of quarter – September 30$1.25
$1.31

In the third quarter of 2017,2022, the impact of a weakerstronger U.S. dollar resulted in a decreasean increase in total revenues of $29$31 million, a decreasean increase in total operating expenses of $17 million, and a decreasean increase in interest expense of $4$2 million from the same period in 2016.

Similarly, inof 2021. In the first nine months of 2017,2022, the impact of a weakerstronger U.S. dollar resulted in a decreasean increase in total revenues of $29$65 million, an increase in total operating expenses of $15$34 million, and a decreasean increase in interest expense of $4$6 million from the same period of 2021.
There was no material change in 2016.


Table of Contents


Thethe impact of FX on total revenues and operating expenses is discussed furtherduring the third quarter and first nine months ended September 30, 2022 from the information provided in Part II, Item 3.7A. Quantitative and Qualitative Disclosures AboutDisclosure about Market Risk, in the Foreign Exchange Risk section.CP's 2021 Annual Report on Form 10-K.


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 timingan impact on earnings.earnings due to the timing of recoveries from CP's fuel cost adjustment program. The following table indicates the average fuel price for the three and nine months ended September 30, 20172022 and the comparative periods in 2016.of 2021.

Average Fuel Price (U.S. dollars per U.S. gallon)
2017
2016
For the three months ended – September 30$2.08
$1.90
For the nine months ended – September 30$2.07
$1.72
Average Fuel Price (U.S. dollars per U.S. gallon)20222021
For the three months ended - September 30$4.33 $2.70 
For the nine months ended - September 30$4.13 $2.59 

Average fuel prices for the nine months ended September 30, 2017 exclude the effects of an $8 million fuel tax recovery related to prior periods. The impact of fuel priceprices on earnings includeincludes the impacts of British Columbia (B.C.) and Alberta carbon taxes, levies, and leviesobligations under cap-and-trade programs recovered and paid, on revenues and expenses, respectively.

In the third quarter of 2017,2022, the favourable impact of higherfuel prices on Operating income was $84 million. Higher fuel prices, the favourable impact of the timing of recoveries under CP's fuel cost adjustment program, and increased carbon tax recoveries resulted in an increase in Total revenues of $206 million. Higher fuel prices resulted in an increase in total revenues of $14 million and an increase in totalTotal operating expenses of $9$122 million from the same period in 2016.of 2021.

In the first nine months of 2017,2022, the favourable impact of higher fuel prices on Operating income was $137 million. Higher fuel prices and increased carbon tax recoveries resulted in an increase in totalTotal revenues of $73 million and an increase$511 million. Higher fuel prices resulted in totalTotal operating expenses of $70$374 million from the same period in 2016. The second quarter results of 2016 had been impacted by wildfires in northern Alberta, which negatively impacted fuel input costs by an estimated $9 million without triggering a commensurate offsetting impact to benchmark fuel recovery prices.2021.

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 CPCompany's Common Share PriceShares are listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") with ticker symbol "CP". The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for the three and nine months endedSeptember 30, 20172022 and the comparative periods in 2016.2021.

TSX (in Canadian dollars)20222021
Opening Common Share price, as at January 1$90.98 $88.31 
Ending Common Share price, as at June 30$89.91 $95.32 
Ending Common Share price, as at September 30$92.21 $82.71 
Change in Common Share price for the three months ended September 30$2.30 $(12.61)
Change in Common Share price for the nine months ended September 30$1.23 $(5.60)
Toronto Stock Exchange (in Canadian dollars)2017
2016
Opening Common Share Price, as at January 1$191.56
$176.73
Ending Common Share Price, as at June 30$208.65
$166.33
Ending Common Share Price, as at September 30$209.58
$200.19
Change in Common Share Price for the three months ended September 30$0.93
$33.86
Change in Common Share Price for the nine months ended September 30$18.02
$23.46
NYSE (in U.S. dollars)20222021
Opening Common Share price, as at January 1$71.94 $69.34 
Ending Common Share price, as at June 30$69.84 $76.91 
Ending Common Share price, as at September 30$66.72 $65.07 
Change in Common Share price for the three months ended September 30$(3.12)$(11.84)
Change in Common Share price for the nine months ended September 30$(5.22)$(4.27)
New York Stock Exchange (in U.S. dollars)2017
2016
Opening Common Share Price, as at January 1$142.77
$127.60
Ending Common Share Price, as at June 30$160.81
$128.79
Ending Common Share Price, as at September 30$168.03
$152.70
Change in Common Share Price for the three months ended September 30$7.22
$23.91
Change in Common Share Price for the nine months ended September 30$25.26
$25.10

In the third quarter of 2017,2022, the impact of the change in Common Share prices resulted in an increasea decrease in stock-based compensation expense of $2$3 million compared to an increasea decrease of $18$27 million in the same period in 2016.of 2021.

In the first nine months of 2017,2022, the impact of the change in Common Share prices resulted in an increasea decrease in stock-based compensation expense of $10$6 million compared to an increasea decrease of $14$10 million in the same period in 2016.of 2021.
27

The impact of share price on stock-based compensation is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the Share Price Impact on Stock-Based Compensation section.Compensation.


Table of Contents


Operating Revenues

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, equipment rents, and crew costs. Non-freight revenue is generated from leasing of certain assets, switching fees,assets; other arrangements, including contracts with passenger service operators and logistical management services.services; and interline switching fees.
For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$2,264 $1,896 $368 19 17 
Non-freight revenues (in millions)48 46 2 4 4 
Total revenues (in millions)$2,312 $1,942 $370 19 17 
Carloads (in thousands)730.0 665.0 65.0 10 N/A
Revenue ton-miles (in millions)37,569 35,391 2,178 6 N/A
Freight revenue per carload (in dollars)$3,101 $2,851 $250 9 7 
Freight revenue per revenue ton-mile (in cents)6.03 5.36 0.67 13 11 
   2017 vs. 2016
For the three months ended September 3020172016Total Change% Change
FX Adjusted
% Change(2)
Freight revenues (in millions)(1)
$1,547
$1,510
$37
2
4
Non-freight revenues (in millions)48
44
4
9
9
Total revenues (in millions)$1,595
$1,554
$41
3
5
Carloads (in thousands)(3)
666.4
648.2
18.2
3
N/A
Revenue ton-miles (in millions)35,170
33,915
1,255
4
N/A
Freight revenue per carload (dollars)$2,321
$2,328
$(7)—
2
Freight revenue per revenue ton-miles (cents)4.40
4.45
(0.05)(1)1
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(1)
Freight revenues include fuel surcharge revenues of $52 million in 2017, and $40 million in 2016. 2017 and 2016 fuel surcharge revenues include B.C. and Alberta carbon taxes and levies recovered.
(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 variance is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(3)
Certain figures have been revised to conform with current presentation.

•
Freight revenues were $1,547 million in the third quarter of 2017, an increase of $37 million, or 2%, from $1,510 million in the same period of 2016.
Freight revenues were $2,264 million in the third quarter of 2022, an increase of $368 million, or 19%, from $1,896 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes as measured by 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 the third quarter of 2022 were 37,569 million, an increase of 2,178 million, or 6%, from 35,391 million in the same period of 2021. This increase was mainly attributable to higher volumes of Intermodal, Potash, and frac sand. This increase was primarily due to higher volumes, as measured by revenue ton-miles, of frac sand, crude, domestic potash, domestic intermodal, Canadian coal and Canadian grain, and the favourable impact of higher fuel surcharge revenue of $14 million, slightly offset by lower volumes of international intermodal and U.S. grain, and the unfavourable impact of the change in FX of $29 million.

•
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 the third quarter of 2017 were 35,170 million, an increase of 4% compared with 33,915 million in the same period of 2016. This increase was primarily due to increases in frac sand, crude, domestic potash, domestic intermodal, Canadian coal, energy products and Canadian grain, partially offset by decreases in international intermodal and U.S. grain.

•
Non-freight revenues were $48 million in the third quarter of 2017, an increase of $4 million, or 9%, from $44 million in the same period of 2016. This increase was primarily due to the recovery of prior costs following the expiration of a passenger service contract in 2017, partially offset by a decrease in passenger and switching revenues.
   2017 vs. 2016
For the nine months ended September 3020172016Total Change% Change
FX Adjusted
% Change(2)
Freight revenues (in millions)(1)
$4,708
$4,464
$244
56
Non-freight revenues (in millions)133
131
2
22
Total revenues (in millions)$4,841
$4,595
$246
56
Carloads (in thousands)(3)
1,955.2
1,876.7
78.5
4N/A
Revenue ton-miles (in millions)105,381
100,341
5,040
5N/A
Freight revenue per carload (dollars)$2,408
$2,379
$29
12
Freight revenue per revenue ton-miles (cents)4.47
4.45
0.02
—1
(1)
Freight revenues include fuel surcharge revenues of $164 million in 2017, and $90 million in 2016. 2017 and 2016 fuel surcharge revenues include B.C. and Alberta carbon taxes and levies recovered.
(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 variance is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(3) Certain figures have been revised to conform with current presentation.

•
Freight revenues were $4,708 million in the first nine months of 2017, an increase of $244 million, or 5%, from $4,464 million in the same period of 2016. This increase was primarily due to an increase in volumes, as measured by RTMs, of frac sand, potash, Canadian grain, and domestic intermodal, and the favourable impact of higher fuel prices on fuel

Table of Contents


surcharge revenue of $73 million partially offset by lower international intermodal, fertilizers,volumes of Coal and automotive volumesCanadian grain.

Freight revenue per RTM is defined as freight revenue per revenue-producing ton of freight over a distance of one mile. This is an indicator of yield. Freight revenue per RTM was 6.03 cents in the third quarter of 2022, an increase of 0.67 cents, or 13%, from 5.36 cents in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $206 million, higher freight rates, and the unfavourablefavourable impact of the change in FX of $29$31 million. InThis increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the secondcompletion of customer contracts.

Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 730.0 thousand in the third quarter of 2016, there2022, an increase of 65.0 thousand, or 10%, from 665.0 thousand in the same period of 2021. This increase was primarily due to higher volumes of Intermodal, Potash, and frac sand. This increase was partially offset by lower volumes of crude.

Freight revenue per carload is defined as freight revenue per revenue-generating shipment of containers or freight cars. This is an estimated $20 million declineindicator of yield. Freight revenue per carload was $3,101 in revenuesthe third quarter of 2022, an increase of $250, or 9%, from $2,851 in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a direct result of higher fuel prices of $206 million, higher freight rates, and the northern Alberta wildfires.favourable impact of the change in FX of $31 million. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts.

•
Non-freight revenues were $48 million in the third quarter of 2022, an increase of $2 million, or 4%, from $46 million in the same period of 2021. This increase was primarily due to higher interline switching fees.
28

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$6,214 $5,822 $392 7 6 
Non-freight revenues (in millions)138 133 5 4 3 
Total revenues (in millions)$6,352 $5,955 $397 7 6 
Carloads (in thousands)2,068.4 2,079.9 (11.5)(1)N/A
Revenue ton-miles (in millions)109,355 113,725 (4,370)(4)N/A
Freight revenue per carload (in dollars)$3,004 $2,799 $205 7 6 
Freight revenue per revenue ton-mile (in cents)5.68 5.12 0.56 11 10 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Freight revenues were $6,214 million in the first nine months of 2022, an increase of $392 million, or 7%, from $5,822 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM, partially offset by lower volumes as measured by RTMs.

RTMs for the first nine months of 2022 were 109,355 million, a decrease of 4,370 million, or 4% from 113,725 million in the same period of 2021. This decrease was mainly attributable to lower volumes of Canadian grain, Coal, and Energy, chemicals and plastics. This decrease was partially offset by higher volumes of U.S. grain, Intermodal, Potash, and frac sand.

Freight revenue per RTM was 5.68 cents in the first nine months of 2022, an increase of 0.56 cents, or 11%, from 5.12 cents in the same period in 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $511 million, higher freight rates, and the favourable impact of the change in FX of $64 million. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts.

Carloads were 2,068.4 thousand in the first nine months of 2022, a decrease of 11.5 thousand, or 1%, from 2,079.9 thousand in the same period of 2021. This decrease was primarily due to lower volumes of Canadian grain, Energy, chemicals and plastics, Coal, and Automotive. This decrease was partially offset by higher volumes of Intermodal, frac sand, and Potash.

Freight revenue per carload was $3,004 in the first nine months of 2022, an increase of $205, or 7%, from $2,799 in the same period of 2021. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $511 million, higher freight rates, and the favourable impact of the change in FX of $64 million. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to the completion of customer contracts.

Non-freight revenues were $138 million in the first nine months of 2022, an increase of $5 million, or 4%, from $133 million in the same period of 2021. This increase was primarily due to higher revenue from passenger service operators and higher leasing revenue, partially offset by lower revenue from logistical services.

 for the first nine months of 2017 were 105,381 million, an increase of 5% compared with 100,341 million in the same period of 2016. This increase was primarily due to increases in frac sand, potash, Canadian grain, and domestic intermodal partially offset by decreases in international intermodal, fertilizers, and automotive.

•
Non-freight revenues were $133 million in the first nine months of 2017, an increase of $2 million, or 2%, from $131 million in the same period of 2016. This increase was primarily due to the recovery of prior costs following the expiration of a passenger service contract in 2017. This increase was partially offset by decreases in transload, switching and passenger revenues.

Fuel Cost Adjustment Program

Freight revenues include fuel surcharge revenues associated with CP's fuel cost adjustment program, which is designed to respond to fluctuations in fuel prices and help reduce exposure to changing fuel prices. The surcharge is applied to shippers through price indices, tariffs and by contract, within agreed-upon guidelines. The Company is also subject toThis program includes recoveries of carbon taxation systemstaxes, levies, and levies in some jurisdictions in which it operates, the costs of which are passed on to the shipper.obligations under cap-and-trade programs. Freight revenues includeincluded fuel surcharge revenues of $52 million for the third quarter of 2017 and $40 million for the same period in 2016. The impact of higher fuel prices resulted in an increase in total revenues of $14 million. Similarly, in the first nine months of 2017, fuel surcharge revenues were $164 million and $90 million for the same period of 2016, an increase in total revenues of $73 million. These figures include carbon tax and levy recoveries. 

Lines of Business

In the first quarter of 2017, CP revised the grouping of revenues, and aggregated certain lines of business where:
“Canadian Grain” and “U.S. Grain” were aggregated into the line of business "Grain";
“Chemicals and Plastics” and “Crude” were aggregated into the line of business "Energy, Chemicals and Plastics"; and
“Domestic Intermodal" and “International Intermodal” were aggregated into the line of business "Intermodal".

Prior period figures have been aggregated accordingly.

Grain
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$351
$372
$(21)(6)(4)
Carloads (in thousands)108.0
113.6
(5.6)(5)N/A
Revenue ton-miles (in millions)8,627
9,180
(553)(6)N/A
Freight revenue per carload (dollars)$3,251
$3,272
$(21)(1)2
Freight revenue per revenue ton-mile (cents)4.07
4.05
0.02
—
3

Grain revenue was $351$393 million in the third quarter of 2017, a decrease2022, an increase of $21$245 million, or 6%166%, from $372$148 million in the same period of 2016. The decrease in revenue was primarily due to lower shipments of U.S. grain primarily to the U.S. Pacific North West and the unfavourable impact of the change in FX, partially offset by higher Canadian grain shipments to the U.S. RTMs decreased more than carloads due to the increased proportion of Canadian grain to the U.S. which has a shorter length of haul, and the decreased proportion of U.S. grain to the U.S. Pacific North West, which has a longer length of haul. Freight revenue per revenue ton-mile increased primarily due to the higher proportion of Canadian grain to the U.S.

   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$1,107
$1,041
$66
67
Carloads (in thousands)325.6
312.2
13.4
4N/A
Revenue ton-miles (in millions)27,274
26,404
870
3N/A
Freight revenue per carload (dollars)$3,402
$3,336
$66
23
Freight revenue per revenue ton-mile (cents)4.06
3.94
0.12
34


Table of Contents


Grain revenue was $1,107 million in the first nine months of 2017, an increase of $66 million, or 6%, from $1,041 million in the same period of 2016. This increase was primarily due to increased Canadian grain volumes and higher fuel surcharge revenue. Carloads increased more than RTMs due to the decreased proportion of U.S. grain to the U.S. Pacific North West, which has a longer length of haul. The increase in freight revenue per revenue ton-mile is primarily due to increased regulated Canadian grain rates.

Coal
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$165
$160
$5
3
4
Carloads (in thousands)81.3
80.0
1.3
2
N/A
Revenue ton-miles (in millions)6,009
5,798
211
4
N/A
Freight revenue per carload (dollars)$2,021
$2,007
$14
1
1
Freight revenue per revenue ton-mile (cents)2.73
2.77
(0.04)(1)(1)
Coal revenue was $165 million in the third quarter of 2017, an increase of $5 million, or 3%, from $160 million in the same period of 2016.2021. This increase was primarily due to higher Canadian exportfuel prices, higher volumes, and higher fuel surcharge revenue. The decrease in freight revenue per revenue ton-mile was primarily due to the increased proportion of Canadian export coal volumes, which have a lower freight revenue per revenue ton-mile.carbon tax recoveries.

   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$478
$454
$24
56
Carloads (in thousands)233.3
226.7
6.6
3N/A
Revenue ton-miles (in millions)17,230
16,540
690
4N/A
Freight revenue per carload (dollars)$2,047
$2,003
$44
22
Freight revenue per revenue ton-mile (cents)2.77
2.75
0.02
11

Coal revenue was $478 million inIn the first nine months of 2017,2022, fuel surcharge revenues were $941 million, an increase of $24$575 million, or 5%157%, from $454$366 million in the same period of 2016. This increase was primarily due to an increase in Canadian export and U.S. thermal coal volumes and an increase in fuel surcharge revenue. The increase in freight revenue per ton-mile was primarily due to the increased proportion of U.S. thermal coal volumes, which have a higher freight revenue per revenue ton-mile.

