Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
FORM
10-K/A
AMENDMENT NO. 1
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number
001-01342
Canadian Pacific Railway Limited
(Exact name of registrant as specified in its charter)
 
Canada98-0355078
(State or Other Jurisdiction
of Incorporation or Organization)
(IRS Employer
Identification No.)
   
Canada
98-0355078
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
7550 Ogden Dale Road S.E.
,
Calgary
, Alberta
, Canada
 
CalgaryAB
T2C 4X9
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (403)
319-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class  Trading Symbol(s)
Title of Each Class
 
Trading Symbol(s)
Name of Each Exchange on which Registered
Common Shares, without par value, of
Canadian Pacific Railway Limited
 CP New York Stock Exchange
 Toronto Stock Exchange
Perpetual 4% Consolidated Debenture Stock of Canadian Pacific Railway Company CP/40 New York Stock Exchange
 BC87 London Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Debt securities of Canadian Pacific Railway Company

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
Yes  þ   No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐     No  ☒
Yes  o No þ

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

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

☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and "emerging“emerging growth company"company” in Rule
12b-2
of the Exchange Act. (Check one):
Large accelerated filer☒Accelerated filer☐
Non-accelerated
filer		☐ (Do not check if a smaller reporting company)Smaller reporting company☐
Large accelerated filer
þ
Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  þ

☒
As of June 30, 2019, the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by
non-affiliates
of the registrant, in U.S. dollars, was $32,712,064,612, based on the closing sales price per share as reported by the New York Stock Exchange on such date.

As of the close of business on February 18,April
20
, 2020, there were 136,748,767135,631,754 shares of the registrant's common sharesregistrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.

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EXPLANATORY NOTE

Canadian Pacific Railway Limited, ("CPRL" or the "Company"), a corporation incorporated under the Canada Business Corporations Act (the “Company”), qualifies as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934,, as amended (the “Exchange Act”). Although as a foreign private issuer the Company is no longernot required to do so, the Company currently continues to file annual reports on Form
10-K,
quarterly reports on Form
10-Q,
and current reports on Form
8-K
with the Securities and Exchange Commission (“SEC”) instead of filing the reports on forms available to foreign private issuers.

CPRL The Company prepares and files a management informationproxy circular and related material under Canadian requirements. As the Company’s management informationproxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference information required by Part III of thisits Form
10-K
from its management informationproxy circular. Accordingly, in
The Company filed its Annual Report on Form
10-K
for the fiscal year ended December 31, 2019 (“2019 Form
10-K”)
on February 20, 2020. In reliance upon and as permitted by Instruction G(3) to Form
10-K,
the Company will beis filing an amendmentthis Amendment No. 1 on Form
10-K/A
in order to thisinclude in the 2019 Form
10-K containing
the Part III information no later than 120 daysnot previously included in the 2019 Form
10-K.
No attempt has been made in this Amendment No. 1 on Form
10-K/A
to modify or update the other disclosures presented in the 2019 Form
10-K.
This Amendment No. 1 on Form
10-K/A
does not reflect events occurring after the endfiling of the fiscal year covered by2019 Form
10-K.
Accordingly, this Amendment No. 1 on Form 10-K.
10-K/A
should be read in conjunction with the 2019 Form
10-K
and the Company’s other filings with the SEC.
In this Amendment No. 1 on Form
10-K/A,
we also refer to Canadian Pacific Railway Limited as “Canadian Pacific,” “we,” “us,” “our,” “our corporation,” or “the corporation.” References to “GAAP” mean generally accepted accounting principles in the United States.
All references to our websites and to our Canadian management proxy circular filed with the SEC on March 19, 2020 as Exhibit 99.1 to our Current Report on Form
8-K
(the “Circular”) contained herein do not constitute incorporation by reference of information contained on such websites and the Circular and such information should not be considered part of this document.


Table of Contents

1 /SERVICE EXCELLENCE



CANADIAN PACIFIC RAILWAY LIMITED
FORM 10-K
10-K/A
TABLE OF CONTENTS
PART I Page
Item 1.Business
3
Item 1A.Risk Factors
18
Item 1B.Unresolved Staff Comments
20
Item 2.Properties
21
Item 3.Legal Proceedings
25
Item 4.Mine Safety Disclosures
25
 Information about our Executive Officers
26
   
PART II  
Item 5.
PART III
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
29
Item 6.Selected Financial Data
31
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
32
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
69
Item 8.Financial Statements and Supplementary Data
70
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
124
Item 9A.Controls and Procedures
124
Item 9B.Other Information
126
   
PART III
Item 10
  
Item 10.
Directors, Executive Officers and Corporate Governance
1
Item 11
128Executive Compensation
7
Item 11.12
Executive Compensation
128
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters58
Item 13
128
Item 13.Certain Relationships and Related Transactions, and Director Independence59
Item 14
128
Item 14.Principal Accounting Fees and Services
128
59
   
PART IV
  
Item 15.15
Exhibits, Financial Statement ScheduleSchedules
61
Item 16
130Form 10-K Summary
Item 16.Form 10-K Summary
136
61
 Signatures
137Signatures
62



CP 2019 ANNUAL REPORT/ 2

PART I



3 /SERVICE EXCELLENCE
 


ITEM 1. BUSINESS

Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Company Overview
Directors
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 12,700 miles, serving the principal business centres of Canada from Montréal, Québec, 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 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.

Director profiles
All 11 nominated directors are qualified and experienced, and have agreed to serve on our Board.
All directors are CP shareholders and must meet our director share ownership requirements within five years of joining the Board.
Share ownership listed here is as at February 28, 2020, and includes shares that directors beneficially own or control, or hold directly or indirectly. Share ownership includes holdings under the Directors’ Deferred Share Unit (“DDSU”) plan.
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 Shares") are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”) under the symbol “CP”.

For purposes of this annual 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:

Isabelle Courville
Chair
Independent
Age:
57
Director since:
May 1, 2013
Residence:
Rosemère, Québec, Canada
2019 voting results:
99.26%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, accounting & financial expertise, environment, health & safety, executive compensation/human resources, transportation industry knowledge, governance, government/regulatory affairs and legal, risk management, sales & marketing, and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
•Meeting Attendance
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 our values of accountability, diversity and pride, in everything we do. Coaching and mentoring all employees into becoming leaders will continue to drive CP forward.
Starting in 2012, 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 December 30, 2019, CP acquired Central Maine & Québec Railway (“CMQ”) for approximately $174 million (U.S. $133 million). CMQ owns rail lines primarily in Québec and Maine, stretching approximately 481 miles, and primarily moving forest products, refined petroleum products, chemicals and plastics. This acquisition provides CP with strategic access into the U.S. Northeast and Atlantic Canada. The transaction provides CP customers with seamless, safe and efficient access to ports at Searsport, Maine, and to Saint John, New Brunswick, via Eastern Maine Railway Company and New Brunswick Southern Railway. Of the total consideration paid, approximately 70% represents the issued and outstanding shares of Central Maine & Québec Railway U.S. Inc. ("CMQ U.S."), while the remaining approximately 30% represents the issued and outstanding shares of Central Maine & Québec Railway Canada Inc. ("CMQ Canada") (together CMQ). The acquisition of the shares of CMQ U.S. is subject to review and approval by the U.S. Surface Transportation Board


CP 2019 ANNUAL REPORT/ 4

(“STB”) and as such, the shares of CMQ U.S. have been placed in an independent voting trust.  For additional information regarding this acquisition, refer to Item 8. Financial Statements and Supplementary Data, Note 11 Business combination.

On December 17, 2019, the Company announced a new normal course issuer bid ("NCIB"), commencing December 20, 2019, to purchase up to 4.80 million Common Shares for cancellation before December 19, 2020.

During the first quarter of 2019, the Company experienced severe winter operating conditions and an increase in the frequency and severity of casualty incidents and derailments. As a result, the Company incurred significant costs to manage severe weather conditions, as well as direct casualty costs, and higher operating costs. During this period and the subsequent network recovery the Company also experienced losses and deferrals of potential revenues.

Change in Executive Officers
At the end of September 2019, Mr. Robert Johnson retired from his position as Executive Vice-President, Operations. Effective September 1, 2019, CP's new Executive Vice-President, Operations, is Mr. Mark Redd.

Change in Board of Directors
On July 15, 2019, the Company announced the appointment of Ms. Andrea Robertson and Mr. Edward R. Hamberger to CP’s Board of Directors, effective July 15, 2019.

On May 7, 2019, CP announced the election of all nine director nominees and, upon her re-election as a director, Ms. Isabelle Courville was confirmed as Chair of CP's Board of Directors. Ms. Courville replaced Mr. Andrew F. Reardon, the prior Chair of CP’s Board of Directors, who did not stand for re-election at the May 7, 2019 shareholder meeting.

Prior Developments
During the second quarter of 2018, the Company received multiple strike notices 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. CP reached a three-year agreement with IBEW, ratified by IBEW membership on June 29, 2018, and a four-year agreement with TCRC, ratified by TCRC membership on July 20, 2018. 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.

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 28 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.



5 /SERVICE EXCELLENCE


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 2019, 2018 and 2017:                                            
chart-aae5780c58dc56b59c1a01.jpg
cplegendfreight.jpg

Board2019 Freight Revenues7 of 7100%
Audit and Finance4 of 4100%
Governance5 of 5100%
Compensation5 of 5100%
Risk and Sustainability2 of 2100% 

chart-a5b71f172c7355d4b75.jpgchart-1293570c775d59bca18.jpg
BUSINESS EXPERIENCE
President of
Hydro-Québec
Distribution and
Hydro-Québec
TransÉnergie (2007 to 2013)
20 years of experience in the Canadian telecommunications industry, including President of Bell Canada’s Enterprise Group (2003 to 2006) and President and Chief Executive Officer of Bell Nordiq Group (2002 to 2003)
PUBLIC COMPANY BOARD EXPERIENCE
SNC-Lavalin Group Inc. (2017 to present) (Chair of Human Resources Committee and member of Governance and Ethics Committee)
Veolia Environment S.A. (2015 to present) (member of Accounts and Audit Committee, Nominating Committee and the Research, Innovation and Sustainable Development Committee)
Laurentian Bank of Canada (2007 to 2019) (Chair of the Board and member of Human Resources and Corporate Governance Committee)
Gecina S.A. (2016 to April 2017) (member of Audit Committee)
TVA Group (2013 to 2016) (member of Human Resources Committee)
OTHER EXPERIENCE
Other Boards
Institute for Governance of Private and Public Organizations (IGOPP) (2016 to present) (member of Human Resources Committee)
Institute of Corporate Directors (ICD) (2013 to 2017)
EDUCATION
Bachelor’s degree in Engineering Physics, École Polytechnique de Montréal
Bachelor’s degree in Civil Law, McGill University Doctorate Honoris Causa, University of Montréal
SHARE OWNERSHIP
Shares: 900
DDSUs: 8,575
Options: 0
Meets share ownership requirements
The Hon. John Baird, P.C.
Independent
Age:
50
Director since:
May 14, 2015
Residence:
Toronto,
Ontario, Canada
.
2019 voting results:
99.43%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, environment, health & safety, transportation industry knowledge, governance, government & regulatory affairs and legal, risk management and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
2018 Freight RevenuesMeeting Attendance2017 Freight Revenues



CP 2019 ANNUAL REPORT/ 6

In 2019, the Company generated Freight revenues totalling $7,613 million ($7,152 million in 2018 and $6,375 million in 2017). The following charts compare the percentage of the Company’s total Freight revenues derived from each of the three major business lines in 2019, 2018 and 2017:

chart-be1d3aa0712f5983831a01.jpgchart-671b6919cb30573fb94.jpgchart-398e2cd11798530b800a01.jpg
2019 Freight RevenuesBoard2018 Freight Revenues2017 Freight Revenues7 of 7100%
Governance5 of 5100%
Compensation2 of 2100%
Risk and Sustainability2 of 2100%

BULK��
The Company’s Bulk business represented approximately 40%
BUSINESS EXPERIENCE
Senior Advisor at the law firm of total Freight revenues in 2019.Bennett Jones LLP,

Hatch Ltd. (an engineering firm) and Eurasia Group (a geopolitical risk consultancy) (2015 to present)
The following charts compare the percentage
Member of the Company's Bulk freight revenues by commodity businessInternational Advisory Board, Barrick Gold Corporation (2015 to present)
President of Grantham Finchley Consulting Inc. (2015 to present)
PUBLIC COMPANY BOARD EXPERIENCE
Canfor / Canfor Pulp (CPPI) (2016 to present) (member of Environmental, Health and Safety Committee; Capital Expenditure Committee and Corporate Governance Committee)
OTHER EXPERIENCE
Other Boards
FWD Group Ltd./FWD Ltd. (2015 to present) (member of Audit Committee and Risk Management and Actuarial Committee)
PineBridge Investments (2015 to present)
Friends of Israel Initiative (2015 to present) (member of the Board)
Other experience
Served as Canadian Foreign Minister, Minister of Transport and Infrastructure, Minister of the Environment, and President of the Treasury Board during his three terms as a Member of the Canadian Parliament (2006 to 2015)
Appointed to the Privy Council in 2019, 20182006
Former Minister of Community and 2017:Social Services and Minister of Energy in Ontario provincial legislature



chart-8efeb65e050755ab8eca01.jpgchart-03d91a04b9a95843840a01.jpgchart-c20d777ac1bb52ab962a01.jpg
Senior Advisor to Community Living Ontario, an organization that supports individuals with developmental disabilities
Advisory Board member to Prince’s Charities Canada, the charitable office of His Royal Highness The Prince of Wales
EDUCATION
Honours Bachelor of Arts (Political Studies), Queen’s University
SHARE OWNERSHIP
Shares: 0
DDSUs: 5,302
Options: 0
Meets share ownership requirements
1
Table of Contents
Keith E. Creel
Not Independent
Age:
51
Director since:
May 14, 2015
Residence:
Wellington,
Florida, U.S.A.
2019 voting results:
99.82%
for
DIRECTOR SKILLS AND QUALIFICATIONS
President and Chief Executive Officer of CP since January 31, 2017. Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, environment, health & safety, executive compensation/human resources, transportation industry knowledge, governance, government/regulatory affairs and legal, risk management, sales & marketing and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Bulk RevenuesBoard2018 Bulk Revenues2017 Bulk Revenues
(40%7 of Freight Revenues)7(41% of Freight Revenues)(44% of Freight Revenues)100%



7 /SERVICE EXCELLENCE
 

BUSINESS EXPERIENCE

GrainPresident and Chief Executive Officer of CP (2017 to present)
The Company’s Grain business represented approximately 55%
President and Chief Operating Officer of Bulk revenues, which was 22%CP (February 2013 to January 2017)
Named “Railroad Innovator” for 2014 by Progressive Railroading in recognition of total Freight revenueshis leadership at CP
Executive Vice-President and Chief Operating Officer of Canadian National Railway Company (CN) (2010 to 2013)
Other positions at CN included Executive Vice- President, Operations, Senior Vice-President Eastern Region, Senior Vice-President Western Region, and Vice-President of CN’s Prairie division (2002 to 2010)
Trainmaster and director of corridor operations at Illinois Central Railway prior to its merger with CN in 2019.1999

The following charts compare the percentage
Superintendent and general manager at Grand Trunk Western Railroad (1999 to 2002)
Began his railroad career in 1992 as an intermodal ramp manager at Burlington Northern Railway in Birmingham, Alabama
OTHER EXPERIENCE
Other Boards
Member of the Company's Grain freight revenues generated from CanadianBoard of TTX Company (a private company) (2014 to present)
Representative on American Association of Railroads
Other experience
Commissioned officer in the U.S. Army and U.S. shipmentsserved in 2019, 2018 and 2017:the Persian Gulf War in Saudi Arabia

chart-c8af06c310ae5a0fb81.jpgchart-9f3372f51ff1568b8a5a01.jpgchart-9e94807481d153ef810a01.jpg
EDUCATION
Bachelor of Science in Marketing, Jacksonville State University
Advanced Management Program, Harvard Business School
SHARE OWNERSHIP
Shares: 3,490
DSUs: 31,928
Options: 561,653
Meets executive share ownership requirements (see page 31)
Gillian (Jill) H. Denham
Independent
Age:
59
Director since:
September 6, 2016
Residence:
Toronto, Ontario, Canada
2019 voting results:
98.46%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, executive compensation/human resources, investment management, governance, government/regulatory affairs and legal, risk management, sales & marketing and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Grain RevenuesBoard2018 Grain Revenues2017 Grain Revenues7 of 7100%
(55%Audit and Finance4 of Bulk Revenues; 22%4100%
Audit4 of Freight Revenues)4(53%100%
Finance2 of Bulk Revenues; 22%2100%
Risk and Sustainability2 of Freight Revenues)2(54% of Bulk Revenues; 24% of Freight Revenues)100%

CP's Grain network is unique among railways
BUSINESS EXPERIENCE
President, Authentum Partners Ltd., a company that invests in North America as it is strategically positioned in the heartand advises technology related businesses (2018 to present)
Vice Chair Retail Markets for Canadian Imperial Bank of grain-producing regionsCommerce (“CIBC”) (2001 to 2005)
Previously held senior positions at CIBC Wood Gundy and CIBC, including: Managing Director Head of Western CanadaCommercial Banking and the Northern PlainsE-Commerce
President of Merchant Banking/Private Equity and Managing Director Head responsible for CIBC’s European Operations
PUBLIC COMPANY BOARD EXPERIENCE
Morneau Shepell Inc. (2008 to present) (Chair of the U.S. Canadian grain transported by CP consistsBoard)
National Bank of both whole grains, such as wheat, durum, canola, pulses and soybeans, and processed products such as oils, meals and malt. This business is centred in the Canadian Prairies (Saskatchewan, Manitoba, and Alberta), with grain shipped primarily westCanada (2010 to the Portpresent) (member of Vancouver, and eastHuman Resources Committee)
Kinaxis Inc. (2016 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 the CTA, 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, soybeans, corn 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 2019 ANNUAL REPORT/ 8

Coal
The Company’s Coal business represented approximately 22% of Bulk revenues, which was 9% of total Freight revenues in 2019.

The following charts compare the percentagepresent) (Chair of the Company's Coal freight revenues generated from CanadianCompensation Committee and U.S. shipments in 2019, 2018member of the Audit Committee and 2017:Nominating and Governance Committee)

chart-1a3f99ddfe6c5b4d8eba01.jpgchart-0cf8eb25e955595186ca01.jpgchart-970ee8fed27e5ee3baba01.jpg
IHS Markit Ltd. (2014 to 2016)
Penn West Petroleum Ltd. (2012 to 2016)
Calloway Real Estate Investment Trust (2011 to 2012)
OTHER EXPERIENCE
Other Boards
Munich Reinsurance Company of Canada (Chair) (2012 to present)
Temple Insurance Company (Chair) (2012 to present)
Centre for Addiction and Mental Health (CAMH) (2015 to 2019)
EDUCATION
Honours Business Administration (HBA) degree, Ivey Business School, Western University
MBA, Harvard Business School
SHARE OWNERSHIP
Shares: 0
DDSUs: 3,513
Options: 0
Has until September 2021 to meet the share ownership requirements
Edward R. Hamberger
Independent
Age:
69
Director since:
July 15, 2019
Residence:
Delray Beach, Florida, U.S.A
.
2019 voting results:
N/A
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, environment, health & safety, transportation industry knowledge, governance, government/regulatory affairs and legal, risk management, sales & marketing and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Coal RevenuesBoard2018 Coal Revenues2017 Coal Revenues5 of 5100%
(22%Audit and Finance4 of Bulk Revenues; 9%4100%
Risk and Sustainability2 of Freight Revenues)2(23% of Bulk Revenues; 9% of Freight Revenues)(22% of Bulk Revenues; 10% of Freight Revenues)100%

In Canada, CP handles mostly metallurgical coal destined
BUSINESS EXPERIENCE
President and Chief Executive Officer Association of American Railroads (1998 to 2019)
Served as Assistant Secretary 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 forgovernmental
affairs at the U.S. Midwest markets.Department of Transportation (1987 to 1989)

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
OTHER EXPERIENCE
Other Boards
Transportation Institute, University of Denver (2002 to power-generating facilities in the U.S. Midwest.present)

Potash
The Company's Potash business represented approximately 15%
Business Advisory Committee, Kellogg School of Bulk revenues, which was 6% of total Freight revenues in 2019.Management, Northwestern University (2000 to 2019)

The following charts compare the percentage
TTCI (Chair of the Company's Potash freight revenues generated from export and domestic potash shipments in 2019, 2018 and 2017:Board) (1998 to 2019)

chart-92d6315eec5459f4a6ea01.jpgchart-9ef1a987466b576ab5ea01.jpgchart-017d8a1d3cd95a0b8b1a01.jpg
Railinc Corporation (1998 to 2019)
Mineta Transportation Institute, San Jose State University (2005 to 2019)
EDUCATION
Juris Doctor Georgetown University
Master of Science, Foreign Service, Georgetown University
Bachelor of Science, Foreign Service, Georgetown University
SHARE OWNERSHIP
Shares: 0
DDSUs: 383
Options: 0
Has until July 2024 to meet the share ownership requirements
2
Table of Contents
Rebecca MacDonald
Independent
Age:
66
Director since:
May 17, 2012
Residence:
North York, Ontario, Canada
2019 voting results:
99.35%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, executive compensation/human resources, investment management, governance, risk management, sales & marketing and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Potash RevenuesBoard2018 Potash Revenues2017 Potash Revenues7 of 7100%
(15%Audit4 of Bulk Revenues; 6%4100%
Compensation3 of Freight Revenues)3(16%100%
Governance (Chair)5 of Bulk Revenues; 7% of Freight Revenues)5(15% of Bulk Revenues; 6% of Freight Revenues)100%

The Company’s Potash traffic moves mainly from Saskatchewan
BUSINESS EXPERIENCE
Founder and current Executive Chair of Just Energy Group Inc., a Toronto-based independent marketer of deregulated gas and electricity
President and Chief Executive Officer of Just Energy (2001 to offshore markets through the ports of Vancouver, Portland and Thunder Bay, and to markets2007)
Founded Energy Savings Income Fund in 1997, another company which aggregated customers in the U.S. All potash shipments for export beyondderegulation of the U.K. natural gas industry
Founded Energy Marketing Inc. in 1989
PUBLIC COMPANY BOARD EXPERIENCE
Just Energy Group Inc. (2001 to present) (Executive Chair since 2007)
OTHER EXPERIENCE
Other Boards
Horatio Alger Association in both Canada and the U.S. are marketed by Canpotex Limited and K+S Potash Canada. Canpotex is an export


9 /SERVICE EXCELLENCEUnited States
 

Other experience

Founded the Rebecca MacDonald Centre for Arthritis and Autoimmune Disease at Mount Sinai Hospital in Toronto
company owned in equal shares by Nutrien Ltd. and The Mosaic Company. Independently, these producers move domestic potash with CP primarily to the U.S. Midwest for local application.

