Canadian Pacific Railway
Annual Report 2018

Plain-text annual report

BUILT TO DRIVE GROWTH 2018 ANNUAL REPORT B U I L T T O D R I V E G R O W T H C P 2 0 1 8 A N N U A L R E P O R T PERFORMANCE HIGHLIGHTS $ in millions, except per share data, ratios or unless otherwise indicated FINANCIAL HIGHLIGHTS Total revenues Operating income(1) Adjusted operating income (1)(2) Operating ratio (1) Adjusted operating ratio (1)(2) Net income Adjusted income (2) Diluted earnings per share (EPS) Adjusted diluted EPS (2) Cash from operations Free cash (2) Return on invested capital (ROIC) (2) Adjusted ROIC (2) STATISTICAL HIGHLIGHTS(3) Revenue ton-miles (RTMs) (millions) Carloads (thousands) Gross ton-miles (GTMs) (millions) Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs) Average train weight – excluding local traffic (tons) Average train length – excluding local traffic (feet) Average terminal dwell (hours) Average train speed (mph) Total employees (end of period) Total workforce (end of period) SAFETY INDICATORS(3) FRA personal injuries per 200,000 employee-hours FRA train accidents per million train miles 2014 2015 2016 2017 2018 $ 6,620 $ 6,712 $ 6,232 $ 6,554 $ 7,316 2,202 2,198 66.7% 66.7% 1,476 1,482 8.46 8.50 2,123 969 14.4% 14.5% 149,849 2,684 272,862 1.035 8,076 6,682 8.7 18.0 14,255 14,385 2,618 2,550 61.0% 62.0% 1,352 1,625 8.40 10.10 2,459 1,381 12.9% 15.2% 145,257 2,628 263,344 0.999 8,314 6,935 7.2 21.4 12,817 12,899 2,411 2,411 61.3% 61.3% 1,599 1,549 10.63 10.29 2,089 1,007 14.4% 14.0% 135,952 2,525 242,694 0.980 8,614 7,217 6.7 23.5 11,653 11,698 2,519 2,468 61.6% 62.4% 2,405 1,666 16.44 11.39 2,182 874 20.5% 14.7% 142,540 2,634 252,195 0.980 8,806 7,214 6.6 22.6 12,163 12,242 2,831 2,831 61.3% 61.3% 1,951 2,080 13.61 14.51 2,712 1,289 15.3% 16.2% 154,207 2,740 275,362 0.953 9,100 7,313 6.8 21.5 12,770 12,793 1.68 1.26 1.84 1.41 1.67 1.12 1.65 0.99 1.47 1.10 (1) Comparative figures were restated to reflect the adoption of the new accounting standard for presentation of other components of net periodic benefit recovery. For a full description and reconciliation of the restatement see Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes in our Annual Report on Form 10-K. (2) These measures have no standardized meanings prescribed by generally accepted accounting principles (GAAP) in the United States of America and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K. (3) Certain statistical highlights and safety indicators figures have been updated to reflect new information or have been revised to conform with current presentation. EXCHANGE LISTINGS The common shares of Canadian Pacific Railway Limited are listed on the Toronto and New York stock exchanges under the symbol CP. CONTACT US Investor Relations Email: investor@cpr.ca Canadian Pacific Investor Relations 7550 Ogden Dale Road S.E. Calgary, AB, Canada T2C 4X9 Shareholder Services Email: shareholder@cpr.ca Canadian Pacific Shareholder Services Office of the Corporate Secretary 7550 Ogden Dale Road S.E. Calgary, AB, Canada T2C 4X9 Transfer Agent and Registrar Computershare Investor Services Inc. serves as transfer agent and registrar for the common shares in Canada. Computershare Trust Company, N.A. serves as co-transfer agent and co-registrar for the common shares in the U.S. Visit the Computershare website at www.investorcentre.com/cp. Auditors Deloitte LLP 217419_CP_AnnualReport2018_Cover_ENG.indd 4-151 2019-03-05 12:03 PM File name 217419_CP_AnnualReport2018_Cover_ENG_ENG_INSIDE Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited March 5, 2019 12:17 PM Contact Melissa Heringer Files sent LOCOMOTIVES DON’T DRIVE OUR BUSINESS. 217419_CP_AnnualReport2018_1-19_150.indd 1 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent 217419_CP_AnnualReport2018_1-19_150.indd 2 2019-02-26 6:24 PM CP 2018 ANNUAL REPORT / 3 PEOPLE DO. Highest revenues. Lowest operating ratio. Best safety record. Record year. One reason: culture. We have a 13,000-strong team who know what it takes to drive growth, day-in, day-out. 217419_CP_AnnualReport2018_1-19_150.indd 3 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent 61.3% OPERATING RATIO 540 BPS 2014 VS. 2018 LONGER,FASTERTRAINS & IDLING LESS 9% 19% 22% TRAIN LENGTH 2014 VS. 2018 TRAIN SPEED 2014 VS. 2018 TERMINAL DWELL 2014 VS. 2018 217419_CP_AnnualReport2018_1-19_150.indd 4 2019-02-26 6:24 PM CP 2018 ANNUAL REPORT / 5 One person does not drive sustainable, profitable growth. Thousands do. We are focused on providing the best service with the lowest cost basis. This creates value for our customers, shareholders and employees alike. This is our story every year. We’ve come a long way since 2012. Our transformation would not have happened without people working collaboratively and driving change collectively. It’s not easy. If it was, all companies would be successful. Precision scheduled railroading is the model for CP’s transformation and growth. It’s founded on delivering service, optimizing assets, controlling costs, developing people and operating safely. It’s a simple and powerful blueprint that works, but only if you create the right culture to bring it to life. PEOPLE DRIVE GROWTH. CULTURE IS THE ENGINE. WE ARE NOT A RELAXED WORKING ENVIRONMENT. WE ARE A REWARDING ONE. Precision scheduled railroading demands a culture ingrained with a railroader philosophy. People collectively focused on service, accountability, performance and the pursuit of continued excellence. Creating a high-performance culture takes time and commitment. Across all levels of the organization, we teach and coach people to do what needs to be done. And, importantly, we encourage them to drive innovation and positive change. Our people are empowered through clearly set responsibilities and expectations. This creates a nimble and entrepreneurial culture. When performance produces positive results it inspires people, filling them with passion and furthering their engagement. We strive for this success and excellence every day. As our record 2018 shows, we redefine what best means each year. We are not a relaxed working environment. We are a rewarding one. We will always be the destination for people who want to work with the best. It is this culture that drives sustainable, profitable growth. FEDERAL RAILROAD ADMINISTRATION TRAIN ACCIDENTS FREQUENCY INDUSTRY LEADER FOR 13TH STRAIGHT YEAR 13%2014 VS. 2018 S E L I M N A R T I N O I L L I M R E P . O N 2 1.5 1 0.5 0 2014 2015 2016 2017 2018 217419_CP_AnnualReport2018_1-19_150.indd 5 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent 6 / CP 2018 ANNUAL REPORT We are built to drive sustainable, profitable growth. It takes discipline, but the formula is simple: We grow with customers who value what we do and want to build success together over the long-term. That’s win-win. We have ingrained precision scheduled railroading into the way we operate our business. We know how fast locomotives are supposed to run on average; how many miles we get per car; fleet cycle times; and how many people are needed to run a given level of business. We have developed our people to embrace the railroader culture that’s necessary to make this model work. And we have taken the same approach with developing our marketing team. SUSTAINABLE MEANS STICK TO THE MODEL. WE HAVE DEVELOPED OUR PEOPLE TO EMBRACE THE RAILROADER CULTURE THAT’S NECESSARY TO MAKE THIS MODEL WORK. We are first and foremost an operating railway, not a marketing company. We created the position of chief marketing officer and on-boarded some exceptional talent with one clear directive: create opportunities that are in lockstep with our operations. Longer, faster trains moving continuously is a powerful model. Efficiencies, extended sidings and innovation have all created new service offerings and the ability to compete for business and markets where we couldn’t before. More importantly, our operating model and surplus land have created our industry’s most valuable commodity: capacity. We take advantage of the right opportunities in the market. We do what we say we’re going to do for our customers. We provide value and generate returns to our shareholders and franchise. New opportunities and service offerings have to fit with our business. We strategically choose the right customers to grow with. We’re part of their success; they’re part of ours. That’s what creates stickiness and sustainable, profitable growth. FREIGHT REVENUE VARIANCE % of 2018 Freight Revenue vs 2017 2% Grain Coal Potash Fertilizers & Sulphur 1% Forest Products Energy, Chemicals & Plastics Metals, Minerals & Consumer Products Automotive Intermodal 18% 7% 7% 8% 10% 13% Total Change 12% Growth 38% 217419_CP_AnnualReport2018_1-19_150.indd 6 2019-02-26 6:24 PM FREIGHT REVENUE VARIANCE % of 2018 Freight Revenue vs 2017 18% 2% 1% 7% 7% 8% 10% 13% 12% Growth 38% BUSINESS MIX % of 2018 Freight Revenue Intermodal 22% Merchandise 37% Forest Products 4% Energy, Chemicals & Plastics 17% Metals, Minerals & Consumer Products 11% Automotive 5% Bulk 41% Grain 22% Coal 9% Potash 7% Fertilizers & Sulphur 3% 217419_CP_AnnualReport2018_1-19_150.indd 7 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent FOOTPRINT CAPACITY SURPLUS CAPACITY AT MAJOR YARDS AND TERMINALS GRAIN HIGH EFFICIENCY PRODUCT TRAIN AND NEW HOPPERS DELIVER 44% MORE GRAIN PER TRAIN 217419_CP_AnnualReport2018_1-19_150.indd 8 2019-02-26 6:24 PM DOMESTIC INTERMODAL 5% COMPOUND ANNUAL GROWTH RATE SINCE 2013 FOOTPRINT CAPACITY SURPLUS CAPACITY AT MAJOR YARDS AND TERMINALS AUTOMOTIVE PREPARED FOR 100% OF GLOVIS’ BUSINESS STARTING IN 2020 INTERNATIONAL INTERMODAL WELCOMED OCEAN NETWORK EXPRESS TO OUR FRANCHISE GRAIN HIGH EFFICIENCY PRODUCT TRAIN AND NEW HOPPERS DELIVER 44%MOREGRAINPERTRAIN ENERGY, CHEMICALS & PLASTICS 38% YEAR-OVER-YEAR REVENUE DRIVEN BY REFINED PRODUCTS AND CRUDE 217419_CP_AnnualReport2018_1-19_150.indd 9 2019-03-05 12:28 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited March 5, 2019 12:41 PM Contact Melissa Heringer Files sent 10 / CP 2018 ANNUAL REPORT Culture not only drives results and instills pride, it also creates a sense of family. And we do not use that word lightly. CP is a family. At work as at home, we have tasks and responsibilities, as well as expectations. We serve each other, our customers and shareholders. We take our responsibility to serve seriously. So, too, the respect we hold for one another and accountability to do the right thing. These are all fundamental to precision scheduled railroading. We are all a team of operating railroaders united across operations, finance, marketing, IT, engineering and all other disciplines. We serve a common goal to deliver the best service in the industry. We are accountable to each other to do it safely, for the benefit of everyone and their loved ones. We take responsibility for helping drive the success of the North American economy. And we serve to help make communities healthier. SERVICE AND ACCOUNTABILITY. WE SERVE EACH OTHER, OUR CUSTOMERS AND SHAREHOLDERS. Together, we have created not only record operating and financial results, but the safest railroad in North America. Our success has also delivered tens of millions of dollars and countless volunteer hours to support local communities. Our values of accountability, diversity and pride drive our actions, foster respect and inspire our journey towards excellence. CP HOLIDAYTRAIN $1.6M + 251,588 LB OF FOOD COLLECTED IN 2018 FOR FOOD BANKS CPHASHEART $2M $16M $3M RAISED AT THE CP WOMEN’S OPEN FOR THE JIMPATTISON CHILDREN’S HOSPITAL RAISED OVER FIVE YEARS TO SUPPORT HEART HEALTH DONATEDBYEMPLOYEES TOGETHER WITH CP’S CORPORATE MATCH SINCE 2013 217419_CP_AnnualReport2018_1-19_150.indd 10 2019-02-26 6:24 PM CPHASHEART 217419_CP_AnnualReport2018_1-19_150.indd 11 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent The biggest railroad doesn’t win the business. The best service does. Delivering faster, better, more reliable service creates the most meaningful value for customers. A culture built on doing what you say you’re going to do is both powerful and sustainable – a business model based on cheapest price is not. As a company of railroaders, we have created a superior rail service. We have the shortest and fastest routes in key lanes across Canada and the U.S. Our flagship transcontinental service provides the fastest and most consistent service between Eastern Canada, Calgary and Vancouver. We have expanded our reach with new Ohio Valley and direct Vancouver- to-Detroit services. Our reach extends past our physical footprint. We are now gaining traction as a global transportation solution. We have connections with other railways; a network of more than 100 transload facilities across Canada and the U.S. to extend our reach to markets not directly served by rail; and links with ports on both the West and East coasts. All of this gives us one important advantage: global reach and growth potential. BEST SERVICE. GLOBAL REACH. B R I T I S H C O L U M B I A A L B E R TA EDMONTON SCOTFORD LLOYDMINSTER S A S K AT C H E W A N VANCOUVER PORTLAND HUNTINGDON WA KINGSGATE ID MT CALGARY SASKATOON COUTTS BRACKEN ASSINIBOIA ESTEVAN REGINA MOOSE JAW KEMNAY WINNIPEG WHITETAIL PORTAL BISBEE KRAMER NOYES MN ND NEW TOWN DEVILS LAKE OR WY TRACY CA NV UT AZ NM OK AR AS A COMPANY OF RAILROADERS, WE HAVE CREATED A SUPERIOR RAIL SERVICE. CP CP TRACKAGE, HAULAGE AND COMMERCIAL RIGHTS CLASS 1 RAILWAY M A N I T O B A O N TA R I O Q U E B E C N E W B R U N S W I C K N O VA S C O T I A ME QUEBEC CITY MONTREAL BURLINGTON VT THUNDER BAY SUDBURY GATINEAU DULUTH MI WI MINNEAPOLIS/ ST. PAUL SAULT STE. MARIE NY ALBANY NH MA CT AYER RI NEW LONDON TORONTO BUFFALO SHELDON MASON CITY MILWAUKEE CHICAGO IA IL IN LIMA OH DETROIT PA NEW YORK (THE BRONX, FRESH POND) BETHLEHEM NJ PHILADELPHIA MD DE MI KY MO KANSAS CITY JEFFERSONVILLE VA WV NC SC TN AL MS GA LA FL SD NE CO KS TX 217419_CP_AnnualReport2018_1-19_150.indd 12 2019-03-05 12:28 PM B R I T I S H C O L U M B I A A L B E R TA EDMONTON SCOTFORD LLOYDMINSTER S A S K AT C H E W A N CALGARY SASKATOON M A N I T O B A O N TA R I O Q U E B E C N E W B R U N S W I C K N O VA S C O T I A ME QUEBEC CITY MONTREAL BURLINGTON VT NY ALBANY NH MA CT AYER RI NEW LONDON NEW YORK (THE BRONX, FRESH POND) BETHLEHEM NJ PHILADELPHIA MD DE REGINA MOOSE JAW KEMNAY WINNIPEG COUTTS BRACKEN ASSINIBOIA ESTEVAN WHITETAIL PORTAL BISBEE KRAMER ND NEW TOWN DEVILS LAKE NOYES MN THUNDER BAY SD NE CO KS TX SUDBURY GATINEAU SAULT STE. MARIE MI TORONTO BUFFALO DULUTH MI WI MINNEAPOLIS/ ST. PAUL TRACY SHELDON MASON CITY MILWAUKEE CHICAGO IA IL IN DETROIT PA LIMA OH JEFFERSONVILLE VA WV MO KANSAS CITY OK AR KY TN NC SC GA AL MS LA FL VANCOUVER PORTLAND HUNTINGDON WA KINGSGATE ID MT OR WY CA NV UT AZ NM 217419_CP_AnnualReport2018_1-19_150.indd 13 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent 217419_CP_AnnualReport2018_1-19_150.indd 14 2019-02-26 6:24 PM CP 2018 ANNUAL REPORT / 15 2018 marked a milestone for CP. We are now driving sustainable, profitable growth. Since 2012, we have rebuilt the engine: we transformed our operations, right-sized our assets and made strategic investments to improve our service. We’ve entered new markets, repatriated market share and are now winning new business. We have gone from industry laggard to leader. And we are just getting started. Much like that of our founders more than 135 years ago, our journey wasn’t easy. But we’re not stopping. As a family of railroaders, we are focused on continually moving forward. Doing more. Doing better. Always innovating. However, we will never lose sight of the operating model fundamental to our success: precision scheduled railroading. A railroader methodology rooted in five foundations: providing service, controlling costs, optimizing assets, operating safely and developing people. This will never change. HISTORIC YEAR FOR CP FAMILY. LETTER TO SHAREHOLDERS FROM THE PRESIDENT AND CEO IN MY 27 YEARS OF RAILROADING, I’VE NEVER BEEN MORE CONFIDENT IN A TEAM’S ABILITY TO DELIVER. In 2018, we generated record revenues of $7.3 billion, up 12 percent from the previous year. Our operating ratio and adjusted operating ratio1 were 61.3 percent, the lowest yearly adjusted operating ratio1,2 in the company’s history. Combined, our performance in 2018 resulted in a 12 percent increase in operating income2, diluted earnings per share of $13.61 and adjusted diluted earnings per share1 of $14.51, an increase of 27 percent. There are many milestones to highlight from this past year, none of which would have been possible without our exceptional people. This year showed what our 13,000-strong family of CP railroaders and an industry-leading operating model can do for our customers, our shareholders and the North American economy. IN MEMORIAM As we reflect on 2018, we do so while acknowledging the February 4, 2019 derailment near Field, B.C. The impact and sorrow of that loss will stay with our CP family for a long, long time. Our thoughts, prayers and deepest sympathies are with the families, friends and colleagues of Dylan Paradis, Daniel Waldenberger-Bulmer and Andrew Dockrell. The entire CP team continues to grieve, and will for some time. 217419_CP_AnnualReport2018_1-19_150.indd 15 2019-03-05 12:28 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited March 5, 2019 12:41 PM Contact Melissa Heringer Files sent This past year, I held town halls at several rail yards on our network. My message was simple: we have come a long way, but the journey has only just begun. We cannot rest on our laurels, nor can we forget what got us to this point – a commitment to the foundations of precision scheduled railroading, a culture of respect, asking tough questions and an ongoing dedication to excellence. One memory I will take from 2018 is a letter I received from an employee as we were working through labor negotiations. He wrote that he felt like more than “just” a signal maintainer. His daily tasks and efforts made sure trains moved safely, got goods to market and were integral in making the economy tick. It’s a powerful statement. We are not just individuals working in isolation to perform a task, we are a family of world-class railroaders driving the supply chain forward. That’s the attitude fueling our sustainable growth. OUR CUSTOMERS This year we saw revenue growth across every one of our lines of business. A strong demand environment, coupled with our network capacity and ability to provide service was a big part of this success. However, the year also underlines the power of our franchise to win business in markets where we previously didn’t compete. Our business mix will always be largely weighted to bulk, but we’re working hard every day to diversify. Through superior service, competitive cost basis and reliable capacity, we are now expanding our intermodal and merchandise footprint. Our bulk business remains strong. We delivered record volumes of western Canadian grain and grain products to Vancouver in November, and October was the company’s best month ever for shipping grain and grain products, to all destinations. Our investment in our new 8,500-foot High Efficiency Product grain train will enable us to move more and maintain our leadership position in this space. In close collaboration with K+S Potash Canada and Canpotex, we also moved record volumes of potash. At the same time, our intermodal revenues increased 13 percent this year. In fact, 2018 was a record year for our domestic intermodal franchise. We grew with existing customers, won new business with shippers like Ocean Network Express and are confident we can continue to grow in this space, when and if the opportunities make sense for our network. Automotive revenues were up an impressive 10 percent, in spite of a weak economic environment for the automotive industry. Even with headwinds, we are poised for continued success. In 2018 we also lost CP railroaders Tony Nenasheff, Daniel Johnson and Robert Hemling. Our hearts go out to their loved ones, friends and colleagues. Words cannot express the deep sorrow I feel personally for the loss of these professional railroaders. Safety is an ongoing journey; it’s not about a single destination. CP remains steadfast in our commitment to safety, across our entire operation. We remain laser-focused on our foundational principle to operate safely. For the 13th straight year, we remain the safest Class 1 railroad in North America, based on the Federal Railroad Administration train accident frequency rate. However, we must continue to innovate, drive improvements and learn. For the sake of our colleagues who are no longer with us, for our team of railroaders and their families, and for the communities we operate in – we will continue to improve in this area. Our motivation has never been stronger; our conviction unwavering. OUR PEOPLE Since becoming CEO, I have focused on employee outreach, engagement and our most important foundation – developing people. If you don’t create the right culture of accountability, performance and execution, you’re not going to succeed in precision scheduled railroading. As my mentor and friend Hunter Harrison always told me, “The true legacy of a leader is not how the railroad runs when you’re there, it’s the team you develop and how it runs when you’re not.” Our people must come to work every day knowing what is expected of them. Individually we all play a role, but our railroading model demands a collective effort. I may set the vision as CEO, but we all serve each other. Today, there is a level of commitment, espritdecorps and pride you won’t experience elsewhere. Importantly, we’ve also strengthened labor stability. We have secured long-term agreements with unions on both sides of the border that provide a solid foundation for continued growth. As we grow, our unionized employees see and feel the rewards. 217419_CP_AnnualReport2018_1-19_150.indd 16 2019-02-26 6:24 PM CP 2018 ANNUAL REPORT / 17 WESEE NO ENDTO OUR GROWTHTRACKBECAUSEWEARE THE ONESBUILDINGIT. Construction is well underway on our new Vancouver auto compound and Ford has signed on as anchor tenant. In 2020, we will start carrying 100 percent of Hyundai Glovis’ traffic. In merchandise, our growth in forest products is leveraging the strength of our Vancouver, Toronto and Montreal transload capabilities. Even if you exclude crude shipments, our energy, chemicals and plastics portfolio generated double-digit growth, largely the result of our marketing team selling our service and adding incremental volume. OUR SHAREHOLDERS Investors want certainty and accountability. As railroaders, so do we. Precision scheduled railroading is proven to deliver in any economic environment and has allowed us to grow faster than our industry peers. We are driving both stronger margins and topline revenue growth. We are also in a strong free cash1 position. We do three things with our free cash: we invest back in the business; we give it back to our shareholders through dividends and share repurchases; and, we pay down debt. Our capital investment strategy has everything to do with running the business safer and better, including margin improvement, productivity and service reliability – all key ingredients of the precision scheduled railroading model. In 2018, we invested a record $1.6 billion in replacing depleted assets and enhancing our network and equipment. As our business continues to grow in 2019, we plan to invest approximately $1.6 billion in capital programs with attractive rates of return. Our quarterly dividend, which we increased by 15.5 percent, returned nearly $350 million to you, our shareholders. Given market volatility in the latter half of 2018, we saw a very compelling opportunity to create additional value for our shareholders, so we announced a new normal course issuer bid (NCIB) program in October to repurchase a total of 5.68 million shares, or 4 percent of our common shares outstanding, over a 12-month period. We also purchased 4.38 million of our common shares under our previous NCIB, which we completed in May. In total, CP has repurchased more than 37 million of its common shares since 2014. This represents approximately 26 percent of our public float, as at December 31, 2018. Since 2014, we’ve returned more than $8.9 billion to shareholders in dividends and share purchase. OUR FUTURE When CP’s transformation began in 2012, many said we couldn’t achieve operational efficiencies or improve service. We proved them wrong. Many then questioned whether we could deliver topline growth. We proved them wrong again. We have the right people – the 13,000-strong CP family of exceptional railroaders – and the right operating model to continue to safely deliver for each other, our customers, shareholders and the broader economy. In my 27 years of railroading, I’ve never been more confident in a team’s ability to deliver. We see no end to our growth track because we are the ones building it. We have the foundational underpinnings and room to grow in the weeks, months and years ahead. We are re-doubling our commitment to safety, and we will never lose sight of what got us here. As a result of our people, our culture and our strategy, the future is bright; you can read more by visiting our company purpose statement at cpr.ca/en/about-cp. Sincerely, Keith Creel President and Chief Executive Officer 1 These measures have no standardized meanings prescribed by generally accepted accounting principles (GAAP) in the United States of America and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K. 2 Comparative years’ figures have been restated for the retrospective adoption of the new accounting standard for presentation of other components of net periodic benefit recovery. For a full description and reconciliation of the restatements, see Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes in our Annual Report on Form 10-K. 217419_CP_AnnualReport2018_1-19_150.indd 17 2019-03-05 12:28 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited March 5, 2019 12:41 PM Contact Melissa Heringer Files sent 18 / CP 2018 ANNUAL REPORT The story told in the preceding pages, and the numbers and values to follow, show a railway that is truly delivering for its shareholders. By the start of 2018, Keith Creel was leading the company’s pivot to growing in a sustainable, profitable way. His team began the year with a plan to win new business, and subsequently executed their plan to near-perfection. The team’s strong performance throughout the year gives customers good reason to come back and shareholders confidence to invest. It’s the right way to grow a business. A TEAM THAT LEADS THE INDUSTRY CP’s direct routes to strategic markets stand as a testament to the foresight of past leaders dating to its 1881 founding. But CP’s 2018 results could not have come from network strength alone, as history has shown. Keith Creel and his team are, simply put, the best railroaders in the business. They have established a railroad culture in the 13,000-strong CP family. Keith believes in ensuring all CP railroaders understand how their individual contributions affect the company, its customers and its shareholders. CP has put in place the right people who don’t just make promises – they deliver. The strength of precision scheduled railroading permeates everything the men and women of CP achieved in 2018. 2018 was the year the entire North American railway industry embraced precision scheduled railroading, which was created by our former CEO E. Hunter Harrison. It is gratifying to those of us who have long believed in this model that it is now considered the industry’s gold standard. I am convinced the industrywide adoption of the precision scheduled railroading model will benefit investors and rail shippers alike. A RENEWAL AT THE BOARD LEVEL CP’s board takes its responsibility to provide guidance and oversight to the executive team and to serve as a voice for shareholders seriously. 2018 was a year of stability for the board, following two years in which we built up a strong team. I’m pleased to welcome director Ed Monser, who joined the board in December, following a distinguished career in education, engineering and corporate leadership. We continue our membership in the 30% Club, a group committed to female leadership on corporate boards. Diversity is a foundational value for CP and CP’s Board of Directors. LETTER FROM THE CHAIR. LOOKING TO THE FUTURE CP has the right team in place to continue to set a powerful example for the entire rail industry. I know their success will continue following my departure from the board in May 2019. I leave the board in the capable hands of Isabelle Courville, who has been designated by the board as its next Chair. Isabelle will become the first female Chair not only of CP, but of any North American Class 1 railway. Her executive and corporate governance experience will serve CP well in the years ahead. It has been my honor to serve as a director of this iconic company since 2013 and Chair since 2015. It is a source of great pride that I was able to accompany Hunter and Keith through this extraordinary journey. I will eagerly watch the CP story continue to unfold. I believe the people and processes are in place to make CP the true leader in this dynamic and storied industry. As we reflect on the year that was and look forward to the remainder of 2019, we must pause to remember the three victims of the February 4, 2019 derailment near Field, B.C. and the three railroaders we lost in 2018. CP’s foundational commitment to safety remains, and that commitment will be integral to the company’s continued success. Sincerely, Andrew F. Reardon Chair 217419_CP_AnnualReport2018_1-19_150.indd 18 2019-02-26 6:24 PM CP 2018 ANNUAL REPORT / 19 CANADIAN PACIFIC RAILWAY LIMITED FORM 10-K 217419_CP_AnnualReport2018_1-19_150.indd 19 2019-02-26 6:24 PM File name 217419_CP_AnnualReport2018_1-19_150 Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 6:38 PM Contact Melissa Heringer Files sent 20 / CP 2018 ANNUAL REPORT CANADIAN PACIFIC RAILWAY LIMITED FORM 10-K TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Executive Officers of the Registrant Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits, Financial Statement Schedule Signatures Page 22 36 38 39 43 43 44 47 49 50 85 86 137 137 139 141 141 141 141 141 143 149  CP 2018 ANNUAL REPORT / 21 PART I 22 / CP 2018 ANNUAL REPORT ITEM 1. BUSINESS Company Overview Canadian Pacific Railway Limited (“CPRL”), together with its subsidiaries (“CP” or the “Company”), owns and operates a transcontinental freight railway in Canada and the United States (“U.S.”). CP provides rail and intermodal transportation services over a network of approximately 12,500 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. 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, through the U.S. and into Mexico. CP transports bulk commodities, merchandise freight and intermodal traffic. For additional information regarding CP's network and geographical locations, refer to Item 2. Properties. CPRL was incorporated on June 22, 2001, under the Canada Business Corporations Act and controls and owns all of the Common Shares of Canadian Pacific Railway Company (“CPRC”), which was incorporated in 1881 by Letters Patent pursuant to an Act of the Parliament of Canada. CPRL's registered, executive and corporate head office is located at 7550 Ogden Dale Road S.E., Calgary, Alberta T2C 4X9. CPRL's Common Shares (the "Common Share") are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”) under the symbol “CP”. For purposes of this report, all references herein to “CP”, “the Company”, “we”, “our” and “us” refer to 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. All references to currency amounts included in this annual report, including the Consolidated Financial Statements, are in Canadian dollars unless specifically noted otherwise. Strategy CP is continuing the journey to become the best railway in North America, with a culture of responsibility and accountability focused on five key foundations: • • • • • 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 in providing a reliable product with a lower cost operating model. Centralized planning aligned with local execution is bringing the Company closer to the customer and 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 and heavier trains, and improved asset utilization, 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. CP strives for continuous implementation of state-of-the-art safety technology, safety management systems, and safety culture with our employees to ensure 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 has established a culture focused on a passion for service with integrity, in everything we do. Coaching and mentoring all employees into becoming leaders will help drive CP forward. During the turnaround, CP transformed its operations by investing in the network and executing a precision scheduled railroading model that lowers costs, optimizes assets, and provides better, more competitive service. Today, we continue to apply our long-term strategy: leverage our lower cost base, network strengths and improved service to drive sustainable, profitable growth. While the accomplishments during the turnaround were tremendous, CP’s journey to become North America’s best-performing rail carrier is far from over. As a Company, we will remain focused on our next level of service, productivity, and innovation to continue to generate value for our customers and results for our shareholders. Business Developments On October 19, 2018, CPRL announced a new normal course issuer bid ("NCIB"), commencing October 24, 2018, to purchase up to 5.68 million of Common Shares for cancellation before October 23, 2019. Labour Disruptions - On April 18, 2018, CP received a 72-hour strike notice from the Teamsters Canada Rail Conference - Train & Engine (“TCRC”), representing approximately 3,000 conductors and locomotive engineers, and the International Brotherhood of Electrical Workers (“IBEW”), representing approximately 360 signal maintainers, of their respective plans to strike. At that time, CP commenced its work stoppage contingency plan to ensure a smooth, efficient and safe wind-down of operations.  CP 2018 ANNUAL REPORT / 23 On April 20, 2018, CP reached an agreement with TCRC and IBEW to have the Canadian Industrial Relations Board administer a ratification vote on each of CP’s final offers, which averted a potential work stoppage. The ratification votes occurred from May 18 to May 25, 2018 and both offers were voted down. On May 26, 2018, CP received another 72-hour strike notice from TCRC and IBEW, and again CP commenced its work stoppage contingency plans. On May 29, 2018, CP reached a tentative three-year agreement with IBEW and averted strike action by its members.This agreement was ratified by the IBEW membership on June 29, 2018, with 78% of members voting for ratification. On May 30, 2018, CP reached a tentative four-year agreement with TCRC and ended strike action which began at 22:00 Eastern Standard Time on May 29, 2018. On July 20, 2018, this agreement was also ratified. The wind-down of operations and return to full service levels following the strike notices caused disruption to the network, losses in potential revenue and costs related to labour disruptions in the second quarter. Change in Executive Officers On February 14, 2019, the Board of Directors appointed Mr. John Brooks to the position of Executive Vice-President and Chief Marketing Officer ("CMO") from the position of Vice-President and CMO, and Mr. Chad Rolstad to the position of Vice-President, Human Resources from the position of Assistant Vice-President , Human Resources. On May 25, 2018, Mr. John Derry resigned from his position as Vice-President of Human Resources. Change in Board of Directors On December 17, 2018, CP announced that CP Board Chair, Andrew F. Reardon, will retire from CP's Board of Directors as of CP's 2019 Annual General Meeting on May 7, 2019. Isabelle Courville, a current member of the Board, has been designated by the Board as its next chair. On September 25, 2018, the Company announced the appointment of Edward L. Monser to CP's Board of Directors effective December 17, 2018. Operations The Company operates in only one operating segment: rail transportation. Although the Company provides a breakdown of revenue by business line, the overall financial and operational performance of the Company is analyzed as one segment due to the integrated nature of the rail network. Additional information regarding the Company's business and operations, including revenue and financial information, and information by geographic location is presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, Note 26 Segmented and geographic information. Lines of Business The Company transports bulk commodities, merchandise freight and intermodal traffic. Bulk commodities, which typically move in large volumes across long distances, include Grain, Coal, Potash, and Fertilizers and sulphur. Merchandise freight consists of industrial and consumer products, such as Energy, chemicals and plastics, Metals, minerals and consumer products, Automotive and Forest 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. 24 / CP 2018 ANNUAL REPORT The Company’s revenues are primarily derived from transporting freight. The following chart shows the Company's Freight revenue by each line of business in 2018, 2017 and 2016: 2018 Freight Revenues 2017 Freight Revenues 2016 Freight Revenues  CP 2018 ANNUAL REPORT / 25 In 2018, the Company generated Freight revenues totalling $7,152 million ($6,375 million in 2017 and $6,060 million in 2016). The following charts compare the percentage of the Company’s total Freight revenues derived from each of the three major business lines in 2018, 2017 and 2016: 2018 Freight Revenues 2017 Freight Revenues 2016 Freight Revenues BULK The Company’s Bulk business represented approximately 41% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Bulk freight revenues by commodity business in 2018, 2017 and 2016: 2018 Bulk Revenues (41% of Freight Revenues) 2017 Bulk Revenues (44% of Freight Revenues) 2016 Bulk Revenues (44% of Freight Revenues) 26 / CP 2018 ANNUAL REPORT Grain The Company’s Grain business represented approximately 53% of Bulk revenues, which is 22% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Grain freight revenues generated from Canadian and U.S. shipments in 2018, 2017 and 2016: 2018 Grain Revenues (53% of Bulk Revenues; 22% of Freight Revenues) 2017 Grain Revenues (54% of Bulk Revenues; 24% of Freight Revenues) 2016 Grain Revenues (55% of Bulk Revenues; 24% of Freight Revenues) CP's Grain network is unique among railways in North America as it is strategically positioned in the heart of grain-producing regions of Western Canada and the Northern Plains of the U.S. Canadian grain transported by CP consists of both whole grains, such as wheat, canola, durum, pulses and soybeans, and processed products such as oils, meals and malt. This business is centred in the Canadian Prairies (Alberta, Saskatchewan and Manitoba), with grain shipped primarily west to the Port of Vancouver, and east to the Port of Thunder Bay for export. Grain is also shipped to the U.S., to eastern Canada, and to Mexico for domestic consumption. Canadian grain includes a division of business that is regulated by the Canadian government through the Canada Transportation Act (“CTA”). This regulated business is subject to a maximum revenue entitlement (“MRE”). Under this regulation, railways can set their own rates for individual movements. However, the MRE governs aggregate revenue earned by the railway based on a formula that factors in the total volumes, length of haul, average revenue per ton and inflationary adjustments. The regulation applies to western Canadian export grain shipments to the ports of Vancouver and Thunder Bay. U.S. grain transported by CP consists of both whole grains, such as wheat, corn, soybeans and durum, and processed products such as meals, oils and flour. This business is centred in the states of Minnesota, North Dakota, South Dakota and Iowa. Grain destined for domestic consumption moves east via Chicago, to the U.S. Northeast or is interchanged with other carriers to the U.S. Pacific Northwest and U.S. Southeast. In partnership with other railways, CP also moves grain to export terminals in the U.S. Pacific Northwest and the Gulf of Mexico. Export grain traffic is also shipped to ports at Superior and Duluth.  CP 2018 ANNUAL REPORT / 27 Coal The Company’s Coal business represented approximately 23% of Bulk revenues, which is 9% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Coal freight revenues generated from Canadian and U.S. shipments in 2018, 2017 and 2016: 2018 Coal Revenues (23% of Bulk Revenues; 9% of Freight Revenues) 2017 Coal Revenues (22% of Bulk Revenues; 10% of Freight Revenues) 2016 Coal Revenues (22% of Bulk Revenues; 10% of Freight Revenues) In Canada, CP handles mostly metallurgical coal destined for export for use in the steelmaking process. CP’s Canadian coal traffic originates mainly from Teck Resources Limited’s mines in southeastern B.C. CP moves coal west from these mines to port terminals for export to world markets (Pacific Rim, Europe and South America), and east for the U.S. Midwest markets. In the U.S., CP moves primarily thermal coal from connecting railways, serving the thermal coal fields in the Powder River Basin in Montana and Wyoming, which is delivered to power-generating facilities in the U.S. Midwest. Potash The Company's Potash business represented approximately 16% of Bulk revenues, which is 7% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Potash freight revenues generated from export and domestic potash shipments in 2018, 2017 and 2016: 2018 Potash Revenues (16% of Bulk Revenues; 7% of Freight Revenues) 2017 Potash Revenues (15% of Bulk Revenues; 6% of Freight Revenues) 2016 Potash Revenues (12% of Bulk Revenues; 6% of Freight Revenues) The Company’s Potash traffic moves mainly from Saskatchewan to offshore markets through the ports of Vancouver, Portland and Thunder Bay, and to markets in the U.S. All potash shipments for export beyond Canada and the U.S. are marketed by Canpotex Limited and K+S Potash Canada. Canpotex is a joint venture between Nutrien Ltd. and The Mosaic Company. Independently, these producers move domestic potash with CP primarily to the U.S. Midwest for local application. 28 / CP 2018 ANNUAL REPORT Fertilizers and Sulphur The Company's Fertilizers and sulphur business represented approximately 8% of Bulk revenues, which is 3% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Fertilizers and sulphur freight revenues generated from dry fertilizers, wet fertilizers and sulphur transportation in 2018, 2017 and 2016: 2018 Fertilizers & Sulphur Revenues (8% of Bulk Revenues; 3% of Freight Revenues) 2017 Fertilizers & Sulphur Revenues (9% of Bulk Revenues; 4% of Freight Revenues) 2016 Fertilizers & Sulphur Revenues (11% of Bulk Revenues; 4% of Freight Revenues) Dry fertilizers include: phosphate, urea, ammonium sulphate and nitrate.Wet fertilizers are primarily anhydrous ammonia. Roughly half of CP's fertilizer shipments originate from production facilities in Alberta, where abundant sources of natural gas and other chemicals provide feedstock for fertilizer production. Most sulphur is produced in Alberta as a byproduct of processing sour natural gas, refining crude oil and upgrading bitumen produced in the Alberta oil sands. Sulphur is a raw material used primarily in the manufacturing of sulphuric acid, which is used most extensively in the production of phosphate fertilizers. Sulphuric acid is also a key ingredient in industrial processes ranging from smelting and nickel leaching to paper production. MERCHANDISE The Company’s Merchandise business represented approximately 37% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Merchandise freight revenue by commodity business in 2018, 2017 and 2016: 2018 Merchandise Revenues 2017 Merchandise Revenues 2016 Merchandise Revenues (37% of Freight Revenues) (35% of Freight Revenues) (34% of Freight Revenues) Merchandise products move in trains of mixed freight and in a variety of car types. Service involves delivering products to many different customers and destinations. In addition to traditional rail service, CP moves merchandise traffic through a network of truck-rail transload facilities, expanding the reach of CP's network to non-rail served facilities.  CP 2018 ANNUAL REPORT / 29 Forest Products The Company’s Forest products business represented approximately 11% of Merchandise revenues, which is 4% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Forest products freight revenues generated from pulp and paper (wood pulp, paperboard, newsprint and paper), lumber and panel, and other shipments in 2018, 2017 and 2016: 2018 Forest Products Revenues (11% of Merchandise Revenues; 4% of Freight Revenues) 2017 Forest Products Revenues (12% of Merchandise Revenues; 4% of Freight Revenues) 2016 Forest Products Revenues (13% of Merchandise Revenues; 5% of Freight Revenues) Forest products traffic includes pulp and paper, and lumber and panel shipped from key producing areas in B.C., northern Alberta, northern Saskatchewan, Ontario and Quebec to destinations throughout North America, including Vancouver to export markets. Energy, Chemicals and Plastics The Company’s Energy, chemicals and plastics business represented approximately 47% of Merchandise revenues, which is 17% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Energy, chemicals and plastics freight revenues generated from petroleum products, crude, chemicals, biofuels and plastics shipments in 2018, 2017 and 2016: 2018 Energy, Chemicals & Plastics Revenues (47% of Merchandise Revenues; 17% of Freight Revenues) 2017 Energy, Chemicals & Plastics Revenues (41% of Merchandise Revenues; 14% of Freight Revenues) 2016 Energy, Chemicals & Plastics Revenues (42% of Merchandise Revenues; 14% of Freight Revenues) Petroleum products consist of commodities such as liquefied petroleum gas ("LPG"), fuel oil, asphalt, gasoline, condensate (diluent) and lubricant oils. The majority of the Company’s western Canadian energy traffic originates in the Alberta Industrial Heartland, Canada's largest hydrocarbon processing region, and Saskatchewan.The Bakken formation region in Saskatchewan and North Dakota is another source of condensate, LPG and other refined petroleum. Interchanges with several rail interline partners gives the Company access to refineries and export facilities in the Pacific Northwest, Northeast U.S. and the Gulf Coast, as well as the Texas and Louisiana petrochemical corridor and port connections. 