Potash
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$103
$81
$22
2729
Carloads (in thousands)34.6
29.0
5.6
19N/A
Revenue ton-miles (in millions)4,083
3,651
432
12N/A
Freight revenue per carload (dollars)$2,978
$2,782
$196
79
Freight revenue per revenue ton-mile (cents)2.53
2.21
0.32
1416

Potash revenue was $103 million in the third quarter of 2017, an increase of $22 million, or 27%, from $81 million in the same period of 2016.2021. This increase was primarily due to higher domestic potash volumes, an increase in export potash volumes to the U.S. Pacific North West,fuel prices and higher fuel surcharge revenue, partially offset by the unfavourable impactincreased carbon tax recoveries.

29

Lines of the change in FX. The increase in freight revenue per revenue ton-mile was primarily due to the increased proportion of export potash to the U.S. Pacific North West, which has a shorter length of haul.

Table of Contents


   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$310
$242
$68
2829
Carloads (in thousands)102.9
84.2
18.7
22N/A
Revenue ton-miles (in millions)11,919
10,333
1,586
15N/A
Freight revenue per carload (dollars)$3,013
$2,878
$135
55
Freight revenue per revenue ton-mile (cents)2.60
2.35
0.25
1112

Potash revenue was $310 million in the first nine months of 2017, an increase of $68 million, or 28%, from $242 million in the same period of 2016. This increase was primarily due to higher domestic potash volumes, higher export potash volumes to the U.S. Pacific North West, and higher fuel surcharge revenue. The increase in freight revenue per revenue ton-mile was due to the increased proportion of export potash to the U.S. Pacific North West, which has a shorter length of haul.

Fertilizers and Sulphur
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$52
$64
$(12)(19)(17)
Carloads (in thousands)13.8
14.3
(0.5)(3)N/A
Revenue ton-miles (in millions)864
958
(94)(10)N/A
Freight revenue per carload (dollars)$3,814
$4,476
$(662)(15)(13)
Freight revenue per revenue ton-mile (cents)6.08
6.68
(0.60)(9)(7)

Fertilizers and sulphur revenue was $52 million in the third quarter of 2017, a decrease of $12 million, or 19%, from $64 million in the same period of 2016. This decrease was primarily due to a decline in fertilizer volumes, which have a higher freight revenue per revenue ton-mile, and to the unfavourable impact of the change in FX, partially offset by higher sulphur volumes and higher fuel surcharge revenue. Carloads decreased less than RTMs due to the increased proportion of fertilizers to the U.S. Pacific North West, which has a shorter length of haul.

   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$181
$218
$(37)(17)(17)
Carloads (in thousands)43.2
45.2
(2.0)(4)N/A
Revenue ton-miles (in millions)2,837
3,144
(307)(10)N/A
Freight revenue per carload (dollars)$4,198
$4,825
$(627)(13)(13)
Freight revenue per revenue ton-mile (cents)6.39
6.93
(0.54)(8)(7)

Fertilizers and sulphur revenue was $181 million in the first nine months of 2017, a decrease of $37 million, or 17%, from $218 million in the same period of 2016. This decrease was primarily due to lower volumes, particularly fertilizers which have a higher freight revenue per revenue ton-mile. This decrease was partially offset by higher fuel surcharge revenue. Carloads decreased less than RTMs due to the increased proportion of fertilizers to the U.S. Pacific North West, which has a shorter length of haul.

Forest Products
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$67
$71
$(4)(6)(3)
Carloads (in thousands)17.2
16.9
0.3
2
N/A
Revenue ton-miles (in millions)1,157
1,217
(60)(5)N/A
Freight revenue per carload (dollars)$3,870
$4,211
$(341)(8)(5)
Freight revenue per revenue ton-mile (cents)5.78
5.86
(0.08)(1)2

Table of Contents



Forest products revenue was $67 million in the third quarter of 2017, a decrease of $4 million, or 6%, from $71 million in the same period of 2016. This decrease was due to lower volumes of lumber and panel products, due to U.S. tariffs on Canadian softwood lumber in 2017, and the unfavourable impact of the change in FX. Carloads increased while RTMs decreased due to an increase in traffic with a shorter length of haul.
   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$202
$212
$(10)(5)(4)
Carloads (in thousands)49.8
51.0
(1.2)(2)N/A
Revenue ton-miles (in millions)3,390
3,619
(229)(6)N/A
Freight revenue per carload (dollars)$4,056
$4,160
$(104)(3)(2)
Freight revenue per revenue ton-mile (cents)5.96
5.87
0.09
2
3
Forest products revenue was $202 million in the first nine months of 2017, a decrease of $10 million, or 5%, from $212 million in the same period of 2016. This decrease was due to lower volumes of lumber and panel products, due to U.S. tariffs on Canadian softwood lumber in 2017, partially offset by higher fuel surcharge revenue. Carloads decreased less than RTMs due to an increase in traffic with a shorter length of haul.

Energy, Chemicals and Plastics
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$208
$187
$21
11
15
Carloads (in thousands)64.7
57.4
7.3
13
N/A
Revenue ton-miles (in millions)4,992
3,971
1,021
26
N/A
Freight revenue per carload (dollars)$3,227
$3,254
$(27)(1)2
Freight revenue per revenue ton-mile (cents)4.18
4.71
(0.53)(11)(9)

Energy, chemicals and plastics revenue was $208 million in the third quarter of 2017, an increase of $21 million, or 11%, from $187 million in the same period of 2016. This increase was primarily due to higher volumes of crude, liquefied petroleum gas ("L.P.G."), plastics and fuel oil and higher fuel surcharge revenue, partly offset by the unfavourable impact of the change in FX. The decrease in freight revenue per revenue ton-mile is primarily due to volume gains in longer length of haul lanes for crude and L.P.G. through Kansas City, and higher plastics and fuel oil volumes, which have a lower freight revenue per revenue ton-mile.
   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$651
$638
$13
2
3
Carloads (in thousands)194.0
185.1
8.9
5
N/A
Revenue ton-miles (in millions)15,302
14,295
1,007
7
N/A
Freight revenue per carload (dollars)$3,357
$3,448
$(91)(3)(2)
Freight revenue per revenue ton-mile (cents)4.26
4.47
(0.21)(5)(3)

Energy, chemicals and plastics revenue was $651 million in the first nine months of 2017, an increase of $13 million, or 2%, from $638 million in the same period of 2016. This increase was primarily due to higher volumes of fuel oil, plastics, and L.P.G. shipments and higher fuel surcharge revenue, partially offset by the unfavourable change in FX. The decrease in freight revenue per revenue ton-mile is primarily due to volume gains in longer length of haul lanes for crude and L.P.G. through Kansas City, and higher fuel oil and plastics volumes, which have a lower freight revenue per revenue ton-mile.


Table of Contents


Metals, Minerals and Consumer Products
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$192
$142
$50
35
39
Carloads (in thousands)68.2
50.3
17.9
36
N/A
Revenue ton-miles (in millions)3,030
2,171
859
40
N/A
Freight revenue per carload (dollars)$2,806
$2,821
$(15)(1)2
Freight revenue per revenue ton-mile (cents)6.32
6.53
(0.21)(3)—

Metals, minerals and consumer products revenue was $192 million in the third quarter of 2017, an increase of $50 million, or 35%, from $142 million in the same period of 2016. This increase was primarily due to higher frac sand, steel and aggregates volumes and higher fuel surcharge revenue, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to an increased length of haul for frac sand traffic.
   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$552
$415
$137
33
34
Carloads (in thousands)191.1
144.9
46.2
32
N/A
Revenue ton-miles (in millions)8,512
6,067
2,445
40
N/A
Freight revenue per carload (dollars)$2,888
$2,862
$26
1
2
Freight revenue per revenue ton-mile (cents)6.49
6.83
(0.34)(5)(4)

Metals, minerals and consumer products revenue was $552 million in the first nine months of 2017, an increase of $137 million, or 33%, from $415 million in the same period of 2016. This increase was primarily due to higher frac sand, aggregates and steel volumes and higher fuel surcharge revenue. The decrease in freight revenue per revenue ton-mile is primarily due to higher volumes of frac sand, which have a lower freight revenue per revenue ton-mile. RTMs increased more than carloads due to an increased length of haul for frac sand traffic.

Automotive
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$68
$86
$(18)(21)(18)
Carloads (in thousands)25.0
28.9
(3.9)(13)N/A
Revenue ton-miles (in millions)316
393
(77)(20)N/A
Freight revenue per carload (dollars)$2,737
$2,985
$(248)(8)(5)
Freight revenue per revenue ton-mile (cents)21.62
21.91
(0.29)(1)2

Automotive revenue was $68 million in the third quarter of 2017, a decrease of $18 million, or 21%, from $86 million in the same period of 2016. This decrease was primarily due to a decline in volume and the unfavourable impact of the change in FX. The freight revenue per carload decrease was more than the decrease in freight revenue per revenue ton-mile due to reduced volumes of traffic with lower freight rates.
   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$223
$270
$(47)(17)(17)
Carloads (in thousands)79.9
97.2
(17.3)(18)N/A
Revenue ton-miles (in millions)1,016
1,305
(289)(22)N/A
Freight revenue per carload (dollars)$2,788
$2,777
$11
—
1
Freight revenue per revenue ton-mile (cents)21.92
20.68
1.24
6
7


Table of Contents


Automotive revenue was $223 million in the first nine months of 2017, a decrease of $47 million, or 17%, from $270 million in the same period of 2016. This decrease was primarily due to a decline in volume, partially offset by higher fuel surcharge revenue. The increase in freight revenue per revenue ton-mile was primarily due to a decrease in volumes with a longer length of haul and lower freight rates per revenue ton-mile.

Intermodal
   2017 vs. 2016
For the three months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$341
$347
$(6)(2)(1)
Carloads (in thousands)253.6
257.8
(4.2)(2)N/A
Revenue ton-miles (in millions)6,092
6,576
(484)(7)N/A
Freight revenue per carload (dollars)$1,343
$1,345
$(2)—
1
Freight revenue per revenue ton-mile (cents)5.59
5.27
0.32
6
7

Intermodal revenue was $341 million in the third quarter of 2017, a decrease of $6 million, or 2%, from $347 million in the same period of 2016. This decrease was primarily due to a decline in international volumes associated with the loss of a contract, partially offset by higher domestic traffic and fuel surcharge revenue. Freight revenue per revenue ton-mile increased due to more revenue generating moves of empty customer containers.
   2017 vs. 2016
For the nine months ended September 3020172016Total Change% ChangeFX Adjusted
% Change
Freight revenues (in millions)$1,004
$974
$30
3
3
Carloads (in thousands)735.4
730.2
5.2
1
N/A
Revenue ton-miles (in millions)17,901
18,634
(733)(4)N/A
Freight revenue per carload (dollars)$1,364
$1,333
$31
2
3
Freight revenue per revenue ton-mile (cents)5.61
5.23
0.38
7
8

Intermodal revenue was $1,004 million in the first nine months of 2017, an increase of $30 million, or 3%, from $974 million in the same period of 2016. This increase was primarily due to higher domestic traffic and higher fuel surcharge revenue, partially offset by a decline in international volumes associated with the loss of a contract. Freight revenue per revenue ton-mile increased due to more revenue generating moves of empty customer containers.

Operating Expenses

  2017 vs. 2016
For the three months ended September 30 (in millions)20172016Total Change% Change
FX Adjusted % Change(1)
Compensation and benefits$256
$294
$(38)(13)(11)
Fuel150
138
12
9
12
Materials45
39
6
15
15
Equipment rents35
43
(8)(19)(17)
Depreciation and amortization162
155
7
5
6
Purchased services and other257
228
29
13
15
Total operating expenses$905
$897
$8
1
3
Business

Grain

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$391 $352 $39 11 9 
Carloads (in thousands)87.6 89.0 (1.4)(2)N/A
Revenue ton-miles (in millions)7,577 7,715 (138)(2)N/A
Freight revenue per carload (in dollars)$4,463 $3,955 $508 13 11 
Freight revenue per revenue ton-mile (in cents)5.16 4.56 0.60 13 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 varianceAdjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operating expenses were $905Grain revenue was $391 million in the third quarter of 2017,2022, an increase of $8$39 million, or 1%11%, from $897$352 million in the same period of 2016.2021. This increase was primarily due to:
an adjustment reducing discontinuance liabilities for certain branch lines in 2016;
to increased freight revenue per RTM and higher volume variable expenses;
volumes of U.S. corn from the unfavourable impact of increases in fuel price of $9 million;
the unfavourable impact of wage and benefit inflation;
higher depreciation expenses;

Table of Contents


higher casualty costs; and
higher incentive based compensation.

U.S. Midwest to western Canada. This increase was partially offset by:
by lower volumes of Canadian grain primarily to eastern Canada and Vancouver due to drought conditions that impacted the 2021-2022 Canadian crop size, as well as a delayed harvest for the 2022-2023 crop year. Freight revenue per RTM increased due to higher defined benefit pension plan incomefuel surcharge revenue as a result of $26 million;
lower stock based compensation expense;higher fuel prices, higher freight rates, and
the favourable impact of the change in FX of $17 million.FX.


  2017 vs. 2016
For the nine months ended September 30 (in millions)20172016Total Change% Change
FX Adjusted % Change(1)
Compensation and benefits$766
$907
$(141)(16)(15)
Fuel480
394
86
22
23
Materials142
133
9
7
8
Equipment rents108
132
(24)(18)(18)
Depreciation and amortization493
478
15
3
3
Purchased services and other812
690
122
18
19
Total operating expenses$2,801
$2,734
$67
2
3
For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$1,121 $1,244 $(123)(10)(11)
Carloads (in thousands)255.4 323.8 (68.4)(21)N/A
Revenue ton-miles (in millions)23,335 28,564 (5,229)(18)N/A
Freight revenue per carload (in dollars)$4,389 $3,842 $547 14 13 
Freight revenue per revenue ton-mile (in cents)4.80 4.36 0.44 10 9 
(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 varianceAdjusted % Change is defined and reconciled in Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operating expenses were $2,801Grain revenue was $1,121 million in the first nine months of 2017, an increase2022, a decrease of $67$123 million, or 2%10%, from $2,734$1,244 million in the same period of 2016.2021. This decrease was primarily due to lower volumes of Canadian grain to Vancouver and eastern Canada due to drought conditions that impacted the 2021-2022 Canadian crop size. This decrease was partially offset by higher volumes of U.S. corn from the U.S. Midwest to western Canada and increased freight revenue per RTM. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX. RTMs decreased less than carloads due to moving higher volumes of U.S. corn from the U.S. Midwest to western Canada, which has a longer length of haul.

Coal

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$156 $158 $(2)(1)(2)
Carloads (in thousands)71.6 73.4 (1.8)(2)N/A
Revenue ton-miles (in millions)3,857 4,334 (477)(11)N/A
Freight revenue per carload (in dollars)$2,179 $2,153 $26 1 1 
Freight revenue per revenue ton-mile (in cents)4.04 3.65 0.39 11 10 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Coal revenue was $156 million in the third quarter of 2022, a decrease of $2 million, or 1%, from $158 million in the same period of 2021. This decrease was primarily due to lower volumes of Canadian coal to Vancouver as a result of production challenges at the mines. This decrease was partially offset by increased freight revenue per RTM and higher volumes of Canadian coal to Kamloops, B.C. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX. RTMs decreased more than carloads due to moving lower volumes
30

of Canadian coal to Vancouver, which has a longer length of haul, and moving higher volumes of Canadian coal to Kamloops, B.C., which has a shorter length of haul.

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$458 $491 $(33)(7)(7)
Carloads (in thousands)213.2 224.2 (11.0)(5)N/A
Revenue ton-miles (in millions)12,037 14,451 (2,414)(17)N/A
Freight revenue per carload (in dollars)$2,148 $2,190 $(42)(2)(2)
Freight revenue per revenue ton-mile (in cents)3.80 3.40 0.40 12 12 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Coal revenue was $458 million in the first nine months of 2022, a decrease of $33 million, or 7%, from $491 million in the same period of 2021. This decrease was primarily due to lower volumes of Canadian coal to Vancouver as a result of production challenges at the mines, partially offset by higher volumes of Canadian coal to Kamloops, B.C. and increased freight revenue per RTM. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of Canadian coal to Vancouver, which has a longer length of haul, and moving higher volumes of Canadian coal to Kamloops, B.C., which has a shorter length of haul.

Potash

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$170 $113 $57 50 48 
Carloads (in thousands)45.7 35.8 9.9 28 N/A
Revenue ton-miles (in millions)5,164 3,941 1,223 31 N/A
Freight revenue per carload (in dollars)$3,720 $3,156 $564 18 16 
Freight revenue per revenue ton-mile (in cents)3.29 2.87 0.42 15 13 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Potash revenue was $170 million in the third quarter of 2022, an increase of $57 million, or 50%, from $113 million in the same period of 2021. This increase was primarily due to:
to higher volumes of export potash to Vancouver as a result of the unfavourableprior year impacts of the B.C. wildfires, higher volumes of export potash to Thunder Bay, higher volumes of domestic potash as a result of the prior year impact of increases inmine closures, and increased freight revenue per RTM. Freight revenue per RTM increased due to higher fuel pricesurcharge revenue as a result of $70 million;
higher fuel prices, higher freight rates, and the gain on sale of CP's Arbutus Corridor in 2016 of $50 million;
higher volume variable expenses;
thefavourable impact of wagethe change in FX. RTMs increased more than carloads due to moving higher volumes of export potash to Vancouver, which has a longer length of haul.