Fertilizers and Sulphur
The Company's Fertilizers and sulphur business represented approximately 8% of Bulk revenues, which was 3% of total Freight revenues in 2019.

The following charts compare the percentage
Previously Vice-Chair of the Company's Fertilizers and sulphur freight revenues generated from dry fertilizers, wet fertilizers and sulphur transportation in 2019, 2018 and 2017:Board of Directors of Mount Sinai Hospital

chart-5ff5a930163a5f95a4ca01.jpgchart-d44dcb94cccf5e9a914a01.jpgchart-8a3a4c71d3e453ba842a01.jpg
Previously a member of the Board of Governors of the Royal Ontario Museum
EDUCATION
Honorary LLD degree, University of Victoria
SHARE OWNERSHIP
Shares: 0
DDSUs: 11,740
Options: 0
Meets share ownership requirements
Edward L. Monser
Independent
Age:
69
Director since:
December 17, 2018
Residence:
St. Louis, Missouri, U.S.A.
2019 voting results:
99.82%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, accounting & financial expertise, environment, health & safety, executive compensation/human resources, transportation industry knowledge, governance, risk management, sales & marketing and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Fertilizers & Sulphur Revenues
Board
2018 Fertilizers & Sulphur Revenues2017 Fertilizers & Sulphur Revenues7 of 7100%
(8%
Audit and Finance
4 of Bulk Revenues; 3%4100%
Audit
3 of Freight Revenues)4(8%75%
Compensation
5 of Bulk Revenues; 3% of Freight Revenues)5(9% of Bulk Revenues; 4% of Freight Revenues)100%

Dry fertilizers include: phosphate, urea, ammonium sulphate
BUSINESS EXPERIENCE
President (2010-2018) and nitrate. Wet fertilizers are primarily anhydrous ammonia. Approximately halfChief Operating Officer (2001-2015) of CP's fertilizer shipments originate from production facilities in Alberta, where abundant sourcesEmerson Electric Co.
President (1996-2001) and Executive Vice President (1991-1996) of natural gas and other chemicals provide feedstock for fertilizer production.Rosemount Inc.

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 39% of total Freight revenues in 2019.

The following charts compare the percentage
Member of the Company's Merchandise freight revenue by commodity business in 2019, 2018Advisory Economic Development Board for China’s Guangdong Province
Member and 2017:current Vice-Chairman of the U.S.-India Strategic Partnership Forum

chart-092330ae7b655c75a54.jpgchart-c0558d8fd95f5d57baaa01.jpgchart-4023f352e496575ba4ea01.jpg
PUBLIC COMPANY BOARD EXPERIENCE
Air Products & Chemicals Corporation (2013 to present) (Chair of Management Development and Compensation Committee and member of Audit Committee)
OTHER EXPERIENCE
Other Boards
Seyer Industries (2019 to present)
Vertiv Company (2016 to present)
Ranken Technical College
Other experience
Past board member and past vice-chairman of the U.S.-China Business Council
EDUCATION
Bachelor’s degree, Engineering, Illinois Institute of Technology
Bachelor’s degree, Education, Eastern Michigan University
Executive MBA, Stanford University Graduate School of Business
SHARE OWNERSHIP
Shares: 0
DDSUs: 925
Options: 0
Has until December 2023 to meet the share ownership requirements
Matthew H. Paull
Independent
Age:
68
Director since:
January 26, 2016
Residence:
Willmette, Illinois, U.S.A.
2019 voting results:
99.79%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, executive compensation/human resources, investment management, governance, government/regulatory affairs and legal, risk management and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Merchandise Revenues
Board
2018 Merchandise Revenues2017 Merchandise Revenues7 of 7100%
(39%
Compensation (Chair)
5 of Freight Revenues)5(37%100%
Finance
2 of Freight Revenues)2(35%100%
Risk and Sustainability
2 of Freight Revenues)2100%


BUSINESS EXPERIENCE
CP 2019 ANNUAL REPORT/ 10

Merchandise products moveSenior Executive Vice-President and Chief Financial Officer of McDonald’s Corporation (2001 until his retirement in both mixed freight and unit trains,2008)
Before joining McDonald’s in 1993, was a partner at Ernst & Young where he managed a variety of car types. Service involves delivering productsfinancial practices during his
18-year
career and consulted with many leading multinational
corporations
PUBLIC COMPANY BOARD EXPERIENCE
Air Products & Chemicals Corporation (2013 to many different customerspresent) (Chair of Audit and destinations. In additionFinance Committee and member of Corporate Governance and Nominating Committee and Executive Committee)
Chipotle Mexican Grill Inc. (2016 to traditional rail service, CP moves merchandise traffic through a network2020) (member of truck-rail transload facilities, expanding the reachCompensation Committee)*
Best Buy Co. (2003 to 2013) (lead independent director and chair of CP's networkFinance Committee)
WMS Industries Inc. (2012 to non-rail served facilities.2013)

Forest Products
The Company’s Forest products business represented approximately 10%
KapStone Paper and Packaging Corporation (2010 to 2018)
OTHER EXPERIENCE
Other Boards
Pershing Square Capital Management, L.P. (2008 to present) (member of Merchandise revenues, which was 4%Advisory Board)
EDUCATION
Master’s degree in Accounting, University of total Freight revenues in 2019.Illinois

The following charts compare the percentage
Bachelor’s degree, University 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 2019, 2018 and 2017:Illinois

chart-2d6a24f4fa4f5a35b49.jpgchart-4973ddc3e2e152bf974a01.jpgchart-ab0cd94ec85b55de8e5a01.jpg
SHARE OWNERSHIP
Shares: 3,000
DDSUs: 5,715
Options: 0
Meets share ownership requirements
*
As previously announced by Chipotle Mexican Grill Inc. on March 6, 2020, Mr. Paull will not stand for re-election to the Board of Chipotle Mexican Grill Inc. at its 2020 annual meeting of shareholders.
3
Table of Contents
Jane L. Peverett
Independent
Age:
61
Director since:
December 13, 2016
Residence:
West Vancouver, British Columbia, Canada
2019 voting results:
99.23%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, accounting & financial expertise, environment, health & safety, executive compensation/human resources, governance, government/regulatory affairs and legal, risk management and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Forest Products Revenues
Board
2018 Forest Products Revenues2017 Forest Products Revenues7 of 7100%
(10%
Audit and Finance (Chair)
4 of Merchandise Revenues;
4%4		100%
Audit
4 of Freight Revenues)4(11%100%
Finance
2 of Merchandise Revenues;
4%2		100%
Governance
3 of Freight Revenues)3(12% of Merchandise Revenues;
4% of Freight Revenues)		100%

Forest products traffic includes pulp and paper, and lumber and panel shipped from key producing areas in B.C., Ontario, Québec, and northern Alberta to destinations throughout North America, including Vancouver to export markets.
BUSINESS EXPERIENCE



11 /SERVICE EXCELLENCE
 

President & Chief Executive Officer of BC Transmission Corporation (electrical transmission) (2005 to 2009)
Vice-President, Corporate Services and Chief Financial Officer of BC Transmission Corporation (2003 to 2005)
President of Union Gas Limited (a natural gas storage, transmission and distribution company) (2002 to 2003)
Other positions at Union Gas Limited: President & Chief Executive Officer (2001 to 2002); Senior Vice-President Sales & Marketing (2000 to 2001) and Chief Financial Officer (1999 to 2000)
PUBLIC COMPANY BOARD EXPERIENCE

Energy, ChemicalsCIBC (2009 to present) (Chair of Audit Committee)
Northwest Natural Gas Company (2007 to present) (member of Organization and PlasticsExecutive Compensation Committee and Public Affairs and Environmental Policy Committee)
The Company’s Energy, chemicals
Capital Power Corporation (2019 to present) (Member of Corporate Governance, Compensation and plastics business represented approximately 52% of Merchandise revenues, which was 20% of total Freight revenues in 2019.Nominating Committee and Health, Safety and Environment Committee)

The following charts compare the percentage
Encana Corp. (2003 to 2017)
Postmedia Network Canada Corp. (2013 to 2016)
HydroOne Limited (2015 to 2018)
OTHER EXPERIENCE
Other Boards
CSA Group (2019 to present) (Chair of the Company's Energy, chemicals and plastics freight revenues generatedBoard)
British Columbia Institute of Corporate Directors Executive Committee
EDUCATION
Bachelor of Commerce degree, McMaster University
Master of Business Administration degree, Queen’s University
Certified Management Accountant
A Fellow of the Society of Management Accountants
Holds the ICD.D designation from petroleum products, crude, chemicals, biofuels and plastics shipments in 2019, 2018 and 2017:the Institute of Corporate Directors
chart-03b78252e0525358839a01.jpgchart-2c0fceecb6035f9aa72.jpgchart-32e452b601b85facb57.jpg
SHARE OWNERSHIP
Shares: 0
DDSUs: 3,565
Options: 0
Has until January 2021 to meet the share ownership requirements
Andrea Robertson
Independent
Age:
56
Director since:
July 15, 2019
Residence:
Calgary, Alberta, Canada
2019 voting results:
N/A
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, environment, health & safety, executive compensation/human resources, transportation industry knowledge, governance, government/regulatory affairs and legal, risk management, and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Energy, Chemicals & Plastics Revenues
Board
2018 Energy, Chemicals & Plastics Revenues2017 Energy, Chemicals & Plastics Revenues5 of 5100%
(52%
Governance
3 of Merchandise Revenues;
20%3		100%
Compensation
3 of Freight Revenues)3(47% of Merchandise Revenues;
17% of Freight Revenues)		(41% of Merchandise Revenues;
14% of Freight Revenues)		100%

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
BUSINESS EXPERIENCE
President & Chief Executive Officer, Shock Trauma Air Rescue Service (STARS) (2012 to destination and export markets in Mexico, the U.S. Midwest, and the U.S. West Coast, as well as the Texas and Louisiana petrochemical corridor and port connections.present)

Crude moves from production facilities throughout Alberta, North Dakota, and Saskatchewan. CP provides efficient routes
President & Chief Operating Officer, Shock Trauma Air Rescue Service (STARS) (2011 to refining markets in the Gulf Coast, the U.S. Northeast, and the West Coast through connections with our railway partners.2012)

OTHER EXPERIENCE
Other Boards
The Company’s chemical traffic includes products such as ethylene glycol, caustic soda, methanol, sulphuric acid, styrene and soda ash. These shipments originate from western Canada,Calgary Airport Authority (2017 to present)
Bow Valley College (2015 to 2018)
United Way (2007 to 2013)
Alberta Children’s Hospital Foundation (2008 to 2009)
Foothills Development Council (2008 to 2009)
Libin Cardiovascular Institute (2008 to 2009)
EDUCATION
Executive Leadership, Harvard University
ICD.D Rotman School of Business
Masters in Science of Health Administration, Central Michigan University
Baccalaureate of Nursing - University of Calgary
Executive Fellowship - Wharton University
SHARE OWNERSHIP
Shares: 0
DDSUs: 381
Options: 0
Has until July 2024 to meet the Gulf of Mexico, the U.S. Midwest, and eastern Canada, and move to end markets in Canada, the U.S. and overseas.share ownership requirements

CP's biofuels traffic originates mainly from facilities in the U.S. Midwest, shipping primarily to destinations in the U.S. Northeast.

The most commonly shipped plastics products are polyethylene and polypropylene. Approximately half of the Company’s plastics traffic originates in central and northern Alberta and moves to various North American destinations.



CP 2019 ANNUAL REPORT/ 12

Metals, Minerals and Consumer Products
The Company’s Metals, minerals and consumer products business represented approximately 26% of Merchandise revenues, which was 10% of total Freight revenues in 2019.

The following charts compare the percentage of the Company's Metals, minerals and consumer products freight revenues generated from aggregates (excluding frac sand), steel, frac sand, food and consumer products, and non-ferrous metals transportation in 2019, 2018 and 2017:

chart-afda085bc9ff5bb4a08.jpgchart-23c107b873c150b6a20.jpgchart-584c6be3b3e451dc990a01.jpg
Gordon T. Trafton
Independent
Age:
66
Director since:
January 1, 2017
Residence:
Naperville, Illinois, U.S.A.
2019 voting results:
99.51%
for
DIRECTOR SKILLS AND QUALIFICATIONS
Brings expertise in the following areas: senior executive leadership, accounting & financial literacy, environment, health & safety, executive compensation/human resources, transportation industry knowledge, governance, government/regulatory affairs and legal, risk management, sales & marketing and strategic oversight.
OVERALL 2019
ATTENDANCE
100%
Meeting Attendance
2019 Metals, Minerals & Consumer Products Revenues
Board
2018 Metals, Minerals & Consumer Products Revenues2017 Metals, Minerals & Consumer Products Revenues7 of 7100%
(26%
Audit
4 of Merchandise Revenues;
10%4		100%
Governance
5 of Freight Revenues)5(30%100%
Risk and Sustainability (Chair)
2 of Merchandise Revenues;
11% of Freight Revenues)2		(34% of Merchandise Revenues;
12% of Freight Revenues)		100%

Aggregate products include coarse particulate and composite materials such as cement, limestone, dolomite, gravel, clay and gypsum. Cement is the leading commodity within aggregates, and is shipped directly from production facilities in Alberta, Québec, and Ontario to energy and construction projects in the U.S. Midwest, Alberta,and the U.S. Pacific Northwest.
BUSINESS EXPERIENCE

The majority of frac sand originates at mines located along the Company’s network in Wisconsin and movesConsultant, Brigadier Consulting (2013)
Consultant, CP (2013)
Special Advisor to the Bakken, Marcellus Shale, Permian Basin,Canadian National Railway leadership team (2009 to his retirement in 2010)
Senior Vice-President Strategic Acquisitions and other shale formations across North America.Integration, CN (2009 to 2010)

CP transports steel in various forms
Senior Vice-President, Southern Region, CN (2003 to 2009)
Held a number of leadership positions with Illinois Central Railroad and Burlington Northern Railroad
OTHER EXPERIENCE
Other Boards
Leeds School of Business Advisory Board, University of Colorado Boulder (2012 to present)
EDUCATION
Bachelor of Science, Transportation Management from mills in Iowa, Ontario and Saskatchewanthe Leeds School of Business, University of Colorado Boulder
SHARE OWNERSHIP
Shares: 0
DDSUs: 3,521
Options: 0
Has until January 2022 to a variety of industrial users. The Company carries base metals such as zinc, aluminum, and lead. CP also moves ores from mines to smelters and refineries for processing, andmeet the processed metal to automobile and consumer products manufacturers.share ownership requirements

Food, consumer, and other products traffic consists of a diverse mix of goods, including food products, railway equipment, building materials and waste products.



13 /SERVICE EXCELLENCE
 


4
Automotive
Table of Contents
Notes:
Other than as disclosed below, none of the nominated directors is, or has been in the last 10 years:
(a)
a director, chief executive officer or chief financial officer of a company that:
was subject to a cease trade or similar order or an order that denied the issuer access to any exemptions under securities legislation for over 30 consecutive days, that was issued while the proposed director was acting in that capacity, or
was subject to a cease trade or similar order or an order that denied the issuer access to an exemption under securities legislation for over 30 consecutive days, that was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in that capacity
(b)
a director or executive officer of a company that, while that proposed director was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets,
(c)
become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold their assets, or
(d)
subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities commission.
Ms. Denham served as a director of Penn West Petroleum Ltd. (now Obsidian Energy Ltd.) from June 2012 to June 2016, which was subject to cease trade orders on its securities following the July 2014 announcement of the review of its accounting practices and restatement of certain of its financial statements. Those cease trade orders ended on September 23, 2014.
Ms. Peverett was a director of Postmedia Network Canada Corp. (Postmedia) from April 2013 to January 2016. On October 5, 2016, Postmedia completed a recapitalization transaction under a court-approved plan of arrangement under the CBCA. Approximately US$268.6 million of debt was exchanged for shares that represented approximately 98% of the outstanding shares of Postmedia at that time. Postmedia repaid, extended and amended the terms of its outstanding debt obligations.
5
Table of Contents
Executive Officers
The Company’s Automotiveinformation regarding executive officers is included in Part I of our 2019 Form
10-K
under Executive Officers of the Registrant, following Item 4. Mine Safety Disclosures.
Code of Business Ethics
Our code of business ethics (the “Code”) sets out our expectations for conduct. It covers confidentiality, protecting our assets, avoiding conflicts of interest, fair dealing with third parties, compliance with the laws, rules and regulations, as well as reporting any illegal or unethical behaviour, among other things. The Code applies to everyone at CP and our subsidiaries: directors, officers, employees (unionized
and non-unionized) and
contractors who do work for us.
Directors, officers
and non-union employees
must sign an acknowledgment every year that they have read, understood and agree to comply with the Code. Unionized employees are provided with a copy of the Code every three years. In 2019, unionized employees were mailed a copy of the Code. Directors must also confirm annually that they have complied with the Code. The Code is part of the terms and conditions of employment
for non-union employees,
and contractors must agree to follow principles of standards of business conduct consistent with those set out in our Code as part of the terms of engagement.
Monitoring compliance and updating the Code
The Governance Committee is responsible for monitoring compliance with the Code, reviewing it periodically and recommending changes as appropriate, and promptly disclosing any aspects of the Code that have been waived. The Audit and Finance Committee ensures compliance with the Code. 100%
of non-union employees
have completed their annual certification of compliance with the Code.
We also have a supplemental code of ethics for the CEO and other senior financial officers (including the EVP and CFO, the Vice-President of Financial Planning and Accounting and the Assistant Vice-President and Controller) which sets out our longstanding principles of conduct for these senior roles. We also have a business represented approximately 12%ethics reporting policy that outlines the processes CP has established for CP personnel and others to report concerns regarding conduct within CP, including questionable management and/or corporate practices, the potential violation of Merchandise revenues, which was 5%any law, or a potential violation of total Freight revenuesthe Code.
The latest version of the Code, the supplemental code of ethics and the business ethics reporting policy is posted on our website (investor.cpr.ca/governance). Only the Board or Governance Committee (Audit and Finance Committee in the case of the CEO and senior financial officers) can waive an aspect of the Code. Any waivers are posted on our website. No waivers were requested or granted in 2019.

Corporate Governance
CP has a strong governance culture and we have adopted many leading policies and practices. As a U.S. and Canadian listed company, our corporate governance practices comply with or exceed the practices outlined by the Canadian Securities Administrators (CSA) in National Policy
58-201
Corporate Governance Guidelines and the Toronto Stock Exchange (TSX), the Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE).
We regularly review our policies and practices and make changes as appropriate, so we stay at the forefront of good governance as standards and guidelines continue to evolve in Canada and the United States.
The following charts compareBoard and the percentageGovernance Committee are responsible for developing our approach to corporate governance. This includes annual reviews of the Company's Automotive freight revenues generatedcorporate governance principles and guidelines which were established by movements of finished vehicles from Canadian, U.S., overseas, and Mexican origins, machinery, and parts and other in 2019, 2018 and 2017:

chart-b271b54f605b58ce9d0a01.jpgchart-91040acc4a955bd3aeaa01.jpgchart-02346b2172a657dbba5a01.jpg
2019 Automotive Revenues2018 Automotive Revenues2017 Automotive Revenues
(12% of Merchandise Revenues;
5% of Freight Revenues)		(12% of Merchandise Revenues;
5% of Freight Revenues)		(13% of Merchandise Revenues;
5% of Freight Revenues)

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.Board, as well as cross border shipments to Canadian markets; vehicles from overseas that move through the Portterms of Vancouver to eastern Canadian markets;reference for the Board 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 21% of total Freight revenues in 2019.

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 2019, 2018 and 2017:

chart-4e0ec5b1b3ce52b3855a01.jpgchart-bb3ce973246f5e9b85ea01.jpgchart-b3eddfa3982c5122a09.jpg
2019 Intermodal Revenues2018 Intermodal Revenues2017 Intermodal Revenues
(21% of Freight Revenues)(22% of Freight Revenues)(21% of Freight Revenues)



CP 2019 ANNUAL REPORT/ 14

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.

CP’s domestic intermodal business moves goods from a broad spectrum of industries including wholesale, retail, 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, providingcomplete 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 Montréal 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 Montréal, 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 6% of the Company's Freight revenues in 2019. 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 2019. 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, 2019, 2018four Board committees.
CP’s corporate governance principles and 2017, no customer comprised more than 10%guidelines are available on our website (investor.cpr.ca/governance).
CP’s Audit and Finance Committee has been established in accordance with Section 3(a)(58)(A) the Exchange Act and NYSE standards and CSA National Instrument
52-110.
The current members of Total revenues or accounts receivable.the Audit and Finance Committee are Jane Peverett (chair), Isabelle Courville, Jill Denham, Edward Hamberger and Edward Monser, all of whom are independent. All members of the Audit and Finance Committee are “financially literate” as required by the NYSE and CSA. Ms. Peverett, Ms. Courville and Mr. Monser have been determined to be “audit committee financial experts” as defined by the SEC.

If significant corporate governance differences between CP’s corporate governance practices and Item 303A of the NYSE arise, they will be disclosed on our website (investor.cpr.ca/governance).
6
Table of Contents
ITEM 11. EXECUTIVE COMPENSATION
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, motor carriers, and other competitors 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


15 /SERVICE EXCELLENCE


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) ("TDGA").