30 / CP 2018 ANNUAL REPORT Crude moves from production facilities throughout Alberta, Saskatchewan and North Dakota. CP provides efficient routes to refining markets in the Northeast U.S., the Gulf Coast and the West Coast through connections with our railway partners. The Company’s chemical traffic includes products such as ethylene glycol, caustic soda, methanol, sulphuric acid, styrene and soda ash.These shipments originate from Alberta, the U.S. Midwest, the Gulf of Mexico and eastern Canada, and move to end markets in Canada, the U.S. and overseas. CP's biofuels traffic originates mainly from facilities in the U.S. Midwest, shipping primarily to destinations in the northeastern U.S. The most commonly shipped plastics products are polyethylene and polypropylene.Almost half of the Company’s plastics traffic originates in central and northern Alberta and moves to various North American destinations. Metals, Minerals and Consumer Products The Company’s Metals, minerals and consumer products business represented approximately 30% of Merchandise revenues, which is 11% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Metals, minerals and consumer products freight revenues generated from frac sand, steel, aggregates (excluding frac sand), food and consumer products, and non-ferrous metals transportation in 2018, 2017 and 2016: 2018 Metals, Minerals & Consumer Products Revenues (30% of Merchandise Revenues; 11% of Freight Revenues) 2017 Metals, Minerals & Consumer Products Revenues (34% of Merchandise Revenues; 12% of Freight Revenues) 2016 Metals, Minerals & Consumer Products Revenues (28% of Merchandise Revenues; 9% of Freight Revenues) The majority of frac sand originates at mines located along the Company’s network in Wisconsin and moves to the Permian Basin, the Bakken, Marcellus Shale and other shale formations across North America. CP transports steel in various forms from mills in Iowa, Ontario and Saskatchewan to a variety of industrial users. The Company carries base metals such as zinc, aluminum, lead and copper. CP also moves ores from mines to smelters and refineries for processing, and the processed metal to automobile and consumer products manufacturers. Aggregate products include coarse particulate and composite materials such as cement, limestone, gravel, clay and gypsum. Cement accounts for the majority of aggregate traffic and is shipped directly from production facilities in Alberta, Iowa and Ontario to energy and construction projects in North Dakota, Alberta, Manitoba and the U.S. Midwest. Food and consumer products traffic consists of a diverse mix of goods, including food products, railway equipment, building materials and waste products.  CP 2018 ANNUAL REPORT / 31 Automotive The Company’s Automotive business represented approximately 12% of Merchandise revenues, which is 5% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Automotive freight revenues generated by movements of finished vehicles from Canadian, U.S., overseas, and Mexican origins, machinery, and parts and other in 2018, 2017 and 2016: 2018 Automotive Revenues (12% of Merchandise Revenues; 5% of Freight Revenues) 2017 Automotive Revenues (13% of Merchandise Revenues; 5% of Freight Revenues) 2016 Automotive Revenues (17% of Merchandise Revenues; 6% of Freight Revenues) CP’s Automotive portfolio consists of four finished vehicle traffic components: 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 shipments to Canadian markets; vehicles from overseas that move through the Port of Vancouver to eastern Canadian markets; and Mexican-produced vehicles that ship to the U.S. and Canada. In addition to finished vehicles, CP ships machinery, pre-owned vehicles, and automotive parts. A comprehensive network of automotive compounds is utilized to facilitate final delivery of vehicles to dealers throughout Canada and in the U.S. Intermodal The Company’s Intermodal business represented approximately 22% of total Freight revenues in 2018. The following charts compare the percentage of the Company's Intermodal freight revenues generated from Canada, ports, cross border transportation, other international, and U.S. in 2018, 2017 and 2016: 2018 Intermodal Revenues (22% of Freight Revenues) 2017 Intermodal Revenues (21% of Freight Revenues) 2016 Intermodal Revenues (22% of Freight Revenues) Domestic intermodal freight consists primarily of manufactured consumer products that are predominantly moved in 53-foot containers within North America. International intermodal freight moves in marine containers to and from ports and North American inland markets. 32 / CP 2018 ANNUAL REPORT CP’s Domestic intermodal business moves goods from a broad spectrum of industries including retail, wholesale, less-than truckload, full-truckload, food, forest products and various other commodities. Key service factors in domestic intermodal include consistent on-time delivery, the ability to provide door-to-door service and the availability of value-added services. The majority of the Company’s Domestic intermodal business originates in Canada, where CP markets its services directly to retailers and manufacturers, providing complete door-to-door service and maintaining direct relationships with its customers. In the U.S., the Company’s service is delivered mainly through intermodal marketing companies ("IMC"). CP’s international intermodal business consists primarily of containerized traffic moving between the ports of Vancouver and Montreal and inland points across Canada and the U.S. Import traffic from the Port of Vancouver is mainly long-haul business destined for eastern Canada and the U.S. Midwest and Northeast. CP works closely with the Port of Montreal, a major year-round East Coast gateway to Europe, to serve markets primarily in the U.S. Midwest and Canada. The Company’s U.S. Northeast service connects eastern Canada with the Port of New York, offering a competitive alternative to trucks. Fuel Cost Adjustment Program The short-term volatility in fuel prices may adversely or positively impact revenues. CP employs a fuel cost adjustment program designed to respond to fluctuations in fuel prices and help reduce volatility to changing fuel prices. Fuel surcharge revenues are earned on individual shipments and are based primarily on the price of On Highway Diesel. As such, fuel surcharge revenue is a function of freight volumes and fuel prices. Fuel surcharge revenues accounted for approximately 7% of the Company's Freight revenues in 2018. The Company is also subject to carbon taxation systems and levies in some jurisdictions in which it operates, the costs of which are passed on to the shipper. As such, fuel surcharge revenue includes carbon taxes and levy recoveries. Non-freight Revenues Non-freight revenues accounted for approximately 2% of the Company’s Total revenues in 2018. Non-freight revenues are generated from leasing certain assets; other arrangements, including logistical services and contracts with passenger service operators; and switching fees. Significant Customers For each of the years ended December 31, 2018, 2017 and 2016, no customer comprised more than 10% of Total revenues or accounts receivable. Competition The Company is subject to competition from other railways, motor carriers, ship and barge operators, and pipelines. Price is only one factor of importance as shippers and receivers choose a transportation service provider. Service is another factor and requirement, both in terms of transit time and reliability, which vary by shipper and commodity. As a result, the Company’s primary competition varies by commodity, geographic location, access to markets and mode of available transportation. CP’s primary rail competitors are Canadian National Railway Company (“CN”), which operates throughout much of the Company’s territory in Canada, and Burlington Northern Santa Fe, LLC, including its primary subsidiary BNSF Railway Company (“BNSF”), which operates throughout much of the Company’s territory in the U.S. Midwest. Other railways also operate in parts of the Company’s territory. Depending on the specific market, competing railways and motor carriers may exert pressure on price and service levels. Seasonality 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 compared to the first quarter, as fertilizer volumes are typically highest during the second quarter and demand for construction-related goods is 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. Government Regulation 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. The Company’s Canadian operations are subject to economic and safety regulations. Economic regulatory oversight is provided by the Canadian Transportation Agency (“the Agency”) as delegated by the CTA, while safety regulatory oversight is primarily provided by Transport Canada (“TC”) pursuant to the Railway Safety Act (“RSA”). The CTA indirectly regulates rates by providing remedies for freight rates, including ancillary charges, remedies for level of service, long-haul interswitching rates and regulated interswitching rates in Canada. The CTA also regulates the MRE for the movement of export grain, construction and abandonment of railways, commuter and passenger access, and noise and vibration-related disputes. The RSA regulates safety-related aspects of railway operations in Canada, including the delegation of inspection, investigation and enforcement powers to TC.TC is also responsible for overseeing the transportation of dangerous goods as set out under the Transportation of Dangerous Goods Act (Canada) ("TDG"). The Company’s U.S. operations are similarly subject to economic and safety regulations. Economic regulatory oversight is provided by the Surface Transportation Board (“STB”) which administers Title 49 of the United States Code and related Code of Federal Regulations. Safety regulatory oversight is exercised by the  CP 2018 ANNUAL REPORT / 33 Federal Railroad Administration (“FRA”), and the Pipelines and Hazardous Materials Safety Administration (“PHMSA”). The STB is an economic regulatory body with jurisdiction over railroad rate and service issues and proposed railroad mergers and other transactions. The FRA regulates safety-related aspects of the Company’s railway operations in the U.S. under the Federal Railroad Safety Act, as well as rail portions of other safety statutes. PHMSA regulates the safe transportation of all hazardous materials by rail. Various other regulators directly and indirectly affect the Company’s operations in areas such as health, safety, security, environmental and other matters. Regulatory Change After the tragic accident in Lac-Mégantic, Quebec, in July 2013 involving a non-related short-line railway, the Government of Canada implemented several measures pursuant to the RSA and the TDG. These modifications implemented changes with respect to rules associated with securing unattended trains; the classification of crude 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 did not have a material impact on CP’s operating practices. On June 18, 2015, “An Act to amend the Canada Transportation Act and the Railway Safety Act” received Royal Assent and is now in force. The legislation set out new minimum insurance requirements for federally regulated railways based on amounts of crude and toxic inhalation hazards ("TIH") or poisonous inhalation hazards moved. It also imposes strict liability; limits railway liability to the minimum insurance level; mandates the creation of a fund of $250 million paid for by a levy on crude shipments, to be utilized for damages beyond $1 billion (in respect of CP); allows railways and insurers to have existing rights to pursue other parties (subrogation); and prevents shifting liability to shippers from railways except through written agreement. As the implementation of various aspects of the amendments by the Government of Canada is still being completed, the Company is not yet able to determine their full impact. On May 1, 2015, the U.S. Transportation Secretary announced the final rule for a new rail tank car standard for flammable liquids and the phase-out schedule for older tank cars used to transport flammable liquids. The development of the new tank car standard was done in coordination between Transport Canada, PHMSA and the FRA. This announcement was followed by publishing the new tank car standard and phase-out schedule in Canada on May 20, 2015. Canada has since issued two protective directions to advance phase-out dates. The first, Protective Direction 38, eliminated the ability to ship crude oil in legacy U.S. Department of Transportation ("DOT") 111 tank cars after November 1, 2016 (the phase-out date in the United States for these cars remained January 1, 2018). Protective Direction 39 was issued on September 19, 2018 and eliminated the ability to ship crude oil in unjacketed CPC 1232 tank cars after November 1, 2018, as well as certain condensates after January 1, 2019. The phase-out deadline for this car in the United States remains April 1, 2020. CP does not own any tank cars used for commercial transportation of hazardous commodities. On October 29, 2015, the Surface Transportation Extension Act of 2015 ("STEA") was signed into law. The law extends, by three years, the deadline for the U.S. rail industry to implement Positive Train Control (“PTC”), a set of highly advanced technologies designed to prevent train-to-train collisions, speed-related derailments and other accidents caused by human error by determining the precise location, direction and speed of trains, warning train operators of potential problems, and taking immediate action if an operator does not respond. Legislation passed by the U.S. Congress in 2008 mandated that PTC systems be put into service by the end of 2015 on rail lines used to transport passengers or toxic-by-inhalation materials. The STEA extended the deadline to install and activate PTC to December 31, 2018, or December 31, 2020 under certain circumstances, allowing the Company additional time to ensure safe and effective implementation of PTC on its rail network. For further details on the capital expenditures associated with compliance with the PTC regulatory mandate, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. On December 4, 2015, the Fixing America’s Surface Transportation Act (“FAST Act”) was signed into law, representing the first long-term transportation legislation enacted in the U.S. in over a decade. The FAST Act contains key provisions on safety enhancements for tank cars moving flammable liquids in the U.S. and electronically controlled pneumatic ("ECP") train braking.Among those key provisions, the FAST Act requires new tank cars to be equipped with thermal blankets, requires all legacy DOT-111 tank cars moving flammable liquids to be upgraded to new retrofit standards (regardless of how many cars may be in a train) and sets minimum requirements for protection of certain valves. The FAST Act called for the U.S. Secretary of Transportation to re-evaluate its ECP final rule within one year using the results of this evaluation to determine whether ECP braking system requirements are justified. On December 4, 2017, the DOT found the ECP brake rule costs outweigh the benefits. On September 24, 2018, PHMSA officially repealed the ECP brake rule. The STB Reauthorization Act of 2015 was signed into law on December 18, 2015. The law requires numerous changes to the structure and composition of the STB, removing it from under the DOT and establishing the STB as an independent U.S. agency, as well as increasing STB Board membership from three to five members. Notably, the law vests in the STB certain limited enforcement powers, by authorizing it to investigate rail carrier violations on the STB Board’s own initiative. The law also requires the STB to establish a voluntary binding arbitration process to resolve rail rate and practice disputes. Finally, on May 23, 2018, the Transportation Modernization Act received Royal Assent. The legislation amends the CTA and the RSA, among other Acts, to (1) replace the existing 160 kilometer extended interswitching limit and the competitive line rate provisions with a new long-haul interswitching regime; (2) modify the existing Level of Service remedy for shippers by instructing the Agency to determine, upon receipt of a complaint, if a railway company is fulfilling its common carrier obligation to the “highest level of service that is reasonable in the circumstances”; (3) allow the existing Service Level Agreement arbitration remedy to include the consideration of reciprocal financial penalties; (4) increase the threshold for summary Final Offer Arbitrations from $750,000 to $2 million; (5) bifurcate the Volume-Related Composite Price Index (“VRCPI”) component of the annual MRE determination for transportation of regulated grain, to encourage 34 / CP 2018 ANNUAL REPORT hopper car investment by CP and CN; (6) mandate the installation of locomotive voice and video recorders ("LVVRs"), with statutory permission for random access by railway companies and Transport Canada to the LVVR data in order to proactively strengthen railway safety in Canada; and (7) compel railways to provide additional data to the federal government. 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 have a material adverse effect on 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 an Environmental Management System to facilitate the reduction of environmental risk. Specific environmental programs are in place to address areas such as air emissions, wastewater, management of vegetation, chemicals and waste, storage tanks and fueling 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 senior management. 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. 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 railcars carrying hazardous materials, could be direct targets or indirect casualties of terrorist attacks. Regulations by the DOT 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 TIH materials. Legislative changes in Canada to the TDG 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 material adverse effect on the Company's business or operating results. CP takes the following security measures: • CP employs its own police service that works closely with communities and other law enforcement and government agencies to promote railway safety and infrastructure security. As a railway law enforcement agency, CP Police Services is headquartered in Calgary, with police officers assigned to over 25 field offices responsible for railway police operations in six Canadian provinces and 14 U.S. states. CP Police Services operates on the CP rail network as well as in areas where CP has non-railway operations. CP’s Police Communication Centre (“PCC”) operates 24 hours a day. PCC receives reports of emergencies, dangerous or potentially dangerous conditions, and other safety and security issues from our employees, the public, and law enforcement and other government officials. PCC ensures that proper emergency responders are notified as well as governing bodies. CP’s Security Management Plan is a comprehensive, risk-based plan modelled on and developed in conjunction with the security plan prepared by the Association of American Railroads post-September 11, 2001. Under this plan, CP routinely examines and prioritizes railway assets, physical and cyber vulnerabilities, and threats, as well as tests and revises measures to provide essential railway security. To address cyber security risks, CP implements mitigation programs that evolve with the changing technology threat environment. The Company has also worked diligently to establish backup sites to ensure a seamless transition in the event that the Company's operating systems are the target of a cyber- attack. By doing so, CP is able to maintain network fluidity. CP security efforts consist of a wide variety of measures including employee training, engagement with our customers and training of emergency responders. • • •  CP 2018 ANNUAL REPORT / 35 Available Information CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). Our website also contains charters for each of the committees of our Board of Directors, our corporate governance guidelines and our Code of Business Ethics. This Form 10-K and other SEC filings made by CP are also accessible through the SEC’s website at www.sec.gov. The Company has included the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as an Exhibit to this report. All references to our websites contained herein do not constitute incorporation by reference of information contained on such websites and such information should not be considered part of this document. 36 / CP 2018 ANNUAL REPORT ITEM 1A. RISK FACTORS The risks set forth in the following risk factors could have a materially adverse effect on the Company's financial condition, results of operations, and liquidity, and could cause those results to differ materially from those expressed or implied in the Company's forward-looking statements and forward-looking information (collectively, "forward-looking statements"). The information set forth in this Item 1A. Risk Factors should be read in conjunction with the rest of the information included in this report, including Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data. As a common carrier, the Company is required by law to transport dangerous goods and hazardous materials, which could expose the Company to significant costs and claims. 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 to loss. CP transports dangerous goods and hazardous materials, including but not limited to crude oil, ethanol and TIH materials such as chlorine gas and anhydrous ammonia. A train accident involving hazardous materials could result in significant claims against CP arising from personal injury, property or natural resource damage, environmental penalties and remediation obligations. Such claims, if insured, could exceed the existing insurance coverage commercially available to CP, which could have a material adverse effect on CP’s financial condition and liquidity. CP is also required to comply with rules and regulations regarding the handling of dangerous goods and hazardous materials in Canada and the U.S. Noncompliance with these rules and regulations can subject the Company to significant penalties and could factor in litigation arising out of a train accident. Changes to these rules and regulations could also increase operating costs, reduce operating efficiencies and impact service delivery. The Company is subject to significant governmental legislation and regulation over commercial, operating and environmental matters. The Company’s railway operations are subject to extensive federal laws, regulations and rules in both Canada and the U.S. Operations are subject to economic and safety regulations in Canada primarily by the Agency and Transport Canada. The Company’s U.S. operations are subject to economic and safety regulation by the STB and the FRA. Various other regulators directly and indirectly affect the Company’s operations in areas such as health, safety, security, environmental and other matters. Additional economic regulation of the rail industry by these regulators or the Canadian and U.S. legislatures, whether under new or existing laws, could have a significant negative impact on the Company’s ability to determine prices for rail services and result in a material adverse effect in the future on the Company’s financial position, results of operations, and liquidity in a particular year or quarter. This potential material adverse effect could also result in reduced capital spending on the Company’s rail network or in abandonment of lines. The Company’s compliance with safety and security regulations may result in increased capital expenditures and operating costs. For example, compliance with the Rail Safety Improvement Act of 2008 will result in additional capital expenditures associated with the statutorily mandated implementation of PTC. In addition to increased capital expenditures, implementation of such regulations may result in reduced operational efficiency and service levels, as well as increased operating expenses. The Company’s operations are subject to extensive federal, state, provincial and local environmental laws concerning, among other matters, emissions to the air, land and water and the handling of hazardous materials and wastes. Violation of these laws and regulations can result in significant fines and penalties, as well as other potential impacts on CP’s operations. These laws can impose strict, and in some circumstances, joint and several liability on both current and former owners, and on operators of facilities. Such environmental liabilities may also be raised by adjacent landowners or third parties. In addition, in operating a railway, it is possible that releases of hazardous materials during derailments or other accidents may occur that could cause harm to human health or to the environment. Costs of remediation, damages and changes in regulations could materially affect the Company’s operating results and reputation. The Company has been, and may in the future be, subject to allegations or findings to the effect that it has violated, or is strictly liable under, environmental laws or regulations. The Company currently has obligations at existing sites for investigation, remediation and monitoring, and will likely have obligations at other sites in the future. The actual costs associated with both current and long-term liabilities may vary from the Company’s estimates due to a number of factors including, but not limited to changes in: the content or interpretation of environmental laws and regulations; required remedial actions; technology associated with site investigation or remediation; and the involvement and financial viability of other parties that may be responsible for portions of those liabilities. Global economic conditions could negatively affect demand for commodities and other freight transported by the Company. A decline or disruption in domestic, cross border or global economic conditions that affect the supply or demand for the commodities that CP transports may decrease CP’s freight volumes and may result in a material adverse effect on CP’s financial or operating results and liquidity. Economic conditions resulting in bankruptcies of one or more large customers could have a significant impact on CP's financial position, results of operations, and liquidity in a particular year or quarter. The Company faces competition from other transportation providers and failure to compete effectively could adversely affect financial results. The Company faces significant competition for freight transportation in Canada and the U.S., including competition from other railways, pipelines, and trucking and barge companies. Competition is based mainly on quality of service, freight rates and access to markets. Other transportation modes generally use public rights-of-way that are built and maintained by government entities, while CP and other railways must use internal resources to build and maintain their rail networks. Competition with the trucking industry is generally based on freight rates, flexibility of service and transit time performance.Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, or legislation that eliminates or significantly reduces the burden of the size or weight limitations currently applicable to trucking carriers, could have a material adverse effect on CP's financial results.  CP 2018 ANNUAL REPORT / 37 The operations of carriers with which the Company interchanges may adversely affect operations. The Company's ability to provide rail services to customers in Canada and the U.S. also depends upon its ability to maintain cooperative relationships with connecting carriers with respect to, among other matters, revenue division, car supply and locomotive availability, data exchange and communications, reciprocal switching, interchange, and trackage rights. Deterioration in the operations or services provided by connecting carriers, or in the Company's relationship with those connecting carriers, could result in CP's inability to meet customers' demands or require the Company to use alternate train routes, which could result in significant additional costs and network inefficiencies. The availability of qualified personnel could adversely affect the Company's operations. Changes in employee demographics, training requirements and the availability of qualified personnel, particularly locomotive engineers and trainpersons, could negatively impact the Company’s ability to meet demand for rail services. 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 required to meet the demand for rail services. Strikes or work stoppages could adversely affect the Company's operations. Class I railroads are party to collective bargaining agreements with various labour unions. The majority of CP's employees belong to labour unions and are subject to these agreements. Disputes with regard to the terms of these agreements or the Company's potential inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns or lockouts, which could cause a significant disruption of the Company's operations and have a material adverse effect on the Company's results of operations, financial condition and liquidity. Additionally, future national labour agreements, or provisions of labour agreements related to health care, could significantly increase the Company's costs for health and welfare benefits, which could have a material adverse impact on its financial condition and liquidity. The Company may be subject to various claims and lawsuits that could result in significant expenditures. By the nature of its operation, the Company is exposed to the potential for a variety of litigation and other claims, including personal injury claims, labour and employment disputes, commercial and contract disputes, environmental liability, freight claims and property damage claims. In respect of workers' claims in Canada related to occupational health and safety, the Workers' Compensation Act (Canada) covers those matters. In the U.S., the Federal Employers' Liability Act ("FELA") is applicable to railroad employees. A provision for a litigation matter or other claim will be accrued according to applicable accounting standards and any such accrual will be based on an ongoing assessment of the strengths and weaknesses of the litigation or claim, its likelihood of success together with an evaluation of the damages or other monetary relief sought. Any material changes to litigation trends, a catastrophic rail accident or series of accidents involving freight loss, property damage, personal injury, environmental liability or other significant matters could have a material adverse effect on the Company's results of operations, financial position and liquidity, in each case, to the extent not covered by insurance. The Company may be affected by acts of terrorism, war, or risk of war. CP plays a critical role in the North American transportation system and therefore could become the target for acts of terrorism or war. CP is also involved in the transportation of hazardous materials, which could result in CP's equipment or infrastructure being direct targets or indirect casualties of terrorist attacks. Acts of terrorism, or other similar events, any government response thereto, and war or risk of war could cause significant business interruption to CP and may adversely affect the Company’s results of operations, financial condition and liquidity. Severe weather or natural disasters could result in significant business interruptions and costs to the Company. CP is exposed to severe weather conditions and natural disasters including earthquakes, floods, fires, avalanches, mudslides, extreme temperatures and significant precipitation that may cause business interruptions that can adversely affect the Company’s entire rail network. This could result in increased costs, increased liabilities and decreased revenues, which could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. Insurance maintained by the Company to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of the Company's damages or damages to others, and this insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of services, the Company may not be able to restore services without a significant interruption in operations. The Company relies on technology and technological improvements to operate its business. Information technology is critical to all aspects of CP’s business. If the Company were to experience a significant disruption or failure of one or more of its information technology or communications systems (either as a result of an intentional cyber or malicious act, or an unintentional error) it could result in service interruptions or other failures, misappropriation of confidential information and deficiencies, which could have a material adverse effect on the Company's 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 its results of operations, financial condition, and liquidity. The state of capital markets could adversely affect the Company's liquidity. Weakness in the capital and credit markets could negatively impact the Company’s access to capital. From time to time, the Company relies on the capital markets to provide some of its capital requirements, including the issuance of long-term debt instruments and commercial paper. Significant instability or disruptions of the capital markets and the credit markets, or deterioration of the Company's financial condition due to internal or external factors could restrict or eliminate the Company's access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds. Instability or disruptions of the capital markets and deterioration of the Company's financial condition, alone or in combination, could also result in a reduction in the Company's credit rating to below investment grade, which could also further prohibit or restrict the Company from accessing external sources of short-term and long-term debt financing, and/or significantly increase the associated costs. 38 / CP 2018 ANNUAL REPORT Disruptions within the supply chain could negatively affect the Company's operational efficiencies and increase costs. 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 the Company's results of operations, financial condition and liquidity. The Company may be affected by fluctuating fuel prices. Fuel expense constitutes a significant portion of the Company’s operating costs. Fuel prices can be subject to dramatic fluctuations, and significant price increases could have a material adverse effect on the Company's results of operations. The Company currently employs a fuel cost adjustment program to help reduce volatility in changing fuel prices, but the Company cannot be certain that it will always be able to fully mitigate rising or elevated fuel costs through this program. Factors affecting fuel prices include: worldwide oil demand, international politics, weather, refinery capacity, supplier and upstream outages, unplanned infrastructure failures, and labour and political instability. The Company is dependent on certain key suppliers of core railway equipment and materials that could result in increased price volatility or significant shortages of materials, which could adversely affect results of operations, financial condition and liquidity. Due to the complexity and specialized nature of core railway equipment and infrastructure (including rolling stock equipment, locomotives, rail and ties), there can be a limited number of suppliers of rail equipment and materials 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, which could have a material adverse effect on the Company's results of operations, financial condition and liquidity. Additionally, CP’s operations are dependent on the availability of diesel fuel. A significant fuel supply shortage arising from production decreases, increased demand in existing or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage to refinery or pipeline infrastructure, political unrest, war or other factors could have a material adverse effect on the Company's results of operations, financial position and liquidity in a particular year or quarter. The Company may be directly and indirectly affected by the impacts of global climate change. There is potential for significant impacts to CP’s infrastructure due to changes in global weather patterns. Increasing frequency, intensity and duration of extreme weather events such as flooding, storms and forest fires may result in substantial costs to respond during the event, to recover from the event and possibly to modify existing or future infrastructure requirements to prevent recurrence. The Company is currently subject to emerging regulatory programs that place a price on carbon emissions associated with railway operations in Canada. Government bodies at the provincial and federal level are imposing carbon taxation systems and cap and trade market mechanisms in the Canadian jurisdictions in which CP operates. As a significant consumer of diesel fuel, an escalating price on carbon emissions will lead to a corresponding increase of the Company’s business costs. Programs that place a price on carbon emissions or other government restrictions on certain market sectors may further impact current and potential customers including thermal coal and petroleum crude oil sectors. ITEM 1B. UNRESOLVED STAFF COMMENTS None.  CP 2018 ANNUAL REPORT / 39 ITEM 2. PROPERTIES Network Geography The Company’s network extends from the Port of Vancouver on Canada’s Pacific Coast to the Port of Montreal in eastern Canada, and to the U.S. industrial centres of Chicago, Illinois; Detroit, Michigan; Buffalo and Albany, New York; Kansas City, Missouri; and Minneapolis, Minnesota. The Company’s network is composed of three primary corridors: Western, Central and Eastern. The Western Corridor: Vancouver to Thunder Bay Overview – The Western Corridor links Vancouver with Thunder Bay, which is the Western Canadian terminus of the Company’s Eastern Corridor. With service through Calgary, the Western Corridor is an important part of the Company’s routes between Vancouver and the U.S. Midwest, and between Vancouver and eastern Canada. The Western Corridor provides access to the Port of Thunder Bay, Canada’s primary Great Lakes bulk terminal. Products – The Western Corridor is the Company’s primary route for bulk and resource products traffic from western Canada to the Port of Vancouver for export. CP also handles significant volumes of international intermodal containers and domestic general merchandise traffic. Feeder Lines – CP supports its Western Corridor with four significant feeder lines: the “Coal Route”, which links southeastern B.C. coal deposits to the Western Corridor and to coal terminals at the Port of Vancouver; the “Edmonton-Calgary Route”, which provides rail access to Alberta’s Industrial Heartland (north of Edmonton, Alberta) in addition to the petrochemical facilities in central Alberta; the “Pacific CanAm Route”, which connects Calgary and Medicine Hat in Alberta with Pacific Northwest rail routes at Kingsgate, B.C. via the Crowsnest Pass in Alberta; and the “North Main Line Route” that provides rail service to customers between Portage la Prairie, Manitoba, and Wetaskiwin, Alberta, including intermediate points Yorkton and Saskatoon in Saskatchewan. This line is an important collector of Canadian grain and fertilizer, serving the potash mines located east and west of Saskatoon and many high-throughput grain elevators and processing facilities. In addition, this line provides direct access to refining and upgrading facilities at Lloydminster, Alberta, and western Canada’s largest pipeline terminal at Hardisty, Alberta. Connections – The Company’s Western Corridor connects with the Union Pacific Railroad (“UP”) at Kingsgate and with BNSF at Coutts, Alberta, and at New Westminster and Huntingdon in B.C. This corridor also connects with CN at many locations including Thunder Bay, Winnipeg, Manitoba, Regina and Saskatoon in Saskatchewan, Red Deer, Camrose, Calgary and Edmonton in Alberta, Kamloops and several locations in the Greater Vancouver area in B.C. Yards and Repair Facilities – CP supports rail operations on the Western Corridor with main rail yards at Vancouver, Calgary, Edmonton, Moose Jaw in Saskatchewan, Winnipeg and Thunder Bay. The Company has locomotive and railcar repair facilities at Golden, Vancouver, Calgary, Moose Jaw and Winnipeg. CP also has major intermodal terminals at Vancouver, Calgary, Edmonton, Regina and Winnipeg. The Central Corridor: Moose Jaw and Winnipeg to Chicago and Kansas City Overview – The Central Corridor connects with the Western Corridor at Moose Jaw and Winnipeg. By running south to Chicago and Kansas City, through the Twin Cities of Minneapolis and St. Paul, Minnesota, and through Milwaukee, Wisconsin, CP provides a direct, single-carrier route between western Canada 40 / CP 2018 ANNUAL REPORT and the U.S. Midwest, providing access to Great Lakes and Mississippi River ports. From La Crosse, Wisconsin, the Central Corridor continues south towards Kansas City via the Quad Cities (Davenport and Bettendorf in Iowa, and Rock Island and Moline in Illinois), providing an efficient route for traffic destined for southern U.S. and Mexican markets. CP’s Kansas City line also has a direct connection into Chicago and by extension to points east on CP’s network such as Toronto, Ontario and the Port of Montreal in Quebec. Products – Traffic transported on the Central Corridor includes intermodal containers from the Port of Vancouver, fertilizers, chemicals, crude, frac sand, automotive, grain and other agricultural products. Feeder Lines – The Company has operating rights over BNSF tracks between Minneapolis and St. Paul along with connectivity to the twin ports of Duluth, Minnesota and Superior, Wisconsin. CP maintains its own yard facilities that provide an outlet for grain from the U.S. Midwest to the grain terminals at these ports. This is a strategic entry point for large dimensional shipments that can be routed via CP's network to locations such as Alberta's Industrial Heartland to serve the needs of the oil sands and energy industry. CP's route from Winona, Minnesota, to Tracy, Minnesota, provides access to key agricultural and industrial commodities. CP’s feeder line between Drake and New Town in North Dakota is geographically situated in a highly strategic region for Bakken oil production. CP also owns two significant feeder lines in North Dakota and western Minnesota operated by the Dakota Missouri Valley and Western Railroad and the Northern Plains Railroad, respectively. Both of these short lines are also active in providing service to agricultural and Bakken-oil-related customers. Connections – The Company’s Central Corridor connects with all major railways at Chicago. Outside of Chicago, CP has major connections with BNSF at Minneapolis Minot, North Dakota, and the Duluth-Superior Terminal and with UP at St. Paul and Mankato, Minnesota. CP connects with CN at Milwaukee and Chicago. At Kansas City, CP connects with Kansas City Southern (“KCS”), BNSF, Norfolk Southern Railway ("NS") and UP. CP’s Central Corridor also links to several short-line railways that primarily serve grain and coal producing areas in the U.S., and extend CP’s market reach in the rich agricultural areas of the U.S. Midwest. Yards and Repair Facilities – The Company supports rail operations on the Central Corridor with main rail yards in Chicago, Milwaukee, St. Paul and Glenwood in Minnesota, and Mason City and Davenport (Nahant yard) in Iowa. In addition, CP has a major locomotive repair facility at St. Paul and car repair facilities at St. Paul and Chicago. CP shares a yard with KCS in Kansas City. CP owns 49% of the Indiana Harbor Belt Railroad, a switching railway serving Greater Chicago and northwest Indiana. CP is also part owner of the Belt Railway Company of Chicago, which is the largest intermediate switching terminal railroad in the U.S. CP has major intermodal terminals in Minneapolis and Chicago as well as a dried distillers' grains transload facility that complements the service offering in Chicago. The Eastern Corridor: Thunder Bay to Montreal, Detroit and Albany Overview – The Eastern Corridor extends from Thunder Bay through to its eastern terminus at Montreal and from Toronto to Chicago via Windsor, Ontario and Detroit or Buffalo. The Company’s Eastern Corridor provides shippers direct rail service from Toronto and Montreal to Calgary and Vancouver via the Company’s Western Corridor and to the U.S. via the Central Corridor. This is a key element of the Company’s transcontinental intermodal service. The corridor also supports the Company’s market position at the Port of Montreal by providing one of the shortest rail routes for European cargo destined to the U.S. Midwest, using the CP-owned route between Montreal and Detroit, coupled with a trackage rights arrangement on NS tracks between Detroit and Chicago. Products – Major traffic categories transported in the Eastern Corridor include Forest products, chemicals and plastics, crude, ethanol, Metals, minerals and consumer products, intermodal containers, automotive products and general merchandise. Feeder Lines – A major feeder line serves the steel industry at Hamilton, Ontario and provides connections with both CSX Corporation (“CSX”) and NS at Buffalo. The Delaware & Hudson Railway Company, Inc. ("D&H") feeder line extends from Montreal to Albany. Connections – The Eastern Corridor connects with a number of short-line railways including routes from Montreal to Quebec City, Quebec and Montreal to Saint John, New Brunswick, and Searsport, Maine. Connections are also made with PanAm Southern at Mechanicville, New York, for service to the Boston and New England areas, and the Vermont Railway at Whitehall, New York. Through haulage arrangements, CP has service to Fresh Pond, New York, to connect with New York & Atlantic Railway as well as direct access to the Bronx and Queens. CP can also access Philadelphia as well as a number of short-lines in Pennsylvania. Connections are also made with CN at a number of locations, including Sudbury, North Bay, Windsor, London, Hamilton and Toronto in Ontario, and Montreal in Quebec. CP also connects in New York with the two eastern class 1 carriers; NS and CSX at Buffalo, NS at Schenectady and CSX at Albany. Yards and Repair Facilities – CP supports its rail operations in the Eastern Corridor with major rail yards at Sudbury, Toronto, London and Montreal. The Company has locomotive repair facilities at Montreal and Toronto and car repair facilities at Thunder Bay,Toronto and Montreal.The Company’s largest intermodal facility is located in the northern Toronto suburb of Vaughan and serves the Greater Toronto and southwestern Ontario areas. CP also operates intermodal terminals at Montreal and Detroit. CP also has transload facilities in Agincourt and Hamilton, Ontario to meet a variety of commodity needs in the area.  