Canadian Pacific Railway Annual Report 2014

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FY2014 Annual Report · Canadian Pacific Railway

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IT’S
SIMPLE.

CANADIAN PACIFIC ANNUAL REPORT | 2014

BEST
SERVICE.

LOWEST
COST.

The best service in the industry, with the lowest cost basis. That’s the CP story. Period.

This is not just about 2014’s record performance. Delivering the highest-quality service

at the lowest cost in the industry is our story every year. That objective has driven the

transformational change we’ve undergone over the past two-and-a-half years, and it

will continue to guide us as we convert that change into growth going forward.

CP ANNUAL REPORT | 2014

OPERATING RATIO IS
JUST A NUMBER.

We achieved a 64.7 operating ratio for the full year 2014. That’s excellent. We can

and likely will do better in the future, but operating ratio is just a number.

We are not in this business to set operating ratio records. We are in this business to

grow. The only meaningful way to do that is to serve customers better, at lower cost,

than the competition. Safely. That’s our focus.

CP ANNUAL REPORT | 2014

THE BEST SERVICE.
DEFINED.

While each customer has a unique mix of requirements, our deﬁnition of great

service is the same for every customer: Do what you say you’ll do. Very simple.

Do exactly what you say you’ll do, when you say you’ll do it, every time.

Notice that we said simple, not easy. If it were easy, everyone would be doing it.

We’re not perfect, but we know this: When you consistently deliver as promised,

customers will come to you, and stick with you. And so will smart shareholders.

CP ANNUAL REPORT | 2014

LOWEST COST.
NOT LOWEST PRICE.

When we say lowest cost, we don’t mean lowest price. Delivering faster, better,

more reliable service has value to our customers. We expect to be able to charge

a fair price for that value.

Our service is not a commodity. Our prices are competitive, but we will walk away

before we will compete solely on price. We are simply not interested in business

we can’t do at a fair proﬁt. We have already proven our commitment to that

philosophy. It will be our philosophy going forward.

CP ANNUAL REPORT | 2014

LOWEST COST MEANS
MORE FLEXIBILITY.

For CP, a lower cost basis does more than contribute to earnings. It gives us more

ﬂexibility. We can compete for business we couldn’t even consider a few years ago,

opening exciting new playing ﬁelds and expanding our options for driving the top

line. And with a lower breakeven point, we are more durable in a downturn.

A low-cost position also allows us to be more agile. If one business declines, we can

quickly re-purpose key assets or shift investments to serve other customers until it

cycles back.

CP ANNUAL REPORT | 2014

IT’S NOT ABOUT
THE PRICE OF CRUDE.

Our story is not about crude oil prices. Or the weather, or the economy, or any other

external force that’s on people’s minds at a given moment. We have built CP to thrive

and grow in all market conditions. When we deliver the highest levels of service at

the lowest cost, CP can weather any storm.

Remember that regardless of what’s going on in the world, goods need to be moved.

And when we execute our model, nobody, not even trucks, can move goods more

efﬁciently and more reliably than CP.

CP ANNUAL REPORT | 2014

WE ARE FOCUSED
ON GROWTH.

We have improved more rapidly, more profoundly, more dramatically, than any other

Class 1 railroad in history. But that’s old news now.

What excites us is growth. Serving our customers. Competing for business.

Excelling at the fundamentals. Getting up early every day and being the best we

can be as railroaders.

As we become more and more successful at taking our lower-cost, higher-quality rail

offering to market, we will grow. Then, everybody wins. Shareholders and customers,

company and employees, families and communities.

CP ANNUAL REPORT | 2014

SIMPLE.

BEST SERVICE. LOWEST COST.

If you remember nothing else from the 2014 CP Annual Report,

remember these two simple concepts. Because boiled down to its

essence, they have always been the CP story. And it is FAR from over.

CP ANNUAL REPORT | 2014

DEAR
SHAREHOLDERS:

$8.50. Our full-year operating ratio for 2014 was

64.7 per cent, a 520 basis-point improvement on

an adjusted basis.

But the CP story is not about last year’s numbers.

quality service opens high-value markets for us in

MAXIMIZING VALUE AND RETURNS

merchandise and intermodal segments, our low-cost

FOR OUR SHAREHOLDERS

base gives us new ﬂexibility in other segments to

proﬁtably balance price with volume and cash ﬂow.

CONFIDENCE IN THE PLAN

I know our investors are viewing the current low

crude prices with great concern. Many are seeing

an energy sector downturn as a major challenge

standing in the way of us achieving our 2018

goals. We remain conﬁdent in our plan.

As we pursue our growth objectives over the next

four years, we will also take every opportunity to

deliver value and investment returns to you, our

shareholders.

With an improved balance sheet we were able to

repurchase approximately 10.5 million shares in

2014, demonstrating our belief in the long-term

prospects of the company. We also entered into

a joint venture with a leading real estate ﬁrm in

We are not pinning our success as a railroad on

January of 2015 to assess, develop and implement

the energy sector. Ours is a solid, highly diverse

strategies for realizing maximum long-term

franchise, with a multitude of exciting growth

shareholder value from surplus land.

opportunities. And by investor standards, four

years is a long-term strategy. A lot can happen

NEXT: CONVERTING LEADERSHIP

CP is now an industry leader instead of an

during that time. When crude cycles back, we’re

INTO GROWTH

industry underachiever. We have solidiﬁed our

in a great position to beneﬁt, but we are not

company as a leading low-cost provider delivering

dependent on it.

premium quality service. Our story now is all

about converting those two important strengths

A SIMPLE FOCUS: LOWEST COST,

into growth.

BEST SERVICE.

We’re shifting our focus from cost control to

growth after transforming this company in record

time. We will always work to improve efﬁciency,

but we’ve turned the corner. This is the next

phase: Grow the business. I’m sure there will

NEW PLAN, NEW PRIORITY

Last fall, we announced our plan to reach an

aggressive set of goals for 2018, focused on

growing revenue, increasing EPS and generating

cash. We put out some big numbers – $10 billion

in full-year revenue, double our EPS, $6 billion in

cumulative cash ﬂow before dividends. The plan

There are plenty of opportunities left to lower

be challenges ahead, but I have no doubt that

our costs, and trust me, I’m sure you could still

we’re going to continue to achieve and surpass

ﬁnd a customer or two who are not thrilled with

our goals. I thank you for your conﬁdence and

our service. We’re going to keep getting better

continued support.

at this. We have gotten to where we are today

by improving cost and service simultaneously.

Anyone who knows me knows that the process

of uncovering opportunities to improve in both

Sincerely,

includes carefully managing capital to drive growth

areas will never end. That’s a given, not our story.

This is our story. Four simple words. Lowest cost,

best service. As a business, when you focus on

that, when you achieve that, consistently and

over time, everything else takes care of itself.

That’s what we’re going to do.

E. Hunter Harrison

Chief Executive Ofﬁcer

What we achieved in 2014 was powerful.
I’m not just talking about our record-
breaking results. In a little over two years,
we’ve succeeded in building CP into an
industry leader. We've become the railroad
I knew we could be the day I took this job.

at low incremental cost and continuing to improve

our operating ratio.

Our ﬁnancial results in 2014 were phenomenal.

In the fourth quarter, we grew revenues by

10 per cent while posting a sub-60 operating ratio,

proving our ability to manage costs while growing

the top line. Our full-year numbers were equally

We are going to invest in infrastructure to support

growth, including strategic siding extensions and

Centralized Trafﬁc Control (CTC) technology. Our

objective is to increase our network velocity, build

capacity and enhance our ability to operate safely

impressive – revenue hitting an all-time high of

as we grow.

$6.62 billion; reported earnings per share reached
$8.46, and adjusted EPS climbed 32 per cent to

We are going to assess new business opportunities

on a case-by-case basis. While our premium

CP ANNUAL REPORT | 2014

EXECUTIVE LEADERSHIP

E. HUNTER HARRISON

PETER EDWARDS

TONY MARQUIS

Chief Executive Ofﬁcer

KEITH CREEL

Vice-President, Human Resources
and Labour Relations

Senior Vice-President Operations,
Eastern Region

President and Chief Operating Ofﬁcer

PAUL A. GUTHRIE

LAIRD PITZ

GUIDO DE CICCIO

Senior Vice-President Operations,
Western Region

BART DEMOSKY

Executive Vice-President and
Chief Financial Ofﬁcer

Chief Legal Ofﬁcer and
Corporate Secretary

ROBERT JOHNSON

Senior Vice-President Operations,
Southern Region

Vice-President and Chief Risk Ofﬁcer

MICHAEL REDEKER

Vice-President and
Chief Information Ofﬁcer

SCOTT MACDONALD

Senior Vice-President Operations (System)

MARK WALLACE

Vice-President, Corporate Affairs
and Chief of Staff

2014
FINANCIALS

CP ANNUAL REPORT | 2014

TABLE OF CONTENTS

BUSINESS PROFILE
STRATEGY
FORWARD-LOOKING INFORMATION
ADDITIONAL INFORMATION
FINANCIAL HIGHLIGHTS

1.
2.
3.
4.
5.
6. OPERATING RESULTS
PERFORMANCE INDICATORS
7.
LINES OF BUSINESS
8.
9. OPERATING EXPENSES
10. OTHER INCOME STATEMENT ITEMS
11. QUARTERLY FINANCIAL DATA
12. FOURTH QUARTER SUMMARY
13. CHANGES IN ACCOUNTING POLICY
14. LIQUIDITY AND CAPITAL RESOURCES
15. NON-GAAP MEASURES
16. BALANCE SHEET
17. SHAREHOLDER RETURNS
18. FINANCIAL INSTRUMENTS
19. OFF-BALANCE SHEET ARRANGEMENTS
20. CONTRACTUAL COMMITMENTS
21. FUTURE TRENDS AND COMMITMENTS
22. BUSINESS RISKS
23. CRITICAL ACCOUNTING ESTIMATES
24. SYSTEMS, PROCEDURES AND CONTROLS
25. 2014 GUIDANCE UPDATES
26. GLOSSARY OF TERMS

20
20
21
22
22
24
26
27
33
36
36
37
39
39
42
47
48
49
52
52
52
55
61
64
65
65

This Management’s Discussion and Analysis (“MD&A”) is
provided in conjunction with the Consolidated Financial
Statements and related notes for the year ended
December 31, 2014 prepared in accordance with
accounting principles generally accepted in the United
States of America (“GAAP”). All information has been
prepared in accordance with GAAP, except as described in
Section 15, Non-GAAP Measures of this MD&A. Except
where otherwise indicated, all financial information
reflected herein is expressed in Canadian dollars.

February 23, 2015

In this MD&A, “our”, “us”, “we”, “CP”, “Canadian Pacific”
and “the Company” refer to 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. Other terms not
defined in the body of this MD&A are defined in Section 26,
Glossary of Terms.

Unless otherwise indicated, all comparisons of results for
2014 and 2013 are against the results for 2013 and 2012,
respectively. Unless otherwise indicated, all comparisons of
results for the fourth quarter of 2014 are against the results
for the fourth quarter of 2013.

1. BUSINESS PROFILE

Canadian Pacific Railway Limited, through its subsidiaries, operates a transcontinental railway in Canada and the United States (“U.S.”) and
provides logistics and supply chain expertise. CP provides rail and intermodal transportation services over a network of approximately 13,700 miles,
serving the principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia (“B.C.”), and the U.S. Northeast and
Midwest regions. Our railway feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend the
Company’s market reach east of Montreal in Canada, throughout the U.S. and into Mexico. The Company transports bulk commodities, merchandise
freight and intermodal traffic. Bulk commodities include Canadian grain, U.S. grain, coal, potash, and fertilizers and sulphur. Merchandise freight
consists of finished vehicles and automotive parts, chemicals and plastics, crude oil, forest products, and metals, minerals, and consumer products.
Intermodal traffic consists largely of high-value, time-sensitive retail goods in overseas containers that can be transported by train, ship and truck,
and in domestic containers and trailers that can be moved by train and truck.

2. STRATEGY

Canadian Pacific is driving change as it moves through its transformational journey to become the best railroad in North America, while creating
long-term value for shareholders. The Company is focused on providing customers with industry leading rail service; driving sustainable, profitable
growth; optimizing our assets; and reducing costs, while remaining a leader in rail safety.

Looking forward, CP is executing its strategic plan to become the lowest cost rail carrier centred on five key foundations, which are the Company’s
performance drivers.

Provide Service: Providing efficient and consistent transportation solutions for the Company’s customers. “Doing what we say we are going to
do” is what drives CP by providing a reliable product with a lower cost operating model. Centralized planning aligned with local execution is
bringing the Company closer to the customer and accelerating decision-making.

Control Costs: Controlling and removing unnecessary costs from the organization, eliminating bureaucracy and continuing to identify productivity
enhancements are the keys to success.

Optimize Assets: Through longer sidings, improved asset utilization, and increased train lengths, the Company is moving increased volumes with
fewer locomotives and cars while unlocking capacity for future growth potential.

Operate Safely: Each year, CP safely moves millions of carloads of freight across North America while ensuring the safety of our people and the
communities through which we operate. Safety is never to be compromised. Continuous research and development in state-of-the-art safety
technology and highly focused employees ensure our trains are built for safe, efficient operations across our network.

Develop People: CP recognizes that none of the other foundations can be achieved without its people. Every CP employee is a railroader and the
Company is shaping a new culture focused on a passion for service with integrity in everything it does. Coaching and mentoring managers into
becoming leaders will help drive CP forward.

3. FORWARD-LOOKING INFORMATION

This MD&A and Annual Report contains certain forward-looking statements within the meaning of the United States Private Securities Litigation
Reform Act of 1995 and other relevant securities legislation. These forward-looking statements include, but are not limited to, statements
concerning the Company’s defined benefit pension expectations for 2015 and through 2018, including our targeted revenues of $10 billion in 2018,
our expected cumulative cash flow before dividends of $6 billion and our expected diluted EPS of more than double 2014 diluted EPS, 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 and
pension contributions, and capital expenditures. Forward-looking information typically contains statements with words such as “anticipate”,
“believe”, “expect”, “plan” or similar words suggesting future outcomes.

Readers are cautioned not to place undue reliance on forward-looking information because it is possible that CP will not achieve predictions,
forecasts, projections and other forms of forward-looking information. Current economic conditions render assumptions, although reasonable when
made, subject to greater uncertainty. In addition, except as required by law, CP undertakes no obligation to update publicly or otherwise revise any
forward-looking information, whether as a result of new information, future events or otherwise.

By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, including but not limited to the
following factors: changes in business strategies; general North American and global economic, credit and business conditions; risks in 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; inflation; changes in laws and regulations, including regulation of rates; changes in
taxes and tax rates; potential increases in maintenance and operating costs; 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 on the financial position of pension plans and
investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes as well as
security threats and the governmental response to them, and technological changes.

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. These more specific factors are identified and discussed in Section 22, Business Risks and elsewhere in this MD&A. Other risks are
detailed from time to time in reports filed by CP with securities regulators in Canada and the United States.

Financial Assumptions

Financial expectations for 2015

The Company expects revenue growth to be 7-8%, operating ratio below 62% and adjusted earnings per share (“EPS”) growth to be 25% or
greater from 2014 annual Diluted EPS, excluding significant items, of $8.50, discussed further in Section 15, Non-GAAP Measures. Key assumptions
for full year 2015 financial expectations include:

▫ no assumption on share buybacks beyond current Normal Course Issuer Bid (“NCIB”) program expiring March 16, 2015;

▫ Canadian dollar to U.S. dollar exchange rate of $1.20;

▫ an income tax rate of 27.5%;

▫ defined benefit pension expense of approximately $45 million, compared to 2014 pension income of $52 million;

▫ capital expenditures of approximately $1.5 billion;

▫ average On Highway Diesel (“OHD”) price of U.S. $2.70;

▫ average WTI price of U.S. $46; and

▫ 140,000 crude carloads.

CP ANNUAL REPORT | 2014

Defined benefit pension expectations for 2015

Defined benefit pension contributions are currently estimated to be between $80 million and $90 million in 2015, and between $50 million and
$100 million in each year from 2016 to 2018. This contribution level reflects the Company’s intentions with respect to the rate at which CP applies
the voluntary prepayments made in previous years to reduce contribution requirements. Defined benefit pension expense for 2015 is expected to be
approximately $45 million. These pension contributions and pension expense estimates are based on a number of economic and demographic
assumptions and are sensitive to changes in the assumptions or to actual experience differing from the assumptions. Pensions are discussed further
in Section 23, Critical Accounting Estimates.

Financial expectations through 2018

CP is targeting to grow revenues to $10 billion in 2018. Over the 2015 to 2018 time frame, CP also expects to generate cumulative cash flow before
dividends, discussed further in Section 15, Non-GAAP Measures, of $6 billion and for Diluted EPS to more than double compared to 2014. Key
assumptions to reaching these goals include:

▫ annual capital spending in the range of $1.4 billion to $1.6 billion;

▫ average fuel cost of U.S. $3.50 per U.S. gallon;

▫ Canadian to U.S. dollar exchange rate of 1.10; and

▫ income tax rate of 27.5%.

Undue reliance should not be placed on these assumptions and other forward-looking information.

4. ADDITIONAL INFORMATION

Additional information, including the Company’s Consolidated Financial Statements, press releases and other required filing documents, are
available on SEDAR at www.sedar.com in Canada, on EDGAR at www.sec.gov in the U.S. and on the Company website at www.cpr.ca. Copies of
such documents, as well as the Company’s Notice of Intention to Make a NCIB, may be obtained by contacting the Corporate Secretary’s Office. The
aforementioned documents are issued and made available in accordance with legal requirements and are not incorporated by reference into this
MD&A.

5. FINANCIAL HIGHLIGHTS

For the year ended December 31
(in millions, except percentages and per share data)

Revenues
Operating income
Operating income, excluding significant items(1)
Net income

Basic earnings per share

Diluted earnings per share

Diluted earnings per share, excluding significant items(1)

Dividends declared per share

Return on capital employed (“ROCE”)(2)

Operating ratio

Operating ratio, excluding significant items(1)

Free cash(1)

Total assets at December 31

Total long-term financial liabilities at December 31(3)

2014

$ 6,620
2,339
2,335
1,476

8.54

8.46

8.50

2013

6,133
1,420
1,844
875

5.00

4.96

6.42

2012

5,695
949
1,309
484

2.82

2.79

4.34

1.4000

1.3500

14.9%

64.7%

725

16,640

5,746

9.5%

76.8%

69.9%

530

17,060

4,784

6.9%

83.3%

77.0%

14,727

4,735

8.50

6.42

8.46

4.96

2.79

4.34

64.7

83.3

76.8

64.7

69.9

77.0

2014 2013

2012

2014

2013

2012

2014 2013 2012

Diluted EPS ($)

Diluted EPS,
excluding significant items ($)(1)

Operating ratio (%)

Operating ratio, excluding
significant items (%)(1)

(1) These measures have no standardized meaning prescribed by GAAP and, therefore, unlikely to be comparable to similar measures of other companies. These earnings
measures and significant items are discussed further in Section 15, Non-GAAP Measures along with a reconciliation of free cash to GAAP cash position.

(2) ROCE is defined as earnings before interest and taxes (“EBIT”), divided by the average for the year of total assets, less current liabilities, as measured under GAAP
and it is discussed further in Section 15, Non-GAAP Measures.

(3) Total long-term financial liabilities excludes: deferred taxes of $2,773 million, $2,903 million and $2,092 million, and other non-financial long-term liabilities of
$1,100 million, $898 million and $1,573 million for the years 2014, 2013 and 2012 respectively.

CP ANNUAL REPORT | 2014

6. OPERATING RESULTS

Income

Operating income was $2,339 million in 2014, an increase of $919 million, or 65%, from $1,420 million in 2013. This increase was primarily due to:

▫ an asset impairment charge in 2013;

▫ higher volumes of traffic, as measured by revenue ton-miles (“RTMs”), generating higher freight revenue;

▫ efficiency savings generated from improved operating performance, asset utilization and insourcing of certain Information Technology (“IT”)

activities;

▫ lower pension expense;

▫ the favourable impact of the change in foreign exchange (“FX”); and

▫ lower casualty expense.

This increase in Operating income was partially offset by higher incentive and stock-based compensation resulting from improved corporate
performance and higher wage and benefit inflation.

Operating income was $1,420 million in 2013, an increase of $471 million, or 50%, from $949 million in 2012. This increase was primarily due to:

▫ efficiency savings generated from improved operating performance, asset utilization and insourcing of certain IT activities;

▫ increased volumes of traffic, as measured by RTMs, generating higher freight revenue;

▫ higher freight rates;

▫ the net impact of a strike in the second quarter of 2012;

▫ labour restructuring charges in 2012 and associated experience gains in 2013;

▫ lower management transition costs and a favourable litigation settlement related to management transition in 2013; and

▫ the favourable impact of the change in FX.

This increase was partially offset by:

▫ a higher asset impairment charge in 2013 due to the anticipated sale of a portion of Dakota, Minnesota & Eastern (“DM&E”) line west of Tracy,

Minnesota (“DM&E West”) compared to the impairment of various assets in 2012, discussed further in Section 9, Operating Expenses;

▫ higher volume variable expenses as a result of an increase in workload;

▫ higher incentive and stock-based compensation expenses;

▫ wage and benefit inflation; and

▫ higher depreciation and amortization expenses due to higher depreciable assets as a result of the Company’s capital program.

Net income was $1,476 million in 2014, an increase of $601 million, or 69%, from $875 million in 2013. This increase was primarily due to higher
Operating income, partially offset by an increase in Income tax expense.

Net income was $875 million in 2013, an increase of $391 million, or 81%, from $484 million in 2012. This increase was primarily due to higher
Operating income and a decrease in Other income and charges due to advisory fees related to shareholder matters in 2012 and was partially offset
by higher Income tax expenses due to the impact of higher earnings.

Diluted Earnings per Share

Diluted earnings per share was $8.46 in 2014, an increase of $3.50, or 71% from $4.96 in 2013. Excluding the two significant items totaling $0.04
per share, discussed further in Section 15, Non-GAAP Measures, Diluted EPS, excluding significant items, was $8.50 in 2014, an increase of $2.08,
or 32%, from $6.42 in 2013. These increases were primarily due to higher Net income and lower average outstanding shares due to the share
repurchase program.

Diluted EPS was $4.96 in 2013, an increase of $2.17, or 78% from $2.79 in 2012. Excluding the five significant items totaling $1.46 per share,
discussed further in Section 15, Non-GAAP Measures, Diluted EPS, excluding significant items, was $6.42 in 2013, an increase of $2.08, or 48%,
from $4.34 in 2012. These increases were primarily due to higher Net income.

Diluted EPS, excluding significant items, has no standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar
measures presented by other companies.

Operating Ratio

The operating ratio provides the percentage of revenues used to operate the railway, and is calculated as operating expenses divided by revenues. A
lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s operating ratio was 64.7% in 2014, a decrease
from 76.8% in 2013. This improvement was primarily due to an asset impairment charge in 2013, higher volumes of traffic generating higher freight
revenues, and efficiency savings; partially offset by higher incentive and stock-based compensation resulting from improved corporate performance,
and higher wage and benefit inflation.

The operating ratio, excluding significant items, discussed further in Section 15, Non-GAAP Measures, was 64.7% in 2014, a decrease from 69.9%
in 2013. This improvement was primarily due to higher volumes generating higher freight revenues and efficiency savings, partially offset by higher
incentive and stock-based compensation resulting from improved corporate performance, and higher wage and benefit inflation.

The operating ratio was 76.8% in 2013, a decrease from 83.3% in 2012. This improvement was primarily due to efficiency savings, increased
volumes of traffic and higher freight rates, partially offset by a higher asset impairment charge.

The operating ratio, excluding significant items, discussed further in Section 15, Non-GAAP Measures, was 69.9% in 2013, a decrease from 77.0%
in 2012. This improvement was primarily due to an increase in efficiency savings, increased volumes of traffic and higher freight rates.

Operating ratio, excluding significant items, has no standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar
measures presented by other companies.

Return on Capital Employed

The calculation of ROCE utilizes Earnings Before Interest and Taxes (“EBIT”) on a rolling twelve month basis. ROCE was 14.9% at December 31,
2014, compared with 9.5% in 2013. This improvement was primarily due to higher earnings. Excluding the significant items in 2014 and 2013 from
EBIT, Adjusted ROCE was 14.9% at December 31, 2014, compared with 12.4% in 2013. This improvement was primarily due to higher earnings.

ROCE was 9.5% at December 31, 2013, compared with 6.9% in 2012. This improvement was primarily due to higher earnings partially offset by a
higher asset impairment charge. Excluding the significant items in 2013 and 2012 from EBIT, Adjusted ROCE was 12.4% at December 31, 2013,
compared with 9.8% in 2012. This improvement was primarily due to higher earnings.

ROCE, Adjusted ROCE, EBIT and Adjusted EBIT and significant items are discussed further in Section 15, Non-GAAP Measures.

Impact of Foreign Exchange on Earnings

Fluctuations in foreign exchange 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.

Canadian to U.S. dollar
Average exchange rates

For the year ended – December 31
For the three months ended – December 31

Canadian to U.S. dollar
Exchange rates

Beginning of year – January 1
Beginning of quarter – April 1
Beginning of quarter – July 1
Beginning of quarter – October 1
End of quarter – December 31

Average Fuel Price

(U.S. dollars per U.S. gallon)

For the year ended – December 31
For the three months ended – December 31

2014

$ 1.10
$ 1.13

2014

$ 1.06
$ 1.11
$ 1.07
$ 1.12
$ 1.16

2014

$ 3.41
$ 3.11

$
$

$
$
$
$
$

$
$

2013

1.03
1.04

2013

0.99
1.02
1.05
1.03
1.06

2012

1.00
0.99

2012

1.02
1.00
1.02
0.98
0.99

$
$

$
$
$
$
$

2013

2012

3.47
3.51

$
$

3.45
3.47

CP ANNUAL REPORT | 2014

7. PERFORMANCE INDICATORS

For the year ended December 31(1)

Operations Performance

Freight gross ton-miles (“GTMs”) (millions)
Revenue ton-miles (“RTMs”) (millions)
Train miles (thousands)
Average train weight – excluding local traffic (tons)
Average train length – excluding local traffic (feet)
Average terminal dwell (hours)
Average train speed (mph)(2)
Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs)
Total employees (average)(3)
Workforce (end of period)

Safety Indicators

FRA personal injuries per 200,000 employee-hours
FRA train accidents per million train-miles

2014

2013

2012

273,276
149,849
36,625
8,046
6,683
8.7
18.1
1.03
14,575
14,698

267,629
144,249
37,817
7,573
6,530
7.1
18.4
1.06
15,011
14,977

254,354
135,032
40,270
6,709
5,981
7.5
N/A
1.15
16,999
16,907

1.67
1.26

1.71
1.80

1.56
1.69

% Change

2014
vs. 2013

2013
vs. 2012

2
4
(3)
6
2
23
(2)
(3)
(3)
(2)

(2)
(30)

5
7
(6)
13
9
(5)
N/A
(8)
(12)
(11)

10
7

(1) Certain prior period figures have been revised to conform with current presentation or have been updated to reflect new information.
(2) 2012 average train speed information not available for new reporting definition.
(3) 2012 average number of employees has been adjusted for a strike.

The indicators listed in this table are key measures of the Company’s operating performance. Definitions of these performance indicators are
provided in Section 26, Glossary of Terms.

Operations Performance

GTMs for 2014 were 273,276 million, a 2% increase compared with 267,629 million in 2013. This improvement was primarily due to higher
shipments in Canadian grain, Crude, Domestic intermodal, and Metals, minerals and consumer products.

RTMs for 2014 were 149,849 million, an increase of 4% compared with 144,249 million in 2013. RTMs are discussed further in Section 8, Lines of
Business.

Train miles for 2014 decreased by 3% compared with 2013, reflecting improvements in operating efficiency from longer, heavier trains.

Average train weight increased in 2014 by 473 tons, or 6%, from 2013. Average train length increased in 2014 by 153 feet, or 2%, from 2013.
Average train weight and length benefited significantly from improvements in operating plan efficiency and increased volumes of bulk traffic
conveyed in longer, heavier trains. Both of these improvements leverage the siding extensions completed in 2013 and 2014.

Average terminal dwell, the average time a freight car resides in a terminal, increased by 23% in 2014 to 8.7 hours from 7.1 hours in 2013. The
unfavourable increase was primarily due to operational challenges in the U.S. Midwest.

Average train speed was 18.1 miles per hour in 2014, a decrease of 2%, from 18.4 miles per hour in 2013. The unfavourable decrease was primarily
due to operational challenges in the U.S. Midwest. This decrease was partially offset by speed improvements in the fourth quarter of 2014 through
improved asset velocity, decreased terminal dwell, and successful execution of the Company’s operating plan.

Fuel efficiency improved by 3% in 2014 compared to 2013. This improvement is primarily due to the continued execution of the Company’s fuel
conservation strategy and increased locomotive productivity from higher average train weights.

The average number of total employees for 2014 decreased by 436, or 3%, compared with 2013. This improvement was primarily due to job
reductions as a result of continuing strong operational performance and natural attrition, partially offset by additional IT employees as part of the
Company’s insourcing strategy.

The workforce on December 31, 2014 decreased by 279, or 2%, compared with December 31, 2013. This improvement was primarily due to job
reductions as a result of continuing strong operational performance, natural attrition and fewer contractors.

Safety Indicators

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

The FRA personal injury rate per 200,000 employee-hours for CP was 1.67 in 2014, 1.71 in 2013 and 1.56 in 2012.

The FRA train accident rate for CP in 2014 was 1.26 accidents per million train-miles, compared with 1.80 in 2013 and 1.69 in 2012.

8. LINES OF BUSINESS

International
intermodal
9%

Domestic
intermodal
12%

Automotive
6%

Canadian Grain
15%

U.S. Grain
8%

Coal
10%

International
intermodal
11%

Domestic
intermodal
11%

Automotive
7%

Canadian Grain,
15%

U.S. Grain
7%

Coal
10%

Metals, minerals,
and consumer
products
11%

Crude
7%

Chemicals
and plastics
10%

Forest
products
3%

Potash
5%

Fertilizers
and sulphur
4%

Metals, minerals,
and consumer
products
10%

Crude
6%

Chemicals
and plastics
9%

Forest
products
3%

Potash
5%

Fertilizers
and sulphur
4%

2014 Freight Revenues

2013 Freight Revenues

Total Revenue, Volumes and Freight Rates

For the year ended December 31

Freight revenues (in millions)
Other revenues (in millions)

Total revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

6,464
156

6,620

2,684
149,849

2,408
4.31

2013

5,982
151

6,133

2,688
144,249

2,226
4.15

2012

5,550
145

5,695

2,669
135,032

2,079
4.11

% Change

2014
vs. 2013

2013
vs. 2012

8
3

–
4

8
4

1
7

7
1

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

For each of the twelve months ended December 31, 2014, 2013 and 2012, no customer comprised more than 10% of total revenues and accounts
receivable.

2014 TO 2013 COMPARATIVES

Freight Revenues

Freight revenues are earned from transporting bulk commodities, merchandise and intermodal goods, and include fuel recoveries billed to the
Company’s customers. Freight revenues were $6,464 million in 2014, an increase of $482 million, or 8% from $5,982 million in 2013. This increase
was primarily due to:
▫ higher volumes in Canadian grain, Domestic intermodal, Crude, and Metals, minerals and consumer products;
▫ higher freight rates; and
▫ the favourable impact of the change in FX.

This increase was partially offset by:
▫ lower shipments in International intermodal and Automotive, primarily due to the exit of certain customer contracts;
▫ lower Fertilizers and sulphur shipments primarily due to sulphur production shutdowns; and
▫ lower shipments in certain lines of business in the first half of the year due to the impact of harsh winter operating conditions.

CP ANNUAL REPORT | 2014

In 2014, RTMs, measuring the relative weight and distance of rail freight moved by the Company, increased by approximately 5,600 million, or 4%
compared to the same period of 2013. This increase was primarily due to higher:

▫ Canadian originating shipments of grain;

▫ volumes in energy related commodities and frac sand; and

▫ Domestic intermodal shipments.

This increase was partially offset by lower:

▫ International intermodal shipments;

▫ Fertilizers and sulphur shipments; and

▫ U.S. originating thermal coal shipments.

Fuel Cost Recovery Program

CP employs a fuel cost recovery program designed to automatically respond to fluctuations in fuel prices and help reduce volatility to changing fuel
prices. Fuel surcharge revenue is earned on individual shipments primarily based on OHD; as such, fuel surcharge revenue is a function of freight
volumes. Short-term volatility in fuel prices may adversely or positively impact expenses and revenues.

Canadian Grain

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

988

869

767

291
26,691

3,391
3.70

256
22,864

3,397
3.80

248
22,149

3,089
3.46

% Change

2014
vs. 2013

2013
vs. 2012

14
17

–
(3)

3
3

10
10

CP’s Canadian grain business consists of whole grains, oilseeds and grain products originating in the Canadian prairies, moving to export outlets on
the west and east coasts, as well as processors in Canada, U.S. and Mexico for domestic use. Canadian grain revenue was $988 million in 2014, an
increase of $119 million, or 14% from $869 million in 2013. This increase was primarily due to higher shipments as a result of strong export
demand and record Canadian crop production, partially offset by reduced freight rates.