The Company’s U.S. operations are similarly subject to economic and safety regulations. Economic regulatory oversight is provided by the STB which administers Title 49 of the United States Code and related Code of Federal Regulations. Safety regulatory oversight is exercised by the 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. The 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 Changes
After the tragic accident in Lac-Mégantic, Québec, in July 2013 involving a non-related short-line railway company, the Government of Canada implemented several measures pursuant to the RSA and the TDGA. 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 paid for by levies on crude shipments, to be utilized for damages beyond a railway's liability; allows railways and insurers to maintain rights to pursue other parties (subrogation); and prevents shifting liability to shippers from railways except through written agreement.

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 TC, 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 dateforeign private issuer in the United States, for these cars remained January 1, 2018). Protective Direction 39 was issued on September 19, 2018we are deemed to comply with this Item if we provide information required by Items 6.B and eliminated the ability6.E.2 of Form
20-F,
with more detailed information provided if otherwise made publicly available or required to ship crude oilbe disclosed 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 Canada. We have provided information required by Items 6.B and 6.E.2 of Form
20-F
in the United States remains April 1, 2020. CP doesCircular. As a foreign private issuer in the U.S., we are not own any tank cars used for commercial transportationrequired to disclose executive compensation according to the requirements of hazardous commodities.Regulation
S-K

On October 29, 2015, the Surface Transportation Extension Act of 2015 ("STEA") was signed into law. The law extends, by three years, the deadline forthat apply to U.S. domestic issuers, and we are otherwise not required to adhere to the U.S. rail industryrequirements relative to implement Positive Train Control (“PTC”), a set of highly advanced technologies designedcertain other proxy disclosures and requirements. Our executive compensation disclosure complies with Canadian requirements, which are, in most respects, substantially similar 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. Congressrules. We generally attempt to comply with the spirit of the U.S. proxy rules when possible and to the extent that they do not conflict, in 2008 mandated that PTC systemswhole or in part, with required Canadian corporate or securities requirements or disclosure.
All dollar amounts included in this Item 11 are in Canadian dollars, unless otherwise expressly stated to be put into service byin U.S. dollars.
Compensation Committee Interlocks and Insider Participation
There were no reportable interlocks or insider participation affecting the end of 2015 on rail lines used to transport passengers or toxic-by-inhalation materials. The STEA extendedCompany’s Management Resources and Compensation Committee during the deadline to install and activate PTC toyear ended December 31, 2018, with an optional two-year extension (December 31, 2020) under certain circumstances. 2019. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or our Management Resources and Compensation Committee.
Compensation Committee Report
The Company receivedManagement Resources and Compensation Committee has reviewed and discussed the two-year extension 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’sCompensation Discussion and Analysis contained in this annual report on Form
10-K/A
with management of Financial Conditionthe Company and, Results of Operations, Liquiditybased on such review and Capital Resources.

On December 4, 2015,discussion, 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.Management Resources 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 changesCompensation Committee recommended 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.


CP 2019 ANNUAL REPORT/ 16

Finally, on May 23, 2018, the Transportation Modernization Act received Royal Assent. The legislation amended the CTA and the RSA, among other Acts, to (1) replace the previous 160 kilometre extended interswitching limit and the competitive line rate provisions with a new long-haul interswitching regime; (2) modify the existing Level of Service remedy for shippers by instructing the 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 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 TC 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, financial condition, 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, financial condition, 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 rail 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. New regulations published by TC under the TDGA have added requirements for railway companies to take actions to mitigate security risks of transporting dangerous goods by rail. 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, financial condition, 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.


17 /SERVICE EXCELLENCE


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.

Labour Relations
CP employs approximately 13,000 active employees across North America with three-quarters based in Canada and the remainder in the U.S. Unionized employees represent nearly 75% of our workforce and are represented by 34 active bargaining units.

Canada
Within Canada there are eight bargaining units representing approximately 7,100 Canadian unionized active employees. From time to time, we negotiate to renew collective agreements with various unionized groups of employees. In such cases, the collective agreements remain in effect until the bargaining process has been exhausted (pursuant to the Canada Labour Code). Agreements are in place with all eight bargaining units in Canada, effective until December 31, 2020, 2021 and 2022.

United States
In the U.S., there are currently 26 active bargaining units on three subsidiary railroads representing nearly 2,300 unionized active employees. Nine agreements are open for amendment and are under negotiation at this time. All other agreements have been negotiated and concluded, or will become amendable in 2020, 2021, and 2022.

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 U.S. 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 and applicable securities laws in Canada as Exhibits to this annual 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.


CP 2019 ANNUAL REPORT/ 18

ITEM 1A. RISK FACTORS

The risks set forth in the following risk factors could have a materially adverse effect on the Company's business, 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 shouldunder “Compensation Discussion and Analysis” below be read in conjunction with the rest of the information included in this annual report including Item 7. Management’son Form
10-K/A.
Respectfully submitted,
Management Resources and Compensation Committee
Matthew Paull (Chair)
Isabelle Courville
Rebecca MacDonald
Edward Monser
Andrea Robertson
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Table of Contents
2.3 EXECUTIVE COMPENSATION
Our executive compensation program is designed to pay for performance, and to align management’s interests with our business strategy and the interests of our shareholders.
The next section describes our compensation program and explains the 2019 compensation decisions for our NEOs:
Keith E. Creel, President and Chief Executive Officer
Nadeem S. Velani, Executive Vice-President and Chief Financial Officer
John K. Brooks, Executive Vice-President and Chief Marketing Officer
Laird J. Pitz, Senior Vice-President and Chief Risk Officer
Mark A. Redd, Executive Vice-President Operations
Robert A. Johnson, Retired Executive Vice-President Operations
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review, the compensation committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy circular.
Where to find it
Compensation discussion and analysis
9
Our approach to executive compensation9
Compensation governance12
Compensation program17
2019 Executive compensation18
Executive profiles28
Share performance and cost of management42
Executive compensation details
43
Summary compensation table43
Incentive plan awards47
Retirement plans51
Termination and change in control54
8
Table of Financial ConditionContents
2019 compensation
The table below shows the total direct compensation awarded to the named executive officers (NEOs) for 2019.
                                    
      
At-risk
pay
       
($ thousands)        
Long-term incentive awards
       
    Base salary  
Short-term

incentive
  Performance
share units		 Stock options    Total direct   
compensation   		  %
at risk
Keith E. Creel
President and Chief Executive Officer
    1,538    2,979    5,870   3,642        14,029    89%
Nadeem S. Velani
Executive Vice-President and Chief Financial Officer
    751    1,096    1,552   979        4,378    83%
John K. Brooks
Executive Vice-President and Chief Marketing Officer
    670    829    1,197   697        3,393    81%
Laird J. Pitz
Senior Vice-President and Chief Risk Officer
    529    571    811   503        2,414    78%
Mark A. Redd
Executive Vice-President Operations
    491    593    605   355        2,044    76%
Robert A. Johnson
(1)
Retired Executive Vice-President Operations
    478    524    1,015   629        2,646    82%
Note(s):
(1)
Mr. Johnson retired from the Company effective September 30, 2019.
Compensation for the NEOs is benchmarked and Resultsset in U.S. dollars consistent with industry practice. The compensation has been converted to Canadian dollars using an average exchange rate of Operations$1.3269 for 2019, with the exception of Mr. Velani, whose salary is set in U.S. dollars, but paid in Canadian dollars, and Item 8. Financial Statementsis subject to a foreign exchange adjustment of US$1 to CAD$1.3432.
You can read more about executive compensation in the compensation discussion and Supplementary Data.analysis.

COMPENSATION DISCUSSION AND ANALYSIS
Our approach to executive compensation
We believe in the importance of paying for performance and aligning management’s interests with those of our shareholders.
Our executive compensation program supports our railway-focused culture, and is closely linked to the critical metrics that drive the achievement of our strategic plan without taking on undue risk, and is designed to create long-term sustainable value for our shareholders.
We have five key performance drivers designed to focus us on our goal of being the best railroad company in North America:
1.
Provide customers with industry-leading rail service
2.
Control costs
3.
Optimize our assets
4.
Remain a leader in rail safety
5.
Develop our people
As disclosed in our 2018 proxy circular, we implemented several changes to our compensation program in 2017. These changes were the result of an extensive shareholder engagement program and review of executive compensation by the Compensation Committee, the Board and our human resources group. Other than the shifting of the weighting of the metrics within our short-term incentive plan (STIP) and performance share unit (PSU) plans, we did not make any further changes to the structure of our compensation plans in 2019.
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Table of Contents
Compensation mix
Attracting and retaining high calibre executives is key to our long-term success.
We believe strong performance should yield significant rewards. Our executive compensation includes fixed and variable
(at-risk)
pay and the proportion of
at-risk
pay increases by level. Executives earn more if we perform well, and less when performance is not as strong. A significant portion of executive pay is tied to the value of our shares, aligning with shareholder interests. We require our executives to own CP equity and our share ownership guidelines increase by executive level (see page 12).
Variable short-term compensation is more focused on corporate results for executives (75% of target) than for other employees (50% of target) who have more emphasis placed on individual and departmental goals.
This supports our view that the STIP should be tied to overall corporate performance and the areas of our business that each employee influences directly.
The table below shows the pay mix for our current NEOs based on their total target compensation.
Benchmarking
With input from our compensation advisors, we reviewed and updated our compensation comparator group in 2018. Other than the removal of Goldcorp Inc., which was acquired by Newmont Mining Inc., from the comparator group, we did not make any further changes to our comparator group in 2019. Our comparator group consists of six Class 1 Railroad peers as well as 11 capital-intensive Canadian companies. For certain positions within the organization, we apply a common carrier,heavier weighting to Class 1 Railroad peers; however, we consistently review alignment and compensation practices against the Companywhole group.
Our compensation peer group is as follows:
BNSF Railway CompanyBCE Inc.
Canadian National Railway CompanyFortis Inc.
CSX CorporationTC Energy Corporation
Kansas City SouthernTELUS Corporation
Norfolk Southern CorporationRogers Communications Inc.
Union Pacific CorporationBarrick Gold Corporation
Cenovus Energy Inc.Kinross Gold Corporation
Enbridge Inc.Suncor Energy Inc.
Imperial Oil Limited
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Table of Contents
Compensation pays out over time
  
Variable pay includes short and long-term incentive awards to facilitate annual and longer-term performance and align with shareholder interests.
Incentive awards are cash and equity-based. Equity-based awards vest at the end of three years for PSUs and over four years for stock options. Stock options expire at the end of seven years.
The Compensation Committee ensures that the performance objectives for the incentive plans align directly with our strategic plan, which is reviewed and approved by the Board.
Executives are CP shareholders
We require executives and senior management employees to own equity in the company so they have a stake in our future success. Share ownership requirements are set as a multiple of base salary and increase by level. Executives must satisfy the requirement within five years of being appointed to their position and can meet the requirements by holding shares or deferred share units (DSUs). The CEO must maintain the ownership level of six times his base salary for one year after he retires or leaves CP. Once executives have met their initial shareholding requirements, they are required to maintain compliance, which is reported annually to the Compensation Committee.
DSUs are redeemed for cash no earlier than six months after the executive retires or leaves the company or until the end of the following calendar year for Canadian-resident executives. Payment to U.S.-resident executives who participate in the Senior Executives’ Deferred Share Unit Plan (the DSU Plan) is made after the
six-month
waiting period to be in compliance with U.S. tax regulations.
11
Table of Contents
The table below shows the ownership requirement by level, which applied to 87 executives and senior management employees in 2019.
Ownership requirement
(as a multiple of base salary)
  CEO
6x
  Executive Vice-President
3x
  Senior Vice-President
2x
  Vice-President
1.5 to 2x
  Senior management
1x
Mr. Creel, Mr. Velani and Mr. Pitz have met their ownership requirement. Mr. Brooks and Mr. Redd are expected to meet their requirement within the five-year period following their appointment. Mr. Johnson, who retired from the company on September 30, 2019, met his ownership requirement. You can read about each executive’s share ownership in their individual profiles beginning on page 28.
Compensation governance
Disciplined decision-making process
Executive compensation decisions involve management, the Compensation Committee and the Board. The Compensation Committee also receives advice and support from external consultants from time to time.
 
DECISION-MAKING PROCESS1Management makes recommendations to the Compensation Committee Management: reviews market data reviews compensation survey data analyzes company performance proposes corporate and individual performance objectives to the Committee for the coming year2The Committee works with a consultant and makes compensation recommendations to the Board The Committee: Yrecommends the corporate performance targets and weightings for the incentive plans reviews the corporate performance results for the incentive plans Yreviews individual performance receives independent advice from its external consultant Yrecommends the annual and long-term incentive awards to the Board3The Board has final approval The Board: Yreviews corporate and individual performance decides whether to use discretion approves compensation for the CEO and other NEOs approves all grants of equity compensation awards Ysets performance objectives for the following year
The Board has final approval on all matters relating to executive compensation. It can also use its discretion to adjust pay decisions as appropriate.
Qualified and experienced Compensation Committee
The Compensation Committee is responsible for our compensation philosophy, strategy and program design. The Compensation Committee consists of five independent directors.
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Table of Contents
The Compensation Committee has the relevant skills, background and experience for carrying out its duties. The table below shows the key skills and experience of each member:
Human Resources/
compensation/
succession planning
CEO/senior
management
Governance
and policy
development		Transportation
industry		Risk
management		Engagement
(shareholders
and others)
Matthew Paull
(Committee Chair)
✓✓✓✓✓
Isabelle Courville
(Chair of the Board)
✓✓✓✓✓✓
Rebecca MacDonald
✓✓✓✓✓
Ed Monser
✓✓✓✓✓✓
Andrea Robertson
✓✓✓✓✓✓
Compensation Committee members also have specific human resources and compensation-related experience, including:
direct responsibility for executive compensation matters
membership on other human resources committees
compensation plan design and administration, compensation decision-making and understanding the Board’s role in the oversight of these practices
understanding the principles and practices related to leadership development, talent management, succession planning and employment contracts
engagement with investors on compensation issues
oversight of financial analysis related to compensation plan design and practices
oversight of labour matters and a unionized workforce
pension benefit oversight
recruitment of senior executives
The Compensation Committee has no interlocks or insider participation. None of the members were employed by or had any relationship with CP during 2019 requiring disclosure under Item 404 or Item 407(e)(4) of Regulation
S-K
of the Exchange Act. You can read about the background and experience of each member in the director profiles beginning on page 1.
Independent advice
The Compensation Committee and management retain separate independent executive compensation advisors to avoid any conflicts of interest:
Committee advisorManagement advisor
•   the Compensation Committee retained Kingsdale Advisors (Kingsdale) in 2018 and 2019 to act as an independent compensation advisor
•   the Compensation Committee approves all compensation related fees and work performed by the independent compensation advisor
•   management engages Willis Towers Watson to provide market survey data and advice relating to executive compensation
The next table shows the fees paid to Kingsdale and Willis Towers Watson in 2018 and 2019.
                     
   2019       2018 
    Kingsdale   Willis Towers Watson        Kingsdale   Willis Towers Watson 
Executive compensation-related fees
   $  90,000    $     74,785         $  78,750    $   233,309 
Other fees
   $112,821    $2,598,193         $111,254    $2,150,258 
Total fees
   $202,821    $2,672,978         $190,004    $2,383,567 
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Fees paid
Kingsdale was first retained by the Board to provide independent advisory services related to compensation in 2018. For 2019, the Board retained Kingsdale to provide independent advisory services related to governance trends and specific governance items, as well as CEO compensation. $90,000 was paid to Kingsdale in fees for advisory services provided to the Board. The total governance and executive compensation fees represent 44% of the $202,821 paid in total to Kingsdale for all services provided to CP, including proxy solicitation and shareholder advisory services.
In 2019, $74,785 was paid to Willis Towers Watson for executive compensation advisory fees provided to management. The total executive compensation fees represent 3% of the total fees in 2019 to Willis Towers Watson for all services provided to management, including actuarial and pension consulting, corporate risk and insurance broking services.
Compensation risk
Effective risk management is integral to achieving our business strategies and to our long-term success.
The Board believes that our executive compensation program should not increase our risk profile. The Compensation Committee is responsible for overseeing compensation risk. It reviews the executive compensation program, incentive plan design and our policies and practices to make sure they encourage the right decisions and actions to reward performance and align with shareholder interests.
Incentive plan targets are linked to our corporate objectives and our corporate risk profile. The Compensation Committee believes that our approach to goal setting, establishing performance measures and targets and evaluating performance results helps mitigate risk-taking that could reward poor judgment by executives or have a negative effect on shareholder value.
All of the Compensation Committee members other than Mr. Paull and Mr. Monser are members of the Governance Committee. In addition, Ms. Courville and Mr. Monser are also members of the Audit and Finance Committee, and Ms. Courville and Mr. Paull are members of the Risk and Sustainability Committee. This cross-membership strengthens risk oversight because it gives the directors a broader perspective of risk oversight and a deeper understanding of our enterprise risks.
Regular risk review
The Compensation Committee conducts a comprehensive compensation risk review approximately every two years to make sure that we have identified the compensation risks and have appropriate measures in place to mitigate those risks. An independent consultant assists the Compensation Committee with the review, which includes looking at:
the targets for the STIP and PSU plan, anticipated payout levels and the risks associated with achieving targeted performance;
the design of the long-term incentive awards, which reward sustainable financial and operating performance; and
the compensation program, policies and practices to ensure alignment with our enterprise risk management practices.
In 2019, Management retained Willis Towers Watson to perform a detailed risk assessment of our compensation plans, programs and practices. Willis Towers Watson concluded that there did not appear to be significant risks associated with CP’s compensation programs. The committee reviewed Willis Towers Watson’s findings and agreed that CP’s compensation policies and programs did not encourage excessive risk that could have material adverse effects on CP.
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Table of Contents
Managing compensation risk
We mitigate risk in three ways:
1. Plan design
• we use a mix of fixed and variable
(at-risk)
compensation and a significant proportion is
at-risk
pay
• short and long-term incentive plans have specific performance measures that are closely aligned with the achievement of our business strategy and performance required to achieve results in accordance with guidance provided to the market
• the payout curve for the STIP is designed asymmetrically to reflect the significant stretch in target performance
• the payout under the STIP is capped and not guaranteed, and the compensation committee has discretion to reduce the awards
• the long-term incentive plan has overlapping vesting periods to address longer-term risks and maintain executives’ exposure to the risks of their decision-making through unvested share based awards
2. Policies
• we promote an ethical culture and everyone is subject to a code of business ethics
• we have share ownership requirements for executives and senior management so they have a stake in our future success
• we have a disclosure and insider trading/reporting policy to protect our interests and ensure high business standards and appropriate conduct
• our anti-hedging policy prohibits directors, officers and employees from hedging our shares and share-based awards
• our anti-pledging policy prohibits directors and senior officers from holding our shares in a margin account or otherwise pledging them as security
• we also have a policy that prohibits employees from forward selling shares that may be delivered on the future exercise of stock options, or otherwise monetizing their option awards, other than through exercising the options and subsequently selling the shares through a public venue or the company’s cashless exercise option
• our clawback policy allows us to recoup incentive pay from current and former senior executives as appropriate (see page 16 for more information about clawbacks)
• DSUs held by the CEO and executives are not settled for cash until at least six months after leaving the Company
• our whistleblower policy applies to all employees and prohibits retaliation against anyone who makes a complaint acting in good faith
3. Mitigation
    measures
• senior executives have a significant portion of their compensation deferred
• we must achieve a specific threshold of operating income, otherwise no short-term incentive awards are granted
• financial performance is verified by our external auditor (completion of annual financial statement audit) before the Board makes any decisions about short-term incentives
• the Compensation Committee adopted principles for adjusting payout under the STIP, and provides them to the Board as part of their review of the Compensation Committee’s recommendations and performance overall
• environmental principles are fundamental to how we achieve our financial and operational objectives, and the Compensation Committee takes them into account when exercising discretion and determining the short-term incentive awards
• all long-term incentive eligible employees are subject to
two-year
non-compete
and
non-solicit
covenants should they leave CP
• safety is considered as part of individual performance under the short-term incentive for the President and CEO and executives in operations roles in addition to being a specific STIP measure
• we regularly benchmark executive compensation against our comparator group of companies
• different performance scenarios are stress-tested and back-tested to understand possible outcomes
• we review and consider risks associated with retention-related compensation
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Table of Contents
Key policies
In addition to CP’s code of business ethics and the business ethics reporting policy, a number of other policies act to mitigate compensation risk. You can read more about ethical behaviour at CP and our code of business ethics and other policies beginning on page 6.
Clawbacks
Our clawback policy allows the Board to recoup short and long-term incentive compensation paid to a current or former senior executive if:
the incentive compensation received was calculated based on financial results that were subsequently restated or corrected, in whole or in part; and/or
the senior executive engaged in gross negligence, fraud or intentional misconduct that caused or contributed to the need for the restatement or correction, as admitted by the senior executive or as reasonably determined by the Board
The Board has sole discretion to determine whether it is in our best interests to pursue reimbursement of all or part of the incentive compensation and these actions would be separate from any actions by law enforcement agencies, regulators or other authorities.
Anti-hedging
Our disclosure and insider trading and reporting policy prohibits directors, executive officers and employees from buying financial instruments that are designed to transport dangerous goodshedge or offset a decrease in the market value of equity awards or shares they hold directly or indirectly.
Anti-pledging
Our anti-pledging policy prohibits directors and hazardous materials, which could exposeexecutive officers from holding any CP securities in a margin account or otherwise pledging the Company to significant costssecurities as collateral for a loan.
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Table of Contents
Compensation program
Total direct compensation consists of salary, an annual short-term incentive and claims.Railways, including CP, are legally required to transport dangerous goodsa long-term incentive award that focus executives on driving strong financial, operational and hazardous materialscustomer satisfaction results while building shareholder value. Executives also receive pension benefits and perquisites as part of their common carrier obligations regardlessoverall compensation.
ElementPurposeRisk mitigating features
Link to business and
talent strategies
Salary
Cash
(see page 18)
•  competitive level of fixed pay
•  reviewed annually
•  external advisor benchmarks against our comparator group to ensure appropriate levels and fairness
•  attract and retain talent
•  no automatic or guaranteed increases to promote a performance culture
Short-term
incentive
Cash bonus
(see page 18)
•  annual performance incentive to attract and retain highly qualified leaders
•  set target awards based on level of employee
•  set target performance at the beginning of the year to assess actual performance at the end of the year
•  actual payouts are based on the achievement of
pre-determined
corporate and individual objectives
•  corporate performance has an operating income hurdle
•  payouts are capped
•  no guarantee of a minimum payout
•  attract and retain highly qualified leaders
•  motivate high corporate and individual performance
•  use metrics that are based on the strategic plan and approved annually
•  align personal objectives with area of responsibility and role in achieving operating results
Deferred
compensation
Deferred share
units
(see page 52)
•  encourages share ownership
•  executives can elect to receive the short-term incentive and their annual PSU grant in DSUs if they have not yet met their share ownership requirement
•  company provides a 25% match of the deferral amount in DSUs
•  deferral limited to the amount needed to meet the executive’s share ownership guidelines
•  aligns management interests with growth in shareholder value
•  helps retain key talent
•  company contributions vest after three years
•  sustained alignment of executive and shareholder interests because the value of DSUs is tied directly to our share price
•  cannot be redeemed for cash until a minimum of six months after the executive leaves CP
Long-term incentive (LTIP)
(see page 21)
Performance
share units
(see page 23)
•  equity-based incentive aligns with shareholder interests and focuses on three-year performance
•  accounts for 60% of an executive’s long-term incentive award
•  use
pre-defined
market and financial metrics
•  the number of units that vest is based on a performance multiplier that is capped
•  no guarantee of a minimum payout
•  focuses the leadership team on achieving challenging performance goals
•  ultimate value based on share price and company performance
•  attract and retain highly qualified leaders
Stock options
(see page 24)
•  accounts for 40% of an executive’s long-term incentive award
•  vests over four years, term is seven years
•  focuses on appreciation in our share price, aligning with shareholder interests
•  only granted to executives
•  focuses the leadership team on creating sustainable long-term value
Pension
Defined
contribution and defined benefit
pension plans
(see page 51)
•  pension benefit based on pay and service and competitive with the market
•  supplemental plan for executives and senior managers
•  balances risk management of highly performance-focused pay package
•  attract and retain highly qualified leaders
Perquisites
Flexible
spending
account
(see page 45)
•  competitive with the market
•  restrictions for the CEO
•  attract and retain highly qualified leaders
17
Table of risk or potential exposure to loss. CP transports dangerous goodsContents
2019 Executive compensation
Salary
Salaries are set every year based on the executive’s performance, leadership abilities, responsibilities and hazardous materials, including but not limited to crude oil, ethanolexperience as well as succession 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 exceedretention considerations. The Compensation Committee also considers the existing insurance coverage commercially available to CP, which could have a material adverse effect on CP’s financial condition, operating results, and liquidity. CP is also required to comply with rules and regulations regarding the handling of dangerous goods and hazardous materials in Canadaeconomic outlook and the median salary and practices of the comparator group before making its decisions. The base salaries of all NEOs are set in U.S. Noncompliancedollars consistent with these rulesindustry practice.
             