CP 2018 ANNUAL REPORT / 41 Right-of-Way The Company’s rail network is standard gauge, which is used by all major railways in Canada, the U.S. and Mexico. Continuous welded rail is used on the core main line network. CP uses different train control systems on portions of the Company’s owned track, depending on the volume of rail traffic. Remotely controlled centralized traffic control signals are used in various corridors to authorize the movement of trains. CP is currently implementing PTC on 2,117 miles of its U.S. network. In other corridors, train movements are directed by written instructions transmitted electronically and by radio from rail traffic controllers to train crews. In some specific areas of intermediate traffic density, CP uses an automatic block signalling system in conjunction with written instructions from rail traffic controllers. Track and Infrastructure CP operates on a network of approximately 12,500 miles of track and has access to 2,200 miles under trackage rights. The Company's owned track miles includes leases with wholly owned subsidiaries where the term of the lease exceeds 99 years. CP's track network represents the size of the Company's operations that connects markets, customers and other railways. Of the total mileage operated, approximately 5,400 miles are located in western Canada, 2,300 miles in eastern Canada, 4,400 miles in the U.S. Midwest and 400 miles in the U.S. Northeast. CP’s network accesses the U.S. markets directly through three wholly owned subsidiaries: Soo Line Railroad Company (“Soo Line”), a Class I railway operating in the U.S. Midwest; the Dakota, Minnesota and Eastern Railroad ("DM&E"), a wholly owned subsidiary of the Soo Line, which operates in the U.S. Midwest; and the D&H, which operates between eastern Canada and the U.S. Northeast. At December 31, 2018, the breakdown of CP operated track miles is as follows: First main track Second and other main track Passing sidings and yard track Industrial and way track Total track miles Total 12,469 1,114 4,260 781 18,624 Rail Facilities CP operates numerous facilities including: terminals for intermodal, transload, automotive and other freight; classification rail yards for train-building and switching, storage-in-transit and other activities; offices to administer and manage operations; dispatch centres to direct traffic on the rail network; crew quarters to house train crews along the rail line; shops and other facilities for fuelling; maintenance and repairs of locomotives; and facilities for maintenance of freight cars and other equipment. Typically in all of our major yards, CP Police Services has offices to ensure the safety and security of the yards and operations. The following table includes the major yards, terminals and transload facilities on CP's network: Major Classification Yards Vancouver, British Columbia Calgary, Alberta Edmonton, Alberta Moose Jaw, Saskatchewan Winnipeg, Manitoba Toronto, Ontario Montreal, Quebec Chicago, Illinois St. Paul, Minnesota Major Intermodal Terminals Vancouver, British Columbia Calgary, Alberta Edmonton, Alberta Regina, Saskatchewan Winnipeg, Manitoba Vaughan, Ontario Montreal, Quebec Chicago, Illinois St. Paul, Minnesota Transload Facilities Vancouver, British Columbia Toronto, Ontario Hamilton, Ontario Lachine, Quebec Equipment CP's equipment includes: owned and leased locomotives and railcars; heavy maintenance equipment and machinery; other equipment and tools in our shops, offices and facilities; and vehicles for maintenance, transportation of crews, and other activities. 42 / CP 2018 ANNUAL REPORT The Company’s locomotive fleet is composed of largely high-adhesion alternating current locomotives that are more fuel efficient and reliable and have superior hauling capacity, compared with standard direct current locomotives. As of December 31, 2018, the Company had 243 locomotives in storage. As a result, the Company does not foresee the need to acquire new locomotives for the next several years. As of December 31, 2018, CP owned or leased the following locomotive units: Locomotives Road freight High-adhesion alternating current Standard direct current Road switcher Yard switcher Total locomotives Owned Leased 784 249 342 14 1,389 34 — — — 34 Total 818 249 342 14 1,423 Average Age (in years) 13 31 26 36 20 CP owns and leases a fleet of 35,805 freight cars. Owned freight cars include units acquired by CP, equipment leased to third parties, and held under capital leases. Leased freight cars include all units under a short-term or long-term operating lease or financed equipment. As of December 31, 2018, CP owned and leased the following units of freight cars: Freight cars Box car Covered hopper Flat car Gondola Intermodal Multi-level autorack Company service car Open top hopper Tank car Total freight cars Owned 2,687 7,305 1,439 3,749 1,325 2,788 2,265 312 214 Leased 126 10,639 779 1,430 — 567 171 — 9 Total 2,813 17,944 2,218 5,179 1,325 3,355 2,436 312 223 22,084 13,721 35,805 Average Age (in years) 31 28 24 21 16 30 47 32 14 28 As of December 31, 2018, CP owned and leased the following units of intermodal equipment: Intermodal equipment Containers Chassis Total intermodal equipment Owned 8,624 5,774 14,398 Leased 294 494 788 Total 8,918 6,268 15,186 Average Age (in years) 7 13 9 Headquarters Office Building CP owns and operates a multi-building campus in Calgary encompassing the head office building, a data centre, training facility and other office and operational buildings. The Company's main dispatch centre is located in Calgary, and is the primary dispatching facility in Canada. Rail traffic controllers coordinate and dispatch crews, and manage the day-to-day locomotive management along the network, 24 hours a day, and seven days a week. The operations centre has a complete backup system in the event of any power disruption. In addition to fully operational redundant systems, CP has a fully integrated Business Continuity Centre, should CP's operations centre be affected by any natural disaster, fire, cyber-attack or hostile threat. CP also maintains a secondary dispatch centre located in Minneapolis, where a facility similar to the one in Calgary exists. It services the dispatching needs of  CP 2018 ANNUAL REPORT / 43 locomotives and train crews working in the U.S. Capital Expenditures The Company incurs expenditures to expand and enhance its rail network, rolling stock and other infrastructure. These expenditures are aimed at improving efficiency and safety of our operations. Such investments are also an integral part of the Company's multi-year capital program and support growth initiatives. For further details, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. Encumbrances Refer to Item 8. Financial Statements and Supplementary Data, Note 17 Debt, for information on the Company's capital lease obligations and assets held as collateral under these agreements. ITEM 3. LEGAL PROCEEDINGS For further details, refer to Item 8. Financial Statements and Supplementary Data, Note 24 Commitments and Contingencies. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 44 / CP 2018 ANNUAL REPORT EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are appointed by the Board of Directors and they hold office until their successors are appointed, subject to resignation, retirement or removal by the Board of Directors. There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. As of the date of this filing, the executive officers’ names, ages and business experience are: Name, Age and Position Business Experience Keith Creel, 50 President and Chief Executive Officer Mr.Creel became President and CEO of CP on January 31,2017.Previously,he was President and Chief Operating Officer ("COO") from February 5, 2013, to January 30, 2017. Prior to joining CP, Mr. Creel was Executive Vice-President and COO at CN from January 2010 to February 2013. During his time at CN, Mr. Creel held various positions including Executive Vice-President, Operations, Senior Vice-President Eastern Region, Senior Vice-President Western Region, and Vice-President of the Prairie Division. Mr. Creel began his railroad career at Burlington Northern Railway in 1992 as an intermodal ramp manager in Birmingham, Alabama. He also spent part of his career at Grand Trunk Western Railroad as a superintendent and general manager, and at Illinois Central Railroad as a trainmaster and director of corridor operations, prior to its merger with CN in 1999. Robert Johnson, 57 Executive Vice-President, Operations Mr. Johnson has been Executive Vice-President, Operations of CP since April 20, 2016. Previous to this appointment, Mr. Johnson was CP's Senior Vice-President Operations, Southern Region from June 2013 to April 2016. Prior to joining CP, Mr. Johnson's railroad career spanned 32 years with BNSF, where he held roles that progressively added to his responsibilities in operations, transportation and service excellence. His most recent position at BNSF was General Manager, Northwest Division, overseeing day-to-day operations for that region. Nadeem Velani, 46 Executive Vice-President and Chief Financial Officer Mr. Velani has been Executive Vice-President and CFO of CP since October 17, 2017. Previous to this appointment, he was the Vice-President and CFO of CP from October 19, 2016 to October 16, 2017, Vice- President, Investor Relations from October 28, 2015 and Assistant Vice-President, Investor Relations from March 11, 2013. Prior to joining CP, Mr. Velani spent 15 years at CN where he worked in a variety of positions in Strategic and Financial Planning, Investor Relations, Sales and Marketing, and the Office of the President and CEO. Mr. Velani holds a bachelor's degree in Economics from Western University and a Masters of Business Administration degree ("MBA") in Finance/International Business from McGill University. John Brooks, 48 Executive Vice-President and Chief Marketing Officer Mr. Brooks has been Executive Vice-President and CMO of CP since February 14, 2019. Previous to this appointment, he was the Vice-President and CMO of CP from February 14, 2017 to February 13, 2019. He has worked in senior marketing roles at CP since he joined the Company in 2007, most recently as Vice-President, Marketing - Bulk and Intermodal. Mr. Brooks began his railroading career with UP and later helped start I&M Rail Link, LLC, which was purchased by DM&E in 2002. Mr. Brooks was Vice-President, Marketing at DM&E prior to it being acquired by CP in 2007. With more than 20 years in the railroading business, Mr. Brooks brings a breadth of experience to the CMO role that will be pivotal to CP's continued and future success. James Clements, 49 Vice-President, Strategic Planning and Transportation Services Mr. Clements has been Vice-President, Strategic Planning and Transportation Services of CP since 2015. Mr. Clements has responsibilities that include strategic network issues and Network Service Centre operations. In addition, he has responsibility for all of CP’s facilities and Real Estate across North America. Mr. Clements has been at CP for 24 years and his previous experience covers a wide range of areas of CP’s business, including car management, finance, joint facilities agreements, logistics, grain marketing and sales in both Canada and the U.S., as well as marketing and sales responsibility for various other lines of business at CP. He has an MBA in Finance/International Business from McGill University and a Bachelor of Science in Computer Science and Mathematics from McMaster University.  CP 2018 ANNUAL REPORT / 45 Jeffrey Ellis, 51 Chief Legal Officer and Corporate Secretary Mr. Ellis has been Chief Legal Officer and Corporate Secretary of CP since November 23, 2015. Mr. Ellis is accountable for the overall strategic leadership, oversight and performance of the legal, corporate secretarial, government relations and public affairs functions of CP in Canada and the U.S. Mike Foran, 45 Vice-President, Market Strategy and Asset Management Prior to joining CP in 2015, Mr. Ellis was the U.S. General Counsel at BMO Financial Group. Before joining BMO in 2006, Mr. Ellis was with the law firm of Borden Ladner Gervais LLP in Toronto, Canada. Mr. Ellis has Bachelor of Arts and Master of Arts from the University of Toronto, Juris Doctor and Master of Laws from Osgoode Hall Law School, and an MBA from the Richard Ivey School of Business, University of Western Ontario. Jeff is a member of the bars of New York, Illinois and Ontario. Mr. Foran has been Vice-President, Market Strategy and Asset Management of CP since February 14, 2017. His prior roles with CP include Vice-President Network Transportation from 2014 to 2017, Assistant Vice-President Network Transportation from 2013 to 2014, and General Manager – Asset Management from 2012 to 2013. In over 20 years at CP, Mr. Foran has worked in operations, business development, marketing and general management. Mr. Foran holds an Executive MBA from the Ivey School of Business at Western University and a Bachelor of Commerce from the University of Calgary. Michael Redeker, 58 Vice-President and Chief Information Officer Mr. Redeker has been Vice-President and Chief Information Officer ("CIO") of CP since October 15, 2012. Prior to joining CP, Mr. Redeker was Vice-President and CIO of Alberta Treasury Branch from May 2007 to September 2012. He also spent 11 years at IBM Canada, where he focused on delivering quality information technology services within the financial services industry. Laird Pitz, 74 Senior Vice-President and Chief Risk Officer Mr. Pitz has been Senior Vice-President and Chief Risk Officer ("CRO") of CP since October 17, 2017. Previously, he was the Vice-President and CRO of CP from October 29, 2014 to October 16, 2017 and the Vice-President, Security and Risk Management of CP from April 2014 to October 2014. Prior to joining CP, Mr. Pitz was retired from March 2012 to April 2014, and Vice-President, Risk Mitigation of CN from September 2003 to March 2012. Mr. Pitz, a Vietnam War veteran and former Federal Bureau of Investigation special agent, is a 40-year career professional who has directed strategic and operational risk mitigation,security and crisis management functions for companies operating in a wide range of fields, including defence, logistics and transportation. Chad Rolstad, 42 Vice-President, Human Resources Mr. Rolstad has been Vice-President, Human Resources of CP since February 14, 2019. Previous to this appointment, he was Assistant Vice-President, Human Resources of CP from August 1, 2018 to February 13, 2019 and Assistant Vice-President, Strategic Procurement of CP from April 10, 2017 to July 31, 2018. Prior to joining CP, Mr. Rolstad held various leadership positions at BNSF Railway in marketing and operations. Mr. Rolstad has a Bachelor of Science from the Colorado School of Mines and an MBA from Duke University. 46 / CP 2018 ANNUAL REPORT PART II  CP 2018 ANNUAL REPORT / 47 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Share Information The Common Shares are listed on the TSX and on the NYSE under the symbol "CP". Share Capital At February 13, 2019, the latest practicable date prior to the date of this Annual Report on Form 10-K, there were 140,041,483 Common Shares and no preferred shares issued and outstanding, which consists of 14,254 holders of record of the Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase the Common Shares. Each option granted can be exercised for one Common Share. At February 13, 2019, 1.7 million options were outstanding under the Company’s MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 1.1 million options available to be issued by the Company’s MSOIP in the future. CP has a Director's Stock Option Plan (“DSOP”), under which directors are granted options to purchase the Common Shares. There are no outstanding options under the DSOP, which has 0.3 million options available to be issued in the future. Securities Authorized for Issuance Under Equity Compensation Plans The following table shows, as of December 31, 2018, compensation plans under which equity securities of the Corporation are authorized for issuance upon the exercise of options outstanding under the MSOIP and the DSOP. The table also shows the number of Common Shares available for issuance, including 340,000 Shares under the DSOP. On July 21, 2003, the Board suspended all further grants of options under the DSOP. Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total (a) (b) (c) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 1,533,598 $ — 1,533,598 $ 176.02 — 176.02 1,641,047 — 1,641,047 48 / CP 2018 ANNUAL REPORT Stock Performance Graph The following graph provides an indicator of cumulative total shareholder return on the Common Shares, of an assumed investment of $100, as compared to the TSX 60 Index (“TSX 60”), the Standard & Poor's 500 Stock Index (“S&P 500”), and the peer group index (comprising CN, KCS, UP, NS and CSX) on December 31 for each of the years indicated. The values for the assumed investments depicted on the graph and in the table have been calculated assuming that any dividends are reinvested. Issuer Purchase of Equity Securities CP has established a share repurchase program, which is further described in the Share repurchase section in Item 8. Financial Statements and Supplementary Data, Note 20 Shareholders' Equity. During 2018, CP repurchased 4.7 million Common Shares for $1,127 million at an average price of $240.68. The following table presents the number of Common Shares repurchased during each month for the fourth quarter of 2018 and the average price paid by CP for the repurchase of such Common Shares. 2018 October 1 to October 31 November 1 to November 30 December 1 to December 31 Ending Balance Total number of shares purchased(1) Average price paid per share(2) Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares (or units) that may yet be purchased under the plans or programs 399,700 $ 822,500 965,000 2,187,200 $ 259.71 272.23 249.10 259.74 399,700 822,500 965,000 2,187,200 5,283,240 4,460,740 3,495,740 N/A (1) Includes shares repurchased but not yet cancelled at quarter end. (2) Includes brokerage fees.  CP 2018 ANNUAL REPORT / 49 ITEM 6. SELECTED FINANCIAL DATA The following table presents as of, and for the years ended, December 31, selected financial data related to the Company’s financial results for the last five fiscal years. The selected financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data. For information regarding historical exchange rates, please see Impact of FX on Earnings in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (in millions, except per share data, percentage and ratios) 2018 2017 2016 2015 2014 Financial Performance Total revenues Operating income(1) Adjusted operating income(1) (2) Net income Adjusted income(2) Basic earnings per share ("EPS") Diluted EPS Adjusted diluted EPS(2) Dividends declared per share Financial Position Total assets Total long-term debt, including current portion Total shareholders' equity Cash provided by operating activities Free cash(2) Financial Ratios Return on invested capital ("ROIC")(2) Adjusted ROIC(2) Operating ratio(1) (3) Adjusted operating ratio(1) (2) $ 7,316 $ 6,554 $ 6,232 $ 6,712 $ 2,831 2,831 1,951 2,080 13.65 13.61 14.51 2,519 2,468 2,405 1,666 16.49 16.44 11.39 2,411 2,411 1,599 1,549 10.69 10.63 10.29 2.5125 2.1875 1.8500 2,618 2,550 1,352 1,625 8.47 8.40 10.10 1.4000 6,620 2,202 2,198 1,476 1,482 8.54 8.46 8.50 1.4000 $ 21,254 $ 20,135 $ 19,221 $ 19,637 $ 16,550 8,696 6,636 2,712 1,289 15.3% 16.2% 61.3% 61.3% 8,159 6,437 2,182 874 20.5% 14.7% 61.6% 62.4% 8,684 4,626 2,089 1,007 14.4% 14.0% 61.3% 61.3% 8,957 4,796 2,459 1,381 12.9% 15.2% 61.0% 62.0% 5,759 5,610 2,123 969 14.4% 14.5% 66.7% 66.7% (1) Comparative years' figures have been restated for the retrospective adoption of Accounting Standards Update ("ASU") 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. (2) These measures have no standardized meanings prescribed by accounting principles generally accepted in the United States of America ("GAAP") and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (3) Operating ratio is defined as operating expenses divided by revenues. 50 / CP 2018 ANNUAL REPORT ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS Executive Summary 2019 Outlook Performance Indicators Results of Operations Impact of Foreign Exchange on Earnings Impact of Fuel Price on Earnings Impact of Share Price on Earnings Operating Revenues Operating Expenses Other Income Statement Items Liquidity and Capital Resources Non-GAAP Measures Off-Balance Sheet Arrangements Critical Accounting Estimates Forward-Looking Statements Page 51 51 52 54 57 58 58 59 64 67 68 71 78 79 83  CP 2018 ANNUAL REPORT / 51 The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes in Item 8. Financial Statements and Supplementary Data, and other information in this report. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars. In the first quarter of 2018, the comparative figures contained in or derived from the Consolidated Statement of Income were restated to reflect the adoption of the new Accounting Standards Update ("ASU") ASU 2017-07 for presentation of Other components of net periodic benefit recovery. These changes in presentation do not result in any changes to net income or earnings per share. For further information, refer to Item 8. Financial Statements and Supplemental Data, Note 2 Accounting changes. Executive Summary 2018 Results • Financial performance – In 2018, CP reported Diluted EPS of $13.61, a 17% decrease from $16.44 in 2017. The Adjusted diluted EPS increased to $14.51, a 27% improvement compared to Adjusted diluted EPS of $11.39 in 2017. CP’s commitment to service and operational efficiency produced an Operating ratio and Adjusted operating ratio of 61.3%. Adjusted diluted EPS and Adjusted operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. • Total revenues – CP’s total revenues increased by 12% to $7,316 million in 2018 from $6,554 million in 2017, driven primarily by an 8% volume growth as measured in revenue ton-miles ("RTM"). • Operating performance – CP's average train weight increased by 3% to 9,100 tons and fuel efficiency improved by 3%, primarily as a result of improvements in operating plan efficiency. Average train speed decreased by 5% to 21.5 miles per hour and average dwell time increased by 3% to 6.8 hours in 2018 primarily from network disruptions from labour negotiations in the second quarter and harsher weather conditions in the first quarter. These metrics are discussed further in Performance Indicators of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table compares 2018 outlook to actual results: Outlook Revenue growth Mid-single digits Actual outcomes Revenue growth of 12% to $7,316 million Adjusted diluted EPS(1) Capital expenditures Initially set as low double-digits Adjusted diluted EPS growth from full-year 2017 Adjusted diluted EPS of $11.39. Approximately $1.35 billion to $1.50 billion Revised at the end of the third quarter to grow in excess of 20% from the full-year 2017 Adjusted diluted EPS. Revised at the end of the third quarter to $1.60 billion. Adjusted diluted EPS growth of 27% to $14.51 $1.55 billion (1) Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Due to reasons similar to those described in the 2019 Outlook section below, CP had not calculated an outlook for Diluted EPS in 2018. During 2018, CP exceeded its revenue growth primarily due to sustainable volume growth, mainly attributable to increased shipments of Energy, chemicals and plastics, Intermodal, and Potash, partially offset by decreased shipments of U.S. grain. CP also exceeded its Adjusted diluted EPS outlook primarily due to volume growth and continued cost control. Capital expenditures were $1.55 billion spent primarily on network improvements, growth initiatives and renewal of depleted assets. 2019 Outlook With a 2019 plan that encompasses profitable sustainable growth, CP expects RTM growth to be in the mid-single digit and Adjusted diluted EPS growth to be in the double-digits. CP’s expectations for Adjusted diluted EPS growth in 2019 are based on Adjusted diluted EPS of $14.51 in 2018. CP assumes the Canadian-to-U.S. dollar exchange rate will be approximately $1.30 and expects an effective tax rate in the range of 25.5 to 26 percent. CP estimates other components of net periodic benefit recovery to increase by $11 million versus 2018, and no material land sales. As CP continues to invest in service, productivity and safety, the Company plans to invest approximately $1.6 billion in capital programs in 2019. Capital programs are defined and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Adjusted diluted EPS is defined and discussed further in Non-GAAP Measures and in Forward-Looking Statements of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although CP has provided a forward-looking non-GAAP measure (Adjusted diluted EPS), it is not practicable to provide a reconciliation to a forward-looking reported Diluted EPS, the most comparable GAAP measure, due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In past years, CP has recognized significant asset impairment charges and management transition recoveries or costs related to senior executives. These or other similar, large unforeseen transactions affect Diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the Canadian-to-U.S. dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted diluted EPS. In particular, CP excludes the foreign exchange ("FX") impact 52 / CP 2018 ANNUAL REPORT of translating the Company’s U.S. dollar denominated long-term debt from Adjusted diluted EPS. Please see Forward-Looking Statements of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion. Performance Indicators The following table lists the key measures of the Company’s operating performance: % Change 2018 vs. 2017 2017 vs. 2016 9 5 3 1 3 (5) (3) 5 5 5 4 1 2 — (1) (4) — — 4 5 (1) (12) For the year ended December 31 Operations Performance Gross ton-miles (“GTMs”) (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 (miles per hour, or "mph") Fuel efficiency (U.S. gallons of locomotive fuel consumed/1,000 GTMs) Total employees (average) Total employees (end of period) Workforce (end of period) Safety Indicators 2018 2017(1) 2016(1) 275,362 252,195 242,694 32,312 30,632 30,373 9,100 7,313 6.8 21.5 0.953 12,695 12,770 12,793 8,806 7,214 6.6 22.6 0.980 12,034 12,163 12,242 8,614 7,217 6.7 23.5 0.980 12,082 11,653 11,698 FRA personal injuries per 200,000 employee-hours FRA train accidents per million train-miles 1.47 1.10 1.65 0.99 1.67 1.12 (11) 11 (1) Certain figures have been updated to reflect new information or have been revised to conform with current presentation. Operations Performance These key measures of operating performance reflect how effective CP's management is at controlling costs and executing the Company's operating plan and strategy. CP continues to drive further productivity improvements in its operations, allowing the Company to deliver superior service and grow its business at low incremental cost. A GTM is the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises of the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs for 2018 were 275,362 million, a 9% increase compared with 252,195 million in 2017. This increase was primarily driven by increased volumes of Energy, chemicals and plastics, Potash, and Intermodal, partially offset by decreased shipments of U.S. grain. GTMs in 2017 increased by 4% compared with 242,694 million in 2016. This increase was primarily driven by increased volumes of Energy, chemicals and plastics, frac sand, and Potash. This increase was partially offset by decreased volumes of international intermodal and Automotive. Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles for 2018 were 32,312 thousands, an increase of 5% compared with 30,632 thousands in 2017. This reflects the impact of higher volumes partially offset by continuous improvements in train weights as evident in the relative comparison to GTMs, which grew by 9% in 2018. Train miles in 2017 increased by 1% compared with 30,373 thousands in 2016. This reflects the impact of higher volumes partially offset by continuous improvements in train weights as evident in the relative comparison to GTMs, which grew by 4% in 2017. The average train weight is defined as the average gross weight of CP trains, both loaded and empty. This excludes trains in short-haul service, work trains used to move CP’s track equipment and materials, and the haulage of other railways’ trains on CP’s network. Average train weight of 9,100 tons in 2018 increased by 294 tons, or 3%, compared with 8,806 tons in 2017. This increase was due to continuous improvements in operating plan efficiency, as well as higher volumes of heavier commodities, such as crude and Potash, compared to the same period in 2017. Average train weight increased in 2017 by 192 tons, or 2%, from 8,614 tons in 2016. This increase was due to continuous improvements in operating plan efficiency, as well as higher frac sand, Potash, and crude volumes compared to the same period in 2016.  CP 2018 ANNUAL REPORT / 53 The average train length is the sum of each car multiplied by the distance travelled, divided by train miles. Local trains are excluded from this measure. Average train length of 7,313 feet in 2018 increased by 99 feet, or 1%, compared with 7,214 feet in 2017. This was a result of improvements in operating plan efficiency and increased Intermodal and Potash volumes, which move in longer trains. Average train length remained relatively constant between 2017 and 2016. This is a result of moving proportionately more shorter but heavier frac sand and crude trains compared to the same period in 2016, offset by improvements in operating plan efficiency. The average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving at the terminal, a customer releasing the car to the Company, or a car arriving at interchange from another railway. The timing ends when the train leaves, a customer receives the car from CP, or the freight car is transferred to another railway. Freight cars are excluded if they are being stored at the terminal or used in track repairs. Average terminal dwell increased by 3% in 2018 from 6.6 hours in 2017 to 6.8 hours in 2018. In 2018, this unfavourable increase was primarily due to: • • • network disruptions from labour negotiations in the second quarter of 2018; harsher weather conditions and increased network disruptions in the first quarter of 2018; and higher volumes in the second half of the year and increased delays from accelerated track and roadway capital programs in the third quarter of 2018. Average terminal dwell in 2017 decreased by 1% from 6.7 hours in 2016. In 2017, this favourable decrease was primarily due to continued improvements in yard operating performance and focus and visibility provided through improved trip planning. The average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It is calculated by dividing the total train miles travelled by the total train hours operated. This calculation does not include delay time related to customer or foreign railways and excludes the time and distance travelled by: i) trains used in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing track. Average train speed was 21.5 mph in 2018, a decrease of 5%, from 22.6 mph in 2017. This decrease was primarily due to: • • • network disruptions from labour negotiations in the second quarter of 2018; harsher weather conditions and increased network disruptions in the first quarter of 2018; and higher volumes and increased delays from accelerated track and roadway capital programs in the third quarter of 2018. This decrease was partially offset by the completion of roadway capital programs, resulting in improved network fluidity in the fourth quarter of 2018. Average train speed in 2017 was 22.6 mph, a decrease of 4%, from 23.5 mph in 2016. This decrease was primarily due to: • • • increased volumes of heavier and slower frac sand and Potash trains; decreased volumes of lighter and faster Intermodal trains; and harsher weather conditions in the first quarter of 2017. Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs. Fuel efficiency for 2018 of 0.953 U.S. gallons/1,000 GTMs improved by 3% compared to 2017. Fuel efficiency was flat in 2017 compared to 2016. The improvement in fuel efficiency in 2018 compared to 2017 was primarily due to improved productivity from running longer trains. Total Employees and Workforce An employee is defined by the Company as an individual currently engaged in full-time, part-time or seasonal employment with CP. The average number of total employees for 2018 increased by 661 compared with 2017. The increase was primarily due to growth in volumes. The total number of employees as at December 31, 2018 was 12,770, an increase of 607, or 5%, compared to 12,163 as at December 31, 2017, which is in line with the current and expected growth in volumes. The average number of total employees for 2017 decreased by 48, compared to 2016. This decrease was primarily due to strong operational performance, natural attrition and efficient resource management planning. The total number of employees as at December 31, 2017 was 12,163, an increase of 510, or 4%, compared to 11,653 as at December 31, 2016, which is in line with the current and expected growth in volumes. The workforce is defined as total employees plus contractors and consultants. The total workforce as at December 31, 2018 was 12,793, an increase of 551, or 5%, compared to 12,242 as at December 31, 2017. This increase was in line with the current and expected growth in GTMs and RTMs. The workforce as at December 31, 2017 was 12,242, an increase of 544, or 5%, compared to 11,698 as at December 31, 2016. This increase is in line with the current and expected growth in GTMs and RTMs. 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. 54 / CP 2018 ANNUAL REPORT The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 1.47 in 2018, 1.65 in 2017 and 1.67 in 2016. The FRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA damage reporting threshold of U.S. $10,700 in 2018 and 2017 and U.S. $10,500 in damage for 2016. The FRA train accidents per million train-miles frequency for CP in 2018 was 1.10, compared with 0.99 in 2017 and 1.12 in 2016. Results of Operations Income * Comparative years' figures have been restated for the retrospective adoption of Accounting Standards Update ("ASU") 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. ** Adjusted operating income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating income was $2,831 million in 2018, an increase of $312 million, or 12%, from $2,519 million in 2017. This increase was primarily due to higher volumes and the efficiencies generated from improved operating performance and asset utilization. This increase was partially offset by: • • • cost inflation; management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017; and higher depreciation and amortization driven primarily from a higher asset base as a result of higher capital program spending in 2018. Operating income was $2,519 million in 2017, an increase of $108 million, or 4%, from $2,411 million in 2016. This increase was primarily due to: • • • higher volumes; management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP; and the efficiencies generated from improved operating performance and asset utilization. This increase was partially offset by: • • • • lower gains on land sales of $91 million, following the sales of CP's Arbutus Corridor and Obico rail yard in 2016; the unfavourable impact of the change in FX of $32 million; the impact of wage and benefit inflation; and higher depreciation and amortization. Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $2,831 million in 2018, an increase of $363 million, or 15%, from $2,468 million in 2017. Adjusted operating income was $2,468 million in 2017, an increase of $57 million, or 2%, from $2,411 million in 2016. These increases were primarily due to the same factors discussed above for the increase in Operating income, except that Adjusted operating income in 2017 excludes the management transition recovery of $51 million.  CP 2018 ANNUAL REPORT / 55 *Adjusted income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Net income was $1,951 million in 2018, a decrease of $454 million, or 19%, from $2,405 million in 2017. This decrease was primarily due to lower income tax recoveries from tax rate changes in 2018 compared to 2017 and the unfavourable impact of the change in FX translation on U.S. dollar-denominated debt. This decrease was partially offset by higher Operating income and higher Other components of net periodic benefit recovery. Net income was $2,405 million in 2017, an increase of $806 million, or 50%, from $1,599 million in 2016. This increase was primarily due to: • • • income tax recoveries of $541 million from tax rate changes; higher Operating income; and the favourable impact of FX translation on U.S. dollar-denominated debt. This increase was partially offset by higher Income tax expense associated with higher pre-tax earnings. Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $2,080 million in 2018, an increase of $414 million, or 25%, from $1,666 million in 2017. This increase was primarily due to higher Adjusted operating income and higher Other components of net periodic benefit recovery. This increase was partially offset by higher income tax expense associated with higher pre-tax earnings. Adjusted income was $1,666 million in 2017, an increase of $117 million, or 8%, from $1,549 million in 2016. This increase was primarily due to the increase in Adjusted operating income, partially offset by higher income tax expense associated with higher pre-tax earnings. 56 / CP 2018 ANNUAL REPORT Diluted Earnings per Share *Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Diluted EPS was $13.61 in 2018, a decrease of $2.83, or 17%, from $16.44 in 2017. This decrease was primarily due to lower Net income, partially offset by the lower average number of outstanding Common Shares due to the Company's share repurchase program. Diluted EPS was $16.44 in 2017, an increase of $5.81, or 55%, from $10.63 in 2016. This increase was primarily due to higher Net income and the lower average number of outstanding Common Shares due to the Company's share repurchase program. Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $14.51 in 2018, an increase of $3.12, or 27%, from $11.39 in 2017. Adjusted diluted EPS was $11.39 in 2017, an increase of $1.10, or 11%, from $10.29 in 2016. These increases were primarily due to higher Adjusted income and the lower average number of outstanding Common Shares due to the Company's share repurchase program. Operating Ratio * Comparative years' figures have been restated for the retrospective adoption of ASU 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. ** Adjusted operating ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  CP 2018 ANNUAL REPORT / 57 The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s Operating ratio was 61.3% in 2018, a 30 basis point improvement from 61.6% in 2017. This improvement was primarily due to higher volumes and efficiencies generated from improved operating performance and asset utilization. This improvement was partially offset by: the impact of higher fuel prices; • cost inflation; and • management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017. • The Company’s Operating ratio was 61.6% in 2017, a 30 basis point increase from 61.3% in 2016. This increase was primarily due to lower gains on land sales of $91 million, following the sales of CP's Arbutus Corridor and Obico rail yard in 2016, and by the impact of higher fuel prices. This increase was partially offset by: • • • higher volumes; management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP; and efficiencies generated from improved operating performance and asset utilization. Adjusted operating ratio, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was 61.3% in 2018, a 110 basis point improvement from 62.4% in 2017. This improvement in Adjusted operating ratio reflects the same factors discussed above for the improvement in Operating ratio except that Adjusted operating ratio in 2017 excludes the $51 million management transition recovery. Adjusted operating ratio was 62.4% in 2017, a 110 basis point increase from 61.3% in 2016. This increase in Adjusted operating ratio reflects the same factors discussed above for the increase in Operating ratio except that Adjusted operating ratio in 2017 excludes the $51 million management transition recovery. Return on Invested Capital Return on invested capital ("ROIC") is a measure of how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions made by management, and is an important performance criteria in determining certain elements of the Company's long-term incentive plan. ROIC was 15.3% in 2018, a 520 basis point decrease compared to 20.5% in 2017, primarily due to: a higher average invested capital base due to higher Retained earnings from Net income; • higher Income tax expense due to lower income tax recoveries from tax rate changes in 2018 compared to 2017; and • the unfavourable impact of the change in FX translation on U.S. dollar-denominated debt. • This decrease was partially offset by higher Operating income and higher Other components of net periodic benefit recoveries. ROIC was 20.5% in 2017, a 610 basis point increase compared to 14.4% in 2016 primarily due to higher Operating income and lower taxes due to income tax rate changes, partially offset by a higher average invested capital base due to higher Retained earnings from Net income. Adjusted ROIC was 16.2% in 2018, a 150 basis point increase compared to 14.7% in 2017 due to higher Adjusted operating income and higher Other components of net periodic benefit recoveries. This increase was partially offset by a higher adjusted average invested capital base due to higher Retained earnings from Net income and higher taxes due to higher taxable earnings. Adjusted ROIC was 14.7% in 2017, a 70 basis point increase compared to 14.0% in 2016 due to higher Adjusted operating income, partially offset by a higher adjusted average invested capital base due to higher Retained earnings from Net income. ROIC and Adjusted ROIC are defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Impact of Foreign Exchange on Earnings Fluctuations in FX affect the Company’s results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. U.S. dollar- denominated revenues and expenses increase (decrease) when the Canadian dollar weakens (strengthens) in relation to the U.S. dollar. In 2018, the impact of a weaker U.S. dollar resulted in a decrease in total revenues of $8 million, a decrease in total operating expenses of $4 million and no change to interest expense. In 2017, the impact of a weaker U.S. dollar resulted in a decrease in total revenues of $68 million, a decrease in total operating expenses of $36 million and a decrease in interest expense of $8 million. On February 8, 2019, noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was U.S. $1.00 = $1.33 Canadian dollar. 58 / CP 2018 ANNUAL REPORT The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and the U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, the high and low exchange rates and period end exchange rates for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board. Average exchange rates (Canadian/U.S. dollar) For the year ended – December 31 For the three months ended – December 31 Ending exchange rates (Canadian/U.S. dollar) Beginning of year – January 1 Beginning of quarter – April 1 Beginning of quarter – July 1 Beginning of quarter – October 1 End of year – December 31 High/Low exchange rates (Canadian/U.S. dollar) High Low 2018 1.30 $ 1.32 $ 2017 1.30 $ 1.27 $ 2016 1.33 $ 1.33 $ 2015 1.28 $ 1.34 $ 2018 2017 2016 2015 1.25 $ 1.29 $ 1.32 $ 1.29 $ 1.36 $ 1.34 $ 1.33 $ 1.30 $ 1.25 $ 1.25 $ 1.38 $ 1.30 $ 1.29 $ 1.31 $ 1.34 $ 1.16 $ 1.27 $ 1.25 $ 1.33 $ 1.38 $ 2018 1.37 $ 1.23 $ 2017 1.37 $ 1.21 $ 2016 1.46 $ 1.25 $ 2015 1.40 $ 1.17 $ $ $ $ $ $ $ $ $ $ 2014 1.10 1.13 2014 1.06 1.11 1.07 1.12 1.16 2014 1.16 1.06 In 2019, CP expects that for every $0.01 the U.S. dollar appreciates (depreciates) relative to the Canadian dollar, it will increase (decrease) revenues by $28 million, operating expenses by $15 million and net interest expense by $3 million on an annualized basis. Impact of Fuel Price on Earnings Fluctuations in fuel prices affect the Company’s results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be a timing impact on earnings, as discussed further in Item 1. Business, Operations, Fuel Cost Adjustment Program and Item 1A. Risk Factors, Fuel Cost Volatility. Average Fuel Price (U.S. dollars per U.S. gallon) For the year ended – December 31 For the three months ended – December 31 $ $ 2018 2.72 $ 2.71 $ 2017 2.16 $ 2.43 $ 2016 1.80 2.01 Average fuel prices for 2017 exclude the effects of an $8 million fuel tax recovery related to prior periods. The impact of fuel price on earnings includes the impacts of B.C. and Alberta carbon taxes and levies recovered and paid, on revenues and expenses, respectively. In 2018, the impact of higher fuel prices resulted in an increase in total revenues of $212 million and an increase in total operating expenses of $197 million. In 2017, the impact of higher fuel prices resulted in an increase in total revenues of $105 million and an increase in total operating expenses of $104 million. Impact of Share Price on Earnings Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The following tables indicate the opening and ending price of the Common Shares on the TSX and the NYSE for each quarter and the change in the price of the Common Shares on the TSX and the NYSE for the years ended December 31, 2018, 2017 and 2016: Toronto Stock Exchange (in Canadian dollars) Opening Common Share price, as at January 1 Ending Common Share price, as at March 31 Ending Common Share price, as at June 30 Ending Common Share price, as at September 30 Ending Common Share price, as at December 31 Change in Common Share price for the year ended December 31 2018 229.66 $ 227.20 $ 240.92 $ 273.23 $ 242.24 $ 12.58 $ $ $ $ $ $ $ 2017 191.56 $ 195.35 $ 208.65 $ 209.58 $ 229.66 $ 38.10 $ 2016 176.73 172.55 166.33 200.19 191.56 14.83  CP 2018 ANNUAL REPORT / 59 New York Stock Exchange (in U.S. dollars) Opening Common Share price, as at January 1 Ending Common Share price, as at March 31 Ending Common Share price, as at June 30 Ending Common Share price, as at September 30 Ending Common Share price, as at December 31 Change in Common Share price for the year ended December 31 2018 182.76 $ 176.50 $ 183.02 $ 211.94 $ 177.62 $ (5.14) $ $ $ $ $ $ $ 2017 142.77 $ 146.92 $ 160.81 $ 168.03 $ 182.76 $ 39.99 $ 2016 127.60 132.69 128.79 152.70 142.77 15.17 In 2018, the impact of the change in the price of the Common Shares resulted in an increase in stock-based compensation expense of $2 million compared to an increase of $18 million in 2017, and an increase of $9 million in 2016. The impact of share price on stock-based compensation is discussed further in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Share Price Impact on Stock-Based Compensation. Operating Revenues For the year ended December 31 Freight revenues (in millions)(1) Non-freight revenues (in millions) Total revenues (in millions) Carloads (in thousands) 2018 2017 2016 7,152 $ 6,375 $ 6,060 $ 164 179 172 7,316 $ 6,554 $ 6,232 $ $ $ 777 (15) 762 2,739.8 2,634.2 2,524.9 105.6 2018 vs. 2017 2017 vs. 2016 Total Change % Change FX Adjusted % Change(2) Total Change % Change FX Adjusted % Change(2) 12 (8) 12 4 8 8 4 12 $ (8) 12 $ N/A N/A 8 $ 315 7 322 109.3 6,588 20 5 4 5 4 5 1 4 0.01 — 6 5 6 N/A N/A 2 1 Revenue ton-miles (in millions) 154,207 142,540 135,952 11,667 Freight revenue per carload (in dollars) $ 2,611 $ 2,420 $ 2,400 $ 191 Freight revenue per revenue ton-miles (in cents) 4.64 4.47 4.46 0.17 (1) Freight revenues include fuel surcharge revenues of $492 million in 2018, $242 million in 2017 and $133 million in 2016. 