U.S. Grain

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

503

431

405

173
11,724

2,909
4.29

182
11,119

2,359
3.87

185
10,933

2,188
3.70

% Change

2014
vs. 2013

2013
vs. 2012

(5)
5

23
11

(2)
2

8
5

CP’s U.S. grain traffic originates in key Midwest grain producing states and moves over multiple gateways within the U.S. for domestic use and to
export outlets in the Pacific Northwest, Northeast U.S. and Gulf of Mexico. U.S. Grain revenue was $503 million in 2014, an increase of $72 million,
or 17% from $431 million in 2013. This increase was primarily due to:

▫ higher freight rates;

▫ increased volume to the Pacific Northwest, which has a longer length of haul, in the second half of the year; and

▫ the favourable impact of the change in FX.

This increase was partially offset by the impact of harsh winter operating conditions in the first quarter of 2014.

Coal

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

621

627

602

313
22,443

1,985
2.77

330
23,172

1,904
2.71

337
22,375

1,787
2.69

% Change

2014
vs. 2013

2013
vs. 2012

(1)

(5)
(3)

4
2

(2)
4

7
1

CP serves both the metallurgical and thermal coal markets. The Company’s Canadian coal business consists primarily of metallurgical coal
transported from Southeastern B.C. to the ports of Vancouver, B.C. and Thunder Bay, Ontario. CP’s U.S. coal business consists primarily of the
transportation of thermal coal and petroleum coke within the U.S. Midwest or for export through west coast ports. Coal revenue was $621 million in
2014, a decrease of $6 million, or 1% from $627 million in 2013. This decrease was primarily due to lower shipments of U.S. originating thermal
coal, partially offset by higher Canadian originating shipments of metallurgical coal, and increased freight rates.

Potash

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

% Change

2014
vs. 2013

2013
vs. 2012

347

312

281

118
14,099

2,941
2.46

114
13,231

2,745
2.36

103
12,221

2,711
2.29

4
7

7
4

11
8

1
3

The potash transported by CP originates in Saskatchewan and is shipped to the ports of Vancouver, B.C. and Portland, Oregon, as well as to other
Canadian and U.S. destinations. Potash revenue was $347 million in 2014, an increase of $35 million, or 11% from $312 million in 2013. This
increase was primarily due to:

▫ the favourable impact of the change in FX;

▫ higher shipments, driven by export volumes in the second half of 2014 and higher domestic shipments in the first half of 2014; and

▫ higher freight rates.

This increase was partially offset by the impact of harsh winter operating conditions in the first quarter of 2014.

Fertilizers and Sulphur

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

234

258

239

61
4,180

$ 3,801
5.59

71
4,939

3,615
5.22

74
4,837

3,213
4.96

% Change

2014
vs. 2013

2013
vs. 2012

(9)

(14)
(15)

5
7

(4)
2

13
5

Fertilizers and sulphur include chemical fertilizers shipped mainly from western Canada to various North American locations, and sulphur originating
primarily in Alberta and moving to the Port Metro Vancouver, B.C. and a variety of U.S. and Canadian destinations. Fertilizers and sulphur revenue
was $234 million in 2014, a decrease of $24 million, or 9% from $258 million in 2013. This decrease was primarily due to lower shipments resulting
from weak demand and high inventory levels at destination, and a delayed return to full production of sulphur customer facilities. This decrease was
partially offset by the favourable impacts of the change in FX and higher freight rates.

CP ANNUAL REPORT | 2014

Forest Products

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

206

193

59
3,956

$ 3,493
5.20

66
4,619

3,132
4.46

67
4,713

2,895
4.11

% Change

2014
vs. 2013

2013
vs. 2012

–

(11)
(14)

12
17

(1)
(2)

8
9

Forest products include wood pulp, paper products, lumber, and panel transported from key producing areas in western Canada, Ontario and
Quebec to various destinations in North America. Forest products revenue was $206 million in 2014, unchanged from 2013. Increases within Forest
products were due to:

▫ strong lumber demand with existing customers;

▫ the favourable impact of the change in FX; and

▫ higher freight rates.

These increases were offset by the exit of certain lumber customer contracts in Western Canada and lower pulp and paper shipments due to
customer production issues.

Chemicals and Plastics

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

637

565

512

198
13,635

3,214
4.67

197
13,573

2,857
4.15

193
13,233

2,649
3.87

% Change

2014
vs. 2013

2013
vs. 2012

1
–

12
13

2
3

8
7

The Company’s chemicals and plastics business includes a wide range of commodities including petroleum products, chemicals, plastics, and liquid
petroleum gas (“LPG”) products that ship across the Company’s network. Chemicals and plastics revenue was $637 million in 2014, an increase of
$72 million, or 13% from $565 million in 2013. This increase was primarily due to:

▫ the favourable impact of the change in FX;

▫ higher freight rates; and

▫ an increase in volume from strong demand for liquefied petroleum gas, fuel oils, asphalt and plastics in the second half of 2014.

This increase was partially offset by lower shipments of biofuels in the first half of the year that resulted from supply chain issues.

Crude

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

484

375

206

110
16,312

4,419
2.97

90
13,898

4,144
2.70

54
7,303

3,828
2.80

% Change

2014
vs. 2013

2013
vs. 2012

22
17

7
10

67
90

8
(4)

The Company’s crude origination franchise is located throughout Alberta, Saskatchewan and North Dakota and moves crude over connections with
interline railroad partners to refining markets across North America. Crude revenue was $484 million in 2014, an increase of $109 million, or 29%
from $375 million in 2013. This increase was primarily due to:

▫ increased shipments from Western Canada and the Bakken region;

▫ the favourable impact of the change in FX; and

▫ higher freight rates.

Metals, Minerals and Consumer Products

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

% Change

2014
vs. 2013

2013
vs. 2012

712

608

550

253
11,266

2,814
6.32

232
10,404

2,655
5.90

222
9,933

2,482
5.55

9
8

6
7

5
5

7
6

CP’s metals, minerals and consumer products business is a diverse mix of input materials, such as aggregates, steel, consumer products and non-
ferrous metals which are shipped throughout North America. Metals, minerals and consumer products revenue was $712 million in 2014, an
increase of $104 million, or 17% from $608 million in 2013. This increase was primarily due to:

▫ higher volumes, primarily as a result of strong frac sand demand;

▫ the favourable impact of the change in FX; and

▫ higher freight rates.

Automotive

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

357

403

425

134
1,953

$ 2,670
18.26

146
2,329

2,758
17.27

162
2,482

2,629
17.13

% Change

2014
vs. 2013

2013
vs. 2012

(11)

(8)
(16)

(3)
6

(5)

(10)
(6)

5
1

CP’s automotive portfolio consists of four finished vehicle traffic segments: import vehicles that move through Port Metro Vancouver to Eastern
Canadian markets; Canadian-produced vehicles that ship to the U.S. from Ontario production facilities; U.S.-produced vehicles that ship within the
U.S. as well as cross-border into Canadian markets; and, Mexican-produced vehicles that ship to the U.S. and Canada. In addition to finished
vehicles, CP ships automotive parts, machinery and pre-owned vehicles. Automotive revenue was $357 million in 2014, a decrease of $46 million, or
11% from $403 million in 2013. This decrease was primarily due to:

▫ a volume decline resulting from operational challenges in the U.S. Midwest following harsh winter operating conditions;

▫ the exit of a customer contract; and

▫ a reduction in long haul import traffic.

This decrease was partially offset by the favourable impact of the change in FX.

CP ANNUAL REPORT | 2014

Domestic Intermodal

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

787

684

653

428
11,867

1,837
6.63

370
10,276

1,850
6.65

347
9,718

1,885
6.73

% Change

2014
vs. 2013

2013
vs. 2012

16
15

(1)
–

7
6

(2)
(1)

Domestic intermodal business primarily involves the distribution of container shipments from a broad spectrum of industries within North America.
Domestic intermodal revenue was $787 million in 2014, an increase of $103 million, or 15% from $684 million in 2013. This increase was primarily
due to higher volumes including short-haul expressway service between Toronto and Montreal.

International Intermodal

For the year ended December 31

Freight revenues (in millions)

Carloads (in thousands)
Revenue ton-miles (in millions)

Freight revenue per carload (dollars)
Freight revenue per revenue ton-mile (cents)

2014

2013

2012

588

644

717

546
11,723

1,077
5.02

634
13,825

1,016
4.66

677
15,135

1,058
4.73

% Change

2014
vs. 2013

2013
vs. 2012

(9)

(14)
(15)

6
8

(10)

(6)
(9)

(4)
(1)

International intermodal traffic involves the movement of ocean-carrier owned marine containers through North American ports to inland markets,
as well as export shipments of goods through those ports to Asia, Europe and beyond. International intermodal revenue was $588 million in 2014, a
decrease of $56 million, or 9% from $644 million in 2013. This decrease was due to lower volumes as a result of the exit of certain customer
contracts. This decrease was partially offset by:
▫ higher transcontinental container volumes from existing customers;
▫ higher freight rates; and
▫ the favourable impact of the change in FX.

Other Revenue

Other revenue was $156 million in 2014, an increase of $5 million, or 3% from $151 million in 2013. This increase was primarily due to higher
leasing revenues.

2013 TO 2012 COMPARATIVES

Revenue variances below compare 2013 to 2012 figures.

Freight Revenues

Freight revenues were $5,982 million in 2013, an increase of $432 million, or 8% from $5,550 million in 2012. This increase was primarily due to:
▫ higher shipments, as measured by RTMs, of Industrial and consumer products, Grain, Fertilizers and sulphur and Coal;
▫ increased freight rates;
▫ the favourable impact of the change in FX;
▫ the impact of a strike in 2012 on Canadian shipments; and
▫ higher fuel surcharge revenues due to an increase in traffic volumes with full margin coverage.

This increase was partially offset by lower shipments in Intermodal and Automotive and the impact of the network outages in the second quarter of
2013.

Other Revenue

Other revenue was $151 million in 2013, an increase of $6 million, or 4% from $145 million in 2012. This increase was primarily due to higher
leasing and interline switching revenues.

9. OPERATING EXPENSES

Purchased
services and
other, 23%

Depreciation and
amortization,
13%

Compensation
and benefits,
32%

Fuel, 24%

Equipment
rents,
4%

Materials,
5%

Asset
impairments,
9%

Purchased
services and
other, 21%

Compensation
and benefits,
29%

Fuel, 21%

Depreciation and
amortization,
12%

Equipment
rents,
4%

Materials,
3%

2014 Operating expenses

2013 Operating expenses

For the year ended December 31
(in millions)

Operating expenses

Compensation and benefits(1)(2)
Fuel
Materials(2)
Equipment rents
Depreciation and amortization
Purchased services and other(1)(2)
Asset impairments
Labour restructuring

Total operating expenses

2014

2013

2012

% Change

2014
vs. 2013

2013
vs. 2012

$ 1,352
1,048
193
155
552
985
–
(4)

1,385
1,004
160
173
565
998
435
(7)

1,474
999
166
206
539
1,044
265
53

$ 4,281

4,713

4,746

(2)
4
21
(10)
(2)
(1)
(100)
43

(9)

(6)
1
(4)
(16)
5
(4)
64
–

(1)

(1) As a result of management transition, $20 million and $22 million were charged in Compensation and benefits and Purchased services and other, respectively in
2012. The U.S. $9 million recovery due to the favourable settlement of litigation recorded in first quarter of 2013 and $5 million management transition costs recorded
in fourth quarter of 2013 were charged to Purchased services and other and Compensation and benefits, respectively.

(2) Billings to third parties for the recovery of costs incurred for freight car repairs and servicing have been reclassified from Purchased services and other to
Compensation and benefits and Materials within Operating expenses.

Operating expenses were $4,281 million in 2014, a decrease of $432 million, or 9%, from $4,713 million in 2013. This decrease was primarily due
to:
▫ an asset impairment charge in 2013;
▫ efficiencies generated from improved operating performance, asset utilization, and insourcing of certain IT activities;
▫ lower pension expense; and
▫ lower casualty expense.

This decrease was partially offset by:
▫ the unfavourable impact of the change in FX;
▫ higher stock-based and incentive compensation;
▫ wage and benefit inflation;
▫ higher material costs for freight car and locomotive repairs, and increased track maintenance activities; and
▫ higher volume variable expenses as a result of an increase in workload, as measured by GTMs.

CP ANNUAL REPORT | 2014

2014 TO 2013 COMPARATIVES

Compensation and Benefits

Compensation and benefits expense includes employee wages, salaries, fringe benefits and stock-based compensation. Compensation and benefits
expense was $1,352 million in 2014, a decrease of $33 million, or 2%, from $1,385 million in 2013. This decrease was primarily due to:

▫ lower pension expense;

▫ lower costs achieved through a smaller workforce; and

▫ road and yard efficiencies as a result of continuing strong operational performance.

This decrease was partially offset by:

▫ higher incentive compensation;

▫ stock-based compensation primarily driven by the higher change in stock price;

▫ wage and benefit inflation;

▫ the unfavourable impact of the change in FX; and

▫ an increase in IT personnel as part of the Company’s insourcing strategy, offset by efficiency savings recorded in Purchased services and other.

Fuel

Fuel expense consists mainly of fuel used by locomotives and includes provincial, state and federal fuel taxes. Fuel expense was $1,048 million in
2014, an increase of $44 million, or 4%, from $1,004 million in 2013. This increase was primarily due to the unfavourable change in FX and an
increase in workload, as measured by GTMs.

This increase was partially offset by improvements in fuel efficiency as a result of increased train weights and focus on the fuel conservation
strategies of the Company’s operating plan, and reduced fuel prices.

Materials

Materials expense includes the cost of material used for track, locomotive, freight car, building maintenance and software sustainment. Materials
expense was $193 million in 2014, an increase of $33 million or 21%, from $160 million in 2013. This increase was primarily due to increased
freight car and locomotive repairs, and increased track maintenance activities.

Equipment Rents

Equipment rents expense includes the cost associated with using other companies’ freight cars, intermodal equipment, and locomotives, net of rental
income received from other railways for the use of CP’s equipment. Equipment rents expense was $155 million in 2014, a decrease of $18 million or
10% from $173 million in 2013. This decrease is a result of operating efficiencies, resulting in the Company requiring fewer assets, thereby
permitting the return or sublease of certain leased freight cars and locomotives. This decrease was offset by the unfavourable change in FX.

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 $552 million for 2014, a decrease of $13 million, or 2%, from
$565 million in the same period of 2013. This decrease was primarily due to:

▫ the favourable impact of depreciation studies implemented in 2014;

▫ a decrease in accelerated depreciation of IT assets; and

▫ lower depreciable assets resulting from the sale of DM&E West.

This decrease was partially offset by higher depreciable assets as a result of the Company’s capital program as well as the change in FX.

Purchased Services and Other

For the year ended December 31
(in millions)

Purchased services and other
Support and facilities
Track and operations(1)
Intermodal
Equipment(1)
Casualty
Other(1)
Land sales

Total Purchased services and other

2014

2013

2012

% Change

2014
vs 2013

2013
vs 2012

$ 383
210
167
178
35
44
(32)

392
219
159
180
63
23
(38)

420
196
153
190
80
28
(23)

$ 985

998

1,044

(2)
(4)
5
(1)
(44)
91
(16)

(1)

(7)
12
4
(5)
(21)
(18)
65

(4)

(1) Billings to third parties for the recovery of costs incurred for freight car repairs and servicing have been reclassified from Purchased services and other to
Compensation and benefits and Materials within Operating expenses.

Purchased services and other expense encompasses a wide range of costs, including expenses for joint facilities, personal injuries and damage,
environmental remediation, property and other taxes, contractor and consulting fees, insurance, and gains on land sales. Purchased services and
other expense was $985 million in 2014, a decrease of $13 million, or 1% from $998 million in 2013. This decrease was primarily due to:

▫ efficiencies generated mainly from insourcing of certain IT activities, included in Support and facilities;

▫ lower casualty expense; and

▫ lower locomotive overhauls as certain older locomotives undergo a life extension program, included in Equipment.

This decrease was partially offset by:

▫ the unfavourable impact of the change in FX;

▫ higher engineering maintenance work and dismantling costs, included in Track and operations;

▫ an insurance recovery in 2013, related to flooding in 2011, reported in Other;

▫ higher corporate sponsorships and donations, reported in Other;

▫ higher intermodal expenses related to pick up and delivery service, reported in Intermodal;

▫ a favourable settlement of litigation in 2013 related to management transition, included in Other; and

▫ higher legal fees, reported in Support and facilities.

Asset Impairments

On January 2, 2014, the Company executed an agreement with Genesee & Wyoming Inc (“G&W”) for the sale of the DM&E West resulting in a
2013 charge of $435 million ($257 million after tax) for an asset impairment and accruals for costs associated with the sale. Upon closing on
May 30, 2014, the sale generated U.S. $218 million in gross proceeds (CDN $236 million).

Labour Restructuring

In the fourth quarter of 2012, CP recorded a charge of $53 million ($39 million after tax) for a labour restructuring initiative. The majority of the
resulting position reductions were completed in 2013 and 2014 with the remaining positions to be eliminated in 2015. As a result of favourable
experience, the Company recorded a recovery of $4 million ($3 million after tax) in the first quarter of 2014 and $7 million ($5 million after tax) in
the fourth quarter of 2013 for the labour restructuring initiative recorded in 2012.

2013 TO 2012 COMPARATIVES

Operating expense variances below compare 2013 to 2012 figures.

CP ANNUAL REPORT | 2014

Operating Expenses

Operating expenses were $4,713 million in 2013, a decrease of $33 million, or 1%, from $4,746 million in 2012. This decrease was primarily due
to:
▫ efficiencies generated from improved operating performance, asset utilization, and insourcing of certain IT activities;
▫ higher labour restructuring charges in 2012 and associated experience gains in 2013;
▫ lower management transition costs, reflected in Compensation and benefits and Purchased services and other; and
▫ higher land sales in 2013.

This decrease was partially offset by:
▫ a higher asset impairment charge in 2013;
▫ higher volume variable expenses as a result of an increase in workload;
▫ the unfavourable impact of the change in FX;
▫ higher incentive compensation resulting from improved corporate performance and higher stock-based compensation;
▫ wage and benefit inflation; and
▫ higher depreciation and amortization expenses.

10. OTHER INCOME STATEMENT ITEMS

Other Income and Charges

Other income and charges consists of gains and losses from the change in foreign exchange on long-term debt (“FX on LTD”) discussed further in
Section 15, Non-GAAP Measures, and working capital, various costs related to financing, shareholder costs, equity income and other non-operating
expenditures. Other income and charges was an expense of $19 million in 2014, compared with an expense of $17 million in 2013, an increase of
$2 million, or 12%. This increase was primarily due to FX losses on U.S. denominated debt, partially offset by higher equity earnings.

Net Interest Expense

Net interest expense includes interest on long-term debt and capital leases. Net interest expense was $282 million in 2014, an increase of $4
million, or 1%, from $278 million in 2013. This increase was primarily due to the unfavourable impact of the change in FX rates on U.S. dollar
denominated interest expense partially offset by higher interest income and the impact of principal repayments of debt securities.

Income Taxes

Income tax expense was $562 million in 2014, an increase of $312 million, or 125%, from $250 million in 2013. This increase was due to higher
taxable earnings and a higher effective income tax rate in 2014.

The effective income tax rate for 2014 was 27.6%, compared with 22.2% for 2013.

The Company expects a normalized 2015 income tax rate of approximately 27.5%. The Company’s 2015 outlook for its normalized 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 other
events and developments, discussed further in Section 22, Business Risks and Section 23, Critical Accounting Estimates. The Company expects to
have an increase in cash tax payments in future years.

11. QUARTERLY FINANCIAL DATA

For the quarter ended
(in millions, except per share data)

Total revenue
Operating income
Net income

Basic earnings per share
Diluted earnings per share

2014

2013

Dec. 31(1)

Sep. 30

Jun. 30 Mar. 31(2)

Dec. 31(3)

Sep. 30(4)

Jun. 30 Mar. 31(5)

$1,760
708
451

$ 2.66
2.63

$1,670
621
400

$ 2.33
2.31

$1,681
587
371

$ 2.13
2.11

$1,509
423
254

$ 1.45
1.44

$1,607
114
82

$ 0.47
0.47

$1,534
524
324

$ 1.85
1.84

$1,497
420
252

$ 1.44
1.43

$1,495
362
217

$ 1.25
1.24

(1) Significant item included in the fourth quarter of 2014 was a $12 million charge ($9 million after tax) due to foreign exchange translation on CP’s U.S. dollar
denominated long-term debt issued to facilitate the share repurchase program.

(2) Significant item included in the first quarter of 2014 was a recovery of $4 million ($3 million after tax) of the Company’s 2012 labour restructuring initiative due to
favourable experience gains, recorded in Compensation and benefits.

(3) Significant items included in the fourth quarter of 2013 were an asset impairment charge and accruals for future costs related to the sale of DM&E West totaling
$435 million ($257 million after tax), a recovery of $7 million ($5 million after tax) of the Company’s 2012 labour restructuring initiative and $5 million ($4 million after
tax) of management transition costs.

(4) Significant item included in the third quarter of 2013 was an Income tax expense of $7 million as a result of the change in the province of British Columbia’s
corporate income tax rate, which required the re-calculation of the Company’s Deferred income tax liability as at January 1, 2013.

(5) Significant item included in the first quarter of 2013 was a recovery of U.S. $9 million (U.S. $6 million after tax) from a litigation settlement related to management
transition.

Quarterly Trends

Volumes and revenues from certain goods are stronger during different periods of the year. First-quarter revenues are typically lower mainly due to
winter weather conditions, closure of the Great Lakes ports and reduced transportation of retail goods. Second and third-quarter revenues generally
improve over the first quarter as fertilizer volumes are typically highest during the second quarter and demand for construction-related goods are
generally highest in the third quarter. Revenues are typically strongest in the fourth quarter, primarily as a result of the transportation of grain after
the harvest, fall fertilizer programs and increased demand for retail goods moved by rail. Operating income is also affected by seasonal fluctuations.
Operating income is typically lowest in the first quarter due to lower freight revenue and higher operating costs associated with winter conditions.
Net income is also influenced by seasonal fluctuations in customer demand and weather-related issues.

12. FOURTH-QUARTER SUMMARY

For the three months ended December 31
(in millions)

Total freight revenues
Other revenues

Total revenues

Total operating expenses

Operating income
Operating income, excluding significant items(1)
Net income

Basic earnings per share

Diluted earnings per share

Diluted earnings per share, excluding significant items(1)

Operating Ratio

Operating Ratio, excluding significant items(1)

2014

2013 % Change

$ 1,719
41

1,760

1,052

708
708
451

2.66

2.63

2.68

1,570
37

1,607

1,493

114
547
82

0.47

1.91

9
11

(30)

521
29
450

466

460

59.8%

92.9% (3,310) bps

65.9%

(610) bps

(1) These measures have no standardized meaning prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. These
significant items are discussed further in Section 15, Non-GAAP Measures.

Operating Results

Operating income was $708 million in the fourth quarter of 2014, an increase of $594 million, or 521%, from $114 million in the same period of
2013. This increase was primarily due to:

▫ an asset impairment charge in 2013;

▫ higher volumes of traffic, as measured by RTMs, generating higher freight revenue;

▫ efficiency savings generated from improved operating performance, asset utilization and insourcing of certain IT activities;

▫ lower fuel price; and

▫ the favourable impact of the change in FX.

This increase was partially offset by a reduction in Workers’ Compensation Board (“WCB”) liabilities mainly due to a higher discount rate and
favourable claims experience in 2013, and higher wage and benefit inflation in 2014.

CP ANNUAL REPORT | 2014

Net income was $451 million in the fourth quarter of 2014, an increase of $369 million, or 450%, from $82 million in the same period of 2013. The
increase was primarily due to higher Operating income, partially offset by an increase in Income tax expense and Other income and charges.

Diluted Earnings per Share

Diluted EPS was $2.63 in the fourth quarter of 2014, an increase of $2.16, or 460%, from $0.47 in the same period of 2013. Diluted EPS, excluding
significant items, discussed further in Section 15, Non-GAAP Measures, was $2.68 in fourth quarter of 2014, an increase of $0.77, or 40%, from
$1.91 in the same period of 2013. These increases were primarily due to higher Net income and lower average outstanding shares due to the share
repurchase program.

Operating Ratio

The operating ratio provides the percentage of revenues used to operate the railway, and is calculated as Total operating expenses divided by Total
revenues. A lower percentage normally indicates higher efficiency in the operation of the railway. The operating ratio was 59.8% in the fourth
quarter of 2014, compared with 92.9% in the same period of 2013. This improvement was primarily due to:

▫ an asset impairment charge in 2013;

▫ higher volumes generating higher freight revenues; and

▫ an increase in efficiency savings in 2014.

The operating ratio, excluding significant items, discussed further in Section 15, Non-GAAP Measures, was 59.8% in the fourth quarter of 2014,
compared with 65.9% in the same period of 2013. This improvement was primarily due to higher volumes generating higher freight revenues and
efficiency savings.

Freight Revenues

Freight revenues were $1,719 million in the fourth quarter of 2014, an increase of $149 million, or 9%, from $1,570 million in the same period of
2013. This increase was primarily due to:

▫ higher shipments in Domestic intermodal, Potash, Metals, minerals and consumer products, and Crude;

▫ the favourable impact of the change in FX; and

▫ higher freight rates.

This increase was partially offset by lower shipments in International intermodal and Automotive due to the exit of certain customer contracts, and
lower coal traffic in the U.S.

Other Revenue

Other revenue was $41 million in the fourth quarter of 2014, an increase of $4 million or 11%, from $37 million in the same period of 2013. This
increase was primarily due to higher leasing and interline switching revenues.

Operating Expenses

Operating expenses were $1,052 million in the fourth quarter of 2014, a decrease of $441 million, or 30%, from $1,493 million in the same period
of 2013. This decrease was primarily due to:

▫ an asset impairment charge in 2013;

▫ efficiencies generated from improved operating performance, asset utilization, and insourcing of certain IT activities;

▫ lower fuel price;

▫ lower stock-based compensation primarily due to a stock price reduction in the quarter, compared to a strong increase in the fourth quarter of

2013;

▫ lower pension expense; and

▫ lower depreciation expense.

This decrease was partially offset by:

▫ the unfavourable impact of the change in FX;

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

▫ higher wage and benefit inflation;
▫ a 2013 reduction in WCB liabilities mainly due to a higher discount rate and favourable claims experience; and
▫ an insurance recovery in the fourth quarter of 2013, related to flooding in 2011.

13. CHANGES IN ACCOUNTING POLICY

2014 Accounting Change

Unrecognized Tax Benefit Liability

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB
Accounting Standards Codification (“ASC”) Topic 740. The amendments require an entity to present an unrecognized tax benefit, or a portion of an
unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward, with certain exception applied. This ASU is effective prospectively for public entities for fiscal years, and interim periods
within those years, beginning after December 15, 2013. The adoption of this ASU is not expected to have a material impact to the Company’s
financial statements.

Future Accounting Changes

Reporting discontinued operations and disclosures of disposals of components

In April 2014, FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, an
amendment to FASB ASC Topic 205 and Topic 360. The update amends the definition of a discontinued operation in Topic 205, expands disclosure
requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose information about individually
significant components that are disposed of or held for sale and do not qualify as discontinued operations. In addition, an entity is required to
separately present assets and liabilities of a discontinued operation for all comparative periods and separately present assets and liabilities of assets
held for sale in the initial period in which the disposal group is classified as held for sale on the face of the consolidated balance sheets. For each
period in which assets and liabilities are separately presented on the consolidated balance sheets, those amounts should not be offset and presented
as a single amount. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning after
December 15, 2014 and will be applied prospectively. The adoption of this ASU is not expected to have a material impact to the Company’s financial
statements.

Revenue from contracts with customers

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, a new FASB ASC Topic 606 which supersedes the revenue
recognition requirements in Topic 605 and most industry-specific guidance throughout the Industry Topics of the Codification. This new standard
requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires enhanced disclosures about
revenue to help users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning after
December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the ASU. The
Company has not, at this time, ascertained the full impact on the consolidated financial statements from the adoption of this new standard but does
not expect the impact to be material.

14. LIQUIDITY AND CAPITAL RESOURCES

The Company believes adequate amounts of cash and cash equivalents are available in the normal course of business to provide for ongoing
operations, including the obligations identified in the tables in Section 20, Contractual Commitments and Section 21, Future Trends and
Commitments. The Company is not aware of any trends or expected fluctuations in the Company’s liquidity that would create any deficiencies.
Liquidity risk is discussed further in Section 22, Business Risks. The following discussion of operating, investing and financing activities describes the
Company’s indicators of liquidity and capital resources.

Operating Activities

Cash provided by operating activities was $2,123 million in 2014, an increase of $173 million from $1,950 million in 2013. This increase was largely
due to improved earnings partially offset by higher income taxes paid and an increase in accounts receivable resulting from higher customer billings.

Investing Activities

Cash used in investing activities was $750 million in 2014, a decrease of $847 million from $1,597 million in 2013. This decrease was primarily due
to a reduction in Restricted cash and cash equivalents related to the collateralizing of letters of credit, discussed further in Section 20, Business Risks.
In addition the decrease reflects the proceeds received in 2014 from the sale of DM&E West, partially offset by higher additions to properties.

CP ANNUAL REPORT | 2014

Additions to properties (“capital programs”) were $1,449 million in 2014, an increase of $213 million from $1,236 million in 2013. The increase,
primarily in track and rolling stock investments, reflects CP’s strategy of reinvesting in the plant, enhancing throughput and capacity, and optimizing
existing assets.

Capital Programs

For the year ended December 31
(in millions, except for miles and crossties)

Additions to properties
Track and roadway
Rolling stock
Information systems
Buildings and other

Total – accrued additions to properties
Less:

Other non-cash transactions

2014

2013

2012

$ 1,011
219
96
150

831
169
110
155

744
155
105
148

1,476

1,265

1,152

Cash invested in additions to properties (per Consolidated Statements of Cash Flows)

$ 1,449

1,236

1,148

Track installation capital programs

Track miles of rail laid (miles)
Track miles of rail capacity expansion (miles)
Crossties installed (thousands)

492
21
1,040

429
24
926

470
32
794

Track and roadway expenditures include the replacement and enhancement of the Company’s track infrastructure. Of the $1,011 million additions in
2014, approximately $875 million was dedicated to the renewal of depleted assets; namely rail, ties, ballast, signals, bridges, and compliance with
the Positive Train Control (“PTC”) regulatory mandate. The remaining $136 million was targeted on network improvements to increase productivity,
efficiency, and capacity.

Rolling stock investments encompass locomotives and freight cars. In 2014, expenditures on locomotives were approximately $123 million and were
focused on the remanufacture of older four-axle yard units. Expenditures on freight cars were approximately $96 million and were largely
acquisitions of existing units previously leased.

The remaining capital expenditures are allocated to information services, buildings, and other. In 2014, CP invested approximately $96 million in
information systems primarily focused on insourcing, rationalizing, and modernizing core hardware and applications. Investments in buildings and
other items were $117 million and included intermodal and automotive terminals, shop equipment, and facilities. Expenditures on intermodal
containers were approximately $33 million and included replacement units for containers at the end of their service life and incremental units to
meet growing demand.

Additions to properties (“capital programs”) in 2015 are expected to be approximately $1.5 billion. Approximately 70% of planned capital programs
are for track and roadway, 10% are for rolling stock assets, between 5% and 10% are for information services, and between 10% and 15% are for
buildings and other.

CP intends to finance capital expenditures with available cash from operations, but may partially finance these expenditures with new debt, capital
leases and temporary draws on the Company’s credit facility. The Company’s decisions on funding equipment acquisitions will be influenced by such
factors as optimizing the Company’s capital structure and maintaining the Company’s debt covenants and investment grade rating, as well as the
amount of cash flow CP believes can be generated from operations and prevailing capital market conditions.

Financing Activities

Cash used in financing activities was $1,630 million in 2014, as compared to $220 million in 2013. This increase was largely due to payments made
to buy back shares under the share repurchase program, discussed further in Section 17, Shareholder Returns and a repayment of a capital lease.
These uses of cash were partially offset by proceeds from the issuance of commercial paper of U.S. $675 million (CDN $771 million), discussed
further in Section 22, Business Risks.

The Company has available, as sources of financing, up to U.S. $2 billion under its revolving credit facility and up to CDN $188 million under its
bilateral letter of credit facilities, discussed further in Section 22, Business Risks.

Debt to Total Capitalization

Debt to total capitalization is the sum of long-term debt, long-term debt maturing within one year and short-term borrowing, divided by debt plus
total Shareholders’ equity as presented on the Company’s Consolidated Balance Sheets. At December 31, 2014, the Company’s debt to total

capitalization increased to 50.8%, compared with 40.7% at December 31, 2013. This increase was largely due to the share repurchase program
discussed further in Section 17, Shareholder Returns, and issuance of U.S. $675 million in commercial paper. These increases were partially offset by
an increase in equity driven by increased earnings in 2014.