    2019
(in USD)		   % change from 2018   2018
(in USD)		 
  Keith Creel
   1,158,750    3.0%    1,125,000 
  Nadeem Velani
   566,500    3.0%    550,000 
  John Brooks
   525,000    31.3%    400,000 
  Laird Pitz
   400,000    6.7%    375,000 
  Mark Redd
   425,000    24.4%    341,700 
  Robert Johnson
   458,350    3.0%    445,000 
Notes:
Mr. Brooks was promoted to the position of Executive Vice-President & Chief Marketing Officer effective February 14, 2019, with a corresponding increase in pay.
Mr. Redd was promoted to the position of Executive Vice-President Operations effective September 1, 2019, with a corresponding increase in pay.
Short-term incentive plan (STIP)
The short-term incentive award is an annual incentive that focuses executives on achieving strong financial, safety, operational and regulations can subject the Company to significant penalties and could factor in litigation arising outcustomer satisfaction results.
What it is
•  cash bonus for achieving
pre-determined
annual corporate and individual performance objectives that are tied directly to our strategy and operational requirements
Payout
•  corporate performance is assessed against financial, safety and operational measures
•  individual performance is assessed against individual performance objectives
•  no guarantee of a minimum payout
Restrictions
•  must meet minimum level of performance
•  must achieve corporate operating income hurdle for any payout on individual or corporate performance to occur
•  performance multiplier is capped for exceptional performance
•  actual award is capped as a percentage of base salary
If the executive retires
•  executive must give three months’ notice
•  award for the current year is
pro-rated
to the retirement date
18
Table of a train accident. Changes to these rules and regulations could also increase operating costs, reduce operating efficiencies and impact service delivery.

The Companytable below shows the 2019 short-term incentive awarded to the NEOs. All salaries have been converted to Canadian dollars using an average exchange rate of $1.3269 for 2019, with the exception of Mr. Velani, whose salary is set in U.S. dollars, but paid in Canadian dollars, and is subject to significant governmental legislationa foreign exchange adjustment of US$1 to CAD$1.3432.
We use financial and regulation over commercial, operating
non-financial
measures to assess corporate performance. Individual performance is assessed against individual performance objectives for the year and environmental matters.The Company’s railway operationsother
pre-determined
goals that reflect the strategic and operational priorities critical to each executive’s role.
Year EndSalary$XTargetshort-termincentiveX[Corporateperformancefactor+Individualperformancefactor]=2019short-termincentive$(as a % of base salary)75%25%$1.3269(0-200%)(0-200%)Keith Creel$1,537,545X125.00%X155%155%=$2,978,994Nadeem Velani$760,923X90.00%X155%175%=1,095,729John Brooks$696,623X74.40%X155%175%=$829,259Laird Pitz$530,760X70.00%X155%150%=$571,230Mark Redd$563,933X68.34%X155%150%=$592,539Robert Johnson$608,185X75.00%X155%150%=$523,969
Notes:
As both Mr. Brooks and Mr. Redd received promotions in 2019, their short-term incentive plan (STIP) targets have been prorated accordingly.
Mr. Johnson retired from the Company effective September 30, 2019. His STIP is reflective of the portion of the year which he was employed.
Corporate and individual performance factors are capped at 200% to limit payouts and avoid excessive risk-taking.
An employee’s payout on the individual component of the STIP may be zero or range from 50% to 200%. Any award payable under the individual component is subject to extensive federal laws, regulations and rules in both Canada anda minimum level of corporate performance. No award is payable unless the U.S. Operationsminimum corporate hurdle is achieved.
Actual STIP awards are subject to economic and safety regulations in Canada primarily by the Agency and TC. 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 suchalso capped as health, safety, security, environmental and other matters. Additional economic regulationa percentage of the rail industry by these regulators or the Canadian and U.S. federal and state or provincial legislative bodies, 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 effectbase salary, as shown in the future ontable to the Company’s business, financial position, resultsright.
Assessing corporate performance
In 2019, we increased the weighting of operations, and liquidity in a particular year or quarter.our safety measure within the STIP targets to 20% from 10%. This potential material adverse effect could also result in reduced capital spending on the Company’s rail network or in abandonment of lines.change

                 
  Payout as a % of base salary 
Level Below
hurdle		  Minimum  Target  Maximum 
CEO
  0%   62.5%   125%   250% 
Other named executives
  0%   34.2-45%   68.3-90%   136.7-180% 
The Company’s compliance with
reinforces CP’s commitment to safety and security regulations may resultour focus on maintaining our industry leading position in increased capital expendituressafety performance. To accommodate this change we decreased our weighting by 5% on Operating Ratio and operating costs.5% on Operating Income to a total of 35% each on our financial measures from 40% each. No changes were made to actual metrics in 2019 as they are reflective of CP’s focus on sustainable, profitable growth.
New For example, compliance with the Rail Safety Improvement Act of 2008 has resulted in additional capital expenditures associated with the statutorily mandated implementation of PTC.2020
In 2020, CP will add a second safety metric to its STIP program. 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 mayindustry standard Federal Railroad Administration (FRA) Train Accident metric, we will also be raised by adjacent landowners or third parties. In addition,measuring FRA Personal Injury Frequency.
Our employees work 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 toan industrial setting where 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, motor carriers, ship and barge operators, and pipelines. 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


19 /SERVICE EXCELLENCE


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.

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 and adversely affect our business, operating results, and financial condition.

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 railways 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 litigation and other claims that could result in significant expenditures. By nature of its operations, the Company is exposed to potential for litigation and other claims, including personal injury claims, labour and employment disputes, commercial and contract disputes, environmental liability, freight claims and property damage claims. Accruals are made in accordance with applicable accounting standards and based on an ongoing assessment of the likelihood of success of the claim together with an evaluation of the damages or other monetary relief sought. Material changesis high. Adding this measure reinforces CP’s commitment to litigation trends, a catastrophic rail incident or series of incidents involving freight loss, property damage, personal injury, environmental liability, or other claims, and other significant matters could have a material adverse impact to the Company's results of operations, financial position and liquidity, inensure our employees get home safe each case, to the extent not covered by insurance.day.

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 targetSTIP weighting 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 may notsafety will continue to be available20%, with 10% each allocated to FRA Train Accident Frequency and FRA Personal Injury Frequency.
19
Table of Contents
Corporate performance
The table below shows the 2019 scorecard and results. The targets were set with adequate stretch to motivate strong performance.
The Board sets a corporate hurdle for operating income. There is no payout if we do not achieve that corporate hurdle. If we achieve the hurdle but corporate performance is below threshold for all measures, then only the individual performance factor is used to calculate the awards. Corporate results between 50% and 200% of target are interpolated. For 2019, the operating income hurdle was set at commercially reasonable rates. Even with insurance, if any natural occurrence leads$2 billion.
CP delivered record financial performance in 2019. Our precision scheduled railroading operating model enabled us to produce our highest-ever revenues, lowest-ever operating ratio and record operating income and adjusted earnings. The reported operating ratio came in at 59.9% and reported operating income was $3,124 million. From a catastrophic interruptionsafety perspective, CP’s personal injury rate improved 4% and our train accident frequency led the industry in this key safety metric.
                               
Performance measure
   Why it is important  Threshold
(50%)		   Target
(100%)		   Exceptional
(200%)		   2019
Reported
Result		  2019
STIP
Result		  Weighting  Score 
Financial measures
                                  
STIP Operating ratio
Operating expenses divided by total revenues based on an assumed fuel price and foreign exchange rate
 
Continues our focus on
driving down costs while
focusing on growth strategy
   61.3%    60.8%    60.3%    59.9%   59.9%   35%   200% 
STIP Operating income
($ millions)
Total revenues less total
operating expenses based on an assumed foreign exchange rate
 
Highlights the importance of
revenue growth to our corporate strategy
   3,014    3,054    3,121    3,124   3,089   35%   152% 
Safety measure
                                  
FRA Train Accident Frequency
Number of FRA reportable train accidents which meet FRA reporting thresholds per million train miles
 
CP has long been an industry leader in rail safety and we are more focused on it than ever, committed to protecting our people, our communities, our environment and our customers’ goods. As safety is our top priority, in 2019, we increased the weighting of our safety measure within the STIP targets to 20% from 10%
   1.12    1.08    0.99    1.06   1.06   20%   122% 
Operating measure
                                  
Trip Plan Compliance
Calculated as the number of shipments completed on time (less than 12 hours late vs. baseline plan), divided by the total number of shipments completed
 
Trip plan compliance is a detailed schedule of performance and the core of CP’s product offering. It balances between customer needs and what we are capable of delivering
 
It is critical to the service we provide customers and to our growth strategy. Trip plan compliance, as a stand-alone measure, is a relatively new measure at CP
   75%    80%    85%    77.1%   77.1%   10%   71% 
Corporate performance factor
                             
 
155%
 
The Compensation Committee may adjust the results for unusual or
non-recurring
items that are outside our normal business and do not accurately reflect our ongoing operating results or business trends and affect the comparability of services,our financial performance year over year. Results used under the Company maySTIP could therefore differ from our reported GAAP results. Significant items that were adjusted so that they do not be ableimpact, either favourably or unfavourably, the assumptions made when the STIP targets were planned include: foreign exchange rates, fuel price and land sales, all of which were adjusted to restore services without a significant interruptionreflect the original assumptions made in operations.our 2019 budget. Consequently, Operating Income was adjusted downwards compared to our reported results which reduced the bonus payment.

20
Table of Contents
Assessing individual performance
Executives set individual performance objectives before the start of every financial year.
The Company reliesindividual performance factor is based on technologythe executive’s performance against those objectives and technological improvements to operate its business.Information technology isother
pre-defined
quantitative and qualitative goals that reflect the strategic and operational priorities 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,each executive’s role, including operational management, safety, 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


CP 2019 ANNUAL REPORT/ 20

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.

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. Introduction of, or changes to, regulations by government bodies in response to these anticipated impacts could result in a significant increase in expenses and could adversely affect our business performance, results of operations, financial position, and liquidity.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

objectives.

21 /SERVICE EXCELLENCE


ITEM 2. PROPERTIES

Network Geography
The Company’s network extends from the Port of Vancouver on Canada’s Pacific Coast to the Port of Montréal and eastern Québec in Canada, and to the U.S. industrial centres of Chicago, Illinois; Detroit, Michigan; Buffalo and Albany, New York; Kansas City, Missouri; and Minneapolis, Minnesota.

a2020cpmapcpataglance05.jpg

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 stations 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.



CP 2019 ANNUAL REPORT/ 22

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 in B.C., 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 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 alsoEach objective has a direct connection into Chicagominimum, target and by extensionmaximum. The individual performance factor ranges from 0% to points east on CP’s network such as Toronto, Ontario and the Port of Montréal in Québec.200%.

Products– Traffic transported on the Central Corridor includes intermodal containers from the Port of Vancouver, fertilizers, chemicals, crude, frac sand, Automotive, and 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. A haulage arrangement with Genesee & Wyoming Inc., provides Intermodal service to Jeffersonville, Ohio.

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 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 Eastern Québec, Detroit and Albany
Overview– The Eastern Corridor extends from Thunder Bay through to the Port of Montréal and eastern Québec, and from Toronto to Chicago via Windsor, Ontario and Detroit or Buffalo. The Company’s Eastern Corridor provides shippers direct rail service from Toronto, Montréal, and eastern Québec 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 Montréal by providing one of the shortest rail routes for European cargo destined to the U.S. Midwest, using the CP-owned route between Montréal and Detroit, coupled with a trackage rights arrangement on NS tracks between Detroit and Chicago.CP’s acquisition of CMQ Canada provides access through southern and eastern Québec into the U.S. Northeast and Atlantic Canada.

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 Montréal to Albany.

Connections– The Eastern Corridor connects with a number of short-line railways including routes from Montréal to Québec City, Québec and Montréal 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 Montréal in Québec. CP also connects in New York with the two eastern Class I railways; NS and CSX at Buffalo, NS at Schenectady and CSX at Albany.



23 /SERVICE EXCELLENCE
 


Yards and Repair Facilities– CP supports its rail operations in the Eastern Corridor with major rail yards at Sudbury, Toronto, London and Montréal. The Company has locomotive repair facilities at Montréal and Toronto and car repair facilities at Thunder Bay, Toronto and Montréal. 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 Montréal and Detroit. CP also has transload facilities in Agincourt and Hamilton, Ontario to meet a variety of commodity needs in the area.

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 rail 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 has implemented 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.

Network Investment
The Company continually assesses its network to ensure appropriate capacity to meet market demand. As part of CP's annual capital program, the Company has made substantial investments to support current and future volumes, including upgrading the network to handle longer and heavier trains, such as extending sidings to accommodate new train lengths. The Company’s operating metrics, such as average train speed, length and weight, demonstrate efficient utilization of network capacity, discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Performance Indicators.

Track and Infrastructure
CP operates on a network of approximately 12,700 miles of track, not including 244 miles of tracks owned and operated by CMQ U.S. 237 miles of first main track and 81 miles of sidings and yard tracks have been acquired through the CMQ Canada transaction and is included below. CP 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, 2,500 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, 2019, the breakdown of CP operated track miles is as follows:
2019 individual performance factor
The individual performance factor
for the CEO has a cap, so his
individual performance factor
cannot exceed the corporate
performance factor.
This ensures the payout factor for
the CEO aligns with the CEO’s
overall responsibility for CP’s
performance.
Keith Creel
155
% 
Nadeem Velani
175
% 
John Brooks
175
% 
Laird Pitz
150
% 
Mark Redd
150
% 
Robert Johnson
150
% 
The Compensation Committee sets the individual performance factor for the CEO. The CEO reviews the performance of his direct reports against their objectives, and recommends their individual performance factors to the Compensation Committee.
  Total
First main track12,683
Second and other main track1,088
Passing sidings and yard track4,353
Industrial and way track779
Total track miles18,903

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. The Company continues to invest in terminal upgrades and new facilities to accommodate incremental growth in volumes, such as creating additional capacity with the redesign of the classification yard at Alyth in Calgary. The Company’s average terminal dwell is an indicator of efficient utilization of yard capacity, discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Performance Indicators. Typically in all of our major yards, CP Police Services has offices to ensure the safety and security of the yards and operations.



CP 2019 ANNUAL REPORT/ 24

The following table includes the major yards, terminals and transload facilities on CP's network:
Major Classification YardsMajor Intermodal TerminalsTransload Facilities
See the profiles beginning on page 28 to read about each executive’s individual performance in 2019.
Compensation Committee Discretion
The Compensation Committee has developed principles for the use of discretion. Adjustments should not relieve management from the consequences of their decision making. Adjustments should also neither reward nor penalize management for decisions on discretionary transactions, events outside their control (such as foreign exchange rates and fuel prices that are beyond the assumptions used in the planning process) or transactions outside normal corporate planning and budgeting.
As a result, the Compensation Committee can reduce the corporate performance factor for any executive officer as it deems appropriate, as long as it follows the principles. The Board can also use its discretion to adjust the targets and payouts up or down, following the principles set out by the Compensation Committee. The Compensation Committee did not exercise any such discretion in 2019.
Long-term incentive plan
Long-term incentive awards focus executives on medium and longer-term performance to create sustainable shareholder value.
Target awards are set based on the competitive positioning of each executive’s compensation and the practices of companies in our peer group in order to attract and retain experienced railroad executives with highly specialized skills.
Vancouver, British ColumbiaVancouver, British ColumbiaVancouver, British Columbia
Calgary, AlbertaCalgary, AlbertaToronto, Ontario
Edmonton, AlbertaEdmonton, AlbertaHamilton, Ontario
Moose Jaw, SaskatchewanRegina, SaskatchewanLachine, Québec
Winnipeg, ManitobaWinnipeg, Manitoba 
Toronto, OntarioVaughan, OntarioPerformance share units (60%)Stock options (40%)
What they are
•  notional share units that vest at the end of three years based on absolute and relative performance and the price of our shares
•  right to buy CP shares at a specified price in the future
Payout
•  cliff vest at the end of three years based on performance against three
pre-defined
financial and market metrics
•  no guarantee of a minimum payout
•  vest 25% every year beginning on the anniversary of the grant date
•  expire at the end of seven years
•  only have value if our share price increases above the exercise price
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Montréal, QuébecMontréal, QuébecPerformance share units (60%)Stock options (40%)
Dividend equivalents
•  earned quarterly and compound over the three-year period
•  do not earn dividend equivalents
Restrictions
•  must meet minimum level of performance
•  performance multiplier is capped for exceptional performance
•  cannot be exercised during a blackout period
If the executive retires
•  must give three months’ notice
•  award continues to vest and executive is entitled to receive the full value as long as they have worked for six months of the performance period, otherwise the award is forfeited
•  must give three months’ notice
•  options continue to vest, but expire five years after the retirement date or on the normal expiry date, whichever is earlier
Stock options are usually granted in January immediately after the fourth quarter financial statement blackout period ends, while performance share units (PSUs) are awarded in February after the Compensation Committee has reviewed the
year-end
financial results in detail.
Grants are also made for special situations like retention or new hires. Special grants can include PSUs, RSUs, DSUs or stock options. These grants are made on the first Tuesday of the month following approval. If we are in a blackout period, the grant is made after the blackout has been lifted.
 
Chicago, Illinois
Non-Compete
and
Non-Solicitation
Chicago, Illinois
CP is mindful that the demand for experienced and talented railroaders is high, particularly those with backgrounds in precision scheduled railroading. To manage near-term retention risk, the company’s long-term incentive award agreements contain
non-compete,
non-solicitation
and other restrictive clauses, including
non-disclosure
restrictions.
Non-compete
and
non-solicitation
provisions will apply if a recipient fails to comply with certain commitments for a
two-year
period following the end of employment.
2019 long-term incentive awards
To determine the appropriate value of long-term incentive grants provided to the NEOs, the Compensation Committee considers the practices of our comparator group and external market data, as well as internal factors including executive retention, dilutive impact and long-term value creation.
The table below shows the 2019 long-term incentives awarded to the NEOs.
 