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$445 $348 $97 28 26 
Carloads (in thousands)125.1 114.8 10.3 9 N/A
Revenue ton-miles (in millions)14,297 12,705 1,592 13 N/A
Freight revenue per carload (in dollars)$3,557 $3,031 $526 17 16 
Freight revenue per revenue ton-mile (in cents)3.11 2.74 0.37 14 12 
(1)FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, benefit inflation;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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Potash revenue was $445 million in the first nine months of 2022, an adjustment reducing discontinuance liabilities for certain branch linesincrease of $97 million, or 28%, from $348 million in 2016;
the gain on salesame period of surplus2021. This increase was primarily due to increased freight cars in 2016revenue per RTM and higher volumes of $17 million;export potash to Vancouver, Thunder Bay, and
higher depreciation expense.

the U.S. Pacific Northwest. This increase was partially offset by:by lower volumes of domestic potash. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX. RTMs increased more than carloads due to moving higher volumes of export potash, which has a longer length of haul.
31


Fertilizers and Sulphur

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$81 $72 $9 13 11 
Carloads (in thousands)14.9 15.1 (0.2)(1)N/A
Revenue ton-miles (in millions)1,138 1,141 (3)— N/A
Freight revenue per carload (in dollars)$5,436 $4,768 $668 14 12 
Freight revenue per revenue ton-mile (in cents)7.12 6.31 0.81 13 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Fertilizers and sulphur revenue was $81 million in the third quarter of 2022, an increase of $9 million, or 13%, from $72 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of dry fertilizers, partially offset by lower volumes of sulphur and wet fertilizers. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$244 $227 $17 7 6 
Carloads (in thousands)46.8 48.4 (1.6)(3)N/A
Revenue ton-miles (in millions)3,585 3,673 (88)(2)N/A
Freight revenue per carload (in dollars)$5,214 $4,690 $524 11 9 
Freight revenue per revenue ton-mile (in cents)6.81 6.18 0.63 10 8 
(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 benefit pension plan incomeand reconciled in Non-GAAP Measures of $76 million;this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
management transition recovery
Fertilizers and sulphur revenue was $244 million in the first nine months of $512022, an increase of $17 million, associated with Mr. E. Hunter Harrison's retirementor 7%, from $227 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of dry fertilizers, partially offset by lower volumes of wet fertilizers and sulphur. Freight revenue per RTM increased due to higher fuel surcharge revenue as CEOa result of CP;higher fuel prices, higher freight rates, and the favourable impact of the change in FX.
efficiencies generated
Forest Products

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$109 $89 $20 22 18 
Carloads (in thousands)18.5 18.7 (0.2)(1)N/A
Revenue ton-miles (in millions)1,488 1,419 69 5 N/A
Freight revenue per carload (in dollars)$5,892 $4,759 $1,133 24 20 
Freight revenue per revenue ton-mile (in cents)7.33 6.27 1.06 17 13 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forest products revenue was $109 million in the third quarter of 2022, an increase of $20 million, or 22%, from improved operating performance$89 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and asset utilization;higher volumes of lumber, partially offset by lower volumes of paperboard. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX. RTMs increased while carloads decreased due to moving higher volumes of lumber from western Canada to the U.S. Midwest, which has a longer length of haul, and lower volumes of paperboard from Kansas City and Minneapolis to the U.S. Midwest, which have shorter lengths of haul.
32

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$299 $259 $40 15 13 
Carloads (in thousands)55.3 55.1 0.2 — N/A
Revenue ton-miles (in millions)4,366 4,290 76 2 N/A
Freight revenue per carload (in dollars)$5,407 $4,701 $706 15 12 
Freight revenue per revenue ton-mile (in cents)6.85 6.04 0.81 13 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forest products revenue was $299 million in the first nine months of 2022, an increase of $40 million, or 15%, from $259 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM, higher volumes of newsprint from Saint John, N.B., and higher volumes of paper and panel products from B.C. This increase was partially offset by lower volumes of lumber. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

Energy, Chemicals and Plastics

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$360 $392 $(32)(8)(10)
Carloads (in thousands)75.1 78.2 (3.1)(4)N/A
Revenue ton-miles (in millions)6,286 6,330 (44)(1)N/A
Freight revenue per carload (in dollars)$4,794 $5,013 $(219)(4)(6)
Freight revenue per revenue ton-mile (in cents)5.73 6.19 (0.46)(7)(9)
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Energy, chemicals and plastics revenue was $360 million in the third quarter of 2022, a decrease of $32 million, or 8%, from $392 million in the same period of 2021. This decrease was primarily due to decreased freight revenue per RTM and lower volumes of conventional crude and petroleum products. This decrease was partially offset by higher fuel surcharge revenue as a result of higher fuel prices, higher volumes of DRUbitTM crude to Kansas City and ethylene glycol, the favourable impact of the change in FX, and higher freight rates. Freight revenue per RTM decreased primarily due to lower crude liquidated damages, including customer volume commitments, as a result of $15the completion of customer contracts. Carloads decreased more than RTMs due to moving lower volumes of conventional crude to Noyes, MN and Kingsgate, B.C., which have shorter lengths of haul, and higher volumes to DRUbitTM crude to Kansas City, which has a longer length of haul.

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$1,010 $1,149 $(139)(12)(13)
Carloads (in thousands)221.2 241.5 (20.3)(8)N/A
Revenue ton-miles (in millions)18,221 19,328 (1,107)(6)N/A
Freight revenue per carload (in dollars)$4,566 $4,758 $(192)(4)(5)
Freight revenue per revenue ton-mile (in cents)5.54 5.94 (0.40)(7)(8)
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Energy, chemicals and plastics revenue was $1,010 million in the first nine months of 2022, a decrease of $139 million, or 12%, from $1,149 million in the same period of 2021. This decrease was primarily due to decreased freight revenue per RTM and lower volumes of conventional crude, petroleum products, and plastics. This decrease was partially offset by higher fuel surcharge revenue as a result of higher fuel prices, higher volumes of DRUbitTM crude to Kansas City, higher freight rates, and the favourable impact of the change in FX. Freight revenue per RTM decreased primarily due to lower crude liquidated damages, including customer volume commitments, as a result of the completion of customer contracts. Carloads decreased more than RTMs due to moving lower volumes of conventional crude to Noyes, MN and Kingsgate, B.C., which have shorter lengths of haul, and moving higher volumes of DRUbitTM crude to Kansas City, which has a longer length of haul.

33

Metals, Minerals and Consumer Products

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$246 $196 $50 26 22 
Carloads (in thousands)66.0 60.4 5.6 9 N/A
Revenue ton-miles (in millions)3,225 2,992 233 8 N/A
Freight revenue per carload (in dollars)$3,727 $3,245 $482 15 12 
Freight revenue per revenue ton-mile (in cents)7.63 6.55 1.08 16 14 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Metals, minerals and consumer products revenue was $246 million in the third quarter of 2022, an increase of $50 million, or 26%, from $196 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of frac sand to the Bakken and Marcellus shale formations, partially offset by lower volumes of steel. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$655 $535 $120 22 20 
Carloads (in thousands)187.2 177.2 10.0 6 N/A
Revenue ton-miles (in millions)8,852 8,328 524 6 N/A
Freight revenue per carload (in dollars)$3,499 $3,019 $480 16 14 
Freight revenue per revenue ton-mile (in cents)7.40 6.42 0.98 15 13 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Metals, minerals and consumer products revenue was $655 million in the first nine months of 2022, an increase of $120 million, or 22%, from $535 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes of frac sand to the Marcellus and Bakken shale formations, partially offset by lower volumes of steel. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

Automotive

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$111 $83 $28 34 31 
Carloads (in thousands)25.1 23.3 1.8 8 N/A
Revenue ton-miles (in millions)418 403 15 4 N/A
Freight revenue per carload (in dollars)$4,422 $3,562 $860 24 21 
Freight revenue per revenue ton-mile (in cents)26.56 20.60 5.96 29 26 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Automotive revenue was $111 million in the third quarter of 2022, an increase of $28 million, or 34%, from $83 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM and higher volumes moving from Ontario to Chicago and Kansas City. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, the favorable impact of the change in FX and higher freight rates. Carloads increased more than RTMs due to moving higher volumes from Ontario to Chicago and Kansas City, which have shorter lengths of haul.
34

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$322 $289 $33 11 10 
Carloads (in thousands)78.0 85.4 (7.4)(9)N/A
Revenue ton-miles (in millions)1,308 1,378 (70)(5)N/A
Freight revenue per carload (in dollars)$4,128 $3,384 $744 22 20 
Freight revenue per revenue ton-mile (in cents)24.62 20.97 3.65 17 15 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Automotive revenue was $322 million in the first nine months of 2022, an increase of $33 million, or 11%, from $289 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM, partially offset by lower volumes as a result of global supply chain challenges. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX. Carloads decreased more than RTMs due to moving proportionately lower volumes within the U.S. Midwest and eastern Canada, which has a shorter length of haul.

Intermodal

For the three months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$640 $441 $199 45 44 
Carloads (in thousands)325.5 271.1 54.4 20 N/A
Revenue ton-miles (in millions)8,416 7,116 1,300 18 N/A
Freight revenue per carload (in dollars)$1,966 $1,627 $339 21 20 
Freight revenue per revenue ton-mile (in cents)7.60 6.20 1.40 23 22 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Intermodal revenue was $640 million in the third quarter of 2022, an increase of $199 million, or 45%, from $441 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM, higher international intermodal volumes to and from the Port of Vancouver and the Port of Saint John, onboarding new international intermodal customers, and higher domestic retail volumes. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher intermodal ancillary revenue, higher freight rates, and the favourable impact of the change in FX.

For the nine months ended September 3020222021Total Change% Change
FX Adjusted
% Change(1)
Freight revenues (in millions)$1,660 $1,280 $380 30 29 
Carloads (in thousands)886.2 809.5 76.7 9 N/A
Revenue ton-miles (in millions)23,354 21,008 2,346 11 N/A
Freight revenue per carload (in dollars)$1,873 $1,581 $292 18 18 
Freight revenue per revenue ton-mile (in cents)7.11 6.09 1.02 17 16 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Intermodal revenue was $1,660 million in the first nine months of 2022, an increase of $380 million, or 30%, from $1,280 million in the same period of 2021. This increase was primarily due to increased freight revenue per RTM, higher volumes due to onboarding new international customers, higher international volumes to and from the Port of Saint John and the Port of Montreal, and higher domestic wholesale and retail volumes. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher intermodal ancillary revenue, higher freight rates, and the favourable impact of the change in FX.


35

Operating Expenses

For the three months ended September 30
(in millions of Canadian dollars)		20222021Total Change% Change
FX Adjusted % Change(1)
Compensation and benefits$393 $381 $12 3 2 
Fuel358 199 159 80 75 
Materials66 51 15 29 29 
Equipment rents33 31 2 6 3 
Depreciation and amortization213 203 10 5 4 
Purchased services and other312 303 9 3 2 
Total operating expenses$1,375 $1,168 $207 18 16 
(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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operating expenses were $1,375 million in the third quarter of 2022, an increase of $207 million, or 18%, from $1,168 million in the same period of 2021. This increase was primarily due to:
•the unfavourable impact of changes in fuel prices of $122 million;
•cost inflation;
•higher volume variable expenses as a result of an increase in workload as measured by GTMs;
•the unfavourable impact of the change in FX of $17 million; and
•a decrease in fuel efficiency of 2% due to higher volumes of Intermodal, which has lower horsepower utilization.

This increase was partially offset by lower casualty costs incurred in 2022.

For the nine months ended September 30
(in millions of Canadian dollars)		20222021Total Change% Change
FX Adjusted % Change(1)
Compensation and benefits$1,154 $1,165 $(11)(1)(2)
Fuel1,001 623 378 61 58 
Materials191 164 27 16 16 
Equipment rents97 92 5 5 3 
Depreciation and amortization634 605 29 5 4 
Purchased services and other935 932 3 — — 
Total operating expenses$4,012 $3,581 $431 12 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operating expenses were $4,012 million in the first nine months of 2022, an increase of $431 million, or 12%, from $3,581 million in the same period of 2021. This increase was primarily due to:
•the unfavourable impact of changes in fuel prices of $374 million;
•cost inflation;
•a gain on the exchange of property and construction easements in Chicago of $50 million in 2021;
•a decrease in efficiencies primarily due to harsh winter weather conditions in the first quarter of 2022; and
•the unfavourable impact of the changes in FX of $34 million.

This increase was partially offset by lower acquisition-related costs of $90 million associated with the KCS acquisition that were recognized in Purchased services and other and lower volume variable expenses as a result of a decrease in workload as measured by GTMs.

Compensation and Benefits

Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was $256$393 million in the third quarter of 2017, a decrease2022, an increase of $38$12 million, or 13%3%, from $294$381 million in the same period of 2016. 2021.

This decreaseincrease was primarily due to:
higher defined benefit pension plan income of $26 million;
lower stock-based compensation driven primarily by the change in stock price;
the favourable •impact of the change in FX of $5 million; and
lower labour expense due to operational efficiencies.

This decrease was partially offset by:
wage and benefit inflation;
higher incentive based compensation, and
higher•increased volume variable expensesexpense as a result of an increase in workload as measured in GTMs.

by GTMs; and
36

Table of Contents

•increased new hire training costs.

This increase was partially offset by:
•lower stock-based compensation of $5 million;
•lower defined benefit pension current service cost of $5 million; and
•decreased incentive compensation.

Compensation and benefits expense was $766$1,154 million in the first nine months of 2017,2022, a decrease of $141$11 million, or 16%1%, from $907$1,165 million in the same period of 2016.2021. This decrease was primarily due to:
higher•decreased incentive compensation;
•lower volume variable expense as a result of a decrease in workload as measured by GTMs; and
•lower defined benefit pension plan incomecurrent service cost of $76 million;$17 million.
management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP;
lower labour expense due to operational efficiencies;
lower stock-based compensation driven primarilyThis decrease was partially offset by the change in stock price;impact of wage and
the favourable benefit inflation and unfavourable impact of the change in FX of $4$8 million.

This decrease was partially offset by wage and benefit inflation and higher volume variable expenses as a result of an increase in workload as measured in GTMs.

Fuel

Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was $150$358 million in the third quarter of 2017,2022, an increase of $12$159 million, or 9%80%, from $138$199 million in the same period of 2016.2021. This increase was primarily due to:
•the unfavourable impact of higher fuel prices of $122 million;
•an increase in workload, as measured by GTMs;
•a decrease in fuel efficiency of 2% due to higher volumes of Intermodal, which has lower horsepower utilization; and
•the unfavourable impact of the change in FX of $6 million.

Fuel expense was $1,001 million in the first nine months of 2022, an increase of $378 million, or 61%, from $623 million in the same period of 2021. This increase was primarily due to:
•the unfavourable impact of higher fuel prices of $374 million;
•a decrease in fuel efficiency of 2% due to lower locomotive productivity and harsher winter operating conditions in the first quarter of 2022, and lower volumes of Canadian grain, which has higher horsepower utilization; and
•the unfavourable impact of the change in FX of $12 million.

This increase was partially offset by a decrease in workload, as measured by GTMs.

Materials

Materials expense includes the cost of materials used for the maintenance of track, locomotives, freight cars, and buildings, as well as software sustainment. Materials expense was $66 million in the third quarter of 2022, an increase of $15 million, or 29%, from $51 million in the same period of 2021. This increase was primarily due to the unfavourable impact of $9 million frominflation including higher non-locomotive fuel prices, and an increase in workload, as measured by GTMs. This increase was partially offset by the favourable impact of the change in FX of $4 million.higher spending on locomotive and track maintenance.

FuelMaterials expense was $480$191 million in the first nine months of 2017,2022, an increase of $86$27 million, or 22%16%, from $394$164 million in the same period of 2016.2021. This increase was primarily due to to:
•the unfavourable impact of $70 million frominflation including higher non-locomotive fuel prices and prices;
•an increase in workload, as measured by GTMs. This increase was partially offset by an $8 millionnon-locomotive fuel tax recovery related to prior periods in the second quarter of 2017consumption; and the favourable impact of the change in FX of $3 million.

•higher spending on track maintenance.
Materials

Materials expense includes the cost of material used for track, locomotive, freight car and building maintenance and software sustainment. Materials expense was $45 million in the third quarter of 2017, an increase of $6 million, or 15%, from $39 million in the same period of 2016. This increase was primarily due to higher right of way maintenance activities and higher locomotive maintenance and overhaul costs.

Materials expense was $142 million in the first nine months of 2017, an increase of $9 million or 7%, from $133 million in the same period of 2016. This increase was due to higher right of way maintenance activities and higher locomotive maintenance and overhaul costs. This increase was partially offset by lower freight car repairs.

Equipment Rents

Equipment rents expense includes the cost associated with using other railways' 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 $35$33 million in the third quarter of 2017, a decrease2022, an increase of $8$2 million, or 19%6%, from $43$31 million in the same period of 2016.2021. This decreaseincrease was primarily due to the purchase and returngreater usage of leasedpooled freight cars and locomotiveslower price incentives received on Intermodal cars.

This increase was partially offset by higher container rents in 2022 and to a decrease in CP's use ofhigher receipts for CP rolling stock used by other railroads' equipment.railways.

Equipment rents expense was $108$97 million in the first nine months of 2017, a decrease2022, an increase of $24$5 million, or 18%5%, from $132$92 million in the same period of 2016.2021. This decreaseincrease was primarily due to the purchaseto:
•lower price incentives received on Intermodal cars;
•greater usage of pooled freight cars; and return of leased freight cars
•slower cycle times.

37

This increase was partially offset by higher receipts for CP rolling stock used by other railways and locomotives, and an increasehigher container rents in receipts from other railroads' use of CP's equipment.2022.