Interest Coverage Ratio

Interest coverage ratio is used in assessing the Company’s debt servicing capabilities. This ratio provides an indicator of the Company’s debt
servicing capabilities, and how these have changed, period over period and in comparison to the Company’s peers. Interest coverage ratio is
measured, on a rolling twelve month basis, as EBIT divided by Net interest expense, discussed further in Section 15, Non-GAAP Measures. At
December 31, 2014, the Company’s interest coverage ratio was 8.2, compared with 5.0 at December 31, 2013. This improvement was primarily due
to year over year improvement in EBIT. In 2014, EBIT was impacted by FX on LTD, discussed further in Section 15, Non-GAAP Measures, and the
recovery of prior year labour restructuring charges, while in 2013 EBIT was impacted by the recovery of prior year labour restructuring charges, asset
impairment charges, and management transition costs, discussed further in Section 15, Non-GAAP Measures.

Excluding these significant items from EBIT, Adjusted interest coverage ratio was 8.3 at December 31, 2014, compared with 6.6 at December 31,
2013. This increase was primarily due to an increase in Adjusted EBIT. Adjusted interest coverage ratio, Adjusted EBIT, and significant items are
discussed further in Section 15, Non-GAAP Measures.

Credit Measures

Credit ratings provide information relating to the Company’s financing costs, 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-investment grade credit rating is an important measure in assessing the Company’s ability to maintain access to public financing and to
minimize cost of capital. It also affects the ability of the Company to engage in certain collateralized business activities on a cost effective basis,
which is discussed further in Section 22, Business Risks.

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.

On April 16, 2014, Standard & Poor’s Ratings Services raised CP’s long-term corporate credit rating to “BBB” from “BBB-” and assigned a positive
outlook to the rating.

On April 24, 2014, Moody’s Investors Service upgraded CP’s senior unsecured ratings to Baa2 from Baa3 and assigned a positive outlook to the
rating.

On June 5, 2014, Dominion Bond Rating Service Limited (“DBRS”) upgraded CP’s Issuer Rating, Unsecured Debentures and Medium-Term Notes
ratings to “BBB” from “BBB (low)” and assigned a positive outlook to the ratings.

On October 27, 2014, DBRS upgraded CP’s Issuer Rating, Unsecured Debentures and Medium-Term Notes ratings to “BBB (high)” and assigned a
stable outlook to the ratings. On November 4, 2014, DBRS assigned an “R-2 (high)” rating to the Company’s U.S. $1 billion commercial paper
program.

On November 4, 2014, Standard & Poor’s Rating Services raised CP’s long-term corporate credit rating to “BBB+” from “BBB”, senior secured debt
rating to “A” from “A-”, senior unsecured debt rating to “BBB+” from “BBB” and assigned stable outlook to the rating. Separately, Standard &
Poor’s Rating Service assigned its “A-2” short-term corporate credit rating, and assigned its “A-2” global scale relating to the Company’s US$1
billion commercial paper program.

On November 7, 2014, Moody’s Investor Service upgraded CP’s senior unsecured ratings to Baa1 from Baa2 and assigned a stable outlook to the
rating. Separately, Moody’s Investor Service assigned a “P-2” rating to the Company’s U.S. $1 billion commercial paper program.

Adjusted net debt to Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) is a non-GAAP measure that management
uses to evaluate CP’s financial discipline with respect to capital markets credit sensitivities. The Company’s goal is to maintain a degree of continuity
and predictability for investors by meeting a minimum threshold.

Adjusted net debt to adjusted EBITDA for the years ended December 31, 2014, 2013, and 2012 was 2.3, 2.2, and 3.2 times, respectively. The
increase between 2013 and 2014 is due to additional debt issued under the commercial paper program, offset by the improved net income at
December 31, 2014. The decrease of 1.0 between 2012 and 2013 reflects the Company’s improved net income and a net asset position for the
Company’s main Canadian defined benefit pension plan at December 31, 2013. Adjusted net debt to Adjusted EBITDA is discussed further in
Section 15, Non-GAAP Measures.

Free Cash

Free cash and cash flow before dividends are Non-GAAP measures that management considers to be indicators of liquidity. These measures are
discussed further in Section 15, Non-GAAP Measures.

CP ANNUAL REPORT | 2014

CP generated positive free cash of $725 million in 2014, compared to $530 million in 2013. The improvement in free cash of $195 million was
primarily due to improved earnings and proceeds received from the sale of DM&E West. This increase was partially offset by higher capital additions
and higher income tax payments.

15. NON-GAAP MEASURES

The Company presents non-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-GAAP measures facilitate a
multi-period assessment of long-term profitability allowing management and other external users of the Company’s consolidated financial
statements to compare profitability on a long-term basis with that of the Company’s peers.

These non-GAAP measures exclude other significant items that are not among the Company’s normal ongoing revenues and operating expenses.
These non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures
presented by other companies.

Operating expenses, excluding significant items, provide relevant and useful information for evaluating the effectiveness of the Company’s
operations and underlying business trends.

Operating income, excluding significant items, provides a measure of the profitability of the railway on an ongoing basis.

Income, excluding significant items, provides management with a measure of income on an ongoing basis.

Diluted earnings per share, excluding significant items, provides the same information on a per share basis.

Operating ratio, excluding significant items, calculated as operating expenses, excluding significant items divided by revenues, provides the
percentage of revenues used to operate the railway on an ongoing basis.

Significant Items

Significant items are material transactions that may include, but are not limited to, restructuring and asset impairment charges, gains and losses on
non-routine sales of assets and other items that are not normal course business activities.

In 2014, there were two significant items included in Net income as follows:

▫ in the fourth quarter, a $12 million charge ($9 million after tax) due to foreign exchange translation on CP’s U.S. dollar denominated long-term

debt issued to facilitate the share repurchase program; and

▫ in the first quarter, a recovery of $4 million ($3 million after tax) was recorded for CP’s 2012 labour restructuring initiative due to favourable

experience gains, recorded in Compensation and benefits.

In 2013, there were five significant items included in Net income as follows:

▫ in the fourth quarter, an asset impairment charge and accruals for future costs totaling $435 million ($257 million after tax) relating to the sale of

DM&E West which closed in the second quarter of 2014;

▫ in the fourth quarter, management transition costs related to the retirement of the Company’s Chief Financial Officer and the appointment of the

new Chief Financial Officer of $5 million ($4 million after tax);

▫ in the fourth quarter, a recovery of $7 million ($5 million after tax) of the Company’s 2012 labour restructuring initiative due to favourable

experience gains, discussed further in Section 9, Operating Expenses;

▫ in the third quarter, an income tax expense of $7 million as a result of the change in the province of British Columbia’s corporate income tax rate;

and

▫ in the first quarter, a recovery of U.S. $9 million (U.S. $6 million after tax) related to settlement of certain management transition amounts which

had been subject to legal proceedings.

In 2012, there were six significant items included in Net income as follows:

▫ in the fourth quarter, an asset impairment charge of $185 million ($111 million after tax) with respect to the option to build into the Powder River

Basin and another investment;

▫ in the fourth quarter, an asset impairment charge of $80 million ($59 million after tax) related to a certain series of locomotives;

▫ in the fourth quarter, a labour restructuring charge of $53 million ($39 million after tax) as part of a restructuring initiative which was largely
completed in 2013 and 2014, with the remaining positions to be eliminated in 2015, discussed further in Section 9, Operating Expenses;

▫ in the second quarter, a charge of $42 million ($29 million after tax) with respect to compensation and other management transition costs;

▫ during the first and second quarters, advisory fees of $27 million ($20 million after tax) related to shareholder matters; and

▫ in the second quarter, an income tax expense of $11 million as a result of the change in the province of Ontario’s corporate income tax rate.

Reconciliation of Non-GAAP measures to GAAP measures

(in millions)

For the year ended
December 31

2014

2013

2012

For the three months ended
December 31
2014

2013

Operating expenses, excluding significant items(1)

$ 4,285

4,289

4,386

$ 1,052

1,060

Add significant items:
Labour restructuring
Asset impairments
Management transition costs

Operating expenses as reported

Operating income, excluding significant items(1)

Add significant items:
Labour restructuring
Asset impairments
Management transition costs

Operating income as reported

Income, excluding significant items(1)

Add significant items, net of tax:

Labour restructuring
Asset impairments
Management transition costs
Advisory fees related to shareholder matters
Impact of foreign exchange translation on USD
denominated debt
Income tax rate change

(4)
–
–

(7)
435
(4)

53
265
42

–
–
–

(7)
435
5

$ 4,281

$ 2,335

4,713

1,844

4,746

1,309

$ 1,052

708

1,493

547

4
–
–

7
(435)
4

$ 2,339

$ 1,482

1,420

1,132

3
–
–
–

(9)
–

5
(257)
2
–

–
(7)

(53)
(265)
(42)

949

753

(39)
(170)
(29)
(20)

–
(11)

–
–
–

708

460

–
–
–
–

(9)
–

7
(435)
(5)

114

338

5
(257)
(4)
–

–
–

Net income as reported

$ 1,476

875

484

451

(1) These earnings measures have no standardized meanings prescribed by U.S. GAAP and, therefore, may not be comparable to similar measures presented by other
companies. These earnings measures and other significant items are described in this section.

Diluted earnings per share

Excluding significant items
Add significant items:
Labour restructuring
Asset impairments
Management transition costs
Advisory fees related to shareholder matters
Impact of foreign exchange translation on USD denominated debt
Income tax rate change

For the year ended
December 31

2014

2013

2012

For the three months ended
December 31
2014

2013

8.50

6.42

4.34

2.68

1.91

0.01
–
–
–
(0.05)
–

0.03
(1.46)
0.01
–
–
(0.04)

(0.22)
(0.98)
(0.17)
(0.12)
–
(0.06)

–
–
–
–
(0.05)
–

0.03
(1.45)
(0.02)
–
–
–

Diluted earnings per share as reported

8.46

4.96

2.79

2.63

0.47

CP ANNUAL REPORT | 2014

Operating ratio

Excluding significant items
Add significant items:
Labour restructuring
Asset impairments
Management transition costs

Operating ratio as reported

Free Cash

For the year ended
December 31

2014

2013

2012

For the three months ended
December 31
2014

2013

64.7%

69.9%

77.0%

59.8%

65.9%

–
–
–

(0.1)%
7.1%
(0.1)%

0.9%
4.7%
0.7%

–
–
–

64.7%

76.8%

83.3%

59.8%

(0.4)%
27.1%
0.3%

92.9%

Free cash and cash flow before dividends are non-GAAP measures that management considers to be indicators of liquidity. The measures are used
by management to provide information with respect to the relationship between cash provided by operating activities and investment decisions and
provide comparable measures for period to period changes. Free cash is calculated as cash provided by operating activities, less cash used in
investing activities, excluding changes in restricted cash and cash equivalents and investment balances used to collateralize letters of credit, and
dividends paid, adjusted for changes in cash and cash equivalents balances resulting from FX fluctuations. Cash flows provided by financing
activities, excluding dividend payments, are not included in the computation of free cash. Cash flow before dividends is calculated as cash provided
by operating activities less cash used in investing activities, excluding changes in restricted cash and cash equivalents and investment balances used
to collateralize letters of credit.

Reconciliation of free cash to GAAP cash position(1)

(in millions)

Cash provided by operating activities
Cash used in investing activities
Change in restricted cash and cash equivalents used to collateralize letters of credit(2)
Dividends paid
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents

Free cash(1)
Cash (used in) provided by financing activities, excluding dividend payment
Change in restricted cash and cash equivalents used to collateralize letters of credit(2)

(Decrease) increase in cash and cash equivalents, as shown on the Consolidated Statements of

Cash Flows

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

For the year ended
December 31

2014

2013

2012

$ 2,123
(750)
(411)
(244)
7

725
(1,386)
411

1,950
(1,597)
411
(244)
10

530
24
(411)

(250)
476

143
333

226

476

1,328
(1,011)
–
(223)
(1)

93
193
–

286
47

333

(1) Free cash and cash provided by financing activities, excluding dividend payment have no standardized meaning prescribed by GAAP and, therefore, are unlikely to be
comparable to similar measures presented by other companies.

(2) Changes in Restricted cash and cash equivalents related to collateralized letters of credit are discussed further in Section 22, Business Risks.

Interest Coverage Ratio

The interest coverage ratio, excluding significant items, also referred to as Adjusted interest coverage ratio, is calculated as Adjusted EBIT divided by
Net interest expense. By excluding significant items which affect EBIT, Adjusted interest coverage ratio provides a metric that is more comparable on
a period to period basis. Interest coverage ratio and Adjusted interest coverage ratio are discussed further in Section 14, Liquidity and Capital
Resources.

Calculation of Interest Coverage Ratio

(in millions, except for interest coverage ratio)

EBIT(1)

Adjusted EBIT(1)

Net interest expense

Interest coverage ratio(1)

Adjusted interest coverage ratio(1)

2014

2013

2012

$ 2,320

$ 2,328

282

1,403

912

1,827

$ 1,299

278

276

8.2

8.3

5.0

6.6

3.3

4.7

(1) Interest coverage ratio, Adjusted interest coverage ratio, EBIT and Adjusted EBIT have no standardized meanings prescribed by GAAP and, therefore, are unlikely to
be comparable to similar measures of other companies.

ROCE

ROCE is an all-encompassing measure of performance which measures how productively the Company uses its assets. ROCE is defined as EBIT (on a
rolling twelve month basis) divided by the average for the twelve months of total assets, less current liabilities excluding the current portion of long-
term debt. ROCE, excluding significant items, also referred to as Adjusted ROCE, is calculated as Adjusted EBIT divided by the average for the twelve
months of total assets, less current liabilities excluding the current portion of long-term debt. By excluding significant items which affect EBIT,
Adjusted ROCE provides a metric that is more comparable on a period to period basis. ROCE and Adjusted ROCE are discussed further in Section 6,
Operating Results.

Calculation of Adjusted ROCE

(in millions, except for percentages)

EBIT for the year ended December 31(1)

Adjusted EBIT for the year ended December 31(1)

Average for the twelve months of total assets, less current liabilities excluding the current portion of

long-term debt

ROCE(1)

Adjusted ROCE(1)(2)

2014

2,320

2,328

$ 15,617

14.9%

2013

1,403

1,827

14,711

9.5%

12.4%

2012

912

1,299

13,251

6.9%

9.8%

(1) EBIT, Adjusted EBIT, ROCE and Adjusted ROCE have no standardized meaning prescribed by U.S. GAAP and, therefore, are unlikely to be comparable to similar
measures of other companies.

(2) Adjusted ROCE is defined as Adjusted EBIT divided by the average for twelve months of Total assets, less current liabilities, excluding current portion of long-term
debt, as measured under GAAP.

CP ANNUAL REPORT | 2014

Interest coverage ratio and ROCE include EBIT, a non-GAAP measure, which can be calculated as Operating income, less Other income and charges.
Adjusted EBIT is calculated as Operating income, excluding significant items less Other income and charges, excluding significant items that are
reported in Other income and charges on the Company’s income statement. A reconciliation of Operating income to EBIT and Adjusted EBIT, each
for the twelve months ended December 31, 2014 and 2013, is presented below:

Earnings before interest and tax
(in millions)

Adjusted EBIT(1)
Add Significant items:
Labour restructuring
Asset impairments
Management transition
Advisory costs related to shareholder matters

Impact of foreign exchange translation on USD denominated debt

EBIT(1)
Add:

Other income and charges

Operating income as reported

For the year ended
December 31

2014

2013

2012

$ 2,328

1,827

1,299

4
–
–
–
(12)

7
(435)
4
–
–

2,320

1,403

$ 2,339

1,420

(53)
(265)
(42)
(27)
–

912

949

(1) EBIT and Adjusted EBIT have no standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other
companies. These earnings measures and significant items are described in this section.

Adjusted Debt to Adjusted EBITDA

Adjusted net debt to Adjusted EBITDA is a non-GAAP measure that management uses to evaluate CP’s financial discipline with respect to capital
markets’ credit sensitivities. Adjusted 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 unfunded pension and other benefits liability, net of tax and the net present
value of operating leases, which is discounted by the Company’s effective interest rate for each of the years presented. Adjusted EBITDA is calculated
as Adjusted EBIT plus Depreciation and amortization, adjusted for net periodic pension and other benefit cost and operating lease expense.

The following tables reconcile Adjusted debt to Long-term debt and Adjusted EBITDA to Adjusted EBIT for the years ended December 31, 2014,
2013, and 2012.

Reconciliation of Adjusted net debt to Long-term debt

(in millions)

Adjusted debt as at December 31
Add:

Net unfunded pension and other benefits liability, net of tax
Net present value of operating leases(1)

Long-Term debt as at December 31

(1) Operating leases were discounted at the Company’s effective interest rate for each of the periods presented.

2014

2013

2012

6,605 $

5,394 $

6,247

(365)
(447)

–
(518)

(1,042)
(515)

5,793 $

4,876 $

4,690

Reconciliation of Adjusted EBITDA to Adjusted EBIT

(in millions)

Adjusted EBITDA for the year ended December 31(1)
Add:

Adjustment for net periodic pension and other benefit cost
Operating lease expense
Depreciation and amortization

Adjusted EBIT for the year ended December 31(1)

2014

2013

2012

$ 2,864

2,464

1,957

137
(121)
(552)

82
(154)
(565)

63
(182)
(539)

$ 2,328

1,827

1,299

(1) Adjusted EBITDA and Adjusted EBIT have no standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented
by other companies. These earnings measures and significant items are described in this section.

16. BALANCE SHEET

Financial position at December 31
($ millions)

2014

2013

Change

Changes during the year ended
December 31, 2014, include:

Current Assets

Cash and cash equivalents

Restricted cash and cash equivalents

Accounts receivable, net

Materials and supplies

Deferred income taxes

Other current assets

Current Liabilities

226

–

702

177

116

476

411

580

165

344

(250)

(53)

(411)

(100)

122

(288)

(84)

119

See section 14, Liquidity and Capital Resources.
2013 amount pledged as collateral to letters of
credit.
Increase primarily due to freight receivables due
to higher customer billings.
Increase in engineering materials for 2015
projects, partially offset by lower fuel inventory.
Decrease due to the use of income tax loss carry
forwards and tax credits.
Increase primarily due to higher prepaid income
taxes.

Accounts payable and accrued liabilities

1,277

1,189

Long-term debt maturing within one year

134

189

(55)

(29)

Non-current assets

Investments

Properties

112

14,438

13,327

1,111

Assets held for sale
Goodwill and intangible assets

182
176

222
162

(40)
14

(18)
9

Pension asset

Other assets

304

1,028

(724)

(70)

151

200

(49)

(25)

Increase primarily due to higher income and other
taxes payable as well as amounts payable for CP
common shares repurchased, discussed further in
Section 17, Shareholder Returns.
Decrease is primarily due to debt repayments of
$183 million, partially offset by amounts reclassed
from long term debt.

Increase due to equity earnings and FX on U.S.
investment balances.
Increase due to capital additions and FX, partially
offset by depreciation and assets reclassed to
Assets held for sale.
Decrease due to completion of DM&E West sale in
2014, partially offset by the transfer of certain
assets of D&H from properties, discussed further
in Section 21, Future Trends and Commitments.
Increase primarily due to FX.
Decrease primarily due to lower discount rates,
partially offset by investment returns on plan
assets greater than expected.
Decrease primarily due to settling of currency
forwards and various other reductions.

CP ANNUAL REPORT | 2014

Financial position at December 31
($ millions)

Non-current liabilities
Pension and other benefit liabilities

2014

2013

Change

Changes during the year ended
December 31, 2014, include:

755

657

Other long-term liabilities

432

338

Long-term debt

5,659

4,687

972

Deferred income taxes

Shareholders’ equity

2,773

2,903

(130)

(4)

Share capital

2,185

2,240

(55)

(2)

Additional paid-in capital

Accumulated other comprehensive loss

(2,219)

(1,503)

(716)

Retained earnings

5,608

6,326

(718)

(11)

17. SHAREHOLDER RETURNS

Share Capital

Increase primarily due to lower discount rates.
Increase due to higher share based liabilities from
new grants and a higher share price compared to
2013.
Increase due to the issuance of commercial paper,
discussed further in Section 22, Business Risks, and
FX, partially offset by amounts reclassed to current.
Decrease primarily due to a recovery on other
comprehensive loss, partially offset by deferred
income tax expenses on earnings, utilization of loss
carry-forwards, and FX.

Decrease due to CP common shares repurchased,
partially offset by shares issued under CP’s stock
option plans.
Increase due to stock option expense, partially
offset by options exercised.
Increase primarily due to changes in pension and
post-retirement defined benefit plans.
Decrease due to CP common shares repurchased
and dividends declared, partially offset by Net
income.

At February 20, 2015, 164,538,579 common shares and no preferred shares were issued and outstanding. In addition, CP has a Management Stock
Option Incentive Plan (“MSOIP”) under which key officers and employees are granted options to purchase CP shares. Each option granted can be
exercised for one Common Share. At February 20, 2015, 2.6 million options were outstanding under the Company’s MSOIP and Directors’ Stock
Option Plan, as well as stand-alone option agreements entered into with Mr. E. Hunter Harrison, Mr. Keith Creel and Mr. Bart Demosky. 2.5 million
additional options may be issued in the future under the MSOIP and Directors’ Stock Option Plan.

Stock Price

The market value per CP common share, as listed on the Toronto Stock Exchange was $223.75 at December 31, 2014, an increase of $63.10 per
share from $160.65 at December 31, 2013. The market value per CP common share at December 31, 2013 was an increase of $59.75 per share
from $100.90 at December 31, 2012.

Return on Capital Employed

ROCE is a measure of performance which measures how productively the Company uses its assets. ROCE was 14.9% at December 31, 2014,
compared with 9.5% in the same period of 2013. This increase was primarily due to an increase in EBIT. ROCE is discussed further in Section 15,
Non-GAAP Measures.

Cash Returned to Shareholders

On December 16, 2014, the Company’s Board of Directors declared a quarterly dividend of $0.3500 per share, unchanged from 2013, on the
outstanding common shares. The dividend is payable on January 26, 2015 to holders of record at the close of business on December 31, 2014.

Dividends

Dividends declared by the Board of Directors in the last three years are as follows:

Dividend amount

$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3500
$0.3000

Record date

March 27, 2015
December 31, 2014
September 26, 2014
June 27, 2014
March 28, 2014
December 27, 2013
September 27, 2013
June 28, 2013
March 28, 2013
December 28, 2012
September 28, 2012
June 22, 2012
March 30, 2012

Payment date

April 27, 2015
January 26, 2015
October 27, 2014
July 28, 2014
April 28, 2014
January 27, 2014
October 28, 2013
July 29, 2013
April 29, 2013
January 28, 2013
October 29, 2012
July 30, 2012
April 30, 2012

Share Repurchase Program

On March 11, 2014, the Company announced a new share repurchase program to implement a normal course issuer bid (“NCIB”) to purchase, for
cancellation, up to 5.3 million common shares. On September 29, 2014, the Company announced the amendment of the bid to increase the
maximum number of its Common Shares that may be purchased from 5.3 million to 12.7 million of its outstanding Common Shares, effective
October 2, 2014. Under the filing, share purchases may be made during the twelve month period that began March 17, 2014, and ends March 16,
2015. The purchases are made at the market price on the day of purchase, with the net proceeds allocated to share capital up to the average
carrying amount of the shares, and any excess allocated to retained earnings.

CP believes that the purchase of its shares from time to time is an appropriate and advantageous use of the Company’s funds to maximize
shareholder value.

Purchases of the Company’s common shares may be made through the facilities of the TSX, the New York Stock Exchange (“NYSE”) and alternative
trading platforms by means of open market transactions or by such other means as may be permitted by the TSX and under applicable securities
laws, including by private agreement pursuant to issuer bid exemption orders issued by applicable securities regulatory authorities. The purchase
price for any common shares under the share repurchase program will be the market price at the time of purchase or such other price as may be
permitted by the TSX. Any private purchase made under an exemption order issued by a securities regulatory authority will generally be at a discount
to the prevailing market price. The actual number of common shares repurchased under the NCIB and the timing of any such purchases will be
determined by the Company and there cannot be any assurances as to how many common shares will ultimately be acquired under the NCIB. From
October 2, 2014 to December 31, 2014 the Company repurchased 5.2 million common shares for $1,102 million at an average price of $211.67 per
share. From March 17, 2014 to December 31, 2014, the Company repurchased 10.5 million Common shares for $2,089 million at an average price
of $199.42 per share.

18. FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

The Company categorizes its financial assets and liabilities measured at fair value in line with the fair value hierarchy established by GAAP that
prioritizes, with respect to reliability, the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels.
Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and gives the highest priority to these inputs.
Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and gives lower priority to
these inputs.

When possible, the estimated fair value is based on quoted market prices 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 and commodity) and volatility, depending on the type of derivative and 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.

CP ANNUAL REPORT | 2014

Carrying Value and Fair Value of Financial Instruments

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of
approximately $6,939 million and a carrying value of $5,793 million at December 31, 2014. At December 31, 2013, long-term debt had a fair value
of approximately $5,572 million and a carrying value of $4,876 million. 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 interest and principal at estimated interest rates
expected to be available to the Company at period end. All derivatives and long-term debt are classified as Level 2.

Financial Risk Management

Derivative Financial Instruments

Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, foreign exchange 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 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 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.

Credit Risk Management

Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations under a contract and as a result create a financial
loss for the Company.

The railway industry predominantly serves financially established customers and the Company has experienced limited financial losses with respect to
credit risk. The credit worthiness of customers is assessed using credit scores supplied by a third party, and through direct monitoring of their
financial well-being on a continual basis. The Company establishes guidelines for customer credit limits and should thresholds in these areas be
reached, appropriate precautions are taken to improve collectability.

Counterparties to financial instruments expose the Company to credit losses in the event of non-performance. Counterparties for derivative and cash
transactions are limited to high credit quality financial institutions, which are monitored on an on-going basis. Counterparty credit assessments are
based on the financial health of the institutions and their credit ratings from external agencies. The Company does not anticipate non-performance
that would materially impact the Company’s financial statements. In addition, the Company believes there are no significant concentrations of credit
risk.

Foreign Exchange 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
foreign exchange 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.

Occasionally the Company will enter into short-term FX forward contracts as part of its cash management strategy.

Net Investment Hedge

Foreign Exchange Forward Contracts

The Company may enter into FX forward contracts to lock-in the amount of Canadian dollars it has to pay on U.S. dollar denominated debt
maturities.

At December 31, 2014, the Company had no remaining FX forward contracts to fix the exchange rate on U.S. dollar denominated debt maturities. At
December 31, 2013, the Company had FX forward contracts to fix the exchange rate on U.S. $100 million of principal outstanding on a capital lease
due in January 2014, U.S. $175 million of its 6.50% Notes due in May 2018, and U.S. $100 million of its 7.25% Notes due in May 2019. These
derivatives, which were accounted for as cash flow hedges, guaranteed the amount of Canadian dollars that the Company would repay when these
obligations mature.

During the three months ended March 31, 2014, the Company settled the FX forward contract related to the repayment of a capital lease due in
January 2014 for proceeds of $8 million.

During the three months ended June 30, 2014, the Company de-designated and settled prior to maturity the FX forward contracts related to the
repayment of its 6.5% Notes due in May 2018 and its 7.25% Notes due in May 2019 for proceeds of $17 million settled in the third quarter of 2014
with the offset recorded as realized gains of $3 million in Accumulated other comprehensive loss and $14 million in Retained earnings. Amounts
remaining in Accumulated other comprehensive loss are being amortized to Other income and charges until the underlying debts, which were
hedged, are repaid. The amount being amortized to Other income and charges in 2014 is not significant. At December 31, 2013, the unrealized gain
derived from these FX forwards was $25 million of which $6 million was included in Other current assets and $19 million in Other assets with the
offset reflected as an unrealized gain of $5 million in Accumulated other comprehensive loss and as an unrealized gain of $20 million in Retained
earnings.

During 2014, the combined realized and unrealized foreign exchange gain was $3 million, recorded in Other income and charges relating to these
settled derivatives, compared to an unrealized foreign exchange gain of $18 million in 2013. Gains recorded in Other income and charges were
largely offset by unrealized losses on the underlying debt which the derivatives were designated to hedge.

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, 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 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 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 such as treasury rate locks, bond forwards or forward starting swaps, 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 fourth quarter of 2014, the Company entered into forward starting floating-to-fixed interest rate swap agreements (“forward starting
swaps”) totaling a notional U.S. $1.4 billion 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 are recorded in Accumulated other comprehensive loss, net
of tax, as cash flow hedges until the probable forecasted note is issued. Subsequent to the notes issuance, amounts in Accumulated other
comprehensive loss are reclassified to Net interest expense. As at December 31, 2014, the unrealized loss derived from the forward starting swaps
was $46 million of which $21 million was included in Accounts payable and accrued liabilities and $25 million in Other long-term liabilities with the
offset reflected in Other comprehensive (loss) income on the Company’s Interim Consolidated Statements of Comprehensive Income (Loss).

Interest Rate Swaps

During the fourth quarter of 2014, the Company also entered into floating-to-fixed interest rate swap agreements totaling U.S. $600 million to
hedge the variability in cash flow associated with fluctuations in interest rates on commercial paper issuances. These swaps expire in 2015 and are
accounted for as a cash flow hedge. The effective portion of changes in fair value of the swaps is recorded in Accumulated other comprehensive loss,
net of tax. Subsequent to the commercial paper issuance, the amounts recorded in Accumulated other comprehensive loss are reclassified to Net
interest expense. At December 31, 2014, the unrealized gain, recorded in Other current assets on the Company’s Consolidated Balance Sheets, was
not significant. The offset was reflected in Other comprehensive (loss) income on the Company’s Interim Consolidated Statements of Comprehensive
Income (Loss).

At December 31, 2013, the Company had no outstanding interest rate swaps.

Treasury Rate Locks

At December 31, 2014, the Company had net unamortized losses related to interest rate locks, which are accounted for as cash flow hedges, settled
in previous years totaling $21 million, as compared to net unamortized losses of $22 million at December 31, 2013. These amounts are composed of
various unamortized gains and losses related to specific debts which are reflected in Accumulated other comprehensive loss and are amortized to
Net interest expense in the period that interest on the related debt is charged. The amortization of these gains and losses resulted in a negligible
increase to Net interest expense and Other comprehensive loss in 2014 and comparative periods.

CP ANNUAL REPORT | 2014

Fuel Price Management

The Company is exposed to commodity risk related to purchases of diesel fuel. CP employs a fuel cost recovery program designed to automatically
respond to fluctuations in fuel prices and help reduce volatility to changing fuel prices, and the potential reduction in net income due to increases in
the price of diesel. Fuel expense constitutes a large portion of the Company’s operating costs and volatility in diesel fuel prices can have a significant
impact on the Company’s income. Items affecting volatility in diesel prices include, but are not limited to, fluctuations in world markets for crude oil
and distillate fuels, which can be affected by supply disruptions and geopolitical events.

The impact of variable fuel expense is mitigated substantially through fuel cost recovery programs which apportion incremental changes in fuel prices
to shippers through price indices, tariffs, and by contract, within agreed upon guidelines. While these programs provide effective and meaningful
coverage, residual exposure remains as the fuel expense risk may not be completely recovered from shippers due to timing and volatility in the
market. In the past, to address the residual portion of CP’s fuel costs not mitigated by its fuel cost recovery programs, CP had a systematic hedge
program. As a result of improving coverage from its fuel cost recovery programs, CP exited its hedging program during the first quarter of 2013.

19. OFF-BALANCE SHEET ARRANGEMENTS

Guarantees

At December 31, 2014, the Company had residual value guarantees on operating lease commitments of $120 million. 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. The Company has accrued
for all guarantees that it expects to pay. As at December 31, 2014, these accruals amounted to $3 million compared with $6 million as at
December 31, 2013.

20. 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.

Contractual Commitments

At December 31, 2014

Payments due by period
(in millions)

Contractual commitments

Long-term debt
Capital lease
Operating lease(1)
Supplier purchase
Other long-term liabilities(2)

Total contractual commitments

Total

2015

2016 &
2017

2018 &
2019

2020 &
beyond

$ 5,673
150
569
1,396
648

131
3
114
217
114

845
7
155
266
126

1,164
8
98
208
114

3,533
132
202
705
294

$ 8,436

579

1,399

1,592

4,866

(1) Residual value guarantees on certain leased equipment with a maximum exposure of $120 million, discussed further in Section 19, Off-Balance Sheet Arrangements,
are not included in the minimum payments shown above, as management believes that CP will not be required to make payments under these residual guarantees.

(2) Includes expected cash payments for restructuring, environmental remediation, asset retirement obligations, post-retirement benefits, workers’ compensation
benefits, long-term disability benefits, pension benefit payments for the Company’s non-registered supplemental pension plan, deferred income tax liabilities 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 2015 to 2024. 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 Section 23, Critical Accounting Estimates. Deferred income tax liabilities may vary resulting from changes in tax rates,
tax regulations and the operating results of the Company. As the cash impact in any particular year cannot be reasonably determined, all long-term deferred tax
liabilities have been reflected in the “2020 & beyond” category in this table. Deferred income taxes are discussed further in Section 23, Critical Accounting Estimates.