St. Paul, MinnesotaMinneapolis, Minnesota
Target as a % of base salary
 
Keith Creel
500%
Nadeem Velani
275%
John Brooks
225%
Laird Pitz
200%
Mark Redd
225%
Robert Johnson
225%

Effective January 1, 2019, Mr. Creel’s long-term incentive target was increased to 600% of his base salary; however, consistent with Mr. Creel’s 2016 employment agreement, his 600% LTI target has been reduced by 100% until the end of 2021 to fund an upfront performance grant that he received in 2017. Therefore, his target was 500% of his base salary in 2019.
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Table of Contents
Equipment
                             
   
2019  
long-term  
                       
   incentive        
Allocation
 
 
   award        
Performance share units
 
      
Stock options
 
 
   (grant value) ($)        
                ($)
 
   
                (#)
 
      
($)
 
   
(#)
 
 
            
Keith Creel
 
   
 
9,512,269
 
 
 
       
 
5,870,208
 
 
 
   
 
21,901
 
 
 
    
 
3,642,061
 
 
 
   
 
54,202
 
 
 
Nadeem Velani
 
   
 
2,531,053
 
 
 
       
 
1,552,110
 
 
 
   
 
5,788
 
 
 
    
 
978,943
 
 
 
   
 
16,313
 
 
 
John Brooks
 
   
 
1,893,801
 
 
 
       
 
1,196,771
 
 
 
   
 
4,465
 
 
 
    
 
697,030
 
 
 
   
 
10,453
 
 
 
Laird Pitz
 
   
 
1,313,416
 
 
 
       
 
810,534
 
 
 
   
 
3,024
 
 
 
    
 
502,882
 
 
 
   
 
7,484
 
 
 
Mark Redd
 
   
 
959,877
 
 
 
      
 
 
604,824
 
 
 
  
 
 
2,167
 
 
 
    
 
355,053
 
 
 
   
 
5,293
 
 
 
Robert Johnson
 
   
 
1,643,916
 
 
 
       
 
1,014,508
 
 
 
   
 
3,785
 
 
 
    
 
629,408
 
 
 
   
 
9,367
 
 
 
CP's equipment includes: owned
Notes:
See the summary compensation table on page 43 for details about how we calculated the grant date fair values of the PSUs and leased locomotivesstock options. Both were calculated in accordance with FASB ASC Topic 718.
The grant value of the awards based on the NYSE trading price has been converted to Canadian dollars using a 2019 average exchange rate of $1.3269.
On February 14, 2019, additional stock options were granted to Mr. Brooks as a result of his promotion to Executive Vice-President.
On September 3, 2019, additional PSUs and railcars; heavy maintenance equipmentstock options were granted to Mr. Redd as a result of his promotion to Executive Vice-President.
Performance share units
PSU awards focus executives on achieving medium-term goals within a three-year performance period.
The Board sets performance measures, thresholds and machinery; other equipmenttargets at the beginning of the performance period.
The number of units that vest is based on our performance over the three-year period. We must achieve threshold performance on a measure, otherwise the payout factor for that measure is zero and tools ina portion of the award is forfeited. If performance is exceptional on a measure, the Board may approve a payout of up to 200%.
PSUs earn additional units as dividend equivalents at the same rate as dividends paid on our shops, offices and facilities; and vehicles for maintenance, transportation of crews, and other activities. In this section, owned equipment includes units acquired by CP, equipment leased to third parties, and units held under finance leases, and leased equipment includes units under a short-term or long-term operating lease.shares.

The Company’s locomotive fleetaward is composedpaid out in cash based on the number of largely high-adhesion alternating current locomotivesunits that are more fuel efficientearned and reliable and have superior hauling capacity as compared with standard direct current locomotives. The Company is continuing a modernization program on severalthe average closing share price for the 30 trading days prior to the end of the oldest locomotivesperformance period on the TSX or NYSE, as applicable. The award may be paid out in shares purchased on the open market, on the CEO’s recommendation, using the
after-tax
value.
2019 PSU awards
The performance period for the 2019 PSU awards is January 1, 2019 to December 31, 2021. In 2019, CP returned to measuring total shareholder return (TSR) performance based on the Class 1 Railways and the S&P TSX 60 Index from the S&P Road and Rail Index and the S&P TSX Capped Industrial Index. The Class 1 Railways align us more closely to our industry peers. Additionally, the S&P TSX 60 Index is a more common benchmark for the broader investment community and a more widely recognized index than the S&P TSX Capped Industrial Index.
Performance will be assessed against the measures in the fleet in ordertable below. Awards will be prorated if results fall between threshold and exceptional.
                   
  2019 PSU performance measures
 
  
  Why the measure is important
 
  
Threshold
(50%)
 
   
Target
(100%)
 
   
Exceptional
(200%)
 
   
Weighting
 
 
PSU three-year average return on invested capital (ROIC)
Net operating profit after tax divided by average invested capital
 
  
Focuses executives on the effective use of capital as we grow
 
Ensures shareholders’ capital is employed in a value-accretive manner
 
   15.3%    16%    16.4%    70% 
Total shareholder return
Measured over three years. The percentile ranking of CP’s TSX Compound Annual Growth Rate (CAGR) relative to the companies that make up the S&P/TSX 60
  
Compares our TSR on the TSX to the broader S&P/TSX60 to reflect our progress relative to the Canadian market
 
Aligns long-term incentive compensation with long-term shareholder interests
 
   25th
percentile		 
 		   50th
percentile		 
 		   75th
percentile		 
 		   15% 
Total shareholder return
Measured over three years. The ordinal ranking of CP’s NYSE CAGR relative to the Class 1 Railroads
  
Compares our TSR on the NYSE to the publicly traded Class 1 Railroads to ensure we are competitive against our primary competitors.
 
Aligns long-term incentive compensation with long-term shareholder interests
   4th    3rd    1st    15% 
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At the end of the three-year performance period, the starting point for determining relative TSR will be the
10-day
average closing share price of our shares on the appropriate index prior to improve reliabilityJanuary 1, 2019 and availability,the closing point will be the
10-day
average closing share price of our shares on the appropriate index prior to January 1, 2022. TSR is adjusted over the period to reflect dividends paid. The payout multiplier is interpolated if our performance falls between 50% and 200%. If results are below the threshold level for any of the performance measures, units for that specific measure will be forfeited.
The table below shows the details of the 2019 annual PSU award grant.
             
    
Grant value ($)
 
     
# of PSUs
 
     
Grant price
 
 
Keith Creel
 
   
 
5,870,208
 
 
 
     
 
21,901
 
 
 
     
 
US$202.00 (NYSE)
 
 
 
Nadeem Velani
 
   
 
1,552,110
 
 
 
     
 
5,788
 
 
 
     
 
$268.16 (TSX)
 
 
 
John Brooks
 
   
 
1,196,771
 
 
 
     
 
4,465
 
 
 
     
 
US$202.00 (NYSE)
 
 
 
Laird Pitz
 
   
 
810,534
 
 
 
     
 
3,024
 
 
 
     
 
US$202.00 (NYSE)
 
 
 
Mark Redd
 
  
 
 
432,874
171,950
 
 
 
 
    
 
 
1,615
552
 
 
 
 
    
 
 
US$202.00 (NYSE)
US$234.76 (NYSE)
 
 
 
 
Robert Johnson
 
   
 
1,014,508
 
 
 
     
 
3,785
 
 
 
     
 
US$202.00 (NYSE)
 
 
 
Notes:
On September 3, 2019, additional PSUs were granted to Mr. Redd as well asa result of his promotion to introduce new technologyExecutive Vice-President.
The grant value of the PSU awards based on the NYSE trading price have been converted to Canadian dollars using a 2019 average exchange rate of $1.3269. We calculated the number of PSUs to be granted to each executive by dividing the grant value by the theoretical value of a PSU (using the Willis Towers Watson binomial lattice model methodology), applied to our
30-day
average closing share price on the TSX or the NYSE prior to the fleet. CP’s locomotive productivity,day of the grant.
Stock options
Stock options focus executives on longer term performance. Options have a seven-year term and vest 25% each year beginning on the anniversary date of the grant. The grant price is the last closing price of our common shares on the TSX or the NYSE on the applicable the grant date. Options only have value for the holder if our current share price increases above the grant price.
2019 stock option awards
The table below shows the details of the 2019 annual stock option award grant.
             
    
Grant value ($)
 
     
# of options
 
     
Grant price
 
 
Keith Creel
 
   
 
3,642,061
 
 
 
     
 
54,202
 
 
 
     
 
US$205.31 (NYSE)
 
 
 
Nadeem Velani
 
   
 
978,943
 
 
 
     
 
16,313
 
 
 
     
 
$271.50 (TSX)
 
 
 
John Brooks
 
  
 
 
502,881
194,149
 
 
 
 
    
 
 
7,484
2,969
 
 
 
 
    
 
 
US$205.31 (NYSE)
US$202.00 (NYSE)
 
 
 
 
Laird Pitz
 
   
 
502,882
 
 
 
     
 
7,484
 
 
 
     
 
US$205.31 (NYSE)
 
 
 
Mark Redd
 
  
 
 
268,508
86,545
 
 
 
 
    
 
 
3,996
1,297
 
 
 
 
    
 
 
US$205.31 (NYSE)
US$234.76 (NYSE)
 
 
 
 
Robert Johnson
 
   
 
629,408
 
 
 
     
 
9,367
 
 
 
     
 
US$205.31 (NYSE)
 
 
 
Notes:
On February 14, 2019, additional stock options were granted to Mr. Brooks as a result of his promotion to Executive Vice-President.
On September 3, 2019, additional options were granted to Mr. Redd as a result of his promotion to Executive Vice-President.
The grant value of the stock option awards based on the NYSE trading price have been converted to Canadian dollars using a 2019 average exchange rate of $1.3269.
We calculated the number of options to be granted to each executive by dividing the grant value by the theoretical value of an option (using the Willis Towers Watson binomial option pricing methodology), applied to our
30-day
average closing share price on the TSX or the NYSE prior to the day of the grant.
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Table of Contents
About the stock option plan
The management stock option incentive plan (the stock option plan) was introduced in October 2001.
Stock options awarded on or after January 1, 2017 have a seven-year term. If the expiry date falls within a blackout period, the expiry date will be extended to 10 business days after the end of the blackout period date. If a further blackout period is imposed before the end of the extension, the term will be extended another 10 days after the end of the additional blackout period.
Regular stock options granted before 2017 expire 10 years from the date of grant and generally vest 25% each year over four years, beginning on the anniversary of the grant date.
The table below sets out the limits for issuing options under the plan:
As a % of the number of shares outstanding
Maximum number of shares that may be reserved for issuance to insiders as options
10%
Maximum number of options that may be granted to insiders in a
one-year
period
10%
Maximum number of options that may be granted to any insider in a
one-year
period
5%
As a % of the number of shares outstanding at
the time the shares were reserved
Maximum number of options that may be granted to any person
5%
We measure
dilution
by determining the number of options available for issuance and the number of options outstanding as a percentage of outstanding shares. Our potential dilution at the end of 2019 was 1.8%. Notwithstanding the limits noted above, the dilution level, measured by the number of options available for issuance as a percentage of outstanding shares continues to be capped, at the discretion of the Board, at 7%.
The option grant price is the last closing market price of shares on the grant date on the TSX or the NYSE (for grants after December 15, 2014 depending on the currency of the grant).
The table below shows the
burn rate
for the last three fiscal years, calculated by dividing the number of stock options granted in the fiscal year by the weighted average number of outstanding shares for the year.
             
(as at December 31)
 
    
2017
 
     
2018
 
     
2019
 
 
Number of options granted
 
     
 
369,980
 
 
 
     
 
282,125
 
 
 
     
 
224,730
 
 
 
Weighted number of shares outstanding
 
     
 
145,863,318
 
 
 
     
 
142,885,817
 
 
 
     
 
138,771,939
 
 
 
Burn rate
 
     
 
0.25%
 
 
 
     
 
0.20%
 
 
 
     
 
0.16%
 
 
 
The table below shows the options outstanding and available for grant from the Stock Option Plan as at December 31, 2019.
         
      
Number of options/shares
 
     
Percentage of outstanding shares
 
 
Options outstanding (as at December 31, 2019)
 
     
 
1,416,346
 
 
 
     
 
1.03
 
% 
 
Options available to grant (as at December 31, 2019)
 
     
 
1,098,707
 
 
 
     
 
0.80
 
% 
 
Shares issued on exercise of options in 2019
 
     
 
260,267
 
 
 
     
 
0.19
 
% 
 
Options granted in 2019
 
     
 
224,730
 
 
 
     
 
0.16
 
% 
 
Since the launch of the stock option plan in October 2001, a total of 18,078,642 shares have been available for issuance under the plan and 15,563,589 shares have been issued through the exercise of options.
We do not provide financial assistance to option holders to facilitate the purchase of shares under the stock option plan.
Additional information
There is a double trigger on options so that if there is a change of control and only if an option holder is terminated without cause, all of his or her stock options will vest immediately according to the change in control provisions in the stock option plan.
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Table of Contents
If an employee retires, the options continue to vest and expire on the original expiry date or five years from retirement, whichever is earlier.
If an employee is terminated without cause, the employee has six months to exercise any vested options. If the employee resigns, the employee has 30 days to exercise any vested options. If an employee is terminated with cause, all options are cancelled.
Options will continue to vest and expire on the scheduled expiry date if the holder’s employment ends due to permanent disability. If an option holder dies, the options will expire 12 months following his or her death and may be exercised by the holder’s estate.
Options can only be assigned to the holder’s family trust, holding corporation or retirement trust, or a legal representative of an option holder’s estate or a person who acquires the option holder’s rights by bequest or inheritance.
The CEO, the Chair of the Board and the Compensation Committee chair have authority to grant options to certain employees based on defined parameters, such as the daily average gross ton-miles (“GTMs”) dividedposition of the employee and the expected value of the option award. In 2019, the Compensation Committee authorized a pool of 50,000 options for allocation by daily average operating horsepower,the CEO, who granted 19,456 options to 13 employees to recognize performance and for retention.
Making changes to the years ended December 31, 2019, 2018,stock option plan
The Board can make the following changes to the stock option plan without shareholder approval:
changes to clarify information or to correct an error or omission
changes of an administrative or a housekeeping nature
changes to eligibility to participate in the stock option plan
terms, conditions and mechanics of granting stock option awards
changes to vesting, exercise, early expiry or cancellation
amendments that are designed to comply with the law or regulatory requirements
The Board must receive shareholder approval to make other changes, including the following, among other things:
an increase to the maximum number of shares that may be issued under the plan
a decrease in the exercise price
a grant of options in exchange for, or related to, options being cancelled or surrendered
The Board has made two amendments to the stock option plan since it was introduced in 2001:
on February 28, 2012, the stock option plan was amended so that a change of control would not trigger accelerated vesting of options held by a participant, unless the person is terminated without cause or constructively dismissed; and
on November 19, 2015, the stock option plan was amended to provide
net stock settlement
as a method of exercise, which allows an option holder to exercise options without the need for us to sell the securities on the open market, resulting in less dilution.
26
Table of Contents
Payout of 2017 was 202, 198, and 201 GTMs per Operating horsepower, respectively. Operating horsepower excludes units offline, tied up or in storage, or in use on other railways, and includes foreign units online. As ofPSU award
On December 31, 2019, the Company had 314 locomotives in storage. As a result, the Company does not foresee the need to acquire new locomotives2017 PSU grant for the next several years. Asperiod of January 1, 2017 to December 31, 2019 CP owned or leasedvested and was paid out on February 7, 2020. The NEOs received a payout of 193% on the following locomotive units: award, which includes dividends earned up to the payment date. The table below shows the difference between the actual payout value and the grant value for each NEO.
LocomotivesOwned
Leased
Total
Average Age
(in years)

Line haul731
88
819
13
Road switcher560
—
560
28
Total locomotives1,291
88
1,379
19

CP’s
2017 grant value(2017 PSU award+Dividend equivalents)x2017 PSU performance factorxMarket share price=PSU value($)(# of units)(# of units)(0-200%)($)Keith Creel4,407,78822,294680193%US$245.0114,138,889Nadeem Velani782,3953,903119193%$323.562,517,052John Brooks428,4422,16766193%US$245.011,374,360Laird Pitz394,2371,99461193%US$245.011,264,578Mark Redd367,3491,85857193%US$245.011,178,305Robert Johnson958,7054,849148193%US$245.013,075,226
Closing market share price is calculated on days when both the TSX and NYSE markets are open. For Mr. Velani, the market share price was calculated using $323.56, the average in-service utilization percentage for freight cars, for the years ended
30-day
closing price of our shares prior to December 31, 2019 2018,on the TSX. For Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and 2017,Mr. Johnson, the market share price was 81%, 84%, and 84%, respectively. Average in-service utilization is defined asUS$245.01, the average active fleet for the year divided by total cars, excluding company service cars and tank cars as these are utilized only as required for non-revenue movements. As
30-day
closing price of our shares prior to December 31, 2019 CP ownedon the NYSE, and leased the following unitsvalue of freight cars:these shares were converted to Canadian dollars using the
year-end
exchange rate of $1.2988. For comparability, for Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson, the 2017 grant value was converted using an exchange rate of $1.2986.
How we calculated the 2017 PSU performance factor
Freight carsOwnedLeased
Total
Average Age
(in years)

Box car2,594250
2,84430
Covered hopper7,6079,699
17,30624
Flat car1,461770
2,23126
Gondola3,6481,440
5,08821
Intermodal1,319150
1,46915
Multi-level autorack2,894719
3,61326
Company service car2,396174
2,57045
Open top hopper105—
10532
Tank car339
4212
Total freight cars22,05713,211
35,26825



25 /SERVICE EXCELLENCE


As ofThe PSU performance factor for the three-year period from January 1, 2017 to December 31, 2019 CP owned and leased the following units of intermodal equipment:
Intermodal equipmentOwnedLeased
Total
Average Age
(in years)
Containers8,804—
8,8047
Chassis6,290601
6,89111
Total intermodal equipment15,094601
15,6959

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 system193%, as shown in the event of any power disruption. 

In addition to fully operational redundant systems, CPtable below. The payout value 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 locatedbeen calculated in Minneapolis, where a facility similar toaccordance with the one in Calgary exists. It services the dispatching needs of 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 partterms of the Company's multi-year capital programPSU plan 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.the 2017 award agreement.

                         
PSU measures
 
  
Threshold
(50%)
 
   
Target
(100%)
 
   
Maximum
(200%)
 
   
PSU
result
 
   
Weighting
 
   
PSU
performance
factor
 
 
3 Year Average Adjusted Return on Invested Capital
(1)
 
  
 
 
14.5%
 
 
 
  
 
 
15%
 
 
 
  
 
 
15.5%
 
 
 
  
 
 
15.9%
 
 
 
  
 
 
60%
 
 
 
  
 
 
200%
 
 
 
TSR to S&P/TSX Capped Industrial Index
 
   
 
25th
percentile
 
 
 
 
   
 
50th
percentile
 
 
 
 
   
 
75th
percentile
 
 
 
 
   
 
80th
percentile
 
 
 
 
   
 
20%
 
 
 
   
 
200%
 
 
 
TSR to S&P 1500 Road and Rail Index
 
   
 
25th
percentile
 
 
 
 
   
 
50th
percentile
 
 
 
 
   
 
75th
percentile
 
 
 
 
   
 
66.7th
percentile
 
 
 
 
   
 
20%
 
 
 
   
 
167%
 
 
 
PSU performance factor
 
                            
 
193%
 
 
 
Encumbrances
Refer to Item 8. Financial Statements and Supplementary Data, Note 18 Debt, for information on the Company's finance lease obligations and assets held as collateral under these agreements.
(1)
Adjusted Return on Invested Capital is a non-GAAP measure. Non-GAAP measures are defined and reconciled on pages 54-62 of CP’s Annual Report on Form 10-K for the year ended December 31, 2019.


ITEM 3. LEGAL PROCEEDINGS

27
For further details, refer to Item 8. Financial Statements and Supplementary Data, Note 26 Commitments and contingencies.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

Table of Contents

KEITH E. CREEL  
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CP 2019 ANNUAL REPORT/ 26