2018 and 2017 fuel surcharge revenues include carbon taxes, levies and obligations recovered under cap-and-trade programs. (2) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company’s revenues are primarily derived from transporting freight. Changes in freight volumes generally contribute to corresponding changes in freight revenues and certain variable expenses, such as fuel, equipment rents and crew costs. Non-freight revenue is generated from leasing of certain assets; other arrangements, including logistical services and contracts with passenger service operators; and switching fees. Freight Revenues Freight revenues were $7,152 million in 2018, an increase of $777 million, or 12%, from $6,375 million in 2017. This increase was primarily due to higher volumes, as measured by RTMs, of Energy, chemicals and plastics, Potash, and Intermodal, and the favourable impact of higher fuel surcharge revenue of $212 million, as a result of higher fuel prices. This increase was partially offset by lower volumes of U.S. grain, and the unfavourable impact of the change in FX of $8 million. Freight revenues were $6,375 million in 2017, an increase of $315 million, or 5%, from $6,060 million in 2016. This increase was primarily due to higher volumes, as measured by RTMs, of frac sand, Energy, chemicals and plastics, domestic intermodal, Potash and Canadian grain, and the favourable impact of higher fuel surcharge revenue of $105 million, as a result of higher fuel prices. This increase was partially offset by lower volumes of Automotive, international intermodal, fertilizer and U.S. grain, and the unfavourable impact of the change in FX of $67 million. RTMs RTMs are defined as the movement of one revenue-producing ton of freight over a distance of one mile. RTMs measure the relative weight and distance of rail freight moved by the Company. RTMs for 2018 were 154,207 million, an increase of 11,667 million, or 8%, compared with 142,540 million in 2017. This increase was mainly attributable to increased shipments of Energy, chemicals and plastics, Potash, and Intermodal, partially offset by decreased shipments of U.S. grain. 60 / CP 2018 ANNUAL REPORT RTMs for 2017 were 142,540 million, an increase of 5% compared with 135,952 million in 2016. This increase was mainly attributable to increased shipments of frac sand, Energy, chemicals and plastics, Potash, domestic intermodal and Canadian grain. This increase was partially offset by decreased shipments of international intermodal, U.S. grain, fertilizer and Automotive. Non-freight Revenues Non-freight revenues were $164 million in 2018, a decrease of $15 million, or 8%, from $179 million in 2017. This decrease was primarily due to the recovery of prior costs following the expiration of a passenger service contract in 2017 and lower passenger revenues in 2018. Non-freight revenues were $179 million in 2017, an increase of $7 million, or 4%, from $172 million in 2016. This increase was primarily due to the recovery of prior costs following the expiration of a passenger service contract in 2017, partially offset by lower passenger revenues. Lines of Business Grain For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 1,566 $ 1,532 $ 1,480 $ 34 429.4 440.7 431.9 36,856 37,377 36,892 (11.3) (521) 168 0.15 2 (3) (1) 5 4 2 $ N/A N/A 5 $ 4 52 8.8 485 51 0.09 4 2 1 1 2 5 N/A N/A 3 4 Freight revenue per carload (in dollars) $ 3,645 $ 3,477 $ 3,426 $ Freight revenue per revenue ton-mile (in cents) 4.25 4.10 4.01 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Grain revenue was $1,566 million in 2018, an increase of $34 million, or 2%, from $1,532 million in 2017. This increase was primarily due to higher freight revenue per revenue ton-mile, higher fuel surcharge as a result of higher fuel prices, and record volumes of Canadian grain in the fourth quarter. These increases were partially offset by decreased volumes of U.S. grain, primarily wheat, and soybeans to the Pacific Northwest, and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates, primarily for regulated Canadian grain. RTMs decreased less than carloads due to moving proportionately more Canadian grain, which has a longer length of haul compared to U.S. grain. Grain revenue was $1,532 million in 2017, an increase of $52 million, or 4%, from $1,480 million in 2016.This increase was primarily due to increased Canadian grain volumes and higher fuel surcharge revenue, partially offset by the unfavourable impact of the change in FX. Carloads increased more than RTMs due to the decreased proportion of U.S. grain to the Pacific North West, which has a longer length of haul. The increase in freight revenue per revenue ton-mile is primarily due to increased regulated Canadian grain rates. Coal For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 673 $ 631 $ 606 $ 304.3 306.0 305.3 22,443 22,660 22,171 42 (1.7) (217) 150 0.22 7 (1) (1) 7 8 7 $ N/A N/A 7 $ 8 25 0.7 489 77 0.05 4 — 2 4 2 4 N/A N/A 4 2 Freight revenue per carload (in dollars) $ 2,211 $ 2,061 $ 1,984 $ Freight revenue per revenue ton-mile (in cents) 3.00 2.78 2.73 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.  CP 2018 ANNUAL REPORT / 61 Coal revenue was $673 million in 2018, an increase of $42 million, or 7%, from $631 million in 2017. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices, and higher freight revenue per revenue ton-mile, partially offset by lower volumes of Canadian export coal, and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates. Coal revenue was $631 million in 2017, an increase of $25 million, or 4%, from $606 million in 2016. This increase was primarily due to an increase in Canadian export volumes and higher fuel surcharge revenue, partially offset by the unfavourable impact of the change in FX. The increase in freight revenue per revenue ton-mile was primarily due to increased freight rates. RTMs increased more than carloads due to proportionately more export Canadian coal moved. Potash For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 486 $ 411 $ 338 $ 158.4 137.4 116.4 75 21.0 18,371 15,751 14,175 2,620 18 15 17 3 2 19 $ N/A N/A 3 $ 2 73 21.0 1,576 84 0.23 22 18 11 3 10 23 N/A N/A 4 11 Freight revenue per carload (in dollars) $ 3,071 $ 2,988 $ 2,904 $ Freight revenue per revenue ton-mile (in cents) 2.65 2.61 2.38 83 0.04 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Potash revenue was $486 million in 2018, an increase of $75 million, or 18%, from $411 million in 2017. This increase was primarily due to higher export potash volumes, as well as higher fuel surcharge revenue as a result of higher fuel prices, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving proportionately more export potash to Vancouver, which has a longer length of haul. Potash revenue was $411 million in 2017, an increase of $73 million, or 22%, from $338 million in 2016. This increase was primarily due to higher export and domestic potash volumes, as well as higher fuel surcharge revenue, partially offset by the unfavourable impact of the change in FX. The increase in freight revenue per revenue ton-mile was due to the increased proportion of export traffic to the U.S. Pacific Northwest, which has a shorter length of haul. Fertilizers and Sulphur For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 243 $ 241 $ 284 $ 58.1 4,051 57.7 3,849 59.6 4,140 2 0.4 202 8 1 1 5 — (4) 1 $ N/A N/A 1 $ (4) (43) (1.9) (291) (591) (0.60) (15) (3) (7) (12) (9) (14) N/A N/A (11) (8) Freight revenue per carload (in dollars) $ 4,186 $ 4,178 $ 4,769 $ Freight revenue per revenue ton-mile (in cents) 6.00 6.27 6.87 (0.27) (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Fertilizers and sulphur revenue was $243 million in 2018, an increase of $2 million, or 1%, from $241 million in 2017. This increase was primarily due to increased volumes of dry fertilizer and sulphur, and higher fuel surcharge revenue as a result of higher fuel prices, partially offset by lower freight revenue per revenue ton-mile, and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile decreased due to moving proportionately less wet fertilizer, which has higher freight rates, and increased volumes of longer haul sulphur from Canada to the U.S. Fertilizers and sulphur revenue was $241 million in 2017, a decrease of $43 million, or 15%, from $284 million in 2016. This decrease was primarily due to lower fertilizer volumes, which have a higher freight revenue per revenue ton-mile, and the unfavourable impact of the change in FX. The decrease was partially offset by higher fuel surcharge revenue. RTMs decreased more than carloads due to decreased traffic to the U.S. and increased shorter length of haul traffic. 62 / CP 2018 ANNUAL REPORT Forest Products For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 284 $ 265 $ 275 $ 68.6 4,763 65.8 4,484 66.1 4,691 19 2.8 279 103 0.04 7 4 6 3 1 8 $ N/A N/A 3 $ 1 (10) (0.3) (207) (121) 0.06 (4) — (4) (3) 1 (2) N/A N/A (1) 3 Freight revenue per carload (in dollars) $ 4,139 $ 4,036 $ 4,157 $ Freight revenue per revenue ton-mile (in cents) 5.96 5.92 5.86 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forest products revenue was $284 million in 2018, an increase of $19 million, or 7%, from $265 million in 2017. This increase was primarily due to increased volumes of wood pulp and paper products, and higher fuel surcharge revenue as a result of higher fuel prices, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to increased volumes of longer haul wood pulp from eastern Canada to the U.S. Forest products revenue was $265 million in 2017, a decrease of $10 million, or 4%, from $275 million in 2016. This decrease was primarily due to lower volumes of lumber and panel products, due to U.S. tariffs on Canadian softwood lumber in 2017, and the unfavourable impact of the change in FX, partially offset by higher fuel surcharge revenue. Carloads decreased less than RTMs due to a decrease in lumber and panel traffic with a longer length of haul. Energy, Chemicals and Plastics For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 1,243 $ 898 $ 852 $ 334.6 269.5 250.0 345 65.1 27,830 21,327 19,021 6,503 38 24 30 11 6 39 $ N/A N/A 46 19.5 2,306 12 $ (77) 6 (0.27) 5 8 12 (2) (6) 7 N/A N/A — (4) Freight revenue per carload (in dollars) $ 3,715 $ 3,333 $ 3,410 $ Freight revenue per revenue ton-mile (in cents) 4.47 4.21 4.48 382 0.26 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Energy, chemicals and plastics revenue was $1,243 million in 2018, an increase of $345 million, or 38%, from $898 million in 2017. This increase was primarily due to increased volumes of crude and liquefied petroleum gas ("L.P.G."), and higher fuel surcharge revenue as a result of higher fuel prices, partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving proportionately more crude, which has a longer length of haul. Energy, chemicals and plastics revenue was $898 million in 2017, an increase of $46 million, or 5%, from $852 million in 2016. This increase was primarily due to higher volumes of crude, plastics, fuel oil and LPG, and higher fuel surcharge revenue, partially offset by the unfavourable impact of the change in FX. The decrease in freight revenue per revenue ton-mile was primarily due to volume gains in longer length of haul lanes for crude and L.P.G and higher plastics and fuel oil volumes, which have a lower freight revenue per revenue ton-mile.  CP 2018 ANNUAL REPORT / 63 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 797 $ 739 $ 564 $ 252.2 255.3 11,858 11,468 195.3 8,338 58 (3.1) 390 267 0.28 8 (1) 3 9 4 8 $ N/A N/A 9 $ 4 175 60.0 3,130 6 (0.33) 31 31 38 — (5) 33 N/A N/A 2 (3) 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 (in dollars) $ 3,161 $ 2,894 $ 2,888 $ Freight revenue per revenue ton-mile (in cents) 6.72 6.44 6.77 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Metals, minerals and consumer products revenue was $797 million in 2018, an increase of $58 million, or 8%, from $739 million in 2017. This increase was primarily due to higher freight revenue per revenue ton-mile, higher fuel surcharge revenue as a result of higher fuel prices, and increased volumes of steel and aggregate products.This increase was partially offset by the unfavourable impact of the change in FX. RTMs increased while carloads decreased due to a decrease in volumes of short haul copper ore traffic. Freight revenue per revenue ton-mile increased due to higher freight rates. Metals, minerals and consumer products revenue was $739 million in 2017, an increase of $175 million, or 31%, from $564 million in 2016. This increase was primarily due to frac sand, aggregates and steel volumes, and higher fuel surcharge revenue, partially offset by the unfavourable impact of the change in FX. The decrease in freight revenue per revenue ton-mile was primarily due to the higher volumes of frac sand, which have a lower freight revenue per revenue ton-mile, and longer length of haul for cement and bentonite clay traffic. Automotive For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 322 $ 293 $ 350 $ 108.3 1,347 105.1 1,321 124.1 1,667 29 3.2 26 190 1.77 10 3 2 7 8 11 $ (57) N/A N/A 7 $ 8 (19.0) (346) (40) 1.13 (16) (15) (21) (1) 5 (15) N/A N/A — 7 Freight revenue per carload (in dollars) $ 2,975 $ 2,785 $ 2,825 $ Freight revenue per revenue ton-mile (in cents) 23.92 22.15 21.02 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Automotive revenue was $322 million in 2018, an increase of $29 million, or 10%, from $293 million in 2017. This increase was primarily due to higher freight revenue per revenue ton-mile, higher fuel surcharge revenue as a result of higher fuel prices, and higher volumes of machinery. This increase was partially offset by the unfavourable change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates. Automotive revenue was $293 million in 2017, a decrease of $57 million, or 16% from $350 million in 2016. This decrease was primarily due to a decline in volume and the unfavourable impact of the change in FX, partially offset by higher fuel surcharge revenue. The increase in freight revenue per revenue ton-mile was primarily due to a higher proportion of traffic with higher freight rates. 64 / CP 2018 ANNUAL REPORT Intermodal For the year ended December 31 Freight revenues (in millions) Carloads (in thousands) Revenue ton-miles (in millions) 2018 vs. 2017 2017 vs. 2016 2018 2017 2016 Total Change % Change FX Adjusted % Change(1) Total Change % Change FX Adjusted % Change(1) $ 1,538 $ 1,365 $ 1,311 $ 1,025.9 996.7 976.2 173 29.2 26,688 24,303 24,857 2,385 Freight revenue per carload (in dollars) $ 1,499 $ 1,370 $ 1,342 $ 129 Freight revenue per revenue ton-mile (in cents) 5.76 5.62 5.27 0.14 13 3 10 9 2 13 $ N/A N/A 9 $ 54 20.5 (554) 28 2 0.35 4 2 (2) 2 7 5 N/A N/A 3 7 (1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Intermodal revenue was $1,538 million in 2018, an increase of $173 million, or 13%, from $1,365 million in 2017. This increase was primarily due to higher international volumes through the Port of Vancouver, higher wholesale domestic volumes, as well as higher fuel surcharge revenue as a result of higher fuel prices. This was partially offset by the unfavourable impact of the change in FX. RTMs increased more than carloads due to discontinuing expressway service, and an increased length of haul for international intermodal volume moving through the Port of Vancouver. Intermodal revenue was $1,365 million in 2017, an increase of $54 million, or 4%, from $1,311 million in 2016. This increase was primarily due to higher domestic volumes and higher fuel surcharge revenue, partially offset by a decline in international volumes associated with the loss of a contract and the unfavourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to more revenue-generating moves of empty customer containers. Operating Expenses 2018 Operating Expenses 2017 Operating Expenses 2016 Operating Expenses  CP 2018 ANNUAL REPORT / 65 2018 vs. 2017 2017 vs. 2016 For the year ended December 31 (in millions) Compensation and benefits(1) Fuel Materials Equipment rents Depreciation and amortization Purchased services and other Total operating expenses(1) 2018 2017 2016 Total Change % Change FX Adjusted % Change(2) Total Change % Change FX Adjusted % Change(2) $ 1,468 $ 1,309 $ 1,356 $ 918 201 130 696 677 190 142 661 1,072 1,056 567 180 173 640 905 159 241 11 (12) 35 16 $ 4,485 $ 4,035 $ 3,821 $ 450 12 36 6 (8) 5 2 11 12 $ (47) 36 6 (8) 5 2 11 $ 110 10 (31) 21 151 214 (3) 19 6 (18) 3 17 6 (3) 22 7 (17) 4 18 7 (1) 2016 and 2017 comparative year figures have been restated for the retrospective adoption of ASU 2017-07, discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. (2) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operating expenses were $4,485 million in 2018, an increase of $450 million, or 11%, from $4,035 million in 2017. This increase was primarily due to: • • • • • • • • • the unfavourable impact of $197 million from higher fuel prices; higher volume variable expenses; cost inflation; management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017; higher depreciation and amortization due to a higher asset base; a $20 million charge associated with a loss contingency; harsher winter operating conditions in the first quarter of 2018; higher stock-based compensation primarily driven by stronger performance against targets, partially offset by the changes in share price; and higher incentive compensation. This increase was partially offset by the efficiencies generated from improved operating performance and asset utilization and higher gains on land sales of $26 million mainly from the sale of Bass Lake railway line, in the fourth quarter of 2018. Operating expenses were $4,035 million in 2017, an increase of $214 million, or 6%, from $3,821 million in 2016. This increase was primarily due to: • • • • • the unfavourable impact of $104 million from higher fuel prices; lower gains on land sales of $91 million, following the sales of CP's Arbutus Corridor and Obico rail yard in 2016; higher volume variable expenses; cost inflation; and higher depreciation and amortization due to a higher asset base. This increase was partially offset by: • • • management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP; efficiencies generated from improved operating performance and asset utilization; and the favourable impact of the change in FX of $36 million. Compensation and Benefits Compensation and benefits expense includes employee wages, salaries, fringe benefits and stock-based compensation. Compensation and benefits expense was $1,468 million in 2018, an increase of $159 million, or 12%, from $1,309 million in 2017. This increase was primarily due to: • • • • • • • higher volume variable expenses as a result of an increase in workload as measured by GTMs; management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP; the impact of wage and benefit inflation; higher stock-based compensation primarily driven by stronger performance against targets, partially offset by the changes in share price; higher incentive compensation; an increase in training programs; and harsher winter operating conditions. This increase was partially offset by lower labour expenses due to operational efficiencies. 66 / CP 2018 ANNUAL REPORT Compensation and benefits expense was $1,309 million in 2017, a decrease of $47 million, or 3% from $1,356 million in 2016. This decrease was primarily due to: • • • management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP; lower labour expenses due to operational efficiencies; and the favourable impact of the change in FX of $9 million. This decrease was partially offset by: • • • • the impact of wage and benefit inflation; higher volume variable expenses as a result of an increase in workload as measured by GTMs; the unfavourable impact of stock-based compensation driven primarily by the change in stock price; and higher incentive compensation. Fuel Fuel expense consists mainly of fuel used by locomotives and includes provincial, state and federal fuel taxes. Fuel expense was $918 million in 2018, an increase of $241 million, or 36%, from $677 million in 2017. This increase was primarily due to: • • • the unfavourable impact of $197 million from higher fuel prices; an increase in workload, as measured by GTMs; and a fuel tax recovery received in 2017 that related to prior periods of $8 million. This increase was partially offset by improvements in fuel efficiency of approximately 3%. Fuel expense was $677 million in 2017, an increase of $110 million, or 19%, from $567 million in 2016. This increase was primarily due to the unfavourable impact of $104 million from higher fuel prices and an increase in workload, as measured by GTMs. This increase was partially offset by the favourable impact of the change in FX of $10 million and an $8 million fuel tax recovery related to prior periods. Materials Materials expense includes the cost of material used for maintenance of track, locomotives, freight cars and buildings as well as software sustainment. Materials expense was $201 million in 2018, an increase of $11 million, or 6%, from $190 million in 2017.This increase was primarily due to higher locomotive maintenance and higher non-locomotive fuel costs. Materials expense was $190 million in 2017 an increase of $10 million, or 6%, from $180 million in 2016. This increase was primarily due to higher locomotive maintenance and overhaul costs and higher right-of-way maintenance. 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 $130 million in 2018, a decrease of $12 million, or 8%, from $142 million in 2017. This decrease was primarily due to the purchase or return of leased freight cars and lower usage of pooled intermodal containers reducing rental expenses by $7 million, and a $4 million increase in receipts from other railways' use of CP equipment. Equipment rents expense was $142 million in 2017, a decrease of $31 million, or 18%, from $173 million in 2016. This decrease was primarily due to the purchase or return of leased freight cars, locomotives and intermodal containers reducing rental expenses by $19 million, and a $12 million increase in receipts from other railways' use of CP equipment. Depreciation and Amortization Depreciation and amortization expense represents the charge associated with the use of track and roadway, buildings, rolling stock, information systems and other depreciable assets. Depreciation and amortization expense was $696 million for 2018, an increase of $35 million, or 5%, from $661 million in 2017. This increase was primarily due to higher asset base as a result of higher capital program spending in 2018. Depreciation and amortization expense was $661 million for 2017, an increase of $21 million, or 3%, from $640 million in 2016. This increase was primarily due to a higher depreciable asset base, partially offset by the favourable impact of the change in FX of $3 million.  CP 2018 ANNUAL REPORT / 67 Purchased Services and Other For the year ended December 31 (in millions) 2018 2017 2016 2018 vs. 2017 2017 vs. 2016 Total Change % Change Total Change % Change Support and facilities Track and operations Intermodal Equipment Casualty Property taxes Other Land sales Total Purchased services and other $ $ 264 $ 268 221 143 73 124 20 (41) 1,072 $ 266 $ 251 197 157 72 121 7 (15) 1,056 $ 271 $ 238 180 165 68 116 (27) (106) 905 $ (2) 17 24 (14) 1 3 13 (26) 16 (1) $ 7 12 (9) 1 2 186 173 2 $ (5) 13 17 (8) 4 5 34 91 151 (2) 5 9 (5) 6 4 (126) (86) 17 Purchased services and other expense encompasses a wide range of third-party costs, including contractor and consulting fees, locomotive and freight car repairs performed by third parties, property and other taxes, intermodal pickup and delivery services, casualty expense, expenses for joint facilities and gains on land sales. Purchased services and other expense was $1,072 million in 2018, an increase of $16 million, or 2%, from $1,056 million in 2017. This increase was primarily due to: • • • a $20 million charge associated with a loss contingency, reported in Other; higher intermodal expenses related to pickup and delivery, reported in Intermodal; and higher costs due to winter weather related impacts and costs related to labour disruptions, reported primarily in Track and operations. This increase was partially offset by higher gains on land sales of $26 million mainly from the sale of Bass Lake railway line, in the fourth quarter of 2018, and lower locomotive engine overhaul expenses as a greater proportion of this work was capital in nature in 2018, reported in Equipment. Purchased services and other expense was $1,056 million in 2017, an increase of $151 million, or 17%, from $905 million in 2016. This increase was primarily due to: • • • • • lower gains on land sales of $91 million, following the sales of CP's Arbutus Corridor and Obico rail yard in 2016; a $17 million gain on sale of surplus freight cars, and a reduction in accrued discontinuance costs for certain branch lines, both in 2016, reported in Other; higher right-of-way and track dismantling costs, reported in Track and operations; higher intermodal expenses related to pickup and delivery services, reported in Intermodal; and higher property taxes due to tax rate increases. This increase was partially offset by the favourable impact of the change in FX of $10 million. As part of optimizing its assets, the Company may identify and dispose of property used or formerly used in operating activities. The Company includes as part of operating expenses the gains and losses that arise on disposal of such long-lived assets. The following disposals have impacted Purchased services and other during the current and comparative periods: • in the fourth quarter of 2018, the Company completed the sale of Bass Lake railway line, for gross proceeds of $37 million and a gain on sale of $35 million; in the fourth quarter of 2016, the Company completed the sale of CP's Obico rail yard for gross proceeds of $38 million and a gain on sale of $37 million; in the second quarter of 2016, the Company disposed of 1,000 surplus freight cars that had reached, or were nearing the end of, their useful life in a non- monetary exchange for new freight cars. The Company recognized a gain on sale of $17 million from the transaction and the sale did not impact cash from investing activities; and in the first quarter of 2016, the Company completed the sale of CP’s Arbutus Corridor to the City of Vancouver for gross proceeds of $55 million and a gain on sale of $50 million. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor. • • • Other Income Statement Items Other Expense (Income) Other expense (income) consists of gains and losses from the change in FX on long-term debt, working capital, costs related to financing, shareholder costs, equity income and other non-operating expenditures. Other expense was $174 million in 2018, a change of $352 million, or 198%, compared to an income of $178 million in 2017. This change was primarily due to an FX translation loss of $168 million on U.S. dollar-denominated debt, compared to a gain of $186 million and a $10 million insurance recovery of legal costs in 2017. These unfavourable changes were partially offset by a $13 million charge on the settlement and roll of forward starting swaps in 2017 and higher equity income in 2018. 68 / CP 2018 ANNUAL REPORT Other income was $178 million in 2017, an increase of $133 million, or 296%, compared to an income of $45 million in 2016. This increase was primarily due to higher FX translation gains of $186 million on U.S. dollar-denominated debt, compared to $79 million in the same period of 2016, and a $10 million insurance recovery of legal costs in 2017, compared to a legal settlement charge of $25 million in 2016. This increase was partially offset by a $13 million charge on the settlement and roll of forward starting swaps in 2017. Other Components of Net Periodic Benefit Recovery Other components of net periodic benefit recovery were $384 million in 2018, an increase of $110 million, or 40%, from $274 million in 2017. Other components of net periodic benefit recovery were $274 million in 2017, an increase of $107 million, or 64%, from $167 million in 2016. These increases were primarily due to the 7.75% expected rate of return in each of 2016, 2017 and 2018 being applied to greater asset values, and decreases in the recognized net actuarial loss. Net Interest Expense Net interest expense includes interest on long-term debt and capital leases. Net interest expense was $453 million in 2018, a decrease of $20 million, or 4%, from $473 million in 2017. This decrease was primarily due to a favourable $15 million impact as a result of a lower effective interest rate and lower debt levels from debt refinancing in the second quarter of 2018, as well as higher capitalized interest. Net interest expense was $473 million in 2017, an increase of $2 million, from $471 million in 2016. This increase was primarily due to lower capitalized interest, partially offset by the favourable impact from the change in FX of $8 million. Income Tax Expense Income tax expense was $637 million in 2018, an increase of $544 million, or 585%, from $93 million in 2017. The increase is due to net income tax recoveries in 2017 of $541 million, primarily as a result of U.S. tax reform, and higher 2018 taxable earnings, partially offset by other tax rate changes in 2018. Income tax expense was $93 million in 2017, a decrease of $460 million, or 83%, from $553 million in 2016. The decrease is primarily due to net income tax recoveries of $541 million as a result of U.S. tax reform, partially offset by other tax rate changes, and higher taxable earnings in 2017. The effective income tax rate for 2018 was 24.64% on reported income and 24.55% on Adjusted income. The effective income tax rate for 2017 was 3.74% on reported income and 26.42% on Adjusted income. Adjusted income is a Non-GAAP measure, which is discussed further in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company expects a 2019 effective tax rate of approximately 25.50% to 26.00%. The Company’s 2019 outlook for its effective tax rate is based on certain assumptions about events and developments that may or may not materialize, or that may be offset entirely or partially by new events and developments. This is discussed further in Item 1A. Risk Factors. Liquidity and Capital Resources The Company believes adequate amounts of Cash and cash equivalents are available in the normal course of business to provide for ongoing operations, including the obligations identified in the tables in Contractual Commitments of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company is not aware of any trends or expected fluctuations in the Company's liquidity that would create any deficiencies. The Company's primary sources of liquidity include its Cash and cash equivalents, its bilateral letter of credit facilities, and its revolving credit facility. As at December 31, 2018, the Company had $61 million of Cash and cash equivalents, U.S. $1.0 billion available under its revolving credit facility and up to $540 million available under its letter of credit facilities. As at December 31, 2017, the Company had $338 million of Cash and cash equivalents, U.S. $2.0 billion available under its revolving credit facility and up to $281 million available under its letter of credit facilities. Effective June 8, 2018, the Company cancelled the U.S. $1.0 billion one-year plus one-year portion of the revolving credit facility and extended the maturity date on the U.S. $1.0 billion five-year portion to June 28, 2023. As at December 31, 2018 and 2017, the U.S. $1.0 billion five-year revolving credit facility was undrawn. The revolving credit facility agreement requires the Company not to exceed a maximum debt to earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio. As at December 31, 2018, the Company was in compliance with the threshold stipulated in this financial covenant. The Company has a commercial paper program that enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As at December 31, 2018 and 2017, there were no commercial paper borrowings outstanding. As at December 31, 2018, under its bilateral letter of credit facilities, the Company had letters of credit drawn of $60 million from a total available amount of $600 million. This compares to letters of credit drawn of $319 million from a total available amount of $600 million as at December 31, 2017. Under the bilateral letter of credit facility, the Company has the option to post collateral in the form of Cash or cash equivalents, equal at least to the face value of the letter of credit issued. As at December 31, 2018, the Company did not have any collateral posted on its bilateral letter of credit facility. As at December 31, 2017, the Company had $150 million posted as collateral on its bilateral letter of credit facility.  CP 2018 ANNUAL REPORT / 69 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 $2,712 million in 2018, an increase of $530 million compared to $2,182 million in 2017. This increase was primarily due to higher cash generating income and a favourable change in working capital mainly due to decreased income taxes payable in 2017. Cash provided by operating activities was $2,182 million in 2017, an increase of $93 million from $2,089 million in 2016. The increase was primarily due to higher cash generating income, partially offset by an unfavourable change in working capital mainly as a result of increased receivables from higher revenues in 2017. Investing Activities Cash used in investing activities was $1,458 million in 2018, an increase of $163 million from $1,295 million in 2017. This increase was primarily due to higher additions to properties discussed further below in Capital Programs during 2018. Cash used in investing activities was $1,295 million in 2017, an increase of $226 million from $1,069 million in 2016. The increase was primarily due to higher additions to properties during 2017 as well as lower proceeds from the sale of properties and other assets compared to 2016. Additions to properties were $1,551 million in 2018, an increase of $211 million from $1,340 million in 2017. Additions to properties were $1,340 million in 2017, an increase of $158 million from $1,182 million in 2016. These increases, primarily in track and roadway and rolling stock investments, reflect CP's continued investments in its network and locomotive fleet. Capital Programs For the year ended December 31 (in millions, except for track miles and crossties) Additions to capital Track and roadway Rolling stock Information systems(1) Buildings and other Total – accrued additions to capital Less: Non-cash transactions 2018 2017 $ 965 $ 958 $ 401 86 122 1,574 23 198 78 132 1,366 26 Cash invested in additions to properties (per Consolidated Statements of Cash Flows) Track installation capital programs $ 1,551 $ 1,340 $ Track miles of rail laid (miles) Track miles of rail capacity expansion (miles) Crossties installed (thousands) (1) Information systems include hardware and software. 281 4 1,015 313 4 1,138 2016 904 105 88 108 1,205 23 1,182 252 2 1,008 Track and roadway expenditures include the replacement and enhancement of the Company’s track infrastructure. Of the $965 million additions in 2018, approximately $847 million was invested in the renewal of depleted assets, namely rail, ties, ballast, signals and bridges. Approximately $47 million was spent on PTC compliance requirements and $71 million was invested in network improvements and growth initiatives. Rolling stock investments encompass locomotives and freight cars. In 2018, expenditures on locomotives were approximately $218 million and were focused on the continued re-investment in CP's exiting locomotive fleet. Freight car and container investments of approximately $183 million were largely focused on the acquisition of existing units previously held under operating leases and renewal of depleted assets, including the acquisition of covered hoppers for grain transportation. In 2018, CP invested approximately $86 million in information systems primarily focused on rationalizing and enhancing business systems, providing real-time data, and modernizing core hardware and applications. Investments in buildings and other items were $122 million, and included items such as facility upgrades and renovations, vehicles and shop equipment. 70 / CP 2018 ANNUAL REPORT For 2019, CP expects to invest approximately $1.6 billion in its capital program, which will be financed with cash generated from operations. Approximately 50% to 60% of the planned capital program is for track and roadway, including PTC. Approximately 30% is expected to be allocated to rolling stock, including freight cars and locomotive improvements. Approximately 5% is expected to be allocated to information services, and 5% to 15% is expected to be allocated to buildings and other. Free Cash CP generated positive Free cash of $1,289 million in 2018, an increase of $415 million from $874 million in 2017. This increase is primarily due to an increase in cash provided by operating activities due to higher cash generating activities compared to 2017, partially offset by an increase in cash used in investing activities as a result of higher additions to properties compared to 2017. CP generated positive Free cash of $874 million in 2017, a decrease of $133 million from $1,007 million in 2016. This decrease is primarily due to an increase in cash used in investing activities as a result of higher additions to properties as well as lower proceeds from the sale of properties and other assets compared to 2016, partially offset by an increase in cash provided by operating activities due to higher Net income compared to the same period of 2016. Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's capital programs. The 2018 capital programs are discussed above. Free cash is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Financing Activities Cash used in financing activities was $1,542 million in 2018, an increase of $842 million from $700 million in 2017. This increase was primarily due to the principal repayments of the U.S. $275 million and the $375 million notes, and higher payments to repurchase Common Shares under the Company's share repurchase program in 2018 compared to 2017, partially offset by the issuance of the U.S. $500 million notes in May 2018. Cash used in financing activities was $700 million in 2017, a decrease of $793 million from $1,493 million in 2016. This decrease was primarily due to lower payments to repurchase Common Shares under the Company's share repurchase program in 2017, partially offset by higher dividends paid during the year. Credit Measures Credit ratings provide information relating to the Company’s operations and liquidity, and affect the Company’s ability to obtain short-term and long-term financing and/or the cost of such financing. A mid-investment grade credit rating is an important measure in assessing the Company’s ability to maintain access to public financing and to minimize the cost of capital. It also affects the ability of the Company to engage in certain collateralized business activities on a cost-effective basis. Credit ratings and outlooks are based on the rating agencies’ methodologies and can change from time to time to reflect their views of CP. Their views are affected by numerous factors including, but not limited to, the Company’s financial position and liquidity along with external factors beyond the Company’s control. As at December 31, 2018, CP's credit ratings from Standard & Poor's Rating Services ("Standard & Poor's") and Moody's Investor Service ("Moody's") remain unchanged from December 31, 2017. Credit ratings as at December 31, 2018(1) Long-term debt Standard & Poor's Long-term corporate credit Senior secured debt Senior unsecured debt Senior unsecured debt Moody's Commercial paper program Standard & Poor's Moody's CP 2018 ANNUAL REPORT / 71 BBB+ A BBB+ Baa1 A-2 P-2 Outlook stable stable stable stable N/A N/A (1) Credit ratings are not recommendations to purchase, hold or sell securities and do not address the market price or suitability of a specific security for a particular investor. Credit ratings are based on the rating agencies' methodologies and may be subject to revision or withdrawal at any time by the rating agencies. The Adjusted net debt to Adjusted EBITDA ratio for the years ended December 31, 2018, 2017, and 2016, was 2.6, 2.6 and 2.9, respectively. The ratio is unchanged between 2017 and 2018 as higher EBITDA was offset by a higher debt balance as a result of the weakening of the Canadian dollar. The decrease from 2016 to 2017 was due to lower Long-term debt and a higher Cash and cash equivalents balance as at December 31, 2017 compared to December 31, 2016. Adjusted net debt to Adjusted EBITDA ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted net debt to Adjusted EBITDA ratio of 2.0 to 2.5. Share Capital At February 13, 2019, the latest practicable date prior to the date of this Annual Report on Form 10-K, there were 140,041,483 Common Shares and no preferred shares issued and outstanding, which consists of 14,254 holders of record of the Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase the Common Shares. Each option granted can be exercised for one Common Share. At February 13, 2019, 1.7 million options were outstanding under the Company’s MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 1.1 million options available to be issued by the Company’s MSOIP in the future. CP has a Director's Stock Option Plan (“DSOP”), under which directors are granted options to purchase the Common Shares. There are no outstanding options under the DSOP, which has 0.3 million options available to be issued in the future. Non-GAAP Measures The Company presents Non-GAAP measures including Free cash to provide a basis for evaluating underlying earnings and liquidity trends in the Company’s business that can be compared with the results of operations in prior periods. In addition, these Non-GAAP measures facilitate a multi-period assessment of long-term profitability, allowing management and other external users of the Company’s consolidated financial information to compare profitability on a long- term basis, including assessing future profitability, with that of the Company’s peers. These Non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies. The presentation of these Non-GAAP measures is not intended to be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with GAAP. Non-GAAP Performance Measures The Company uses Adjusted income, Adjusted diluted earnings per share, Adjusted operating income and Adjusted operating ratio to evaluate the Company’s operating performance and for planning and forecasting future business operations and future profitability. These Non-GAAP measures are presented in Item 6. Selected Financial Data and discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These Non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance, allocation of resources and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets, the FX impact of translating the Company’s U.S. dollar denominated long-term debt, and certain items outside the control of management. These items may not be non-recurring. However, excluding these significant items from GAAP results allows for a consistent understanding of the Company's consolidated financial performance when performing a multi-period assessment including • • • • • • 72 / CP 2018 ANNUAL REPORT assessing the likelihood of future results. Accordingly, these Non-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information. In 2018, there were two significant items included in Net income as follows: • in the second quarter, a deferred tax recovery of $21 million due to reductions in the Missouri and Iowa state tax rates that favourably impacted Diluted EPS by 15 cents; and during the course of the year, a net non-cash loss of $168 million ($150 million after deferred tax) due to FX translation of the Company's U.S. dollar- denominated debt as follows: – – – – in the fourth quarter, a $113 million loss ($103 million after deferred tax) that unfavourably impacted Diluted EPS by 72 cents; in the third quarter, a $38 million gain ($33 million after deferred tax) that favourably impacted Diluted EPS by 23 cents; in the second quarter, a $44 million loss ($38 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents; and in the first quarter, a $49 million loss ($42 million after deferred tax) that unfavourably impacted Diluted EPS by 29 cents. In 2017, there were five significant items included in Net income as follows: • in the second quarter, a charge on hedge roll and de-designation of $13 million ($10 million after deferred tax) that unfavourably impacted Diluted EPS by 7 cents; in the second quarter, an insurance recovery of a legal settlement of $10 million ($7 million after current tax) that favourably impacted Diluted EPS by 5 cents; in the first quarter, a management transition recovery of $51 million related to the retirement of Mr. E. Hunter Harrison as CEO of CP ($39 million after deferred tax) that favourably impacted Diluted EPS by 27 cents; during the course of the year, a net deferred tax recovery of $541 million as a result of changes in income tax rates as follows: – – in the fourth quarter, a deferred tax recovery of $527 million, primarily due to the U.S. tax reform, that favourably impacted Diluted EPS by $3.63; in the third quarter, a deferred tax expense of $3 million as a result of the change in the Illinois state corporate income tax rate change that unfavourably impacted Diluted EPS by 2 cents; in the second quarter, a deferred tax recovery of $17 million as a result of the change in the Saskatchewan provincial corporate income tax rate that favourably impacted Diluted EPS by 12 cents; and – during the course of the year, a net non-cash gain of $186 million ($162 million after deferred tax) due to FX translation of the Company’s U.S. dollar- denominated debt as follows: – – – – in the fourth quarter, a $14 million loss ($12 million after deferred tax) that unfavourably impacted Diluted EPS by 8 cents; in the third quarter, a $105 million gain ($91 million after deferred tax) that favourably impacted Diluted EPS by 62 cents; in the second quarter, a $67 million gain ($59 million after deferred tax) that favourably impacted Diluted EPS by 40 cents; and in the first quarter, a $28 million gain ($24 million after deferred tax) that favourably impacted Diluted EPS by 16 cents. In 2016, there were two significant items included in Net income as follows: • in the third quarter, a $25 million expense ($18 million after current tax) related to a legal settlement that unfavourably impacted Diluted EPS by 12 cents; and during the course of the year, a net non-cash gain of $79 million ($68 million after deferred tax) due to FX translation of the Company’s U.S. dollar- denominated debt as follows: – – – – in the fourth quarter, a $74 million loss ($64 million after deferred tax) that unfavourably impacted Diluted EPS by 43 cents; in the third quarter, a $46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents; in the second quarter, an $18 million gain ($16 million after deferred tax) that favourably impacted Diluted EPS by 10 cents; and in the first quarter, a $181 million gain ($156 million after deferred tax) that favourably impacted Diluted EPS by $1.01. • • In 2015, there were four significant items included in Net income as follows: • • in the third quarter, a $68 million gain ($42 million after current tax) related to the sale of D&H South that favourably impacted Diluted EPS by 26 cents; in the third quarter, a $47 million charge ($35 million after deferred tax) related to the early redemption premium on notes that unfavourably impacted Diluted EPS by 22 cents; in the second quarter, a deferred income tax expense of $23 million as a result of the change in the Alberta provincial corporate income tax rate that unfavourably impacted Diluted EPS by 14 cents; and during the course of the year, a net non-cash loss of $297 million ($257 million after deferred tax) due to FX translation of the Company’s U.S. dollar- denominated debt as follows: – – – – in the fourth quarter, a $115 million loss ($100 million after deferred tax) that unfavourably impacted Diluted EPS by 64 cents; in the third quarter, a $128 million loss ($111 million after deferred tax) that unfavourably impacted Diluted EPS by 69 cents; in the second quarter, a $10 million gain ($9 million after deferred tax) that favourably impacted Diluted EPS by 5 cents; and in the first quarter, a $64 million loss ($55 million after deferred tax) that unfavourably impacted Diluted EPS by 34 cents. In 2014, there were two significant items included in Net income as follows: • in the fourth quarter, a net non-cash loss of $12 million ($9 million after deferred tax) due to FX translation on the Company’s U.S. dollar-denominated debt that unfavourably impacted Diluted EPS by 5 cents; and  CP 2018 ANNUAL REPORT / 73 • in the first quarter, a recovery of $4 million ($3 million after current tax) was recorded for the Company's 2012 labour restructuring initiative due to favourable experience gains, recorded in Compensation and benefits that favourably impacted Diluted EPS by 1 cent. Reconciliation of GAAP Performance Measures to Non-GAAP Performance Measures The following tables reconcile the most directly comparable measures presented in accordance with GAAP to the Non-GAAP measures presented in Item 6. Selected Financial Data and discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Adjusted income is calculated as Net income reported on a GAAP basis adjusted for significant items. (in millions) Net income as reported Less significant items (pre-tax): Legal settlement charge Insurance recovery of legal settlement Charge on hedge roll and de-designation Gain on sale of D&H South Labour restructuring Management transition recovery Impact of FX translation on U.S. dollar-denominated debt Early redemption premium on notes Add: Tax effect of adjustments(1) Income tax rate changes Adjusted income For the year ended December 31 2018 2017 2016 2015 2014 $ 1,951 $ 2,405 $ 1,599 $ 1,352 $ 1,476 — — — — — — (168) — (18) (21) — 10 (13) — — 51 186 — 36 (541) (25) — — — — — 79 — 4 — — — — 68 — — (297) (47) (26) 23 — — — — 4 — (12) — (2) — $ 2,080 $ 1,666 $ 1,549 $ 1,625 $ 1,482 (1) The tax effect of adjustments was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of 10.64%, 15.27%, 7.17%, 9.29% and 26.31% for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items. Adjusted diluted earnings per share is calculated using Adjusted income, as defined above, divided by the weighted-average diluted number of Common Shares outstanding during the period as determined in accordance with GAAP. Diluted earnings per share as reported $ 13.61 $ 16.44 $ 10.63 $ 8.40 $ 8.46 For the year ended December 31 2018 2017 2016 2015 2014 Less significant items (pre-tax): Legal settlement charge Insurance recovery of legal settlement Charge on hedge roll and de-designation Gain on sale of D&H South Labour restructuring Management transition recovery Impact of FX translation on U.S. dollar-denominated debt Early redemption premium on notes Add: Tax effect of adjustments(1) Income tax rate changes — — — — — — (1.17) — (0.12) (0.15) — 0.07 (0.09) — — 0.35 1.27 — 0.25 (3.70) (0.17) — — — — — 0.53 — 0.02 — — — — 0.42 — — (1.84) (0.30) (0.16) 0.14 Adjusted diluted earnings per share $ 14.51 $ 11.39 $ 10.29 $ 10.10 $ — — — — 0.02 — (0.07) — (0.01) — 8.50 (1) The tax effect of adjustments was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of 10.64%, 15.27%, 7.17%, 9.29% and 26.31% for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items. 