21. FUTURE TRENDS AND COMMITMENTS

Agreements and Recent Developments

Resolution of certain legal proceedings

CP’s entitlement to an exercised purchase option of the building (“purchase option”). As at December 31, 2014, the loan of $20 million and the
purchase option, book value of $8 million, were recorded as Other assets in the Company’s Consolidated Balance Sheets.

In January 2015, CP reached a settlement with a third party that, following the sale of the building to an arm’s length third party in February 2015,
will result in CP receiving net proceeds of $59 million for the sale of the building and resolution of legal proceedings. The net proceeds would
include repayment of the aforementioned loan to the judicial trustee. CP expects to record a gain of approximately $31 million ($27 million after-tax)
to Purchased services and other in the first quarter of 2015.

Issuance of long-term debt and settlement of forward starting swaps

On January 28, 2015, CP announced the issuance of U.S. $700 million 2.900% 10-year Notes due February 1, 2025 for net proceeds of U.S. $694
million. This transaction closed on February 2, 2015. The net proceeds will be used for general corporate purposes, capital investments, and share
repurchases.

On January 28, 2015, the Company settled a notional U.S. $700 million of forward starting swaps, designated as a cash flow hedge related to the
issuance of the notes described above. The fair value of these derivative instruments was a loss of U.S. $50 million at the time of the settlement.
Effective hedge losses were deferred in Accumulated other comprehensive loss and will be amortized to Net interest expense until the underlying
notes, which were hedged, are repaid.

Joint venture with DREAM Unlimited

On January 20, 2015, CP announced it had an agreement to create a joint venture with DREAM Unlimited called DREAM Van Horne Properties. The
joint venture was created to evaluate the Company’s real estate, and to explore innovative ways to maximize value, including industrial, commercial
and residential development.

Sale of the Delaware and Hudson Railway Company

On November 17, 2014, the Company announced a proposed agreement with Norfolk Southern Corporation (“NS”) for the sale of approximately
283 miles of the Delaware and Hudson Railway Company Inc.’s line between Sunbury, Pennsylvania, and Schenectady, New York. The assets
expected to be sold to NS upon completion of this transaction have been classified as Assets held for sale on the Company’s Consolidated Balance
Sheets. The assets continue to be reported at their carrying value as this is lower than their expected fair value. The sale to NS, when agreed, will be
subject to regulatory approval by the U.S. Surface Transportation Board and is expected to close in 2015.

Legal Proceedings Related To Lac-Me´ gantic Rail Accident

On July 6, 2013, a train carrying crude oil operated by Montreal Maine and Atlantic Railway (“MM&A”) derailed and exploded in Lac-Mégantic,
Quebec on a section of railway line owned by MM&A. The previous day CP had interchanged the train to MM&A, and after that interchange MM&A
exercised exclusive control over the train.

Following this incident, the Minister of Sustainable Development, Environment, Wildlife and Parks of Quebec issued an order directing certain named
parties to recover the contaminants and to clean up and decontaminate the derailment site. CP was added as a named party on August 14,
2013. CP is a party to an administrative appeal with respect to this order. No hearing date on the merits of CP’s appeal has been scheduled.

A class action lawsuit has also been filed in the Superior Court of Quebec on behalf of a class of persons and entities residing in, owning or leasing
property in, operating a business in or physically present in Lac-Mégantic. The lawsuit seeks damages caused by the derailment including for
wrongful deaths, personal injuries, and property damages. CP was added as a defendant on August 16, 2013. The Superior Court of Quebec is not
expected to release its judgment on the authorization of the class action before the end of February 2015.

In the wake of the derailment and ensuing litigation, MM&A filed for bankruptcy in Canada and the United States. In an Adversary Proceeding filed
by the MM&A U.S. bankruptcy trustee against CP, Irving Oil and the World Fuel entities, CP has been accused of failing to ensure that World Fuel or
Irving Oil properly classified the oil lading and of not refusing to ship the oil in DOT-111 tank cars. CP intends to move to withdraw the bankruptcy
court reference and will thereafter seek to have the claim against CP dismissed as federally preempted.

In addition, CP has received two damage to cargo notices of claims from the shipper of the oil on the derailed train, Western Petroleum. Western
Petroleum has submitted U.S. and Canadian notices of claims for the same damages and, under the Carmack Amendment (the U.S. damage to cargo
statute), seeks to recover for all injuries associated with, and indemnification for all claims arising from, 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.

At this early stage in the legal proceedings, any potential liability and the quantum of potential loss cannot be determined. Nevertheless, CP denies
liability for MM&A’s derailment and will vigorously defend itself in the proceedings described above and in any proceeding that may be commenced
in the future.

CP ANNUAL REPORT | 2014

Sale of the Dakota, Minnesota & Eastern Railroad West End

CP announced its intention to explore strategic options for a portion of its main line track of the DM&E, west of Tracy, Minnesota, on December 4,
2012. On January 2, 2014, the Company executed an agreement with G&W for the sale of DM&E West tracks between Tracy, Minnesota and Rapid
City, South Dakota, and between Colony, Wyoming and Crawford, Nebraska. DM&E West encompasses approximately 660 miles and the sale closed
on May 30, 2014 for U.S. $218 million (CDN $236 million) in gross proceeds.

Changes in Executive Officers

On May 7, 2014, CP announced Chief Executive Officer E. Hunter Harrison agreed to a contract extension with the railway for an additional year,
and will remain with the Company until 2017. Effective October 29, 2014, Mr. Laird Pitz was appointed Vice-President and Chief Risk Officer. On
January 21, 2015, the Company announced the appointment of Mr. Timothy Marsh as Senior Vice-President Sales and Marketing. Mr. Marsh
replaces Jane O’Hagan who left the Company on May 29, 2014. On February 11, 2015, the Company announced that Executive Vice President and
Chief Financial Officer Bart Demosky had decided to leave the Company. Mr. Demosky has agreed to stay on until May 31, 2015.

Changes in Board of Directors

Prior to the Company’s shareholder meeting on May 1, 2014, it was announced that Mr. Richard Kelly would not stand for re-election as a member
of the Company’s Board of Directors. On May 1, 2014, the Company announced that Gary Colter was elected Chairman of the Company’s Board of
Directors. Mr. Colter replaced Paul Haggis who continues to serve as a director of the Company. Effective May 20, 2014, the Hon. Jim Prentice
resigned as a member of the Company’s Board of Directors. Mr. Prentice had been appointed to the Board on June 7, 2013.

Environmental

Cash payments related to the Company’s environmental remediation program, described in Section 23, Critical Accounting Estimates, totaled $8
million in 2014, compared with $9 million in 2013 and $11 million in 2012. Cash payments for environmental initiatives are estimated to be
approximately $16 million in 2015, $11 million in 2016, $9 million in 2017 and a total of approximately $57 million over the remaining years
through 2024, which will be paid in decreasing amounts. All payments will be funded from general operations.

CP continues to be responsible for remediation work on portions of a property in the State of Minnesota and continues to retain liability accruals for
remaining future expected costs. The costs are expected to be incurred over approximately 10 years. The state’s voluntary investigation and
remediation program will oversee the work to ensure it is completed in accordance with applicable standards.

Certain Other Financial Commitments

In addition to the financial commitments mentioned previously in Section 19, Off-Balance Sheet Arrangements and Section 20, Contractual
Commitments, the Company is party to certain other financial commitments set forth in the table and discussed below.

Letters of Credit

Letters of credit are obtained mainly to provide security to third parties under the terms of various agreements, including workers’ compensation and
supplemental pension. 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 bi-lateral letter of credit facility.

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
2015 through 2032. These expenditures are expected to be financed by cash generated from operations or by issuing new debt.

At December 31, 2014

Amount of commitments per period
(in millions)

Commitments

Letters of credit
Capital commitments

Total commitments

Pension Plan Surplus and Deficit

Total

2015

2016 &
2017

2018 &
2019

2020 &
beyond

$ 412
427

412
288

–
100

$ 839

700

100

–
21

–
18

A description of future expectations related to the Company’s pension plans are included in Section 23, Critical Accounting Estimates.

Restructuring

Cash payments related to severance under all restructuring initiatives totaled $21 million in 2014, compared with $33 million in 2013 and $22
million in 2012. Cash payments for restructuring initiatives are estimated to be approximately $12 million in 2015, $6 million in 2016, $3 million in
2017, and a total of approximately $5 million over the remaining years through 2025. These amounts include residual payments to protected
employees for previous restructuring plans that have been completed.

22. BUSINESS RISKS

In the normal course of operations, the Company is exposed to various business risks and uncertainties that can have an effect on financial
condition. While some financial exposures are reduced through risk management strategies including the insurance and hedging programs CP has in
place, there are certain circumstances where the financial risks are not fully insurable or are driven by external factors beyond the Company’s
influence or control.

As part of the preservation and delivery of value to the Company’s shareholders, CP has developed an integrated Enterprise Risk Management
framework to support consistent achievement of key business objectives through daily pro-active management of risk. The objective of the program
is to actively manage those potential events that are identified through a thorough evaluation of risks. Each event identified is assessed based on the
potential impact and likelihood, taking account of financial, environmental, and reputational impacts, and existing management control. Risk
mitigation strategies are formulated to accept, treat, transfer, or eliminate the exposure to the identified events. Readers are cautioned that the
following is not an exhaustive list of all the risks to which CP is exposed, nor will the Company’s mitigation strategies eliminate all risks listed.

Competition

The Company faces significant competition for freight transportation in Canada and the U.S., including competition from other railways, pipelines,
trucking and barge companies. Competition is based mainly on price, quality of service and access to markets. Competition with the trucking
industry is generally based on freight rates, flexibility of service and transit time performance. The cost structure and service of competitors could
impact the Company’s competitiveness and have a materially adverse impact on business or operating results. Certain aspects of competition in
Canada are also subject to regulation and are discussed further in Regulatory Authorities below.

To mitigate competition risk, the Company’s strategies include:

▫ creating long-term value for customers and shareholders by profitably growing through collaborative supply chain solutions and aligned

investments with customers, delivering competitive and reliable service, developing markets that are consistent with the network’s strengths,
enhancing network capability, and selective use of long-term contracts;

▫ renewing and maintaining infrastructure to enable safe and efficient operations;

▫ driving efficiency through the operating plan to reduce costs and enhance the quality and reliability of service; and

▫ exercising a disciplined yield approach to competitive contract renewals and bids.

Liquidity

Revolving Credit Facility

On September 26, 2014, CP terminated its existing revolving credit facility agreement dated November 29, 2013. On the same day, CP entered into
a new revolving credit facility (the “facility”) agreement with 15 highly rated financial institutions for a commitment amount of U.S. $2 billion. The
facility includes a U.S. $1 billion five years portion and a U.S. $1 billion one year plus one year term out portion. The facility can accommodate draws
of cash and/or letters of credit at market competitive pricing. At December 31, 2014, the facility was undrawn. The facility agreement requires the
Company not to exceed a maximum debt to total capitalization ratio. At December 31, 2014, the Company satisfied the threshold stipulated in this
financial covenant.

Commercial Paper Program

During the fourth quarter of 2014, the Company established a commercial paper program which enabled it to issue commercial paper up to a
maximum aggregate principal amount of U.S. $1 billion in the form of unsecured promissory notes. The commercial paper program is backed by a
U.S. $1 billion committed, revolving credit facility, which matures on September 26, 2016. As at December 31, 2014, the Company had total
commercial paper borrowings of U.S. $675 million ($783 million in Canadian dollars) presented in Long-term debt on the Consolidated Balance
Sheets as the Company has the intent and the ability to renew these borrowings on a long-term basis. The weighted-average interest rate on these
borrowings was 0.44%. CP did not have a commercial paper program in 2013.

The Company presents issuances and repayments of commercial paper in the Consolidated Statements of Cash Flows on a net basis, all of which
have a maturity of less than 90 days.

CP ANNUAL REPORT | 2014

Bilateral Letter of Credit Facilities

During 2013, the Company entered into a series of committed and uncommitted bilateral letter of credit facility agreements with financial
institutions to support its requirement to post letters of credit in the ordinary course of business. The agreements have varying expiration dates with
the earliest expiry in August 2014. Under these agreements, the Company has the option to post collateral in the form of cash or cash equivalents,
equal at least to the face value of the letter of credit issued. Collateral provided includes highly liquid investments purchased three months or less
from maturity and is stated at cost, which approximates market value and is shown separately on the balance sheet as Restricted cash and cash
equivalents on the Consolidated Balance Sheets.

At December 31, 2014, under its bilateral facilities the Company had letters of credit drawn of $412 million from a total available amount of $600
million. The Company can largely withdraw this collateral during any month.

Regulatory Authorities

The Company’s railway operations are subject to extensive federal laws, regulations and rules in both Canada and the U.S. which directly affect how
operations and business activities are managed.

Operations are subject to economic and safety regulation in Canada primarily by the Canadian Transportation Agency (“the Agency”), Transport
Canada, the Canada Transportation Act (“CTA”) and the Railway Safety Act. The CTA provides shipper rate and service remedies, including Final
Offer Arbitration, competitive line rates and compulsory inter-switching in Canada. The Agency regulates the maximum revenue entitlement for the
movement of grain, commuter and passenger access, charges for ancillary services and noise-related disputes. Transport Canada regulates safety-
related aspects of railway operations in Canada.

The Company’s U.S. operations are subject to economic and safety regulation by the STB and Federal Railroad Administration (“FRA”). The STB is an
economic regulatory body with jurisdiction over railroad rate and service issues and reviewing proposed railroad mergers and other transactions. The
FRA regulates safety-related aspects of CP’s railway operations in the U.S. under the Federal Railroad Safety Act, as well as rail portions of other
safety statutes.

Various other regulators directly and indirectly affect the Company’s operations in areas such as health, safety, security, environmental and other
matters. To mitigate statutory and regulatory impacts, CP is actively and extensively engaged throughout the different levels of government and
regulators, both directly and indirectly through industry associations, including the Association of American Railroads (“AAR”) and the Railway
Association of Canada. No assurance can be given to the content, timing or effect on CP of any anticipated legislation or further legislative action.

Regulatory Change

On May 29, 2014, the Canadian Federal Government enacted the “Fair Rail for Grain Farmers Act” (the “Fair Rail Act”). This legislation requires the
Company and Canadian National Railway Company to move a minimum amount of grain, which amount is determined by and may be adjusted by
the federal cabinet. The federal cabinet has ordered continued weekly grain volume minimums for the period from November 30, 2014 to March 28,
2015. In addition, the Fair Rail Act expands the terms and conditions associated with the inter-switching provisions of the CTA in the provinces of
Alberta, Saskatchewan and Manitoba, provides that the Agency make regulations specifying what constitutes operational terms that may be subject
to service agreement arbitration and gives the Agency the power to order a railway to compensate any person who has incurred expenses because
of a failure to meet obligations under Sections 113 and 114 of the CTA, or does not meet its obligations under the terms of a confidential contract
that includes a compensation clause. Bill C-30 also amends the Canada Grain Act to permit the regulation of contracts relating to grain and the
arbitration of disputes respecting the provisions of those contracts.

After the tragic accident in Lac-Me´ gantic, Quebec in July of 2013 involving a non-related short-line railroad, the Government of Canada
implemented several measures pursuant to the Rail Safety Act and the Transportation of Dangerous Goods Act. These modifications implemented
changes with respect to rules associated with securing unattended trains, the classification of crude oil being imported, handled, offered for
transport or transported and the provision of information to municipalities through which dangerous goods are transported by rail. The U.S. federal
government has taken similar actions. These changes do not have a material impact on CP’s operating practices.

On November 19, 2013, the Agency initiated consultation on the current approach to determining the adequacy of railway third party liability
coverage and solicited input on possible improvements to the current regulatory framework. The consultation period ended on May 9, 2014. The
Company provided responses to the request for consultation. Based on the input received, the Agency may make changes to its administration of the
current regulatory framework, propose revisions to the regulatory framework or consult again with stakeholders on any proposed regulatory changes
with respect to railway third party liability coverage.

There is ongoing discussion with Canadian and American regulators concerning amendments to the regulation for the transportation of hazardous
commodities including the tank cars used for the transportation of crude oil. The U.S. Pipeline and Hazardous Materials Safety Administration
(“PHMSA”), in coordination with the FRA, issued a Notice of Proposed Rulemaking requesting comments on various possible new operational
requirements and enhanced tank car standards for trains hauling large volumes of certain flammable liquids. Among other things, PHMSA’s proposal
calls for rail routing risk assessments; notification to state emergency response commissions; reduced operating speeds; enhanced braking; and
enhanced standards for both new and existing tank cars. The AAR filed comments on behalf of the Class I railroads on September 30, 2014.

Transport Canada also issued its proposal to revise tank car standards for comments. It was generally consistent with the U.S. approach but did not
include as many varied operating requirements. The Railway Association of Canada filed comments on behalf of its members, including CP, on
August 29, 2014. CP does not own any tank cars used for commercial transportation of hazardous commodities.

Security

CP is subject to statutory and regulatory directives in Canada and the U.S. that address security concerns. CP plays a critical role in the North
American transportation system. Rail lines, facilities, and equipment, including rail cars carrying hazardous materials, could be direct targets or
indirect casualties of terrorist attacks. Regulations by the Department of Transportation and the Department of Homeland Security in the U.S. include
speed restrictions, chain of custody and security measures which can impact service and increase costs for the transportation of hazardous materials,
especially toxic inhalation materials. Legislative changes in Canada to the Transportation of Dangerous Goods Act are expected to add new security
regulatory requirements similar to those in the U.S. In addition, insurance premiums for some or all of the Company’s current coverage could
increase significantly, or certain coverage may not be available to the Company in the future. While CP will continue to work closely with Canadian
and U.S. government agencies, future decisions by these agencies on security matters or decisions by the industry in response to security threats to
the North American rail network could have a materially adverse effect on business or operating results.

As the Company strives to ensure customers have unlimited access to North American markets, CP has taken the following steps to provide
enhanced security and reduce the risks associated with the cross-border transportation of goods:

▫ to strengthen the overall supply chain and border security, the Company is a certified carrier in voluntary security programs, such as the Customs-

Trade Partnership Against Terrorism and Partners in Protection;

▫ to streamline clearances at the border, CP has implemented several regulatory security frameworks that focus on the provision of advanced
electronic cargo information and improved security technology at border crossings, including the implementation of the Vehicle and Cargo
Inspection System at five of the Company’s border crossings;

▫ to strengthen railway security in North America, the Company signed a revised voluntary Memorandum of Understanding with Transport Canada
and worked with the AAR to develop and put in place an extensive industry-wide security plan to address terrorism and security-driven efforts
seeking to restrict the routings and operational handlings of certain hazardous materials;

▫ to reduce toxic inhalation risk in high threat urban areas, CP works with the Transportation Security Administration; and

▫ to comply with U.S. regulations for rail security sensitive materials, CP has implemented procedures to maintain positive chain of custody and are

performing annual route assessments to select and use the route posing the least overall safety and security risk.

Positive Train Control

In the U.S., the Rail Safety Improvement Act requires Class I railroads to implement, by December 31, 2015, interoperable PTC on main track in the
U.S. that has passenger rail traffic or toxic inhalant hazard commodity traffic. The legislation defines PTC as a system designed to prevent train-to-
train collisions, over-speed derailments, incursions into established work zone limits, and the movement of a train through a switch left in the wrong
position. The FRA has issued rules and regulations for the implementation of PTC, and CP filed its PTC Implementation Plans in April 2010, which
outlined the Company’s solution for interoperability as well as its consideration of relative risk in the deployment plan. The Company is participating
in industry and government working groups to evaluate the scope of effort that will be required to comply with these regulatory requirements, and
to further the development of an industry standard interoperable solution that can be supplied in time to complete deployment. At this time CP
estimates the cost to implement PTC as required for railway operations in the U.S. to be up to U.S. $328 million. As at December 31, 2014, total
expenditures related to PTC were approximately $210 million, including approximately $26 million and $64 million for the fourth quarter and full
year of 2014 respectively, discussed further in Section 14, Liquidity and Capital Resources.

Labour Relations

At December 31, 2014, approximately 77% of CP’s workforce was unionized and approximately 75% of its workforce is located in
Canada. Unionized employees are represented by a total of 39 bargaining units. Agreements are in place with all seven bargaining units that
represent employees in Canada and all 32 bargaining units that represent employees in the Company’s U.S. operations.

Canada

All of the Canadian bargaining agreements are in place through at least December 31, 2014. Agreements with unions representing Canadian
running trades employees, Teamsters Canada Rail Conference (“TCRC”), and Canadian car and locomotive repair employees, Unifor, expired at the
end of 2014. On February 14, 2015, a tentative 4-year agreement was reached with Unifor. On February 16, 2015, the Company and TCRC agreed
to enter into binding arbitration after a day and a half work stoppage.

A tentative six year settlement was reached with the Canadian Rail Traffic Controllers on July 17, 2014. This agreement was ratified on August 27,
2014 and comes into effect on January 1, 2015. Agreements with the other four Canadian bargaining units expire at the end of 2017.

CP ANNUAL REPORT | 2014

U.S.

The Company is party to collective agreements with fourteen bargaining units of the Soo Line subsidiary, thirteen bargaining units of the D&H
subsidiary, and five bargaining units of the DM&E subsidiary.

Contracts with all fourteen bargaining units on Soo Line representing train service employees, car repair employees, locomotive engineers, yard
supervisors, clerks, machinists, boilermakers and blacksmiths, electricians, sheet metal workers, and mechanical labourers are open for negotiation
on January 1, 2015. Meetings have been scheduled with those bargaining units which have served formal notices, which to date include the
International Association of Machinist and Aerospace Workers (“IAMAW”) (machinists), the Transportation and Communications Union (“TCU”)
(clerical), the Brotherhood of Locomotive Engineers and Trainmen (“BLE&T”) (engineers) and the Sheet Metal Air Rail Transportation –
Transportation Division (“SMART-TD”) (conductors).

On the D&H, contracts for all thirteen bargaining units, including locomotive engineers, train service employees, car repair employees, signal
maintainers, yardmasters, electricians, machinists, mechanical labourers, track maintainers, clerks, police, engineering supervisors and mechanical
supervisors are open for negotiation January 1, 2015. Meetings have been scheduled with those bargaining units which have served formal notices,
including IAMAW (machinists), TCU (clerical, police, and mechanical and engineering supervisors) and BLE&T (engineers).

Agreements with three of the five bargaining units which cover all DM&E signal and communication workers, mechanics and maintenance of way
workers open for negotiation on January 1, 2015. Negotiations, which opened January 1, 2014, continue for the agreement covering engineers and
conductors on the former Iowa, Chicago, and Eastern Railroad (“IC&E”) portion of DM&E.

An hourly rated agreement was ratified and implemented December 1, 2014 with SMART-TD, and will be amendable on January 1, 2018.

Environmental Laws and Regulations

The Company’s operations and real estate assets are subject to extensive federal, provincial, state and local environmental laws and regulations
governing emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. If the
Company is found to have violated such laws or regulations it could materially affect the Company’s business or operating results. 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 implemented a comprehensive Environmental Management System to facilitate the reduction of environmental risk. CP’s annual
corporate Operations Environmental Plan states the current environmental goals, objectives and strategies.

Specific environmental programs are in place to address areas such as air emissions, wastewater, management of vegetation, chemicals and waste,
storage tanks and fuelling facilities. CP has also undertaken environmental impact assessments and risk assessments to identify, prevent and
mitigate environmental risks. There is continued focus on preventing spills and other incidents that have a negative impact on the environment.
There is an established Strategic Emergency Response Contractor network and spill equipment kits are located across Canada and the U.S. to ensure
a rapid and efficient response in the event of an environmental incident. In addition, emergency preparedness and response plans are regularly
updated and tested.

The Company has developed an environmental audit program that comprehensively, systematically and regularly assesses the Company’s facilities
for compliance with legal requirements and the Company’s policies for conformance to accepted industry standards. Included in this is a corrective
action follow-up process and semi-annual review by the Safety, Operations and Environment Committee established by the Board of Directors.

CP focuses on key strategies, identifying tactics and actions to support commitments to the community. The Company’s strategies include:

▫ protecting the environment;

▫ ensuring compliance with applicable environmental laws and regulations;

▫ promoting awareness and training;

▫ managing emergencies through preparedness; and

▫ encouraging involvement, consultation and dialogue with communities along the Company’s lines.

Climate Change

In both Canada and the U.S., the federal governments have not designated railway transportation as a large final emitter with respect to greenhouse
gas (“GHG”) emissions. The railway transportation industry is currently not regulated with respect to GHG emissions, nor does CP operate under a
regulated cap of GHG emissions. Growing support for climate change legislation is likely to result in changes to the regulatory framework in Canada
and the U.S., however, the timing and specific nature of those changes are difficult to predict. Specific instruments such as carbon taxes, and
technical and fuel standards have the ability to significantly affect the Company’s capital and operating costs. Restrictions, caps and/or taxes on the
emissions of GHG could also affect the markets for, or the volume of, the goods the Company transports.

The fuel efficiency of railways creates a significant advantage over trucking, which currently handles a majority of the market share of ground
transportation. Although trains are already three times more fuel efficient than trucks on a per ton-mile basis, the Company continues to adopt new
technologies to minimize the Company’s fuel consumption and GHG emissions.

Potential physical risks associated with climate change include damage to railway infrastructure due to extreme weather effects, (e.g. increased
flooding or winter storms). Improvements to infrastructure design and planning are used to mitigate the potential risks posed by weather events. The
Company maintains flood plans, winter operating plans, an avalanche risk management program and geotechnical monitoring of slope stability.

Financial Risks

Pension Funding Volatility

A description of pension funding volatility related to the Company’s pension plans are included in Section 23, Critical Accounting Estimates.

Fuel Cost Volatility

Fuel expense constitutes a significant portion of CP’s operating costs and can be influenced by a number of factors, including, without limitation,
worldwide oil demand, international politics, weather, refinery capacity, unplanned infrastructure failures, labour and political instability and the
ability of certain countries to comply with agreed-upon production quotas.

The Company’s mitigation strategy consists of fuel cost recovery programs which reflect changes in fuel costs that are included in freight rates.
Freight rates will increase when fuel prices rise and will decrease when fuel costs decrease. While fluctuations in fuel cost are mitigated, the risk
cannot be completely eliminated due to timing and the volatility in the market.

In the past, to address the residual portion of fuel costs not mitigated by fuel cost recovery programs, CP had an automatic hedging program. As a
result of improving coverage from the Company’s fuel cost recovery programs, CP exited its hedging program during the first quarter of 2013. Fuel
price management is discussed further in Section 18, Financial Instruments.

Foreign Exchange Risk

Although CP conducts business primarily in Canada, a significant portion of its revenues, expenses, assets and liabilities including debt are
denominated in U.S. dollars. The value of the Canadian dollar is affected by a number of domestic and international factors, including, without
limitation, economic performance, and Canadian, U.S. and international monetary policies. Consequently, the Company’s results are affected by
fluctuations in the exchange rate between these currencies. On average, a $0.01 weakening (or strengthening) of the Canadian dollar increases (or
reduces) EPS by approximately $0.07 per share. On an annualized basis, a $0.01 weakening (or strengthening) of the Canadian dollar positively (or
negatively) impacts Freight revenues by approximately $35 million and negatively (or positively) impacts Operating expenses by approximately $16
million. Foreign exchange translation on the Company’s U.S. dollar denominated long-term debt is excluded from these sensitivities. To manage this
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. Foreign
exchange management is discussed further in Section 18, Financial Instruments.

Interest Rate Risk

In order to meet the Company’s capital structure requirements, CP may enter into long-term debt agreements. These debt agreements expose CP to
increased interest costs on future fixed debt instruments and existing variable rate debt instruments should market rates increase. In addition, the
present value of the Company’s assets and liabilities will also vary with interest rate changes. To manage interest rate exposure, CP may enter into
forward rate agreements such as treasury rate locks or bond forwards that lock in rates for a future date, thereby protecting against interest rate
increases. CP may also enter into swap agreements whereby one party agrees to pay a fixed rate of interest while the other party pays a floating
rate. Contingent on the direction of interest rates, the Company may incur higher costs depending on the contracted rate. Interest rate management
is discussed further in Section 18, Financial Instruments.

General and Other Risks

Transportation of Dangerous Goods and Hazardous Materials

Railways, including CP, are legally required to transport dangerous goods and hazardous materials as part of their common carrier obligations
regardless of risk or potential exposure of loss. A train accident involving hazardous materials, including toxic inhalation of hazardous commodities
such as chlorine and anhydrous ammonia could result in catastrophic losses from personal injury and property damage, which could have a material
adverse effect on CP’s operations, financial condition and liquidity.

Legal Proceedings Related to Lac-Mégantic Rail Accident

Legal proceedings related to the tragic accident at Lac-Mégantic, Quebec are discussed in Section 21, Future Trends and Commitments.

CP ANNUAL REPORT | 2014

Supply Chain Disruptions

The North American transportation system is integrated. CP’s operations and service may be negatively impacted by service disruptions of other
transportation links such as ports, handling facilities, customer facilities, and other railways. A prolonged service disruption at one of these entities
could have a material adverse effect on CP’s operations, financial condition and liquidity.

Reliance on Technology and Technological Improvements

Information technology is critical to all aspects of the Company’s business. While the Company has business continuity and disaster recovery plans in
place, a significant disruption or failure of one or more of the information technology or communications systems could result in service interruptions
or other failures and deficiencies which could have a material adverse effect on results of operations, financial condition and liquidity. If CP is unable
to acquire or implement new technology, the Company may suffer a competitive disadvantage, which could also have an adverse effect on results of
operations, financial condition and liquidity.

Qualified Personnel

Changes in employee demographics, training requirements, and the availability of qualified personnel, particularly locomotive engineers and train-
persons, could negatively impact the Company’s ability to meet demand for rail service. The Company has workforce planning tools and programs in
place and are undertaking technological improvements to assist with manual tasks. Unpredictable increases in the demand for rail services may
increase the risk of having insufficient numbers of trained personnel, which could have a material adverse effect on the Company’s results of
operations, financial condition and liquidity. In addition, changes in operations and other technology improvements may significantly impact the
number of employees.

Severe Weather

CP is exposed to severe weather conditions including floods, avalanches, mudslides, extreme temperatures and significant precipitation that may
cause business interruptions that can adversely affect the Company’s entire rail network and result in increased costs, increased liabilities, and
decreased revenue, which could have a material adverse effect on CP’s operations, financial condition and liquidity.

Supplier Concentration

Due to the complexity and specialized nature of rail equipment and infrastructure, there can be a limited number of suppliers of this equipment and
material available. Should these specialized suppliers cease production or experience capacity or supply shortages, this concentration of suppliers
could result in CP experiencing cost increases or difficulty in obtaining rail equipment and materials. While CP manages this risk by sourcing key
products and services from multiple suppliers whenever possible, widespread business failures of suppliers could have a material adverse effect on
CP’s operations, financial condition and liquidity.

General Risks

There are factors and developments that are beyond the influence or control of the railway industry generally and CP specifically which may have a
material adverse effect on the Company’s business or operating results. The Company’s freight volumes and revenues are largely dependent upon
the performance of the North American and global economies, which remains uncertain, and other factors affecting the volumes and patterns of
international trade. CP’s bulk traffic is dominated by grain, metallurgical coal, fertilizers and sulphur. Factors outside of CP’s control which affect
bulk traffic include:
▫ with respect to grain volumes, domestic production-related factors such as weather conditions, acreage plantings, yields and insect populations;
▫ with respect to coal volumes, global steel production;
▫ with respect to fertilizer volumes, grain and other crop markets, with both production levels and prices being important factors; and
▫ with respect to sulphur volumes, gas production levels in southern Alberta, industrial production and fertilizer production, both in North America

and abroad.

The merchandise commodities transported by the Company include those relating to the forestry, energy, industrial, automotive and other consumer
spending sectors. Factors outside of CP’s control which affect this portion of CP’s business include the general state of the North American economy,
with North American industrial production, business investment and consumer spending being the general sources of economic demand. Housing,
auto production and energy development are also specific sectors of importance. Factors outside of CP’s control which affect the Company’s
intermodal traffic volumes include North American consumer spending and a technological shift toward containerization in the transportation
industry that has expanded the range of goods moving by this means.

Adverse changes to any of the factors outside of CP’s control which affect CP’s bulk traffic, the merchandise commodities transported by CP or CP’s
intermodal traffic volumes or adverse changes to fuel prices could have a material adverse effect on CP’s operations, financial condition and liquidity.

CP is also sensitive to factors including, but not limited to, natural disasters, security threats, commodity pricing, global supply and demand, and
supply chain efficiency. Other business risks include: potential increases in maintenance and operational costs, uncertainties of litigation, risks and
liabilities arising from derailments and technological changes.

23. CRITICAL ACCOUNTING ESTIMATES

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

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

Environmental Liabilities

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

Liabilities for environmental remediation may change from time to time as new information about previously untested sites becomes known. The net
liability may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which
cannot be quantified at this time, are not expected to be material to the Company’s financial position, but may materially affect income in the period
in which a charge is recognized. Material increases to costs would be reflected as increases to Other long-term liabilities and Accounts payable and
accrued liabilities on the Company’s Consolidated Balance Sheets and to Purchased services and other within Operating expenses on the
Consolidated Statements of Income.