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 $162$213 million inand $634 million for the third quarter of 2017,three and nine months ended September 30, 2022, an increase of $7$10 million or 5%, from $155and an increase of $29 million inor 5%, respectively, compared to the same periodperiods of 2016. This increase was2021. These increases were primarily due to a higher depreciable asset base partially offset byas well as the favourableunfavourable impact of the change in FX of $2 million.

Depreciation and amortization expense was $493 million in the first nine months of 2017, an increase of $15 million, or 3%, from $478 million in the same period of 2016. This increase was primarily due to a higher depreciable asset base.


Table of Contents


Purchased Services and Other



2017 vs. 2016
For the three months ended September 30 (in millions)2017
2016(1)

Total Change% Change
For the three months ended September 30
(in millions of Canadian dollars)		For the three months ended September 30
(in millions of Canadian dollars)		20222021Total Change% Change
Support and facilities$65
$62
$3
5
Support and facilities$83 $80 $3 4 
Track and operations58
54
4
7
Track and operations68 66 2 3 
Intermodal49
44
5
11
Intermodal59 50 9 18 
Equipment35
39
(4)(10)Equipment26 26 — — 
Casualty20
15
5
33
Casualty24 42 (18)(43)
Property taxes31
29
2
7
Property taxes32 30 2 7 
Other1
(10)11
(110)Other23 17 6 35 
Land sales(2)(5)3
(60)Land sales(3)(8)5 (63)
Total Purchased services and other$257
$228
$29
13
Total Purchased services and other$312 $303 $9 3 
(1)

Certain comparative figures have been revised to conform with current presentation.

Purchased services and other expense encompasses a wide range of third-party costs, including expenses for joint facilities, personal injuries and damage claims, environmental remediation, property and other taxes, contractor and consulting fees, insurance, and gains on land sales. Purchased services and other expense was $257$312 million in the third quarter of 2017,2022, an increase of $29$9 million, or 13%3%, from $228$303 million in the same period of 2016.2021. This increase was primarily due to:
an adjustment reducing discontinuance liabilities for certain branch lines•cost inflation;
•higher expenses due to higher events and sponsorship costs;
•lower gains on land sales; and
•the unfavorable impact of the change in 2016,FX of $4 million.

This increase was partially offset by:
•lower expenses primarily due to the reduced severity of casualty incidents;
•expenses due to the wildfire response in British Columbia in 2021, reported in Other;Support and facilities, and Track and operations; and
•lower legal expenses compared to the same period in 2021, reported in Support and facilities.

For the nine months ended September 30
(in millions of Canadian dollars)		20222021Total Change% Change
Support and facilities$249 $214 $35 16 
Track and operations217 204 13 6 
Intermodal167 154 13 8 
Equipment82 80 2 3 
Casualty74 101 (27)(27)
Property taxes103 98 5 5 
Other56 148 (92)(62)
Land sales(13)(67)54 (81)
Total Purchased services and other$935 $932 $3 — 

Purchased services and other expense was $935 million in the first nine months of 2022, an increase of $3 million from $932 million in the same period of 2021. This increase was primarily due to:
•a gain on the exchange of property and construction easements in Chicago of $50 million in 2021;
•cost inflation;
•higher casualty costs,expenses primarily due to higher rolling stock costs associated with major incidents;events and sponsorship costs;
38

•increased purchased services due to harsher weather conditions, reported in Track and operations;
•a $7 million arbitration settlement in 2021, reported in Track and operations;
•the unfavorable impact of the change in FX of $7 million; and
•higher intermodal expenses related to pickup and delivery, and terminal costs, reported in Intermodal;Intermodal.
lower gains on fewer land sales; and
higher right of way maintenance and dismantling costs, reported in Track and operations.

This increase was partially offset byby:
•lower acquisition-related costs of $90 million associated with the favourable impact of the change in FX of $5 million and fewer engine overhauls,KCS acquisition, reported in Equipment.Other;

•lower expenses primarily due to the reduced severity of casualty incidents; and
•lower expenses from lower volumes, reported in Intermodal, and Track and operations.

Other Income Statement Items



2017 vs. 2016
For the nine months ended September 30 (in millions)2017
2016(1)

Total Change% Change
Support and facilities$201
$200
$1
1
Track and operations193
184
9
5
Intermodal144
132
12
9
Equipment120
122
(2)(2)
Casualty55
49
6
12
Property taxes95
88
7
8
Other9
(25)34
(136)
Land sales(5)(60)55
(92)
Total Purchased services and other$812
$690
$122
18
(1)
Certain comparative figures have been revised to conform with current presentation.

Purchased servicesEquity Earnings of Kansas City Southern

In the third quarter of 2022, the Company recognized $221 million (U.S. $169 million) equity income of KCS in the Company's Interim Consolidated Statements of Income. This amount is net of amortization of basis differences of $42 million (U.S. $32 million) associated with KCS purchase accounting and other expensenet of acquisition-related costs incurred by KCS. No similar equity income existed in the same period of 2021 as CP acquired KCS into trust on December 14, 2021.

On a historical basis, without any effect of purchase accounting, KCS recorded net income attributable to controlling interests of $263 million (U.S. $201 million) in the third quarter of 2022, a favourable change of $66 million (U.S. $45 million), or 34%, from a $197 million (U.S. $156 million) net Income. This change was $812primarily due to higher revenues of $180 million (U.S. $138 million) and lower acquisition-related costs, partially offset by higher fuel cost of $56 million (U.S. $43 million). Acquisition-related costs (net of tax) incurred by KCS in the third quarter of 2022 were $12 million (U.S. $10 million), a decrease of $23 million (U.S. $18 million), or 66%, from $35 million (U.S. $28 million) in the same period of 2021. These values have been translated at the average FX rate of $1.31 and $1.26 CAD per USD for the three months ended September 30, 2022 and 2021, respectively.

In the first nine months of 2022, the Company recognized $627 million (U.S. $489 million) equity income of KCS in the Company's Interim Consolidated Statements of Income. This amount is net of amortization of basis differences of $121 million (U.S. $94 million) associated with KCS purchase accounting and net of acquisition-related costs incurred by KCS.

On a historical basis, without any effect of purchase accounting, KCS recorded net income attributable to controlling interests of $748 million (U.S. $583 million) in the first nine months of 2017, an increase2022, a favourable change of $122$835 million (U.S. $653 million), or 18%961%, from $690a $87 million (U.S. $70 million) net loss. This change was primarily due to lower acquisition-related costs, including the merger termination fee paid to CP in the same period of 2016. This increase was primarily due to:
lower gains on land sales2021, and higher revenues of $55 million;
the gain on sale$393 million (U.S. $306 million), partially offset by higher fuel cost of surplus freight cars in 2016$145 million (U.S. $113 million). Acquisition-related costs (net of $17 million, reported in Other;
an adjustment reducing discontinuance liabilities for certain branch lines in 2016, reported in Other;
higher right of way maintenance and dismantling costs, reported in Track and operations;
higher third-party snow removal services, reported in Track and operations;
higher expenses related to pickup and delivery services, reported in Intermodal;
higher property taxes due to tax rate increases; and
higher casualty costs, primarily due to higher rolling stock costs associated with major incidents.





Table of Contents


As part of optimizing its assets, the Company may identify and dispose of property used or formerly used in operating activities. The Company includes as part of operating expenses the gains and losses that arise on disposal of such long-lived assets. The following disposals have impacted Purchased services and other during the comparative periods:
in the second quarter of 2016, the Company disposed of 1,000 surplus freight cars that had reached or were nearing the end of their useful life, in a non-monetary exchange for new freight cars. The Company recognized a gain on sale of $17 million from the transaction and the sale did not impact cash from investing activities; and
tax) incurred by KCS in the first quarternine months of 2016,2022 were $39 million (U.S. $30 million), a decrease of $727 million (U.S. $583 million), or 95%, from $766 million (U.S. $613 million) in the Company completedsame period of 2021. These values have been translated at the saleaverage FX rate of CP’s Arbutus Corridor to$1.28 and $1.25 CAD per USD for the Cityfirst nine months of Vancouver for gross proceeds of $55 million2022 and a gain on sale of $50 million. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor.2021, respectively.

Other Income Statement ItemsExpense

Other Income and Charges

Other income and chargesexpense consists of gains and losses from the change in FX on long-term debt and lease liabilities and working capital, various costs related to financing, activities, shareholder costs, equity income, and other non-operating expenditures. Other income and chargesexpense was a gain of $105$7 million in the third quarter of 2017,2022, a decrease of $117 million, or 94%, compared to another expense of $71$124 million in the same period of 2016, a change of $176 million, or 248%.2021. This changedecrease was primarily due to the favourable impactacquisition-related costs of $83 million in 2021 which included losses on interest rate hedges of $111 million, bridge facility fees of $2 million, and gains on FX hedges of $30 million. In addition, an FX translation loss of $105$46 million on U.S. dollar-denominated debt duringwas incurred in the third quarter of 2017,2021 compared to nil in the same period of 2022 as a result of the designation of all U.S. dollar-denominated debt and lease liabilities as a net investment hedge following the KCS acquisition in the fourth quarter of 2021. This decrease was partially offset by higher FX losses on cash and working capital of $9 million in the third quarter of 2022 as compared to the unfavourable impactsame period in 2021.

Other expense was $13 million in the first nine months of FX translation2022, a decrease of $46$240 million, or 95%, from $253 million in the same period of 2016,2021. This decrease was primarily due to acquisition-related costs of $295 million in 2021 which included losses on interest rate hedges of $261 million, bridge facility and a legal settlement chargebackstop revolver fees of $25$47 million, and gains on FX hedges of $13 million. This decrease was partially offset by an FX translation gain of $39 million in the third quarterfirst nine months of 2016. These items2021 compared to nil in the same period of 2022 as a result of the designation of all U.S. dollar-denominated debt and lease liabilities as discussed above, and higher FX losses on cash and working capital of $10 million in the nine months ended September 30, 2022 as compared to the same period in 2021.

FX translation gains and losses on debt and lease liabilities are discussed further in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Other income


39

Merger Termination Fee

On May 21, 2021, KCS terminated the Original Merger Agreement with CP to enter into a definitive agreement with Canadian National Railway. At the same time and charges wasin accordance with the terms of the Original Merger Agreement, KCS paid CP a gaintermination fee of $194$845 million (U.S. $700 million). This amount is reported as "Merger termination fee" in the firstCompany's Interim Consolidated Statements of Income for the nine months of 2017, compared to a gain of $119 millionended September 30, 2021. No similar items were received in the same period of 2016, a change2022.

Other Components of $75Net Periodic Benefit Recovery

Other components of net periodic benefit recovery is related to the Company's pension and other post-retirement and post-employment benefit plans. It includes interest cost on benefit obligations, expected return on fund assets, recognized net actuarial losses, and amortization of prior service costs. Other components of net periodic benefit recovery was $102 million and $304 million for the three and nine months ended September 30, 2022, an increase of $7 million or 63%.This change was primarily due to higher FX translation gains7%, and an increase of $47$18 million on U.S. dollar-denominated debt,or 6%, respectively, compared to the same periodperiods of 2016,2021. These increases were primarily due to decreases in recognized net actuarial losses of $14 million and a $10$42 million, insurance recovery of legal costs in 2017, compared to a legal settlement charge of $25 million in 2016. These favourable changes wererespectively, partially offset by a $13increases in the interest cost on benefit obligations of $7 million charge on the settlement and roll of the forward starting swaps in 2017.$23 million, respectively.

Net Interest Expense

Net interest expense includes interest on long-term debt and capitalfinance leases. Net interest expense was $115$166 million in the third quarter of 2017, a decrease2022, an increase of $1$62 million, or 1%60%, from $116$104 million in the same period of 2016.2021. This decreaseincrease was primarily due to interest of $65 million incurred on long-term debt and the U.S. $500 million term facility issued for the KCS acquisition, and higher interest on commercial paper of $5 million as a result of higher interest rates along with a higher average outstanding balance, partially offset by the favourable impact from the change in FX of $4$9 million partially offset by lower capitalized interest.related to repayment of maturing long-term debt.

Net interest expense was $357$486 million in the first nine months of 2017,2022, an increase of $2$171 million, or 1%54%, from $355$315 million in the same period of 2016.2021. This increase was primarily due to lower capitalized interest of $192 million incurred on long-term debt and the U.S. $500 million term facility issued for the KCS acquisition, and higher interest on commercial paper of $7 million as a result of higher interest rates along with a higher average outstanding balance, partially offset by the favourable impact from the change in FXimpacts of $4 million.$25 million related to repayment of maturing long-term debt and $13 million as a result of a lower effective interest rates.

Income Tax Expense

Income tax expense was $170$196 million in the third quarter of 2017,2022, an increase of $47$27 million, or 38%16%, from $123$169 million in the same period of 2016.2021. This increase was primarily due to higher taxable earnings partially offset by aand lower effective tax rate in 2017.recoveries on acquisition-related costs associated with the KCS acquisition.

Income tax expense was $456 million in the first nine months of 2017, an increase of $46 million, or 11%, from $410 million in the same period of 2016. This increase was due to higher taxable earnings, partially offset by a lower effective tax rate in 2017.by:

During the three months ended September 30, 2017, an Illinois state income tax rate increase was enacted and resulted in •a $3 million deferred tax expenserecovery of $12 million on the revaluation of deferred income tax balances as at January 1, 2017.2022 as a result of an Iowa state corporate tax rate decrease enacted during the third quarter of 2022;

During the nine months ended September 30, 2017, the Company recorded a net•an outside basis deferred tax recovery arising from the difference between the carrying amount of $14CP's investment in KCS for financial reporting and the underlying tax basis of this investment; and
•a lower effective tax rate.

Income tax expense was $526 million relatedin the first nine months of 2022, a decrease of $91 million, or 15%, from $617 million in the same period of 2021. This decrease was primarily due to:
•higher taxable earnings in 2021 due to the revaluationmerger termination payment received in connection with KCS's termination of itsthe Original Merger Agreement of $845 million (U.S. $700 million);
•the deferred income tax balances as at January 1, 2017. recovery described above; and
•a lower effective tax rate.

This was due to legislation enacted in the second quarter to decrease the Saskatchewan provincial corporate income tax rate which resulted in a $17 million recovery,was partially offset by lower tax recoveries on acquisition-related costs associated with the $3 millionKCS acquisition, and an outside basis deferred tax expense described above.arising from the difference between the carrying amount of CP's investment in KCS for financial reporting and the underlying tax basis of this investment.

The effective tax rate in the third quarter and first nine months of 2017,2022, including equity earnings of KCS and other discrete items, was 24.95%18.01% and 18.97%, respectively, compared with 26.23%to 26.36% and 21.00% in the same periodperiods of 2016.2021. The effective tax rate in the third quarter and first nine months of 2017,2022, excluding discrete items, was 26.50%24.25% compared to 25.17% in 2016.

The effective tax rate in the first nine months of 2017, including discrete items was 24.28%, compared with 25.26% in24.60% for the same period of 2016. The effective tax rateperiods in the first nine months of 2017, excluding discrete items, was 26.50% compared to 26.50% in 2016.

2021.

The Company expects an annualized effective tax rate in 20172022 between 24.00% and 24.50%, which excludes equity earnings of approximately 26.50%.KCS and other discrete items. The Company’s 20172022 outlook for its annualized effective income 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. This is discussed further in Item 1A. Risk Factors of CP's 20162021 Annual Report on Form 10-K.
10-K.

40
Table of Contents


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 Contractual Commitments of this Item 2. 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, itscommercial paper program, bilateral lettersletter of credit facility,facilities, and its revolving credit facility. The Company believes that these sources as well as cash flow generated through operations and existing debt capacity are adequate to meet its short-term and long-term cash requirements. The Company is not aware of any material trends, events, or uncertainties that would create any deficiencies in the Company's liquidity.

As at September 30, 2017,2022, the Company had $142$138 million of Cash and cash equivalents U.S. $2.0 billion available under its revolving credit facility and upcompared to $286$69 million available under its letters of credit (Decemberat December 31, 2016 - $164 million of Cash and cash equivalents, U.S. $2.0 billion available under its revolving credit facility and up to $280 million available under its letters of credit).2021.

As at September 30, 2017,2022, the Company's U.S. $2.0 billionexisting revolving credit facility which includes a U.S. $1.0 billion five-year portion and U.S. $1.0 billion one-year plus one-year term-out portion, was undrawn, (Decemberunchanged from December 31, 2016 - undrawn). Effective June 23, 2017, the maturity date on the U.S $1.0 billion one-year plus one-year term-out portion was extended to June 27, 2019, and the maturity date on the2021, from a total available amount of U.S. $1.0 billion five-year portion was extended to June 28, 2022. The Company did not draw from its revolving credit facility during$1.3 billion. During the three and nine months ended September 30, 2017.2022, the Company repaid in full the outstanding borrowings of U.S. $400 million ($504 million) and U.S. $500 million ($636 million) respectively on the U.S. $500 million unsecured non-revolving term credit facility (the "term facility"). The facility was automatically terminated on September 15, 2022 following the final principal repayment. The revolving credit facility agreement requires the Company not to exceedmaintain a maximum debt to earnings before interest, tax, depreciation, and amortization ratio.financial covenant. As at September 30, 2017,2022, the Company was in compliance with all terms and conditions of the threshold stipulated in thiscredit 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. TheThis commercial paper program is backed by the U.S. $1.0 billion one-year plus one-year term-out portion of the revolving credit facility. As at September 30, 2017,2022, total commercial paper borrowings were $nil (DecemberU.S. $525 million, compared to U.S. $265 million as at December 31, 2016 - $nil).2021.