74 / CP 2018 ANNUAL REPORT Adjusted operating income is calculated as Operating income reported on a GAAP basis less significant items. (in millions) Operating income as reported(1) Less significant items: Gain on sale of D&H South Labour restructuring For the year ended December 31 2018 2017 2016 2015 2014 $ 2,831 $ 2,519 $ 2,411 $ 2,618 $ 2,202 — — — — — — 68 — — 4 Management transition recovery Adjusted operating income(1) (1) Comparative years' figures have been restated for the retrospective adoption of ASU 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. 2,831 $ 2,468 $ 2,550 $ 2,411 $ 2,198 — — — — 51 $ Adjusted operating ratio excludes those significant items that are reported within Operating income. Operating ratio as reported(1) Less significant items: Gain on sale of D&H South Management transition recovery Adjusted operating ratio(1) For the year ended December 31 2018 2017 2016 2015 2014 61.3% 61.6% 61.3% 61.0% 66.7% — — 61.3% — (0.8) 62.4% — — 61.3% (1.0) — 62.0% — — 66.7% (1) Comparative years' figures have been restated for the retrospective adoption of ASU 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. ROIC and Adjusted ROIC ROIC is calculated as Operating income less Other expense (income) and Other components of net periodic benefit recovery, tax effected at the Company's annualized effective tax rate, divided by the sum of total Shareholders' equity, Long-term debt, Long-term debt maturing within one year and Short-term borrowing, as presented in the Company's Consolidated Financial Statements, averaged between the beginning and ending balance over a rolling twelve-month period. Adjusted ROIC excludes Other components of net periodic benefit recovery, and significant items reported in Operating income and Other expense (income) in the Company's Consolidated Financial Statements, as these significant items are not considered indicative of future financial trends either by nature or amount. Total Shareholders' equity, Long-term debt, Long-term debt maturing within one year and Short-term borrowing is similarly adjusted for the impact of periodic significant items, net of tax, on closing balances as part of this average. ROIC and Adjusted ROIC are performance measures that measure how productively the Company uses its long-term capital investments,representing critical indicators of good operating and investment decisions made by management and are important performance criteria in determining certain elements of the Company's long-term incentive plan. ROIC and Adjusted ROIC are presented in Item 6. Selected Financial Data and discussed further in Results of Operations of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  CP 2018 ANNUAL REPORT / 75 Calculation of ROIC and Adjusted ROIC (in millions, except for percentages) Operating income(1) Less: Other expense (income) Other components of net periodic benefit recovery(1) Tax(2) Average of total shareholders' equity, long-term debt, long-term debt maturing within one year and short-term borrowing ROIC For the year ended December 31 2018 2017 2016 2015 2014 $ 2,831 $ 2,519 $ 2,411 $ 2,618 $ 2,202 174 (384) 749 2,292 14,964 15.3% $ $ $ $ (178) (274) 111 2,860 13,961 $ $ (45) (167) 675 1,948 13,532 $ $ 335 (70) 728 1,625 12,561 $ $ 19 (137) 640 1,680 11,653 20.5% 14.4% 12.9% 14.4% (1) Comparative years' figures have been restated for the retrospective adoption of ASU 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. (2) Tax was calculated at the annualized effective tax rate of 24.64%, 3.74%, 25.72%, 30.95%, and 27.59% for each of the above items for the years presented, respectively. (in millions, except for percentages) Adjusted operating income(1) Less: Other expense (income) Other components of net periodic benefit recovery(1) Add significant items (pre-tax): Legal settlement charge Insurance recovery of legal settlement Charge on hedge roll and de-designation Impact of FX translation on U.S. dollar-denominated debt Early redemption premium on notes Less: Tax(2) Average of total shareholders' equity, long-term debt, long-term debt maturing within one year and short-term borrowing Add: For the year ended December 31 2018 2017 2016 2015 2014 $ 2,831 $ 2,468 $ 2,411 $ 2,550 $ 2,198 174 (384) — — — 168 — (178) (274) — (10) 13 (186) — (45) (167) 25 — — (79) — 335 (70) — — — 297 47 19 (137) — — — 12 — 788 2,421 14,964 $ $ $ $ 724 2,013 13,961 $ $ 673 1,896 13,532 $ $ 716 1,913 12,561 $ $ 642 1,686 11,653 Impact of periodic significant items net of tax on the above average (11) (289) 9 8 (2) Adjusted average for the twelve months of total shareholders' equity, long- term debt, long-term debt maturing within one year and short-term borrowing Adjusted ROIC $ 14,953 $ 13,672 $ 13,541 $ 12,569 $ 11,651 16.2% 14.7% 14.0% 15.2% 14.5% (1) Comparative years' figures have been restated for the retrospective adoption of ASU 2017-07, and the impact on the 2017 and 2016 comparatives are discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The restatements of 2015 and 2014 comparatives resulted in a decrease in Operating income of $70 million and $137 million for the years ended December 31, 2015 and 2014, respectively. (2) Tax was calculated at the adjusted annualized effective tax rate of 24.55%, 26.42%, 26.20%, 27.25%, and 27.58% for each of the above items for the years presented, respectively. 76 / CP 2018 ANNUAL REPORT Free Cash Free cash is calculated as Cash provided by operating activities, less Cash used in investing activities, adjusted for changes in cash and cash equivalents balances resulting from FX fluctuations and the cash settlement of hedges settled upon issuance of debt. Free cash is a measure that management considers to be an indicator of liquidity. Free cash is useful to investors and other external users of the Consolidated Financial Statements as it assists with the evaluation of the Company's ability to generate cash from its operations without incurring additional external financing. The cash settlement of forward starting swaps that occurred in the second quarter of 2018 in conjunction with the issuance of long-term debt is not an indicator of CP's ongoing cash generating ability and therefore has been excluded from free cash. Positive Free cash indicates the amount of cash available for reinvestment in the business, or cash that can be returned to investors through dividends, stock repurchase programs, debt retirements or a combination of these. Conversely, negative Free cash indicates the amount of cash that must be raised from investors through new debt or equity issues, reduction in available cash balances or a combination of these. Free cash should be considered in addition to, rather than as a substitute for, Cash provided by operating activities. Free cash is presented in Item 6. Selected Financial Data and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Reconciliation of Cash Provided by Operating Activities to Free Cash For the year ended December 31 (in millions) 2018 2017 2016 2015 2014 Cash provided by operating activities $ 2,712 $ 2,182 $ 2,089 $ 2,459 $ Cash used in investing activities (1,458) (1,295) (1,069) (1,123) Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents Settlement of forward starting swaps on debt issuance 11 24 (13) — (13) — 45 — Free cash $ 1,289 $ 874 $ 1,007 $ 1,381 $ 2,123 (1,161) 7 — 969 Foreign Exchange Adjusted % Change FX adjusted % change allows certain financial results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Financial result variances at constant currency are obtained by translating the comparable period of the prior year results denominated in U.S. dollars at the foreign exchange rates of the current period. FX adjusted % change in revenues are further used in calculating FX adjusted % change in freight revenue per carload and RTM. These measures are discussed in Operating Revenues of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (in millions) Freight revenues by line of business Grain Coal Potash Fertilizers and sulphur Forest products Energy, chemicals and plastics Metals, minerals, and consumer products Automotive Intermodal Freight revenues Non-freight revenues Total revenues Reported 2018 Reported 2017 Reported 2016 Variance due to FX FX Adjusted 2017 FX Adj. % Change Variance due to FX FX Adjusted 2016 FX Adj. % Change 2018 vs. 2017 2017 vs. 2016 $ 1,566 $ 1,532 $ 1,480 $ — $ 1,532 673 486 243 284 1,243 797 322 1,538 7,152 164 631 411 241 265 898 739 293 1,365 6,375 179 606 338 284 275 852 564 350 1,311 6,060 172 — (1) (1) (1) (1) (1) (2) (1) (8) — 631 410 240 264 897 738 291 1,364 6,367 179 2 7 19 1 8 39 8 11 13 12 (8) $ (19) $ 1,461 (2) (4) (3) (4) (15) (9) (5) (6) (67) (1) 604 334 281 271 837 555 345 1,305 5,993 171 $ 7,316 $ 6,554 $ 6,232 $ (8) $ 6,546 12 $ (68) $ 6,164 5 4 23 (14) (2) 7 33 (15) 5 6 5 6  CP 2018 ANNUAL REPORT / 77 FX adjusted % changes in operating expenses are discussed in Operating Expenses of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (in millions) Compensation and benefits(1) Fuel Materials Equipment rents Depreciation and amortization Purchased services and other Total operating expenses(1) 2018 vs. 2017 2017 vs. 2016 Reported 2018 Reported 2017 Reported 2016 Variance due to FX FX Adjusted 2017 FX Adj. % Change Variance due to FX FX Adjusted 2016 FX Adj. % Change $ 1,468 $ 1,309 $ 1,356 $ (1) $ 1,308 918 201 130 696 677 190 142 661 1,072 1,056 567 180 173 640 905 $ 4,485 $ 4,035 $ 3,821 $ — — — — 677 190 142 661 (3) (4) $ 1,053 4,031 12 36 6 (8) 5 2 $ (9) $ 1,347 (10) (2) (2) (3) (10) 557 178 171 637 895 11 $ (36) $ 3,785 (3) 22 7 (17) 4 18 7 (1) Comparative years' figures have been restated for the retrospective adoption of ASU 2017-07, discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. Reconciliation of Net Income to Earnings before interest and tax, Adjusted earnings before interest and tax and Adjusted earnings before interest, tax, depreciation and amortization EBIT is calculated as Net income before Net interest expense and Income tax expense. Adjusted EBIT excludes significant items reported in both Operating income and Other expense (income). Adjusted EBITDA is calculated as Adjusted EBIT plus Other components of net periodic benefit recovery, operating lease expense and Depreciation and amortization. (in millions) Net income as reported Add: Net interest expense Income tax expense EBIT Less significant items (pre-tax): Legal settlement charge Insurance recovery of legal settlement Charge on hedge roll and de-designation Gain on sale of D&H South Labour restructuring Management transition recovery Impact of FX translation on U.S. dollar-denominated debt Early redemption premium on notes Adjusted EBIT Less: Other components of net periodic benefit recovery Operating lease expense Depreciation and amortization Adjusted EBITDA For the year ended December 31 2018 2017 2016 2015 2014 $ 1,951 $ 2,405 $ 1,599 $ 1,352 $ 1,476 453 637 473 93 471 553 394 607 282 562 3,041 2,971 2,623 2,353 2,320 — — — — — — (168) — — 10 (13) — — 51 186 — (25) — — — — — 79 — — — — 68 — — (297) (47) — — — — 4 — (12) — 3,209 2,737 2,569 2,629 2,328 384 (97) (696) 274 (104) (661) 167 (111) (640) 70 (127) (595) 137 (121) (552) $ 3,618 $ 3,228 $ 3,153 $ 3,281 $ 2,864 78 / CP 2018 ANNUAL REPORT Adjusted Net Debt to Adjusted EBITDA Ratio Adjusted net debt is defined as Long-term debt, Long-term debt maturing within one year and Short-term borrowing as reported on the Company’s Consolidated Balance Sheets adjusted for pension plans deficit, the net present value of operating leases, which is discounted by the Company’s effective interest rate for each of the years presented, and Cash and cash equivalents. Adjusted net debt to Adjusted EBITDA ratio is calculated as Adjusted net debt divided by Adjusted EBITDA. The Adjusted net debt to Adjusted EBITDA ratio is a key credit measure used to assess the Company’s financial capacity. The ratio provides information on the Company’s ability to service its debt and other long-term obligations. Adjusted net debt to Adjusted EBITDA ratio is discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Reconciliation of Long-term Debt to Adjusted Net Debt (in millions) Long-term debt including long-term debt maturing within one year as at December 31 Less: Pension plans deficit(1) Net present value of operating leases Cash and cash equivalents Adjusted net debt as at December 31 (1) Pension plans deficit is the total funded status of the Pension plans in deficit only. Calculation of Adjusted Net Debt to Adjusted EBITDA Ratio (in millions, except for ratios) Adjusted net debt as at December 31 Adjusted EBITDA for the year ended December 31 Adjusted net debt to Adjusted EBITDA ratio 2018 2017 2016 8,696 $ 8,159 $ 8,684 $ $ (266) (387) 61 (278) (281) 338 9,288 $ 8,380 $ 2018 2017 2016 $ 9,288 $ 8,380 $ 3,618 2.6 3,228 2.6 (273) (361) 164 9,154 9,154 3,153 2.9 Off-Balance Sheet Arrangements Guarantees Refer to Item 8. Financial Statements and Supplementary Data, Note 25 Guarantees for details. Contractual Commitments The accompanying table indicates the Company’s obligations and commitments to make future payments for contracts, such as debt, capital lease and commercial arrangements as at December 31, 2018. Payments due by period (in millions) Contractual commitments Total 2019 2020 & 2021 2022 & 2023 2024 & beyond Interest on long-term debt and capital lease $ 12,004 $ 457 $ 870 $ 8,625 159 485 1,247 498 501 5 90 658 53 449 11 126 160 103 737 $ 1,002 117 99 133 100 9,940 6,673 26 170 296 242 Long-term debt Capital leases Operating lease(1) Supplier purchase Other long-term liabilities(2) Total contractual commitments $ 23,018 $ 1,764 $ 1,719 $ 2,188 $ 17,347 (1) Residual value guarantees on certain leased equipment with a maximum exposure of $2 million are not included in the minimum payments shown above, as management believes that CP will not be required to make payments under these residual guarantees. (2) Includes expected cash payments for environmental remediation, post-retirement benefits, workers’ compensation benefits, long-term disability benefits, pension benefit payments for the Company’s non-registered supplemental pension plan and certain other long-term liabilities. Projected payments for post-retirement benefits, workers’ compensation benefits and long- term disability benefits include the anticipated payments for years 2019 to 2028. Pension contributions for the Company’s registered pension plans are not included due to the volatility in calculating them. Pension payments are discussed further in Critical Accounting Estimates of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.  CP 2018 ANNUAL REPORT / 79 Certain Other Financial Commitments In addition to the financial commitments mentioned previously in Off-Balance Sheet Arrangements and Contractual Commitments of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company is party to certain other financial commitments discussed below. Letters of Credit Letters of credit are obtained mainly to provide security to third parties under the terms of various agreements, including the supplemental pension plan. CP is liable for these contractual amounts in the case of non-performance under these agreements. Letters of credit are accommodated through a revolving credit facility and the Company’s bilateral letter of credit facilities. Capital Commitments The Company remains committed to maintaining the current high level of quality of our capital assets in pursuing sustainable growth.As part of this commitment, CP has entered into contracts with suppliers to make various capital purchases related to track programs. Payments for these commitments are due in 2019 through 2032. These expenditures are expected to be financed by cash generated from operations or by issuing new debt. The accompanying table indicates the Company’s commitments to make future payments for letters of credit and capital expenditures as at December 31, 2018. Payments due by period (in millions) Certain other financial commitments Letters of credit Capital commitments Total certain other financial commitments Total 2019 2020 & 2021 2022 & 2023 2024 & beyond $ $ 60 $ 586 646 $ 60 $ 310 370 $ — $ 92 92 $ — $ 67 67 $ — 117 117 Critical Accounting Estimates To prepare the Consolidated Financial Statements that conform with GAAP, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reported periods. Using the most current information available, the Company reviews estimates on an ongoing basis, including those related to environmental liabilities, pensions and other benefits, property, plant and equipment, deferred income taxes, and personal injury and other claims liabilities. The development, selection and disclosure of these estimates, and this Management's Discussion and Analysis of Financial Condition and Results of Operations, have been reviewed by the Board of Directors’ Audit Committee, which is composed entirely of independent directors. Environmental Liabilities Environmental remediation accruals cover site-specific remediation programs. CP estimates of the probable costs to be incurred in the remediation of properties contaminated by past railway use reflect the nature of contamination at individual sites according to typical activities and scale of operations conducted. The Company screens and classifies sites according to typical activities and scale of operations conducted. CP has developed remediation strategies for each property based on the nature and extent of the contamination, as well as the location of the property and surrounding areas that may be adversely affected by the presence of contaminants. CP also considers available technologies, treatment and disposal facilities and the acceptability of site-specific plans based on the local regulatory environment. Site-specific plans range from containment and risk management of the contaminants through to the removal and treatment of the contaminants and affected soils and groundwater. The details of the estimates reflect the environmental liability at each property. The Company is committed to fully meeting regulatory and legal obligations with respect to environmental matters. Some sites include remediation activities that are projected beyond the 10-year period, which CP is unable to reasonably estimate and determine. Therefore, CP's accruals of the environmental liabilities is based on an estimate of costs for a rolling 10-year period covered by the environmental program. Payments are expected to be made over 10 years to 2028. A limited portion of the environmental accruals, the stable Perpetual Care for the environmental program, are fixed and reliably determined. This portion of the environmental liabilities is discounted using a risk-free rate, adjusted by inflation and productivity improvements. Provisions for environmental remediation costs are recorded in “Other long-term liabilities” (refer to Item 8. Financial Statements and Supplementary Data, Note 19 Other long-term liabilities), except for the current portion which is recorded in “Accounts payable and accrued liabilities” (refer to Item 8. Financial Statements and Supplementary Data, Note 16 Accounts payable and accrued liabilities). The accruals for environmental remediation represent CP’s best estimate of its probable future obligations and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include CP’s best estimate of all probable costs, CP’s total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, are not expected to be material to the Company’s financial position, but may materially affect income in the period in which a charge is recognized. 80 / CP 2018 ANNUAL REPORT The environmental liabilities are also sensitive to the increase in cost of materials which would be reflected as increases to "Other long-term liabilities" and "Accounts payable and accrued liabilities" on the Company’s Consolidated Balance Sheets and to "Purchased services and other" within Operating expenses on the Company's Consolidated Statements of Income. CP's cash payments for environmental initiatives are estimated to be approximately $8 million in 2019, $9 million in 2020, $9 million in 2021 and a total of approximately $58 million over the remaining years through 2028. All payments will be funded from general operations. Pensions and Other Benefits CP has defined benefit and defined contribution pension plans. Other benefits include post-retirement medical and life insurance for pensioners, and some post- employment workers’ compensation and long-term disability benefits in Canada. Workers’ compensation and long-term disability benefits are discussed in the Personal Injury and Other Claims Liabilities section below. Pension and post-retirement benefits liabilities are subject to various external influences and uncertainties. Information concerning the measurement of costs for pensions and other benefits is discussed in Item 8. Financial Statements and Supplementary Data, Note 1 Summary of significant accounting policies. Information on an Accounting Standards Update effective January 1, 2018, concerning the change in presentation of costs for pensions and other benefits is discussed in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The amendments also restrict capitalization to the current service cost component when applicable. Net Periodic Benefit Costs The Company reports the current service cost component of net periodic benefit cost in "Compensation and benefits" for pensions and post-retirement benefits and in "Purchased services and other" for self-insured workers' compensation and long-term disability benefits on the Company's Consolidated Statements of Income.The Other components of net periodic benefit recovery are reported as a separate line item outside of Operating income on the Company's Consolidated Statements of Income. Components of the net periodic benefit costs (credits) are as follows: 2018 2017 (in millions of Canadian dollars) Defined benefit pensions Defined contribution pensions Post-retirement benefits Self-insured workers' compensation and long-term disability benefits All plans Current service cost Other components 120 $ (405) $ Total (285) $ Current service cost Other components 103 $ (294) $ 10 5 7 — 18 3 10 23 10 9 4 8 — 18 2 Total (191) 9 22 10 142 $ (384) $ (242) $ 124 $ (274) $ (150) $ $ CP estimates net periodic benefit credits for defined benefit pensions to be approximately $309 million in 2019 ($107 million in current service cost and $416 million in other components of net periodic recovery), and net periodic benefit costs for defined contribution pensions to be approximately $10 million in 2019. Net periodic benefit costs for post-retirement benefits in 2019 are not expected to differ materially from the 2018 costs. Total net periodic benefit credits for all plans are estimated to be approximately $267 million in 2019 (2018 - $242 million), comprised of $128 million (2018 - $142 million) in current service cost and $395 million (2018 - $384 million) in other components of net periodic recovery. The expected rate of return on the market-related asset value used to compute the net periodic benefit credit in 2017 and 2018 was 7.75%. For computing the net periodic benefit credit in 2019, the Company is reducing this rate to 7.50% to reflect CP's current view of future long-term investment returns. Net periodic benefit costs and credits are discussed further in Item 8. Financial Statements and Supplementary Data, Note 21 Pensions and other benefits. Pension Plan Contributions The Company made contributions of $36 million, which is net of a $10 million refund of plan surplus, to the defined benefit pension plans in 2018, compared with $46 million in 2017. The Company’s main Canadian defined benefit pension plan accounts for nearly all of CP’s pension obligation and can produce significant volatility in pension funding requirements, given the pension fund’s size, the many factors that drive the pension plan’s funded status and Canadian statutory pension funding requirements. The Company made voluntary prepayments of $600 million in 2011, $650 million in 2010 and $500 million in 2009 to the Company’s main Canadian defined benefit pension plan. CP has applied $1,323 million of these voluntary prepayments to reduce its pension funding requirements in 2012–2018, leaving $427 million of the voluntary prepayments still available at December 31, 2018 to reduce CP’s pension funding requirements in 2019 and future years. CP continues to have significant flexibility with respect to the rate at which the remaining voluntary prepayments are applied to reduce future years’ pension contribution requirements, which allows CP to manage the volatility of future pension funding requirements. At this time, CP estimates it will apply $30 million of the remaining voluntary prepayments against its 2019 pension funding requirements.  CP 2018 ANNUAL REPORT / 81 CP estimates its aggregate pension contributions, including its defined benefit and defined contribution plans, to be in the range of $50 million to $75 million in 2019, and in the range of $30 million to $70 million per year from 2020 to 2022. These estimates reflect the Company’s current intentions with respect to the rate at which CP will apply the remaining voluntary prepayments against contribution requirements in the next few years. Future pension contributions will be highly dependent on the Company’s actual experience with such variables as investment returns, interest rate fluctuations and demographic changes, on the rate at which previous years’ voluntary prepayments are applied against pension contribution requirements, and on any changes in the regulatory environment. CP will continue to make contributions to the pension plans that, at a minimum, meet pension legislative requirements. Pension Plan Risks Fluctuations in the liability and net periodic benefit costs for pensions result from favourable or unfavourable investment returns and changes in long-term interest rates. The impact of favourable or unfavourable investment returns is moderated by the use of a market-related asset value for the main Canadian defined benefit pension plan’s public equity securities and absolute return strategies. The impact of changes in long-term interest rates on pension obligations is partially offset by their impact on the pension funds’ investments in fixed income assets. The plans’ investment policy provides a target allocation of approximately 45% of the plans’ assets to be invested in public equity securities. As a result, stock market performance is a key driver in determining the pension funds’ asset performance. If the rate of investment return on the plans’ public equity securities in 2018 had been 10% higher (or lower) than the actual 2018 rate of investment return on such securities, 2019 net periodic benefit costs for pensions would be lower (or higher) by approximately $23 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, 2018 had been higher (or lower) by 0.1% with no related changes in the value of the pension funds’ investment in fixed income assets, 2019 net periodic benefit costs for pensions would be lower (or higher) by approximately $11 million and 2019 current service costs for pensions would be lower (or higher) by approximately $4 million. However, a change in bond yields would also lead to a change in the value of the pension funds’ investment in fixed income assets, and this change would partially offset the impact on net periodic benefit costs noted above. The Company estimates that an increase in the discount rate of 0.1% would decrease the defined benefit pension plans’ projected benefit obligations by approximately $148 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 $150 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 $12 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 $5 million. CP reviews its pensioner mortality experience to ensure that the mortality assumption continues to be appropriate, or to determine what changes to the assumption are needed. 82 / CP 2018 ANNUAL REPORT Property, Plant and Equipment The Company follows the group depreciation method under which a single depreciation rate is applied to the total cost in a particular class of property, despite differences in the service life or salvage value of individual properties within the same class. CP performs depreciation studies of each property asset class approximately every three years to update depreciation rates. The studies are conducted with assistance from third-party specialists and analyzed and reviewed by the Company's management. Depreciation studies for U.S. assets are reviewed and approved by the Surface Transportation Board ("STB"). Depreciation studies for Canadian assets are provided to the Canadian Transportation Agency (the "Agency"), but the Agency does not approve depreciation rates. In determining appropriate depreciation rates, management is required to make judgements and assumptions about a variety of key factors that are subject to future variability due to inherent uncertainties. These include the following: Key Assumptions Assessments • Whole and remaining asset lives • Salvage values • • • • • • • • Statistical analysis of historical retirement patterns; Evaluation of management strategy and its impact on operations and the future use of specific property assets; Assessment of technological advances; Engineering estimates of changes in current operations and analysis of historic, current and projected future usage; Additional factors considered for track assets: density of traffic and whether rail is new or has been re-laid in a subsequent position; Assessment of policies and practices for the management of assets including maintenance; and Comparison with industry data. Analysis of historical, current and estimated future salvage values. CP depreciates the cost of properties, net of salvage, on a straight-line basis over the estimated useful life of the class of property. The estimates of economic lives are uncertain and can vary due to changes in any of the assessed factors noted in the table above for whole and remaining asset lives. Additionally, the depreciation rates are updated to reflect the change in residual values of the assets in the class. It is anticipated that there will be changes in the estimates of weighted average useful lives and net salvage for each property asset class as assets are acquired, used and retired. Substantial changes in either the useful lives of properties or the salvage assumptions could result in significant changes to depreciation expense. For example, if the estimated average life of track assets, including rail, ties, ballast and other track material, increased (or decreased) by one year, annual depreciation expense would decrease (or increase) by approximately $16 million. Due to the capital intensive nature of the railway industry, depreciation represents a significant part of operating expenses.The estimated useful lives of properties have a direct impact on the amount of depreciation recorded as a component of Properties on the Company’s Consolidated Balance Sheets. At December 31, 2018 and 2017, accumulated depreciation was $7,964 million and $7,413 million, respectively. Deferred Income Taxes CP accounts for deferred income taxes based on the liability method. This method focuses on the Company’s balance sheet and the temporary differences otherwise calculated from the comparison of book versus tax values. The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carry forwards. It is assumed that such temporary differences will be settled in the deferred income tax assets and liabilities at the balance sheet date. In determining deferred income taxes, the Company makes estimates and assumptions regarding deferred tax matters, including estimating the timing of the realization and settlement of deferred income tax assets (including the benefit of tax losses) and liabilities. Deferred income taxes are calculated using enacted federal, provincial, and state future income tax rates, which may differ in future periods. As at December 31, 2018, the Company has completed the measurement of certain income tax effects of the Tax Cuts and Jobs Act in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118"). There was no significant change identified from the provisional amount previously reported in the prior year. Deferred income tax expense is included in "Income tax expense" on the Company's Consolidated Statements of Income. Additional disclosures are provided in Item 8. Financial Statements and Supplementary Data, Note 6 Income taxes. Personal Injury and Other Claims Liabilities CP estimates the potential liability arising from incidents, claims and pending litigations relating to personal injury claims by employees, third-party claims, certain occupation-related claims and property damage claims. Personal Injury In Canada, employee occupational injuries are governed by provincial workers' compensation legislation. Occupational injury claims in the provinces of Quebec, Ontario, Manitoba and B.C. are self-insured and administered through each Worker's Compensation Board ("WCB"). The future costs related to occupation-  CP 2018 ANNUAL REPORT / 83 related injuries are actuarially determined based on past experience and assumptions associated with the injury, compensation, income replacement, health care and administrative costs. In the four provinces where the Company is self-insured, a discount rate is applied to the future estimated costs based on market rates for investment grade corporate bonds to determine the liability. An actuarial study is performed on an annual basis. In the provinces of Saskatchewan and Alberta, the Company is assessed an annual WCB contribution on a premium basis and this amount is not subject to estimation by management.At December 31, 2018 and 2017, respectively, the WCB liability was $81 million and $81 million in "Pension and other benefit liabilities"; $12 million and $11 million in "Accounts payable and accrued liabilities", offset by deposits paid to WCB of $1 million and $1 million in "Other assets" on the Company's Consolidated Balance Sheets. U.S. railway employees are covered by federal law under the FELA rather than workers' compensation programs. Accruals are set for individual cases based on facts, legal opinion and statistical analysis. U.S. accruals are also set and include alleged occupational exposure or injury. Other Claims A provision for a litigation matter or other claim will be accrued according to applicable accounting standards and any such accrual will be based on an ongoing assessment of the strengths and weaknesses of the litigation or claim and its likelihood of success, together with an evaluation of the damages or other monetary relief sought. CP accrues for probable claims when the facts of an incident become known and investigation results provide a reasonable basis for estimating the liability. The lower end of the range is accrued if the facts and circumstances permit only a range of reasonable estimates and no single amount in that range is a better estimate than any other. Additionally, for administrative expediency, a general provision for lesser value injury cases is maintained. Facts and circumstances related to asserted claims can change, and a process is in place to monitor accruals for changes in accounting estimates. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other relevant securities legislation. Forward-looking statements typically include words such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”, “plan”, “will”, “outlook”, “should” or similar words suggesting future outcomes. To the extent that CP has provided guidance using Non-GAAP financial measures, the Company may not be able to provide a reconciliation to a GAAP measure, due to unknown variables and uncertainty related to future results. This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K includes forward-looking statements relating, but not limited to statements concerning the Company’s defined benefit pension expectations for 2019 and through 2022, our expectations for 2019 financial and operational performance, including our full-year guidance for expected RTM and adjusted diluted EPS growth, planned capital expenditures, the Canadian-to-U.S. dollar exchange rate, the effective tax rate and land sales, as well as statements concerning the Company’s operations, anticipated financial performance, business prospects and strategies, including statements concerning the anticipation that cash flow from operations and various sources of financing will be sufficient to meet debt repayments and obligations in the foreseeable future and concerning anticipated capital programs, and statements regarding future payments including income taxes and pension contributions. The forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K are based on current expectations, estimates, projections and assumptions, having regarding to the Company's experience and its perception of historical trends, and includes, but is not limited to, expectations, estimates, projections and assumptions relating to: North American and global economic growth; commodity demand growth; sustainable industrial and agricultural production; commodity prices and interest rates; foreign exchange rates (as specified herein); effective tax rates (as specified herein); performance of our assets and equipment; sufficiency of our budgeted capital expenditures in carrying out our business plan; applicable laws, regulations and government policies; the availability and cost of labour, services and infrastructure; and the satisfaction by third parties of their obligations to the Company. Although the Company believes the expectations, estimates, projections and assumptions reflected in the forward- looking statements presented herein are reasonable as of the date hereof, there can be no assurance that they will prove to be correct. Current economic conditions render assumptions, although reasonable when made, subject to greater uncertainty. Undue reliance should not be placed on forward-looking statements as actual results may differ materially from those expressed or implied by forward-looking statement. By their nature, forward-looking statements involve numerous inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking statements, including but not limited to the following factors: changes in business strategies; general North American and global economic, credit and business conditions; risks associated with agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws, regulations and government policies, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; changes in fuel prices; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; trade restrictions or other changes to international trade arrangements; climate change; and various events that could disrupt operations,including severe weather,such as droughts,floods,avalanches and earthquakes,and cybersecurity attacks,as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive. There are more specific factors that could cause actual results to differ materially from those described in the forward-looking statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K. These more specific factors are 84 / CP 2018 ANNUAL REPORT identified and discussed in Item 1A. Risk Factors. Other risks are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. The forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K are made as of the date hereof. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking statements, or the foregoing assumptions and risks affecting such forward-looking information, whether as a result of new information, future events or otherwise.  CP 2018 ANNUAL REPORT / 85 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk Although CP conducts business primarily in Canada, a significant portion of its revenues, expenses, assets and liabilities including debt are denominated in U.S. dollars. The value of the Canadian dollar is affected by a number of domestic and international factors, including, without limitation, economic performance, and Canadian, U.S. and international monetary policies. Consequently, the Company’s results are affected by fluctuations in the exchange rate between these currencies. On an annualized basis, a $0.01 weakening (or strengthening) of the Canadian dollar positively (or negatively) impacts freight revenues by approximately $28 million (2017 - approximately $27 million) and negatively (or positively) impacts operating expenses by approximately $15 million (2017 - approximately $14 million). CP uses U.S. dollar-denominated debt to hedge its net investment in U.S. operations. As at December 31, 2018, the net investment in U.S. operations is less than the total U.S. dollar-denominated debt. Consequently, FX translation on the Company’s undesignated U.S. dollar-denominated long-term debt causes additional impacts on earnings in Other expense (income). To manage its exposure to fluctuations in exchange rates between Canadian and U.S. dollars, CP may sell or purchase U.S. dollar forwards at fixed rates in future periods. In addition, changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar) make the goods transported by the Company more or less competitive in the world marketplace and may in turn positively or negatively affect revenues. Share Price Impact on Stock-Based Compensation Based on information available at December 31, 2018, and expectations for 2019 grants, for every $1.00 change in share price, stock-based compensation expense has a corresponding change of approximately $0.4 million to $0.6 million (2017 - approximately $0.3 million to $0.5 million). This excludes the impact of changes in share price relative to the S&P/TSX Capped Industrial index and S&P 1500 Road and Rail index, which may trigger different performance share unit payouts. Share-based compensation may also be impacted by non-market performance conditions. Additional information concerning stock-based compensation is included in Item 8. Financial Statements and Supplementary Data, Note 22 Stock-based compensation. 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. As at December 31, 2018, the Company did not have any forward starting floating-to-fixed interest rate swap agreements to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes (December 31, 2017 – notional U.S. $500 million). Information concerning market risks is supplemented in Item 8. Financial Statements and Supplementary Data, Note 18 Financial Instruments. 86 / CP 2018 ANNUAL REPORT ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Statements of Income For the Year Ended December 31, 2018, 2017, and 2016 Consolidated Statements of Comprehensive Income For the Year Ended December 31, 2018, 2017, and 2016 Consolidated Balance Sheets As at December 31, 2018 and 2017 Consolidated Statements of Cash Flows For the Year Ended December 31, 2018, 2017, and 2016 Consolidated Statements of Changes in Shareholders' Equity For the Year Ended December 31, 2018, 2017, and 2016 Notes to Consolidated Financial Statements Page 87 88 89 90 91 92 93  CP 2018 ANNUAL REPORT / 87 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Canadian Pacific Railway Limited Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Canadian Pacific Railway Limited and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity, for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 2 to the financial statements, effective January 1, 2018, the Company has retrospectively changed its method of accounting for the presentation of current period service costs due to the adoption of the Accounting Standards Update No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte LLP Chartered Professional Accountants Calgary, Canada February 15, 2019 We have served as the Company's auditor since 2011. 