At December 31, 2014 and 2013, the accrual for environmental remediation on the Company’s Consolidated Balance Sheets amounted to $91
million and $90 million respectively, of which the long-term portion amounting to $75 million in 2014 and $76 million in 2013 was included in
Other long-term liabilities and the short-term portion amounting to $16 million in 2014 and $14 million in 2013 was included in Accounts payable
and accrued liabilities. Total payments were $8 million in 2014 and $9 million in 2013. The U.S. dollar-denominated portion of the liability was
affected by the change in FX, resulting in an increase in environmental liabilities of $6 million in 2014 and $4 million in 2013.

Pensions and Other Benefits

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

Pension costs are actuarially determined using the projected-benefit method prorated over the credited service periods of employees. This method
incorporates best estimates of expected plan investment performance, salary escalation and retirement ages of employees. The expected return on
fund assets is calculated using market-related asset values developed from a five-year average of market values for the fund’s public equity securities
and absolute return strategies (with each prior year’s market value adjusted to the current date for assumed investment income during the
intervening period) plus the market value of the fund’s fixed income, real estate and infrastructure securities, subject to the market-related asset
value not being greater than 120% of the market value nor being less than 80% of the market value.

The discount rate used to determine the benefit obligation is based on market interest rates on high-quality corporate debt instruments with
matching cash flows. Unrecognized actuarial gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value
of plan assets are amortized over the expected average remaining service period of active employees expected to receive benefits under the plan
(approximately 10 years). Prior service costs arising from collectively bargained amendments to pension plan benefit provisions are amortized over
the term of the applicable union agreement. Prior service costs arising from all other sources are amortized over the expected average remaining
service period of active employees who were expected to receive benefits under the plan at the date of amendment.

The obligations with respect to post-retirement benefits, including health care and life insurance, are actuarially determined and are accrued using
the projected-benefit method prorated over the credited service periods of employees. The obligations with respect to post-employment benefits,
including some workers’ compensation and long-term disability benefits in Canada are the actuarial present value of benefits payable to employees
with existing claims for injuries or disability.

Pension Liabilities and Pension Assets

The Company included pension benefit liabilities of $279 million in Pension and other benefit liabilities and $9 million in Accounts payable and
accrued liabilities on the Company’s December 31, 2014 Consolidated Balance Sheets. The Company also included post-retirement benefits accruals

CP ANNUAL REPORT | 2014

of $387 million in Pension and other benefit liabilities and $20 million in Accounts payable and accrued liabilities on the Company’s December 31,
2014 Consolidated Balance Sheets. Accruals for self-insured workers compensation and long-term disability benefit plans, including $89 million in
Pension and other benefit liabilities, are discussed in the Legal and Personal Injury Liabilities section below.

The Company included pension benefit assets of $304 million in Pension assets on the Company’s December 31, 2014 Consolidated Balance Sheets.

Net Periodic Benefit Costs

Net periodic benefit costs for pensions and post-retirement benefits were included in Compensation and benefits on the December 31, 2014
Consolidated Statement of Income. Combined net periodic benefit credits for pensions and post-retirement benefits (excluding self-insured workers
compensation and long-term disability benefits) were $19 million in 2014, compared with net periodic benefit costs of $77 million in 2013.

Net periodic benefit credits for pensions were $44 million in 2014, compared with net periodic benefit costs of $50 million in 2013. The benefit
credit portion related to defined benefit pensions was $52 million in 2014, compared with the benefit cost portion of $43 million in 2013. The
benefit cost portion related to defined contribution pensions (equal to contributions) was $8 million in 2014, compared with $7 million for 2013. Net
periodic benefit costs for post-retirement benefits were $25 million in 2014, compared with $27 million in 2013.

CP estimates net periodic benefit costs for defined benefit pensions to be approximately $45 million in 2015, and net periodic benefit costs for
defined contribution pensions to be approximately $8 million in 2015. Net periodic benefit costs for post-retirement benefits in 2015 are not
expected to differ materially from the 2014 costs.

Pension Plan Contributions

The Company made contributions of $80 million to the defined benefit pension plans in 2014, compared with $98 million in 2013.

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. 2011, 2010 and 2009 contributions included voluntary prepayments of $600 million in December 2011, $650 million
in September 2010 and $500 million in December 2009 to the Company’s main Canadian defined benefit pension plan. CP continues to have
significant flexibility with respect to the rate at which these voluntary prepayments are applied to reduce future years’ pension contribution
requirements, which allows us to manage the volatility of future pension funding requirements.

CP estimates its aggregate pension contributions, including its defined benefit and defined contribution plan, to be in the range of $90 million to
$100 million in 2015, and in the range of $60 million to $110 million per year from 2016 to 2018. These estimates reflect the Company’s current
intentions with respect to the rate at which CP will apply the 2009, 2010 and 2011 voluntary prepayments against contribution requirements in the
next few years.

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

Pension Plan Risks

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

The plans’ investment policy provides a target allocation of approximately 46% of the plans’ assets to be invested in public equity securities. As a
result, stock market performance is a key driver in determining the pension funds’ asset performance. If the rate of investment return on the plans’
public equity securities in 2014 had been 10 percentage points higher (or lower) than the actual 2014 rate of investment return on such securities,
2015 net periodic benefit costs for pensions would be lower (or higher) by $22 million.

Changes in bond yields can result in changes to discount rates and to changes in the value of fixed income assets. If the discount rate as at
December 31, 2014 had been higher (or lower) by 0.1% with no related changes in the value of the pension funds’ investment in fixed income
assets, 2015 net periodic benefit costs for pensions would be lower (or higher) by $13 million. However, a change in bond yields would also lead to
a change in the value of the pension funds’ investment in fixed income assets, and this change would partially offset the impact to net periodic
benefit costs noted above.

The Company estimates that an increase in the discount rate of 0.1% would decrease the defined benefit pension plans’ projected benefit
obligations by approximately $155 million, and estimates that a decrease in the discount rate of 0.1% would increase the defined benefit pension
plans’ projected benefit obligations by approximately $158 million. Similarly, for every 0.1% the actual return on assets varies above (or below) the
estimated return for the year, the value of the defined benefit pension plans’ assets would increase (or decrease) by approximately $11 million.

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

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

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

In 2014, the Canadian Institute of Actuaries and the Society of Actuaries each published updated mortality tables based on broad pension plan
experience in Canada and the U.S., respectively. CP’s obligations for defined benefit pension and post-retirement benefit plans at December 31, 2014
are based on these new mortality tables, with adjustments to reflect actual plan mortality experience to the extent that credible experience data was
available. The changes to the new mortality tables increased the obligations for pensions and post-retirement benefits by approximately $225 million.

During 2014, the Board of Directors’ Finance Committee approved changes to the asset allocation policy, including new allocation ranges of 35% to
55% public equity, 20% to 40% fixed income, 4% to 20% real estate and infrastructure, and up to 18% absolute return strategies.

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 group approximately every three years to update depreciation rates. The depreciation studies are based on statistical analysis of
historical retirements of properties in the group and incorporate engineering estimates of changes in current operations and of technological
advances. CP depreciates the cost of properties, net of salvage, on a straight-line basis over the estimated useful life of the property group. The
estimates of economic lives are uncertain and can vary due to technological changes or in the rate of wear. Additionally, the depreciation rates are
updated to reflect the change in residual values of the assets in the class. Under the group depreciation method, retirements or disposals of
properties in the normal course of business are accounted for by charging the cost of the property less any net salvage to accumulated depreciation.
For the sale or retirement of larger groups of depreciable assets that are unusual and were not included 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.

Due to the capital intensive nature of the railway industry, depreciation represents a significant part of operating expenses. The estimated useful
lives of properties have a direct impact on the amount of depreciation recorded as a component of Properties on the Company’s Consolidated
Balance Sheets. At December 31, 2014 and 2013, accumulated depreciation was $6,505 million and $6,184 million respectively.

Revisions to the estimated useful lives and net salvage projections for properties 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 lives and net
salvage for each property group 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 road locomotives, the largest
asset group, increased (or decreased) by 5%, annual depreciation expense would decrease (or increase) by approximately $3 million.

The Company reviews the carrying amounts of properties when circumstances indicate that such carrying amounts may not be recoverable based on
future undiscounted cash flows. When such properties are determined to be impaired, recorded asset values are revised to their fair values and an
impairment loss is recognized.

Deferred Income Taxes

CP accounts for deferred income taxes based on the liability method. This method focuses on a Company’s balance sheet and the temporary
differences otherwise calculated from the comparison of book versus tax values. It is assumed that such temporary differences will be settled in the
deferred income tax assets and liabilities at the balance sheet date.

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

A deferred income tax expense of $354 million was included in Income tax expense for 2014 and $212 million was included in Income tax expense
in 2013. The increase in deferred income tax expense in 2014 was primarily due to higher pre-tax income and the asset impairment charge in 2013.
At December 31, 2014 and 2013, deferred income tax liabilities of $2,773 million and $2,903 million, respectively, were recorded as a long-term
liability and are comprised largely of temporary differences related to accounting for properties. Deferred income tax benefits of $56 million
realizable within one year were recorded as a current asset, compared to $344 million in 2013.

Legal and Personal Injury Liabilities

The Company is involved in litigation in Canada and the U.S. related to CP’s business. Management is required to establish estimates of the
potential liability arising from incidents, claims and pending litigation, including personal injury claims and certain occupation-related and property
damage claims.

CP ANNUAL REPORT | 2014

Accruals for incidents, claims and litigation, including WCB accruals, totaled $156 million, net of insurance recoveries, at December 31, 2014 and
$158 million at December 31, 2013. At December 31, 2014 and 2013 respectively, the total accrual included $89 million and $89 million in Pension
and other benefit liabilities, $15 million and $14 million in Other long-term liabilities and $53 million and $63 million in Accounts payable and
accrued liabilities, partially offset by $nil and $7 million in Accounts receivable, and $1 million and $1 million in Other assets.

Legal Liabilities

These estimates are determined on a case-by-case basis. They are based on an assessment of the actual damages incurred and current legal advice
with respect to settlements in other similar cases. CP employs experienced claims adjusters who investigate and assess the validity of individual
claims made against us and estimate the damages incurred.

A provision for incidents, claims or litigation is recorded based on the facts and circumstances known at the time. CP accrues for likely claims when
the facts of an incident become known and investigation results provide a reasonable basis for estimating the liability. The lower end of the range is
accrued if the facts and circumstances permit only a range of reasonable estimates and no single amount in that range is a better estimate than any
other. Additionally, for administrative expediency, a general provision for lesser value injury cases is kept. Facts and circumstances related to
asserted claims can change, and a process is in place to monitor accruals for changes in accounting estimates.

Personal Injury Liabilities

With respect to claims related to occupational health and safety in the provinces of Quebec, Ontario, Manitoba and B.C., claims administered
through the WCB are actuarially determined. In the provinces of Saskatchewan and Alberta, the Company is assessed for an annual WCB
contribution. As a result, this amount is not subject to estimation by management.

Railway employees in the U.S. are not covered by a workers’ compensation program, but are covered by U.S. federal law for railway employees. For
accrual purposes, a combination of case-by-case analysis and statistical analysis is utilized.

Provisions for incidents, claims and litigation charged to income, which are included in Purchased services and other on the Consolidated Statements
of Income, amounted to $29 million in 2014 and $40 million in 2013.

Goodwill

As part of the acquisition of DM&E in 2007, CP recognized goodwill of U.S. $147 million on the allocation of the purchase price, determined as the
excess of the purchase price over the fair value of the net assets acquired. Since the acquisition, the operations of DM&E have been integrated with
CP’s U.S. operations and the related goodwill is allocated to CP’s U.S. reporting unit. Goodwill is tested for impairment at least once per year as at
October 1st. The goodwill impairment test determines if the fair value of the reporting unit continues to exceed its net book value, or whether an
impairment charge is required. The fair value of the reporting unit is affected by projections of its profitability including estimates of revenue growth,
which are inherently uncertain.

The 2014 and 2013 annual test for impairment determined that the fair value of CP’s U.S. reporting unit exceeded the carrying value of the
allocated goodwill by approximately 102% and 47%, respectively.

The impairment test was performed primarily using an income approach based on discounted cash flows. A discount rate of 10.0% was used, based
on the Company’s weighted average cost of capital. The 2013 impairment test also used a discount rate of 10.0%. A change in discount rates of
0.25% would change the valuation by 4.0% to 4.4%. The valuation used revenue growth projections ranging from 4.0% to 14.8% annually. The
revenue growth projection in the 2013 impairment test was 4.0% to 7.4%. A change in the long term growth rate of 0.25% would change the
valuation by 2.5% to 2.75%. A secondary approach used in the valuation was a market approach which included a comparison of implied earnings
multiples of CP U.S. to trading earnings multiples of comparable companies. The derived value of CP U.S. using the income approach compared
favourably with the trading multiples of other Class I railroads. The income approach was chosen over the market approach; however, both
approaches conclude that the assets of CP U.S. are fairly valued.

Decreases to the profit projections, which could be caused by a prolonged economic recession, or increases to the discount rate used in the
valuation, could require an impairment in future periods. The carrying value of CP’s goodwill changes from period to period due to changes in the
exchange rate. At December 31, 2014, goodwill was $164 million and was $150 million in 2013, the increase was primarily due to the favourable
impact of the change in FX partially offset by the portion of goodwill effectively disposed with the sale of the DM&E West, discussed further in
Section 9, Operating Expenses.

24. SYSTEMS, PROCEDURES AND CONTROLS

The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934 (as amended)) to ensure that material
information relating to the Company is made known to them. The Chief Executive Officer and Chief Financial Officer have a process to evaluate
these disclosure controls and are satisfied that they are effective for ensuring that such material information is made known to them.

25. 2014 GUIDANCE UPDATES

2014 Guidance

In the 2013 annual MD&A, the Company outlined that it expected revenue growth to be 6-7%, operating ratio to be 65% or lower and Diluted
earnings per share (“EPS”) growth to be 30% or greater from 2013 annual Diluted EPS, excluding significant items, of $6.42. CP also outlined that
it expected to spend approximately $1.2 billion to $1.3 billion on capital programs in 2014.

Variance from 2014 Guidance

The Company’s 2014 actual results for revenue growth, Operating ratio, and adjusted EPS growth were in line with the latest guidance as disclosed
by the Company. Revenue growth was 8%, operating ratio was 64.7%, and adjusted EPS was $8.50, an increase of 32%. Adjusted operating ratio
and adjusted EPS are discussed further in Section 15, Non-GAAP Measures. Capital expenditures of $1.4 billion were higher than guidance,
discussed further in Section 14, Liquidity and Capital Resources.

26. GLOSSARY OF TERMS

AAR: Association of American Railroads, representing North America’s freight railroads and Amtrak.

Agency: The Canadian Transportation Agency, a regulatory agency under the Canada Transportation Act (“CTA”). The Agency regulates the grain
revenue cap, commuter and passenger access, Final Offer Arbitration, and charges for ancillary services and railway noise.

Average terminal dwell: The average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train
arriving in the terminal, a customer releasing the car to the Company, or a car arriving that is to be transferred to 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 train length – excluding local traffic: The average train length is the sum of each car and locomotive’s equipment length multiplied
by the distance travelled, divided by train miles. Local trains are excluded from this measure.

Average train speed: The average speed measures the line-haul movement from origin to destination including terminal dwell hours calculated by
dividing the total train miles traveled by the total hours operated. This calculation does not include delay time related to customer or foreign railways
and excludes the travel time and distance traveled by: i) trains used in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing
track.

Average train weight – excluding local traffic: 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.

Car miles per car day: The total car-miles for a period divided by the total number of active cars. Total car-miles include the distance travelled by
every car on a revenue-producing train and a train used in or around the Company’s yards. A car-day is assumed to equal one active car-day. An
active car is a revenue-producing car that is generating costs to CP on an hourly or mileage basis. Excluded from this count are i) cars that are not on
the track or are being stored; ii) cars that are in need of repair; iii) cars that are used to carry materials for track repair; iv) cars owned by customers
that are on the customer’s tracks; and v) cars that are idle and waiting to be reclaimed by CP.

Carloads: Revenue-generating shipments of containers, trailers and freight cars.

Casualty expenses: Includes costs associated with personal injuries, freight and property damages, and environmental mishaps.

Class I railroads: a railroad earning a minimum of U.S. $452.7 million in revenues annually as defined by the Surface Transportation Board in the
United States.

CP, the Company: 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.

CPRL: Canadian Pacific Railway Limited.

D&H: Delaware and Hudson Railway Company, Inc., a wholly owned indirect U.S. subsidiary of CPRL.

DM&E: Dakota, Minnesota & Eastern Railroad Corporation, a wholly owned indirect U.S. subsidiary of CPRL.

Employee: An individual, including trainees, who has worked more than 40 hours in a standard biweekly pay period. This excludes part time
employees, contractors, and consultants.

FRA: U.S. Federal Railroad Administration, a regulatory agency whose purpose is to promulgate and enforce rail safety regulations; administer
railroad assistance programs; conduct research and development in support of improved railroad safety and national rail transportation policy;
provide for the rehabilitation of Northeast Corridor rail passenger service; and consolidate government support of rail transportation activities.

CP ANNUAL REPORT | 2014

FRA personal injury rate per 200,000 employee-hours: 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.

FRA train accidents rate: 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. $10,500 or CDN $11,000 in damage.

Freight revenue per carload: The amount of freight revenue earned for every carload moved, calculated by dividing the freight revenue for a
commodity by the number of carloads of the commodity transported in the period.

Freight revenue per RTM: The amount of freight revenue earned for every RTM moved, calculated by dividing the total freight revenue by the
total RTMs in the period.

FX or Foreign Exchange: The value of the Canadian dollar relative to the U.S. dollar (exclusive of any impact on market demand).

GAAP: Accounting principles generally accepted in the United States of America.

GTMs or gross ton-miles: The movement of total train weight over a distance of one mile. Total train weight is comprised of the weight of the
freight cars, their contents and any inactive locomotives. An increase in GTMs indicates additional workload.

Locomotive productivity: The daily average GTMs divided by the active road horsepower. Active road horsepower excludes locomotives in yard
and short haul service, in repair status, in storage and in use on other railways.

Operating income: Calculated as total revenues less total operating expenses and is a common measure of profitability used by management.

Operating ratio: The ratio of total operating expenses to total revenues. A lower percentage normally indicates higher efficiency.

RTMs or revenue ton-miles: The movement of one revenue-producing ton of freight over a distance of one mile.

Soo Line: Soo Line Railroad Company, a wholly owned indirect U.S. subsidiary of CPRL.

STB: U.S. Surface Transportation Board, a regulatory agency with jurisdiction over railway rate and service issues and rail restructuring, including
mergers and sales.

U.S. gallons of locomotive fuel consumed per 1,000 GTMs: The total fuel consumed in freight and yard operations, including yard and
commuter service, but excluding fuel used in capital projects and other non-freight activities, for every 1,000 GTMs traveled. This is calculated by
dividing the total amount of fuel issued to the Company’s locomotives, by the total freight-related GTMs. The result indicates how efficiently CP is
using fuel.

Workforce: The total employees plus part time employees, contractors and consultants.

Canadian Pacific Railway Limited
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Accounting Principles Generally Accepted
In the United States of America

Except where otherwise indicated, all financial information reflected
herein is expressed in Canadian dollars

CP ANNUAL REPORT | 2014

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The information in this report is the responsibility of management. The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include some amounts based on
management’s best estimates and careful judgment. The consolidated financial statements include the accounts of Canadian Pacific Railway Limited,
Canadian Pacific Railway Company and all of its subsidiaries (the “Company” or “CP”). The financial information of the Company included in the
Company’s Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been
approved by the Board of Directors.

Our Board of Directors is responsible for reviewing and approving the consolidated financial statements and for overseeing management’s
performance of its financial reporting responsibilities. The Board of Directors carries out its responsibility for the consolidated financial statements
principally through its Audit Committee (the “Audit Committee”), consisting of four members, all of whom are independent directors. The Audit
Committee reviews the consolidated financial statements with management and the Independent Registered Public Accounting Firm prior to
submission to the Board for approval. The Audit Committee meets regularly with management, internal auditors, and the Independent Registered
Public Accounting Firm to review accounting policies, and financial reporting. The Audit Committee also reviews the recommendations of both the
Independent Registered Public Accounting Firm and the Company’s internal auditors for improvements to internal controls, as well as the actions of
management to implement such recommendations. The internal auditors and Independent Registered Public Accounting Firm have full access to the
Audit Committee, with or without the presence of management.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting in accordance with the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in “InternalControl-IntegratedFramework(2013)”. Based on this assessment,
management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by Deloitte LLP, Independent
Registered Public Accounting Firm, as stated in their report, which is included herein.

/s/ Bart Demosky
Bart Demosky
Executive Vice-President and
Chief Financial Officer

February 23, 2015

/s/ E. Hunter Harrison
E. Hunter Harrison
Chief Executive Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated financial statements of Canadian Pacific Railway Limited and subsidiaries (the “Company”), which
comprise the consolidated balance sheets as at December 31, 2014 and December 31, 2013, and the consolidated statements of income,
consolidated statements of comprehensive income, consolidated statements of cash flows, and consolidated statements of changes in shareholders’
equity for each of the years in the three-year period ended December 31, 2014, and a summary of significant accounting policies and other
explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Canadian Pacific Railway Limited
and subsidiaries as at December 31, 2014 and December 31, 2013 and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.

Other Matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal
control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2015 expressed an
unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte LLP
Chartered Accountants
February 23, 2015
Calgary, Canada

CP ANNUAL REPORT | 2014

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the internal control over financial reporting of Canadian Pacific Railway Limited and subsidiaries (the “Company”) as of
December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and
principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based
on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as at and for the year ended December 31, 2014 of the Company and our
report dated February 23, 2015 expressed an unmodified opinion on those financial statements.

/s/ Deloitte LLP
Chartered Accountants
February 23, 2015
Calgary, Canada

CONSOLIDATED STATEMENTS OF INCOME

Year ended December 31 (in millions of Canadian dollars)

2014

2013

2012

Revenues
Freight
Other

Total revenues

Operating expenses

Compensation and benefits (Note 31)
Fuel
Materials (Note 31)
Equipment rents
Depreciation and amortization
Purchased services and other (Note 31)
Asset impairments (Note 3)
Labour restructuring (Note 4)

Total operating expenses

Operating income
Less:

Other income and charges (Note 5)
Net interest expense (Note 6)

Income before income tax expense

Income tax expense (Note 7)

Net income

Earnings per share (Note 8)
Basic earnings per share
Diluted earnings per share

Weighted-average number of shares (millions) (Note 8)

Basic
Diluted

See Notes to Consolidated Financial Statements.

$ 6,464
156

6,620

1,352
1,048
193
155
552
985
–
(4)

4,281

2,339

19
282

2,038
562

5,982
151

6,133

1,385
1,004
160
173
565
998
435
(7)

4,713

1,420

17
278

1,125
250

$ 1,476

875

5,550
145

5,695

1,474
999
166
206
539
1,044
265
53

4,746

949

37
276

636
152

484

$
$

8.54
8.46

$
$

5.00
4.96

$
$

2.82
2.79

172.8
174.4

174.9
176.5

171.8
173.2

CP ANNUAL REPORT | 2014

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year ended December 31 (in millions of Canadian dollars)

Net income
Net (loss) gain in foreign currency translation adjustments, net of hedging activities
Change in derivatives designated as cash flow hedges
Change in pension and post-retirement defined benefit plans

Other comprehensive (loss) income before income taxes
Income tax recovery (expense) on above items (Note 9)
Equity accounted investments

Other comprehensive (loss) income (Note 9)

Comprehensive income

See Notes to Consolidated Financial Statements.

2014

2013

2012

$ 1,476
(32)
(49)
(941)

(1,022)
306
–

875
3
(1)
1,681

1,683
(418)
–

(716)

1,265

484
11
9
(50)

(30)
–
(2)

(32)

760

$ 2,140

452

CONSOLIDATED BALANCE SHEETS

As at December 31 (in millions of Canadian dollars except common shares)

2014

2013

Assets
Current assets

Cash and cash equivalents (Note 11)
Restricted cash and cash equivalents (Note 19)
Accounts receivable, net (Note 12)
Materials and supplies
Deferred income taxes (Note 7)
Other current assets

Investments (Note 14)
Properties (Note 15)
Assets held for sale (Notes 3 and 13)
Goodwill and intangible assets (Note 16)
Pension asset (Note 24)
Other assets (Notes 17 and 32)

Total assets

Liabilities and shareholders’ equity
Current liabilities

Accounts payable and accrued liabilities (Note 18)
Long-term debt maturing within one year (Note 19)

Pension and other benefit liabilities (Note 24)
Other long-term liabilities (Note 21)
Long-term debt (Note 19)
Deferred income taxes (Note 7)

Total liabilities

Shareholders’ equity

226
–
702
177
56
116

1,277
112
14,438
182
176
304
151

476
411
580
165
344
53

2,029
92
13,327
222
162
1,028
200

$ 16,640

17,060

1,277
134

1,411
755
432
5,659
2,773

11,030

1,189
189

1,378
657
338
4,687
2,903

9,963

Share capital (Note 23)
Authorized unlimited common shares without par value. Issued and outstanding are 166.1 million and 175.4 million

2,185

2,240

at December 31, 2014 and 2013, respectively.

Authorized unlimited number of first and second preferred shares; none outstanding.
Additional paid-in capital
Accumulated other comprehensive loss (Note 9)
Retained earnings

Total liabilities and shareholders’ equity

Commitments and contingencies (Note 27)

See Notes to Consolidated Financial Statements.

Approved on behalf of the Board:

36
(2,219)
5,608

5,610

34
(1,503)
6,326

7,097

$ 16,640

17,060

/s/ Gary F. Colter
Gary F. Colter, Director,
Chair of the Board

/s/ Isabelle Courville
Isabelle Courville, Director,
Chair of the Audit Committee

CP ANNUAL REPORT | 2014

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31 (in millions of Canadian dollars)

2014

2013

2012

Operating activities
Net income
Reconciliation of net income to cash provided by operating activities:

Depreciation and amortization
Deferred income taxes (Note 7)
Pension funding in excess of expense (Note 24)
Asset impairments (Note 3)
Labour restructuring, net (Note 4)

Other operating activities, net
Change in non-cash working capital balances related to operations (Note 10)

Cash provided by operating activities

Investing activities

Additions to properties (Note 15)
Proceeds from the sale of west end of Dakota, Minnesota and Eastern Railroad (Note 3)
Proceeds from sale of properties and other assets
Change in restricted cash and cash equivalents used to collateralize letters of credit (Note 19)
Other

Cash used in investing activities

Financing activities
Dividends paid
Issuance of common shares (Note 23)
Purchase of CP Common shares (Note 23)
Issuance of long-term debt, excluding commercial paper (Note 19)
Repayment of long-term debt, excluding commercial paper (Note 19)
Net issuance of commercial paper (Note 19)
Settlement of foreign exchange forward on long-term debt (Note 20)
Net decrease in short-term borrowing (Note 19)
Other

Cash used in financing activities

Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents

Cash position

(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

$ 1,476

875

484

552
354
(132)
–
(17)
14
(124)

565
212
(55)
435
(29)
(51)
(2)

539
140
(61)
265
50
(84)
(5)

2,123

1,950

1,328

(1,449)
236
52
411
–

(1,236)
–
73
(411)
(23)

(1,148)
–
145
–
(8)

(750)

(1,597)

(1,011)

(244)
62
(2,050)
–
(183)
771
17
–
(3)

(1,630)

(244)
83
–
–
(56)
–
–
–
(3)

(220)

(250)
476

143
333

(223)
198
–
71
(50)
–
–
(27)
1

(30)

(1)

286
47

Cash and cash equivalents at end of year (Note 11)

226

476

333

Supplemental disclosures of cash flow information:

Income taxes paid (refunded)
Interest paid

See Notes to Consolidated Financial Statements.

$
$

226
309

$
$

31
295

$
$

(3)
278

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in millions of Canadian dollars except per share data)

Balance at December 31, 2011

Net income
Other comprehensive loss (Note 9)
Dividends declared ($1.3500 per share)
Effect of stock-based compensation expense
Shares issued under stock option plan (Note 23)

Balance at December 31, 2012

Net income
Other comprehensive income (Note 9)
Dividends declared ($1.4000 per share)
Effect of stock-based compensation expense
Shares issued under stock option plan (Note 23)

Balance at December 31, 2013

Net income
Other comprehensive loss (Note 9)
Dividends declared ($1.4000 per share)
Effect of stock-based compensation expense
CP Common Shares repurchased (Note 23)
Shares issued under stock option plan (Note 23)

Share
capital

Additional
paid-in
capital

Accumulated
other
comprehensive
loss

Retained
earnings

Total
shareholders’
equity

1,854
–
–
–
–
273

2,127
–
–
–
–
113

2,240
–
–
–
–
(136)
81

86
–
–
–
25
(70)

41
–
–
–
17
(24)

34
–
–
–
19
–
(17)

(2,736)
–
(32)
–
–
–

(2,768)
–
1,265
–
–
–

(1,503)
–
(716)
–
–
–
–

5,445
484
–
(232)
–
–

5,697
875
–
(246)
–
–

6,326
1,476
–
(241)
–
(1,953)
–

4,649
484
(32)
(232)
25
203

5,097
875
1,265
(246)
17
89

7,097
1,476
(716)
(241)
19
(2,089)
64

Balance at December 31, 2014

$ 2,185

$ 36

$ (2,219) $ 5,608

$ 5,610

See Notes to Consolidated Financial Statements.

CP ANNUAL REPORT | 2014

CANADIAN PACIFIC RAILWAY LIMITED
Notes to Consolidated Financial Statements
December 31, 2014

Canadian Pacific Railway Limited (“CPRL”), through its subsidiaries (collectively referred to as “CP” or “the Company”), operates a transcontinental
railway in Canada and the United States. CP provides rail and intermodal transportation services over a network of approximately 13,700 miles,
serving the principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest
regions. CP’s railway network feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend the
Company’s market reach east of Montreal in Canada, throughout the U.S. and into Mexico. CP transports bulk commodities, merchandise freight
and intermodal traffic. Bulk commodities include grain, coal, fertilizers and sulphur. Merchandise freight consists of finished vehicles and automotive
parts, as well as forest and industrial and consumer products. Intermodal traffic consists largely of retail goods in overseas containers that can be
transported by train, ship and truck, and in domestic containers and trailers that can be moved by train and truck.

1 Summary of significant accounting policies

Generally accepted accounting principles in the United States of America (“GAAP”)

These consolidated financial statements are expressed in Canadian dollars and have been prepared in accordance with GAAP.

Principles of consolidation

These consolidated financial statements include the accounts of CP and all its subsidiaries. The Company’s investments in which it has significant
influence are accounted for using the equity method. All intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the year, the reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates, including those related to
environmental liabilities, pensions and other benefits, depreciable lives of properties, goodwill, deferred income tax assets and liabilities, as well as
legal and personal injury liabilities based upon currently available information. Actual results could differ from these estimates.

Principal subsidiaries

The following list sets out CPRL’s principal railway operating subsidiaries, including the jurisdiction of incorporation. All of these subsidiaries are
wholly owned, directly or indirectly, by CPRL as at December 31, 2014.

Principal subsidiary

Canadian Pacific Railway Company
Soo Line Railroad Company (“Soo Line”)
Delaware and Hudson Railway Company, Inc. (“D&H”)
Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”)
Mount Stephen Properties Inc. (“MSP”)

Revenue recognition

Incorporated under
the laws of

Canada
Minnesota
Delaware
Delaware
Canada

Railway freight revenues are recognized based on the percentage of completed service method. The allocation of revenue between reporting periods
is based on the relative transit time in each reporting period with expenses recognized as incurred. Volume rebates to customers are accrued as a
reduction of freight revenues based on estimated volume and contract terms as freight service is provided. Other revenues, including passenger
revenue, revenue from leasing certain assets, switching fees, and revenue from logistics services, are recognized as service is performed or
contractual obligations are met. Revenues are presented net of taxes collected from customers and remitted to government authorities.

Cash and cash equivalents

Cash and cash equivalents include highly-liquid short-term investments that are readily convertible to cash with original maturities of three months
or less, but exclude cash and cash equivalents subject to restrictions.

Restricted cash and cash equivalents

Cash and cash equivalents that are restricted as to withdrawal or usage, in accordance with specific agreements, are presented as restricted cash
and cash equivalents on the balance sheets.

Foreign currency translation

Assets and liabilities denominated in foreign currencies, other than those held through foreign subsidiaries, are translated into Canadian dollars at
the year-end exchange rate for monetary items and at the historical exchange rates for non-monetary items. Foreign currency revenues and expenses
are translated at the exchange rates in effect on the dates of the related transactions. Foreign exchange gains and losses, other than those arising
from the translation of the Company’s net investment in foreign subsidiaries, are included in income.

The accounts of the Company’s foreign subsidiaries are translated into Canadian dollars using the year-end exchange rate for assets and liabilities
and the average exchange rates during the year for revenues, expenses, gains and losses. Foreign exchange gains and losses arising from the
translation of these foreign subsidiaries’ accounts are included in “Other comprehensive (loss) income”. The majority of U.S. dollar-denominated
long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. As a result, unrealized foreign exchange (“FX”) gains
and losses on U.S. dollar-denominated long-term debt, designated as a hedge, are offset against foreign exchange gains and losses arising from the
translation of foreign subsidiaries’ accounts in “Other comprehensive (loss) income”.