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

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 PositionBusiness Experience
Keith
Mr. Creel 51
was appointed as President and Chief Executive Officer
Mr. Creel became President and CEO of CP (CEO) on January 31, 2017. Previously,2017, a planned transition that had been in place since he was recruited to CP in February 2013 as President and Chief Operating Officer ("COO") from February 5, 2013, to January 30, 2017.
(COO). Prior to joining CP, Mr. Creel was Executive Vice-Presidenthad a very successful operating career that began in 1992 at Burlington Northern as a management trainee in operations and eventually led to his becoming the EVP and COO at CN in 2010. Mr. Creel obtained a Bachelor of Science in marketing from January 2010Jacksonville State University and has completed the Advanced Management Program at the Harvard Business School. He served as a commissioned officer in the U.S. Army during which time he served in the Persian Gulf War.
The end of 2019 marked Mr. Creel’s third year as our President and CEO. This past year, Mr. Creel was focused on developing people, driving safety improvements and pursuing continued sustainable, profitable growth. Mr. Creel was recognized by
Institutional Investor
as a member of the 2020
All-Canada
Executive Team and was ranked as the top CEO in the Capital Goods/Industrials sector.
2019 individual performance
CP’s purpose is to deliver transportation solutions that connect North America and the world. By doing this safely and efficiently, we create long-term, sustainable value for our shareholders and the broader economy.
We remain grounded in the foundations of precision scheduled railroading. We operate safely, optimize assets, control costs, provide service and develop people. From our multi-year strategic and business plans to our daily operations and sales and marketing playbooks, everything we do is driven by, and tested against, our purpose, our values and the foundations of precision scheduled railroading.
In 2019, Mr. Creel focused on the following key areas:
Developing people
In 2019, Mr. Creel championed the roll out of CP’s three core values of accountability, diversity and pride and appointed a Chief Culture Officer to help sustain and improve its industry-best culture. He also spent considerable time across the CP network engaging
face-to-face
with CP employees, including joining his senior operating team for three CEO town halls.
This past year, he led the development and launch of an employee perspective survey to gather actionable data regarding management employee satisfaction and engagement and oversaw the seamless transition of CP’s operating team due to the retirements of Robert Johnson (Executive Vice-President Operations) and Tony Marquis (Senior Vice-President Operations East).
Developing leaders internally is essential to CP’s continued success. That commitment is evidenced by Mr. Creel’s continued leadership on CP’s Coaching Capability Program, designed for high-potential managers to expand their leadership skills and create a deep bench of talent at CP. The company also continued its executive coaching program for existing and future leaders to receive
one-on-one
coaching and a customized development program from a certified executive coach.
Mr. Creel also led CP’s first executive leadership forum. The forum focused on furthering the development of thought leadership and employee performance potential.
Under Mr. Creel’s leadership, 2019 also saw CP release its first ever diversity and inclusion report, numerous panel discussions involving senior leadership focused on the advancement of women at CP, and CP being named the fourth overall Military Friendly
®
employer in the United States.
Driving safety improvements
For the 14
th
year in a row, CP had the lowest
FRA-reportable
train accident frequency of any North American Class 1 railway. That said, safety is not about a destination, but a constant journey.
Mr. Creel led the initiative to increase the weighting on CP’s safety measure within our STIP, reinforcing CP’s commitment to safety. Under his leadership, CP continues to highlight the Home Safe program, which empowers all employees to begin a safety conversation, regardless of seniority or position, in the workplace and at home. This program, along with a personal commitment from each of CP’s employees, has led to a 20% reduction in personal injury rate since its inception.
This past year, CP also hosted its first Safety Awards for Excellence gala, celebrating outstanding employee safety leadership.
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Table of Contents
Driving sustainable, profitable growth
Under Mr. Creel’s leadership, CP was able to achieve its highest-ever revenues and lowest-ever yearly operating ratio in 2019. This is a result of the company’s disciplined approach to sustainable, profitable growth - a plan rooted in the foundations of precision scheduled railroading.
Despite challenging macroeconomic conditions, revenues increased 7 percent to a record $7.79 billion. Diluted earnings per share (EPS) increased 30 percent to a record $17.69 from $13.61 and adjusted diluted EPS
(1)
rose 13 percent to a record $16.44 from $14.51.
As a result of Mr. Creel’s efforts and leadership, CP led the industry in volume growth and revenue growth for a second consecutive year.
In 2019, CP realized gains in intermodal, automotive, forest products, and energy, chemicals and plastics. Across all lines of business, there were key contract wins throughout the year that set CP up well for 2020 and beyond.
Mr. Creel spearheaded CP’s efforts to extend its reach through various initiatives in 2019 including the acquisition of the Central Maine & Quebec Railway and the opening of new compounds and transload terminals across the CP network.
Additionally, this past year Mr. Creel held several meetings with a broad range of external stakeholders, including investors, Indigenous Peoples, industry associations, government, regulators, customers and policy makers. He also met regularly with current and prospective shareholders at industry conferences, at CP’s headquarters, and at shareholder offices across Canada, the United States and Europe.
With Mr. Creel at the helm, the company remains focused on safely harnessing our network capacity to provide unique solutions that leverage our network strengths and superior service.
The assessment was reviewed by the Compensation Committee and reviewed and approved by the Board.
2019 compensation
The table below shows the compensation awarded to Mr. Creel for 2019.
Compensation (in CAD $‘000)
2019
Fixed
Base earnings
1,538
Variable
Short-term incentive
2,979
Long-term incentive
- PSUs
5,870
- Stock options
3,642
Total direct compensation
14,029
Total target direct compensation
11,147
Notes:
Salary is the actual amount received in the year. Payments made in U.S. dollars have been converted to February 2013. During his timeCanadian dollars using an average exchange rate for the year of $1.3269.
Salary
Mr. Creel’s salary was increased to US$1,158,750 in 2019.
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Table of Contents
2019 Short-term incentive
Based on our 2019 corporate performance and the board’s assessment of his individual performance, Mr. Creel received a cash bonus of $2,978,994 for 2019, calculated as follows:
Year EndSalary ($)XTargetshort-termincentiveX[Corporateperformancefactor ($)+Individualperformancefactor ($)]=2019short-termincentive ($)(as a % ofbase salary)155%x 75%155%x 25%(0-200%)(0-200%)1,537,545125%2,234,245744,7492,978,994
His
year-end
salary and the 2019 STIP award were paid in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.3269 for 2019.
2019 Long-term incentive
Mr. Creel received annual 2019 long-term incentive awards with a total grant value of $9,512,269, 100% of his target award. The grant was allocated as 60% PSUs and 40% stock options.
Realized and realizable pay
The value of Mr. Creel’s incentive compensation is based on our performance over the period and, for the long-term incentive, our share price when the awards vest.
The graph below shows the three-year average of Mr. Creel’s granted and realized and realizable pay from 2017 to 2019.
Notes:
Summary compensation table:
average of salary earned, actual cash bonus received, and long-term incentives granted (using the grant date fair value from 2017 to 2019 as disclosed in the summary compensation table on page 43). The compensation figures have been converted to Canadian dollars using the following average exchange rates: $1.3269 for 2019, $1.2957 for 2018 and $1.2986 for 2017.
Realized and realizable pay:
average of salary earned, actual cash bonus received, the value of long-term incentive awards that have vested or been exercised, and the estimated current value of unvested long-term incentive awards granted from 2017 to 2019.
the value of vested 2017 PSUs paid in February 2020 was calculated using the
30-day
average trading price of our shares prior to December 31, 2019 of US$245.01 on the NYSE with a performance multiplier of 1.93 and includes dividends earned up to the payment date.
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Table of Contents
the value of unvested 2018 and 2019 PSUs are based on the closing price of our shares on December 31, 2019 of US$254.95 on the NYSE with a performance multiplier of 1.0. PSUs include reinvestment of additional units received as dividend equivalents
the value of unvested/unexercised stock options is based on the closing price of our shares on December 31, 2019 of US$254.95 on the NYSE
the compensation figures for salary earned and actual bonus received have been converted to Canadian dollars using the following average exchange rates: $1.3269 for 2019, $1.2957 for 2018 and $1.2986 for 2017.
the value of any realized and realizable PSUs and Stock Options have been converted into Canadian dollars using the 2019
year-end
exchange rate of $1.2988
The
up-front
performance stock options grant received in 2017 is included in realizable pay
We also compare the realized and realizable value of $100 awarded in total direct compensation to Mr. Creel in each year to the value of $100 invested in our shares on the first trading day of the period, assuming reinvestment of dividends to show a meaningful comparison of shareholder value.
Pay linked to shareholder value
The table below shows Mr. Creel’s total direct compensation in Canadian dollars in each of the last three years, compared to its realized and realizable value as at December 31, 2019. We also compare the realized and realizable value of $100 awarded in total direct compensation to Mr. Creel in each year to the value of $100 invested in CP shares on the first trading day of the period, assuming reinvestment of dividends, to show a meaningful comparison of shareholder value.
                     
(in CAD $‘000)             Value of $100 
    
Compensation
awarded
($)
  
Realized and realizable value
of compensation as at
December 31, 2019
($)
   
Period
   
Keith Creel
($)
   
Shareholder
($)
 
2017
   18,780,304   48,994,522    Jan 1, 2017 to Dec 31, 2019    260.88    178.55 
2018
   11,491,066   14,640,604    Jan 1, 2018 to Dec 31, 2019    127.41    147.41 
2019
   14,029,129   15,318,711    Jan 1, 2019 to Dec 31, 2019    109.19    138.38 
Mr. Creel’s compensation awarded is as disclosed in the summary compensation table. Mr. Creel’s realized and realizable value for salary earned and actual bonus received have been converted to Canadian dollars using the following average exchange rates: $1.2986 for 2017, $1.2957 for 2018 and for $1.3269 for 2019. The value of any realized and realizable long-term incentive is converted into Canadian dollars using the 2019
year-end
exchange rate of $1.2988.
Equity ownership
(at February 28, 2020)
               
Requirement
(as a multiple of salary)
  Minimum
ownership value ($)		   Shares ($)  Deferred share
units ($)		  Total ownership
value ($)		  Total ownership
(as a multiple of salary)		 
6x
   9,616,608   1,166,073  10,666,164  11,832,237   7.38x 
Mr. Creel has met his share ownership requirements. Values are based on US$248.77, the closing price of our shares on the NYSE on February 28, 2020 and have been converted using an exchange rate of $1.3429.
2020 Compensation
The Compensation Committee, in collaboration with Kingsdale, reviewed Mr. Creel’s compensation relative to our Class 1 Railroad peers. Through this benchmarking, it was determined that Mr. Creel’s long-term incentive target was considerably below the median. Effective January 1, 2020, Mr. Creel received a 3% increase in base salary, and his long-term incentive target became 660% of his base salary. Consistent with Mr. Creel’s 2016 employment agreement, his 660% long-term incentive target has been reduced by 100% (to a total of 560% each year) until the end of 2021 to fund an upfront performance grant that he received in 2017.
(1)
Adjusted diluted EPS is a
non-GAAP
measure.
Non-GAAP
measures are defined and reconciled on pages 54-62 of CP’s Annual Report on Form
10-K
for the year ended December 31, 2019.
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Table of Contents
NADEEM S. VELANI
  EXECUTIVE VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER
Mr. Velani was appointed Vice-President and Chief Financial Officer (CFO) on October 18, 2016 and was appointed Executive Vice-President and Chief Financial Officer on October 17, 2017. Mr. Velani is a key member of the senior management team responsible for the long-term strategic direction of the Company. Other responsibilities include financial planning, reporting and accounting systems, as well as pension, treasury, investor relations and tax functions.
Mr. Velani joined CP in March 2013 and most recently served as Vice-President Investor Relations. Prior to CP, Mr. Velani spent approximately 15 years at CN where he worked in a variety of positions in financial planning, sales and marketing, investor relations and the Office of the President and CEO.
2019 individual performance
The CEO assessed Mr. Velani’s performance against his individual performance objectives. In 2019, Mr. Velani: executed the company’s strategic multi-year plan to drive sustainable profitable growth; championed company-wide leadership development including as Chair of CP’s Leadership Development Steering Committee; improved the forecasting and budgeting process to help align resources in a volatile macro-economic environment, and continued to implement CP’s pension asset management strategy. Mr. Velani also delivered on CP’s financial principles, including a capital allocation strategy to support robust, long-term shareholder returns.
Mr. Velani was recognized by
Institutional Investor
as a member of the inaugural 2020
All-Canada
Executive Team. He was ranked as the top CFO in the Capital Goods/Industrials sector as voted on by
buy-side
analysts, money managers and sell-side researchers. Mr. Velani was assessed as exceeding his individual performance objectives for the year.
The assessment was reviewed by the Compensation Committee and reviewed and approved by the Board.
2019 compensation
The table below is a summary of the compensation awarded to Mr. Velani for 2019.
Compensation (in CAD $‘000)
2019
Fixed
Base earnings
751
Variable
Short-term incentive
1,096
Long-term incentive
- PSUs
1,552
- Stock options
979
Total direct compensation
4,378
Total target direct compensation
3,538
Salary
Mr. Velani’s salary was increased to US $566,500 in 2019. His salary was paid in Canadian dollars based on a foreign exchange rate of $1.3432.
2019 short-term incentive
Based on our 2019 corporate performance and the CEO’s assessment of his individual performance, Mr. Velani received a cash bonus of $1,095,729 for 2019, calculated as follows:
Year EndSalary ($)XTargetshort-termincentiveX[Corporateperformancefactor ($)+Individualperformancefactor ($)]=2019short-termincentive ($)(as a % ofbase salary)155%x 75%175%x 25%(0-200%)(0-200%)760,92390%796,116299,6131,095,729
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2019 long-term incentive
Mr. Velani received annual 2019 long-term incentive awards with a total grant value of $2,531,053, 100% of his target award. The grant was allocated as 60% PSUs and 40% stock options.
Equity ownership
(at February 28, 2020)
                     
Requirement
(as a multiple of salary)
  Minimum
ownership value ($)		   Shares ($)   Deferred share
units ($)		   Total ownership
value ($)		   Total ownership
(as a multiple of salary)		 
3x
   2,363,511    204,541    2,373,218    2,577,759    3.27x 
Mr. Velani has met his share ownership requirements. Values are based on $332.67, the closing price of our common shares on the TSX on February 28, 2020.
2020 Compensation
A comprehensive market review was conducted to assess Mr. Velani’s compensation relative to our peer group median. It was determined that Mr. Velani’s total direct compensation was below the market median. Therefore, effective January 1, 2020, his long-term incentive target was increased to 300% of base salary from 275%. He also received a 6% increase in base salary effective February 1, 2020.
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Table of Contents
JOHN K. BROOKS  
EXECUTIVE VICE-PRESIDENT AND CHIEF MARKETING OFFICER
Mr. CreelBrooks was appointed Executive Vice-President and Chief Marketing Officer (CMO) on February 14, 2019. During the financial year ended December 31, 2018, Mr. Brooks was CP’s Senior Vice-President and Chief Marketing Officer.
During Mr. Brooks’ sales and marketing career he has held various positionssenior responsibilities in all lines of business, including coal, chemicals, merchandise products, grain and intermodal. He began his railroading career with Union Pacific and later helped start I&M Rail Link, LLC, which was purchased by the Dakota, Minnesota and Eastern Railroad (DM&E) in 2002. Mr Brooks was Vice-President of Marketing at the DM&E prior to it being acquired by CP in 2007.
In the role of CMO, Mr. Brooks is responsible for CP’s business units and leading a group of highly capable sales and marketing professionals across North America. In addition, Mr. Brooks is responsible for strengthening partnerships with existing customers, generating new opportunities for growth, enhancing the value of the company’s service offerings and developing strategies to optimize CP’s book of business.
2019 individual performance
The CEO assessed Mr. Brooks’ performance in 2019 against his individual performance objectives, which included the ongoing development and organization of the sales and marketing team, revenue growth, improving the quality of revenue, customer relationships and network development by expanding our reach through new market offerings, transloads and short lines and enhancing our product offering. Throughout 2019, Mr. Brooks was also focused on proactive customer engagement which included: measuring customer experience, hosting a customer advisory council, hosting meetings of short line railroads and transload operators, recognizing customers through initiatives such as our safe shipper awards and the new grain elevator of the year award. In addition, Mr. Brooks leads his team in the development, measurement and presentation of CP’s annual and multi-year business plan. Mr. Brooks was assessed as having exceeded his overall individual performance objectives.
The assessment was reviewed by the Compensation Committee and reviewed and approved by the Board.
2019 compensation
The table below is summary of the compensation awarded to Mr. Brooks for 2019.
Compensation (in CAD $‘000)
2019
Fixed
Base earnings
670
Variable
Short-term incentive
829
Long-term incentive
- PSUs
1,197
- Stock options
697
Total direct compensation
3,393
Total target direct compensation
2,782
Notes:
Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year of $1.3269.
Salary
Effective February 14, 2019, Mr. Brooks was promoted to Executive Vice-President and Chief Marketing Officer. His salary was increased to US$525,000.
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Table of Contents
2019 short-term incentive
Mr. Brooks’ annual bonus target was prorated to 74.4% of his base salary in 2019 to reflect his time at the new target associated with his promotion. Based on our 2019 corporate performance and the CEO’s assessment of his individual performance, Mr. Brooks received a cash bonus of $829,259 for 2019, calculated as follows:
Year EndSalary ($)XTargetshort-termincentiveX[Corporateperformancefactor ($)+Individualperformancefactor ($)]=2019short-termincentive ($)(as a % ofbase salary)155%x 75%175%x 25%(0-200%)(0-200%)696,62374.40%602,509226,750829,259
His
year-end
salary and the 2019 STIP award were paid in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.3269 for 2019.
2019 long-term incentive
Mr. Brooks’ long-term incentive target was increased to 225% of his annual salary. He received 2019 long-term incentive awards with a total grant value of $1,893,801 which included a top up stock option grant received in February 2019 with a grant value of $194,149 to bring him to the Executive Vice-President level. The grants were allocated as 60% PSUs and 40% stock options.
Equity ownership
(at February 28, 2020)
                     
Requirement
(as a multiple of salary)
  Minimum
ownership value ($)		   Shares ($)   Deferred share
units ($)		   Total ownership
value ($)		   Total ownership
(as a multiple of salary)		 
3x
   2,220,821    692,832    615,076    1,307,908    1.77x 
Mr. Brooks is on track to meet his share ownership requirements by February 2024. Values are based on US$248.77, the closing price of our shares on the NYSE on February 28, 2020 and have been converted using an exchange rate of $1.3429.
2020 Compensation
Mr. Brooks was promoted to Executive Vice-President and Chief Marketing Officer on February 14, 2019. Commensurate with his promotion and supplemented by a competitive market review, effective January 1, 2020, his short-term incentive target was increased to 90% of his base salary from 75% and his long-term incentive target was increased to 275% of base salary from 225%. He also received a 5% increase in base salary effective February 1, 2020.
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Table of Contents
LAIRD J. PITZ
  SENIOR VICE-PRESIDENT AND CHIEF RISK OFFICER
Mr. Pitz was promoted to Senior Vice-President and Chief Risk Officer in October of 2017. This was part of the overall realignment of the risk and insurance functions for succession purposes, and to retain Mr. Pitz for the necessary development of the succession candidates. He is responsible for all aspects of risk-management in Canada and the U.S., including police services, casualty and general claims, environmental risk, field safety and systems, operational regulatory affairs and training, disability management and forensic audit investigations. Mr. Pitz joined CP on April 2, 2014, as Vice-President of Security and Risk Management.
Mr. Pitz, a Vietnam War veteran and former FBI 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 defense, logistics and transportation.
2019 individual performance
The CEO assessed Mr. Pitz’s performance in 2019 against his individual performance objectives, which focused on the development of succession candidates in risk mitigation and safety and sustainability; and managing risk and reducing liability in several key areas: safety, environmental, insurance, police, security, casualty management, damage prevention, regulatory, operating practices, forensic and disability management. Under Mr. Pitz’s leadership, CP has made significant progress in mitigating its overall risk and liability, while supporting sustainable growth including the following results in 2019: $88 million cost control of monetary exposure; evaluating our most significant environmental, social and governance topics impacting the company; securing an independent insurance portfolio to protect the company against uncertain insurable losses; executing a resilient emergency response and crisis preparedness practice; and improving CP’s safety culture through Home Safe initiatives and technical training programs resulting in a 4% reduction in FRA Personal Injury frequency to 1.42 (lowest in CP’s history) and industry leading FRA Train Accident frequency of 1.06. Mr. Pitz was assessed as having exceeded his overall individual performance objectives.
The assessment was reviewed by the Compensation Committee and reviewed and approved by the Board.
2019 compensation
The table below is a summary of the compensation awarded to Mr. Pitz for 2019.
Compensation (in CAD $‘000)
2019
Fixed
Base earnings
529
Variable
Short-term incentive
571
Long-term incentive
- PSUs
811
- Stock options
503
Total direct compensation
2,414
Total target direct compensation
1,964
Notes:
Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year of $1.3269.
Salary
Mr. Pitz’s salary was increased to US$400,000 in 2019.
36
Table of Contents
2019 short-term incentive
Based on our 2019 corporate performance and the CEO’s assessment of his individual performance, Mr. Pitz received a cash bonus of $571,230 for 2019, calculated as follows:
 
Year EndSalary ($)XTargetshort-termincentiveX[Corporateperformancefactor ($)+Individualperformancefactor ($)]=2019short-termincentive ($)(as a % ofbase salary)155%x 75%150%x 25%(0-200%)(0-200%)530,76070%431,906139,324571,230
His
year-end
salary and 2019 STIP award were made in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.3269 for 2019.
2019
long-term
incentive
Mr. Pitz also received 2019 annual long-term incentive awards with a total grant value of $1,313,416, 100% of his target award. The grant was allocated 60% PSUs and 40% stock options.
Equity ownership
(at February 28, 2020)
                     
Requirement
(as a multiple of salary)
  Minimum
ownership value ($)		   Shares ($)   Deferred share
units ($)		   Total ownership
value ($)		   Total ownership
(as a multiple of salary)		 
2x
   1,106,550    25,724    1,485,075    1,510,799    2.73x 
Mr. Pitz has met his share ownership requirements. Values are based on US$248.77, the closing price of our shares on the NYSE on February 28, 2020 and have been converted using an exchange rate of $1.3429.
37
Table of Contents
MARK A. REDD  
EXECUTIVE VICE-PRESIDENT OPERATIONS
Mr. Redd was appointed Executive Vice-President Operations Senioreffective September 1, 2019. Mr. Redd oversees the 24/7 operations of CP’s network including those teams responsible for network transportation, operations, mechanical, engineering, procurement and labour relations.
Mr. Redd brings to his role considerable leadership experience in rail operations and safety excellence.
Mr. Redd joined CP in October 2013. In April 2016, he was appointed Vice-President Eastern Region, Senior Vice-PresidentOperations 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, priorwas promoted to its merger with CN in 1999.
Mark Redd, 49
Executive Vice-President, Operations

Mr. Redd has been Executive Vice-President Operations since September 1, 2019. Before this appointment, he was Senior Vice-President Operations Western Region fromin February 2, 2017 to August 31, 2019 and Vice-President Operations Western Region from April 20, 2016 to February 1, 2017.

Previous Prior to these roles, he was General Manager Operations U.S. West and General Manager Operations Central Division. He was named CP'sCP’s 2016 Railroader of the Year. Prior to joining CP in October 2013,
Mr. Redd worked forbegan his railroading career at Midsouth Rail in Jackson, Mississippi, as a brakeman and conductor, before moving to Kansas City Southern (KCS) as an engineer. Throughout his over 20 years at Kansas City Southern Railway where heKCS, Mr. Redd held a variety of leadership positions in network and field operations. Mr. Redd holds bachelor and Master of Business Administration ("MBA") degrees from the University of Missouri – Kansas City.
Nadeem Velani, 47
Executiveoperations, including 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 CNTransportation where he workedoversaw key operating functions in a variety of positions in Strategicthe U.S. and Financial Planning, Investor Relations, Sales and Marketing, andMexico. During this time, he also served as the OfficeChairman of the President and CEO.

Mr. Velani holds a Bachelor of Economics degree from Western University and an MBAoperating board for the Port Terminal Railroad Association in Finance/International Business from McGill University.Houston, Texas.
John Brooks, 49
Executive Vice-President and Chief Marketing Officer

Mr. Brooks has been Executive Vice-President and Chief Marketing Officer ("CMO") of CP since February 14, 2019. Previous to this appointment, he was the Senior 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 is pivotal to CP's continued and future success. ​
James Clements, 50
Senior Vice-President, Strategic Planning and Technology Transformation

Mr. Clements has been Senior Vice-President, Strategic Planning and Technology Transformation since September 1, 2019. Before this appointment, he was the Vice-President, Strategic Planning and Transportation Services of CP since 2014. Mr. Clements has responsibilities that include strategic network issues, Network Service Centre operations and Information Services.  In addition, he has responsibility for all of CP’s facilities and real estate across North America.

Mr. Clements has been at CP for 25 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.


27 /SERVICE EXCELLENCE
 

2019 individual performance

Jeffrey Ellis, 52
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 andThe CEO assessed Mr. Redd’s performance of the legal, corporate secretarial, government relations and public affairs functions of CP in Canada and the U.S.
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, Ontario.​
Mr. Ellis has Bachelor of Arts and Master of Arts degrees from the University of Toronto, Juris Doctor and Master of Laws degrees from Osgoode Hall Law School, and an MBA from the Richard Ivey School of Business, Western University. Mr. Ellis is a member of the bars of New York, Illinois, Ontario and Alberta.
Mike Foran, 46
Vice-President, Market Strategy and
Asset Management

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, 59
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, 75
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, 43
Vice-President, Human Resources and Chief Culture Officer
Mr. Rolstad has been Vice-President, Human Resources since February 14, 2019 and the Chief Culture Officer since September 1, 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.