As at September 30, 2017,2022, under its bilateral lettersletter of credit facility,facilities, the Company had letters of credit drawn of $314$75 million, compared to $58 million as at December 31, 2021, from a total available amount of $600$300 million. This compares to letters of credit drawn of $320 million from a total available amount of $600 million as at December 31, 2016. Under the bilateral lettersletter of credit facility,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 lettersletter of credit issued. Collateral provided may include highly liquid investments purchased three months or less from maturity and is stated at cost, which approximates market value. As at September 30, 2017,2022 and December 31, 2021, the Company had nodid not have any collateral posted on its bilateral letter of credit facilities.

Contractual Commitments

The Company’s material cash requirements from known contractual obligations and commitments to make future payments primarily consist of long-term debt and related interest, future capital commitments, supplier purchases, leases, and other long term liabilities. Debt and finance leases, interest obligations related to debt and finance leases, and letters of credit facility (December 31, 2016 - $nil).amount to $1,237 million, $656 million and $75 million within the next 12 months, respectively, with the remaining amount committed thereafter of $19,513 million, $14,044 million and nil, respectively. Future capital commitments amount to $356 million within the next 12 months, with the remaining amount committed thereafter of $144 million.

The following discussionSupplier purchase agreements, operating leases, and other long-term liabilities amount to $943 million, $74 million, and $56 million within the next 12 months, respectively, with the remaining amount committed thereafter of operating, investing$548 million, $231 million and financing activities describes$402 million, respectively. Other long-term liabilities include expected cash payments for environmental remediation, post-retirement benefits, worker’s compensation benefits, long-term disability benefits, pension benefit payments for the Company’s indicators of liquiditynon-registered supplemental pension plan, and capital resources.

Operating Activities

Cash provided by operating activities was $527 millioncertain other long-term liabilities. Pension payments are discussed further in the third quarter of 2017, a decrease of $64 million compared to $591 million in the same period of 2016. This decrease was primarily due to higher income taxes paid in 2017, partially offset by higher cash generating income.

Cash provided by operating activities was $1,449 million in the first nine months of 2017, an increase of $128 million from $1,321 million in the same period of 2016. This increase was primarily due to higher cash generating income and improvements in non-cash working capital.

Investing Activities

Cash used in investing activities was $306 million in the third quarter of 2017, an increase of $28 million compared to $278 million in the same period of 2016. This increase was primarily due to higher additions to properties compared to the same period in 2016.

Cash used in investing activities was $861 million in the first nine months of 2017, an increase of $44 million from $817 million in the same period of 2016. This increase was primarily due to lower proceeds from the sale of properties and other assets compared to the same period in 2016.

Financing Activities

Cash used in financing activities was $310 million in the third quarter of 2017, an increase of $6 million from $304 million in the same period of 2016. This increase was primarily due to the net issuance of commercial paper during the third quarter in 2016, partially offset by lower repurchases of CP common shares.

Cash used in financing activities was $597 million in the first nine months of 2017, a decrease of $438 million from $1,035 million in the same period of 2016. This decrease was primarily due to lower repurchases of CP common shares, partially offset by the net issuance of commercial paper during the first nine months of 2016 and the increase in dividends paid of $47 million.


Table of Contents


Interest Coverage Ratio

For the twelve months ended September 30, 2017, the Company’s interest coverage ratio was 6.1, compared with 5.4 for the twelve months ended September 30, 2016. This increase was primarily due to a year over year increase in Earnings before interest and taxes ("EBIT").

Excluding significant items from EBIT, Adjusted interest coverage ratio was 5.7 for the twelve months ended September 30, 2017, compared with 5.3 for the twelve months ended September 30, 2016. This increase was primarily due to a year over year increase in Adjusted EBIT. Interest coverage ratio, Adjusted interest coverage ratio, and EBIT are defined and reconciled in Non-GAAP MeasuresCritical Accounting Estimates of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Guarantees

The Company accrues for all guarantees that it expects to pay. As at September 30, 2022, these accruals amounted to $5 million (December 31, 2021 - $14 million).

Operating Activities

Cash provided by operating activities was $1,102 million in the third quarter of 2022, an increase of $554 million, or 101%, compared to $548 million in the same period of 2021. This increase was primarily due to a dividend received of $259 million from KCS in the third quarter of 2022, the favourable change in working capital, and an increase in cash generating income compared to the same period of 2021.

Cash provided by operating activities was $2,422 million in the first nine months of 2022, a decrease of $662 million, or 21%, compared to $3,084 million in the same period of 2021. The decrease for the first nine months was primarily due to lower cash generating income as a result of the $845 million merger termination fee received from KCS in the second quarter of 2021 and an unfavourable change in working capital driven by acquisition-related payables in 2021, offset by dividends of $593 million received from KCS in 2022.


41

Investing Activities

Cash used in investing activities was $410 million in the third quarter of 2022, a decrease of $1,719 million, or 81%, compared to $2,129 million in the same period of 2021. This decrease was primarily due to merger payments of $1,773 million ( U.S. $1,400 million) made to KCS in September 2021, partially offset by higher capital additions.

Cash used in investing activities was $978 million in the first nine months of 2022, a decrease of $1,842 million, or 65%, compared to $2,820 million in the same period of 2021. The decrease for the first nine months of 2022 compared to the same periods of 2021 was primarily due to merger payments of $1,773 million (U.S.$1,400) made to KCS in September 2021 and lower capital additions, partially offset by lower proceeds from the sale of properties and other assets.

Free Cash

CP generated positive Free cash of $721 million in the third quarter of 2022, an increase of $518 million, or 255%, from $203 million in the same period of 2021. The increase was due to an increase in Cash provided by operating activities, partially offset by higher capital additions during the third quarter of 2022 compared to the same period of 2021. For the first nine months of 2022, CP generated positive Free cash of $1,514 million, an increase of $269 million, or 22%, from $1,245 million in the same period of 2021. The increase was due to an increase in Cash provided by operating activities and lower capital additions during the first nine months of 2022 compared to the same periods of 2021.

Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's capital programs. Free cash is defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financing Activities

Cash used in financing activities was $721 million in the third quarter of 2022, a change of $1,623 million, or 180%, compared to cash provided by financing activities of $902 million in the same period of 2021. This change was primarily due to the net repayment of commercial paper of $42 million in the third quarter of 2022 compared to a net issuance of $713 million in the third quarter of 2021, principal repayments of $504 million (U.S. $400 million) on a term loan during the third quarter of 2022 compared to borrowings under term loan of $633 million (U.S. $500 million) in the third quarter of 2021, and higher dividends paid as a result of a higher number of shares outstanding associated with the shares issued to acquire KCS in the fourth quarter of 2021. This change was partially offset by repayments on long term debt of $7 million during the three months ended September 30, 2022 compared to $318 million during the same period of 2021.

Cash used in financing activities was $1,409 million in the first nine months of 2022, an increase of $1,215 million, or 626%, compared to $194 million in the same period of 2021. This increase was primarily due to principal repayments of $636 million (U.S. $500 million) on a term loan compared to borrowings under term loan of $633 million (U.S. $500 million) in 2021, principal repayments of $125 million of the Company's 5.100% 10-year Medium Term Notes and $313 million (U.S. $250 million) of the Company's 4.500% 10-year Notes at maturity in January 2022, principal repayment of $97 million (U.S. $76 million) of the Company's 6.99% Finance lease at maturity in March 2022, and higher dividends paid as a result of a higher number of shares outstanding associated with the shares issued to acquire KCS in the fourth quarter of 2021. This increase was partially offset by a net issuance of commercial paper of $298 million during the nine months ended September 30, 2022 compared to net repayments of $66 million during the first nine months of 2021, and repayment of long-term debt of $349 million during the first nine months of 2021.

Credit Measures

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

A mid-investmentstrong 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 September 30, 2017,2022, CP's credit ratings from Standard & Poor's Rating Services ("Standard & Poor's"), and Moody's Investor Service ("Moody's"), and Dominion Bond Rating Service Limited ("DBRS") remain unchanged from December 31, 2016. However, during the second quarter of 2017, Moody's changed the outlook on CP's Senior unsecured debt to stable from negative.2021.
42

Credit ratings as at September 30, 20172022(1)
Long-term debtOutlook
Standard & Poor's
Long-term corporate creditBBB+stable
Senior secured debtAstable
Senior unsecured debtBBB+stable
Moody's
Senior unsecured debtBaa1Baa2stable
DBRS
Unsecured debenturesBBBstable
Medium-term notesBBBstable
$1 billion Commercial paper program
Standard & Poor'sA-2N/A
Moody'sP-2N/A
DBRSR-2 (middle)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.

Financial Ratios

The Long-term debt to Net income ratio for the twelve months ended September 30, 2022 and September 30, 2021 was 7.4 and 3.2, respectively. This increase was primarily due to a higher debt balance in connection with the KCS acquisition and lower net income for the twelve months ended September 30, 2022.

The Adjusted net debt to Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) ratio for the twelve months ended September 30, 20172022 and September 30, 20162021 was 2.74.3 and 3.0,2.4, respectively. This decreaseincrease was primarily due to lower adjusted neta higher debt forbalance in connection with the twelve months ended September 30, 2017 as a result of the repayment of commercial paper outstanding as at September 30, 2016.KCS acquisition, partially offset by higher Adjusted EBITDA. The Adjusted net debt to Adjusted EBITDA ratio is a Non-GAAP measure, which is defined and reconciled from the Long-term debt to Net income ratio, the most comparable measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA ratio for the trailing twelve month ended September 30, 2022 was 4.1. This increase from the Adjusted net debt to Adjusted EBITDA ratio in the same period of 2021 was primarily due to a higher debt balance in connection with the KCS acquisition, partially offset by higher Pro-forma adjusted EBITDA. Beginning in the first quarter of 2022, CP added disclosure of Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA Ratio to better align with CP’s debt covenant calculation, which takes into account the trailing twelve month adjusted EBITDA of KCS as well as KCS’s outstanding debt. Please see Non-GAAP Measures of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion. Over the long term, CP targets an Adjusted net debt to Adjusted EBITDA ratio of 2.0 to 2.5.



TableAlthough 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 Contents


Free Cash

significant value. In recent years, CP generated positive Free cash of $214 millionhas recognized acquisition-related costs, the merger termination payment received, changes in the third quarteroutside basis tax difference between the carrying amount of 2017,CP's equity investment in KCS and its tax basis of the investment, changes in income tax rates, and a decrease of $101 million from positive Free cash of $315 million in the same period of 2016. This decrease was primarily due to a decrease in cash provided by operating activities as well as an increase in cash used in investing activities compared to the same period of 2016. For the first nine months of 2017, CP generated positive Free cash of $575 million, an increase of $87 million from positive Free cash of $488 million in the same period of 2016. This increase was primarily duechange to an increaseuncertain tax item. Acquisition-related costs include legal, consulting, financing fees, integration planning costs consisting of third-party services and system migration, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction and integration costs (net of tax) incurred by KCS which were recognized within the Equity loss of KCS). KCS has also recognized significant transaction costs and FX gains and losses. 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 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 cash provided by operating activities slightly offset by an increase in cash used in investing activities compared to the same period of 2016.

Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's additions to properties. Capital additions were $319 million in the third quarter of 2017, $25 million higher than in the same period of 2016. In the first nine months of 2017, capital additions were $895 million, $7 million lower than in the same period of 2016. Free cash is defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations for further discussion.

Supplemental Guarantor Financial Information

Canadian Pacific Railway Company (“CPRC”), a 100%-owned subsidiary of CPRL, is the issuer of certain securities which are fully and unconditionally guaranteed by CPRL on an unsecured basis. The definitionother subsidiaries of Free cash has been revisedCPRC do not guarantee the securities and are referred to excludebelow as the deduction“Non-Guarantor Subsidiaries”. The following is a description of dividends paid. the terms and conditions of the guarantees with respect to securities for which CPRC is the issuer and CPRL provides a full and unconditional guarantee.
43


As a resultof the date of the filing of the Form 10-Q,CPRC had U.S. $12,050 million principal amount of debt securities outstanding due through 2115, and U.S. $30 million and GBP £3 million in perpetual 4% consolidated debenture stock, for all of which CPRL is the guarantor subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. As of the same date, CPRC also had $3,300 million principal amount of debt securities issued under Canadian securities law due through 2050 for which CPRL is the guarantor and not subject to the Exchange Act.

CPRL fully and unconditionally guarantees the payment of the principal (and premium, if any) and interest on the debt securities and consolidated debenture stock issued by CPRC, any sinking fund or analogous payments payable with respect to such securities, and any additional amounts payable when they become due, whether at maturity or otherwise. The guarantee is CPRL’s unsubordinated and unsecured obligation and ranks equally with all of CPRL’s other unsecured, unsubordinated obligations.

CPRL will be released and relieved of its obligations under the guarantees after obligations to the holders are satisfied in accordance with the terms of the respective instruments.

Pursuant to Rule 13-01 of the SEC's Regulation S-X, the Company provides summarized financial and non-financial information of CPRC in lieu of providing separate financial statements of CPRC.

More information on the securities under this guarantee structure can be found in Exhibit 22.1 List of Issuers and Guarantor Subsidiaries of this change, Free cash was increased by $75 millionquarterly report.

Summarized Financial Information

The following tables present summarized financial information for CPRC (Subsidiary Issuer) and $182 millionCPRL (Parent Guarantor) on a combined basis after elimination of (i) intercompany transactions and balances among CPRC and CPRL; (ii) equity in earnings from and investments in the Non-Guarantor Subsidiaries; and (iii) intercompany dividend income.

Statements of Income
CPRC (Subsidiary Issuer) and
CPRL (Parent Guarantor)
(in millions of Canadian dollars)For the nine months ended September 30, 2022For the year ended December 31, 2021
Total revenues$4,566 $5,924 
Total operating expenses2,985 3,712 
Operating income(1)
1,581 2,212 
Less: Other(2)
192 (522)
Income before income tax expense1,389 2,734 
Net income$1,005 $2,548 
(1)Includes net lease costs incurred from non-guarantor subsidiaries for the three and nine months ended September 30, 2016,2022 and for the year ended December 31, 2021 of $323 million and $431 million, respectively.
(2)Includes Other expense, Merger termination fee, Other components of net periodic benefit recovery, and Net interest expense.

Balance Sheets

CPRC (Subsidiary Issuer) and
CPRL (Parent Guarantor)
(in millions of Canadian dollars)As at September 30, 2022As at December 31, 2021
Assets
Current assets$1,229 $963 
Properties11,590 11,342 
Other non-current assets2,865 2,536 
Liabilities
Current liabilities$2,397 $2,789 
Long-term debt19,334 18,574 
Other non-current liabilities3,108 3,008 

44

Excluded from the Income Statements and Balance Sheets above are the following significant intercompany transactions and balances that CPRC and CPRL have with the Non-Guarantor Subsidiaries:

Cash Transactions with Non-Guarantor Subsidiaries

CPRC (Subsidiary Issuer) and
CPRL (Parent Guarantor)
(in millions of Canadian dollars)For the nine months ended September 30, 2022For the year ended December 31, 2021
Dividend income from non-guarantor subsidiaries$126 $297 
Capital contributions to non-guarantor subsidiaries— (134)
Redemption of shares by non-guarantor subsidiaries115 1,370 
Balances with Non-Guarantor Subsidiaries

CPRC (Subsidiary Issuer) and
CPRL (Parent Guarantor)
(in millions of Canadian dollars)As at September 30, 2022As at December 31, 2021
Assets
Accounts receivable, intercompany$226 $344 
Short-term advances to affiliates2,680 2,859 
Long-term advances to affiliates7,714 7,616 
Liabilities
Accounts payable, intercompany$187 $212 
Short-term advances from affiliates2,633 2,777 
Long-term advances from affiliates89 82 

Share Capital

At October 16, 2017,25, 2022, the latest practicable date, there were 144,967,167930,123,568 Common Shares and no preferred shares issued and outstanding, which consists of 14,70315,288 holders of record of the Company's Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase CPthe Common Shares. Each option granted can be exercisedOptions issued prior to the share split described in the Executive Summary now each provide rights over five shares. For consistency, all number of options presented herein are shown on the basis of the number of shares subject to the options. On April 27, 2022, at the Annual and Special Meeting, the Company's shareholders approved an amendment to the MSOIP to increase the maximum number of shares available for oneissuance under the MSOIP, effective at and after April 27, 2022, by 20,000,000 Common Share.Shares. At October 16, 2017, 1.5 million25, 2022, 7,727,281 options were outstanding under the Company’s MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 1.5 million22,509,537 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 CP Common Shares. There are no outstanding options under the DSOP, which has 0.3 million1,700,000 options available to be issued in the future.

Non-GAAP Measures

The Company presents non-GAAPNon-GAAP measures and cash flow information 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-GAAPNon-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-GAAPNon-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-GAAPNon-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.

Adjusted


45

Non-GAAP Performance Measures

The Company uses adjusted earnings results including 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. Core adjusted income and Core adjusted diluted earnings per share are presented to provide financial statement users with additional transparency by isolating for the impact of KCS purchase accounting. KCS purchase accounting represents the amortization of basis differences, being the difference in value between the consideration paid to acquire KCS and the underlying carrying value of the net assets of KCS immediately prior to its acquisition by the Company. All assets subject to KCS purchase accounting contribute to income generation and will continue to amortize over their estimated useful lives. These non-GAAPNon-GAAP measures are presented in Financial Highlights and discussed further in other sections of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These non-GAAPNon-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.amount or provide improved comparability to past performance. 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, acquisition-related costs, the merger termination payment received, the foreign exchange ("FX") impact of translating the Company’s debt and lease liabilities (including borrowings under the credit facility), discrete tax items, changes in the outside basis tax difference between the carrying amount of CP's equity investment in KCS and its tax basis of this investment, changes in income tax rates, changes to an uncertain tax item, and certain items outside the control of management. Acquisition-related costs include legal, consulting, financing fees, integration planning costs consisting of third-party services and system migration, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction and integration costs incurred by KCS which were recognized within Equity earnings of Kansas City Southern in the Company's Interim Consolidated Statements of Income. 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-GAAPNon-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information.