Pensions and other benefits

Pension costs are actuarially determined using the projected-benefit method prorated over the credited service periods of employees. This method
incorporates management’s best estimates of expected plan investment performance, salary escalation and retirement ages of employees. The
expected return on fund assets is calculated using market-related asset values developed from a five-year average of market values for the fund’s
public equity securities and absolute return strategies (with each prior year’s market value adjusted to the current date for assumed investment
income during the intervening period) plus the market value of the fund’s fixed income, real estate and infrastructure securities, subject to the
market-related asset value not being greater than 120% of the market value nor being less than 80% of the market value. The discount rate used to
determine the projected benefit obligation is based on blended market interest rates on high-quality corporate debt instruments with matching cash
flows. Unrecognized actuarial gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of plan assets
are amortized over the expected average remaining service period of active employees expected to receive benefits under the plan (approximately
10 years). Prior service costs arising from collectively bargained amendments to pension plan benefit provisions are amortized over the term of the
applicable union agreement. Prior service costs arising from all other sources are amortized over the expected average remaining service period of
active employees who are expected to receive benefits under the plan at the date of amendment.

Costs for post-retirement and post-employment benefits other than pensions, including post-retirement health care and life insurance and some
workers’ compensation and long-term disability benefits in Canada, are actuarially determined on a basis similar to pension costs.

The over or under funded status of defined benefit pension and other post-retirement benefit plans are measured as the difference between the fair
value of the plan assets and the benefit obligation, and are recognized on the balance sheets. In addition, any unrecognized actuarial gains and
losses and prior service costs and credits that arise during the period are recognized as a component of “Other comprehensive (loss) income”, net of
tax.

Gains and losses on post-employment benefits that do not vest or accumulate, including some workers’ compensation and long-term disability
benefits in Canada, are included immediately in income as “Compensation and benefits”.

Materials and supplies

Materials and supplies are carried at the lower of average cost or market and consist primarily of fuel and parts used in the repair and maintenance
of track structures, equipment, locomotives and freight cars.

Properties

Fixed asset additions and major renewals are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated
depreciation and any impairment. When there is a legal obligation associated with the retirement of property, a liability is initially recognized at its
fair value and a corresponding asset retirement cost is added to the gross book value of the related asset and amortized to expense over the
estimated term to retirement. The Company reviews the carrying amounts of its properties whenever changes in circumstances indicate that such
carrying amounts may not be recoverable based on future undiscounted cash flows. When such properties are determined to be impaired, recorded
asset values are revised to their fair value.

The Company recognizes expenditures as additions to properties or operating expenses based on whether the expenditures increase the output or
service capacity, lower the associated operating costs or extend the useful life of the properties and whether the expenditures exceed minimum
physical and financial thresholds.

CP ANNUAL REPORT | 2014

Much of the additions to properties, both new and replacement properties, are self-constructed. These are initially recorded at cost, including direct
costs and attributable indirect costs, overheads and carrying costs. Direct costs include, among other things, labour costs, purchased services,
equipment costs and material costs. Attributable indirect costs and overheads include incremental long-term variable costs resulting from the
execution of capital projects. Indirect costs include largely local crew facilities, highway vehicles, work trains and area management costs. Overheads
primarily include a portion of the cost of the Company’s engineering department which plans, designs and administers these capital projects. These
costs are allocated to projects by applying a measure consistent with the nature of the cost based on cost studies. For replacement properties, the
project costs are allocated to dismantling and installation based on cost studies. Dismantling work is performed concurrently with the installation.

Ballast programs including undercutting, shoulder ballasting and renewal programs which form part of the annual track program are capitalized as
this work, and the related added ballast material, significantly improves drainage which in turn extends the life of ties and other track materials.
These costs are tracked separately from the underlying assets and depreciated over the period to the next estimated similar ballast program. Spot
replacement of ballast is considered a repair which is expensed as incurred.

The costs of large refurbishments are capitalized and locomotive overhauls are expensed as incurred, except where overhauls represent a betterment
of the locomotive in which case costs are capitalized.

The Company capitalizes development costs for major new computer systems.

The Company follows group depreciation which groups assets which are similar in nature and have similar economic lives. The property groups are
depreciated on a straight-line basis reflecting their expected economic lives determined by studies of historical retirements of properties in the group
and engineering estimates of changes in current operations and of technological advances. Actual use and retirement of assets may vary from
current estimates, which would impact the amount of depreciation expense recognized in future periods. Rail and other track material in the U.S. are
depreciated based directly on usage.

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. However, when removal costs exceed the salvage value on assets and the Company has no legal obligation to
remove the assets, the removal costs incurred are charged to income in the period in which the assets are removed and are not charged to
accumulated depreciation.

For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in depreciation studies, CP records a gain
or loss for the difference between net proceeds and net book value of the assets sold or retired.

Equipment under capital lease is included in Properties and depreciated over the period of expected use.

Assets held for sale

Assets to be disposed that meet the held for sale criteria are reported at the lower of their carrying amount and fair value, less costs to sell, and are
no longer depreciated.

Goodwill and intangible assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets upon acquisition of a business. Goodwill is assigned
to the reporting units that are expected to benefit from the business acquisition which, after integration of operations with the railway network, may
be different than the acquired business.

The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year, or more frequently as
economic events dictate. The fair value of the reporting unit is compared to its carrying value, including goodwill. If the fair value of the reporting
unit is less than its carrying value goodwill is potentially impaired. The impairment charge that would be recognized is the excess of the carrying
value of the goodwill over the fair value of the goodwill, determined in the same manner as in a business combination.

Intangible assets with finite lives are amortized on a straight-line basis over the estimated useful lives of the respective assets. Favourable leases,
customer relationships and interline contracts have amortization periods ranging from 15 to 20 years. When there is a change in the estimated
useful life of an intangible asset with a finite life, amortization is adjusted prospectively.

Financial instruments

Financial instruments are contracts that give rise to a financial asset of one party and a financial liability or equity instrument of another party.

Financial instruments are recognized initially at fair value, which is the amount of consideration that would be agreed upon in an arm’s length
transaction between willing parties.

Subsequent measurement depends on how the financial instruments have been classified. Accounts receivable and investments, classified as loans
and receivables, are measured at amortized cost, using the effective interest method. Certain equity investments, classified as available for sale, are

recognized at cost as fair value cannot be reliably established. Cash and cash equivalents are classified as held for trading and are measured at fair
value. Accounts payable, accrued liabilities, short-term borrowings, dividends payable, other long-term liabilities and long-term debt, classified as
other liabilities, are also measured at amortized cost.

Derivative financial instruments

Derivative financial and commodity instruments may be used from time to time by the Company to manage its exposure to risks relating to foreign
currency exchange rates, stock-based compensation, interest rates and fuel prices. When CP utilizes derivative instruments in hedging relationships,
CP identifies, designates and documents those hedging transactions and regularly tests the transactions to demonstrate effectiveness in order to
continue hedge accounting.

All derivative instruments are classified as held for trading and recorded at fair value. Any change in the fair value of derivatives not designated as
hedges is recognized in the period in which the change occurs in the Consolidated Statements of Income in the line item to which the derivative
instrument is related. On the Consolidated Balance Sheets they are classified in “Other assets”, “Other long-term liabilities”, “Other current assets”
or “Accounts payable and accrued liabilities” as applicable. Gains and losses arising from derivative instruments affect the following income
statement lines: “Revenues”, “Compensation and benefits”, “Fuel”, “Other income and charges”, and “Net interest expense”.

For fair value hedges, the periodic changes in values are recognized in income, on the same line as the changes in values of the hedged items are
also recorded. For a cash flow hedge, the change in value of the effective portion is recognized in “Other comprehensive (loss) income”. Any
ineffectiveness within an effective cash flow hedge is recognized in income as it arises in the same income account as the hedged item. Should a
cash flow hedging relationship become ineffective, previously unrealized gains and losses remain within “Accumulated other comprehensive loss”
until the hedged item is settled and, prospectively, future changes in value of the derivative are recognized in income. The change in value of the
effective portion of a cash flow hedge remains in “Accumulated other comprehensive loss” until the related hedged item settles, at which time
amounts recognized in “Accumulated other comprehensive loss” are reclassified to the same income or balance sheet account that records the
hedged item.

In the Consolidated Statements of Cash Flows, cash flows relating to derivative instruments designated as hedges are included in the same line as
the related hedged items.

The Company from time to time enters into foreign exchange forward contracts to hedge anticipated sales in U.S. dollars, the related accounts
receivable and future capital acquisitions. Foreign exchange translation gains and losses on foreign currency-denominated derivative financial
instruments used to hedge anticipated U.S. dollar-denominated sales are recognized as an adjustment of the revenues when the sale is recorded.
Those used to hedge future capital acquisitions are recognized as an adjustment of the property amount when the acquisition is recorded.

The Company from time to time enters into foreign exchange forward contracts as part of its short-term cash management strategy. These contracts
are not designated as hedges due to their short-term nature and are carried on the Consolidated Balance Sheets at fair value. Changes in fair value
are recognized in income in the period in which the changes occur.

The Company from time to time enters into interest rate swaps to manage the risk related to interest rate fluctuations. These swap agreements
require the periodic exchange of payments without the exchange of the principal amount on which the payments are based. Interest expense on the
debt is adjusted to include the payments owing or receivable under the interest rate swaps. These agreements are usually accounted for as cash flow
hedges with gains and losses recorded in “Accumulated other comprehensive loss” and amortized to “Net interest expense” in the period that
interest on the related debt is charged.

The Company from time to time enters into forward rate agreements to fix interest rates for anticipated issuances of debt. These agreements are
usually accounted for as cash flow hedges with gains and losses recorded in “Accumulated other comprehensive loss” and amortized to “Net
interest expense” in the period that interest on the related debt is charged.

Restructuring accrual

Restructuring liabilities are recorded at their present value. The discount related to liabilities is amortized to “Compensation and benefits” over the
payment period. Provisions for labour restructuring are recorded in “Other long-term liabilities”, except for the current portion, which is recorded in
“Accounts payable and accrued liabilities”.

Environmental remediation

Environmental remediation accruals, recorded on an undiscounted basis unless a reliably determinable estimate as to amount and timing of costs
can be established, cover site-specific remediation programs. The accruals are recorded when the costs to remediate are probable and reasonably
estimable. Certain future costs to monitor sites are discounted at a risk free rate. 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”.

Income taxes

The Company follows the liability method of accounting for income taxes. Deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

CP ANNUAL REPORT | 2014

The effect of a change in income tax rates on deferred income tax assets and liabilities is recognized in income in the period during which the
change occurs.

When appropriate, the Company records a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In
determining whether a valuation allowance is appropriate, CP considers whether it is more likely than not that all or some portion of CP’s deferred
tax assets will not be realized, based on management’s judgment using available evidence about future events.

At times, tax benefit claims may be challenged by a tax authority. Tax benefits are recognized only for tax positions that are more likely than not
sustainable upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50
percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in CP’s tax returns
that do not meet these recognition and measurement standards.

Investment and other similar tax credits are deferred on the Consolidated Balance Sheets and amortized to “Income tax expense” as the related
asset is recognized in income.

Earnings per share

Basic earnings per share are calculated using the weighted average number of Common Shares outstanding during the year. Diluted earnings per
share are calculated using the treasury stock method for determining the dilutive effect of options.

Stock-based compensation

CP follows the fair value based approach to account for stock options. Compensation expense and an increase in additional paid-in capital are
recognized for stock options over their vesting period, or over the period from the grant date to the date employees become eligible to retire when
this is shorter than the vesting period, based on their estimated fair values on the grant date, as determined using the Black-Scholes option-pricing
model.

Any consideration paid by employees on exercise of stock options is credited to share capital when the option is exercised and the recorded fair
value of the option is removed from additional paid-in capital and credited to share capital.

Compensation expense is also recognized for deferred share units (“DSUs”), performance share units (“PSUs”) and restricted share units (“RSUs”)
using the fair value method. Compensation expense is recognized over the vesting period, or for PSUs and DSUs only, over the period from the grant
date to the date employees become eligible to retire when this is shorter than the vesting period. Forfeitures of DSUs, PSUs and RSUs are estimated
at issuance and subsequently at the balance sheet date.

The employee share purchase plan (“ESPP”) gives rise to compensation expense that is recognized using the issue price by amortizing the cost over
the vesting period or over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting
period.

2 Accounting changes

Implemented in 2014

Unrecognized Tax Benefit Liability

In July 2013, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, an amendment to FASB
Accounting Standards Codification (“ASC”) Topic 740. The amendments require an entity to present an unrecognized tax benefit, or a portion of an
unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward, with certain exceptions. This ASU is effective prospectively for public entities for fiscal years, and interim periods within
those years, beginning after December 15, 2013. The adoption of this ASU did not have a material impact to the Company’s financial statements.

Future changes

Reporting discontinued operations and disclosures of disposals of components

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, an
amendment to FASB ASC Topic 205 and Topic 360. The update amends the definition of a discontinued operation in Topic 205, expands disclosure
requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose information about individually
significant components that are disposed of or held for sale and do not qualify as discontinued operations. In addition, an entity is required to
separately present assets and liabilities of a discontinued operation for all comparative periods and separately present assets and liabilities of assets
held for sale in the initial period in which the disposal group is classified as held for sale on the face of the consolidated balance sheets. For each
period in which assets and liabilities are separately presented on the consolidated balance sheets, those amounts should not be offset and presented
as a single amount. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning after
December 15, 2014, and will be applied prospectively. The adoption of this ASU is not expected to have a material impact to the Company’s
financial statements.

Revenue from contracts with customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, a new FASB ASC, Topic 606, which supersedes the
revenue recognition requirements in Topic 605 and most industry-specific guidance throughout the Industry Topics of the Codification. This new
standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires enhanced
disclosures about revenue to help users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. This ASU will be effective for public entities for fiscal years, and interim periods within those years, beginning
after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the ASU. The
Company has not, at this time, ascertained the full impact on the consolidated financial statements from the adoption of this new standard but does
not expect the impact to be material.

3 Asset impairments

(in millions of Canadian dollars)

Dakota, Minnesota & Eastern Railroad – West
Powder River Basin impairment and other investment(1)
Impairment loss on locomotives

Asset impairment, before tax

(1) Includes impairment of other investment of $5 million.

(a) Dakota, Minnesota & Eastern Railroad – West

2013

2012

(a) $
(b)
(c)

435
–
–

–
185
80

435

265

On January 2, 2014, the Company executed an agreement with Genesee & Wyoming Inc. (“G&W”) for the sale of a portion of CP’s DM&E line
between Tracy, Minnesota and Rapid City, South Dakota, Colony, Wyoming and Crawford, Nebraska and connecting branch lines (“DM&E West”).
The sale was subject to regulatory approval by the U.S. Surface Transportation Board (“STB”).

At December 31, 2013, CP classified DM&E West as an asset held for sale carried at CDN$222 million, being its estimated fair value less estimated
direct selling costs. As a result, the Company recorded an asset impairment charge and accruals for future costs associated with the sale totaling
CDN$435 million ($257 million after-tax) in 2013. The components of the asset impairment charge and charge for the accruals, which are subject to
closing adjustments, that were recorded against income as “Asset impairments” are as follows:

(in millions of Canadian dollars)

Property, plant and equipment
Intangible assets
Goodwill (Note 16)

Total asset impairment charge
Accruals for future costs

Total charge

2013

426
2
6

434
1

435

On May 30, 2014, the Company completed the sale of DM&E West to G&W for net proceeds of U.S. $218 million (CDN$236 million).

CP ANNUAL REPORT | 2014

(b) Powder River Basin impairment

As part of the acquisition of DM&E in 2007, CP acquired the option to build a 260 mile extension of its network into coal mines in the Powder River
Basin (“PRB”).

Due to continued deterioration in the market for domestic thermal coal, including a sharp deterioration in 2012, in 2012 CP deferred plans to extend
its rail network into the PRB coal mines indefinitely. As a result of this decision and in light of the declined market conditions, CP evaluated the
recoverability of the carrying amount of PRB assets and determined that this exceeded the estimated fair value by $180 million. The estimated fair
value represents the expected proceeds from the sale of the acquired land, as determined by a comparable market assessment. Other costs
associated with the acquisition of DM&E accumulated by CP since acquisition have been written down to $nil. The amount of impairment associated
with this indefinite deferral was $180 million ($107 million after-tax). The components of the PRB impairment that were charged against income as
“Asset impairments” in 2012 are as follows:

(in millions of Canadian dollars)

Option impairment
Construction plans, including capitalized interest
Land, land option appraisals, including capitalized interest

Total impairment

2012

26
134
20

180

In 2012, CP reached a decision to dispose of a certain series of locomotives to improve operating efficiencies, and accordingly performed an
impairment test on these assets. The impairment test determined that the net book value of these locomotives exceeded their estimated fair value by
$80 million. The estimated fair value represented the expected future cashflows from the disposal of these locomotives at that time. The impairment
charge of $80 million ($59 million after-tax) was recorded in “Asset impairments” and charged against income.

The Company has determined no further impairment is required.

4 Labour restructuring

CP recorded a recovery of $4 million in 2014 ($3 million after-tax) (2013 – a recovery of $7 million, $5 million after tax; 2012 – a charge of
$53 million, $39 million after tax) for a labour restructuring initiative in 2012 which was included in “Labour restructuring” in the Consolidated
Statements of Income, and “Accounts payable and accrued liabilities” and “Other long-term liabilities” in the Consolidated Balance Sheets. The
resulting position reductions were largely achieved by the end of 2014 with a small number expected to be completed in 2015.

At December 31, 2014, the provision for restructuring was $24 million (2013 – $50 million; 2012 – $89 million). The restructuring accrual was
primarily for labour liabilities arising for restructuring plans, including those from prior year initiatives. Payments are expected to continue in
diminishing amounts until 2025.

Set out below is a reconciliation of CP’s liabilities associated with its restructuring accrual:

(in millions of Canadian dollars)

Opening balance, January 1

Accrued(1)
Payments
Amortization of discount(2)

Closing balance, December 31

2014

2013

2012

$ 50
(7)
(21)
2

89
(8)
(33)
2

55
54
(22)
2

$ 24

(1) Includes recoveries of $4 million in the first quarter of 2014 and of $7 million in 2013 related to the fourth quarter 2012 labour restructuring initiative charge of
$53 million.
(2) Amortization of discount is charged to income as “Compensation and benefits”.

5 Other income and charges

(in millions of Canadian dollars)

Foreign exchange loss (gain) on long-term debt
Accretion income on long-term floating rate notes
Loss in fair value of long-term floating rate notes
Other foreign exchange losses (gains)
Advisory fees (related to shareholder matters)
Other

Total other income and charges

6 Net interest expense

(in millions of Canadian dollars)

Interest cost
Interest capitalized to Properties

Interest expense
Interest income

Net interest expense

2014

2013

2012

$ 11
–
–
–
–
8

$ 19

2
–
–
2
–
13

(2)
(3)
1
(1)
27
15

2014

2013

2012

$ 301
(15)

286
(4)

296
(13)

283
(5)

294
(15)

279
(3)

$ 282

278

276

Interest expense includes interest on capital leases of $12 million for the year ended December 31, 2014 (2013 – $19 million; 2012 – $19 million).

7 Income taxes

The following is a summary of the major components of the Company’s income tax expense:

(in millions of Canadian dollars)

Current income tax expense

Deferred income tax expense

Origination and reversal of temporary differences
Effect of tax rate increases
Effect of hedge of net investment in foreign subsidiaries
Tax credits
Other

Total deferred income tax expense

Total income taxes

Income before income tax expense

Canada
Foreign

Total income before income tax expense

Income tax expense

Current
Canada
Foreign

Total current income tax expense

Deferred
Canada
Foreign

Total deferred income tax expense

Total income taxes

2014

2013

2012

208

317
–
42
–
(5)

354

562

$ 1,269
769

$ 2,038

50
158

208

292
62

354

562

183
7
29
–
(7)

212

250

1,019
106

1,125

4
34

256
(44)

212

250

144
11
(9)
(4)
(2)

140

152

464
172

636

6
6

120
20

140

152

CP ANNUAL REPORT | 2014

The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and
income tax purposes and the effect of loss carry forwards. The items comprising the deferred income tax assets and liabilities are as follows:

(in millions of Canadian dollars)

Deferred income tax assets
Restructuring liability
Amount related to tax losses carried forward
Liabilities carrying value in excess of tax basis
Future environmental remediation costs
Tax credits carried forward including minimum tax
Other

Total deferred income tax assets

Deferred income tax liabilities
Properties carrying value in excess of tax basis
Other long-term assets carrying value in excess of tax basis
Other

Total deferred income tax liabilities

Total net deferred income tax liabilities
Current deferred income tax assets

Long-term deferred income tax liabilities

2014

2013

7
28
214
32
20
69

370

3,052
–
35

3,087

2,717
56

16
96
66
31
72
46

327

2,847
9
30

2,886

2,559
344

$ 2,773

2,903

The Company’s consolidated effective income tax rate differs from the expected statutory tax rates. Expected income tax expense at statutory rates is
reconciled to income tax expense as follows:

(in millions of Canadian dollars, except percentage)

Statutory federal and provincial income tax rate

Expected income tax expense at Canadian enacted statutory tax rates
Increase (decrease) in taxes resulting from:

Items not subject to tax
Canadian tax rate differentials
Foreign tax rate differentials
Effect of tax rate increases
Tax credits
Other

Income tax expense

2014

2013

2012

26.31% 26.32% 26.09%

$ 536

296

166

(5)
(1)
36
–
–
(4)

(6)
(1)
(36)
7
–
(10)

(4)
(1)
(17)
11
(4)
1

$ 562

250

152

The Company has no unrecognized tax benefits from capital losses at December 31, 2014 and 2013.

The Company has not provided a deferred liability for the income taxes, if any, which might become payable on any temporary difference associated
with its foreign investments because the Company intends to indefinitely reinvest in its foreign investments and has no intention to realize this
difference by a sale of its interest in foreign investments.

During the third quarter of 2013, legislation was enacted to increase the province of British Columbia’s corporate income tax rate. As a result, the
Company recalculated its deferred income taxes as at January 1, 2013 based on this change and recorded an income tax expense of $7 million in the
third quarter of 2013.

During the second quarter of 2012, legislation was enacted to cancel the previously planned province of Ontario’s corporate income tax rate
reductions. As a result of these changes, the Company recorded an income tax expense of $11 million in the second quarter of 2012, based on its
deferred income tax balances as at January 1, 2012.

At December 31, 2014, the Company had income tax operating losses carried forward of $94 million, which have been recognized as a deferred tax
asset. Certain of these losses carried forward will begin to expire in 2026, with the majority expiring between 2029 and 2034. The Company also
has minimum tax credits of approximately $15 million that will begin to expire in 2016 as well as investment tax credits of $5 million, certain of
which will begin to expire in 2018.

It is more likely than not that the Company will realize the majority of its deferred income tax assets from the generation of future taxable income, as
the payments for provisions, reserves and accruals are made and losses and tax credits carried forward are utilized.

The following table provides a reconciliation of uncertain tax positions in relation to unrecognized tax benefits for Canada and the United States for
the year ended December 31, 2014:

(in millions of Canadian dollars)

Unrecognized tax benefits at January 1
Increase in unrecognized:

Tax benefits related to the current year

Dispositions:

Gross uncertain tax benefits related to prior years

Unrecognized tax benefits at December 31

2014

2013

2012

$ 16

(1)

(7)

(2)

$ 17

If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2014 would impact the
Company’s effective tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense in the
Company’s Consolidated Statements of Income. The total amount of accrued interest and penalties in 2014 was $1 million (2013 – credit of $1
million; 2012 – $nil). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at December 31, 2014 was $5
million (2013 – $4 million; 2012 – $5 million).

The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, or the
relevant income tax in other international jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax
matters for the years through 2009. The federal and provincial income tax returns filed for 2010 and subsequent years remain subject to
examination by the taxation authorities.

All U.S. federal income tax returns and generally all U.S. state and local income tax returns are closed to 2007. The income tax returns for 2008 and
subsequent years continue to remain subject to examination by the taxation authorities.

The Company does not anticipate any material changes to the unrecognized tax benefits previously disclosed within the next twelve months as at
December 31, 2014.

Earnings per share

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

Diluted earnings per share have been calculated using the treasury stock method which assumes that any proceeds received from the exercise of in-
the-money options would be used to purchase Common Shares at the average market price for the period. For purposes of this calculation, at
December 31, 2014, there were 3.1 million dilutive options outstanding (2013 – 3.2 million; 2012 – 4.2 million).

The number of shares used in the earnings per share calculations is reconciled as follows:

(in millions)

Weighted average basic shares outstanding
Dilutive effect of weighted average number of stock options

Weighted average diluted shares outstanding

2014

2013

2012

172.8
1.6

174.9
1.6

171.8
1.4

174.4

176.5

173.2

In 2014, the number of options excluded from the computation of diluted earnings per share because their effect was not dilutive was 0.1 million
(2013 – nil; 2012 – 0.2 million).

CP ANNUAL REPORT | 2014

9 Other comprehensive (loss) income and accumulated other comprehensive loss

The components of “Accumulated other comprehensive loss”, net of tax, are as follows:

(in millions of Canadian dollars)

Unrealized foreign exchange gain (loss) on translation of the net investment in U.S. subsidiaries
Unrealized foreign exchange (loss) gain on translation of the U.S. dollar-denominated long-term debt designated as a

hedge of the net investment in U.S. subsidiaries

Deferred losses on settled hedge instruments
Unrealized effective (losses) gains on cash flow hedges
Amounts for defined benefit pension and other post-retirement plans not recognized in income
Equity accounted investments

Accumulated other comprehensive loss

Components of other comprehensive (loss) income and the related tax effects are as follows:

2014

2013

199

(88)

(84)
(16)
(34)
(2,282)
(2)

193
(16)
3
(1,593)
(2)

$ (2,219) $

(1,503)

(in millions of Canadian dollars)

For the year ended December 31, 2014
Unrealized foreign exchange gain (loss) on:

Translation of the net investment in U.S. subsidiaries
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of

the net investment in U.S. subsidiaries (Note 20)
Change in derivatives designated as cash flow hedges:

Realized loss on cash flow hedges recognized in income
Unrealized loss on cash flow hedges

Change in pension and other benefits actuarial gains and losses
Change in prior service pension and other benefit costs

Other comprehensive loss

For the year ended December 31, 2013
Unrealized foreign exchange gain (loss) on:

Translation of the net investment in U.S. subsidiaries
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of

the net investment in U.S. subsidiaries (Note 20)
Change in derivatives designated as cash flow hedges:

Realized loss on cash flow hedges recognized in income
Unrealized gain on cash flow hedges

Change in pension and other benefits actuarial gains and losses
Change in prior service pension and other benefit costs

Other comprehensive income

Before
tax amount

Income tax
recovery
(expense)

Net of tax
amount

287

–

287

(319)

(277)

(3)
(46)
(873)
(68)

–
12
234
18

(3)
(34)
(639)
(50)

$ (1,022)

$ 306

(716)

220

–

220

(217)

(189)

(19)
18
1,603
78

–
–
(427)
(19)

(19)
18
1,176
59

1,683

$ (418) $ 1,265

(in millions of Canadian dollars)

For the year ended December 31, 2012
Unrealized foreign exchange (loss) gain on:

Translation of the net investment in U.S. subsidiaries
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of

the net investment in U.S. subsidiaries (Note 20)
Change in derivatives designated as cash flow hedges:

Realized gain on cash flow hedges recognized in income
Unrealized gain on cash flow hedges

Change in pension and other benefits actuarial gains and losses
Change in prior service pension and other benefit costs
Equity accounted investments

Other comprehensive loss

Changes in accumulated other comprehensive loss (AOCL) by component:

Before
tax amount

Income tax
recovery
(expense)

Net of tax
amount

(58)

–

(58)

6
3
(62)
12
(2)

(32)

(9)

(1)
–
12
(2)
–

–

5
3
(50)
10
(2)

(32)

(in millions of Canadian dollars)

Opening balance, 2014

Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss

Net current-period other comprehensive income (loss)

Closing balance, 2014

Opening balance, 2013
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss

Net current-period other comprehensive income (loss)

Closing balance, 2013

(1) Amounts are presented net of tax.

Foreign currency
net of hedging
activities(1)

Derivatives and
other(1)

Pension and post-
retirement defined
benefit plans(1)

Total(1)

$ 105

$ (15)

$ (1,593) $ (1,503)

10
–

$ 115

74
31
–

105

(34)
(3)

(37)

$ (52)

$ (14)
17
(18)

(1)

$ (15)

(781)
92

(689)

(805)
89

(716)

$ (2,282) $ (2,219)

$ (2,828) $ (2,768)
1,126
139

1,078
157

1,235

1,265

$ (1,593) $ (1,503)

Amounts in Pension and post-retirement defined benefit plans reclassified from Accumulated other
comprehensive loss

Amortization of prior service costs(a)
Recognition of net actuarial loss(a)

Total before income tax
Income tax recovery

Net of income tax

(a) Impacts Compensation and benefits on the Consolidated Statements of Income.

Change in non-cash working capital balances related to operations

(in millions of Canadian dollars)

(Use) source of cash:
Accounts receivable, net
Materials and supplies
Other current assets
Accounts payable and accrued liabilities

Change in non-cash working capital

2014

2013

(68) $
192

$ 124
(32)

(58)
272

214
(57)

157

2014

2013

2012

$ (112) $ (29) $ (40)
7
15
13

7
(75)
56

(19)
5
41

$ (124) $

(2) $

(5)

CP ANNUAL REPORT | 2014

Cash and cash equivalents

(in millions of Canadian dollars)

Cash
Short-term investments:

Deposits with financial institutions

Total cash and cash equivalents

Accounts receivable, net

(in millions of Canadian dollars)

Freight
Non-freight

Allowance for doubtful accounts

Total accounts receivable, net

2014

2013

$ 226

109

–

367

$ 226

476

2014

2013

$ 535
189

724
(22)

408
192

600
(20)

$ 702

580

The Company maintains an allowance for doubtful accounts based on expected collectability of accounts receivable. Credit losses are based on
specific identification of uncollectible accounts, the application of historical percentages by aging category and an assessment of the current
economic environment. At December 31, 2014, allowances of $22 million (2013 – $20 million) were recorded in “Accounts receivable, net”. During
2014, provisions of $2 million of accounts receivable (2013 – $3 million; 2012 – $3 million) were recorded within “Purchased services and other”.

Assets held for sale

On November 17, 2014, the Company announced a proposed agreement with Norfolk Southern Corporation (“NS”) for the sale of approximately
283 miles of the Delaware and Hudson Railway Company, Inc.’s line between Sunbury, Pennsylvania, and Schenectady, New York. The assets
expected to be sold to NS upon completion of this transaction have been classified as “Assets held for sale” on the Company’s Consolidated
Balance Sheets. The assets continue to be reported at their carrying value as this is lower than their expected fair value. The sale to NS, when
agreed, will be subject to regulatory approval by the STB and is expected to close in 2015.

Investments

(in millions of Canadian dollars)

Rail investments accounted for on an equity basis
Other investments

Total investments

15 Properties

2014

2013

82
30

$ 112

67
25

2014

2013

2014

Average
annual depreciation
rate

(in millions of Canadian dollars)

Track and roadway
Buildings
Rolling stock
Information systems(1)
Other

Total

Accumulated
depreciation

Net book
value

Cost

2.5% $ 14,515
571
3.1%
3,737
2.3%
631
12.4%
1,489
4.5%

$ 4,126
150
1,414
297
518

$ 10,389
421
2,323
334
971

Cost

13,459
535
3,466
679
1,372

Accumulated
depreciation

Net book
value

3,877
138
1,338
338
493

9,582
397
2,128
341
879

$ 20,943

$ 6,505

$ 14,438

19,511

6,184

13,327

(1) During 2014, CP capitalized costs attributable to the design and development of internal-use software in the amount of $69 million (2013 – $85 million;
2012 – $105 million). Current year depreciation expense related to internal use software was $70 million (2013 – $84 million; 2012 – $78 million).

Capital leases included in properties

(in millions of Canadian dollars)

Buildings
Rolling stock

2014
Accumulated
depreciation

Net book
value

1
87

–
224

Cost

1
311

Total assets held under capital lease

$ 312

$ 88

$ 224

16 Goodwill and intangible assets

2013
Accumulated
depreciation

1
195

196

Net book
value

–
316

316

Cost

1
511

512

(in millions of Canadian dollars)

Balance at December 31, 2012
Amortization
Foreign exchange impact
DM&E West impairment (Note 3)

Balance at December 31, 2013
Amortization
Foreign exchange impact

Balance at December 31, 2014

Goodwill

Cost

146
–
10
(6)

150
–
14

24
–
–
(2)

22
–
–

Intangible assets
accumulated
amortization

Net
carrying
amount

(9)
(1)
–
–

(10)
(1)
1

15
(1)
–
(2)

12
(1)
1

$ 164

$ 22

$ (10)

$ 12

Intangible assets of $12 million (2013 – $12 million), acquired in the acquisition of DM&E, include favourable leases, customer relationships and
interline contracts.