CP 2019 ANNUAL REPORT/ 28

PART II



29 /SERVICE EXCELLENCE


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Share Information
The Common Shares are listedagainst his individual performance objectives. Mr. Redd focused on the TSXtransitioning his leadership team which included delivering world class service to our customers by executing CP’s precision scheduled railroading model, leading CP’s safety efforts, and on the NYSE under the symbol "CP".

Share Capital
At February 18, 2020, the latest practicable date priorcontinuing to the date of this Annual Report on Form 10-K, there were 136,748,767 Common Shares and no preferred shares issued and outstanding, which consists of 13,928 holders of record of the Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase the Common Shares. Each option granted can be exercised for one Common Share. At February 18, 2020, 1,569,063 options were outstanding under the MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 895,948 options available to be issued by the Company’s MSOIPdevelop his team in the future. CParea of technical and leadership skills at all levels. Aligning his team through collaboration while maintaining healthy constructive tension within the teams has a Director's Stock Option Plan (“DSOP”), underallowed the operations department to excel in supporting CP’s five foundations. Mr. Redd promoted and advanced CP’s Home Safe efforts which directors are granted options to purchase Common Shares. There are no outstanding options under the DSOP, which has 340,000 options available to be issuedresulted in the future.

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”),lowest personal injury rates 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 andfrequency in the table have been calculated assuming that any dividends are reinvested.

chart-2d95f09caa9c54d1998a01.jpg



CP 2019 ANNUAL REPORT/ 30

Issuer Purchasehistory of Equity Securities
CPCP. Decreased cycle times for bulk trains yielded record results in several commodity groups for carload and tonnage moved. Mr. Redd’s persistent focus on precision scheduled railroading has established a share repurchase program which is further describedimproved operating efficiencies, proven by CP’s industry-leading third quarter results and positioning the company well in Item 8. Financial Statements and Supplementary Data, Note 22 Shareholders' equity. During 2019, CP repurchased 3.8 million Common Shares for $1,141 million at a weighted average price of $300.65. The following table presents the number of Common Shares repurchased during each month for the fourth quarter of 2019 and the average price paid by CP for the repurchase of such Common Shares.into 2020. Mr. Redd was assessed as having exceeded his overall individual performance objectives.
The assessment was reviewed by the Compensation Committee and reviewed and approved by the Board.
2019
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
October 1 to October 31312,279
$284.65
312,279
—
November 1 to November 30—
—
—
—
December 1 to December 31298,409
333.96
298,409
4,502,453
Ending Balance610,688
$308.74
610,688
N/A
2019 compensation
(1) Includes shares repurchased but not yet cancelled at quarter end.
(2) Includes brokerage fees.


The table below is a summary of the compensation awarded to Mr. Redd for 2019.
31 /SERVICE EXCELLENCE
 


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 Foreign Exchange 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)2019
2018
2017
2016
2015
Financial Performance and Liquidity     
Total revenues$7,792
$7,316
$6,554
$6,232
$6,712
Operating income3,124
2,831
2,519
2,411
2,618
Adjusted operating income(1)
3,124
2,831
2,468
2,411
2,550
Net income2,440
1,951
2,405
1,599
1,352
Adjusted income(1)
2,290
2,080
1,666
1,549
1,625
Basic earnings per share ("EPS")17.58
13.65
16.49
10.69
8.47
Diluted EPS17.52
13.61
16.44
10.63
8.40
Adjusted diluted EPS(1)
16.44
14.51
11.39
10.29
10.10
Dividends declared per share3.1400
2.5125
2.1875
1.8500
1.4000
Cash provided by operating activities2,990
2,712
2,182
2,089
2,459
Cash used in investing activities(1,803)(1,458)(1,295)(1,069)(1,123)
Cash used in financing activities(1,111)(1,542)(700)(1,493)(957)
Free cash(1)
1,357
1,289
874
1,007
1,381
Financial Position     
Total assets(2)
$22,367
$21,254
$20,135
$19,221
$19,637
Total long-term debt, including current portion8,757
8,696
8,159
8,684
8,957
Total shareholders' equity7,069
6,636
6,437
4,626
4,796
Financial Ratios     
Operating ratio(3)
59.9%61.3%61.6%61.3%61.0%
Adjusted operating ratio(1)
59.9%61.3%62.4%61.3%62.0%
Return on invested capital ("ROIC")(1)
17.9%15.3%20.5%14.4%12.9%
Adjusted ROIC(1)
16.9%16.2%14.7%14.0%15.2%
Dividend payout ratio(4)
17.9%18.5%13.3%17.4%16.7%
Adjusted dividend payout ratio(1)
19.1%17.3%19.2%18.0%13.9%
Long-term debt to Net income ratio(5)
3.6
4.5
3.4
5.4
6.6
Adjusted net debt to adjusted EBITDA ratio(1)
2.4
2.6
2.6
2.9
2.8
(1)
These measures have no standardized meanings prescribed by accounting principles generally accepted in the United States of America ("GAAP") and, therefore, may not be comparable to similar measures presented by other companies. These measures are defined and reconciled in Non-GAAP Measures in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)
Compensation (in CAD $‘000)
Current period amount is as reported in compliance with GAAP following the adoption of Accounting Standards Update ("ASU") 2016-02 under the cumulative effect adjustment transition approach, discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes. The comparative periods' amounts have not been restated and continue to be reported under the accounting standards in effect for those periods.
(3)
2019
Operating ratio is defined as operating expenses divided by revenues.
(4)
Dividend payout ratio is defined as dividends declared per share divided by Diluted EPS.
(5)
Long-term debt to Net income ratio is defined as long-term debt, including long-term debt maturing within one year, divided by Net income.



CP 2019 ANNUAL REPORT/ 32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS
 Page
Executive Summary
33
2020 Outlook
33
Performance Indicators
34
Results of Operations
36
Impact of Foreign Exchange on Earnings
39
Impact of Fuel Price on Earnings
40
Impact of Share Price on Earnings
41
Operating Revenues
41
Operating Expenses
47
Other Income Statement Items
50
Liquidity and Capital Resources
50
Non-GAAP Measures
54
Off-Balance Sheet Arrangements
62
Critical Accounting Estimates
63
Forward-Looking Statements
67



33 /SERVICE EXCELLENCE


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

Executive Summary
2019 Results
•
Financial performance– In 2019, CP reported Diluted earnings per share ("EPS") of $17.52, a 29%increase from $13.61 in 2018. Adjusted diluted EPS increased to $16.44, a 13% improvement compared to $14.51 in 2018. CP’s commitment to service and operational efficiency produced an Operating ratio of 59.9%. Adjusted diluted EPS is 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 7% to $7,792 million in 2019 from $7,316 million in 2018, driven primarily by higher freight rates.

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

The following table compares 2019 outlook to actual results:
Fixed
 RTM growth
Adjusted diluted EPS(1)
Base earnings
Capital expenditures
491
Outlook
Mid-single digits
Variable

Revised at the end of the third quarter to low-single digits
Double-digit Adjusted diluted EPS growth from full-year 2018 Adjusted diluted EPS of $14.51Approximately $1.60 billion
Actual outcomesRevenue ton-miles ("RTMs") increased by 171 million, or 0.1%Adjusted diluted EPS growth of 13% to $16.44$1.65 billion
(1) Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As described in the 2020 Outlook section below, CP had not calculated an outlook for Diluted EPS in 2019.

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

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

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



CP 2019 ANNUAL REPORT/ 34

Performance Indicators
The following table lists the key measures of the Company’s operating performance:
    % Change
For the year ended December 312019
2018(1)

2017(1)

2019 vs. 20182018 vs. 2017
Operations Performance     
Gross ton-miles (“GTMs”) (millions)280,724
275,362
252,195
2
9
Train miles (thousands)32,924
32,312
30,632
2
5
Average train weight – excluding local traffic (tons)9,129
9,100
8,806
—
3
Average train length – excluding local traffic (feet)7,388
7,313
7,214
1
1
Average terminal dwell (hours)6.4
6.8
6.6
(6)3
Average train speed (miles per hour, or "mph")22.2
21.5
22.6
3
(5)
Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs)0.955
0.953
0.980
—
(3)
Total employees (average)13,103
12,756
12,083
3
6
Total employees (end of period)12,694
12,840
12,215
(1)5
Workforce (end of period)12,732
12,866
12,294
(1)5
Safety Indicators     
FRA personal injuries per 200,000 employee-hours1.42
1.48
1.65
(4)(10)
FRA train accidents per million train-miles1.06
1.10
0.99
(4)11
(1) Certain figures have been updated to reflect new information or have been revised to conform with current presentation.

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

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

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

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

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

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

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

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


35 /SERVICE EXCELLENCE


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

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

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

Average terminal dwell of 6.8 hours in 2018 increased by 3% from 6.6 hours in 2017. This unfavourable increase was primarily due to:
network disruptions from labour negotiations in the second quarter of 2018;
harsher weather conditions and increased network disruptions in the first quarter of 2018; and
higher volumes in the second half of the year and increased delays from accelerated track and roadway capital programs in the third quarter of 2018.

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

Average train speed in 2018 was 21.5 mph, a decrease of 5%, from 22.6 mph in 2017. This decrease was primarily due to:
network disruptions from labour negotiations in the second quarter of 2018;
harsher weather conditions and increased network disruptions in the first quarter of 2018; and
higher volumes and increased delays from accelerated track and roadway capital programs in the third quarter of 2018.

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

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

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

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

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

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

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

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


CP 2019 ANNUAL REPORT/ 36

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

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

Results of Operations
Income
chart-22fe300702c751b18cea01.jpgchart-53a39c415a4653af91ba01.jpg
* Adjusted operating income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating income was $3,124 million in 2019, an increase of $293 million, or 10%, from $2,831 million in 2018. This increase was primarily due to:
higher freight rates;
the efficiencies generated from improved operating performance and asset utilization;
•
the favourable impact of change in FX of $39 million; and
•
the favourable impact from changes in fuel prices of $38 million.

This increase was partially offset by:
•
increased operating expense associated with higher casualty costs in 2019 of $76 million (excluding FX);
•
higher stock-based compensation of $58 million;
cost inflation; and
increased weather related costs as a result of harsh winter operating conditions in the first quarter of 2019.

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

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

This increase was partially offset by:
cost inflation;
•
management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017; and
higher depreciation and amortization driven primarily from a higher asset base as a result of capital program spending in 2018.

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



37 /SERVICE EXCELLENCE


chart-115d238f0169533a931a01.jpgchart-a034985e1f685a3b8dfa01.jpg
*Adjusted income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net income was $2,440 million in 2019, an increase of $489 million, or 25%, from $1,951 million in 2018. This increase was primarily due to:
higher Operating income;
FX translation gains on debt and lease liabilities in 2019 compared to FX translation losses on debt in 2018; and
a higher income tax recovery associated with changes in tax rates.

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

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

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

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



CP 2019 ANNUAL REPORT/ 38

Diluted Earnings per Share
chart-50782fcefbef5c798d0a01.jpgchart-f4ec6144bad45821b32.jpg
*Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

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

Operating Ratio
chart-837e081739825fab988a01.jpgchart-efea72b76285568d85aa01.jpg
* Adjusted operating ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.



39 /SERVICE EXCELLENCE


The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s Operating ratio was 59.9% in 2019, a 140 basis point improvement from 61.3% in 2018. This improvement was primarily due to:
higher freight rates;
the favourable impact of changes in fuel prices; and
the efficiencies generated from improved operating performance and asset utilization.

This improvement was partially offset by:
increased operating expense associated with higher casualty costs in 2019;
higher stock-based compensation; and
cost inflation.

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

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

This improvement was partially offset by:
the unfavourable impact of changes in fuel prices;
cost inflation; and
•
management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017.

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

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

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

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

ROIC was 15.3% in 2018, a 520 basis point decrease compared to 20.5% in 2017 primarily due to:
a higher average invested capital base due to higher Retained earnings from Net income;
higher Income tax expense due to a lower income tax recovery associated with changes in tax rates; and
the unfavourable impact of FX translation losses on debt in 2018 compared to FX translation gains in 2017.

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

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

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

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

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


CP 2019 ANNUAL REPORT/ 40

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

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

The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and the U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, the high and low exchange rates and period end exchange rates for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board.
Average exchange rates (Canadian/U.S. dollar)2019
2018
2017
2016
2015
For the year ended – December 31$1.33
$1.30
$1.30
$1.33
$1.28
For the three months ended – December 31$1.32
$1.32
$1.27
$1.33
$1.34
Exchange rates (Canadian/U.S. dollar)2019
2018
2017
2016
2015
Beginning of year – January 1$1.36
$1.25
$1.34
$1.38
$1.16
Beginning of quarter – April 1$1.33
$1.29
$1.33
$1.30
$1.27
Beginning of quarter – July 1$1.31
$1.32
$1.30
$1.29
$1.25
Beginning of quarter – October 1$1.32
$1.29
$1.25
$1.31
$1.33
End of year – December 31$1.30
$1.36
$1.25
$1.34
$1.38
High/Low exchange rates (Canadian/U.S. dollar)2019
2018
2017
2016
2015
High$1.36
$1.37
$1.37
$1.46
$1.40
Low$1.30
$1.23
$1.21
$1.25
$1.17

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

Impact of Fuel Price on Earnings
Fluctuations in fuel prices affect the Company’s results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be a timing impact on earnings, as discussed further in Item 1. Business, Operations, Fuel Cost Adjustment Program and Item 1A. Risk Factors, Fuel Cost Volatility.
Average Fuel Price (U.S. dollars per U.S. gallon)2019
2018
2017(1)

For the year ended – December 31$2.49
$2.72
$2.16
For the three months ended – December 31$2.53
$2.71
$2.43
(1) Average fuel prices for 2017 exclude the effects of an $8 million fuel tax recovery related to prior periods.

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

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



41 /SERVICE EXCELLENCE


Impact of Share Price on Earnings
Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for each quarter and the change in the price of the Common Shares on the TSX and the NYSE for the years ended December 31, 2019, 2018 and 2017:
Toronto Stock Exchange (in Canadian dollars)2019
2018
2017
Opening Common Share price, as at January 1$242.24
$229.66
$191.56
Ending Common Share price, as at March 31$275.34
$227.20
$195.35
Ending Common Share price, as at June 30$308.43
$240.92
$208.65
Ending Common Share price, as at September 30$294.42
$273.23
$209.58
Ending Common Share price, as at December 31$331.03
$242.24
$229.66
Change in Common Share price for the year ended December 31$88.79
$12.58
$38.10
New York Stock Exchange (in U.S. dollars)2019
2018
2017
Opening Common Share price, as at January 1$177.62
$182.76
$142.77
Ending Common Share price, as at March 31$206.03
$176.50
$146.92
Ending Common Share price, as at June 30$235.24
$183.02
$160.81
Ending Common Share price, as at September 30$222.46
$211.94
$168.03
Ending Common Share price, as at December 31$254.95
$177.62
$182.76
Change in Common Share price for the year ended December 31$77.33
$(5.14)$39.99

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

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

Operating Revenues
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(2)
Total Change% Change
FX Adjusted % Change(2)
Freight revenues (in millions)(1)
$7,613
$7,152
$6,375
$461
65$777
12
12
Non-freight revenues (in millions)179
164
179
15
98(15)(8)(8)
Total revenues (in millions)$7,792
$7,316
$6,554
$476
75$762
12
12
Carloads (in thousands)2,766.4
2,739.8
2,634.2
26.6
1N/A105.6
4
N/A
Revenue ton-miles (in millions)154,378
154,207
142,540
171
—N/A11,667
8
N/A
Freight revenue per carload (in dollars)$2,752
$2,611
$2,420
$141
54$191
8
8
Freight revenue per revenue ton-mile (in cents)4.93
4.64
4.47
0.29
650.17
4
4
(1) Freight revenues include fuel surcharge revenues of $464 million in 2019, $492 million in 2018 and $242 million in 2017. Fuel surcharge revenues include recoveries of carbon taxes, levies, and obligations under cap-and-trade programs.
(2) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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



CP 2019 ANNUAL REPORT/ 42

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

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

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

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

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

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

Lines of Business
Grain
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$1,684
$1,566
$1,532
$118
86$34
2
2
Carloads (in thousands)431.4
429.4
440.7
2.0
—N/A(11.3)(3)N/A
Revenue ton-miles (in millions)36,941
36,856
37,377
85
—N/A(521)(1)N/A
Freight revenue per carload (in dollars)$3,904
$3,645
$3,477
$259
76$168
5
5
Freight revenue per revenue ton-mile (in cents)4.56
4.25
4.10
0.31
760.15
4
4
(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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



43 /SERVICE EXCELLENCE


Coal
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$682
$673
$631
$9
1
1$42
7
7
Carloads (in thousands)304.3
304.3
306.0
—
—
N/A(1.7)(1)N/A
Revenue ton-miles (in millions)21,820
22,443
22,660
(623)(3)N/A(217)(1)N/A
Freight revenue per carload (in dollars)$2,241
$2,211
$2,061
$30
1
1$150
7
7
Freight revenue per revenue ton-mile (in cents)3.13
3.00
2.78
0.13
4
40.22
8
8
(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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

Potash
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$462
$486
$411
$(24)(5)(6)$75
1819
Carloads (in thousands)149.3
158.4
137.4
(9.1)(6)N/A
21.0
15N/A
Revenue ton-miles (in millions)17,297
18,371
15,751
(1,074)(6)N/A
2,620
17N/A
Freight revenue per carload (in dollars)$3,094
$3,071
$2,988
$23
1
—
$83
33
Freight revenue per revenue ton-mile (in cents)2.67
2.65
2.61
0.02
1
—
0.04
22
(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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



CP 2019 ANNUAL REPORT/ 44

Fertilizers and Sulphur
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$250
$243
$241
$7
3
1$2
1
1
Carloads (in thousands)57.0
58.1
57.7
(1.1)(2)N/A0.4
1
N/A
Revenue ton-miles (in millions)3,846
4,051
3,849
(205)(5)N/A202
5
N/A
Freight revenue per carload (in dollars)$4,386
$4,186
$4,178
$200
5
3$8
—
1
Freight revenue per revenue ton-mile (in cents)6.50
6.00
6.27
0.50
8
7(0.27)(4)(4)
(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 $250 million in 2019, an increase of $7 million, or 3%, from $243 million in 2018. This increase was primarily due to higher freight revenue per revenue ton-mile, the favourable impact of the change in FX, and higher volumes of wet fertilizer. This increase was partially offset by lower volumes of sulphur and dry fertilizer. Freight revenue per revenue ton-mile increased due to higher freight rates. RTMs decreased more than carloads due to moving proportionately less wet fertilizer to the U.S. Midwest, which has a longer length of haul.

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

Forest Products
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$304
$284
$265
$20
75$19
78
Carloads (in thousands)71.5
68.6
65.8
2.9
4N/A2.8
4N/A
Revenue ton-miles (in millions)4,974
4,763
4,484
211
4N/A279
6N/A
Freight revenue per carload (in dollars)$4,252
$4,139
$4,036
$113
31$103
33
Freight revenue per revenue ton-mile (in cents)6.11
5.96
5.92
0.15
310.04
11
(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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



45 /SERVICE EXCELLENCE


Energy, Chemicals and Plastics
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$1,534
$1,243
$898
$291
2322$345
3839
Carloads (in thousands)358.1
334.6
269.5
23.5
7N/A65.1
24N/A
Revenue ton-miles (in millions)29,356
27,830
21,327
1,526
5N/A6,503
30N/A
Freight revenue per carload (in dollars)$4,284
$3,715
$3,333
$569
1514$382
1112
Freight revenue per revenue ton-mile (in cents)5.23
4.47
4.21
0.76
17150.26
66
(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 $1,534 million in 2019, an increase of $291 million, or 23%, from $1,243 million in 2018. This increase was primarily due to increased freight revenue per revenue ton-mile, higher volumes of crude, liquefied petroleum gas ("LPG"), fuel oil, and other refined products, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased primarily due to liquidated damages, including customer volume commitments, and higher freight rates. Carloads increased more than RTMs due to moving proportionately less long haul crude to Kansas City, Missouri, and proportionately more short haul crude to Chicago, Illinois and Noyes, Minnesota.

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

Metals, Minerals and Consumer Products
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$752
$797
$739
$(45)(6)(8)$58
8
8
Carloads (in thousands)234.3
252.2
255.3
(17.9)(7)N/A
(3.1)(1)N/A
Revenue ton-miles (in millions)10,684
11,858
11,468
(1,174)(10)N/A
390
3
N/A
Freight revenue per carload (in dollars)$3,210
$3,161
$2,894
$49
2
—
$267
9
9
Freight revenue per revenue ton-mile (in cents)7.04
6.72
6.44
0.32
5
3
0.28
4
4
(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 $752 million in 2019, a decrease of $45 million, or 6%, from $797 million in 2018. This decrease was primarily due to lower volumes of frac sand and steel. This decrease was partially offset by increased freight revenue per revenue ton-mile, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates. Carloads decreased less than RTMs due to increased volumes of short haul metallic ore.

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



CP 2019 ANNUAL REPORT/ 46

Automotive
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$352
$322
$293
$30
97$29
1011
Carloads (in thousands)114.4
108.3
105.1
6.1
6N/A3.2
3N/A
Revenue ton-miles (in millions)1,427
1,347
1,321
80
6N/A26
2N/A
Freight revenue per carload (in dollars)$3,077
$2,975
$2,785
$102
31$190
77
Freight revenue per revenue ton-mile (in cents)24.67
23.92
22.15
0.75
311.77
88
(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 $352 million in 2019, an increase of $30 million, or 9%, from $322 million in 2018. This increase was primarily due to higher volumes from Vancouver to eastern Canada, higher volumes from the U.S. to CP's new Vancouver Automotive Compound, increased freight revenue per revenue ton-mile, and the favourable impact of the change in FX. Freight revenue per revenue ton-mile increased due to higher freight rates.

