SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Registrant’s Telephone Number, Including Area Code: (403) 319-7000

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.

ITEM 1. FINANCIAL STATEMENTS

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

INTERIM CONSOLIDATED BALANCE SHEETS AS AT

(unaudited)

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(unaudited)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

These unaudited interim consolidated financial statements of Canadian Pacific Railway Limited (“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 20172018 annual consolidated financial statements and notes included in CP's 20172018 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 20172018 annual consolidated financial statements, except for the newly adopted accounting policiespolicy discussed in Note 2.

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 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.

On January 1, 2018,2019, the Company adopted the new Accounting Standards Update ("ASU") 2014-09,2016-02, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, using842, Leases. Using the modified retrospective method. Comparativecumulative-effect adjustment transition approach, the Company recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Accordingly, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not recognize any adjustment to the opening balance of retained earnings upon adoption of ASC Topic 606. The Company expects the impact of adoption of this new standard to be immaterial to the Company’s net income on an ongoing basis.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, under FASB ASC Topic 815, Derivatives and Hedging. This improves 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 GAAP. The amendments require the entire change in the fair value of the hedging instrument to be recorded in Other comprehensive income for effective cash flow hedges. Consequently, any ineffective portion of the change in fair value will no longer be recorded to the Consolidated Statement of Income as it arises. While the amendments are effective for public entities beginning on January 1, 2019, early adoption is permitted and the Company early adopted this ASU effective January 1, 2018. Entities are required to apply the amendments in this update to hedging relationshipsadapted existing on the date of adoption, reflected as a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. Other amendments to presentationinternal controls and disclosure are applied prospectively. No significant cumulative-effect adjustment was required.

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,adoption of ASC 842 as a result of operating leases currently not recognized on the balance sheet. The Company does not anticipate a materialat January 1, 2019 is as follows:

There was no significant impact to Net income as a result oflessor accounting upon the adoption of this new standard and is currently evaluating disclosure requirements.ASC 842.

The following table disaggregates the Company’s revenues from contracts with customers by major source:

Contract liabilities represent payments received for performance obligations

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

The effective tax rates for the three and six months ended June 30, 2018, were 21.88% and 23.73%March 31, 2019 was 24.24%, respectively, compared to 22.31% and 23.90%25.92% for the same periodsperiod in 2017.2018.

For the three months ended June 30, 2018,March 31, 2019, the effective tax rate excluding the discrete item of the foreign exchange loss("FX") gain of $44$45 million on the Company's U.S. dollar-denominated debt and the $21 million tax recovery described above,lease liabilities, was 24.75%25.75%.

At June 30, 2018,March 31, 2019, the number of shares outstanding was 142.5139.8 million (June 30, 2017(March 31, 2018 - 146.1143.7 million).

    

Basic earnings per share have been calculated using net income for the period divided by the weighted-average number of shares outstanding during the period.

For the three and six months ended June 30, 2018,March 31, 2019, there were 0.1 million and 0.2 million options respectively, excluded from the computation of diluted earnings per share because their effects were not dilutive (three and six months ended June 30, 2017March 31, 2018 - 0.3 million and 0.40.2 million).

The Company has operating leases for rolling stock, buildings, vehicles, railway equipment, and roadway machines, and finance leases for rolling stock. CP has entered into rolling stock leases that are fully variable or contain both fixed and variable components. Variable components are dependent on the issuance,hours and miles that the Company settled a notional U.S. $500 million of forward starting floating-to-fixed interest rate swap agreements ("forward starting swaps") for a payment of U.S. $19 million ($24 million) (see Note 10). This payment was includedunderlying equipment has been used. Fixed term, short-term, and variable operating lease costs are recorded in cash provided by operating activities consistent with the location of the related hedged itemEquipment rents and Purchased services and other on the Company's Interim Consolidated StatementsIncome Statements. Components of Cash Flows.