88 / CP 2018 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME Year ended December 31 (in millions of Canadian dollars, except per share data) 2018 2017 Revenues (Note 3) Freight Non-freight Total revenues Operating expenses Compensation and benefits (Note 2, 21, 22) Fuel Materials Equipment rents Depreciation and amortization Purchased services and other (Note 11) Total operating expenses Operating income Less: Other expense (income) (Note 4) Other components of net periodic benefit recovery (Note 2, 21) Net interest expense (Note 5) Income before income tax expense Income tax expense (Note 6) Net income Earnings per share (Note 7) Basic earnings per share Diluted earnings per share Weighted average number of shares (millions) (Note 7) Basic Diluted Certain of the comparative figures have been restated in order to be consistent with the 2018 presentation (Note 2). See Notes to Consolidated Financial Statements. $ 7,152 $ 6,375 $ 164 7,316 1,468 918 201 130 696 1,072 4,485 2,831 174 (384) 453 2,588 637 179 6,554 1,309 677 190 142 661 1,056 4,035 2,519 (178) (274) 473 2,498 93 $ $ $ 1,951 $ 2,405 $ 13.65 $ 13.61 $ 16.49 $ 16.44 $ 142.9 143.3 145.9 146.3 2016 6,060 172 6,232 1,356 567 180 173 640 905 3,821 2,411 (45) (167) 471 2,152 553 1,599 10.69 10.63 149.6 150.5  CP 2018 ANNUAL REPORT / 89 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended December 31 (in millions of Canadian dollars) Net income 2018 1,951 $ 2017 2,405 $ $ 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 Other comprehensive (loss) income (Note 8) Comprehensive income See Notes to Consolidated Financial Statements. (60) 38 (449) (471) 169 (302) 24 19 80 123 (65) 58 $ 1,649 $ 2,463 $ 2016 1,599 18 (2) (434) (418) 96 (322) 1,277 90 / CP 2018 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of Canadian dollars, except Common Shares) 2018 2017 Assets Current assets Cash and cash equivalents Accounts receivable, net (Note 10) Materials and supplies Other current assets Investments (Note 12) Properties (Note 13) Goodwill and intangible assets (Note 14) Pension asset (Note 21) Other assets (Note 15) Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable and accrued liabilities (Note 16) Long-term debt maturing within one year (Note 17, 18) Pension and other benefit liabilities (Note 21) Other long-term liabilities (Note 19) Long-term debt (Note 17, 18) Deferred income taxes (Note 6) Total liabilities Shareholders’ equity Share capital (Note 20) Authorized unlimited Common Shares without par value. Issued and outstanding are 140.5 million and 144.9 million at December 31, 2018 and 2017, respectively. Authorized unlimited number of first and second preferred shares; none outstanding. Additional paid-in capital Accumulated other comprehensive loss (Note 8) Retained earnings Total liabilities and shareholders’ equity Commitments and contingencies (Note 24). See Notes to Consolidated Financial Statements. Approved on behalf of the Board: $ 61 $ 815 173 68 1,117 203 18,418 202 1,243 71 21,254 $ 1,449 $ 506 1,955 718 237 8,190 3,518 14,618 $ $ 338 687 152 97 1,274 182 17,016 187 1,407 69 20,135 1,238 746 1,984 749 231 7,413 3,321 13,698 2,002 2,032 42 (2,043) 6,635 6,636 $ 21,254 $ 43 (1,741) 6,103 6,437 20,135 /s/ ANDREW F. REARDON Andrew F. Reardon, Director, /s/ JANE L. PEVERETT Jane L. Peverett, Director, Chair of the Board Chair of the Audit Committee  CP 2018 ANNUAL REPORT / 91 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of Canadian dollars) 2018 2017 2016 Operating activities Net income Reconciliation of net income to cash provided by operating activities: Depreciation and amortization Deferred income taxes (Note 6) Pension recovery and funding (Note 21) Foreign exchange loss (gain) on long-term debt (Note 4) Settlement of forward starting swaps on debt issuance (Note 17, 18) Other operating activities, net Change in non-cash working capital balances related to operations (Note 9) $ 1,951 $ 2,405 $ 1,599 696 256 (321) 168 (24) (79) 65 661 (210) (237) (186) — (113) (138) 640 320 (138) (79) — (198) (55) Cash provided by operating activities 2,712 2,182 2,089 Investing activities Additions to properties Proceeds from sale of properties and other assets (Note 11) Other Cash used in investing activities Financing activities Dividends paid Issuance of CP Common Shares (Note 20) Purchase of CP Common shares (Note 20) Issuance of long-term debt, excluding commercial paper (Note 17) Repayment of long-term debt, excluding commercial paper (Note 17) Net repayment of commercial paper (Note 17) Settlement of forward starting swaps on de-designation (Note 18) 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 Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Income taxes paid Interest paid See Notes to Consolidated Financial Statements. (1,551) (1,340) 78 15 42 3 (1,458) (1,295) (348) 24 (1,103) 638 (753) — — — (1,542) 11 (277) 338 61 $ 318 $ 463 $ $ $ $ (310) 45 (381) — (32) — (22) — (700) (13) 174 164 338 $ 425 $ 475 $ (1,182) 116 (3) (1,069) (255) 21 (1,210) — (38) (8) — (3) (1,493) (13) (486) 650 164 322 488 92 / CP 2018 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (in millions of Canadian dollars, except per share data) Balance at December 31, 2015 Net income Other comprehensive loss (Note 8) Dividends declared ($1.8500 per share) Effect of stock-based compensation expense CP Common Shares repurchased (Note 20) Shares issued under stock option plan (Note 20) Balance at December 31, 2016 Net income Other comprehensive income (Note 8) Dividends declared ($2.1875 per share) Effect of stock-based compensation expense CP Common Shares repurchased (Note 20) Shares issued under stock option plan (Note 20) Balance at December 31, 2017 Net income Other comprehensive income (Note 8) Dividends declared ($2.5125 per share) Effect of stock-based compensation expense CP Common Shares repurchased (Note 20) Shares issued under stock option plan (Note 20) Share capital Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total shareholders’ equity $ 2,058 $ 43 $ (1,477) $ 4,172 $ — — — — (84) 28 2,002 — — — — (27) 57 2,032 — — — — (66) 36 — — — 14 — (5) 52 — — — 3 — (12) 43 — — — 11 — (12) 42 $ — (322) — — — — (1,799) — 58 — — — — (1,741) — (302) — — — — 1,599 — (274) — (1,126) — 4,371 2,405 — (319) — (354) — 6,103 1,951 — (358) — (1,061) — (2,043) $ 6,635 $ 4,796 1,599 (322) (274) 14 (1,210) 23 4,626 2,405 58 (319) 3 (381) 45 6,437 1,951 (302) (358) 11 (1,127) 24 6,636 Balance at December 31, 2018 $ 2,002 $ See Notes to Consolidated Financial Statements.  CP 2018 ANNUAL REPORT / 93 CANADIAN PACIFIC RAILWAY LIMITED Notes to Consolidated Financial Statements December 31, 2018 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 ("U.S."). CP provides rail and intermodal transportation services over a network of approximately 12,500 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, 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 Accounting principles generally accepted 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. Distributions received from equity method investees are classified using the nature of the distribution approach for cash flow presentation purposes, whereby distributions received are classified based on the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as a cash inflow from operating activities) or a return of investment (classified as a cash inflow from investing activities). 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, 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, 2018. 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”) Incorporated under the laws of Canada Minnesota Delaware Delaware Canada Revenue recognition Revenue is recognized when obligations under the terms of a contract with a customer are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for providing services. Government imposed taxes that the Company collects concurrent with revenue generating activities are excluded from revenue. In the normal course of business, the Company does not generate any material revenue through acting as an agent for other entities. The Company provides rail freight transportation services to a wide variety of customers and transports bulk commodities, merchandise freight and intermodal traffic. The Company signs master service agreements with customers that dictate future services the Company is to perform for a customer at the time a bill of lading or service request is received. Each bill of lading or service request represents a separate distinct performance obligation that the Company is obligated to satisfy. The transaction price is generally in the form of a fixed fee determined at the inception of the bill of lading or service request. The Company allocates the transaction price to each distinct performance obligation based on the estimated standalone selling price for each performance obligation. As each bill of lading or service request represents a separate distinct performance obligation, the estimated standalone selling price is assessed at an observable price which is fair market value. Certain customer agreements include variable consideration in the form of rebates, discounts, or incentives. The expected value method is used to estimate variable consideration and is allocated to the applicable performance obligation and is recognized when the related performance obligation 94 / CP 2018 ANNUAL REPORT is satisfied. Additionally, the Company offers published rates for services through public tariff agreements in which a customer can request service, triggering a performance obligation the Company must satisfy. Railway freight revenues are recognized over time as services are provided based on the percentage of completed service method. Volume rebates to customers are accrued as a reduction of freight revenues based on estimated volumes and contract terms as freight service is provided. Freight revenues also include certain ancillary and other services provided in association with the performance of rail freight movements. Revenues from these activities are not material and therefore have been aggregated with the freight revenues from customer contracts with which they are associated. Non-freight revenues, including passenger revenues, switching fees, and revenues from logistics services, are recognized at the point in time the services are provided or when the performance obligations are satisfied. Non-freight revenues also include leasing revenues. Payment by customers is due upon satisfaction of performance obligations. Payment terms are such that amounts outstanding at the period end are expected to be collected within one reporting period. The Company invoices customers at the time the bill of lading or service request is processed and therefore the Company has no material unbilled receivables and no contract assets. All performance obligations not fully satisfied at period end are expected to be satisfied within the reporting period immediately following. 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 when applicable. In the Consolidated Statements of Cash Flow, these balances, if any, are included with cash and cash equivalents. 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 ("FX") 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. FX gains and losses arising from the translation of the foreign subsidiaries’ assets and liabilities are included in “Other comprehensive income (loss)”. A portion 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 FX gains and losses on U.S. dollar-denominated long-term debt, designated as a hedge, are offset against FX gains and losses arising from the translation of foreign subsidiaries’ accounts in “Other comprehensive income (loss)”. Pensions and other benefits Pension costs are actuarially determined using the projected-benefit method pro-rated 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, infrastructure and private debt 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 12 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 income (loss)”, 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 on the Company's Consolidated Statements of Income as "Other components of net periodic benefit cost or recovery".  CP 2018 ANNUAL REPORT / 95 The current service cost component of net periodic benefit cost is reported in "Compensation and benefits" for pensions and post-retirement benefits, and in "Purchased services and other" for self-insured workers' compensation and long-term disability benefits on the Company's Consolidated Statements of Income. Other components of net periodic benefit cost or recovery are reported in "Other components of net periodic benefit cost or recovery" outside of Operating income on the Company's Consolidated Statements of Income. Capitalization of pension costs, when applicable, is restricted to the current service cost component of net periodic benefit cost. Materials and supplies Materials and supplies are carried at the lower of average cost or market value 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 and an impairment loss is recognized. 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. 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 mainly include work trains, material distribution, highway vehicles and work equipment. Overheads primarily include a portion of the engineering department’s costs, 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, which is expensed, is performed concurrently with the installation. Ballast programs including undercutting, shoulder ballasting and renewal programs that 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 depreciation studies. Depreciation studies are regular reviews of asset service lives, salvage values, accumulated depreciation and other related factors. Depreciation rates are established through these studies. Actual use and retirement of assets may vary from current estimates, and would be identified in the next study. These changes in expected economic lives would impact the amount of depreciation expense recognized in future periods.All track assets are depreciated using a straight-line method which recognizes the value of the asset consumed as a percentage of the whole life of the asset. 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 certain asset classes, the historical cost of the asset is separately recorded in the Company’s property records. This amount is retired from the property records upon retirement of the asset. For assets for which the historical cost cannot be separately identified the amount of the gross book value to be retired is estimated using either an indexation methodology, whereby the current replacement cost of the asset is indexed to the estimated year of installation for the asset, or a first-in, first-out approach, or statistical analysis is used to determine the age of the retired asset. CP uses indices that closely correlate to the principal costs of the assets. 96 / CP 2018 ANNUAL REPORT There are a number of estimates inherent in the depreciation and retirement processes and as it is not possible to precisely estimate each of these variables until a group of property is completely retired, CP regularly monitors the estimated service lives of assets and the associated accumulated depreciation for each asset class to ensure depreciation rates are appropriate. If the recorded amounts of accumulated depreciation are greater or less than the amounts indicated by the depreciation studies, then the excess or deficit is amortized as a component of depreciation expense over the remaining service lives of the applicable asset classes. For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in the Company’s depreciation studies, CP records a gain or loss for the difference between net proceeds and net book value of the assets sold or retired. The accumulated depreciation to be retired includes asset-specific accumulated depreciation, when known, and an appropriate portion of the accumulated depreciation recorded for the relevant asset class as a whole, calculated using a cost-based allocation. Revisions to the estimated useful lives and net salvage projections constitute a change in accounting estimate and are addressed prospectively by amending depreciation rates. 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 as at October 1st, or more frequently as economic events dictate. The Company has the option of performing an assessment of certain qualitative factors (“Step 0”) to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test (“Step 1”). Qualitative factors include but are not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If Step 0 indicates that the carrying value is less than the fair value, then performing the two-step impairment test is unnecessary. Under Step 1, 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 other investments, classified as loans and receivables, are measured at amortized cost, using the effective interest method. Cash and cash equivalents and derivatives are classified as held for trading and are measured at fair value. Accounts payable, accrued liabilities, short-term borrowings, other long-term liabilities and long-term debt 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 may affect the following lines on the Consolidated Statements of Income: “Revenues”, “Compensation and benefits”, “Fuel”, “Other expense (income)”, and “Net interest expense”.  CP 2018 ANNUAL REPORT / 97 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 an effective cash flow hedge, the entire change in value of the hedging instrument is recognized in “Other comprehensive income (loss)”. The change in value of the effective 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. Cash flows relating to derivative instruments designated as hedges are included in the same line as the related hedged items on the Consolidated Statements of Cash Flows. 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 an adjusted 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. 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% 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 the Company's Common Shares (the "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. 98 / CP 2018 ANNUAL REPORT 2 Accounting changes Implemented in 2018 Revenue from Contracts with Customers On January 1, 2018, the Company adopted the new Accounting Standards Update ("ASU") 2014-09, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not recognize any adjustment to the opening balance of retained earnings upon adoption of ASC Topic 606. There was no material impact to the Company's net income on adoption of this new standard in 2018. In line with the requirements of ASC Topic 606 additional disclosure has been provided. As of January 1, 2018, the Company had no material remaining performance obligations. Compensation - Retirement Benefits On January 1, 2018, the Company adopted the changes required under ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost under FASB ASC Topic 715, Retirement Benefits as issued by the FASB in March 2017. In accordance with the ASU, beginning on January 1, 2018, the Company reports the current service cost component of net periodic benefit cost in Compensation and benefits on the Company's Consolidated Statements of Income, and reports the Other components of net periodic benefit recovery as a separate line item outside of Operating income on the Company's Consolidated Statements of Income. The Company has applied these changes in presentation retrospectively, which resulted in a decrease in Operating income of $274 million and $167 million for the years ended December 31, 2017 and 2016, respectively. These changes in presentation do not result in any changes to net income or earnings per share. Details of the components of net periodic benefit costs are provided in Note 21 Pensions and other benefits. The ASU also prospectively restricts capitalization of net periodic benefit costs to the current service cost component when applicable. This restriction has no impact on the Company's operating income or amounts capitalized because the Company has and continues to only capitalize an appropriate portion of current service cost for self-constructed properties. Derivatives and Hedging In August 2017, the FASB issued ASU 2017-12,Targeted Improvements to Accounting for Hedging Activities, under FASB ASC Topic 815, Derivatives and Hedging. This improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. These amendments also make targeted improvements to simplify the application of the hedge accounting guidance in GAAP. The amendments require the entire change in the fair value of the hedging instrument to be recorded in Other comprehensive income for effective cash flow hedges. Consequently, any ineffective portion of the change in fair value will no longer be recorded to the Consolidated Statement of Income as it arises. While the amendments are effective for public entities beginning on January 1, 2019, early adoption is permitted and the Company early adopted this ASU effective January 1, 2018. Entities are required to apply the amendments in this update to hedging relationships existing on the date of adoption, reflected as a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. Other amendments to presentation and disclosure are applied prospectively. No significant cumulative-effect adjustment was required. Accumulated Other Comprehensive Income - Reclassification In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income under FASB ASC Topic 220, Income Statement - Reporting Comprehensive Income. The current standard ASC Topic 740, Income Taxes, requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This includes the tax effects of items in Accumulated other comprehensive income ("AOCI") that were originally recognized in Other comprehensive income, subsequently creating stranded tax effects. This ASU allows a reclassification from AOCI to Retained earnings for stranded tax effects specifically resulting from the U.S. federal government's recently enacted tax bill, the Tax Cuts and Jobs Act. The amendments are effective for public entities beginning on January 1, 2019, and early adoption is permitted. Entities are required to apply these amendments either in the period of adoption or retrospectively to each period in which the effect of the change in tax rate from the Tax Cuts and Jobs Act was recognized. The Company early adopted this ASU effective January 1, 2018, electing not to change AOCI, Retained earnings or disclosure in the Company's Consolidated Financial Statements. Future Changes Leases In February 2016, the FASB issued ASU 2016-02, Leases under FASB ASC Topic 842, Leases which will supersede the lease recognition and measurement requirements in Topic 840, Leases. This new standard requires recognition of right-of-use ("ROU") assets and lease liabilities by lessees for those leases classified as finance and operating leases with a maximum term exceeding 12 months. For the Company this new standard will be effective for interim and annual periods commencing January 1, 2019. As a permitted practical expedient at transition, the Company expects to adopt the new standard with a cumulative-effect adjustment to the opening balance of retained earnings at that date and no restatement of comparative periods' financial information.  CP 2018 ANNUAL REPORT / 99 In preparation for adoption of the new standard, in January 2019, the Company implemented internal controls and a lease management system to assist in delivering the required accounting changes. To facilitate transition, the Company expects to make policy choices to utilize available practical expedients provided by the new standard, including the: • Acceptance of the package of practical expedients, permitting the Company not to reassess lease existence, classification and capitalization of initial direct costs previously determined under Topic 840; Acceptance of the previous accounting treatment for land easements where Topic 840 was not applied; Combination of lease and non-lease components as a single lease component for all lease classes, except for leases identified within engineering service agreements; and Off-balance sheet treatment for leases with a term of 12 months or less. • • • The Company has substantially completed its assessment of the impact of this new standard, and expects net increases of approximately $400 million to assets and liabilities associated primarily with the recognition of ROU assets and liabilities for operating leases. The Company expects no impact on the Consolidated Statements of Income and a minimal net impact to retained earnings. Additional disclosures will be provided in the Company's first quarter 2019 financial statements. Financial Instruments - Credit Losses In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments under FASB ASC Topic 326, Financial Instruments - Credit Losses. This new standard intends to replace the incurred loss impairment methodology under GAAP with a methodology that reflects using a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments, and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments are effective for the Company beginning on January 1, 2020. Entities are required to apply the amendments in this update using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact on the consolidated financial statements from the adoption of this ASU. Intangibles – Goodwill and Other In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment under FASB ASC Topic 350, Intangibles - Goodwill and Other. This is intended to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments are effective for the Company beginning on January 1, 2020. Entities are required to apply the amendments in this update prospectively from the date of adoption. The Company does not anticipate that the adoption of this ASU will impact its financial statements as there is a sufficient excess between the fair value and carrying value of the Company's goodwill. Furthermore the Company expects to continue to apply the Step 0 qualitative assessment when testing for goodwill impairment. 3 Revenues The following table disaggregates the Company’s revenues from contracts with customers by major source: (in millions of Canadian dollars) 2018 2017(1) 2016(1) Freight Grain Coal Potash Fertilizers and sulphur Forest products Energy, chemicals and plastics Metals, minerals, and consumer products Automotive Intermodal Total freight revenues Non-freight excluding leasing revenues Revenues from contracts with customers Leasing revenues Total revenues (1) Prior years amounts have not been adjusted under the modified retrospective method (Note 2). $ 1,566 $ 1,532 $ 1,480 673 486 243 284 1,243 797 322 1,538 7,152 102 7,254 62 631 411 241 265 898 739 293 1,365 6,375 117 6,492 62 $ 7,316 $ 6,554 $ 606 338 284 275 852 564 350 1,311 6,060 113 6,173 59 6,232 100 / CP 2018 ANNUAL REPORT 4 Other expense (income) (in millions of Canadian dollars) Foreign exchange loss (gain) on long-term debt Other foreign exchange losses (gains) Insurance recovery of legal settlement Legal settlement Charge on hedge roll and de-designation Other Other expense (income) 2018 168 $ 2017 (186) $ 3 — — — 3 (7) (10) — 13 12 174 $ (178) $ $ $ 2016 (79) (5) — 25 — 14 (45) "Other expense (income)" was previously presented as "Other income and charges" on the Company's Consolidated Statements of Income. This change in presentation has no impact on the components within this line item. 5 Net interest expense (in millions of Canadian dollars) Interest cost Interest capitalized to Properties Interest expense Interest income Net interest expense 2018 475 $ (20) 455 (2) 453 $ $ $ 2017 491 $ (16) 475 (2) 473 $ 2016 497 (25) 472 (1) 471 Interest expense includes interest on capital leases of $11 million for the year ended December 31, 2018 (2017 – $11 million; 2016 – $11 million). 6 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 decrease Effect of hedge of net investment in foreign subsidiaries Other Total deferred income tax expense (recovery) 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 (recovery) Total income taxes CP 2018 ANNUAL REPORT / 101 $ $ $ $ $ 2018 381 $ 2017 303 $ 214 (21) 64 (1) 256 371 (541) (42) 2 (210) 637 $ 93 $ 1,788 $ 800 2,588 $ 1,829 $ 669 2,498 $ 336 $ 45 381 174 82 256 257 $ 46 303 256 (466) (210) $ 637 $ 93 $ 2016 233 336 — (20) 4 320 553 1,513 639 2,152 165 68 233 207 113 320 553 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 Amount related to tax losses carried forward Liabilities carrying value in excess of tax basis Unrealized foreign exchange losses Environmental remediation costs Other Total deferred income tax assets Less: Valuation allowance Total net deferred income tax assets Deferred income tax liabilities Properties carrying value in excess of tax basis Pensions carrying value in excess of tax basis Other Total deferred income tax liabilities Total net deferred income tax liabilities 2018 2017 $ 11 $ 97 85 23 2 218 (5) 213 3,496 164 71 3,731 3,518 $ $ 12 77 11 16 11 127 — 127 3,181 226 41 3,448 3,321 102 / CP 2018 ANNUAL REPORT The Company’s consolidated effective income tax rate differs from the expected Canadian 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 (Canada) 2018 26.86% 2017 26.56% Expected income tax expense at Canadian enacted statutory tax rates $ 695 $ 663 $ Increase (decrease) in taxes resulting from: Losses (gains) not subject to tax Canadian tax rate differentials Foreign tax rate differentials Effect of tax rate decrease Valuation allowance Other Income tax expense 8 — (55) (21) 5 5 $ 637 $ (27) 1 (9) (541) — 6 93 $ 2016 26.65% 573 (23) — — — — 3 553 The Company has no unrecognized tax benefits from capital losses at December 31, 2018 and 2017. In 2018, the Company revalued its deferred income tax balances as a result of tax rate decreases in the states of Iowa and Missouri, resulting in a net recovery of $21 million. On December 22, 2017, the U.S. enacted the “Tax Cuts and Jobs Act” which has been commonly referred to as U.S. tax reform. A significant change under this reform is the reduction of the U.S. federal statutory corporate income tax rate from 35% to 21% beginning in 2018. As a result of this and other tax rate increases in the province of British Columbia and the state of Illinois, the Company revalued its deferred income tax balances accordingly. For the full year 2017, revaluations of deferred tax balances associated with changes in rates total a net recovery of $541 million. As at December 31, 2018, the Company has completed the measurement of certain income tax effects of the Tax Cuts and Jobs Act in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118'). There was no significant change identified from the provisional amount previously reported in the prior year. 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. It is not practical to calculate the amount of the deferred tax liability. At December 31, 2018, the Company had tax effected operating losses carried forward of $8 million, which have been recognized as a deferred tax asset. The majority of these losses carried forward will begin to expire in 2027, with the remaining expiring between 2031 and 2035. The Company expects to fully utilize these tax effected operating losses before their expiry. The Company did not have any minimum tax credits or investment tax credits carried forward. 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 U.S. for the year ended December 31, 2018: (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 2018 13 $ 2017 13 $ 1 (1) 13 $ — — 13 $ $ $ 2016 15 — (2) 13 If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2018 would impact the Company’s effective tax rate.  CP 2018 ANNUAL REPORT / 103 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 net amount of accrued interest and penalties in 2018 was $nil (2017 – $1 million; 2016 – $1 million). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at December 31, 2018 was $11 million (2017 – $11 million; 2016 – $10 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 2012. The federal and provincial income tax returns filed for 2013 and subsequent years remain subject to examination by the Canadian taxation authorities. The Internal Revenue Service ("IRS") audit for 2012 and 2013 has been settled. The income tax returns for 2014 and subsequent years continue to remain subject to examination by the IRS and U.S. state tax jurisdictions.The Company believes that it has recorded sufficient income tax reserves at December 31, 2018 with respect to these income tax examinations. The Company does not anticipate any material changes to the unrecognized tax benefits previously disclosed within the next twelve months as at December 31, 2018. 7 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 CP Common Shares at the average market price for the period. For purposes of this calculation, at December 31, 2018, there were 1.3 million dilutive options outstanding (2017 – 1.4 million; 2016 – 2.2 million). The number of shares used and the earnings per share calculations are reconciled as follows: (in millions of Canadian dollars, except per share data) Net income Weighted average basic shares outstanding (millions) Dilutive effect of weighted average number of stock options (millions) Weighted average diluted shares outstanding (millions) Earnings per share – basic Earnings per share – diluted 2018 1,951 $ 142.9 0.4 143.3 13.65 $ 13.61 $ $ $ $ 2017 2,405 $ 145.9 0.4 146.3 16.49 $ 16.44 $ 2016 1,599 149.6 0.9 150.5 10.69 10.63 In 2018, the number of options excluded from the computation of diluted earnings per share because their effect was not dilutive was 0.2 million (2017 – 0.3 million; 2016 – 0.4 million). 104 / CP 2018 ANNUAL REPORT 8 Other comprehensive income (loss) and accumulated other comprehensive loss The components of Other comprehensive income (loss) and the related tax effects are as follows: (in millions of Canadian dollars) For the year ended December 31, 2018 Unrealized foreign exchange gain (loss) on: Before tax amount Income tax (expense) recovery Net of tax amount Translation of the net investment in U.S. subsidiaries $ 419 $ Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 18) Change in derivatives designated as cash flow hedges: Realized loss on cash flow hedges recognized in income Unrealized gain on cash flow hedges and other 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, 2017 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 18) Change in derivatives designated as cash flow hedges: Realized loss on cash flow hedges recognized in income Unrealized loss on cash flow hedges and other Change in pension and other benefits actuarial gains and losses Change in prior service pension and other benefit costs Other comprehensive income For the year ended December 31, 2016 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 18) Change in derivatives designated as cash flow hedges: Realized loss on cash flow hedges recognized in income Unrealized loss on cash flow hedges and other Change in pension and other benefits actuarial gains and losses Change in prior service pension and other benefit costs Other comprehensive loss $ $ $ $ — $ 64 (3) (8) 115 1 169 $ (479) 10 28 (447) (2) (471) $ (295) $ — $ 319 25 (6) 84 (4) (42) (6) 2 (20) 1 123 $ (65) $ (132) $ — $ 150 10 (12) (422) (12) (20) (2) 2 113 3 $ (418) $ 96 $ The components of Accumulated other comprehensive loss, net of tax, are as follows: (in millions of Canadian dollars) Unrealized foreign exchange gain on translation of the net investment in U.S. subsidiaries Unrealized foreign exchange loss on translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries Net deferred and unrealized losses on derivatives and other Amounts for defined benefit pension and other post-retirement plans not recognized in income (Note 21) Accumulated other comprehensive loss 2018 862 $ (749) (62) (2,094) (2,043) $ $ $ 419 (415) 7 20 (332) (1) (302) (295) 277 19 (4) 64 (3) 58 (132) 130 8 (10) (309) (9) (322) 2017 443 (334) (89) (1,761) (1,741)  CP 2018 ANNUAL REPORT / 105 Changes in Accumulated other comprehensive loss by component are as follows: (in millions of Canadian dollars) Opening balance, January 1, 2018 Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive income (loss) Closing balance, December 31, 2018 Opening balance, January 1, 2017 Net current-period other comprehensive loss before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income Closing balance, December 31, 2017 (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) 109 $ (89) $ (1,761) $ (1,741) 4 — 4 113 $ 127 $ (17) (1) (18) 19 8 27 (62) $ (104) $ (4) 19 15 (417) 84 (333) (2,094) $ (1,822) $ (50) 111 61 (394) 92 (302) (2,043) (1,799) (71) 129 58 109 $ (89) $ (1,761) $ (1,741) Amounts in Pension and post-retirement defined benefit plans reclassified from Accumulated other comprehensive loss are as follows: Amortization of prior service costs(1) Recognition of net actuarial loss(1) Total before income tax Income tax recovery Total net of income tax (1) Impacts "Other components of net periodic benefit recovery" on the Consolidated Statements of Income. 9 Change in non-cash working capital balances related to operations 2018 2017 $ $ $ (2) $ 117 115 $ (31) 84 $ (4) 154 150 (39) 111 2018 2017 2016 $ $ (107) $ (11) 30 153 (91) $ 9 (26) (30) 65 $ (138) $ 2018 677 $ 168 845 (30) 815 $ $ $ 44 14 (18) (95) (55) 2017 536 176 712 (25) 687 (in millions of Canadian dollars) Source (use) of cash: Accounts receivable, net Materials and supplies Other current assets Accounts payable and accrued liabilities Change in non-cash working capital 10 Accounts receivable, net (in millions of Canadian dollars) Freight Non-freight Allowance for doubtful accounts Total accounts receivable, net 106 / CP 2018 ANNUAL REPORT The Company maintains an allowance for doubtful accounts based on expected collectability of accounts receivable. The Allowance for doubtful accounts is based on specific identification of uncollectable accounts, the application of historical percentages by aging category and an assessment of the current economic environment. 11 Dispositions of properties Gain on sale of Bass Lake railway line During the fourth quarter of 2018, the Company completed the sale of the Bass Lake railway line for gross proceeds of $37 million (U.S. $27 million). The company recorded a gain on sale of $35 million ($26 million after tax) within "Purchased services and other" from the transaction. Gain on sale of Obico During the fourth quarter of 2016, the Company completed the sale of its Obico rail yard for gross proceeds of $38 million. The Company recorded a gain on sale of $37 million ($33 million after tax) within "Purchased services and other" from the transaction. Gain on sale of Arbutus Corridor In March 2016, the Company completed the sale of CP’s Arbutus Corridor (the “Arbutus Corridor”) to the City of Vancouver for gross proceeds of $55 million. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor. The Company recorded a gain on sale of $50 million ($43 million after tax) within "Purchased services and other" from the transaction during the first quarter of 2016. 2018 160 $ 43 203 $ $ $ 2017 144 38 182 12 Investments (in millions of Canadian dollars) Rail investments accounted for on an equity basis Other investments Total investments 13 Properties (in millions of Canadian dollars except percentages) Track and roadway Buildings Rolling stock Information systems(1) Other Total 2018 Weighted average annual depreciation rate 2018 2017 Cost Accumulated depreciation Net book value Cost Accumulated depreciation Net book value 2.8% $ 18,599 $ 5,236 $ 13,363 $ 17,285 $ 4,814 $ 12,471 3.0% 2.8% 10.4% 5.1% 781 4,467 551 1,984 218 1,613 252 645 563 2,854 299 1,339 719 4,114 551 1,760 196 1,557 264 582 523 2,557 287 1,178 $ 26,382 $ 7,964 $ 18,418 $ 24,429 $ 7,413 $ 17,016 (1) During 2018, CP capitalized costs attributable to the design and development of internal-use software in the amount of $53 million (2017 – $49 million; 2016 – $46 million). Current year depreciation expense related to internal use software was $49 million (2017 – $55 million; 2016 – $63 million). Capital leases included in properties (in millions of Canadian dollars) 2018 Buildings Rolling stock Total assets held under capital lease Cost 1 $ 311 312 $ $ $ Accumulated depreciation Net book value 1 $ 124 125 $ — $ 187 187 $ 2017 Accumulated depreciation 1 $ 115 116 $ Net book value — 196 196 Cost 1 $ 311 312 $  CP 2018 ANNUAL REPORT / 107 Goodwill Net carrying amount $ $ 191 — (13) 178 — 16 194 $ Intangible assets Accumulated amortization Net carrying amount Total goodwill and intangible assets (11) $ (1) (1) (13) $ (1) — (14) $ 11 $ (1) (1) 9 $ (1) — 8 $ 202 (1) (14) 187 (1) 16 202 Cost 22 $ — — 22 $ — — 22 $ 14 Goodwill and intangible assets (in millions of Canadian dollars) Balance at December 31, 2016 Amortization Foreign exchange impact Balance at December 31, 2017 Amortization Foreign exchange impact Balance at December 31, 2018 $ $ $ 15 Other assets (in millions of Canadian dollars) Long-term materials Contracted customer incentives Prepaid leases Other Total other assets Contracted customer incentives are amortized to income over the term of the related revenue contract. 16 Accounts payable and accrued liabilities (in millions of Canadian dollars) Trade payables Accrued charges Income and other taxes payable Accrued interest Dividends payable Payroll-related accruals Accrued vacation Stock-based compensation liabilities Personal injury, damage and other claims provision Provision for environmental remediation (Note 19) Financial derivative liability (Note 18) Other Total accounts payable and accrued liabilities $ $ $ 2018 26 $ 11 10 24 71 $ 2018 474 $ 360 104 135 91 78 61 53 68 8 — 17 2017 24 11 5 29 69 2017 402 256 72 128 82 72 59 32 28 8 55 44 $ 1,449 $ 1,238 108 / CP 2018 ANNUAL REPORT 17 Debt The following table outlines the Company's outstanding debt instruments and capital lease obligations as at December 31, 2018. (in millions of Canadian dollars except percentages) 6.500% 6.250% 7.250% 9.450% 5.100% 4.500% 4.450% 2.900% 3.700% 4.000% 7.125% 5.750% 4.800% 5.950% 6.450% 5.750% 4.800% 6.125% 5.41% 6.91% 7.49% 10-year Notes 10-year Medium Term Notes 10-year Notes 30-year Debentures 10-year Medium Term Notes 10-year Notes 12.5-year Notes 10-year Notes 10.5-year Notes 10-year Notes 30-year Debentures 30-year Debentures 20-year Notes 30-year Notes 30-year Notes 30-year Notes 30-year Notes 100-year Notes Senior Secured Notes Secured Equipment Notes Equipment Trust Certificates Obligations under capital leases 6.99% 6.57% 12.77% Perpetual 4% Consolidated Debenture Stock Perpetual 4% Consolidated Debenture Stock Less: Unamortized fees on long-term debt Less: Long-term debt maturing within one year (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (A) (B) (C) (D) (E) (E) (E) (F) (F) Maturity May 2018 Jun 2018 May 2019 Aug 2021 Jan 2022 Jan 2022 Mar 2023 Feb 2025 Feb 2026 Jun 2028 Oct 2031 Mar 2033 Sep 2035 May 2037 Nov 2039 Jan 2042 Aug 2045 Sep 2115 Mar 2024 Oct 2024 Jan 2021 Mar 2022 Dec 2026 Jan 2031 Currency in which payable U.S.$ $ 2018 — $ CDN$ U.S.$ U.S.$ CDN$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ CDN$ U.S.$ U.S.$ U.S.$ U.S.$ CDN$ U.S.$ U.S.$ U.S.$ CDN$ U.S.$ G.B.£ — 477 341 125 339 477 955 340 682 477 334 408 607 400 336 748 1,228 113 106 57 104 52 4 8,710 41 6 8,757 61 8,696 506 $ 8,190 $ 2017 345 375 439 314 125 311 438 878 313 — 439 307 375 558 400 308 687 1,129 111 120 52 96 52 3 8,175 38 6 8,219 60 8,159 746 7,413 At December 31, 2018, the gross amount of long-term debt denominated in U.S. dollars was U.S. $5,970 million (2017 – U.S. $5,755 million). Annual maturities and principal repayment requirements, excluding those pertaining to capital leases, for each of the five years following 2018 are (in millions): 2019 – $501; 2020 – $67; 2021 – $382; 2022 – $494; 2023 – $507. Fees on long-term debt are amortized to income over the term of the related debt. A. These debentures and notes pay interest semi-annually and are unsecured, but carry a negative pledge.  CP 2018 ANNUAL REPORT / 109 During the second quarter of 2018, the Company repaid U.S. $275 million 6.500% 10-year Notes at maturity for a total of U.S. $275 million ($352 million) and $375 million 6.250% 10-year Medium Term Notes at maturity for a total of $375 million. The Company also issued U.S. $500 million 4.000% 10-year Notes due June 1, 2028 for net proceeds of U.S. $495 million ($638 million). In conjunction with the issuance, the Company settled a notional U.S. $500 million of forward starting floating-to-fixed interest rate swap agreements ("forward starting swaps") for a payment of U.S. $19 million ($24 million) (see Note 18). This payment was included in cash provided by operating activities consistent with the location of the related hedged item on the Company's Consolidated Statements of Cash Flows. B. The 5.41% Senior Secured Notes are collateralized by specific locomotive units with a carrying value of $111 million at December 31, 2018. 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. C. 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 $81 million at December 31, 2018. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of $11 million is due in October 2024. D. The 7.49% Equipment Trust Certificates are secured by specific locomotive units with a carrying value of $107 million at December 31, 2018. 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. E. At December 31, 2018, capital lease obligations included in long-term debt were as follows: (in millions of Canadian dollars) Minimum lease payments in: Year Capital leases Total minimum lease payments Less: Imputed interest Present value of minimum lease payments Less: Current portion Long-term portion of capital lease obligations 2019 $ 2020 2021 2022 2023 Thereafter $ 16 16 16 114 9 31 202 (43) 159 (5) 154 During the years ended 2018, 2017, and 2016, the Company had no additions to property, plant and equipment under capital lease obligations. The carrying value of the assets collateralizing the capital lease obligations was $187 million at December 31, 2018. F. 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. Credit facility CP has a revolving credit facility (the “facility”) agreement with 15 highly rated financial institutions for a commitment amount of U.S. $1.0 billion. The facility can accommodate draws of cash and/or letters of credit at market competitive pricing. The agreement requires the Company not to exceed a maximum debt to earnings before interest, tax, depreciation, and amortization ratio. As at December 31, 2018 and 2017, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the threshold stipulated in this financial covenant. Effective June 8, 2018, the Company amended its U.S. $2.0 billion revolving credit facility agreement dated September 26, 2014. This fifth amending agreement included the extension of the U.S. $1.0 billion five-year maturity date from June 28, 2022 to June 28, 2023 and the cancellation of the U.S. $1.0 billion one- year plus one-year credit facility agreement. As at December 31, 2018 and 2017, the facility was undrawn. The amount available under the terms of the credit facility was U.S. $1.0 billion at December 31, 2018 (December 31, 2017 – U.S. $2.0 billion). 