The estimated amortization expense for intangible assets for 2015 to 2019 is insignificant each year.

17 Other assets

(in millions of Canadian dollars)

Unamortized fees on long-term debt
Long-term materials
Long-term receivables
Contracted customer incentives
Prepaid leases
Deferred hedging gains (Note 20)
Other

Total other assets

2014

2013

43
30
28
9
9
–
32

44
31
28
6
9
19
63

$ 151

200

Fees on long-term debt and contracted customer incentives are amortized to income over the term of the related debt and over the term of the
related revenue contract, respectively.

CP ANNUAL REPORT | 2014

Accounts payable and accrued liabilities

(in millions of Canadian dollars)

Trade payables
Accrued charges
Income and other taxes payable
Accrued interest
Payroll-related accruals
Accrued vacation
Dividends payable
Personal injury and other claims provision
Purchase of CP Common shares
Provision for environmental remediation (Note 21)
Stock-based compensation liabilities
Provision for restructuring (Note 4)
Other

Total accounts payable and accrued liabilities

Debt

(in millions of Canadian dollars)

6.500% 10-year Notes (A)
6.250% 10-year Medium Term Notes (A)
7.250% 10-year Notes (A)
9.450% 30-year Debentures (A)
5.100% 10-year Medium Term Notes (A)
4.500% 10-year Notes (A)
4.450% 12.5-year Notes (A)
7.125% 30-year Debentures (A)
5.750% 30-year Debentures (A)
5.950% 30-year Notes (A)
6.450% 30-year Notes (A)
5.750% 30-year Notes (A)
Secured Equipment Loan (B)
5.41% Senior Secured Notes (C)
6.91% Secured Equipment Notes (D)
5.57% Senior Secured Notes (E)
7.49% Equipment Trust Certificates (F)
3.88% Senior Secured Notes Series A & B (G)
4.28% Senior Secured Notes (H)
Other long-term loans (nil% – 5.50%)
Obligations under capital leases
(6.313% – 6.99%) (I)
Obligations under capital leases

(12.77%) (I)

Commercial paper (J)

Perpetual 4% Consolidated Debenture Stock (K)
Perpetual 4% Consolidated Debenture Stock (K)

Less: Long-term debt maturing within one year

2014

2013

407
324
95
75
72
66
58
45
39
16
14
11
55

358
343
46
79
67
67
62
57
–
14
20
29
47

$ 1,277

1,189

Currency
in which
payable

2014

2013

Maturity

May 2018
June 2018
May 2019
Aug. 2021
Jan. 2022
Jan. 2022
Mar. 2023
Oct. 2031
Mar. 2033
May 2037
Nov. 2039
Jan. 2042
Aug. 2015
Mar. 2024
Oct. 2024
Dec. 2024
Jan. 2021
Oct./Dec. 2026
Mar. 2027
2015 - 2025

U.S.$
CDN$
U.S.$
U.S.$
CDN$
U.S.$
U.S.$
U.S.$
U.S.$
U.S.$
CDN$
U.S.$
CDN$
U.S.$
CDN$
U.S.$
U.S.$
U.S.$
U.S.$
U.S.$

2022 - 2026

U.S.$

Jan. 2031

CDN$
U.S.$

U.S.$
G.B.£

319
374
405
290
125
287
405
406
282
515
400
284
62
121
156
65
96
148
77
2

147

3
783

292
374
371
266
125
262
371
372
258
471
400
260
80
116
167
62
96
140
73
2

277

3
–

5,752
35
6

5,793
134
5,659

4,838
32
6

4,876
189
4,687

At December 31, 2014, the gross amount of long-term debt denominated in U.S. dollars was U.S. $4,047 million (2013 – U.S. $3,527 million).

Annual maturities and principal repayments requirements, excluding those pertaining to capital leases, for each of the five years following 2014 are
(in millions): 2015 – $131; 2016 – $816; 2017 – $29; 2018 – $725; 2019 – $439.

A. These debentures and notes pay interest semi-annually and are unsecured, but carry a negative pledge.

B. The Secured Equipment Loan is collateralized by specific locomotive units with a carrying value of $63 million at December 31, 2014. The
floating interest rate is calculated based on a six-month average Canadian Dollar Offered Rate (calculated based on an average of Bankers’
Acceptance rates) plus 53 basis points (2014 – 1.89%; 2013 – 1.93%; 2012 – 1.97%). The Company makes blended payments of principal and
interest semi-annually. Final repayment of the remaining principal balance of $53 million is due in August 2015.

C. The 5.41% Senior Secured Notes are collateralized by specific locomotive units with a carrying value of $135 million at December 31, 2014. The
Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of U.S. $44 million is due in
March 2024.

D. The 6.91% Secured Equipment Notes are full recourse obligations of the Company collateralized by a first charge on specific locomotive units
with a carrying value of $131 million at December 31, 2014. The Company pays equal blended semi-annual payments of principal and interest up to
and including October 2024.

E. The 5.57% Senior Secured Notes are secured by specific locomotive units and other rolling stock with a combined carrying value of $57 million
at December 31, 2014. The Company pays equal blended semi-annual payments of principal and interest up to and including December 2024. Final
repayment of the remaining principal of U.S. $33 million is due in December 2024.

F. The 7.49% Equipment Trust Certificates are secured by specific locomotive units with a carrying value of $110 million at December 31, 2014.
The Company makes semi-annual payments that vary in amount and are interest-only payments or blended principal and interest payments. Final
repayment of the remaining principal of U.S. $11 million is due in January 2021.

G. These Notes are secured by locomotives previously acquired by the Company with a carrying value of $127 million at December 31, 2014. The
Company pays equal blended semi-annual payments of principal and interest up to and including December 2026. Final repayment of the remaining
principal of U.S. $69 million is due in the fourth quarter of 2026.

H. These Notes are secured by locomotives previously acquired by the Company with a carrying value of $66 million at December 31, 2014. The
Company pays equal blended semi-annual payments of principal and interest up to and including March 2027. Final repayment of the remaining
principal of U.S. $35 million is due in March 2027.

I. At December 31, 2014, capital lease obligations included in long-term debt were as follows:

(in millions of Canadian dollars)

Minimum lease payments in:

Total minimum lease payments
Less: Imputed interest

Present value of minimum lease payments
Less: Current portion

Long-term portion of capital lease obligations

Year

Capital leases

2015
2016
2017
2018
2019
Thereafter

14
14
14
14
14
160

230
(80)

150
(3)

147

During 2014, the Company had no additions to property, plant and equipment under capital lease obligations (2013 – $nil; 2012 – $nil).

The carrying value of the assets collateralizing the capital lease obligations was $224 million at December 31, 2014.

J. During the fourth quarter of 2014, the Company established a commercial paper program which enabled it to issue commercial paper up to a
maximum aggregate principal amount of U.S. $1 billion in the form of unsecured promissory notes. The commercial paper program is backed by a
U.S. $1 billion committed, revolving credit facility, which matures on September 26, 2016. As at December 31, 2014, the Company had total
commercial paper borrowings of U.S. $675 million (CDN $783 million) presented in “Long-term debt” on the Consolidated Balance Sheets
(2013 – $nil) as the Company has the intent and the ability to renew these borrowings on a long-term basis. The weighted-average interest rate on
these borrowings was 0.44%.

CP ANNUAL REPORT | 2014

The Company presents issuances and repayments of commercial paper in the Consolidated Statements of Cash Flows on a net basis, all of which
have a maturity less than 90 days.

K. The Consolidated Debenture Stock, authorized by an Act of Parliament of 1889, constitutes a first charge upon and over the whole of the
undertaking, railways, works, rolling stock, plant, property and effects of the Company, with certain exceptions.

L. During November 2013, CP extended its revolving credit agreement with 13 highly rated financial institutions and also contains an uncommitted
accordion feature. At December 31, 2013, the facility was undrawn.

At September 26, 2014, the Company terminated its existing revolving credit facility agreement dated as of November 29, 2013. On the same day,
CP entered into a new revolving credit facility (the “facility”) agreement with 15 highly rated financial institutions for a commitment amount of U.S.
$2 billion. The facility includes a U.S. $1 billion five year portion and a U.S. $1 billion one year plus one year term out portion. The facility can
accommodate draws of cash and/or letters of credit at market competitive pricing. At December 31, 2014, the facility is undrawn. The agreement
requires the Company not to exceed a maximum debt to total capitalization ratio. At December 31, 2014, the Company satisfied this threshold
stipulated in the financial covenant.

The weighted average annualized interest rate of the facility for drawn funds was not applicable in 2014 and 2013 compared to 2.94% in 2012.

In October 2014, CP terminated its existing uncommitted demand bilateral letter of credit facility agreements and entered into bilateral letter of
credit facility agreements with six highly rated financial institutions to support its requirement to post letters of credit in the ordinary course of
business. Under these agreements, the Company has the option to post collateral in the form of cash or cash equivalents, equal at least to the face
value of the letter of credit issued. These new agreements permit CP to withdraw amounts posted as collateral at any time; therefore, the amounts
posted as collateral are presented as “Cash and cash equivalents” on the Company’s Consolidated Balance Sheet.

At December 31, 2014, under its bilateral facilities the Company had letters of credit drawn of $412 million from a total available amount of $600
million. Prior to these bilateral agreements, letters of credit were drawn under the Company’s revolving credit facility. At December 31, 2014, under
the terms of the new bilateral letter of credit facilities, no cash and cash equivalents was recorded as “Restricted cash and cash equivalents”
(2013 – $411 million).

20 Financial instruments

A. Fair values of financial instruments

The Company categorizes its financial assets and liabilities measured at fair value in line with the fair value hierarchy established by GAAP that
prioritizes, with respect to reliability, the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels.
Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and give the highest priority to these inputs.
Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and give lower priority to
these inputs.

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of
approximately $6,939 million at December 31, 2014 (December 31, 2013 – $5,572 million) with a carrying value of $5,793 million (December 31,
2013 – $4,876 million). 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 interest and principal at estimated interest rates expected to be available to the Company at period
end. All derivatives and long-term debt are classified as Level 2.

B. Fair values of non-financial assets

At December 31, 2013, CP classified DM&E West as an asset held for sale carried at its estimated fair value less estimated direct selling costs (Note
3). The sale of DM&E West was completed during 2014. During 2012, CP reviewed certain properties for impairment (Note 3) and estimated the fair
values of those properties. These estimated fair values were based on measurements classified as Level 3 which resulted in the recording of a total
impairment charge in 2013 of $434 million and in 2012 of $265 million (Note 3). CP used third party information that was corroborated with other
internal information to estimate the fair value of these properties.

C. Financial risk management

Derivative financial instruments

Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, foreign exchange (“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 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 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.

Credit risk management

Credit risk refers to the possibility that a customer or counterparty will fail to fulfil its obligations under a contract and as a result create a financial
loss for the Company.

Foreign exchange 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
foreign exchange 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.

Occasionally the Company will enter into short-term FX forward contracts as part of its cash management strategy.

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
effective portion recognized in “Other comprehensive income” in 2014 was an unrealized foreign exchange loss of $319 million (2013 – unrealized
loss of $217 million; 2012 – unrealized gain of $69 million) (Note 9). The ineffectiveness during 2014 was negligible (2013 – $nil; 2012 – $nil).

Foreign exchange forward contracts

The Company may enter into FX forward contracts to lock-in the amount of Canadian dollars it has to pay on U.S. denominated debt maturities.

At December 31, 2014, the Company had no remaining FX forward contracts to fix the exchange rate on U.S. denominated debt maturities. During
2014, the Company settled the FX forward contract related to the repayment of a capital lease due in January 2014 for proceeds of $8 million. The
Company also settled, prior to maturity, the FX forward contracts related to the repayment of the 6.50% Notes due in May 2018 and its 7.25%
Notes due in May 2019 for proceeds of $17 million with the offset recorded as realized gains of $3 million in “Accumulated other comprehensive
loss” and $14 million in “Retained earnings”. Amounts remaining in “Accumulated other comprehensive loss” are being amortized to “Other
income and charges” until the underlying debts, which were hedged, are repaid.

During 2014, the combined realized and unrealized foreign exchange gains were $3 million and were recorded in “Other income and charges”
(2013 – unrealized gain of $18 million; 2012 – unrealized loss of $4 million) in relation to these derivatives. Gains recorded in “Other income and
charges” were largely offset by unrealized losses on the underlying debt which the derivatives were designated to hedge. Similarly, losses were
largely offset by unrealized gains on the underlying debt.

CP ANNUAL REPORT | 2014

At December 31, 2014, the Company expected that, during the next 12 months, a negligible amount of pre-tax gain would be reclassified to “Other
income and charges”.

At December 31, 2013, the unrealized gain derived from these FX forwards was $25 million of which $6 million was included in “Other current
assets” and $19 million in “Other assets” with the offset reflected as unrealized gains of $5 million in “Accumulated other comprehensive loss” and
$20 million in “Retained earnings”.

Interest rate management

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 fourth quarter of 2014, the Company entered into forward starting floating-to-fixed interest rate swap agreements (“forward starting
swaps”) totaling a notional U.S. $1.4 billion 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 probable forecasted notes are issued. Subsequent to the notes issuance, amounts in “Accumulated other
comprehensive loss” are reclassified to “Net interest expense”. As at December 31, 2014, the unrealized loss derived from the forward starting
swaps was $46 million of which $21 million was included in “Accounts payable and accrued liabilities” and $25 million in “Other long-term
liabilities” with the offset reflected in “Other comprehensive (loss) income” on the Consolidated Statements of Comprehensive Income.

Interest rate swaps

During the fourth quarter of 2014, the Company entered into floating-to-fixed interest rate swap agreements totaling U.S. $600 million to hedge the
variability in cash flow associated with fluctuations in interest rates on commercial paper issuances. These swaps expire in 2015 and are accounted
for as a cash flow hedge. The effective portion of changes in fair value of the swaps is recorded in “Accumulated other comprehensive loss”, net of
tax. Subsequent to the commercial paper issuance, the amounts recorded in “Accumulated other comprehensive loss” are reclassified to “Net
interest expense”. At December 31, 2014, the unrealized gain recorded in “Other current assets” on the Consolidated Balance Sheets, was not
significant. The offset was reflected in “Other comprehensive (loss) income” on the Consolidated Statements of Comprehensive Income. At
December 31, 2013, the Company had no outstanding interest rate swaps, nor did it enter into or unwind any such transactions during 2013.

Treasury rate locks

At December 31, 2014, the Company had net unamortized losses related to interest rate locks, which are accounted for as cash flow hedges, settled
in previous years totaling $21 million (December 31, 2013 – $22 million). This amount is composed of various unamortized gains and losses related
to specific debts which are reflected in “Accumulated other comprehensive loss” and are amortized to “Net interest expense” in the period that
interest on the related debt is charged. The amortization of these gains and losses resulted in a negligible increase to “Net interest expense” and
“Other comprehensive income” in 2014 (2013 – negligible; 2012 – negligible). At December 31, 2014, the Company expected that, during the next
12 months, a negligible amount of loss related to these previously settled derivatives would be reclassified to “Net interest expense”.

Fuel price management

The Company is exposed to commodity risk related to purchases of diesel fuel and the potential reduction in net income due to increases in the price
of diesel. Fuel expense constitutes a large portion of the Company’s operating costs and volatility in diesel fuel prices can have a significant impact
on the Company’s income. Items affecting volatility in diesel prices include, but are not limited to, fluctuations in world markets for crude oil and
distillate fuels, which can be affected by supply disruptions and geopolitical events.

21 Other long-term liabilities

(in millions of Canadian dollars)

Provision for environmental remediation, net of current portion(1)
Provision for restructuring, net of current portion(2) (Note 4)
Deferred gains on sale leaseback transactions
Deferred revenue on rights-of-way license agreements, net of current portion
Stock-based compensation liabilities, net of current portion
Asset retirement obligations (Note 22)
Deferred retirement compensation
Deferred hedging losses (Note 20)
Other, net of current portion

Total other long-term liabilities

2014

2013

75
13
25
33
145
23
24
25
69

76
21
31
31
69
24
16
–
70

$ 432

338

(1) As at December 31, 2014, the aggregate provision for environmental remediation, including the current portion was $91 million (2013 – $90 million).

(2) As at December 31, 2014, the aggregate provision for restructuring, including the current portion was $24 million (2013 – $50 million).

The deferred revenue on rights-of-way license agreements, and deferred gains on sale leaseback transactions are being amortized to income on a
straight-line basis over the related lease terms. Deferred income credits are being amortized over the life of the related asset.

Environmental remediation accruals

Environmental remediation accruals cover site-specific remediation programs. The estimate of the probable costs to be incurred in the remediation of
properties contaminated by past railway use reflects the nature of contamination at individual sites according to typical activities and scale of
operations conducted. CP has developed remediation strategies for each property based on the nature and extent of the contamination, as well as
the location of the property and surrounding areas that may be adversely affected by the presence of contaminants, considering available
technologies, treatment and disposal facilities and the acceptability of site-specific plans based on the local regulatory environment. Site-specific
plans range from containment and risk management of the contaminants through to the removal and treatment of the contaminants and affected
soils and ground water. The details of the estimates reflect the environmental liability at each property. 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”.
Payments are expected to be made over 10 years to 2024.

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, 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. Changes to costs are reflected as changes to “Other long-term liabilities” or “Accounts payable and accrued
liabilities” on the Consolidated Balance Sheets and to “Purchased services and other” within operating expenses on the Consolidated Statements of
Income. The amount charged to income in 2014 was $4 million (2013 – $6 million; 2012 – $4 million).

22 Asset retirement obligations

Asset retirement obligations are recorded in “Other long-term liabilities”. The majority of these liabilities are discounted at 6.25%. Accretion
expense is included in “Depreciation and amortization” on the Consolidated Statements of Income.

(in millions of Canadian dollars)

Opening balance, January 1
Accretion
Liabilities settled
Revision to estimated cash flows

Closing balance, December 31

2014

2013

$ 24
1
(1)
(1)

23
1
–
–

$ 23

CP ANNUAL REPORT | 2014

Upon the ultimate retirement of grain-dependent branch lines, the Company has to pay a fee, levied under the Canada Transportation Act, of
$30,000 per mile of abandoned track. The undiscounted amount of the liability was $38 million at December 31, 2014 (2013 – $39 million), which,
when present valued, was $20 million at December 31, 2014 (2013 – $21 million). The payments are expected to be made in the 2015 – 2044
period.

The Company also has a liability for a joint facility that will have to be settled upon retirement based on a proportion of use during the life of the
asset. The estimate of the obligation at December 31, 2014, was $21 million (2013 – $20 million), which, when present valued, was $3 million at
December 31, 2014 (2013 – $3 million). For purposes of estimating this liability, the payment related to the retirement of the joint facility is
anticipated to be made in 30 years.

23 Shareholders’ equity

Authorized and issued share capital

The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of First Preferred Shares and unlimited number of
Second Preferred Shares. At December 31, 2014, no First or Second Preferred Shares had been issued.

An analysis of Common Share balances is as follows:

(number of shares in millions)

Share capital, January 1
CP common shares repurchased
Shares issued under stock option plan

Share capital, December 31

2014

2013

2012

175.4
(10.3)
1.0

173.9
–
1.5

170.0
–
3.9

166.1

175.4

173.9

The change in the “Share capital” balances includes $3 million (2013 – $5 million; 2012 – $6 million) related to the cancellation of the TSARs
liability on exercise of tandem stock options, and $17 million (2013 – $24 million; 2012 – $70 million) of stock-based compensation transferred
from “Additional paid-in capital”.

Share repurchase

On February 20, 2014, the Board of Directors of the Company approved a share repurchase program, and in March 2014, the Company filed a new
normal course issuer bid (“bid”) to purchase, for cancellation, up to 5.3 million of its outstanding Common Shares. On September 29, 2014, the
Company announced the amendment of the bid to increase the maximum number of its Common Shares that may be purchased from 5.3 million to
12.7 million of its outstanding Common Shares, effective October 2, 2014. Under the filing, share purchases may be made during the twelve month
period that began March 17, 2014, and ends March 16, 2015. The purchases are made at the market price on the day of purchase, 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 the activities under the share repurchase program:

Number of common shares repurchased
Weighted-average price per share(1)
Amount of repurchase (in millions)(1)

(1) Includes brokerage fees.

24 Pensions and other benefits

2014

10,476,074
199.42
2,089

$
$

The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At December 31, 2014, the Canadian pension plans
represent approximately 99% of total combined pension plan assets and approximately 98% of total combined pension plan obligations.

The DB plans provide for pensions based principally on years of service and compensation rates near retirement. Pensions for Canadian pensioners
are partially indexed to inflation. Annual employer contributions to the DB plans, which are actuarially determined, are made on the basis of being
not less than the minimum amounts required by federal pension supervisory authorities.

CP reached agreements with all of the unions which it had been bargaining with in Canada in 2012. The new agreements introduced amendments
to pension plans. Among other changes, the amendments established a cap on pension for each year of pensionable service, including a cap on
some non-union employees’ pensions. Under the amendments, plan participants will continue to earn additional pensionable years of service as
before, but with a dollar limit on the pension amount for each year earned. Plan amendments resulting from collective bargaining are accounted for
in the periods the new agreements are ratified. The plan amendments resulting from the December 2012 arbitration award were contingent on CP

making plan amendments for non-union employees, and consequently were accounted for in the period CP made such amendments. As a result of
the plan amendments, the projected benefit obligation decreased by $135 million from December 31, 2012, with a corresponding increase to “Other
comprehensive (loss) income” and a reduction of “Accumulated other comprehensive loss” as prior service credits. The prior service credits are
recognized in net periodic pension expense over the remaining terms of the applicable union agreements (averaging approximately two years), and
over the expected average remaining service life of non-union employees.

The Company has other benefit plans including post-retirement health and life insurance for pensioners, and post-employment long-term disability
and workers’ compensation benefits, which are based on Company-specific claims. At December 31, 2014, the Canadian other benefits plans
represent approximately 96% of total combined other plan obligations.

The Finance Committee of the Board of Directors has approved an investment policy that establishes long-term asset mix targets which take into
account the Company’s expected risk tolerances. Pension plan assets are managed by a suite of independent investment managers, with the
allocation by manager reflecting these asset mix targets. Most of the assets are actively managed with the objective of outperforming applicable
benchmarks. In accordance with the investment policy, derivative instruments may be used to hedge or adjust existing or anticipated exposures.

To develop the expected long-term rate of return assumption used in the calculation of net periodic benefit cost applicable to the market-related
value of assets, the Company considers the expected composition of the plans’ assets, past experience and future estimates of long-term investment
returns. Future estimates of investment returns reflect the expected annual yield on applicable fixed income capital market indices, and the long-term
return expectation for public equity, real estate, infrastructure and absolute return investments and the expected added value (relative to applicable
benchmark indices) from active management of pension fund assets.

The Company has elected to use a market-related value of assets for the purpose of calculating net periodic benefit cost, developed from a five-year
average of market values for the plans’ public equity and absolute return investments (with each prior year’s market value adjusted to the current
date for assumed investment income during the intervening period) plus the market value of the plans’ fixed income, real estate and infrastructure
securities.

The benefit obligation is discounted using a discount rate that is a blended interest rate for a portfolio of high-quality corporate debt instruments
with matching cash flows. The discount rate is determined by management with the aid of third-party actuaries.

Net periodic benefit cost

The elements of net periodic benefit cost for DB pension plans and other benefits recognized in the year included the following components:

Pensions

Other benefits

(in millions of Canadian dollars)

2014

2013

2012

2014

2013

2012

Current service cost (benefits earned by employees in the year)
Interest cost on benefit obligation
Expected return on fund assets
Recognized net actuarial loss (gain)
Amortization of prior service costs

Net periodic benefit cost (recovery)

$ 106
477
(757)
190
(68)

135
445
(746)
267
(58)

131
452
(752)
208
2

$ 14
23
–
(2)
–

16
21
–
(11)
–

(52) $

$ 35

19
24
–
3
–

Projected benefit obligation, fund assets, and funded status

Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:

(in millions of Canadian dollars)

Change in projected benefit obligation:
Benefit obligation at January 1

Current service cost
Interest cost
Employee contributions
Benefits paid
Foreign currency changes
Plan amendments and other
Actuarial loss (gain)

Pensions

Other benefits

2014

2013

2014

2013

9,921
106
477
51
(579)
15
–
1,369

10,647
135
445
50
(602)
13
(135)
(632)

$ 483
14
23
–
(27)
2
–
22

535
16
21
–
(33)
2
–
(58)

Projected benefit obligation at December 31

$ 11,360

9,921

$ 517

483

CP ANNUAL REPORT | 2014

(in millions of Canadian dollars)

Change in fund assets:
Fair value of fund assets at January 1

Actual return on fund assets
Employer contributions
Employee contributions
Benefits paid
Foreign currency changes

Fair value of fund assets at December 31

Funded status – plan surplus (deficit)

Projected benefit obligation at December 31
Fair value of fund assets at December 31

Funded Status

All Other benefits plans were in a deficit position at December 31, 2014 and 2013.

Pension asset and liabilities in the Company’s Consolidated Balance Sheets

Amounts recognized in the Company’s Consolidated Balance Sheets are as follows:

(in millions of Canadian dollars)

Pension asset
Accounts payable and accrued liabilities
Pension and other benefit liabilities

Total amount recognized

Pensions

Other benefits

2014

2013

2014

2013

$ 10,722
1,088
80
51
(579)
14

$ 11,376

9,763
1,404
98
50
(602)
9

8
–
26
–
(27)
–

10,722

9
–
32
–
(33)
–

801

$ (510) $ (475)

2014

2013

Pension
plans in
surplus

Pension
plans in
deficit

$ (10,878)
11,182

$ (482)
194

304

$ (288)

Pension
plans in
surplus

(9,533)
10,561

Pension
plans in
deficit

(388)
161

1,028

(227)

Pensions

Other benefits

2014

$ 304
(9)
(279)

2013

1,028
(9)
(218)

2014

–
(34)
(476)

2013

–
(36)
(439)

801

$ (510)

(475)

The defined benefit pension plans’ accumulated benefit obligation as at December 31, 2014 was $10,975 million (2013 – $9,578 million). The
accumulated benefit obligation is calculated on a basis similar to the projected benefit obligation, except no future salary increases are assumed in
the projection of future benefits.

The measurement date used to determine the plan assets and the accrued benefit obligation is December 31. The most recent actuarial valuation for
pension funding purposes for the Company’s main Canadian pension plan was performed as at January 1, 2014. During 2015, the Company expects
to file a new valuation with the pension regulator.

Accumulated other comprehensive losses

Amounts recognized in accumulated other comprehensive losses are as follows:

(in millions of Canadian dollars)

Net actuarial loss:

Other than deferred investment gains
Deferred investment gains

Prior service cost
Deferred income tax

Total (Note 9)

Pensions

Other benefits

2014

2013

2014

2013

$ 3,895
(803)
(20)
(858)

2,982
(738)
(88)
(613)

$ 86
–
5
(23)

61
–
5
(16)

$ 2,214

1,543

$ 68

The unamortized actuarial loss and the unamortized prior service cost included in “Accumulated other comprehensive loss” that are expected to be
recognized in net periodic benefit cost during 2015 are $264 million and a recovery of $5 million, respectively, for pensions and $4 million and $1
million, respectively, for other post-retirement benefits.

Actuarial assumptions

Weighted-average actuarial assumptions used were approximately:

(percentages)

Benefit obligation at December 31:

Discount rate
Projected future salary increases
Health care cost trend rate

Benefit cost for year ended December 31:

Discount rate
Expected rate of return on fund assets
Projected future salary increases
Health care cost trend rate

2014

2013

2012

4.90
4.09
3.00
3.00
7.00(1) 8.00(2) 8.00(2)

4.28
3.00

4.28
4.90
7.75
7.75
3.00
3.00
7.50(2) 8.00(2) 8.00(2)

4.55
7.75
3.00

(1) The health care cost trend rate is assumed to be 7.00% in 2015 and 2016, and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2020
and thereafter.
(2) The health care cost trend rate was previously assumed to be 7.00% in 2015 (7.50% in 2014), and then decreasing by 0.50% per year to an ultimate rate of
5.00% per year in 2019 and thereafter.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in
the assumed health care cost trend rate would have the following effects:

(in millions of Canadian dollars)
Favourable (unfavourable)

Effect on the total of service and interest costs
Effect on post-retirement benefit obligation

One
percentage
point
increase

One
percentage
point
decrease

$ –
(6)

$ –
6

Plan assets

Plan assets are recorded at fair value. The major asset categories are public equity securities, debt securities, real estate, infrastructure and absolute
return investments. The fair values of the public equity and debt securities are primarily based on quoted market prices. Real estate values are based
on annual valuations performed by external parties, taking into account current market conditions and recent sales transactions where practical and
appropriate. Infrastructure values are based on the fair value of each fund’s assets as calculated by the fund manager, generally using a discounted
cash flow analysis that takes into account current market conditions and recent sales transactions where practical and appropriate. Absolute return
investments are a portfolio of units of externally managed hedge funds and are valued by the fund administrators.

The Company’s pension plan asset allocation, the current weighted average asset allocation targets and the current weighted average policy range
for each major asset class, were as follows:

Asset allocation (percentage)

Cash and cash equivalents
Fixed income
Public equity
Real estate and infrastructure
Absolute return

Total

Current
asset
allocation
target

0.5
29.5
46.0
12.0
12.0

100.0

Current
policy
range

0 – 5
20 – 40
35 – 55
4 – 20
0 – 18

Percentage of plan assets
at December 31

2014

1.7
21.9
52.5
7.6
16.3

100.0

2013

4.1
20.6
49.6
10.8
14.9

100.0

CP ANNUAL REPORT | 2014

Summary of the assets of the Company’s DB pension plans at fair values

The following is a summary of the assets of the Company’s DB pension plans at fair values at December 31, 2014 and 2013:

(in millions of Canadian dollars)

December 31, 2014
Cash and cash equivalents
Government bonds(1)
Corporate bonds(1)
Mortgages(2)
Public equities
(cid:129) Canada
(cid:129) U.S. and international

Real estate(3)
Infrastructure(4)
Absolute return(5)

(cid:129) Funds of hedge funds
(cid:129) Multi-strategy funds
(cid:129) Credit funds
(cid:129) Equity funds
Derivative assets(6)

December 31, 2013

Cash and cash equivalents
Government bonds(1)
Corporate bonds(1)
Mortgages(2)
Public equities
(cid:129) Canada
(cid:129) U.S. and international

Real estate(3)
Infrastructure(4)
Absolute return(5)

(cid:129) Funds of hedge funds
(cid:129) Multi-strategy funds
(cid:129) Credit funds
(cid:129) Equity funds
Derivative liabilities(6)(7)

Quoted prices in
active markets
for identical assets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

106
–
–
–

1,448
4,454
–
–

–
–
–
–
–

83
1,180
1,229
77

–
–
–
–

48
27
–
–

–
–
–
116
1

–
–
654
208

652
473
490
130
–

Total

189
1,180
1,229
77

1,496
4,481
654
208

652
473
490
246
1

$ 6,008

$ 2,761

$ 2,607

$ 11,376

155
–
–
–

1,304
3,979
–
–

–
–
–
–
–

282
1,314
849
52

37
20
–
–

–
–
–
–
(24)

–
–
–
–

–
–
847
314

563
403
434
193
–

437
1,314
849
52

1,341
3,999
847
314

563
403
434
193
(24)

5,438

2,530

2,754

10,722

(1) Government & Corporate Bonds:
Fair values for bonds are based on market prices supplied by independent sources as of the last trading day.

(2) Mortgages:
The fair value measurement of $77 million (2013 – $52 million) of mortgages categorized as Level 2 is based on current market yields of financial instruments of similar
maturity, coupon and risk factors.

(3) Real Estate:
The fair value of real estate investments of $654 million (2013 – $847 million) is based on property appraisals which use a number of approaches that typically include
a discounted cash flow analysis, a direct capitalization income method and/or a direct comparison approach. Appraisals of real estate investments are generally
performed semi-annually by qualified external accredited appraisers. There are no unfunded commitments for real estate as at December 31, 2014.

100

(4) Infrastructure:
Infrastructure fund values of $208 million (2013 – $314 million) are based on the fair value of the fund assets as calculated by the fund manager, generally using a
discounted cash flow analysis that takes into account current market conditions and recent sales transactions where practical and appropriate. As at December 31,
2014, unfunded commitments for infrastructure was negligible (2013 – $23 million).

(5) Absolute Return:
The fair value of absolute return fund investments is based on the net asset value reported by the fund administrators. The funds have different redemption policies and
periods. All hedge fund investments have contractual redemption frequencies, ranging from monthly to tri-annually, and redemption notice periods varying from 30 to
95 days. Hedge fund investments that have redemption dates less frequent than every four months or have restrictions on contractual redemption features at the
reporting date are classified as Level 3. There are no unfunded commitments for absolute return investments as at December 31, 2014.

▫ Fund of hedge funds invest in a portfolio of hedge funds that allocate capital across a broad array of funds and/or investment managers.

▫ Multi-strategy funds include funds that invest in broadly diversified portfolios of equity, fixed income and derivative instruments.