In 2017,the first nine months of 2022, there were fivethree 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 third quarter, a deferred tax recovery of $12 million due to a decrease in the Iowa state tax rate that favourably impacted Diluted EPS by 1 cent;
•
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;

Table•a net deferred tax expense of Contents$8 million on changes in the outside basis difference of the equity investment in KCS that unfavourably impacted Diluted EPS by 1 cent as follows:

–in the third quarter, a deferred tax recovery of $9 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 1 cent;

–in the second quarter, a deferred tax expense of $49 million on changes in the outside basis difference of the equity investment in KCS that unfavourably impacted Diluted EPS by 5 cents; and
–in the first quarter, a deferred tax recovery of $32 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 3 cents; and
•acquisition-related costs of $96 million in connection with the KCS acquisition ($92 million after current tax recovery of $4 million), including costs of $57 million recognized in Purchased services and other, and $39 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 9 cents as follows:
–in the third quarter, acquisition-related costs of $30 million ($33 million after current tax expense of $3 million), including costs of $18 million recognized in Purchased services and other and $12 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 3 cents;
–in the second quarter, acquisition-related costs of $33 million ($29 million after current tax recovery of $4 million), including costs of $19 million recognized in Purchased services and other and $14 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 3 cents; and
–in the first quarter, acquisition-related costs of $33 million ($30 million after current tax recovery of $3 million), including costs of $20 million recognized in Purchased services and other and $13 million recognized in Equity earnings of KCS, that unfavourably impacted Diluted EPS by 3 cents.

•
during the course of the year, a net deferred tax recovery of $14 million as a result of the change in income tax rates as follows:
•
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 $200 million ($174 million after deferred tax) due to FX translation of the Company’s U.S. dollar-denominated debt as follows:
•
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 2016,2021, there were twofour significant items included in Net income as follows:
•in the fourth quarter, a deferred tax recovery of $33 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 5 cents;
•in the second quarter, the merger termination payment received of $845 million ($748 million after current taxes) in connection with KCS's termination of the Original Merger Agreement effective May 21, 2021 that favourably impacted Diluted EPS by $1.11;
•during the course of the year, acquisition-related costs of $599 million in connection with the KCS acquisition ($500 million after current tax recovery of $107 million net of deferred tax expense of $8 million), including costs of $183 million recognized in Purchased services and other, $169 million recognized in Equity loss of KCS, and $247 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 75 cents as follows:
–in the fourth quarter, acquisition-related costs of $157 million ($157 million after current tax recovery of $13 million net of deferred tax expense of $13 million), including costs of $36 million recognized in Purchased services and other, $169
46

million in Equity loss of KCS, and a $48 million recovery recognized in Other (income) expense, that unfavourably impacted Diluted EPS by 22 cents;
–in the third quarter, a $25acquisition-related costs of $98 million expense ($1880 million after current tax) related to a legal settlementtax recovery of $61 million net of deferred tax expense of $43 million), including costs of $15 million recognized in Purchased services and other and $83 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 12 cents;
–in the second quarter, acquisition-related costs of $308 million ($236 million after current taxes of $25 million and deferred taxes of $47 million), including costs of $99 million recognized in Purchased services and other and $209 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 35 cents; and
–in the first quarter, acquisition-related costs of $36 million ($27 million after current taxes of $8 million and deferred taxes of $1 million), including costs of $33 million recognized in Purchased services and other and $3 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 4 cents; and
•during the course of the year, a net non-cash gain of $79$7 million ($686 million after deferred tax) due to FX translation of the Company’s U.S. dollar-denominated debt and lease liabilities that favourably impacted Diluted EPS by 1 cent as follows:
–in the fourth quarter, a $74$32 million loss ($6428 million after deferred tax) that unfavourably impacted Diluted EPS by 434 cents;
–in the third quarter, a $46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 276 cents;
–in the second quarter, an $18a $52 million gain ($1645 million after deferred tax) that favourably impacted Diluted EPS by 107 cents; and
–in the first quarter, a $181$33 million gain ($15629 million after deferred tax) that favourably impacted Diluted EPS by $1.01.4 cents.

In the three months ended December 31, 2015,2020, there was onewere two significant itemitems included in Net income as follows:
in•a deferred tax recovery of $29 million due to a change relating to a tax return filing election for the fourth quarter, state of North Dakota that favourably impacted Diluted EPS by 5 cents; and
•a net$103 million non-cash loss of $115 million lossgain ($10090 million after deferred tax) due to FX translation of the Company’s U.S. dollar-denominated debt that unfavourablyfavourably impacted Diluted EPS by 6413 cents.

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-GAAPNon-GAAP measures presented in Financial Highlights and discussed further in other sections of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2017 and 2016:Operations:

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

For the three months ended September 30For the nine months ended September 30
(in millions)2017201620172016
Net income as reported$510
$347
$1,421
$1,215
Less significant items (pretax):



Management transition recovery—
—
51
—
Impact of FX translation on U.S. dollar-denominated debt105
(46)200
153
Charge on hedge roll and de-designation—
—
(13)—
Legal settlement charge—
(25)—
(25)
Insurance recovery of legal settlement—
—
10
—
Income tax rate change(3)—
14
—
Tax effect of adjustments(1)
14
(13)38
14
Adjusted income$422
$405
$1,197
$1,101
 Core adjusted income is calculated as Adjusted income less KCS purchase accounting.

For the three months ended September 30For the nine months ended September 30
(in millions of Canadian dollars)2022202120222021
Net income as reported$891 $472 $2,246 $2,320 
Less significant items (pre-tax):
Acquisition-related costs(30)(98)(96)(442)
Merger termination fee— — — 845 
Impact of FX translation (loss) gain on debt and lease liabilities— (46)— 39 
Add:
Tax effect of adjustments(1)
3 (24)(4)3 
Deferred tax (recovery) expense on the outside basis difference of the investment in KCS(9)— 8 — 
Income tax rate changes(12)— (12)— 
Adjusted income$903 $592 $2,334 $1,881 
Less: KCS purchase accounting(42)— (121)— 
Core adjusted income$945 $592 $2,455 $1,881 
(1)The tax effect of adjustments was calculated as the pretaxpre-tax effect of the adjustments multiplied by the effectiveapplicable tax rate for each of the above items of (6.73%) and 4.35% for the periods presented.three and nine months endedSeptember 30, 2022, respectively, and 16.88% and 0.68% for the three and nine months endedSeptember 30, 2021, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

47

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

Table of Contents



For the three months ended September 30For the nine months ended September 30

2017201620172016
Diluted earnings per share as reported$3.50
$2.34
$9.70
$8.02
Less significant items:



Management transition recovery—
—
0.35
—
Impact of FX translation on U.S. dollar-denominated debt0.72
(0.31)1.36
1.01
Charge on hedge roll and de-designation—
—
(0.09)—
Legal settlement charge—
(0.17)—
(0.16)
Insurance recovery of legal settlement—
—
0.07
—
Income tax rate change(0.02)—
0.10
—
Tax effect of adjustments(1)
0.10
(0.09)0.26
0.09
Adjusted diluted earnings per share$2.90
$2.73
$8.17
$7.26
 Core adjusted diluted earnings per share is calculated as Adjusted diluted earnings per share less KCS purchase accounting.

For the three months ended September 30For the nine months ended September 30
2022202120222021
Diluted earnings per share as reported$0.96 $0.70 $2.41 $3.46 
Less significant items (pre-tax):
Acquisition-related costs(0.03)(0.15)(0.10)(0.66)
Merger termination fee— — — 1.26 
Impact of FX translation (loss) gain on debt and lease liabilities— (0.07)— 0.06 
Add:
Tax effect of adjustments(1)
— (0.04)(0.01)0.01 
Deferred tax (recovery) expense on the outside basis difference of the investment in KCS(0.01)— 0.01 — 
Income tax rate changes(0.01)— (0.01)— 
Adjusted diluted earnings per share$0.97 $0.88 $2.50 $2.81 
Less: KCS purchase accounting(0.04)— (0.13)— 
Core adjusted diluted earnings per share$1.01 $0.88 $2.63 $2.81 
(1)The tax effect of adjustments was calculated as the pretaxpre-tax effect of the adjustments multiplied by the effectiveapplicable tax rate for each of the above items of (6.73%) and 4.35% for the periods presented.three and nine months endedSeptember 30, 2022, respectively, and 16.88% and 0.68% for the three and nine months endedSeptember 30, 2021, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

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

For the three months ended September 30For the nine months ended September 30

For the three months ended September 30For the nine months ended September 30
(in millions)
2017201620172016
(in millions of Canadian dollars)(in millions of Canadian dollars)2022202120222021
Operating income as reported$690
$657
$2,040
$1,861
Operating income as reported$937 $774 $2,340 $2,374 
Less significant item:

Less significant item:
Management transition recovery—
—
51
—
Acquisition-related costsAcquisition-related costs(18)(15)(57)(147)
Adjusted operating income$690
$657
$1,989
$1,861
Adjusted operating income$955 $789 $2,397 $2,521 

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


For the three months ended September 30For the nine months ended September 30For the three months ended September 30For the nine months ended September 30

20172016201720162022202120222021
Operating ratio as reported56.7%57.7%57.9 %59.5%Operating ratio as reported59.5 %60.2 %63.2 %60.1 %
Less significant item:

Less significant item:
Management transition recovery—%—%(1.0)%—%
Acquisition-related costsAcquisition-related costs0.8 %0.8 %0.9 %2.4 %
Adjusted operating ratio56.7%57.7%58.9 %59.5%Adjusted operating ratio58.7 %59.4 %62.3 %57.7 %

ROIC and Adjusted ROIC

Adjusted ROIC is calculated as OperatingAdjusted return divided by Adjusted average invested capital. Adjusted return is defined as Net income less Other income and charges,adjusted for interest expense, tax effected at the Company'sCompany’s adjusted annualized effective tax rate, on a rolling twelve-month basis, divided byand significant items in the Company’s Consolidated Financial Statements, tax effected at the applicable tax rate. Adjusted average invested capital is defined as the sum of Total shareholders'total Shareholders' equity, Long-term debt, and Long-term debt maturing within one year, and Short-term borrowing, as presented in the Company's Consolidated Financial Statements, each averaged between the beginning and ending balance over a rolling twelve-month period.trailing twelve month period, adjusted for the impact of significant items, tax effected at the applicable tax rate, on closing balances as part of this average. Adjusted ROIC excludes significant items reported in Operating income and Other income and charges in the Company's Consolidated Financial Statements, as these significant items are not considered indicative of future financial trends either by nature or amount. ROICamount, and excludes interest expense, net of tax, to incorporate returns on the Company’s overall capitalization. Adjusted ROIC are all-encompassingis a performance measuresmeasure that measuremeasures how productively the Company uses its long-term capital investments, representing critical indicators of good
48

operating and investment decisions made by management, and areis an important performance criteria in determining certain elements of the Company's long-term incentive plan. ROIC and Adjusted ROIC, arewhich is reconciled below from Return on average shareholders' equity, the most comparable measure calculated in accordance with GAAP, is also presented in Financial Highlights and discussed further in Results of Operations of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Table of Contents


Calculation of ROIC andReturn on average shareholders' equity
For the twelve months ended September 30
(in millions of Canadian dollars, except for percentages)20222021
Net income as reported$2,778 $3,122 
Average shareholders' equity$23,641 $8,524 
Return on average shareholders' equity11.8 %36.6 %

Reconciliation of Net income to Adjusted ROICreturn

For the twelve months ended September 30
(in millions, except for percentages)20172016
Operating income$2,757
$2,538
Less:



Other income and charges(120)(20)
Tax(1)
716
679

$2,161
$1,879
Average of total shareholders' equity, long-term debt, long-term debt maturing within one year and short-term borrowing13,623
13,109
ROIC15.9%14.3%
For the twelve months ended September 30
(in millions of Canadian dollars)20222021
Net income as reported$2,778 $3,122 
Add:
Net interest expense611 427 
Tax on interest(1)
(145)(104)
Significant items (pre-tax):
Acquisition-related costs253 442 
Merger termination fee— (845)
Impact of FX translation loss (gain) on debt and lease liabilities32 (142)
Tax on significant items(2)
(8)16 
Deferred tax recovery on the outside basis difference of the investment in KCS(25)— 
Income tax rate changes(12)(29)
Adjusted return$3,484 $2,887 
(1) Tax was calculated at the annualized effective tax rate of 24.89% for 2017 and 26.56% for 2016 for each of the above items for the periods presented.
 For the twelve months ended September 30
(in millions, except for percentages)20172016
Operating income$2,757
$2,538
Less significant item:



   Management transition recovery51
—
Adjusted operating income2,706
2,538
Less:



Other income and charges(120)(20)
Add significant items (pretax):



Charge on hedge roll and de-designation13
—
Legal settlement charge—
25
Insurance recovery of legal settlement(10)—
Impact of FX translation on U.S. dollar-denominated debt(126)(38)
Less:



  Tax(1)
708
680

$1,995
$1,865
Average of total shareholders' equity, long-term debt, long-term debt maturing within one year and short-term borrowing13,623
13,109
Adjusted ROIC14.6%14.2%
(1)Tax was calculated at the adjusted annualized effective tax rate of 26.18%23.73% and 24.34% for 2017the twelve months ended September 30, 2022 and 26.71%2021, respectively.
(2)Tax was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for 2016 for each of the above items of 2.97% and 2.57% for the periods presented.twelve months ended September 30, 2022 and 2021, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

Reconciliation of Average shareholders' equity to Adjusted average invested capital
For the twelve months ended September 30
(in millions of Canadian dollars)20222021
Average shareholders' equity$23,641 $8,524 
Average long-term debt, including long-term debt maturing within one year15,272 9,877 
$38,913 $18,401 
Less:
Significant items (pre-tax):
Acquisition-related costs(127)(221)
Merger termination fee— 423 
  Tax on significant items(1)
2 — 
Deferred tax recovery on the outside basis difference of the investment in KCS13 — 
Income tax rate changes6 15 
Adjusted average invested capital$39,019 $18,184 
(1) Tax was calculated at the pre-tax effect of the adjustment multiplied by the applicable tax rate of 1.71% and 0.51% for the twelve months ended September 30, 2022 and 2021, respectively. The applicable tax rate reflects the taxable jurisdiction and nature, being on account of capital or income, of the significant item.
49

Calculation of Adjusted ROIC

For the twelve months ended September 30
(in millions of Canadian dollars, except for percentages)20222021
Adjusted return$3,484 $2,887 
Adjusted average invested capital$39,019 $18,184 
Adjusted ROIC8.9 %15.9 %

Free Cash

Free cash is calculated as Cash provided by operating activities, less Cash used in investing activities, adjusted for changes in cashCash and cash equivalents balances resulting from FX fluctuations.fluctuations, the operating cash flow impacts of acquisition-related costs associated with the KCS transaction, the merger termination payment received related to KCS's termination of the Original Merger Agreement and the payment to KCS related to the KCS Acquisition. Free cash is a measure that management considers to be ana valuable indicator of liquidity. Free cash is useful to investors and other external users of the consolidated financial statementsCompany'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. Positive Free cash indicates the amount of cash available for reinvestment in the business, or cash that can be returned to investors throughsatisfy debt obligations and discretionary activities such as dividends, stockshare repurchase programs, debt retirements or a combinationand other strategic opportunities. The acquisition-related costs and the merger termination fee related to the KCS acquisition are not indicative of these. Conversely, negativeoperating trends and have been excluded from Free cash indicates the amountcash. The payment to KCS is not indicative of cash that must be raisedinvestment trends and has also been excluded from investors through new debt or equity issues, reduction in available cash balances or a combination of these.free cash. Free cash should be considered in addition to, rather than as a substitute for, Cash provided by operating activities. Free cash is presented in Financial Highlights and discussed further in Liquidity and Capital Resources of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Table of Contents


Reconciliation of Cash Provided by Operating Activities to Free Cash

For the three months ended September 30For the nine months ended September 30
For the three months ended September 30For the nine months ended September 30
(in millions)2017201620172016
(in millions of Canadian dollars)(in millions of Canadian dollars)2022202120222021
Cash provided by operating activities$527
$591
$1,449
$1,321
Cash provided by operating activities$1,102 $548 $2,422 $3,084 
Cash used in investing activities(306)(278)(861)(817)Cash used in investing activities(410)(2,129)(978)(2,820)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents(7)2
(13)(16)Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents13 10 21 6 
Free cash(1)
$214
$315
$575
$488
Less:Less:
Acquisition-related costsAcquisition-related costs(16)(1)(49)(47)
Merger termination feeMerger termination fee— — — 845 
Payment to Kansas City SouthernPayment to Kansas City Southern— (1,773)— (1,773)
Free cashFree cash$721 $203 $1,514 $1,245 
(1) The definition of Free cash has been revised to exclude the deduction of dividends paid. As a result of this change, Free cash was increased by $75 million and $182 million for the three and nine months ended September 30, 2016, respectively.
Foreign Exchange Adjusted % Change

FX Adjusted Variance

FX adjusted variance% 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.