110 / CP 2018 ANNUAL REPORT The Company also has a commercial paper program which enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As at December 31, 2018, the Company had no commercial paper borrowings outstanding (December 31, 2017 – $nil). CP has bilateral letter of credit facilities 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 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 Sheets. As at December 31, 2018, the Company had no collateral posted on its bilateral letter of credit facility (December 31, 2017– $150 million). At December 31, 2018, under its bilateral facilities the Company had letters of credit drawn of $60 million (December 31, 2017 – $319 million) from a total available amount of $600 million (December 31, 2017 – $600 million). 18 Financial instruments A. Fair values of financial instruments The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy established by GAAP that prioritizes those inputs to valuation techniques used to measure fair value based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs, other than quoted prices included within Level 1, are observable for the asset or liability either directly or indirectly; and Level 3 inputs are not observable in the market. When possible, the estimated fair value is based on quoted market prices and, if not available, it is based on estimates from third-party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, FX, 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. All derivatives and long-term debt are classified as Level 2. The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt: (in millions of Canadian dollars) Long-term debt (including current maturities): Fair value Carrying value December 31, 2018 December 31, 2017 $ 9,639 $ 8,696 9,680 8,159 The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of principal and interest at estimated interest rates expected to be available to the Company at period end. As at December 31, 2018 and 2017, the Company did not have any deposits in the form of short-term investments with financial institutions. B. Financial risk management Derivative financial instruments Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel and stock- based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheets, commitments, or forecasted transactions. At the time a derivative contract is entered into and at least quarterly thereafter, an assessment is made as to whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address. It is not the Company’s intent to use financial derivatives or commodity instruments for trading or speculative purposes. 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.  CP 2018 ANNUAL REPORT / 111 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 ongoing 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. FX management The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in the value of financial commitments, assets, liabilities, income, or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures, and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure. Occasionally the Company may 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 effect of the net investment hedge recognized in “Other comprehensive income” in 2018 was an FX loss of $479 million, the majority of which was unrealized (2017 – unrealized gain of $319 million; 2016 – unrealized gain of $150 million) (see Note 8). 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 ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt. To manage interest rate exposure, the Company accesses diverse sources of financing and manages borrowings in line with a targeted range of capital structure, debt ratings, liquidity needs, maturity schedule, and currency and interest rate profiles. In anticipation of future debt issuances, the Company may enter into forward rate agreements, that are designated as cash flow hedges, to substantially lock in all or a portion of the effective future interest expense. The Company may also enter into swap agreements, designated as fair value hedges, to manage the mix of fixed and floating rate debt. Forward starting swaps As at December 31, 2018, the Company had no forward starting swaps to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes (December 31, 2017 – U.S. $500 million). During the second quarter of 2018, the Company settled a notional amount of U.S. $500 million of forward starting swaps related to the U.S. $500 million 4.000% 10-year Notes issued in the same period. The fair value of these derivative instruments at the time of settlement was a loss of U.S. $19 million ($24 million). During the second quarter of 2017, the Company de-designated the hedging relationship for U.S. $700 million of forward starting swaps. The Company settled a notional amount of U.S. $200 million of forward starting swaps for a cash payment of U.S. $16 million ($22 million). The Company rolled the remaining notional amount of U.S. $500 million of forward starting swaps and did not cash settle these swaps. The impact of the U.S. $200 million settlement and U.S. $500 million roll of the forward starting swaps was a charge of $13 million to "Other expense (income)" on the Company's Consolidated Statements of Income. Concurrently, the Company re-designated the forward starting swaps totalling U.S. $500 million to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes. As at December 31, 2018, there were no fair value losses (December 31, 2017 – fair value loss of $55 million) derived from the forward starting swaps that were included in “Accounts payable and accrued liabilities”. The changes in fair value from the forward starting swaps for the year ended December 31, 2018 was a gain of $31 million (2017 – loss of $8 million). This was recorded in "Accumulated other comprehensive loss”, net of tax, and is being reclassified to "Net interest expense" on the Consolidated Statements of Income until the underlying hedged notes are repaid. For the year ended December 31, 2018, a net loss of $10 million related to previous forward starting swap hedges has been amortized to “Net interest expense” (2017 – loss of $11 million).The Company expects that during the next 12 months, $9 million of net losses will be amortized to “Net interest expense”. Treasury rate locks At December 31, 2018, the Company had net unamortized losses related to interest rate locks, which are accounted for as cash flow hedges, settled in previous years totalling $19 million (December 31, 2017 – $20 million). This amount is composed of various unamortized gains and losses related to specific debts which 112 / CP 2018 ANNUAL REPORT 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 $1 million increase to “Net interest expense” and “Other comprehensive income” in 2018 (2017 – loss of $1 million; 2016 – negligible). The Company expects that during the next 12 months, a net loss of $1 million related to these previously settled derivatives will 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. The impact of variable fuel expense is mitigated substantially through fuel cost adjustment 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. 19 Other long-term liabilities (in millions of Canadian dollars) Stock-based compensation liabilities, net of current portion Provision for environmental remediation, net of current portion(1) Deferred revenue on rights-of-way license agreements, net of current portion(2) Deferred gains on sale leaseback transactions(2) Other, net of current portion Total other long-term liabilities 2018 81 $ 74 24 13 45 237 $ $ $ 2017 67 70 26 16 52 231 (1) As at December 31, 2018, the aggregate provision for environmental remediation, including the current portion was $82 million (2017 – $78 million). (2) 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. 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 groundwater. 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” (see Note 16). Payments are expected to be made over 10 years to 2028. 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 Company's Consolidated Balance Sheets and to “Purchased services and other” within operating expenses on the Company's Consolidated Statements of Income. The amount charged to income in 2018 was $6 million (2017 – $5 million; 2016 – $6 million).  CP 2018 ANNUAL REPORT / 113 20 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 an unlimited number of Second Preferred Shares. At December 31, 2018, no First or Second Preferred Shares had been issued. The following table summarizes information related to Common Share balances as at December 31: (number of shares in millions) Share capital, January 1 CP Common Shares repurchased Shares issued under stock option plan Share capital, December 31 2018 144.9 (4.6) 0.2 140.5 2017 146.3 (1.9) 0.5 144.9 2016 153.0 (6.9) 0.2 146.3 The change in the “Share capital” balance includes $12 million of stock-based compensation transferred from “Additional paid-in capital” (2017 – $12 million; 2016 – $5 million). Share repurchase On April 20, 2016, the Company announced the renewal of its normal course issuer bid ("NCIB"), commencing May 2, 2016 to May 1, 2017, to purchase up to 6.91 million of its outstanding Common Shares for cancellation. The Company completed this NCIB on September 28, 2016. On May 10, 2017, the Company announced a new NCIB, commencing May 15, 2017, to purchase up to 4.38 million Common Shares for cancellation before May 14, 2018. The Company completed this NCIB on May 10, 2018. On October 19, 2018, the Company announced a new NCIB, commencing October 24, 2018, to purchase up to 5.68 million Common Shares for cancellation before October 23, 2019. As at December 31, 2018, the Company had purchased 2.19 million Common Shares for $568 million under this NCIB program. All purchases are made in accordance with the respective NCIB at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to "Retained earnings". The following table provides the activities under the share repurchase programs: Number of Common Shares repurchased(1) Weighted-average price per share(2) Amount of repurchase (in millions)(2) (1) Includes shares repurchased but not yet cancelled at year end. (2) Includes brokerage fees. 2018 4,683,162 240.68 $ 1,127 $ $ $ 2017 2016 1,888,100 6,910,000 201.53 $ 381 $ 175.08 1,210 21 Pensions and other benefits The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At December 31, 2018, the Canadian pension plans represent nearly all of total combined pension plan assets and nearly all 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. 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, 2018, the Canadian other benefits plans represent nearly all 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 by investment managers to hedge or adjust existing or anticipated exposures. 114 / CP 2018 ANNUAL REPORT 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 plan 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 long-term return expectation for fixed income, public equity, real estate, infrastructure, private debt 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 years 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, infrastructure and private debt securities. The benefit obligation is discounted using a discount rate that is a blended yield to maturity for a hypothetical portfolio of high-quality corporate debt instruments with cash flows matching projected benefit payments. The discount rate is determined by management. Net periodic benefit cost The elements of net periodic benefit cost for DB pension plans and other benefits recognized in the year include the following components: (in millions of Canadian dollars) 2018 2017 2016 2018 2017 2016 Pensions Other benefits Current service cost (benefits earned by employees) $ 120 $ 103 $ 106 $ 12 $ 12 $ Other components of net periodic benefit cost (recovery): Interest cost on benefit obligation Expected return on fund assets Recognized net actuarial loss Amortization of prior service costs Total other components of net periodic benefit (recovery) cost 438 (955) 114 (2) (405) 451 (893) 153 (5) (294) 467 (846) 190 (7) (196) 19 — 2 — 21 20 — (1) 1 20 Net periodic benefit (recovery) cost $ (285) $ (191) $ (90) $ 33 $ 32 $ 11 21 — 7 1 29 40 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 (gain) loss Pensions 2018 Other benefits 2017 2018 2017 $ 11,679 $ 11,399 $ 518 $ 120 438 47 (640) 20 — (292) 103 451 44 (648) (15) 1 344 12 19 1 (33) 2 — (18) 510 12 20 1 (35) (3) — 13 518 Projected benefit obligation at December 31 $ 11,372 $ 11,679 $ 501 $  CP 2018 ANNUAL REPORT / 115 Pensions 2018 Other benefits 2017 2018 2017 $ 12,808 $ 12,196 $ 4 $ 82 36 47 (640) 16 1,183 46 44 (648) (13) — 32 1 (33) — 12,349 $ 977 $ 12,808 1,129 $ $ 4 $ (497) $ 2018 Pension plans in surplus (10,884) $ 12,127 1,243 $ Pension plans in deficit 2017 Pension plans in surplus (488) $ (11,174) $ 222 (266) $ 12,581 1,407 $ $ $ $ $ 5 (1) 34 1 (35) — 4 (514) Pension plans in deficit (505) 227 (278) (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) (in millions of Canadian dollars) 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, 2018 and 2017. 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 2018 1,243 $ (11) (255) 977 $ $ $ 2017 1,407 $ (10) (268) 1,129 $ Other benefits 2018 — $ (34) (463) (497) $ 2017 — (33) (481) (514) The defined benefit pension plans’ accumulated benefit obligation as at December 31, 2018 was $10,981 million (2017 – $11,273 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, 2018. During 2019, the Company expects to file with the pension regulator a new valuation performed as at January 1, 2019. 116 / CP 2018 ANNUAL REPORT Accumulated other comprehensive loss Amounts recognized in accumulated other comprehensive loss 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 8) Pensions 2018 Other benefits 2017 2018 2017 $ $ 2,233 $ 2,555 $ 611 — (797) (178) (2) (676) 2,047 $ 1,699 $ 61 $ — 2 (16) 47 $ 81 — 2 (21) 62 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 2019 are a cost of $82 million and a recovery of $1 million, respectively, for pensions and costs of $2 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 (4) Projected future salary increases Health care cost trend rate 2018 2017 2016 4.01 2.75 6.00 (1) 3.80 7.75 2.75 7.00 (2) 3.80 2.75 7.00 (2) 4.02 7.75 2.75 7.00 (2) 4.02 2.75 7.00 (2) 4.22 7.75 3.00 7.00 (3) (1) The health care cost trend rate is assumed to be 6.00% in 2019, and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2021 and thereafter. (2) The health care cost trend rate was previously assumed to be 7.00% in 2017 and 2018, and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2022 and thereafter. (3) The health care cost trend rate was previously assumed to be 6.50% in 2017 (7.00% in 2016 and 2015), and then decreasing by 0.50% per year to an ultimate rate of 5.00% per year in 2020 and thereafter. (4) The expected rate of return on fund assets that will be used to compute the 2019 net periodic benefit credit is 7.50%. Assumed health care cost trend rates affect the amounts reported for the health care plans. A one-percentage-point increase in the assumed health care cost trend rate would increase the post-retirement benefit obligation by $5 million, and a one-percentage-point decrease in the assumed health care cost trend rate would decrease the post-retirement benefit obligation by $5 million. A one-percentage-point increase or decrease in the assumed health care cost trend rate would have no material effect on the total of service and interest costs. Plan assets Plan assets are recorded at fair value. The major asset categories are public equity securities, fixed income securities, real estate, infrastructure, absolute return investments and private debt. The fair values of the public equity and fixed income securities are primarily based on quoted market prices. Real estate values are based on appraisals performed by external parties, taking into account current market conditions and recent sales transactions where practical and appropriate. Infrastructure values are based on the 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. Private debt values are based on the value of each fund’s assets as calculated by the fund manager taking into account current market conditions and reviewed annually by external parties. Absolute return investments are a portfolio of units of externally managed hedge funds and are valued by the fund administrators.  CP 2018 ANNUAL REPORT / 117 In December 2018, the Finance Committee of the Board of Directors has approved a new Statement of Investment Policies and Procedures for the Canadian DB plan. The Company’s pension plan asset allocation, the weighted average asset allocation targets and the weighted average policy range for each major asset class at year end, were as follows: Asset allocation (percentage) Cash and cash equivalents Fixed income Public equity Real estate and infrastructure Private debt Absolute return Total Asset allocation target Policy range Percentage of plan assets at December 31 2018 1.2 24.1 45.1 9.8 9.8 10.0 100.0 2017 0.5 29.5 46.0 12.0 — 12.0 100.0 2018 0 – 10 20 – 40 35 – 55 4 – 13 4 – 13 4 – 13 2017 0 – 5 20 – 40 35 – 55 4 – 20 — 0 – 18 2018 1.1 25.6 50.2 7.7 1.3 14.1 100.0 2017 1.4 26.1 53.3 6.2 — 13.0 100.0 118 / CP 2018 ANNUAL REPORT Summary of the assets of the Company’s DB pension plans The following is a summary of the assets of the Company’s DB pension plans at December 31, 2018 and 2017. As of December 31, 2018 and 2017, there were no plan assets classified as Level 3 valued investments. Assets Measured at Fair Value Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Investments measured at NAV(1) Total Plan Assets (in millions of Canadian dollars) December 31, 2018 Cash and cash equivalents $ 127 $ 12 $ — $ Fixed income • Government bonds(2) • Corporate bonds(2) • Mortgages(3) Public equities • Canada • U.S. and international Real estate(4) Infrastructure(5) Private Debt(6) Derivative instruments(7) Absolute return(8) • Funds of hedge funds • Multi-strategy funds • Credit funds • Equity funds December 31, 2017 Cash and cash equivalents Fixed income • Government bonds(2) • Corporate bonds(2) • Mortgages(3) Public equities • Canada • U.S. and international Real estate(4) Infrastructure(5) Absolute return(8) • Funds of hedge funds • Multi-strategy funds • Credit funds • Equity funds 101 128 41 1,287 4,892 — — — — — — — — 1,281 1,606 — — 24 — — — (7) — — — — — — — — — 697 259 162 — 1,189 286 32 232 $ $ 6,576 $ 2,916 $ 2,857 $ 165 $ 11 $ — $ — — — 1,467 5,254 — — — — — — 2,087 1,215 45 62 42 — — — — — — — — — — — 622 176 681 515 252 214 139 1,382 1,734 41 1,287 4,916 697 259 162 (7) 1,189 286 32 232 12,349 176 2,087 1,215 45 1,529 5,296 622 176 681 515 252 214 $ 6,886 $ 3,462 $ 2,460 $ 12,808 (1) Investments measured at net asset value ("NAV"): Amounts are comprised of certain investments measured using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.  CP 2018 ANNUAL REPORT / 119 (2) Government & Corporate Bonds: Fair values for bonds are based on market prices supplied by independent sources as of the last trading day. (3) Mortgages: The fair values of mortgages are based on current market yields of financial instruments of similar maturity, coupon and risk factors. (4) Real estate: Real estate fund values are based on the NAV of the funds that invest directly in real estate investments. The values of the investments have been estimated using the capital accounts representing the plan’s ownership interest in the funds. Of the total, $583 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2017 – $542 million). The remaining $114 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying real estate investments (2017 – $80 million). As at December 31, 2018, there are $38 million of unfunded commitments for real estate investments (December 31, 2017 – $53 million). (5) Infrastructure: Infrastructure fund values are based on the NAV of the funds that invest directly in infrastructure investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. Of the total, $130 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2017 - $nil). The remaining $129 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments (2017 - $176 million). It was estimated that the investments in these funds will be liquidated over the weighted-average period of approximately one year. (6) Private debt: Private debt fund values are based on the NAV of the funds that invest directly in private debt investments. The values of the investments have been estimated using the capital accounts representing the plans' ownership interest in the funds. The funds are subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days. As at December 31, 2018, there are $608 million of unfunded commitments for private debt investments (December 31, 2017 – $nil). (7) Derivatives: The investment managers may utilize the following derivative instruments: equity futures to replicate equity index returns (Level 2); currency forwards to partially hedge foreign currency exposures (Level 2); bond forwards to reduce asset/liability interest rate risk exposures (Level 2); interest rate swaps to manage duration and 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). The Company may utilize derivatives directly, but only for the purpose of hedging foreign currency exposures. As at December 31, 2018, there are currency forwards with a notional value of $1,226 million and a negative fair value of $7 million (December 31, 2017 – $nil). (8) Absolute return: The value of absolute return fund investments is based on the NAV reported by the fund administrators. The funds have different redemption policies and periods. The funds have different redemption policies with redemption notice periods varying from 60 to 95 days and frequencies ranging from monthly to triennially. Portion of the assets of the Company’s DB pension plans measured at fair value using unobservable inputs (Level 3) During 2017 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, 2017 Disbursements Net realized gains Decrease in net unrealized gains Net transfers (out of) Level 3 As at December 31, 2017 $ $ Real Estate 437 (43) 7 (7) (394) — Additional plan assets information The Company's primary investment objective for pension plan assets is to achieve a long–term return, net of all fees and expenses, that is sufficient for the plan's assets to satisfy the current and future obligations to plan beneficiaries, while minimizing the financial impact on the Company. In identifying the asset allocation ranges, consideration was given to the long-term nature of the underlying plan liabilities, the solvency and going-concern financial position of the plan, long-term return expectations and the risks associated with key asset classes as well as the relationships of returns on key asset classes with each other, inflation and interest rates. When advantageous and with due consideration, derivative instruments may be utilized by investment managers, provided the total value of the underlying assets represented by financial derivatives, excluding currency forwards and derivatives held by absolute return funds, 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. At December 31, 2018, the plans were 33% exposed to the U.S. dollar net of currency forwards (43% excluding the currency forwards), 4% exposed to the Euro, and 13% exposed to various other currencies. At December 31, 2018, fund assets consisted primarily of listed stocks and bonds, including 86,084 of the Common Shares (2017 – 107,330) at a market value of $21 million (2017 – $25 million) and Unsecured Notes issued by the Company at a par value of $1 million (2017 – $1 million) and a market value of $1 million (2017 – $1 million). 120 / CP 2018 ANNUAL REPORT 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) Pensions Other benefits 2019 2020 2021 2022 2023 2024 – 2028 $ 624 $ 628 632 636 640 3,246 34 32 31 30 30 144 The benefit payments from the Canadian registered and U.S. qualified DB pension plans are payable from their respective pension funds. Benefit payments from the supplemental pension plan and from the other benefits plans are payable directly from the Company. Defined contribution plan Canadian non-unionized employees hired prior to July 1, 2010 had the option to participate in the Canadian DC plan. All Canadian non-unionized employees hired after such date must participate in this plan. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year. Effective July 1, 2010, a new U.S. DC plan was established. All U.S. non-unionized employees hired after such date must participate in this plan. Employees do not contribute to the plan. The Company annually contributes a percentage of salary. The DC plans provide a pension based on total employee, where appropriate, and employer contributions plus investment income earned on those contributions. In 2018, the net cost of the DC plans, which generally equals the employer’s required contribution, was $10 million (2017 – $9 million; 2016 – $9 million). Contributions to multi-employer plans Some of the Company’s unionized employees in the U.S. are members of a U.S. national multi-employer benefit plan. Contributions made by the Company to this plan in 2018 in respect of post-retirement medical benefits were $3 million (2017 – $5 million; 2016 – $4 million). 22 Stock-based compensation At December 31, 2018, the Company had several stock-based compensation plans, including a stock option plan, various cash settled liability plans and an employee share purchase plan. These plans resulted in an expense in 2018 of $75 million (2017 – $35 million; 2016 – $51 million). Effective January 31, 2017, Mr. E. Hunter Harrison resigned from all positions held by him at the Company, including as the Company’s Chief Executive Officer and as a member of the Board of Directors of the Company. In connection with Mr. Harrison’s resignation, the Company entered into a separation agreement with Mr. Harrison. Under the terms of the separation agreement, the Company agreed to a limited waiver of Mr. Harrison’s non-competition and non-solicitation obligations. Effective January 31, 2017, pursuant to the separation agreement, Mr. Harrison forfeited certain pension and post-retirement benefits and agreed to the surrender for cancellation of 22,514 performance share units ("PSU"), 68,612 deferred share units ("DSU"), and 752,145 stock options. As a result of this agreement, the Company recognized a recovery of $51 million in "Compensation and benefits" in the first quarter of 2017. Of this amount, $27 million related to a recovery from cancellation of certain pension benefits.  CP 2018 ANNUAL REPORT / 121 A. Stock option plan The following table summarizes the Company’s stock option plan as at December 31, 2018: Outstanding, January 1, 2018 Granted Exercised Vested Forfeited Expired Outstanding, December 31, 2018 Vested or expected to vest at December 31, 2018(1) Exercisable, December 31, 2018 Options outstanding Non-vested options Number of options 1,479,275 $ 282,125 $ (200,552) $ N/A (26,650) $ (600) $ 1,533,598 $ 1,500,135 $ 819,496 $ Weighted average exercise price 150.64 248.54 118.86 N/A 211.80 71.69 176.02 174.77 140.54 Number of options 682,927 $ 282,125 $ N/A (226,623) $ (24,327) $ N/A 714,102 $ N/A N/A Weighted average grant date fair value 45.46 55.63 N/A 46.94 47.65 N/A 48.94 N/A N/A (1) As at December 31, 2018, the weighted average remaining term of vested or expected to vest options was 7.0 years with an aggregate intrinsic value of $104 million. The following table provides the number of stock options outstanding and exercisable as at December 31, 2018 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, 2018 at the Company’s closing stock price of $242.24. Options outstanding Options exercisable Range of exercise prices $36.29 – $122.76 $122.77 – $200.75 $200.76 – $217.68 $217.69 – $272.92 Total(1) Number of options 410,049 339,686 388,527 395,336 1,533,598 Weighted average years to expiration Weighted average exercise price Aggregate intrinsic value (millions) 3.3 $ 6.1 $ 5.1 $ 6.2 $ 5.2 $ 93.51 $ 164.47 $ 205.80 $ 242.25 $ 176.02 $ Number of options 410,049 $ 232,206 $ 88,013 $ 89,228 $ 61 26 14 3 104 819,496 $ Weighted average exercise price Aggregate intrinsic value (millions) 93.51 $ 164.49 $ 207.63 $ 228.12 $ 140.54 $ 61 18 3 1 83 (1) As at December 31, 2018, the total number of in-the-money stock options outstanding was 1,342,215 with a weighted-average exercise price of $164.62. The weighted-average years to expiration of exercisable stock options is 4.5 years. Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years. Certain stock options granted in 2018 vest upon the achievement of specific performance criteria. Under the fair value method, the fair value of options at the grant date was approximately $16 million for options issued in 2018 (2017 – $17 million; 2016 – $16 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 2018 5.00 2.22% 25% $ $ 2.3854 4.7% 55.63 $ $ 2017 5.48 1.85% 27% 2.0010 2.8% 45.78 $ $ 2016 5.25 1.21% 27% 1.4000 2.0% 39.01 (1) Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option. (2) Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant. 122 / CP 2018 ANNUAL REPORT (3) Based on the historical stock price volatility of the Company’s stock over a period commensurate with the expected term of the option. (4) Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option. On May 10, 2018, the Company announced an increase in its quarterly dividend to $0.6500 per share, representing $2.6000 on an annual basis. (5) The Company estimates forfeitures based on past experience. The rate is monitored on a periodic basis. In 2018, the expense for stock options (regular and performance) was $10 million (2017 – $3 million; 2016 – $14 million). At December 31, 2018, there was $15 million of total unrecognized compensation related to stock options which is expected to be recognized over a weighted-average period of approximately 1.6 years. The total fair value of shares vested for the stock option plan during 2018 was $11 million (2017 – $14 million; 2016 – $15 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 $ $ 2018 17 $ 24 $ 2017 36 $ 45 $ 2016 30 21 B. Other share-based plans Performance share units plan During 2018, the Company issued 162,255 PSUs with a grant date fair value of approximately $40 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Common Shares. PSUs vest and are settled in cash or in CP Common Shares, approximately 3 years after the grant date, contingent upon CP’s performance (performance factor). The fair value of PSUs is measured periodically until settlement, using a lattice-based valuation model or a Monte Carlo simulation model. The performance period for 125,280 PSUs issued in 2018 was January 1, 2018 to December 31, 2020, and the performance factors for these PSUs are Return on Invested Capital ("ROIC"), Total Shareholder Return ("TSR") compared to the S&P/TSX Capped Industrial Index, and TSR compared to S&P 1500 Road and Rail Index. The performance factors for the remaining 36,975 PSUs are annual revenue for the fiscal year 2020, diluted EPS for the fiscal year 2020, and share price appreciation. The performance period for PSUs issued in 2017 is January 1, 2017 to December 31, 2019, and the performance factors for these PSUs are ROIC, TSR compared to the S&P/TSX Capped Industrial index, and TSR compared to S&P 1500 Road and Rail index. The performance period for PSUs issued in 2016 is January 1, 2016 to December 31, 2018, and the performance factors for these PSUs are Operating Ratio, ROIC, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting estimated payout was 177% on 117,095 total outstanding awards representing a total fair value of $54 million at December 31, 2018, calculated using the Company's average share price using the last 30 trading days preceding December 31, 2018. The performance period for PSUs issued in 2015 was January 1, 2015 to December 31, 2017. The performance factors for these PSUs were Operating Ratio, ROIC, TSR compared to the S&P/TSX60 index, and TSR compared to Class I railways. The resulting payout was 160% of the outstanding units multiplied by the Company's average share price that was calculated using the last 30 trading days preceding December 31, 2017. In the first quarter of 2018, payouts occurred on the total outstanding awards, including dividends reinvested, totaling $30 million on 82,800 outstanding awards. The following table summarizes information related to the Company’s PSUs as at December 31: Outstanding, January 1 Granted Units, in lieu of dividends Settled Forfeited Outstanding, December 31 2018 334,028 162,255 3,643 (66,243) (38,635) 395,048 2017 373,593 134,991 3,571 (133,728) (44,399) 334,028 In 2018, the expense for PSUs was $54 million (2017 – $30 million; 2016 – $29 million). At December 31, 2018, there was $29 million of total unrecognized compensation related to PSUs which is expected to be recognized over a weighted-average period of approximately 1.6 years.  CP 2018 ANNUAL REPORT / 123 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 Company's average share price using the 10 trading days prior to redemption. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated. Senior managers may elect to receive DSUs in lieu of annual bonus cash payments in the bonus deferral program. In addition, senior managers will be granted a 25% company match of DSUs when deferring cash to DSUs to meet ownership targets. The election to receive eligible payments in DSUs is no longer available to a participant when the value of the participant’s DSUs is sufficient to meet the Company’s stock ownership guidelines. Senior managers have 5 years to meet their ownership targets. An expense for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods. The following table summarizes information related to the DSUs as at December 31: Outstanding, January 1 Granted Units, in lieu of dividends Settled Forfeited Outstanding, December 31 2018 156,547 16,481 1,551 (20,072) (1,747) 152,760 2017 234,036 23,932 1,969 (33,682) (69,708) 156,547 During 2018, the Company granted 16,481 DSUs with a grant date fair value of approximately $4 million. In 2018, the expense for DSUs was $4 million (2017 – $3 million recovery; 2016 – $2 million expense). At December 31, 2018, there was $0.6 million of total unrecognized compensation related to DSUs which is expected to be recognized over a weighted-average period of approximately 1.0 years. Summary of share-based liabilities paid The following table summarizes the total share-based liabilities paid for each of the years ended December 31: (in millions of Canadian dollars) 2018 2017 2016 Plan PSUs DSUs Other Total $ $ 30 $ 6 1 37 $ 31 $ 6 2 39 $ 31 17 — 48 C. Employee share purchase plan The Company has an employee share purchase plan whereby both employee and the Company contributions are used to purchase shares on the open market for employees. The Company’s contributions are expensed over the one year vesting period. Under the plan, the Company matches $1 for every $3 contributed by employees up to a maximum employee contribution of 6% of annual salary. The total number of shares purchased in 2018 on behalf of participants, including the Company's contributions, was 118,865 (2017 – 130,041; 2016 – 140,560). In 2018, the Company’s contributions totalled $6 million (2017 – $5 million; 2016 – $5 million) and the related expense was $5 million (2017 – $4 million; 2016 – $5 million). 23 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 fixed price purchase options which create the Company’s variable interests and result in the trusts being considered variable interest entities. Maintaining and operating the leased assets according to specific contractual obligations outlined in the terms of the lease agreements and industry standards is the Company’s responsibility. The 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. 124 / CP 2018 ANNUAL REPORT 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 2018, lease payments after tax were $16 million. Future minimum lease payments, before tax, of $169 million will be payable over the next 12 years. The Company does not guarantee the residual value of the assets to the lessor; however, it must deliver to the lessor the assets in good operating condition, subject to normal wear and tear, at the end of the lease term. As the Company’s actions and decisions do not significantly affect the variable interest entities’ performance, and the Company’s fixed price purchase option is not considered to be potentially significant to the variable interest entities, the Company is not considered to be the primary beneficiary, and does not consolidate these variable interest entities. 24 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, 2018 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. However, an unexpected adverse resolution of one or more of these legal actions could have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year. Commitments At December 31, 2018, the Company had committed to total future capital expenditures amounting to $586 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 $1.2 billion for the years 2019–2032, of which CP estimates approximately $951 million will be incurred in the next five years. As at December 31, 2018, the Company’s commitments under operating leases were estimated at $485 million in aggregate, with minimum annual payments in each of the next five years and thereafter as follows: (in millions of Canadian dollars) Operating leases 2019 2020 2021 2022 2023 Thereafter Total minimum lease payments $ $ 90 71 55 50 49 170 485 Minimal rental expense for operating leases for the year ended December 31, 2018 was $97 million (2017 – $104 million; 2016 – $111 million). Legal proceedings related to Lac-Mégantic rail accident On July 6, 2013, a train carrying petroleum crude oil operated by Montreal Maine and Atlantic Railway (“MMAR”) or a subsidiary, Montreal Maine & Atlantic Canada Co. (“MMAC” and collectively the “MMA Group”), derailed in Lac-Mégantic, Québec. The derailment occurred on a section of railway owned and operated by the MMA Group. The previous day, CP had interchanged the train to the MMA Group, and after the interchange, the MMA Group exclusively controlled the train. In the wake of the derailment, MMAC sought court protection in Canada under the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 and MMAR filed for bankruptcy in the United States. Plans of arrangement have been approved in both Canada and the U.S. (the “Plans”). These Plans provide for the distribution of a fund of approximately $440 million amongst those claiming derailment damages. A number of legal proceedings, set out below, were commenced after the derailment in Canada and/or in the U.S. against CP and others: (1) Québec's Minister of Sustainable Development, Environment, Wildlife and Parks (the "Minister") ordered various parties, including CP, to clean up the derailment site (the “Cleanup Order”). CP appealed the Cleanup Order to the Administrative Tribunal of Québec (the “TAQ”). The Minister subsequently served a Notice of Claim seeking $95 million for compensation spent on cleanup. CP filed a contestation of the Notice of Claim with the TAQ (the “TAQ Proceeding”). CP and the Minister agreed to stay the TAQ Proceedings pending the outcome of the Province of Québec's action, described in the following paragraph. (2) Québec’s Attorney General sued CP in the Québec Superior Court initially claiming $409 million in damages, which claim was amended and reduced to $315 million (the “Province’s Action”). The Province’s Action alleges that CP exercised custody or control over the petroleum crude oil until its delivery to  CP 2018 ANNUAL REPORT / 125 Irving Oil and, further, that CP was negligent in its custody and control of the petroleum crude oil and is therefore jointly and severally liable with third parties responsible for the derailment and vicariously liable for the acts and omissions of MMAC. (3) A class action in the Québec Superior Court on behalf of persons and entities residing in, owning or leasing property in, operating a business in or physically present in Lac-Mégantic at the time of the derailment (the “Class Action”) was certified against CP, MMAC and the train conductor, Mr. Thomas Harding. The Class Action seeks unquantified damages, including for wrongful death, personal injury, and property damage arising from the derailment. All known wrongful death claimants in the Class Action have opted out and, by court order, cannot re-join the Class Action. (4) Eight subrogated insurers sued CP in the Québec Superior Court initially claiming approximately $16 million in damages, which claim was amended and reduced to $14 million (the “Promutuel Action”). Two additional subrogated insurers sued CP in the Québec Superior Court claiming approximately $3 million in damages (the “Royal Action”). Both Actions contain essentially the same allegations as the Province’s Action. The lawsuits do not identify the parties to which the insurers are subrogated, and therefore the extent to which these claims overlap with the proof of claims process under the Plans is difficult to determine at this stage. The Royal Action has been stayed pending the determination of the consolidated proceedings described below. The Province’s Action, the Class Action and the Promutuel Action have been consolidated and will proceed together through the litigation process in the Québec Superior Court. While each Action will remain a separate legal proceeding, there will be a trial to determine liability issues commencing mid-September 2020, and subsequently, if necessary, a trial to determine damages issues. (5) Forty-eight plaintiffs (all individual claims joined in one action) sued CP, MMAC and Harding in the Québec Superior Court claiming approximately $5 million in damages for economic loss and pain and suffering. These plaintiffs assert essentially the same allegations as those contained in the Class Action and the Province’s Action against CP. The plaintiffs assert they have opted-out of the Class Action. All but two of the plaintiffs were plaintiffs in litigation against CP, described below, that originated in the U.S. who either withdrew their claims or had their case dismissed in the U.S. (6) An adversary proceeding commenced against CP in November 2014 in the Maine Bankruptcy Court by the MMAR U.S. estate representative (“Estate Representative”) accuses CP of failing to abide by certain regulations (the “Adversary Proceeding”). The Estate Representative alleges that CP knew or ought to have known that the shipper had misclassified the petroleum crude oil and therefore should have refused to transport it.The Estate Representative seeks damages for MMAR’s business value (as yet unquantified) allegedly destroyed by the derailment. (7) A class action and mass tort action on behalf of Lac-Mégantic residents and wrongful death representatives commenced in Texas in June 2015 and wrongful death and personal injury actions commenced in Illinois and Maine in June 2015 against CP were all removed and subsequently transferred and consolidated in Federal District Court in Maine (the “Maine Actions”). The Maine Actions allege that CP negligently misclassified and mis-packaged the petroleum crude oil being shipped. On CP’s motion, the Maine Actions were dismissed by the Court on several grounds. The plaintiffs are appealing the dismissal decision. (8) The Trustee (“WD Trustee”) for the wrongful death trust (“WD Trust”), as defined and established by the Estate Representative under the Plans, asserts Carmack Amendment claims against CP in North Dakota federal court (the “Carmack Claims”). The WD Trustee seeks to recover approximately $6 million for damaged rail cars and lost crude and recover the settlement amounts the consignor and the consignee paid to the bankruptcy estates, alleged to be $110 million and $60 million, respectively. On CP’s motion, the District Court in North Dakota dismissed the Carmack Claims on timeliness grounds, but the Eighth Circuit Court of Appeals ("8CCA") reversed that decision. CP sought reconsideration by the 8CCA.That appeal was dismissed. CP will be seeking judicial review of this decision with the Supreme Court in February 2019. Failing this judicial review, CP will seek dismissal of the Carmack Claims on various other grounds. At this stage of the proceedings, any potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, CP denies liability and is vigorously defending the above noted proceedings. 25 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 $2 million at December 31, 2018; • 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, 2018, these accruals amounted to $10 million (2017 – $9 million), and are recorded in “Accounts payable and accrued liabilities". 126 / CP 2018 ANNUAL REPORT Indemnifications Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Plan, the Company has undertaken to indemnify and save harmless the trustee, to the extent not paid by the fund, from any and all taxes, claims, liabilities, damages, costs, and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The indemnity includes liabilities, costs, or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined benefit and defined contribution options of the pension plans, or otherwise with respect to the assets of the pension plans that are not part of the fund. The indemnity survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry. At December 31, 2018, the Company had not recorded a liability associated with this indemnification, as it does not expect to make any payments pertaining to it. 26 Segmented and geographic 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, 2018, 2017, and 2016, no one customer comprised more than 10% of total revenues and accounts receivable. Geographic information (in millions of Canadian dollars) 2018 Revenues Long-term assets excluding financial instruments and pension assets 2017 Revenues(1) Long-term assets excluding financial instruments and pension assets 2016 Revenues(1) Long-term assets excluding financial instruments and pension assets (1) Prior years amounts have not been adjusted under the modified retrospective method (Note 2). 27 Selected quarterly data (unaudited) Canada United States Total $ $ $ $ $ $ 5,232 $ 12,133 $ 4,667 $ 11,505 $ 4,473 $ 11,000 $ 2,084 $ 6,759 $ 1,887 $ 5,947 $ 1,759 $ 6,121 $ 7,316 18,892 6,554 17,452 6,232 17,121 For the quarter ended (in millions of Canadian dollars, except per share data) 2018 2017 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 $ 2,006 $ Total revenues Operating income(1) Net income Basic earnings per share(2) Diluted earnings per share(2) 2.93 (1) Comparative period figures have been restated for the retrospective adoption of ASU 2017-07, discussed further in this Item 8. Financial Statements and Supplementary Data, Note 2 1,662 $ 1,898 $ 1,750 $ 1,643 $ 1,713 $ 1,595 $ 2.41 $ 3.84 $ 4.36 $ 3.05 $ 3.28 $ 3.50 $ 6.79 $ 1,603 4.35 3.04 3.83 2.41 3.50 6.77 3.27 2.94 790 874 622 545 436 540 627 348 431 604 480 611 510 984 682 622 $ Accounting changes. (2) Earnings per share for the four quarters combined may not equal earnings per share for the year due to rounding.  