▫ Credit funds invest in an array of fixed income securities.

▫ Equity funds invest primarily in U.S. and global equity securities.

(6) The Company’s pension funds may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially
hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and
interest rate risk (Level 2); credit default swaps to manage credit risk (Level 2); and options to manage interest rate risk and volatility (Level 2).

(7) At December 31, 2013, derivatives were primarily being used to partially hedge foreign currency exposures.

Portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3)

During 2013 and 2014 the portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3)
changed as follows:

(in millions of Canadian dollars)

As at January 1, 2013
Contributions
Disbursements
Net realized gains
Increase in net unrealized gains

As at December 31, 2013
Contributions
Disbursements
Net transfer out of Level 3
Net realized gains
Increase (decrease) in net unrealized gains

As at December 31, 2014

Real Estate

Infrastructure Absolute Return

779
–
(22)
22
68

847
–
(236)
–
67
(24)

333
–
(42)
3
20

314
–
(97)
–
–
(9)

–
1,500
–
(2)
95

1,593
29
–
(116)
–
239

Total

1,112
1,500
(64)
23
183

2,754
29
(333)
(116)
67
206

$ 654

$ 208

$ 1,745

$ 2,607

Level 3 fair value measurements for absolute return, real estate and infrastructure investments are based on the net asset value reported by the fund
administrator, property appraisals and discounted cash flow analysis, of which there are no reasonable alternative assumptions. Therefore it is not
practicable to provide a sensitivity analysis.

Additional plan assets information

The Company’s expected long-term target return is 7.75%, net of all fees and expenses. In identifying the asset allocation ranges, consideration was
given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return
expectations and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation and
interest rates. When advantageous and with due consideration, derivative instruments may be utilized, provided the total value of the underlying
assets represented by financial derivatives, excluding currency forwards, is limited to 30% of the market value of the fund.

When investing in foreign securities, the plans are exposed to foreign currency risk; the effect of which is included in the valuation of the foreign
securities. The plans were 41% exposed to the U.S. dollar, 13% exposed to European currencies, and 5% exposed to various other currencies, as at
December 31, 2014.

At December 31, 2014, fund assets consisted primarily of listed stocks and bonds, including 184,392 of the Company’s Common Shares
(2013 –129,444) at a market value of $41 million (2013 – $21 million) and 6.25% Unsecured Notes issued by the Company at a par value of $2
million (2013 – $2 million) and a market value of $2 million (2013 – $2 million).

CP ANNUAL REPORT | 2014

101

Cash flows
In 2014, the Company contributed $88 million to its pension plans (2013 – $105 million; 2012 – $107 million), including $8 million to the DC plans
(2013 – $7 million; 2012 – $5 million), $67 million to the Canadian registered and U.S. qualified DB pension plans (2013 – $86 million; 2012 – $89
million), and $13 million to the Canadian non-registered supplemental pension plan (2013 – $12 million; 2012 – $13 million). In addition, the
Company made payments directly to employees, their beneficiaries or estates or to third-party benefit administrators of $26 million in 2014
(2013 – $32 million; 2012 – $35 million) with respect to other benefits.

Estimated future benefit payments

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

(in millions of Canadian dollars)

2015
2016
2017
2018
2019
2020 – 2024

Pensions Other benefits

562
579
595
610
624
3,272

36
35
35
34
34
162

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

Defined contribution plan

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

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

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

In 2014, the net cost of the DC plans, which generally equals the employer’s required contribution, was $8 million (2013 – $7 million; 2012 – $5
million).

Contributions to multi-employer plans

Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the
Company to this plan in 2014 in respect of post-retirement medical benefits were $4 million (2013 – $5 million; 2012 – $6 million).

25 Stock-based compensation

At December 31, 2014, the Company had several stock-based compensation plans, including stock option plan, various cash settled liability plans
and an employee stock savings plan. These plans resulted in an expense in 2014 of $110 million (2013 – $92 million; 2012 – $64 million).

Accelerated vesting due to changes in the composition of the Board of Directors

Most of the stock-based compensation plans include a provision whereby vesting is accelerated should certain changes in the composition of the
Board of Directors occur. These provisions were triggered on June 26, 2012 and the recognition of the revised vesting terms as outlined in the stock-
based compensation plans resulted in a credit to “Compensation and benefits” of $8 million in the second quarter of 2012. From February 28,
2012, accelerated vesting will only occur when the definition of change of control under the stock-based compensation plans is triggered and the
holder of the award is terminated without cause.

102

A. Stock Option Plan

Summary of stock options

The following table summarizes the Company’s stock option plan as of December 31:

Outstanding, January 1, 2014
New options granted
Exercised
Vested
Forfeited
Expired

Outstanding at December 31, 2014

Vested or expected to vest at
December 31, 2014(1)

Exercisable at December 31, 2014

Options outstanding

Nonvested options

Number of
options

3,360,483
426,020
(941,492)
–
(97,359)
(8,963)

2,738,689

Weighted
average
exercise price

77.15
173.98
64.76
–
132.67
102.52

94.35

Number of
options

1,733,846
426,020
–
(632,532)
(94,809)
(8,563)

1,423,962

2,729,773

1,314,727

94.19

70.25

N/A

Weighted
average
grant date
fair value

25.35
48.70
–
23.58
36.71
28.63

32.35

N/A

(1) As at December 31, 2014, the weighted average remaining term of vested or expected to vest options was 5.3 years with an aggregate intrinsic value of $355
million.

The following table provides the number of stock options outstanding and exercisable as at December 31, 2014 by range of exercise price and their
related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate
intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised
their options on December 31, 2014 at the Company’s closing stock price of $223.75.

Range of exercise prices

$36.29 – $69.50
$69.51 – $74.55
$74.56 – $117.48
$117.49 – $222.88

Total(1)

Options outstanding

Options exercisable

Weighted
average
years to
expiration

3.5
6.7
6.8
8.7
6.5

Weighted
average
exercise
price

55.63
73.08
89.65
152.84
94.35

Aggregate
intrinsic
value
(millions)

100
120
83
52
355

Number of
options

596,055
794,950
614,608
733,076
2,738,689

Weighted
average
exercise
price

55.63
72.87
86.24
129.76
70.25

Aggregate
intrinsic
value
(millions)

100
71
23
8
202

Number of
options

596,055
469,950
168,128
80,594
1,314,727

(1) As at December 31, 2014, the total number of in-the-money stock options outstanding was 2,738,689 with a weighted-average exercise price of $94.35. The
weighted-average year to expiration of exercisable stock options is 5.2 years.

Under the fair value method, the fair value of options at the grant date was approximately $21 million for options issued in 2014 (2013 – $20
million; 2012 – $28 million). The weighted average fair value assumptions were approximately:

Expected option life (years)(1)
Risk-free interest rate(2)
Expected stock price volatility(3)
Expected annual dividends per share(4)
Estimated forfeiture rate(5)
Weighted average grant date fair value of options granted during the year

2014

5.98
1.66%
29%

1.40

1.2%

$ 48.88

2013

6.25
1.60%
30%

1.40
1.2%

35.40

2012

6.03
1.47%
31%

1.40
1.2%

19.04

(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.

CP ANNUAL REPORT | 2014

103

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

Certain of the Company’s stock option plan are subject to post-vesting restrictions prior to expiry. The discount for these restrictions resulted in a
reduction of the fair value at grant date of options issued in 2012 of $2 million. This discount was estimated using the fair value of put options that,
together with the granted call options, mimicked the characteristics of the post-vesting restriction. The post-vesting restrictions do not relate to
grants in 2013 and 2014.

In 2014, the expense for stock options (regular and performance) was $18 million (2013 – $17 million; 2012 – $24 million). At December 31, 2014,
there was $16 million of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average
period of approximately 1.3 years.

The total fair value of shares vested for the stock option plan during 2014 was $15 million (2013 – $5 million; 2012 – $34 million).

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

(in millions of Canadian dollars)

Total intrinsic value
Cash received by the Company upon exercise of options

B. Other Share-based Plans

Performance share units plan

2014

2013

2012

115
62

103
83

118
198

During 2014, the Company issued 165,500 PSUs with a grant date fair value of $25 million. These units attract dividend equivalents in the form of
additional units based on the dividends paid on the Company’s Common Shares. PSUs vest and are settled in cash, or in CP common shares
approximately three years after the grant date, contingent upon CP’s performance (performance factor). The fair value of PSUs is measured, both on
the grant date and each subsequent quarter until settlement, using a Monte Carlo simulation model. The model utilizes multiple input variables that
determine the probability of satisfying the performance and market conditions stipulated in the grant.

In the second quarter of 2012, changes to the Board resulted in the immediate vesting of a pro-rata portion of all unvested PSUs with a total pay out
of $31 million in 2012.

The performance period for the PSUs issued in 2014 is January 1, 2014 to December 31, 2016. The performance factors for these PSUs are
Operating ratio, Free cash flow, Total Shareholder Return (“TSR”) compared to the S&P/TSX60 index, and TSR compared to Class I railways.
Beginning with PSUs granted in 2014, grant recipients who are eligible to retire and have provided six months of service during the performance
period are entitled to the full award. Previous to 2014, only a pro-rata share of units was retained at retirement.

The performance period for the PSUs issued in the fourth quarter of 2012 and in 2013 is January 1, 2013 to December 31, 2015. The performance
factors for these PSUs are Operating ratio, Free cash flow, Total Shareholder Return (“TSR”) compared to the S&P/TSX60 index, and TSR compared
to Class I railways.

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

Outstanding, January 1
Granted
Units, in lieu of dividends
Forfeited

Outstanding, December 31

2014

2013

349,925
165,500
3,296
(57,938)

200,702
206,405
3,498
(60,680)

460,783

349,925

In 2014, the expense for PSUs was $50 million (2013 – expense of $25 million; 2012 – expense recovery of $1 million). At December 31, 2014,
there was $50 million of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of
approximately 1.4 years.

Deferred share units plan

The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and
Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the market value of a Common Share at the
redemption date. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated.

104

Senior managers may elect to receive DSUs in lieu of cash payments for certain incentive programs. In addition, senior managers will be granted with
a 25% company match of the amount elected when acquiring Common Shares to meet ownership targets. The election to receive eligible payments
in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership
guidelines. Senior managers have five years to meet their ownership targets.

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.

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

Outstanding, January 1
Granted
Units, in lieu of dividends
Forfeited
Redeemed

Outstanding, December 31

2014

2013

332,221
58,460
2,572
(711)
(84,095)

357,740
76,035
4,145
(2,372)
(103,327)

308,447

332,221

During 2014, the Company granted 58,460 DSUs with a grant date fair value of $9 million. In 2014, the expense for DSUs was $28 million (2013 –
$32 million; 2012 – $23 million). At December 31, 2014, there was $3 million of total unrecognized compensation related to DSUs which is
expected to be recognized over a weighted-average period of approximately 0.7 years.

Restricted share units plan

The Company issued 16,325 RSUs in 2014 with a grant date fair value of $3 million. The RSUs are notional full value shares that attract dividend
equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. RSUs have no performance factors
attached to them and are subject to time vesting over various periods of up to 36 months. RSUs are settled in cash up to three years after the grant
date. An expense to income for RSUs is recognized over the vesting period for both the initial subscription price and the change in value between
reporting periods. In 2014, the expense for RSUs was $9 million (2013 – $10 million; 2012 – $7 million). At December 31, 2014, there was $3
million of total unrecognized compensation related to RSUs which is expected to be recognized over a weighted-average period of approximately 2.0
years.

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

Outstanding, January 1
Granted
Units, in lieu of dividends
Exercised
Forfeited

Outstanding, December 31

Summary of share based liabilities paid

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

(in millions of Canadian dollars)

Plan
DSUs
PSUs
RSUs

Total

2014

2013

92,333
16,325
700
(53,964)
(7,874)

173,234
–
1,304
(70,211)
(11,994)

47,520

92,333

2014

2013

2012

$ 17
–
12

$ 29

17
–
9

19
55
–

CP ANNUAL REPORT | 2014

105

C. Employee share purchase plan

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

The total number of shares purchased in 2014 on behalf of participants, including the Company contribution, was 176,906 (2013 – 271,934;
2012 – 445,951). In 2014, the Company’s contributions totalled $5 million (2013 – $5 million; 2012 – $4 million) and the related expense was $5
million (2013 – $5 million; 2012 – $4 million).

26 Variable interest entities

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

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

The financial exposure to the Company as a result of its involvement with the variable interest entities is equal to the fixed lease payments due to
the trusts. In 2014, lease payments after tax were $10 million. Future minimum lease payments, before tax, of $209 million will be payable over the
next 16 years (Note 27).

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

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

27 Commitments and contingencies

In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to
property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions
outstanding or pending at December 31, 2014, 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.

Commitments

At December 31, 2014, the Company had committed to total future capital expenditures amounting to $427 million and operating expenditures
relating to supplier purchase obligations, such as locomotive maintenance and overhaul agreements, as well as agreements to purchase other goods
and services amounting to approximately $1.4 billion for the years 2015-2032 of which CP estimates approximately $700 million will be incurred in
the next 5 years.

As at December 31, 2014, the Company’s commitments under operating leases were estimated at $569 million in aggregate, with minimum annual
payments in each of the next five years and thereafter as follows:

(in millions of Canadian dollars)

2015
2016
2017
2018
2019
Thereafter

Total minimum lease payments

Operating
leases

114
88
67
55
43
202

569

Expenses for operating leases for the year ended December 31, 2014, were $121 million (2013 – $154 million; 2012 – $182 million).

106

Legal proceedings related to Lac-Mégantic rail accident

Following this incident, the Minister of Sustainable Development, Environment, Wildlife and Parks of Quebec issued an order directing certain named
parties to recover the contaminants and to clean up and decontaminate the derailment site. CP was added as a named party on August 14, 2013.
CP is a party to an administrative appeal with respect to this order. No hearing date on the merits of CP’s appeal has been scheduled.

In the wake of the derailment and ensuing litigation, MM&A filed for bankruptcy in Canada and the United States. In an Adversary Proceeding filed
by the MM&A U.S. bankruptcy trustee against CP, Irving Oil and the World Fuel entities, CP has been accused of failing to ensure that World Fuel or
Irving properly classified the oil lading and of not refusing to ship the oil in DOT-111 tank cars. CP intends to move to withdraw the bankruptcy court
reference and will thereafter seek to have the claim against CP dismissed as federally preempted.

28 Guarantees

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

▫ residual value guarantees on operating lease commitments of $120 million at December 31, 2014;

▫ guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in

the operation of the railway through operating leases, rental agreements, easements, trackage and interline agreements; and

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

The maximum amount that could be payable under these guarantees, excluding residual value guarantees, cannot be reasonably estimated due to
the nature of certain of these guarantees. All or a portion of amounts paid under guarantees to other parties in the event of the occurrence of
specified events could be recoverable from other parties or through insurance. The Company has accrued for all guarantees that it expects to pay. At
December 31, 2014, these accruals amounted to $3 million (2013 – $6 million), recorded in “Accounts payable and accrued liabilities”.

Indemnifications

Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Plan, the Company has
undertaken to indemnify and save harmless the trustee, to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs
and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The
indemnity includes liabilities, costs or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined
contribution option of the pension plans or otherwise with respect to the assets of the pension plans that are not part of the fund. The indemnity
survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry. At December 31,
2014, the Company had not recorded a liability associated with this indemnification, as it does not expect to make any payments pertaining to it.

29 Management transition

On May 17, 2012, following a proxy contest, Mr. Fred Green left his position as President and Chief Executive Officer of the Company. That same
day, Mr. Stephen Tobias, a new Board member elected at the Company’s annual shareholders meeting held on May 17, 2012, was appointed by the
Board as Interim Chief Executive Officer and served in that role until June 28, 2012.

CP ANNUAL REPORT | 2014

107

On June 28, 2012, Mr. E. Hunter Harrison was appointed by the Board as President and Chief Executive Officer. As a result of the appointment of
Mr. Harrison, the Company recorded a charge of $38 million with respect to compensation and other transition costs, including $2 million of
associated costs, in the second quarter of 2012. This charge was recorded in the Company’s financial statements in “Compensation and benefits”
and “Purchased services and other”, in the amounts of $16 million and $22 million, respectively.

Included in this charge were amounts totalling $16 million in respect of deferred retirement compensation for Mr. Harrison and $20 million to
Pershing Square Capital Management, L.P. (“Pershing Square”) and related entities. In 2012, Pershing Square and related entities owned or control
approximately 14% of the Company’s outstanding shares, and two Board members, Mr. William Ackman and Mr. Paul Hilal, are partners of Pershing
Square. The amount payable to Pershing Square and related entities was to reimburse them, on behalf of Mr. Harrison, for certain amounts they had
previously paid to or incurred on behalf of Mr. Harrison pursuant to an indemnity in favour of Mr. Harrison in connection with losses suffered in legal
proceedings commenced against Mr. Harrison by his former employer. The terms of Pershing Square’s indemnity required Mr. Harrison to return any
funds advanced under the indemnity in the event he accepted employment at CP. As a result, Mr. Harrison made it a precondition of accepting the
Company’s offer of employment that CP assumes the indemnity obligations and return the funds advanced by Pershing Square. As a result of the
payment, the Company would have been entitled to enforce Mr. Harrison’s rights in the aforementioned legal proceedings, allowing it to recover to
the extent of Mr. Harrison’s success in those proceedings; however on February 3, 2013 the Company and Mr. Harrison settled the legal proceedings
with Mr. Harrison’s former employer, providing the Company with partial recovery (U.S. $9 million) of the amounts in the dispute. The Company may
receive repayment in other circumstances in the event of certain breaches by Mr. Harrison of his obligations under an employment agreement with
the Company. Mr. Harrison was also granted stock options and DSUs upon commencing employment that had a grant date fair value of $12 million
(Note 25).

In addition, the Company agreed to indemnify Mr. Harrison for certain other amounts, to a maximum of $3 million plus legal fees, but as a result of
the settlement of the aforementioned legal proceedings, such indemnity is no longer applicable. Accordingly, no amount was accrued at
December 31, 2012.

The Company also recorded a charge of $4 million in the second quarter of 2012 with respect to a retirement allowance for Mr. Green.

On February 5, 2013, as part of its long-term succession plan, the Company appointed Mr. Keith Creel as President and Chief Operating Officer. In
connection with this appointment, Mr. Harrison’s title changed to Chief Executive Officer.

30 Segmented information

Operating segment

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

In the years ended December 31, 2014, 2013 and 2012, no one customer comprised more than 10% of total revenues and accounts receivable.

Geographic information

(in millions of Canadian dollars)

2014
Revenues
Long-term assets excluding financial instruments, mortgages receivable and deferred tax assets

2013
Revenues
Long-term assets excluding financial instruments, mortgages receivable and deferred tax assets

2012
Revenues
Long-term assets excluding financial instruments, mortgages receivable and deferred tax assets

Canada United States

Total

4,655
$
$ 10,114

$ 1,965
$ 4,733

6,620
$
$ 14,847

$
$

4,330
9,842

4,095
9,138

$
$

1,803
4,237

1,600
4,249

$
$

6,133
14,079

5,695
13,387

108

31 Reclassification of comparative figures

Billings to third parties for the recovery of costs incurred for freight car repairs and servicing have been reclassified from “Purchased services and
other” to “Compensation and benefits” and “Materials” within “Operating expenses” in the Consolidated Statements of Income, in order to match
the billings with the costs incurred on behalf of third parties. As a result, the changes to these components of “Operating expenses” for the year
ended December 31, 2013 and 2012 are noted below. “Operating expenses” in total were unchanged as a result of this reclassification.

(in millions of Canadian dollars)

For the year ended December 31, 2013
As previously reported
(Decrease) increase

As reclassified

For the year ended December 31, 2012
As previously reported
(Decrease) increase

As reclassified

32 Subsequent events

Compensation

and benefits Material

Purchased
services and
other

1,418
(33)

249
(89)

1,385

160

1,506
(32)

238
(72)

876
122

998

940
104

1,474

166

1,044

Issuance of long-term debt and settlement of forward starting swaps

On January 28, 2015, CP announced the issuance of U.S. $700 million 2.900% 10-year Notes due February 1, 2025 for net proceeds of U.S. $694
million. This transaction closed on February 2, 2015.

On January 28, 2015, the Company settled a notional U.S. $700 million of forward starting swaps, designated as a cash flow hedge related to the
issuance of the notes described above. The fair value of these derivative instruments was a loss of U.S. $50 million at the time of the settlement.
Effective hedge losses were deferred in “Accumulated other comprehensive loss” and will be amortized to “Net interest expense” until the
underlying notes, which were hedged, are repaid.

Resolution of certain legal proceedings

In 2013, CP provided an interest free loan pursuant to a court order in the amount of $20 million to a corporation owned by a court appointed
trustee (“the judicial trustee”) to facilitate the acquisition of a building. The building was held in trust during the legal proceedings with regard to
CP’s entitlement to an exercised purchase option of the building (“purchase option”). As at December 31, 2014, the loan of $20 million and the
purchase option, book value of $8 million, were recorded as “Other assets” in the Company’s Consolidated Balance Sheets.

CP ANNUAL REPORT | 2014

109

CP HAS HEART
THE ARTERIES OF A
NATION, THE PULSE
OF COMMITMENT.

CP’s new “CP Has Heart” community
investment program has already contributed
$1.97 million toward heart health education,
medical advances and better quality care.

The vast majority of people today have at least

one risk factor for heart disease. By 2020, experts

believe heart disease will be the leading cause of

death in the world, and CP has decided to step up

and do something to help.

PUTTING OUR HEART

INTO AN IMPORTANT CAUSE

jump cleared, CP funded placement of automated

external deﬁbrillators and lifesaving training in

locations where Calgary-area youth learn, gather

and play.

Other 2014 program initiatives included a

$1.3 million contribution to support paediatric

cardiology research and care at the Children’s

Hospital, London Health Sciences Centre in

Ontario, in association with the LPGA Canadian

Paciﬁc Women’s Open golf tournament, and

sponsorship of the CFL Grey Cup CP Has Heart

Touchdown program, raising funds for critical

cardiac care equipment. The sum total of

contributions toward saving lives and improving

“A railroad serves as the arteries of a nation,

heart health in 2014: $1.97 million.

but at its heart is community.” This is the

sentiment behind our new CP Has Heart

community investment program, formed to

unify companywide efforts around a single

cause to make a positive impact on the countless

communities CP touches.

THE START OF SOMETHING GREAT

Through CP Has Heart, we are excited about our

potential to make a real difference in this highly

preventable and increasingly treatable disease.

Our activities and contributions in 2014 are just

We launched the program through a partnership

a start – we have many exciting initiatives and

with the Heart and Stroke Foundation, tied to

programs in the pipeline for 2015 and beyond.

the Spruce Meadows Canadian Paciﬁc Grand Prix

and Canadian Paciﬁc International, two world-

class equestrian show jumping events. With every

110

Paediatric cardiology patients, Owen
Gillet and Rachael Wright, stand with
Dr. Kambiz Norozi, Chief of Paediatric
Cardiology in the brand new Canadian
Paciﬁc Healthy Hearts Lab at Children’s
Hospital, London Health Sciences Centre.

111

CP ANNUAL REPORT | 2014

CHAIRMAN’S MESSAGE
DEAR FELLOW
SHAREHOLDERS,

The year 2014 marked an important
milestone for CP. It was the year in which
we reached or surpassed the majority of the
ﬁnancial and operating goals the company
set forth when we put a new management
team in place in 2012.

The Board could not be more pleased with CP’s

progress. Thanks to the leadership and vision of

CEO E. Hunter Harrison, the skills and experience

of his management team, and the dedication of

the entire CP workforce, the company achieved

its objectives two years ahead of plan and has an

ambitious growth strategy in place for 2018.

I was proud to be elected by the Board to be its

new Chairman in May of 2014, as my friend and

colleague Paul G. Haggis completed his term.

The Board would like to express its heartfelt

gratitude for Paul’s ﬁne leadership during a time

of profound change at CP. We are fortunate that

he has chosen to remain on the Board, serving on

our Audit and Finance committees.

We would also like to express our appreciation

to Jim Prentice, who left the CP Board after

winning the Alberta Progressive Conservative

leadership election to become Alberta’s 16th

premier in late 2014. Needless to say, Jim brought

extraordinary leadership qualities along with a

strong combination of government and corporate

experience to his role on the Board. We will miss

both his enthusiasm and wise counsel.

This is an exciting time to be associated with CP.

It is a great honour to serve as Chairman of this

great Canadian icon, once again an industry leader.

We are conﬁdent in the company’s continued

success as it begins its next phase of growth.

With sincere appreciation,

Gary F. Colter

Chairman of the Board

CANADIAN PACIFIC BOARD OF DIRECTORS

E. HUNTER HARRISON (5)

PAUL G. HAGGIS (1)(3)

Chief Executive Ofﬁcer
Canadian Paciﬁc Railway Limited
Wellington, Florida

GARY F. COLTER

Chairman of the Board
Canadian Paciﬁc Railway Limited
President CRS Inc.
Mississauga, Ontario

Chairman, Alberta Enterprise Corporation
Canmore Alberta

PAUL C. HILAL (3)(4)*

Partner
Pershing Square Capital
Management, L.P.
New York, New York

WILLIAM A. ACKMAN (2)(3)

Founder, Chief Executive Ofﬁcer
Pershing Square Capital
Management, L.P.
New York, New York

KRYSTYNA T. HOEG, C.A. (2)*(4)

Former President and
Chief Executive Ofﬁcer
Corby Distilleries Limited
Corporate Director
Toronto, Ontario

DR. ANTHONY R.
MELMAN (3)*(5)

President and Chief Executive Ofﬁcer
Acasta Capital
Toronto, Ontario

LINDA J. MORGAN (1)(5)

Partner
Nossaman LLP
Bethesda, Maryland

ANDREW F. REARDON (1)(4)

Retired Chairman
and Chief Executive Ofﬁcer, TTX
Corporate Director
Marco Island, Florida

ISABELLE COURVILLE (1)*(5)

REBECCA MACDONALD (2)(4)

STEPHEN C. TOBIAS (4)(5)*

Corporate Director
Montreal, Quebec

Founder, Executive Chair
Just Energy Group Inc.
Toronto, Ontario

Former Vice-Chairman
and Chief Operating Ofﬁcer
Norfolk Southern Corporation
Garnett, South Carolina

112

CP ANNUAL REPORT | 2014

113

(1) Audit Committee (2) Corporate Governance and Nominating Committee
(3) Finance Committee (4) Management Resources and Compensation Committee
(5) Safety, Operations and Environment Committee
*Denotes Chair of the Committee

SHAREHOLDER INFORMATION

COMMON SHARE MARKET PRICES

Trust Company NA, Canton, Massachusetts, serves

DIRECT DEPOSIT OF DIVIDENDS

TRADING SYMBOL

as co-transfer agent and co-registrar for the

Common Shares in the United States.

Registered shareholders are offered the option of

Common Shares – CP

having their Canadian and U.S. dollar dividends

For information concerning dividends, lost share

directly deposited into their personal bank accounts

DUPLICATE ANNUAL REPORTS

TORONTO STOCK EXCHANGE

2014

2013

(Canadian dollars)

High

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Year

176.72

202.08

236.04

Low

155.02

156.64

192.79

247.56

197.14

High

132.92

144.43

134.90

167.00

Low

102.14

118.25

121.39

126.42

247.56

155.02

167.00

102.14

NEW YORK STOCK EXCHANGE

(U.S. dollars)

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Year

2014

2013

High

159.77

186.00

210.87

Low

139.37

142.73

179.90

220.20

170.51

High

130.81

139.99

129.81

156.96

Low

103.82

113.82

115.54

122.50

220.20

139.37

156.96

103.82

Number of registered shareholders

at year end: 15,550

Closing market prices at year end:

Toronto Stock Exchange: $223.75 (CDN)

New York Stock Exchange: $192.69 (US)

certiﬁcates, estate transfers or for change in share

registration or address, please contact the transfer

agent and registrar by telephone at 1-877-4-CP-

RAIL (1-877-427-7245) toll free North America or

International (514) 982-7555, visit their website at

www.investorcentre.com/cp; or write to:

Computershare Investor Services Inc.

100 University Avenue, 8th Floor

Toronto, Ontario, Canada M5J 2Y1

INFORMATION REGARDING

DIRECT REGISTRATION

The Direct Registration System, or DRS, allows

registered holders to hold securities in “book entry”

form without having a physical certiﬁcate issued as

evidence of ownership. Instead, securities are held

in the name of the registered holder and registered

electronically on the issuer’s records maintained by

the issuer’s transfer agent. If you are a registered

holder of shares and wish to hold your shares using

the DRS, please contact the transfer agent at the

phone number or address shown above.

SHAREHOLDER ADMINISTRATION

For more information about direct registration,

Common Shares

Computershare Investor Services Inc., with

transfer facilities in Montreal, Toronto, Calgary and

Vancouver, serves as transfer agent and registrar

for the Common Shares in Canada. Computershare

log on to Computershare’s website at

www.investorcentre.com/cp and click on

“Got a question? Ask Penny”.

in Canada and the United States on the dividend

payment dates. Shareholders can enroll for direct

deposit either by phone or by completing a direct

deposit enrolment form. For more information about

direct deposit, please contact Computershare Investor

Services Inc. at 1-877-4-CP-RAIL (1-877-427-7245).

4% CONSOLIDATED DEBENTURE STOCK

Inquiries with respect to Canadian Paciﬁc Railway

While every effort is made to avoid duplication,

some Canadian Paciﬁc Railway Limited registered

shareholders may receive multiple copies of

shareholder information mailings such as this

Annual Report. Registered shareholders who

wish to consolidate any duplicate accounts which

are registered in the same name are requested to

write to Computershare Investor Services Inc.

Company’s 4% Consolidated Debenture Stock

CORPORATE GOVERNANCE

should be directed as follows:

CP’s Board of Directors and management are

For stock denominated in U.S. currency – The Bank

committed to a high standard of corporate

of New York Mellon at (212) 815-2719 or by e-mail

governance. They believe effective corporate

at lesley.daley@bnymellon.com; and

governance calls for the establishment of processes

For stock denominated in pounds Sterling – BNY

Trust Company of Canada at (416) 933-8504 or by

e-mail at marcia.redway@bnymellon.com.

MARKET FOR SECURITIES

The Common Shares of Canadian Paciﬁc Railway

Limited are listed on the Toronto and New York

stock exchanges. The Debenture Stock of Canadian

Paciﬁc Railway Company is listed on the London

Stock Exchange (UK pounds sterling) and on the

New York Stock Exchange (U.S. currency).

and structures that contribute to the sound direction

and management of the Corporation’s business,

with a view to enhancing shareholder value.

A detailed description of CP’s approach to

corporate governance is contained in its

Management Proxy Circular issued in connection

with the Corporation’s Annual Meeting of

Shareholders and in its Corporate Governance

Principles and Guidelines which are available on

CP’s website at www.cpr.ca.

114

CP ANNUAL REPORT | 2014

115

GOVERNANCE STANDARDS

SHAREHOLDER SERVICES

Any signiﬁcant differences between the

Shareholders having inquiries or wishing to obtain

Corporation’s corporate governance practices

copies of the Corporation’s Annual Information

and the corporate governance listing standards

Form may contact Shareholder Services at 1-866-

of the New York Stock Exchange (“NYSE Listing

861-4289 or (403) 319-7538, or by e-mail at

Standards”) are set forth on CP’s website at www.

shareholder@cpr.ca, or by writing to:

cpr.ca under About CP, “Corporate governance”.

Shareholder Services

CHIEF EXECUTIVE OFFICER AND

Ofﬁce of the Corporate Secretary

CHIEF FINANCIAL OFFICER CERTIFICATION

7550 Ogden Dale Road S.E.

The certiﬁcations of the Chief Executive Ofﬁcer

and the Executive Vice-President and Chief

Financial Ofﬁcer of each of Canadian Paciﬁc

Calgary, Alberta, Canada T2C 4X9

INVESTOR INFORMATION

Railway Limited and Canadian Paciﬁc Railway

Financial information is available under the

Company required by Section 302 of the Sarbanes-

“Investors” section on CP’s website at www.cpr.ca.

Oxley Act of 2002 (the “302 Certiﬁcations”) and

the rules promulgated by the U.S. Securities and

COMMUNICATIONS AND PUBLIC AFFAIRS

Contact:

Communications and Public Affairs

Canadian Paciﬁc

7550 Ogden Dale Road S.E.
Calgary, Alberta, Canada T2C 4X9

Exchange Commission (“SEC”) thereunder, have

been ﬁled with the SEC as an exhibit to the 2014

Annual Report of Canadian Paciﬁc Railway Limited

and Canadian Paciﬁc Railway Company on Form

40-F. The 302 Certiﬁcations have also been ﬁled

in fulﬁllment of the requirements of CSA National

Instrument 52-109 Certiﬁcation of Disclosure in

Issuers’ Annual and Interim Filings.

2015 ANNUAL AND SPECIAL MEETING

The Annual and Special Meeting of Shareholders

will be held on Thursday, May 14, 2015 in

Calgary, Alberta.

116

Canadian Paciﬁc

7550 Ogden Dale Road S.E.
Calgary, Alberta, Canada T2C 4X9