The Company hasdetermines lease existence and classification at the lease inception date. Leases are identified when an agreement conveys the right to control identified property for a commercial paper program which enables itperiod of time in exchange for consideration. ROU assets represent our right to issue commercial paper upuse an underlying asset for the lease term and lease liabilities represent our obligation to a maximum aggregate principal amount of U.S. $1.0 billionmake lease payments arising from the lease. Operating leases are included in the form of unsecured promissory notes. The commercial paper is backed by the U.S. $1.0 billion revolving credit facility. As at June 30, 2018, the Company had total commercial paper borrowings of U.S. $45 million ($59 million), presented in “Long-term debt maturing within one year”Other assets, Accounts payable and accrued liabilities, and Other long-term liabilities on the Company's Interim Consolidated Balance Sheets as the Company had no intent to renew these borrowingsSheets. Finance leases are included in Properties, Long-term debt maturing within one year, and Long-term debt on a long-term basis (December 31, 2017 - $nil). The weighted-average interest rate on these borrowings was 2.27%.

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

All purchases were made in accordance with the NCIB at prevalent market prices plus brokerage fees, or such other prices that were 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 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 prices and, if not available, it is based on 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")FX and commodity) and volatility, depending on the type of derivative and the nature of the underlying risk. The Company uses inputs 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. All derivatives and long-term debt are classified as Level 2.

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt:

The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of principal and interest at estimated interest rates expected to be available to the Company at period end.

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 Company's 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.

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 the 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 majority of the Company’s U.S. dollar-denominated long-term debt has been designated as a hedge of the 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 effect of the net investment hedge recognized in “Other comprehensive income” for the three and six months ended June 30, 2018March 31, 2019 was an unrealized FX lossgain of $122$120 million and $273 million, respectively (three and six months ended June 30, 2017March 31, 2018 - unrealized FX gainloss of $116 million and $162 million, respectively)$151 million).

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, the Company 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 ongoing 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 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

During the three months ended June 30,second quarter of 2018, the Company settled a notional U.S. $500 million of forward starting swaps related to the U.S. $500 million 4.000% 10-year Notes issued in the same period. The fair value of these derivative instruments at the time of settlement was a loss of U.S. $19 million ($24 million). The changes in fair value offrom the forward starting swaps for the three and six months ended June 30,March 31, 2019 was $nil (three months ended March 31, 2018 was a- gain of $12 million and $31 million, respectively (three and six months ended June 30, 2017 - a loss of $14 million and $12 million, respectively)$19 million). This was recorded in "Accumulated other comprehensive loss”, net of tax, and is being reclassified to "Net interest expense" on the Interim Consolidated Statements of Income until the underlying hedged notes are repaid.

For the three and six months ended June 30, 2018,March 31, 2019, a net loss of $2 million and $5 million, respectively, related to settled forward starting swap hedges has been amortized to “Net interest expense” (three and six months ended June 30, 2017March 31, 2018 - a net loss of $2 million and $5 million, respectively)$3 million). The Company expects that during the next twelve months, an additional $9 million of net losses will be amortized to “Net interest expense”.

At June 30, 2018,March 31, 2019, the Company had several stock-based compensation plans, including stock option plans, various cash settled liability plans and an employee share purchase plan. These plans resulted in an expense for the three and six months ended June 30, 2018March 31, 2019 of $18$34 million and $32 million, respectively (three and six months ended June 30, 2017March 31, 2018 - an expense of $17 million and $5 million, respectively)$14 million).

Stock option plan

In the sixthree months ended June 30, 2018,March 31, 2019, under CP’s stock option plans, the Company issued 172,998 regular215,537 options at the weighted-average price of $231.50$271.84 per share, based on the closing price on the grant date.

Pursuant to the employee plan, these regular options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years.