50

FX adjusted variances% changes in revenues are discussedfurther used in calculating FX adjusted % change in freight revenue per carload and RTM. These items are presented in Operating Revenues and Operating Expenses of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FX adjusted % changes in revenues are as follows:

 For the three months ended September 30
(in millions of Canadian dollars)Reported 2022Reported 2021Variance
due to FX		FX Adjusted 2021FX Adjusted % Change
Freight revenues by line of business
Grain$391 $352 $7 $359 9 
Coal156 158 1 159 (2)
Potash170 113 2 115 48 
Fertilizers and sulphur81 72 1 73 11 
Forest products109 89 3 92 18 
Energy, chemicals and plastics360 392 7 399 (10)
Metals, minerals and consumer products246 196 5 201 22 
Automotive111 83 2 85 31 
Intermodal640 441 3 444 44 
Freight revenues2,2641,89631 1,92717 
Non-freight revenues48 46 — 46 4 
Total revenues$2,312 $1,942 $31 $1,973 17 

 For the nine months ended September 30
(in millions of Canadian dollars)Reported 2022Reported 2021Variance
due to FX		FX Adjusted 2021FX Adjusted % Change
Freight revenues by line of business
Grain$1,121 $1,244 $14 $1,258 (11)
Coal458 491 1 492 (7)
Potash445 348 4 352 26 
Fertilizers and sulphur244 227 4 231 6 
Forest products299 259 6 265 13 
Energy, chemicals and plastics1,010 1,149 14 1,163 (13)
Metals, minerals and consumer products655 535 10 545 20 
Automotive322 289 5 294 10 
Intermodal1,660 1,280 6 1,286 29 
Freight revenues6,2145,82264 5,8866 
Non-freight revenues138 133 1 134 3 
Total revenues$6,352 $5,955 $65 $6,020 6 

51

 For the three months ended September 30
(in millions)Reported 2017Reported 2016Variance
due to FX		FX Adjusted 2016FX Adjusted % Change
Freight revenues$1,547
$1,510
$(29)$1,481
4
Non-freight revenues48
44
—
44
9
Total revenues1,595
1,554
(29)1,525
5
Compensation and benefits256
294
(5)289
(11)
Fuel150
138
(4)134
12
Materials45
39
—
39
15
Equipment rents35
43
(1)42
(17)
Depreciation and amortization162
155
(2)153
6
Purchased services and other257
228
(5)223
15
Total operating expenses905
897
(17)880
3
Operating income$690
$657
$(12)$645
7

 For the nine months ended September 30
(in millions)Reported 2017Reported 2016Variance
due to FX		FX Adjusted 2016FX Adjusted % Change
Freight revenues$4,708
$4,464
$(29)$4,435
6
Non-freight revenues133
131
—
131
2
Total revenues4,841
4,595
(29)4,566
6
Compensation and benefits766
907
(4)903
(15)
Fuel480
394
(3)391
23
Materials142
133
(1)132
8
Equipment rents108
132
(1)131
(18)
Depreciation and amortization493
478
(1)477
3
Purchased services and other812
690
(5)685
19
Total operating expenses2,801
2,734
(15)2,719
3
Operating income$2,040
$1,861
$(14)$1,847
10


Table of Contents


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

EBIT is calculated as Operating income, less Other income and charges. Adjusted EBIT excludes significant items reportedFX adjusted % changes in operating expenses are presented in Operating income and Other income and charges. Adjusted EBITDA is calculated as Adjusted EBIT plus Depreciation and amortization, net periodic pension and other benefit cost other than current service costs, and operating lease expense.


For the twelve months ended September 30
(in millions)20172016
Net income as reported$1,805
$1,534
Add:



Net interest expense473
477
Income tax expense599
547
EBIT2,877
2,558
Less significant items (pretax):

Charge on hedge roll and de-designation(13)—
Management transition recovery51
—
Legal settlement charge—
(25)
Insurance recovery of legal settlement10
—
Impact of FX translation on U.S. dollar-denominated debt126
38
Adjusted EBIT2,703
2,545
Less:



Net periodic pension and other benefit cost other than current service costs243
141
Operating lease expense(107)(115)
Depreciation and amortization(655)(633)
Adjusted EBITDA$3,222
$3,152

Interest Coverage Ratio

Interest coverage ratio is measured, on a rolling twelve-month basis, as EBIT divided by Net interest expense. This ratio provides investors, analysts, and lenders with useful information on how the Company's debt servicing capabilities have changed, period over period and in comparison to the Company’s peers. Interest coverage ratio is discussed further in Liquidity and Capital ResourcesExpenses of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FX adjusted % changes in operating expenses are as follows:

 For the three months ended September 30
(in millions of Canadian dollars)Reported 2022Reported 2021Variance
due to FX		FX Adjusted 2021FX Adjusted % Change
Compensation and benefits$393 $381 $4 $385 2 
Fuel358 199 6 205 75 
Materials66 51 — 51 29 
Equipment rents33 31 1 32 3 
Depreciation and amortization213 203 2 205 4 
Purchased services and other312 303 4 307 2 
Total operating expenses$1,375 $1,168 $17 $1,185 16 

 For the nine months ended September 30
(in millions of Canadian dollars)Reported 2022Reported 2021Variance
due to FX		FX Adjusted 2021FX Adjusted % Change
Compensation and benefits$1,154 $1,165 $8 $1,173 (2)
Fuel1,001 623 12 635 58 
Materials191 164 1 165 16 
Equipment rents97 92 2 94 3 
Depreciation and amortization634 605 4 609 4 
Purchased services and other935 932 7 939 — 
Total operating expenses$4,012 $3,581 $34 $3,615 11 

Adjusted Net Debt to Adjusted EBITDA Ratio and Pro-forma adjusted Net Debt to Pro-forma adjusted EBITDA Ratio

Adjusted net debt to Adjusted earnings before interest, coveragetax, depreciation and amortization ("EBITDA") ratio is calculated as Adjusted EBITnet debt divided by Net interest expense. ByAdjusted 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 from operations, excluding significant itemsitems. The Adjusted net debt to Adjusted EBITDA ratio, which affect EBIT, Adjusted interest coverageis reconciled below from the Long-term debt to Net income ratio, assists managementthe most comparable measure calculated in comparing the Company's performance over various reporting periods on a consistent basis. Adjusted interest coverage ratioaccordance with GAAP, is also presented in Financial Highlights and discussed further in Liquidity and Capital ResourcesResults of Operations of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Beginning in the first quarter of 2022, CP added disclosure of Pro-forma adjusted net debt to Pro-forma adjusted EBITDA ratio to better align with CP’s debt covenant calculation, which incorporates the trailing twelve month adjusted EBITDA of KCS as well as KCS’s outstanding debt. CP is incorporating the trailing twelve month adjusted EBITDA of KCS on a pro-forma basis, as CP is not entitled to earnings prior to the acquisition date of December 14, 2021. CP does not control KCS while it is in the voting trust during review of our merger application by the STB, though CP is the beneficial owner of KCS’s outstanding shares and receives cash dividends from KCS. The adjustment to include the trailing twelve month EBITDA and KCS’s outstanding debt provides users of the financial statements with better insight into CP’s progress in achieving deleveraging commitments. KCS’s disclosed U.S. dollar financial values for the trailing twelve months ended September 30, 2022 were adjusted to Canadian dollars reflecting the FX rate for the appropriate period presented. We have not presented 2021 Pro-forma adjusted net debt to Pro-forma adjusted EBITDA as CP was not the beneficial owner of KCS’s shares as at September 30, 2021.

Calculation of Interest Coverage Ratio and Adjusted Interest CoverageLong-term Debt to Net Income Ratio

(in millions of Canadian dollars, except for ratios)20222021
Long-term debt including long-term debt maturing within one year as at September 30$20,575 $9,968 
Net income for the twelve months ended September 30$2,778 $3,122 
Long-term debt to Net income ratio7.4 3.2 



52


For the twelve months ended September 30
(in millions, except for ratios)20172016
EBIT$2,877
$2,558
Adjusted EBIT2,703
2,545
Net interest expense473
477
Interest coverage ratio6.1
5.4
Adjusted interest coverage ratio5.7
5.3

Reconciliation of Long-term Debt to Adjusted Net Debt toand Pro-forma Adjusted EBITDA RatioNet 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 net present value of operating leases, which is discounted by the Company’s effective interest rate for each of the periods presented,Company's Consolidated Balance Sheets, and Cash and cash equivalents. Adjusted net debt is used as a measure of debt and long-term obligations as part of the calculation of Adjusted Net Debt to adjustedAdjusted EBITDA.

(in millions of Canadian dollars)(1)
20222021
CP Long-term debt including long-term debt maturing within one year as at September 30$20,575 $9,968 
Add:
Pension plans deficit(2)
265 323 
Operating lease liabilities280 274 
Less:
Cash and cash equivalents138 210 
CP Adjusted net debt as at September 30$20,982 $10,355 
KCS's long-term debt including long-term debt maturing within one year as at September 30$5,183 N/A
Add:
KCS operating lease liabilities116N/A
Less:
KCS cash and cash equivalents225N/A
KCS Adjusted net debt as at September 305,074N/A
CP Adjusted net debt as at September 3020,982N/A
Pro-forma Adjusted net debt as at September 30$26,056 N/A
(1) KCS's amounts were translated at the September 30, 2022 period end FX rate of $1.37.
(2) Pension plans deficit is the total funded status of the Pension plans in deficit only.

Reconciliation of Net Income to EBIT, Adjusted EBIT and Adjusted EBITDA ratioand Pro-forma 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 expense. Adjusted EBITDA is calculated as Adjusted EBIT plus operating lease expense and Depreciation and amortization, less Other components of net debt divided byperiodic benefit recovery. Adjusted EBITDA is used as a measure of liquidity derived from operations, excluding significant items, as part of the calculation of Adjusted Net Debt to Adjusted EBITDA.

53

Table of Contents


For the twelve months ended September 30
(in millions of Canadian dollars)(1)
20222021
CP Net income as reported$2,778 $3,122 
Add:
Net interest expense611 427 
Income tax expense677 812 
EBIT4,066 4,361 
Less significant items (pre-tax):
Acquisition-related costs(253)(442)
Merger termination fee— 845 
Impact of FX translation (loss) gain on debt and lease liabilities(32)142 
Adjusted EBIT4,351 3,816 
Add:
Operating lease expense77 71 
Depreciation and amortization840 802 
Less:
Other components of net periodic benefit recovery405 371 
CP Adjusted EBITDA$4,863 $4,318 
Net income attributable to KCS and subsidiaries$1,497 N/A
Add:
KCS interest expense200 N/A
KCS income tax expense498 N/A
KCS EBIT2,195 N/A
Less significant item (pre-tax):
KCS merger income599 N/A
KCS Adjusted EBIT1,596 N/A
Add:
KCS total lease cost40 N/A
KCS depreciation and amortization491 N/A
KCS Adjusted EBITDA2,127 N/A
CP Adjusted EBITDA$4,863 N/A
Less:
Equity earnings of KCS(2)
486 N/A
Acquisition-related costs of KCS(3)
208 N/A
Pro-forma Adjusted EBITDA$6,296 N/A
The(1) KCS's amounts were translated at the quarterly average FX rate of $1.30, $1.28, $1.27, and $1.26 for Q3 2022, Q2 2022, Q1 2022, and Q4 2021, respectively.
(2) Equity earnings of KCS were part of CP's reported net income and therefore have been deducted in arriving to the Pro-forma Adjusted net debt toEBITDA.
(3) Acquisition-related costs of KCS have been adjusted EBITDA ratio is one of the key metrics used by credit rating agencies in assessing the Company's financial capacities and constraints and determining the credit rating of the Company. By excluding the impact of certain items that are not considered by management in developing a minimum threshold, Adjusted net debt toCP's Adjusted EBITDA ratio provides a metric that management usescalculation above, therefore have been deducted in arriving to evaluate the Company's financial discipline with respect to capital markets credit sensitivities from management's perspective and communicates it publicly with investors, analysts and credit rating agencies.Pro-forma Adjusted net debt to Adjusted EBITDA ratio is discussed further in Liquidity and Capital Resources of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.EBITDA.

Reconciliation of Long-term Debt to Adjusted Net Debt
(in millions)20172016
Long-term debt including long term debt maturing within one year as at September 30$8,133
$8,879
Less:

Pension plans in deficit(266)(292)
Net present value of operating leases(1)
(284)(352)
Cash and cash equivalents142
103
Adjusted net debt as at September 30$8,541
$9,420
(1) Operating leases were discounted at the Company’s effective interest rate for each of the periods presented.

Calculation of Adjusted Net Debt to Adjusted EBITDA Ratio and Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA Ratio

(in millions of Canadian dollars, except for ratios)20222021
Adjusted net debt as at September 30$20,982 $10,355 
Adjusted EBITDA for the twelve months ended September 30$4,863 $4,318 
Adjusted net debt to Adjusted EBITDA ratio4.3 2.4 

54

(in millions, except for ratios)20172016
Adjusted net debt as at September 30$8,541
$9,420
Adjusted EBITDA for the twelve months ended September 303,222
3,152
Adjusted net debt to Adjusted EBITDA ratio2.7
3.0

Off-Balance Sheet Arrangements

Guarantees

At September 30, 2017, the Company had residual value guarantees on operating lease commitments of $15 million, compared to $19 million at December 31, 2016. The maximum amount that could be payable under these and all of the Company’s other guarantees cannot be reasonably estimated due to the nature of certain guarantees. All or a portion of amounts paid under certain guarantees could be recoverable from other parties or through insurance. As at September 30, 2017, the fair value of these guarantees recognized as a liability was $11 million, compared to $5 million at December 31, 2016.

Contractual Commitments

The accompanying table indicates the Company’s obligations and commitments to make future payments for contracts, such as debt, capital lease and commercial arrangements, as at September 30, 2017.
Payments due by period (in millions)Total
2017
2018 & 2019
2020 & 2021
2022 & beyond
Contractual commitments









Interest on long-term debt and capital lease$11,322
$90
$833
$752
$9,647
Long-term debt8,067
7
1,199
414
6,447
Capital leases158
7
9
11
131
Operating lease(1)
369
24
124
80
141
Supplier purchase1,914
135
1,050
170
559
Other long-term liabilities(2)
472
26
108
102
236
Total contractual commitments$22,302
$289
$3,323
$1,529
$17,161
(in millions of Canadian dollars, except for ratios)20222021
Pro-forma adjusted net debt as at September 30$26,056 N/A
Pro-forma adjusted EBITDA for the twelve months ended September 30$6,296 N/A
Pro-forma adjusted net debt to Pro-forma adjusted EBITDA ratio4.1 N/A
(1) Residual value guarantees on certain leased equipment with a maximum exposure of $15 million are not included in the minimum payments shown above. Where management believes that CP will be required to make payments under these residual value guarantees, the fair value of these guarantees as at September 30, 2017 of $6 million has been recognized as a liability.
(2) Includes expected cash payments for restructuring, 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 2017 to 2026. 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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Table of Contents


Certain Other Financial Commitments

In addition to the financial commitments mentioned previously in Off-Balance Sheet Arrangements and Contractual Commitments of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 plant quality and renewing the franchise. As part of this commitment, CP has entered into contracts with suppliers to make various capital purchases related to track programs. Payments for these commitments are due in 2017 through 2020. 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 September 30, 2017.
Payments due by period (in millions)Total
2017
2018 & 2019
2020 & 2021
Certain other financial commitments    
Letters of credit$314
$314
$—
$—
Capital commitments316
181
122
13
Total certain other financial commitments$630
$495
$122
$13

Critical Accounting Estimates

To prepare consolidated financial statementsConsolidated 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 statementsConsolidated 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 legal and personal injury and other claims liabilities. Additional information concerning critical accounting estimates is supplemented in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's 2021 Annual Report on Form 10-K.

The development, selection and disclosure of these estimates, and this MD&A, have been reviewed by the Board of Directors’ Audit and Finance Committee, which is composed entirely of independent directors.

Pensions and Other Benefits

Pension Liabilities and Pension Assets

The Company included pension benefit liabilities of $256 million in "Pension and other benefit liabilities" (December 31, 2016 - $263 million) and $10 million (December 31, 2016 -$10 million) in "Accounts payable and accrued liabilities" on the Company’s Interim Consolidated Balance Sheets at September 30, 2017. The Company also included post-retirement benefits accruals of $381 million (December 31, 2016 - $383 million) in "Pension and other benefit liabilities" and $21 million (December 31, 2016 - $21 million) in "Accounts payable and accrued liabilities" on the Company’s Interim Consolidated Balance Sheets as at September 30, 2017.

The Company included pension benefit assets of $1,356 million in "Pension assets" on the Company’s Interim Consolidated Balance Sheets as at September 30, 2017, compared to $1,070 million as at December 31, 2016.

Pension Plan Contributions

The Company made contributions of $11 million to the defined benefit pension plans in the third quarter of 2017, compared with $4 million in the same period of 2016. In the first nine months of 2017, the Company made contributions of $35 million to the defined benefit pension plans, compared with $38 million in the same period of 2016. The Company’s main Canadian defined benefit pension plan accounts for 96% 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 $1,281 million of these voluntary prepayments to reduce its pension funding requirements in 2012–2016, leaving $469 million of the voluntary prepayments still available at September 30, 2017 to reduce CP’s pension funding requirements in the remainder of 2017 and future years. CP continues to have

Table of Contents


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 apply $42 million of the remaining voluntary prepayments against its 2017 pension funding requirements.

CP estimates its aggregate pension contributions, including its defined benefit and defined contribution plans, to be in the range of $50 million to $60 million in 2017, and in the range of $30 million to $80 million per year from 2018 to 2020. 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.