CP 2018 ANNUAL REPORT / 127 28 Condensed consolidating financial information Canadian Pacific Railway Company, a 100%-owned subsidiary of CPRL, is the issuer of certain debt securities, which are fully and unconditionally guaranteed by CPRL. The following tables present condensed consolidating financial information (“CCFI”) in accordance with Rule 3-10(c) of Regulation S-X. Investments in subsidiaries are accounted for under the equity method when presenting the CCFI. The tables include all adjustments necessary to reconcile the CCFI on a consolidated basis to CPRL’s Consolidated Financial Statements for the years presented. CONDENSED CONSOLIDATING STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 2018 (in millions of Canadian dollars) Revenues Freight Non-freight Total revenues Operating expenses Compensation and benefits Fuel Materials Equipment rents Depreciation and amortization Purchased services and other Total operating expenses Operating income Less: Other expense (income) Other components of net periodic benefit (recovery) cost Net interest expense (income) (Loss) income before income tax (recovery) expense and equity in net earnings of subsidiaries Less: Income tax (recovery) expense Add: Equity in net earnings of subsidiaries Net income $ CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non-Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ — $ 5,098 $ 2,054 $ — — — — — — — — — — 19 — 3 (22) (4) 1,969 1,951 $ 120 5,218 996 716 139 137 424 886 3,298 1,920 193 (386) 478 1,635 469 803 361 2,415 466 202 49 (7) 272 522 1,504 911 (38) 2 (28) 975 172 — 1,969 $ 803 $ — $ (317) (317) 6 — 13 — — (336) (317) — — — — — — (2,772) (2,772) $ 7,152 164 7,316 1,468 918 201 130 696 1,072 4,485 2,831 174 (384) 453 2,588 637 — 1,951 128 / CP 2018 ANNUAL REPORT CONDENSED CONSOLIDATING STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 2017 (in millions of Canadian dollars) Revenues Freight Non-freight Total revenues Operating expenses Compensation and benefits Fuel Materials Equipment rents Depreciation and amortization Purchased services and other Total operating expenses Operating income Less: Other (income) expense Other components of net periodic benefit (recovery) cost Net interest (income) expense Income before income tax expense (recovery) and equity in net earnings of subsidiaries Less: Income tax expense (recovery) Add: Equity in net earnings of subsidiaries Net income CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non-Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ — $ 4,516 $ 1,859 $ — — — — — — — — — — (33) — (12) 45 7 2,367 2,405 $ $ 140 4,656 879 522 134 143 400 826 2,904 1,752 (149) (278) 517 1,662 475 1,180 372 2,231 423 155 41 (1) 261 585 1,464 767 4 4 (32) 791 (389) — 2,367 $ 1,180 $ — $ (333) (333) 7 — 15 — — (355) (333) — — — — — — (3,547) (3,547) $ 6,375 179 6,554 1,309 677 190 142 661 1,056 4,035 2,519 (178) (274) 473 2,498 93 — 2,405 Certain of these figures have been reclassified in order to be consistent with the 2018 presentation (Note 2).  CP 2018 ANNUAL REPORT / 129 CONDENSED CONSOLIDATING STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 2016 (in millions of Canadian dollars) Revenues Freight Non-freight Total revenues Operating expenses Compensation and benefits Fuel Materials Equipment rents Depreciation and amortization Purchased services and other Total operating expenses Operating income Less: Other (income) expense Other components of net periodic benefit (recovery) cost Net interest expense (income) Income before income tax expense and equity in net earnings of subsidiaries Less: Income tax expense Add: Equity in net earnings of subsidiaries Net income CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non-Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ — $ 4,332 $ 1,728 $ — — — — — — — — — — (40) — 1 39 6 1,566 1,599 $ $ 134 4,466 923 458 130 204 422 673 2,810 1,656 (34) (174) 493 1,371 337 532 386 2,114 427 109 32 (31) 218 604 1,359 755 29 7 (23) 742 210 — 1,566 $ 532 $ — $ (348) (348) 6 — 18 — — (372) (348) — — — — — — (2,098) (2,098) $ 6,060 172 6,232 1,356 567 180 173 640 905 3,821 2,411 (45) (167) 471 2,152 553 — 1,599 Certain of these figures have been reclassified in order to be consistent with the 2018 presentation (Note 2). 130 / CP 2018 ANNUAL REPORT CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2018 (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 income (loss) before income taxes Income tax recovery (expense) on above items Equity accounted investments Other comprehensive (loss) income Comprehensive income CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non- Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ 1,951 $ 1,969 $ 803 $ (2,772) $ 1,951 — — — — — (302) (302) (479) 38 (455) (896) 171 423 (302) 419 — 6 425 (2) — 423 — — — — — (121) (121) $ 1,649 $ 1,667 $ 1,226 $ (2,893) $ (60) 38 (449) (471) 169 — (302) 1,649 CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2017 (in millions of Canadian dollars) Net income Net gain (loss) 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 income (loss) before income taxes Income tax (expense) recovery on above items Equity accounted investments Other comprehensive income (loss) Comprehensive income CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non- Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ 2,405 $ 2,367 $ 1,180 $ (3,547) $ 2,405 — — — — — 58 58 318 19 82 419 (66) (295) 58 $ 2,463 $ 2,425 $ (294) — (2) (296) 1 — (295) 885 $ — — — — — 237 237 24 19 80 123 (65) — 58 (3,310) $ 2,463  CP 2018 ANNUAL REPORT / 131 CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2016 (in millions of Canadian dollars) Net income Net gain (loss) 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 income (loss) before income taxes Income tax recovery (expense) on above items Equity accounted investments Other comprehensive loss Comprehensive income CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non- Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ 1,599 $ 1,566 $ 532 $ (2,098) $ 1,599 — — — — — (322) (322) 149 (2) (443) (296) 99 (125) (322) $ 1,277 $ 1,244 $ (131) — 9 (122) (3) — (125) 407 $ — — — — — 447 447 (1,651) $ 18 (2) (434) (418) 96 — (322) 1,277 132 / CP 2018 ANNUAL REPORT CONDENSED CONSOLIDATING BALANCE SHEETS AS AT DECEMBER 31, 2018 (in millions of Canadian dollars) Assets Current assets Cash and cash equivalents Accounts receivable, net Accounts receivable, intercompany Short-term advances to affiliates Materials and supplies Other current assets Long-term advances to affiliates Investments Investments in subsidiaries Properties Goodwill and intangible assets Pension asset Other assets Deferred income taxes Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable and accrued liabilities Accounts payable, intercompany Short-term advances from affiliates Long-term debt maturing within one year Pension and other benefit liabilities Long-term advances from affiliates Other long-term liabilities Long-term debt Deferred income taxes Total liabilities Shareholders’ equity Share capital Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non-Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ — $ — 125 — — — 125 1,090 — 11,443 — — — — 6 42 629 167 1,602 136 39 2,615 5 24 12,003 9,579 — 1,243 57 — $ 19 $ — $ 186 224 4,651 37 29 5,146 93 179 — 8,839 202 — 14 — — (516) (6,253) — — (6,769) (1,188) — (23,446) — — — — (6) 61 815 — — 173 68 1,117 — 203 — 18,418 202 1,243 71 — $ $ 12,664 $ 25,526 $ 14,473 $ (31,409) $ 21,254 115 $ 1,017 $ 317 $ — $ 1,449 4 5,909 — 6,028 — — — — — 344 341 506 2,208 639 1,182 120 8,135 1,799 6,028 14,083 2,002 42 (2,043) 6,635 6,636 538 1,656 (2,043) 11,292 11,443 168 3 — 488 79 6 117 55 1,725 2,470 5,946 92 839 5,126 12,003 (516) (6,253) — (6,769) — (1,188) — — (6) (7,963) (6,484) (1,748) 1,204 (16,418) (23,446) — — 506 1,955 718 — 237 8,190 3,518 14,618 2,002 42 (2,043) 6,635 6,636 21,254 Total liabilities and shareholders’ equity $ 12,664 $ 25,526 $ 14,473 $ (31,409) $  CP 2018 ANNUAL REPORT / 133 CONDENSED CONSOLIDATING BALANCE SHEETS AS AT DECEMBER 31, 2017 (in millions of Canadian dollars) Assets Current assets Cash and cash equivalents Accounts receivable, net Accounts receivable, intercompany Short-term advances to affiliates Materials and supplies Other current assets Long-term advances to affiliates Investments Investments in subsidiaries Properties Goodwill and intangible assets Pension asset Other assets Deferred income taxes Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable and accrued liabilities Accounts payable, intercompany Short-term advances from affiliates Long-term debt maturing within one year Pension and other benefit liabilities Long-term advances from affiliates Other long-term liabilities Long-term debt Deferred income taxes Total liabilities Shareholders’ equity Share capital Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings $ $ CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non-Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated $ — $ — 97 500 — — 597 590 — 10,623 — — — — 3 241 508 153 1,004 120 31 2,057 — 27 12,122 8,982 — 1,407 56 — $ 97 $ — $ 179 215 4,996 32 66 5,585 410 155 — 8,034 187 — 13 — — (465) (6,500) — — (6,965) (1,000) — (22,745) — — — — (3) 338 687 — — 152 97 1,274 — 182 — 17,016 187 1,407 69 — 11,813 $ 24,651 $ 14,384 $ (30,713) $ 20,135 82 $ 3 5,291 — 5,376 — — — — — 844 309 1,185 746 3,084 672 1,000 108 7,362 1,802 5,376 14,028 2,032 43 (1,741) 6,103 6,437 1,037 1,643 (1,742) 9,685 10,623 $ 312 $ — $ 153 24 — 489 77 — 123 51 1,522 2,262 6,730 259 417 4,716 12,122 (465) (6,500) — (6,965) — (1,000) — — (3) (7,968) (7,767) (1,902) 1,325 (14,401) (22,745) 1,238 — — 746 1,984 749 — 231 7,413 3,321 13,698 2,032 43 (1,741) 6,103 6,437 20,135 Total liabilities and shareholders’ equity $ 11,813 $ 24,651 $ 14,384 $ (30,713) $ 134 / CP 2018 ANNUAL REPORT CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2018 (in millions of Canadian dollars) CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non- Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated Cash provided by operating activities $ 316 $ 1,968 $ 1,128 $ (700) $ 2,712 Investing activities Additions to properties Proceeds from sale of properties and other assets Advances to affiliates Repayment of advances to affiliates Repurchase of share capital from affiliates Other Cash provided by (used in) investing activities Financing activities Dividends paid Return of share capital to affiliates Issuance of CP Common Shares Purchase of CP Common Shares Issuance of long-term debt, excluding commercial paper Repayment of long-term debt, excluding commercial paper Advances from affiliates Repayment of advances from affiliates Cash used in financing activities Effect of foreign currency fluctuations on U.S. dollar- denominated cash and cash equivalents Cash position Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year — — — — 500 — 500 (348) — 24 (1,103) — — 820 (209) (816) — — — (971) 35 (611) — 964 18 (565) (348) (500) — — 638 (753) — (657) (580) 43 (209) 866 — (3) 117 (352) (964) — — — — — — (1,620) (1,316) 18 (199) 241 (7) (78) 97 — — 820 (866) (1,464) — (1,510) 700 1,464 — — — — (820) 866 2,210 — — — $ — $ 42 $ 19 $ — $ (1,551) 78 — — — 15 (1,458) (348) — 24 (1,103) 638 (753) — — (1,542) 11 (277) 338 61  CP 2018 ANNUAL REPORT / 135 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2017 (in millions of Canadian dollars) CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non- Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated Cash provided by operating activities $ 338 $ 1,334 $ 989 $ (479) $ 2,182 Investing activities Additions to properties Proceeds from sale of properties and other assets Advances to affiliates Repayment of advances to affiliates Capital contributions to affiliates Repurchase of share capital from affiliates Other — — (590) — — — — (950) 29 (550) 242 (1,039) 156 5 (390) 13 (1,528) 243 — — (2) Cash used in investing activities (590) (2,107) (1,664) Financing activities Dividends paid Issuance of share capital Return of share capital to affiliates Issuance of CP Common Shares Purchase of CP Common Shares Repayment of long-term debt, excluding commercial paper Advances from affiliates Repayment of advances from affiliates Settlement of forward starting swaps Cash provided by (used in) financing activities Effect of foreign currency fluctuations on U.S. dollar- denominated cash and cash equivalents Cash position Increase in cash and cash equivalents Cash and cash equivalents at beginning of year (310) (310) — — 45 (381) — 1,383 (485) — 252 — — — — — — — (32) 1,285 — (22) 921 (7) 141 100 (169) 1,039 (156) — — — — — — 714 (6) 33 64 — — 2,668 (485) 1,039 (156) — 3,066 479 (1,039) 156 — — — (2,668) 485 — (2,587) — — — Cash and cash equivalents at end of year $ — $ 241 $ 97 $ — $ (1,340) 42 — — — — 3 (1,295) (310) — — 45 (381) (32) — — (22) (700) (13) 174 164 338 136 / CP 2018 ANNUAL REPORT CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2016 (in millions of Canadian dollars) CPRL (Parent Guarantor) CPRC (Subsidiary Issuer) Non- Guarantor Subsidiaries Consolidating Adjustments and Eliminations CPRL Consolidated Cash provided by operating activities $ 255 $ 1,424 $ 879 $ (469) $ 2,089 Investing activities Additions to properties Proceeds from sale of properties and other assets Advances to affiliates Repayment of advances to affiliates Capital contributions to affiliates Repurchase of share capital from affiliates Other Cash used in investing activities Financing activities Dividends paid Issuance of share capital Return of share capital to affiliates Issuance of CP Common Shares Purchase of CP Common Shares Repayment of long-term debt, excluding commercial paper Net repayment of commercial paper Advances from affiliates Repayment of advances from affiliates Other Cash (used in) provided by financing activities Effect of foreign currency fluctuations on U.S. dollar- denominated cash and cash equivalents Cash position Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year — — — — — — — — (728) 102 (664) 222 (472) 8 — (1,532) (255) (255) — — 21 (1,210) — — 1,189 — — (255) — — — — — — — (24) (8) — — (3) (290) (4) (402) 502 Cash and cash equivalents at end of year $ — $ 100 $ (454) 14 (539) — — — (3) (982) (214) 472 (8) — — (14) — 14 (222) — 28 (9) (84) 148 64 $ — — 1,203 (222) 472 (8) — 1,445 469 (472) 8 — — — — (1,203) 222 — (976) — — — — $ (1,182) 116 — — — — (3) (1,069) (255) — — 21 (1,210) (38) (8) — — (3) (1,493) (13) (486) 650 164  CP 2018 ANNUAL REPORT / 137 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of December 31, 2018, an evaluation was carried out under the supervision of and with the participation of CP's management, including CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures were effective as of December 31, 2018, to ensure that information required to be disclosed by the Company in reports that they file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Management's Report on Internal Control over Financial Reporting Management is responsible for the financial statements and for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018. All internal control systems, no matter how well designed, have inherent limitations.Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and preparation of financial statements in accordance with generally accepted accounting principles. The effectiveness of the Company's internal control over financial reporting as of December 31, 2018 has been audited by Deloitte LLP, the Company's independent registered public accounting firm, as stated in their report, which is included herein. Changes in Internal Control over Financial Reporting During the three months ended December 31, 2018, the Company has not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 138 / CP 2018 ANNUAL REPORT Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Canadian Pacific Railway Limited Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Canadian Pacific Railway Limited and subsidiaries (the "Company") as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 15, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s change in method of accounting for the presentation of current period service costs due to the adoption of the Accounting Standards Update No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Basis for Opinion 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to 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. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed 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 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. /s/ Deloitte LLP Chartered Professional Accountants Calgary, Canada February 15, 2019  CP 2018 ANNUAL REPORT / 139 ITEM 9B. OTHER INFORMATION None. 140 / CP 2018 ANNUAL REPORT PART III  CP 2018 ANNUAL REPORT / 141 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors of Registrant The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. This information will also be contained in the management proxy information that we prepare in accordance with Canadian corporate and securities law requirements. Executive Officers of Registrant The information regarding executive officers is included in Part I of this report under Executive Officers of the Registrant, following Item 4. Mine Safety Disclosures. Compliance with Section 16(a) of the Exchange Act The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. Code of Ethics for Chief Executive Officer and Senior Financial Officers The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. This information will also be contained in the management proxy information that we prepare in accordance with Canadian corporate and securities law requirements. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. This information will also be contained in the management proxy information that we prepare in accordance with Canadian corporate and securities law requirements. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2018. This information will also be contained in the management proxy information that we prepare in accordance with Canadian corporate and securities law requirements. 142 / CP 2018 ANNUAL REPORT PART IV  CP 2018 ANNUAL REPORT / 143 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE The following documents are filed as part of this report: (a) Financial Statements The financial statements filed as part of this filing are listed on the Index to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. (b) Financial Statement Schedule Schedule II – Valuation and Qualifying Accounts (in millions of Canadian dollars) Accruals for personal injury, damage and other claims provision(1) Beginning balance at January 1 Additions charged to expenses Payments and other reductions Impact of FX Ending balance at December 31 2016 2017 2018 Environmental liabilities 2016 2017 $ $ $ $ $ 2018 (1) Includes WCB, FELA, occupational, damage and other claims. $ (c) Exhibits 133 $ 130 $ 118 $ 93 $ 85 $ 78 $ 67 $ 66 $ 93 $ 6 $ 5 $ 6 $ (71) $ (77) $ (60) $ (12) $ (8) $ (7) $ 1 $ (1) $ 1 $ (2) $ (4) $ 5 $ 130 118 152 85 78 82 Exhibits are listed in the exhibit index below. The exhibits include management contracts, compensatory plans and arrangements required to be filed as exhibits to the Form 10-K by Item 601 (10) (iii) of Regulation S-K. Exhibit 3 Description Articles of Incorporation and Bylaws: 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 Restated Certificate and Articles of Incorporation of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 99.2 to Canadian Pacific Railway Limited’s Form 6-K filed with the Securities and Exchange Commission on October 22, 2015, File No. 001-01342). By-law No. 1, as amended, of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 1 to Canadian Pacific Railway Limited’s Form 6-K filed with the Securities and Exchange Commission on May 22, 2009, File No. 001-01342). By-law No. 2 of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 99.1 to Canadian Pacific Railway Limited’s Form 6-K filed with the Securities and Exchange Commission on March 13, 2015, File No. 001-01342). General By-law, as amended, of Canadian Pacific Railway Company, a wholly owned subsidiary of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 2 to Canadian Pacific Railway Limited’s Form 6-K filed with the Securities and Exchange Commission on May 22, 2009, File No. 001-01342). Instruments Defining the Rights of Security Holders, Including Indentures: Indenture dated as of May 8, 2007 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). First Supplemental Indenture dated as of May 8, 2007 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.2 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Second Supplemental Indenture dated as of May 20, 2008 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.3 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). 144 / CP 2018 ANNUAL REPORT 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 Third Supplemental Indenture dated as of May 15, 2009 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.4 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Fourth Supplemental Indenture dated as of September 23, 2010 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.5 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Fifth Supplemental Indenture dated as of December 1, 2011 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.6 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Sixth Supplemental Indenture dated as of February 2, 2015 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.7 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Seventh Supplemental Indenture dated as of August 3, 2015 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.8 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Eighth Supplemental Indenture dated as of November 24, 2015 among Canadian Pacific Railway Limited, Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.9 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Indenture dated as of October 30, 2001 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.10 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). First Supplemental Indenture dated as of April 23, 2004 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.11 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Second Supplemental Indenture dated as of October 12, 2011 between Canadian Pacific Railway Limited and The Bank of New York Mellon (incorporated by reference to Exhibit 4.12 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Third Supplemental Indenture dated as of October 13, 2011 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.13 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Fourth Supplemental Indenture dated as of November 24, 2015 among Canadian Pacific Railway Limited, Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.14 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Indenture dated as of July 15, 1991 between Canadian Pacific Railway Company and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.15 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). First Supplemental Indenture dated as of July 1, 1996 between Canadian Pacific Railway Company and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.16 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Second Supplemental Indenture dated as of November 24, 2015 among Canadian Pacific Railway Limited, Canadian Pacific Railway Company and The Bank of New York Mellon (as successor in interest to Harris Trust and Savings Bank) (incorporated by reference to Exhibit 4.17 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Indenture dated as of May 23, 2008 between Canadian Pacific Railway Company and Computershare Trust Company of Canada (incorporated by reference to Exhibit 4.18 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). First Supplemental Indenture dated as of November 24, 2015 among Canadian Pacific Railway Limited, Canadian Pacific Railway Company and Computershare Trust Company of Canada (incorporated by reference to Exhibit 4.19 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Indenture dated as of September 11, 2015, from Canadian Pacific Railway Company to Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 99.1 to Canadian Pacific Railway Limited’s Registration Statement on Form 6-K filed with the Securities and Exchange Commission on September 14, 2015, File No. 001-01342). First Supplemental Indenture dated as of September 11, 2015 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.21 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Second Supplemental Indenture dated as of November 24, 2015 among Canadian Pacific Railway Limited, Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference to Exhibit 4.22 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342).  CP 2018 ANNUAL REPORT / 145 4.23 4.24 10 10.1* 10.2 10.3* 10.4* 10.5* 10.6* 10.7 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* Guarantee of Canadian Pacific Railway Company’s Perpetual 4% Consolidated Debenture Stock dated as of December 18, 2015, between Canadian Pacific Railway Limited and Canadian Pacific Railway Company (incorporated by reference to Exhibit 4.23 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Third Supplemental Indenture dated as of May 16, 2018 among Canadian Pacific Railway Limited, Canadian Pacific Railway Company and Wells Fargo Bank (incorporated by reference to Exhibit 4.2 to Canadian Pacific Railway Limited's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2018, File No. 001-01342). Material Contracts: Compensation letter dated February 14, 2017, between the Company and Nadeem Velani (incorporated by reference to Exhibit 10.1 Canadian Pacific Railway Limited's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 21, 2017, File No. 001-01342). Fourth Amending Agreement, dated as of June 23, 2017, amending the Credit Agreement, dated September 26, 2014, between Canadian Pacific Railway Company, as Borrower, Canadian Pacific Railway Limited, as Covenantor, Royal Bank of Canada, as Administrative Agent, and the various Lenders party thereto (incorporated by reference to Exhibit 10.1 Canadian Pacific Railway Limited's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 27, 2017, File No. 001-01342). Amendment dated as of January 31, 2017 to the Executive Employment Agreement dated July 23, 2016 and effective as of July 1, 2017 between Keith Creel and Canadian Pacific Railway Company (incorporated by reference to Exhibit 10.1 to Canadian Pacific Railway Limited's Form 10-K filed with the Securities and Exchange Commission on February 16, 2017, File No. 001-01342). Offer of Employment Letter to Robert Johnson dated April 19, 2016 (incorporated by reference to Exhibit 10.2 to Canadian Pacific Railway Limited's Form 10-K filed with the Securities and Exchange Commission on February 16, 2017, File No. 001-01342). Offer of Employment Letter to Nadeem Velani dated October 18, 2016 (incorporated by reference to Exhibit 10.3 Canadian Pacific Railway Limited’s Registration Statement on Form 8-K filed with the Securities and Exchange Commission on October 24, 2016, File No. 001-01342). Executive Employment Agreement,between the Canadian Pacific Railway Limited and Keith Creel effective July 1,2017 (incorporated by reference to Exhibit 10.2 to Canadian Pacific Railway Limited’s Registration Statement on Form 8-K filed with the Securities and Exchange Commission on July 26, 2016, File No. 001-01342). Third Amending Agreement, dated as of June 28, 2016, amending the Credit Agreement, dated September 26, 2014, between Canadian Pacific Railway Company, as Borrower, Canadian Pacific Railway Limited, as Covenantor, Royal Bank of Canada, as Administrative Agent, and the various Lenders party thereto (incorporated by reference to Exhibit 10.1 to Canadian Pacific Railway Limited’s Registration Statement on Form 8-K filed with the Securities and Exchange Commission on June 29, 2016, File No. 001-01342). CP 401(k) Savings Plan, as amended and restated effective October 27, 2014 (incorporated by reference to Exhibit 4.5 to Canadian Pacific Railway Limited's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on December 21, 2015, File No. 333-208647). Stand-Alone Option Agreement dated February 4, 2013 between the Registrant and Keith Creel (incorporated by reference to Exhibit 4.2 to Canadian Pacific Railway Limited’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 24, 2013, File No. 333-188827). Performance Share Unit Plan for Eligible Employees of Canadian Pacific Railway Limited, adopted with effect from February 17, 2009, as amended February 22, 2013,April 30, 2014 and February 18, 2015 (incorporated by reference to Exhibit 10.3 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific Railway Limited Amended and Restated Management Stock Option Incentive Plan, as amended and restated effective November 19, 2015 (incorporated by reference to Exhibit 10.4 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific Railway Limited Employee Share Purchase Plan (U.S.) dated July 1, 2006 ("ESPP (U.S.)"), and Amendment to the ESPP (U.S.) effective January 1, 2015, and Amendment to the ESPP (U.S.) January 1, 2016 (incorporated by reference to Exhibit 10.5 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Directors' Stock Option Plan, effective October 1, 2001 (incorporated by reference to Exhibit 10.7 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Directors' Deferred Share Unit Plan, as amended effective July 1, 2013 (incorporated by reference to Exhibit 10.8 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Senior Executives' Deferred Share Unit Plan, effective as of January 1, 2001, as amended September 6, 2012 (incorporated by reference to Exhibit 10.9 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific Railway Limited Employee Share Purchase Plan (Canada) dated July 1, 2006 ("ESPP (Canada)"), and Amendment to the ESPP (Canada) effective January 1, 2013, and Amendment to the ESPP (Canada) effective November 5, 2013, and Amendment to the ESPP (Canada) effective July 17, 2014 (incorporated by reference to Exhibit 10.10 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). 146 / CP 2018 ANNUAL REPORT 10.17* 10.18* 10.19* 10.20* 10.21* 10.22* 10.23* 10.24* 10.25* 10.26* 10.27* 10.28* 10.29* 10.30* 10.31* 10.32* 10.33* 10.34* Canadian Pacific U.S. Salaried Retirement Income Plan, as restated effective January 1, 2015 (incorporated by reference to Exhibit 10.11 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific U.S. Supplemental Executive Retirement Plan, effective January 1, 2013 ("CPUSERP"), and First Amendment to the CPUSERP effective November 14, 2013, and Second Amendment to the CPUSERP effective January 1, 2014 (incorporated by reference to Exhibit 10.12 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Restricted Share Unit Plan for Eligible Employees of Canadian Pacific Railway Limited, effective August 2, 2011, as amended February 21, 2013 (incorporated by reference to Exhibit 10.13 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). ShortTerm Incentive Plan for Non-Unionized Employees (Canada) and US Salaried Employees,effective January 1,2014 (incorporated by reference to Exhibit 10.14 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.15 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 1, effective July 1, 2010, to the Defined Contribution Provisions (Appendix B) of the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.16 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 2, effective April 1, 2011, to the Defined Contribution Provisions (Appendix B) of the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.17 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 3, effective January 1, 2013, to the Defined Contribution Provisions (Appendix B) of the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.18 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 1 to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009, approved by the Board of Directors on December 16, 2009 (incorporated by reference to Exhibit 10.19 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 2, effective January 1, 2010, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.20 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 3, effective January 1, 2010, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.21 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 4, effective January 1, 2011, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.22 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 5, effective January 1, 2011, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.23 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 6, effective October 1, 2012, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.24 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 7, effective January 1, 2013, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.25 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 8, effective January 1, 2013, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.26 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 9, effective January 1, 2013, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.27 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 10, effective January 1, 2013, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.28 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342).  CP 2018 ANNUAL REPORT / 147 10.35* 10.36* 10.37* 10.38* 10.39* 10.40* 10.41* 10.42* 10.43* 10.44* 10.45 10.46 10.47 10.48 Amendment Number 11, effective January 1, 2013, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.29 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 12, effective January 1, 2015, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.30 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 13, effective January 1, 2015, to the Canadian Pacific Railway Company Pension Plan (Pension Plan Rules), consolidated as at January 1, 2009 (incorporated by reference to Exhibit 10.31 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific Railway Company Secondary Pension Plan (Pension Plan Rules), effective June 1, 2013 (incorporated by reference to Exhibit 10.32 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 1, effective June 1, 2013, to the Canadian Pacific Railway Company Secondary Pension Plan (Pension Plan Rules), effective June 1, 2013 (incorporated by reference to Exhibit 10.33 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment Number 2, effective January 1, 2015, to the Canadian Pacific Railway Company Secondary Pension Plan (Pension Plan Rules) effective January 1, 2015 (incorporated by reference to Exhibit 10.34 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Canadian Pacific Supplemental Executive Retirement Plan, effective January 1, 2011 (incorporated by reference to Exhibit 10.35 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Executive EmploymentAgreement between Canadian Pacific Railway Company,Soo Line Railroad Company and Keith Creel,effective as of February 5, 2013 (incorporated by reference to Exhibit 10.38 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Amendment dated August 10, 2015, to the Executive Employment Agreement between Canadian Pacific Railway Company, Soo Line Railroad Company and Keith Creel, effective as of February 5, 2013 (incorporated by reference to Exhibit 10.39 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Offer of Employment Letter to Laird Pitz dated March 7, 2014 (incorporated by reference to Exhibit 10.44 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Credit Agreement dated as of September 26, 2014 among Canadian Pacific Railway Company and CPR Securities Limited, as borrowers, Canadian Pacific Railway Limited, as covenantor, the Financial Institutions that are signatories to the Credit Agreement, as Lenders, the Royal Bank of Canada, as Administrative Agent, RBC Capital Markets, J.P. Morgan Securities LLC, TD Securities, Morgan Stanley MUFG Loan Partners, LLC and Citibank, N.A., Canadian Branch, as Co-Lead Arrangers, RBC Capital Markets and J.P. Morgan Securities LLC, as Joint Bookrunners, J.P. Morgan Chase Bank, N.A., as Syndication Agent, The Toronto-Dominion Bank, Morgan Stanley MUFG Loan Partners, LLC and Citibank, N.A., Canadian Branch, as Co-Documentation Agents (incorporated by reference to Exhibit 10.45 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). First Amending Agreement dated as of June 15, 2015, to the Credit Agreement dated September 26, 2014, among Canadian Pacific Railway Company and CPR Securities Limited, as borrowers, Canadian Pacific Railway Limited, as covenantor, the signatories to this First Amending Agreement to the Credit Agreement,as Lenders,the Royal Bank of Canada,as Administrative Agent (incorporated by reference to Exhibit 10.46 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Second Amending Agreement dated as of September 17, 2015, to the Credit Agreement dated September 26, 2014, among Canadian Pacific Railway Company and CPR Securities Limited, as borrowers, Canadian Pacific Railway Limited, as covenantor, the signatories to the Second Amending Agreement to this Credit Agreement, as Lenders, the Royal Bank of Canada, as Administrative Agent (incorporated by reference to Exhibit 10.47 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342). Fifth Amending Agreement, dated as of June 8, 2018, amending the Credit Agreement, dated September 26, 2014, between Canadian Pacific Railway Company, as Borrower, Canadian Pacific Railway Limited, as Covenantor, Royal Bank of Canada, as Administrative Agent, and the various Lenders party thereto (incorporated by reference to Exhibit 10.1 Canadian Pacific Railway Limited's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 11, 2018, File No. 001-01342). 10.49 * ** Amendment dated as of January 1, 2019, to the Executive Employment Agreement between Canadian Pacific Railway Company and Keith Creel, dated July 23, 2016 and effective as of July 1, 2017 as amended as of January 31, 2017. 21.1** 23.1** 24.1** 31.1** 31.2** Subsidiaries of the registrant Consent of Independent Registered Public Accounting Firm Power of attorney (included on the signature pages of this Form 10-K) CEO Rule 13a-14(a) Certifications CFO Rule 13a-14(a) Certifications 148 / CP 2018 ANNUAL REPORT 32.1** 32.2** 101.INS** 101.SCH** 101.CAL** 101.LAB** 101.DEF** 101.PRE** CEO Section 1350 Certifications CFO Section 1350 Certifications Inline XBRL Instance Document Inline XBRL Taxonomy Extension Schema Document Inline XBRL Taxonomy Extension Calculation Linkbase Document Inline XBRL Taxonomy Extension Label Linkbase Document Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document The following financial information from Canadian Pacific Railway Limited’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in Extensible Business Reporting Language (XBRL) includes: (i) the Consolidated Statements of Income of each of the three years ended December 31, 2018, 2017, and 2016; (ii) the Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2018, 2017, and 2016; (iii) the Consolidated Balance Sheets at December 31, 2018 and 2017; (iv) the Consolidated Statements of Cash Flows for each of the three years ended December 31, 2018, 2017, and 2016; (v) the Consolidated Statements of Changes in Shareholders’ Equity for each of the three years ended December 31, 2018, 2017, and 2016; and (vi) the Notes to Consolidated Financial Statements. * Management contract or compensatory arrangement ** Filed with this Annual Report on Form 10-K  CP 2018 ANNUAL REPORT / 149 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANADIAN PACIFIC RAILWAY LIMITED (Registrant) By: /s/ KEITH CREEL Keith Creel Chief Executive Officer Dated: February 15, 2019 POWER OF ATTORNEY Each of the undersigned do hereby appoint each of Nadeem Velani and Jeffrey J. Ellis, his or her true and lawful attorney-in-fact and agent, to sign on his or her behalf the Company’s Annual Report on Form 10-K, for the year ended December 31, 2018, and any and all amendments thereto, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on February 15, 2019. Signature /s/ KEITH CREEL Keith Creel /s/ NADEEM VELANI Nadeem Velani /s/ ANDREW F. REARDON Andrew F. Reardon /s/ JOHN R. BAIRD John R. Baird /s/ ISABELLE COURVILLE Isabelle Courville /s/ GILLIAN H. DENHAM Gillian H. Denham /s/ REBECCA MACDONALD Rebecca MacDonald /s/ EDWARD L. MONSER Edward L. Monser /s/ MATTHEW H. PAULL Matthew H. Paull /s/ JANE L. PEVERETT Jane L. Peverett /s/ GORDON T. TRAFTON Gordon T. Trafton Title Chief Executive Officer and Director (Principal Executive Officer) Executive Vice-President and Chief Financial Officer (Principal Financial Officer) Chairman of the Board of Directors Director Director Director Director Director Director Director Director 150 / CP 2018 ANNUAL REPORT 150 / CP 2018 ANNUAL REPORT EXECUTIVE TEAM EXECUTIVE TEAM Keith Creel Keith Creel President and Chief Executive Officer President and Chief Executive Officer Robert Johnson Robert Johnson Executive Vice-President Operations Executive Vice-President Operations Nadeem Velani Nadeem Velani Executive Vice-President and Chief Financial Officer Executive Vice-President and Chief Financial Officer John Brooks John Brooks Executive Vice-President and Chief Marketing Officer Executive Vice-President and Chief Marketing Officer Laird Pitz Laird Pitz Senior Vice-President and Chief Risk Officer Senior Vice-President and Chief Risk Officer Tony Marquis Jeffrey Ellis Chief Legal Officer and Corporate Secretary Senior Vice-President Operations Eastern Region Michael Redeker Mark Redd Vice-President and Chief Information Officer Senior Vice-President Operations Western Region Scott MacDonald Mike Foran Vice-President Market Strategy and Asset Management Senior Vice-President Operations (System) Jeffrey Ellis James Clements Vice-President Strategic Planning and Transportation Services Chief Legal Officer and Corporate Secretary Chad Rolstad Michael Redeker Vice-President Human Resources Vice-President and Chief Information Officer Mike Foran Vice-President Market Strategy and Asset Management James Clements Vice-President Strategic Planning and Transportation Services Joan Hardy Vice-President Sales and Marketing – Grain and Fertilizer Jonathan Wahba Vice-President Sales and Marketing – Intermodal and Automotive Coby Bullard Vice-President Sales and Marketing – Merchandise, Energy, Chemicals & Plastics Chad Rolstad Vice-President Human Resources BOARD OF DIRECTORS BOARD OF DIRECTORS Andrew Reardon Andrew Reardon Chair Board Chair Keith Creel Keith Creel President and Chief Executive Officer President and Chief Executive Officer John Baird John Baird Director Director Isabelle Courville Isabelle Courville Director Director Jill Denham Jill Denham Director Director Rebecca MacDonald Rebecca MacDonald Director Director Edward Monser Edward Monser Director Director Matthew Paull Matthew Paull Director Director Jane Peverett Jane Peverett Director Director Gordon Trafton Gordon Trafton Director Director 217419_CP_AnnualReport2018_1-19_150.indd 150 2019-02-27 3:06 PM PERFORMANCE HIGHLIGHTS $ in millions, except per share data, ratios or unless otherwise indicated FINANCIAL HIGHLIGHTS Total revenues Operating income(1) Adjusted operating income (1)(2) Operating ratio (1) Adjusted operating ratio (1)(2) Net income Adjusted income (2) Diluted earnings per share (EPS) Adjusted diluted EPS (2) Cash from operations Free cash (2) Return on invested capital (ROIC) (2) Adjusted ROIC (2) STATISTICAL HIGHLIGHTS(3) Revenue ton-miles (RTMs) (millions) Carloads (thousands) Gross ton-miles (GTMs) (millions) Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs) Average train weight – excluding local traffic (tons) Average train length – excluding local traffic (feet) Average terminal dwell (hours) Average train speed (mph) Total employees (end of period) Total workforce (end of period) SAFETY INDICATORS(3) FRA personal injuries per 200,000 employee-hours FRA train accidents per million train miles 2014 2015 2016 2017 2018 $ 6,620 $ 6,712 $ 6,232 $ 6,554 $ 7,316 2,202 2,198 66.7% 66.7% 1,476 1,482 8.46 8.50 2,123 969 14.4% 14.5% 149,849 2,684 272,862 1.035 8,076 6,682 8.7 18.0 14,255 14,385 2,618 2,550 61.0% 62.0% 1,352 1,625 8.40 10.10 2,459 1,381 12.9% 15.2% 145,257 2,628 263,344 0.999 8,314 6,935 7.2 21.4 12,817 12,899 2,411 2,411 61.3% 61.3% 1,599 1,549 10.63 10.29 2,089 1,007 14.4% 14.0% 135,952 2,525 242,694 0.980 8,614 7,217 6.7 23.5 11,653 11,698 2,519 2,468 61.6% 62.4% 2,405 1,666 16.44 11.39 2,182 874 20.5% 14.7% 142,540 2,634 252,195 0.980 8,806 7,214 6.6 22.6 12,163 12,242 2,831 2,831 61.3% 61.3% 1,951 2,080 13.61 14.51 2,712 1,289 15.3% 16.2% 154,207 2,740 275,362 0.953 9,100 7,313 6.8 21.5 12,770 12,793 1.68 1.26 1.84 1.41 1.67 1.12 1.65 0.99 1.47 1.10 (1) Comparative figures were restated to reflect the adoption of the new accounting standard for presentation of other components of net periodic benefit recovery. For a full description and reconciliation of the restatement see Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes in our Annual Report on Form 10-K. (2) These measures have no standardized meanings prescribed by generally accepted accounting principles (GAAP) in the United States of America and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K. (3) Certain statistical highlights and safety indicators figures have been updated to reflect new information or have been revised to conform with current presentation. EXCHANGE LISTINGS The common shares of Canadian Pacific Railway Limited are listed on the Toronto and New York stock exchanges under the symbol CP. CONTACT US Investor Relations Email: investor@cpr.ca Canadian Pacific Investor Relations 7550 Ogden Dale Road S.E. Calgary, AB, Canada T2C 4X9 Shareholder Services Email: shareholder@cpr.ca Canadian Pacific Shareholder Services Office of the Corporate Secretary 7550 Ogden Dale Road S.E. Calgary, AB, Canada T2C 4X9 Transfer Agent and Registrar Computershare Investor Services Inc. serves as transfer agent and registrar for the common shares in Canada. Computershare Trust Company, N.A. serves as co-transfer agent and co-registrar for the common shares in the U.S. Visit the Computershare website at www.investorcentre.com/cp. Auditors Deloitte LLP 217419_CP_AnnualReport2018_Cover_ENG.indd 4-151 2019-03-05 12:03 PM File name 217419_CP_AnnualReport2018_Cover_ENG_ENG_INSIDE Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited March 5, 2019 12:17 PM Contact Melissa Heringer Files sent BUILT TO DRIVE BUILT TO DRIVE GROWTH GROWTH 2018 ANNUAL REPORT 2018 ANNUAL REPORT I B U I L T T O D R V E G R O W T H C P 2 0 1 8 A N N U A L R E P O R T Canadian Pacific 7550 Ogden Dale Road S.E. Calgary, Alberta, Canada T2C 4X9 cpr.ca 217419_CP_AnnualReport2018_Cover_ENG.indd 1-3 2019-02-26 2:06 PM File name 217419_CP_AnnualReport2018_Cover_ENG_ENG_OUTSIDE Designer Michelle Wilson Size 11 X 17”, folded to 8.5 X 11” Client CP Rail Project Manager Glen Edwards Colour 4C Project Annual Report 2018 Printer CBN Commercial Solutions, Louise Thomas Last edited February 26, 2019 2:21 PM Contact Melissa Heringer Files sent 

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