Under the fair value method, the fair value of the stock options at the grant date was approximately $9$14 million. The weighted-average fair value assumptions were approximately:

Performance share unit plan

In the sixthree months ended June 30, 2018,March 31, 2019, the Company issued 124,976128,010 PSUs with a grant date fair value of approximately $29$34 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately three years after the grant date, contingent upon CP’s performance ("performance factor"). 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 is measured periodically until settlement, using either a lattice-based valuation model or a Monte Carlo simulation model.

The performance period for 127,431 PSUs issued in the sixthree months ended June 30, 2018March 31, 2019 is January 1, 20182019 to December 31, 2020. The2021, and the performance factors for these PSUs are Return on Invested Capital ("ROIC"), Total Shareholder Return ("TSR") compared to the S&P/TSX Capped Industrial index,60 Index, and TSR compared to S&P 1500 RoadClass I Railways. The performance factors for the remaining 579 PSUs are annual revenue for the fiscal year 2020, diluted EPS for the fiscal year 2020, and Rail index.share price appreciation.

The performance period for the PSUs issued in 20152016 was January 1, 20152016 to December 31, 2017.2018. The performance factors for these PSUs were Operating Ratio, ROIC, TSR compared to the S&P/TSX 60 index, and TSR compared to Class I railways. The resulting payout was 160%177% of the outstanding units multiplied by the Company's average share price that was calculated using the last 30 trading days preceding December 31, 2017.2018. In the first quarter of 2018,2019, payouts occurred on the total outstanding awards, including dividends reinvested, totalling $30totaling $54 million on 82,800117,228 outstanding awards.

Deferred share unit plan

In the sixthree months ended June 30, 2018,March 31, 2019, the Company granted 11,23613,179 DSUs with a grant date fair value of approximately $3 million. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated. An 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.

In the three months ended June 30, 2018,March 31, 2019, the Company made contributions of $11 million (three months ended June 30, 2017March 31, 2018 - $12 million) to its defined benefit pension plans. In the six months ended June 30, 2018, the Company made net contributions of $12$1 million, (six months ended June 30, 2017 - $24 million), to its defined benefit pension plans, which is net of a $10 million refund of plan surplus (six months ended June 30, 2017 - $nil).surplus) to its defined benefit pension plans. Net periodic benefit costs for defined benefit pension plans and other benefits recognized in the three and six months ended June 30,March 31, 2019 and 2018 included the following components:

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 June 30, 2018March 31, 2019 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s financial position or results of operations.

Legal proceedings related to Lac-Mégantic rail accident

On July 6, 2013, a train carrying petroleum crude oil operated by Montreal Maine and Atlantic Railway (“MMAR”) or a subsidiary, Montreal Maine & Atlantic Canada Co. (“MMAC” and collectively the “MMA Group”), derailed in Lac-Mégantic, Québec. The derailment occurred on a section of railway owned and operated by the MMA Group. The previous day, CP had interchanged the train to the MMA Group, and after the interchange, the MMA Group exclusively controlled the train.

the U.S. (the “Plans”). These Plans provide for the distribution of a fund of approximately $440 million amongst those claiming derailment damages.

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

The Province’s Action, the Class Action and the Promutuel Action have been consolidated and will proceed together through the litigation process in the Québec Superior Court. While each Action will remain a separate legal proceeding, there will be a trial to determine liability issues commencing mid-September 2019,2020, and subsequently, if necessary, a trial to determine damages issues.

At this stage of the proceedings, the risk of a finding of liabilityany potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, CP denies liability and is vigorously defending the above noted proceedings.

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.

The expense included in “Purchased services and other” for the three and six months ended June 30, 2018March 31, 2019 was $1 million and $2 million, respectively (three and six months ended June 30, 2017March 31, 2018 - $1 million and $2 million). Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities”. The total amount provided at June 30, 2018March 31, 2019 was $81 million (December 31, 20172018 - $78$82 million). Payments are expected to be made over 10 years through 2028.2029.

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.

Interim Condensed Consolidating Statements of Income

For the three months ended June 30, 2018March 31, 2019    

Interim Condensed Consolidating Statements of Income

For the three months ended June 30, 2017