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 by 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 judgements and assumptions about a variety of key factors that are subject to future variability due to inherent uncertainties. These include the following:
Key AssumptionsAssessments
•
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 relaid 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.  When depreciable property is retired or otherwise disposed of in the normal course of business, the book value, less net salvage proceeds, is charged to accumulated depreciation and if different than the assumptions under the depreciation study could potentially result in adjusted depreciation expense over a period of years. For certain asset classes, the historical cost of the asset is separately recorded in the Company’s property records. This amount is retired from the property records upon retirement of the asset. For assets for which the historical cost cannot be separately identified the amount of the gross book value to be retired is estimated using either an indexation methodology, whereby the current replacement cost of the asset is indexed to the estimated year of installation for the asset, or a first-in, first-out approach, or statistical analysis is used to determine the age of the retired asset. CP uses indices that closely correlate to the principal costs of the assets.

There are a number of estimates inherent in the depreciation and retirement processes and as it is not possible to precisely estimate each of these variables until a group of property is completely retired, CP regularly monitors the estimated service lives of assets and the associated accumulated depreciation for each asset class to ensure depreciation rates are appropriate. If the recorded amounts of accumulated depreciation are greater or less than the amounts indicated by the depreciation studies then the excess or deficit is amortized as a component of depreciation expense over the remaining service lives of the applicable asset classes.

For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in the Company’s depreciation studies, CP records a gain or loss for the difference between net proceeds and net book value of the assets sold or retired. The accumulated depreciation to be retired includes asset specific accumulated depreciation, when known, and an appropriate portion of the accumulated depreciation recorded for the relevant asset class as a whole, calculated using a cost-based allocation.

Revisions to the estimated useful lives and net salvage projections constitute a change in accounting estimate and are addressed prospectively by amending depreciation rates. It is anticipated that there will be changes in the estimates of weighted average useful

Table of Contents


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 $6 million.

Deferred Income Taxes

A deferred income tax expense of $77 million was included in "Income tax expense" for the third quarter of 2017 compared to $50 million for the same period of 2016. For the first nine months of 2017, deferred income tax expense of $168 million was included in "Income tax expense" compared to $233 million the same period of 2016.

The increase in deferred income tax expense in the third quarter of 2017 was primarily due to a change in the estimated timing of recognition of certain temporary differences that correspondingly decreased current tax expense, and the $3 million tax expense in the third quarter on the revaluation of the deferred income tax balances as at January 1, 2017 for the increase to the Illinois state income tax rate.

The decrease in deferred income tax expense for the nine months ended September 30, 2017 was primarily due to a change in the estimated timing of recognition of certain temporary differences that correspondingly increased current tax expense, the deferred income tax recovery of $17 million in the second quarter partially offset by the $3 million tax expense in the third quarter on the revaluation of the deferred income tax balances as at January 1, 2017 for the decrease to the Saskatchewan provincial corporate income tax rate and the increase to the Illinois state income tax rate, respectively.

At September 30, 2017, deferred income tax liabilities of $3,695 million were recorded as a long-term liability and are composed largely of temporary differences related to accounting for properties, compared to $3,571 million as at December 31, 2016.

Legal and Personal Injury Liabilities

Provisions for incidents, claims and litigation charged to income, which were included in "Purchased services and other expense", amounted to $24 million in the third quarter of 2017 compared with $14 million included in "Purchased services and other expense" and $25 million in "Other charges", totalling $39 million for the same period of 2016. For the first nine months of 2017, these provisions amounted to $64 million compared with $72 million for the same period of 2016.

Forward-Looking InformationStatements

This MD&AManagement's Discussion and Analysis of Financial Condition and Results of Operations and Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of other relevant securities legislation. Theselegislation, including applicable securities laws in Canada (collectively referred to herein as "forward-looking statements"). 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 forecasts or targets 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 Quarterly Report on Form 10-Q includes forward-looking statements include,relating, but are not limited to, statements concerning the Company’s 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, statements regarding future payments including income taxes, statements regarding the Company's greenhouse gas ("GHG") emissions targets and pension contributions, and capital expenditures. Forward-looking information typically contains statements with words such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”, “plan”, “will”, “outlook”, “should” or similar words suggesting future outcomes. Toconcerning 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, due to unknown variables and uncertainty related to future results as described above under the heading "pending KCS business combination.

2017 Outlook" of
The forward-looking statements contained in this Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.

ReadersOperations and Quarterly Report on Form 10-Q are cautioned not to place undue reliancebased on forward-looking information because it is possible that CP will not achieve predictions, forecasts,current expectations, estimates, projections and other formsassumptions, having regard 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: changes in business strategies; 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; geopolitical conditions; applicable laws, regulations and government policies; the availability and cost of labour, services and infrastructure; the satisfaction by third parties of their obligations to the Company; and the anticipated impacts of the COVID-19 pandemic on the Company’s business, operating results, cash flows and/or financial condition. Although the Company believes the expectations, estimates, projections and assumptions reflected in the forward-looking information.statements presented herein are reasonable as of the date hereof, there can be no assurance that they will prove to be correct. Current conditions, economic conditionsand otherwise, render assumptions, although reasonable when made, subject to greater uncertainty. In addition, except as required

With respect to the pending KCS business combination, we can provide no assurance when or if the combination will be completed. Completion of the combination is subject to the receipt of final approval from the STB of the CP-KCS control application by law, CP undertakesDecember 31, 2023. There can be no obligation to update publiclyassurance of receipt of this final approval by December 31, 2023. Additionally, even if such final approval is received, there can be no guarantee of the successful integration of KCS or that the combined Company will realize the anticipated benefits of the business combination, whether financial, strategic or otherwise, revise any forward-looking information, whetherand this may be exacerbated by changes to the economic, political and global environment in which the merged company will operate.

Our GHG emissions targets are subject to a number of inherent risks, assumptions and uncertainties that include, but are not limited to, changes in carbon markets, evolving sustainability strategies and scientific or technological developments. Additionally, although our data underlying GHG emissions estimates have been internally vetted using accepted and relevant
55

scientific and technical methodologies, historical performance data may become outdated due to a variety of factors, including improvement in our data collection and measuring systems, activities such as joint ventures, mergers and acquisitions or divestitures, and industry-driven changes to methodologies. As a result of new information, future eventsthese and other factors, we may not achieve our stated targets.

Undue reliance should not be placed on forward-looking statements as actual results may differ materially from those expressed or otherwise.

implied by forward-looking statements. By itstheir nature, forward-looking information involvesstatements involve numerous assumptions, 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 inassociated 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; geopolitical instability; changes in laws, regulations and regulations,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; andtrade restrictions or other changes to international trade arrangements; climate change; 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 the governmental response to them, and technological changes.

changes; and the pandemic created by the outbreak of COVID-19 and its variants and resulting effects on economic conditions, the demand environment for logistics requirements and energy prices, restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and financial institutions, and disruptions to global supply chains. The foregoing list of factors is not exhaustive.

There are more specific factors that could cause actual results to differ materially from those described in the forward-looking statements contained in this MD&A.Management's Discussion and Analysis of Financial Condition and Results of Operations and Quarterly Report on Form 10-Q. These more specific factors are identified and discussed in Item 1A. Risk Factors of CP's 2016

Table of Contents


2021 Annual Report on Form 10-K.10-K. 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 Quarterly Report on Form 10-Q are made as of the date hereof. Except as required by 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 statements, whether as a result of new information, future events or otherwise.

56
Table of Contents


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to market risk during the three and nine months ended September 30, 2017 from the information provided in Item 7A. Quantitative and Qualitative Disclosure about Market Risk of CP's 2016 Annual Report on Form 10-K other than foreign exchange risk and share price impact on stock-based compensation discussed below:

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. In addition, equity earnings or losses of KCS 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, aAs at September 30, 2022, CP expects that every $0.01 weakening (or strengthening) of the Canadian dollar relative to the U.S. dollar, positively (or negatively) impacts Total revenues by approximately $25$35 million and(December 31, 2021 – approximately $30 million), negatively (or positively) impacts Operating expenses by approximately $20 million (December 31, 2021 – approximately $13 million.

million), and negatively (or positively) impacts Net interest expense by approximately $4 million (December 31, 2021 – approximately $3 million) on an annualized basis.

CP uses U.S. dollar-denominated debt and operating lease liabilities to hedge its net investment in U.S. operations. As at September 30, 2017,2022, the net investment in U.S. operations is lessgreater than the total U.S. denominated debt. Consequently, FX translation on the Company’s undesignatedCompany's unhedged net investment in U.S. dollar-denominated long-term debt causesoperations is recognized in Other comprehensive income. There is no additional impactsimpact on earnings in Other incomeexpense (income) related to the FX translation on the Company’s debt and charges. For further information, please refer to Item 8. Financial Statements and Supplementary Data, Note 17 Financial Instruments, in CP's 2016 Annual Report on Form 10-K.operating lease liabilities.

To manage thisits 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.

Subject to final approval by the STB, CP anticipates consummating a business combination with KCS at which time CP will also reassess its functional currency.

Share Price Impact on Stock-Based Compensation

ForBased on information available at September 30, 2022, for every $1.00 change in share price, stock-based compensation expense has a corresponding change of approximately $0.4$1.9 million to $0.5$2.0 million based on information available at September 30, 2017.(December 31, 2021 - approximately $1.5 million to $2.0 million). This excludes the impact of changes in share price relative to the S&P/TSX 60 Index, the S&P/TSX Capped Industrial Index, the S&P 1500 Road and Rail500 Industrials Index, and to Class I railways, which may trigger different performance share unit payouts. Share basedStock-based compensation may also be impacted by non-market performance conditions.


Additional information concerning stock-based compensation is included in Item 1. Financial Statements, Note 16 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. As at September 30, 2022, a hypothetical one percentage point change in interest rates on the Company's floating rate debt obligations outstanding is not material. 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 locks 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.

The fair value of the Company’s fixed rate debt may fluctuate with changes in market interest rates. A hypothetical one percentage point decrease in interest rates as of September 30, 2022 would result in an increase of approximately $1.4 billion to the fair value of the Company's debt as at September 30, 2022 (December 31, 2021 - approximately $2.3 billion). Fair values of CP’s fixed rate debt are estimated by considering the impact of the hypothetical interest rates on quoted market prices and current borrowing rates, but do not consider other factors that could impact actual results.

Information concerning market risks is supplemented in Item 1. Financial Statements, Note 13 Financial instruments.

57
Table of Contents


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2017,2022, an evaluation was carried out under the supervision of and with the participation of CP's management, including its 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 September 30, 2017,2022, to ensure that information required to be disclosed by the Company in reports that it files or submits 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.

Changes in Internal Control over Financial Reporting

During the third quarter of 2017,2022, 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.

58
Table of Contents


PART II

ITEM 1. LEGAL PROCEEDINGS

For further details refer to Item 1. Financial Statements, Note 13 Contingencies17 Contingencies.
.

SEC regulations require the disclosure of any proceeding under environmental laws to which a government authority is a party unless the registrant reasonably believes it will not result in sanctions over a certain threshold. The Company uses a threshold of U.S. $1 million for the purposes of determining proceedings requiring disclosure.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors from the information provided in Item 1A. Risk Factors of CP's 20162021 Annual Report on Form 10-K10-K.
other than the governmental legislation and regulation risk factor discussed below:

The Company is subject to significant governmental legislation and regulation over commercial, operating and environmental matters. The Company’s railway operations are subject to extensive federal laws, regulations and rules in both Canada and the U.S. Operations are subject to economic and safety regulations in Canada primarily by the Agency and Transport Canada. The Company’s U.S. operations are subject to economic and safety regulation by the Surface Transportation Board ("STB") and the Federal Railroad Administration ("FRA"). Various other regulators directly and indirectly affect the Company’s operations in areas such as health, safety, security, environmental and other matters. Additional economic regulation of the rail industry by these regulators or the Canadian and U.S. legislatures, whether under new or existing laws, including Bill C-49, if passed, which is described under the heading "Previous Developments" in Part I of this Quarterly Report on Form 10-Q, could have a significant negative impact on the Company’s ability to determine prices for rail services and result in a material adverse effect in the future on the Company’s financial position, results of operations, and liquidity in a particular year or quarter. This potential material adverse effect could also result in reduced capital spending on the Company’s rail network or in abandonment of lines.

The Company’s compliance with safety and security regulations may result in increased capital expenditures and operating costs. For example, compliance with the Rail Safety Improvement Act of 2008 will result in additional capital expenditures associated with the statutorily mandated implementation of Positive Train Control ("PTC"). In addition to increased capital expenditures, implementation of such regulations may result in reduced operational efficiency and service levels, as well as increased operating expenses.

The Company’s operations are subject to extensive federal, state, provincial and local environmental laws concerning, among other matters, emissions to the air, land and water and the handling of hazardous materials and wastes. Violation of these laws and regulations can result in significant fines and penalties as well as other potential impacts on CP’s operations. These laws can impose strict, and in some circumstances, joint and several liability on both current and former owners and on operators of facilities. Such environmental liabilities may also be raised by adjacent landowners or third parties. In addition, in operating a railway, it is possible that releases of hazardous materials during derailments or other accidents may occur that could cause harm to human health or to the environment. Costs of remediation, damages and changes in regulations could materially affect the Company’s operating results and reputation. The Company has been, and may in the future be, subject to allegations or findings to the effect that it has violated, or is strictly liable under, environmental laws or regulations. The Company currently has obligations at existing sites for investigation, remediation and monitoring, and will likely have obligations at other sites in the future. The actual costs associated with both current and long-term liabilities may vary from The Company’s estimates due to a number of factors including, but not limited to changes in: the content or interpretation of environmental laws and regulations; required remedial actions; technology associated with site investigation or remediation; and the involvement and financial viability of other parties that may be responsible for portions of those liabilities.


Table of Contents


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchase of Equity Securities

On May 10, 2017, CP announcedestablished a newshare repurchase program which is further described in Item 1. Financial Statements, Note 14 Shareholders' equity. This program expired on January 28, 2022 and upon expiry of this normal course issuer bid ("NCIB") to repurchase, for cancellation, up to 4,384,062 of its, the Company had not purchased any Common Shares which received Toronto Stock Exchange ("TSX") approval on May 10, 2017. The NCIB commenced on May 15, 2017 and will expire on May 14, 2018. During the third quarter of 2017, CP repurchased 1.1 million Common Shares in total for $225 million at a weighted average price of $196.46. The following table presents Common Shares repurchased during each month for the third quarter of 2017under this NCIB.
.
2017
Total Number of Shares Purchased(1)
Average Price Paid per Share(2)
Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1 to July 31528,500
193.73
528,500
3,172,662
August 1 to August 31521,200
191.46
521,200
2,651,462
September 1 to September 3095,700
193.20
95,700
2,555,762
Ending Balance1,145,400
196.46
1,145,400
N/A
(1) Includes brokerage fees.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5. OTHER INFORMATION

None.


59
Table of Contents


ITEM 6. EXHIBITS
ExhibitDescription

Compensation letter dated February 14, 2017, between the CompanyRestated Certificate and Nadeem VelaniArticles of Incorporation of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 10.199.2 to Canadian Pacific Railway Limited's Current ReportLimited’s Form 6-K filed with the Securities and Exchange Commission on October 22, 2015, File No. 001-01342).
Articles of Amendment to Restated Certificate and Articles of Incorporation of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 3.1 to Canadian Pacific Railway Limited’s Form 8-K filed with the Securities and Exchange Commission on February 21, 2017,May 5, 2021, File No. 001-01342).
Fourth Amending Agreement, datedBy-law No. 1, as amended, of June 23, 2017, amending the Credit Agreement, dated September 26, 2014, between Canadian Pacific Railway Company, as Borrower, Canadian Pacific Railway Limited as Covenantor, Royal Bank of Canada, as Administrative Agent, and the various Lenders party thereto (incorporated by reference to Exhibit 10.11 to Canadian Pacific Railway Limited's Current Report onLimited’s Form 8-K6-K filed with the Securities and Exchange Commission on June 27, 2017,May 22, 2009, File No. 001-01342).

By-law No. 2 of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 99.1 to Canadian Pacific Railway Limited’s Form 6-K filed with the Securities and Exchange Commission on March 13, 2015, File No. 001-01342).
General By-law, as amended, of Canadian Pacific Railway Company, a wholly owned subsidiary of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 2 to Canadian Pacific Railway Limited’s Form 6-K filed with the Securities and Exchange Commission on May 22, 2009, File No. 001-01342).
101.INS**Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH**Inline XBRL Taxonomy Extension Schema Document
101.CAL**Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**Inline XBRL Taxonomy Extension Label Linkbase Document
101.DEF**Inline XBRL Taxonomy Extension Definition Linkbase Document
101.PRE**Inline XBRL Taxonomy Extension Presentation Linkbase Document
The following financial information from Canadian Pacific Railway Limited’sLimited's Quarterly Report on Form 10-Q for the third quarter ended September 30, 2017,2022, formatted in Extensible Business Reporting Language (XBRL) includes: (i) the Interim Consolidated Statements of Income for the third quarters and first nine months ended September 30, 20172022 and 2016;2021; (ii) the Interim Consolidated Statements of Comprehensive Income for the third quarters and first nine months ended September 30, 20172022 and 2016;2021; (iii) the Interim Consolidated Balance Sheets at September 30, 2017,2022, and December 31, 2016;2021; (iv) the Interim Consolidated Statements of Cash Flows for the third quarters and first nine months ended September 30, 20172022 and 2016;2021; (v) the Interim Consolidated Statements of Changes in Shareholders’ Equity for the third quarters and first nine months ended September 30, 20172022 and 2016;2021; and (vi) the Notes to Interim Consolidated Financial Statements.
104*Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Management contract or compensatory arrangement
**Filed with this StatementQuarterly Report on Form 10-Q





60
Table of Contents


SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CANADIAN PACIFIC RAILWAY LIMITED
(Registrant)
By:/s/ NADEEM VELANI
Nadeem Velani
Executive Vice-President and
Chief Financial Officer
(Principal Financial Officer)

Dated:Date: October 17, 201726, 2022


69
61