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

Intermodal
    2019 vs. 20182018 vs. 2017
For the year ended December 31201920182017Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Freight revenues (in millions)$1,593
$1,538
$1,365
$55
4
3
$173
1313
Carloads (in thousands)1,046.1
1,025.9
996.7
20.2
2
N/A
29.2
3N/A
Revenue ton-miles (in millions)28,033
26,688
24,303
1,345
5
N/A
2,385
10N/A
Freight revenue per carload (in dollars)$1,523
$1,499
$1,370
$24
2
1
$129
99
Freight revenue per revenue ton-mile (in cents)5.68
5.76
5.62
(0.08)(1)(2)0.14
22
(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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



47 /SERVICE EXCELLENCE


Operating Expenses

chart-514007fcbbc256ca8d7a01.jpgchart-af971e4e5002578b914a01.jpgchart-87e3b539e5875d808b2a01.jpg
2019 Operating Expenses2018 Operating Expenses2017 Operating Expenses
    2019 vs. 20182018 vs. 2017
For the year ended December 31 (in millions)2019
2018
2017
Total Change% Change
FX Adjusted % Change(1)
Total Change% Change
FX Adjusted % Change(1)
Compensation and benefits$1,540
$1,468
$1,309
$72
5
4
$159
12
12
Fuel882
918
677
(36)(4)(6)241
36
36
Materials210
201
190
9
4
4
11
6
6
Equipment rents137
130
142
7
5
3
(12)(8)(8)
Depreciation and amortization706
696
661
10
1
1
35
5
5
Purchased services and other1,193
1,072
1,056
121
11
10
16
2
2
Total operating expenses$4,668
$4,485
$4,035
$183
4
3
$450
11
11
(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Operating expenses were $4,668 million in 2019, an increase of $183 million, or 4%, from $4,485 million in 2018. This increase was primarily due to:
•
increased operating expense associated with higher casualty costs incurred in 2019 of $76 million (excluding FX);
•
higher stock-based compensation primarily driven by an increase in stock price of $58 million;
cost inflation;
•
the unfavourable impact of the change in FX of $48 million;
increased weather related costs as a result of harsh winter operating conditions in the first quarter of 2019; and
higher volume variable expenses.

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

Operating expenses were $4,485 million in 2018, an increase of $450 million, or 11%, from $4,035 million in 2017. This increase was primarily due to:
•
the unfavourable impact from changes in fuel prices of $197 million;
higher volume variable expenses;
cost inflation;
•
management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP in 2017;
higher depreciation and amortization due to a higher asset base as a result of the capital program spending in 2018;
•
a charge associated with a loss contingency of $20 million;
increased weather related costs as a result of harsh winter operating conditions in the first quarter of 2018;
higher stock-based compensation of primarily driven by stronger performance against targets, partially offset by the changes in share price; and
higher incentive compensation.


CP 2019 ANNUAL REPORT/ 48

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

Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries, fringe benefits and stock-based compensation. Compensation and benefits expense was $1,540 million in 2019, an increase of $72 million, or 5%, from $1,468 million in 2018. This increase was primarily due to:
•
higher stock-based compensation primarily driven by an increase in stock price of $58 million;
the impact of wage and benefit inflation;
the impact of harsher winter operating conditions driven by operational inefficiencies and increased track labour and overtime;
•
the unfavourable impact of the change in FX of $11 million; and
higher volume variable expenses as a result of an increase in workload as measured by GTMs.

This increase was partially offset by:
lower incentive compensation;
•
lower pension current service cost of $14 million; and
labour efficiencies.

Compensation and benefits expense was $1,468 million in 2018, an increase of $159 million, or 12% from $1,309 million in 2017. This increase was primarily due to:
higher volume variable expenses as a result of an increase in workload as measured by GTMs;
•
management transition recoveries of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP;
the impact of wage and benefit inflation;
higher stock-based compensation of primarily driven by stronger performance against targets, partially offset by the changes in share price;
higher incentive compensation;
an increase in training programs; and
harsher winter operating conditions.

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

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

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

Fuel expense was $918 million in 2018, an increase of $241 million, or 36%, from $677 million in 2017. This increase was primarily due to:
•
the unfavourable impact from higher fuel prices of $197 million;
an increase in workload, as measured by GTMs; and
•
a fuel tax recovery received in 2017 that related to prior periods of $8 million.

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

Materials
Materials expense includes the cost of material used for maintenance of track, locomotives, freight cars and buildings as well as software sustainment. Materials expense was $210 million in 2019, an increase of $9 million, or 4%, from $201 million in 2018. This increase was primarily due to:
higher spending on locomotive maintenance and overhauls;
weather related materials;
cost inflation; and
•
the unfavourable impact of the change in FX of $1 million.

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

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



49 /SERVICE EXCELLENCE


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

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

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

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

Purchased Services and Other
    2019 vs. 20182018 vs. 2017
For the year ended December 31 (in millions)2019
2018
2017
Total Change% ChangeTotal Change% Change
Support and facilities$278
$264
$266
$14
5
$(2)(1)
Track and operations278
268
251
10
4
17
7
Intermodal222
221
197
1
—
24
12
Equipment125
143
157
(18)(13)(14)(9)
Casualty149
73
72
76
104
1
1
Property taxes133
124
121
9
7
3
2
Other29
20
7
9
45
13
186
Land sales(21)(41)(15)20
(49)(26)173
Total Purchased services and other$1,193
$1,072
$1,056
$121
11
$16
2

Purchased services and other expense encompasses a wide range of third-party costs, including contractor and consulting fees, locomotive and freight car repairs performed by third parties, property and other taxes, intermodal pickup and delivery services, casualty expense, expenses for joint facilities and gains on land sales. Purchased services and other expense was $1,193 million in 2019, an increase of $121 million, or 11%, from $1,072 million in 2018. This increase was primarily due to:
•
an increase in number and severity of casualty incidents of $73 million (excluding FX), which were the result of difficult operating conditions due to weather in the first half of 2019, reported in Casualty;
•
lower gains on land sales of $20 million mainly as a result of the sale of the Bass Lake railway line in 2018;
•
the unfavourable impact of the change in FX of $11 million;
an increase in legal fees, reported in Support and facilities;
higher snow removal and other weather related costs; and
higher property taxes due to higher tax rates.

This increase was partially offset by:
•
a decrease in charges associated with contingencies of $10 million, reported in Other;
a decrease in costs for locomotive warranty service agreements due to the insourcing of maintenance of certain locomotives in the company's fleet, reported in Equipment; and
costs related to labour disruptions in the second quarter of 2018, reported in Track and operations.

Purchased services and other expense was $1,072 million in 2018, an increase of $16 million, or 2%, from $1,056 million in 2017. This increase was primarily due to:
•
a charge associated with a loss contingency of $20 million, reported in Other;
higher intermodal expenses related to pickup and delivery, reported in Intermodal; and
higher costs due to winter weather related impacts and costs related to labour disruptions, reported primarily in Track and operations.


CP 2019 ANNUAL REPORT/ 50

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

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

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

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

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

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

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

Income Tax Expense
Income tax expense was $706 million in 2019, an increase of $69 million, or 11%, from $637 million in 2018. The increase was due to:
higher taxable earnings;
•
an increase in unrecognized tax benefits of $24 million; and
•
net income tax recoveries in 2018 of $21 million as a result of the Iowa and Missouri corporate tax rate decreases.

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

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

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

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

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


51 /SERVICE EXCELLENCE



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

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

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

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

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

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

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

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

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



CP 2019 ANNUAL REPORT/ 52

Capital Programs
For the year ended December 31
(in millions, except for track miles and crossties)
2019
2018
2017
Additions to capital   
Track and roadway$1,004
$965
$958
Rolling stock and containers426
401
198
Information systems(1)
70
86
78
Buildings and other164
122
132
Total – accrued additions to capital1,664
1,574
1,366
Less:


Non-cash transactions17
23
26
Cash invested in additions to properties (per Consolidated Statements of Cash Flows)$1,647
$1,551
$1,340
Track installation capital programs


Track miles of rail laid (miles)246
281
313
Track miles of rail capacity expansion (miles)11
4
4
Crossties installed (thousands)1,122
1,015
1,138
(1) Information systems include hardware and software.

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

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

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

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

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

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

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

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


53 /SERVICE EXCELLENCE


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

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

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

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

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

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

Credit ratings as at December 31, 2019(1)
Long-term debt
Short-term incentive
Outlook
593
Standard & Poor's
Long-term incentive


Long-term corporate credit
- PSUs
BBB+stable
605

Senior secured debt
- Stock options
Astable
355

Senior unsecured debt
Total direct compensation
BBB+stable
2,044
Moody's
Total target direct compensation

2,218

Senior unsecured debt
Notes:
Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year of $1.3269.
Baa1stable




Commercial paper program

Standard & Poor'sA-2N/A
Moody's
P-2N/A
(1) Credit ratings are not recommendations
Salary
Effective September 1, 2019, Mr. Redd was promoted to purchase, hold, or sell securitiesExecutive Vice-President Operations. His salary was increased to US$425,000 effective the same date.
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Table of Contents
2019 short-term incentive
Mr. Redd’s annual bonus target was prorated to 68.34% of his base salary in 2019 to reflect his time at the new target associated with his promotion. Based on our 2019 corporate performance and do not address the market price or suitabilityCEO’s assessment of his individual performance, Mr. Redd received a specific securitycash bonus of $592,539 for 2019, calculated as follows:
Year EndSalary ($)XTargetshort-termincentiveX[Corporateperformancefactor ($)+Individualperformancefactor ($)]=2019short-termincentive ($)(as a particular investor. Credit ratings% ofbase salary)155%x 75%150%x 25%(0-200%)(0-200%)563,93368.34%448,018144,521592,539
His
year-end
salary and 2019 STIP award were made in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.3269 for 2019.
2019
long-term
incentive
Mr. Redd’s long-term incentive target was increased to 225% of his annual salary. He received 2019 annual long-term incentive awards with a total grant value of $959,877. This included a top up PSU and stock option grants received in September 2019 with a grant value of $258,495 to bring him to the Executive Vice-President level. The grant was allocated as 60% PSUs and 40% stock options.
Equity ownership
(at February 28, 2020)
                     
Requirement
(as a multiple of salary)
  Minimum
ownership value ($)		   Shares ($)   Deferred
share units ($)		   Total ownership
value ($)		   Total ownership
(as a multiple of salary)		 
3x
   1,797,807    291,791    721,813    1,013,604    1.69x 
Mr. Redd is on track to meet his share ownership requirements by September 2024. Values are based on US$248.77, the rating agencies' methodologiesclosing price of our shares on the NYSE on February 28, 2020 and mayhave been converted using an exchange rate of $1.3429.
2020 Compensation
Mr. Redd was promoted to Executive Vice-President Operations on September 1, 2019. In continuing his progression towards the market median, effective January 1, 2020, his short-term incentive target will be subjectincreased to revision or withdrawal at any time80% of his base salary from 75% and his long-term incentive target will be increased to 250% of base salary from 225%. He also received a 5% increase in base salary effective February 1, 2020.
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Table of Contents
ROBERT A. JOHNSON
  RETIRED EXECUTIVE VICE-PRESIDENT OPERATIONS
On September 30, 2019, Mr. Johnson retired from CP after an impressive railroading career that spanned more than three decades. Mr. Johnson was appointed as Executive Vice-President Operations in April 2016. In this role, Mr. Johnson had overall operational responsibility for CP’s rail network, including aspects of operational safety, service, engineering and mechanical services in both Canada and the U.S. with a focus on train performance and overall fluidity of the network.
Prior to this appointment, Robert was CP’s Senior Vice-President Operations, Southern Region. Mr. Johnson’s railroad career spans over 37 years. He spent 32 of those years with BNSF where he held successively more responsible roles in operations, transportation, engineering and service excellence. His most recent position at BNSF was General Manager, Northwest Division, overseeing
day-to-day
operations for that region.
2019 individual performance
The CEO assessed Mr. Johnson’s performance for the first nine months of 2019 against his individual performance objectives in the areas of people development, safety and operational efficiency. During 2019, Mr. Johnson focused on people development and succession planning which included the development of a deep operating bench as well as identifying and advancing his own successor. He led double digit improvements in retention of train & engine management staff and conductors. Throughout 2019, Mr. Johnson continued to promote and advance CP’s Home Safe efforts which resulted in a two percent improvement in personal injury rates in the first nine months of the year. In addition, Mr. Johnson drove improvements in asset utilization across the network. His persistent focus on CP’s trip plan compliance resulted in record third quarter Trip Plan compliance. Mr. Johnson was assessed as having exceeded his overall individual performance objective.
The assessment was reviewed by the rating agencies.Compensation Committee and reviewed and approved by the Board.

2019 compensation
The Long-term debttable below is summary of the compensation awarded to Net income ratioMr. Johnson for 2019.
 
Compensation (in CAD $‘000)
2019
Fixed
Base earnings
478
Variable
Short-term incentive
524
Long-term incentive
- PSUs
1,015
- Stock options
629
Total direct compensation
2,646
Total target direct compensation
2,433
Notes:
Salary is the actual amount received that year. Payments made in U.S. dollars have been converted to Canadian dollars using an average exchange rate for the year of $1.3269.
Salary
Mr. Johnson’s salary was 3.6increased to US$458,350 in 2019. His salary was prorated for the portion of the year in which he was employed.
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Table of Contents
2019 short-term incentive
Mr. Johnson retired as Executive Vice-President Operations effective September 30, 2019. His 2019 cash bonus is reflective of the portion of the year which he was employed. Based on our 2019 corporate performance and the CEO’s assessment of his individual performance, Mr. Johnson received a cash bonus of $523,969 for 2019, calculated as follows:
 
Year EndSalary ($)XTargetshort-termincentiveX[Corporateperformancefactor ($)+Individualperformancefactor ($)]=2019short-termincentive ($)(as a % ofbase salary)155%x 75%150%x 25%(0-200%)(0-200%)608,18575%396,172127,797523,969
His
year-end
salary and the 2019 STIP award were made in U.S. dollars and have been converted to Canadian dollars using an average exchange rate of $1.3269 for 2019.
2019 long-term incentive
Mr. Johnson received 2019 long-term incentive awards with a total grant value of $1,643,916, 100% of his target award. The grant was allocated as 60% PSUs and 40% stock options.
Equity ownership
At the time of his retirement, Mr. Johnson had met his share ownership requirements.
41
Table of Contents
Share performance and cost of management
The graph below shows the total shareholder return of $100 invested in CP shares compared to the two major market indices over the last five years ending December 31, 2019 assuming reinvestment of dividends.
CP shares have outperformed the S&P/TSX Composite Index and the S&P 500 index over the last five years. The graph shows that significant shareholder value continues to be generated as the total direct compensation paid to our NEOs has declined and stabilized with 4.5our new team. Our share price on the TSX was $176.73 at the beginning of the performance period (US$127.60 on the NYSE) compared to $331.03 at the end of 2019 (US$254.95 on the NYSE), a growth in share appreciation of 87.3%. Our total shareholder return over the same five-year period was 94.9%, assuming reinvestment of dividends.
The total compensation value for NEOs as disclosed in the summary compensation table is 0.4% of our total revenues of $7.79 billion for 2019.
at December 3120152016201720182019CP TSR (C$)100.00109.16132.22156.79194.90CP TSR (US$)100.00112.68145.73143.03207.87S&P/TSX Composite Index (C$)100.00121.08132.09120.36147.89S&P 500 Index (US$)100.00109.54130.81122.65158.07TDC ($ thousands)35,48531,79627,47122,21027,352
Notes:
Total direct compensation
is the total compensation awarded to the NEOs, as reported in the summary compensation table in prior years.
In years where there were
more than five NEOs, we used the following to calculate total direct compensation in the table above:
2019: Keith Creel, Nadeem Velani, John Brooks, Laird Pitz and Mark Redd
2018: Keith Creel, Nadeem Velani, Robert Johnson, Laird Pitz and John Brooks
2017: Keith Creel, Nadeem Velani, Robert Johnson, Laird Pitz and Jeffrey Ellis
2016: Hunter Harrison, Nadeem Velani, Keith Creel, Robert Johnson and Laird Pitz
2015: Hunter Harrison, Mark Erceg, Keith Creel, Laird Pitz and Mark Wallace
Mr. Harrison, Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson, were paid in U.S. dollars and their amounts have been converted using the following average exchange rates: $1.3269 for 2019, $1.2957 for 2018, $1.2986 for 2017, $1.3248 for 2016 and $1.2787 for 2015
42
Table of Contents
EXECUTIVE COMPENSATION DETAILS
Summary compensation table
The table below shows compensation for our six NEOs for the three fiscal years ended December 31, 2019. Mark Redd succeeded Robert Johnson as Executive Vice-President Operations effective September 1, 2019.
All of the NEOs except Mr. Velani were paid in U.S. dollars. Their compensation has been converted to Canadian dollars using the average exchange rates for the year: $1.3269 for 2019, $1.2957 for 2018 and 3.4$1.2986 for 2017.
                                     
              
Non-equity Incentive

plan compensation

($)
          
Name and principal position
 
 
Year
 
  
Salary ($)
 
  
Share-based

awards
($)
 
  
Option-based

awards
($)
 
  
Annual
incentive
plans
 
  
Long-term

incentive
plans
 
  
Pension
values
($)
 
  
All other
compensation
($)
 
  
Total
compensation
($)
 
 
Keith E. Creel
  2019   1,537,866   5,870,208   3,642,061   2,978,994   -   566,343   554,930   15,150,402 
President and Chief
  2018   1,453,595   4,369,757   2,519,163   3,148,551   -   452,209   543,332   12,486,607 
Executive Officer
 
  
 
2017
 
 
 
  
 
1,436,594
 
 
 
  
 
4,407,788
 
 
 
  
 
10,516,630
 
 
 
  
 
2,419,292
 
 
 
  
 
-
 
 
 
  
 
398,894
 
 
 
  
 
926,402
 
 
 
  
 
20,105,600
 
 
 
Nadeem S. Velani
  2019   751,099   1,623,980   978,943   1,095,729   -   214,043   59,250   4,723,044 
Executive Vice-President
  2018   666,946   1,199,385   688,327   1,032,596   -   138,925   57,680   3,783,859 
and Chief Financial Officer
 
  
 
2017
 
 
 
  
 
451,355
 
 
 
  
 
806,073
 
 
 
  
 
202,650
 
 
 
  
 
490,763
 
 
 
  
 
-
 
 
 
  
 
101,027
 
 
 
  
 
49,523
 
 
 
  
 
2,101,391
 
 
 
John K. Brooks
  2019   670,235   1,240,804   697,030   829,259   -   254,186   66,651   3,758,165 
Executive Vice-President
  2018   499,384   424,798   244,922   602,177   -   166,898   61,456   1,999,635 
and Chief Marketing Officer
 
  
 
2017
 
 
 
  
 
436,359
 
 
 
  
 
428,442
 
 
 
  
 
125,582
 
 
 
  
 
420,251
 
 
 
  
 
-
 
 
 
  
 
144,378
 
 
 
  
 
59,567
 
 
 
  
 
1,614,579
 
 
 
Laird J. Pitz
  2019   529,378   810,534   502,882   571,230   -   104,830   45,606   2,564,460 
Senior Vice-President
  2018   482,486   444,139   256,132   560,593   -   87,126   42,346   1,872,822 
and Chief Risk Officer
 
  
 
2017
 
 
 
  
 
457,901
 
 
 
  
 
394,237
 
 
 
  
 
228,694
 
 
 
  
 
435,601
 
 
 
  
 
-
 
 
 
  
 
82,361
 
 
 
  
 
41,137
 
 
 
  
 
1,639,931
 
 
 
Mark A. Redd
  2019   491,307   642,177   355,053   592,539   -   96,231   214,626   2,391,933 
Executive Vice-President
  2018   440,209   832,824   562,059   510,812   -   78,942   283,124   2,707,970 
Operations
 
  
 
2017
 
 
 
  
 
415,321
 
 
 
  
 
367,349
 
 
 
  
 
179,664
 
 
 
  
 
391,637
 
 
 
  
 
-
 
 
 
  
 
69,989
 
 
 
  
 
66,582
 
 
 
  
 
1,490,542
 
 
 
Robert A. Johnson
  2019   478,386   1,014,508   629,408   523,969   -   121,175   79,573   2,847,019 
Retired Executive Vice-
  2018   572,808   950,363   547,936   778,392   -   105,825   63,858   3,019,182 
President Operations
 
  
 
2017
 
 
 
  
 
564,891
 
 
 
  
 
958,705
 
 
 
  
 
556,073
 
 
 
  
 
597,372
 
 
 
  
 
-
 
 
 
  
 
114,037
 
 
 
  
 
54,819
 
 
 
  
 
2,845,897
 
 
 
Notes:
Salary
Represents salary earned during the year. Salary differs from annualized salary because annual increases generally go into effect on April 1 and both Mr. Brooks and Mr. Redd received a promotion in 2017.2019. Mr. Velani’s salary is set in U.S. dollars and was paid in Canadian dollars based on a foreign exchange rate of $1.3432.
Share-based awards
PSUs were granted on February 14, 2019. The decreaseFebruary 14, 2019 grant date accounting fair value of the awards shown in the ratio from 2018Summary Compensation table is $268.16 per share, granted with reference to the TSX or US$202.00 per share granted with reference to the NYSE.
On September 3, 2019, was primarily dueadditional PSUs and options were granted to higher Net income, partially offset by higher debt. The increase in the ratio from 2017 to 2018 was due to lower Net income and higher debt.

The Adjusted net debt to Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio was 2.4 in 2019, compared with 2.6 in 2018 and 2.6 in 2017. The decrease in ratio from 2018 to 2019 was primarily due to an increase in Adjusted EBITDA. The ratio remained unchanged between 2017and2018 as higher Adjusted EBITDA was offset by a higher debt balanceMr. Redd as a result of his promotion to Executive Vice-President. The grant date accounting fair value of this PSU award for Mr. Redd was $234.76 on the weakeningNYSE. The grant date accounting fair value of the Canadian dollar. Adjusted net debt to Adjusted EBITDA ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted net debt to Adjusted EBITDA ratio of 2.0 to 2.5.

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


CP 2019 ANNUAL REPORT/ 54

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

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

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

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

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

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

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

Non-GAAP Performance Measures
The Company uses Adjusted income, Adjusted diluted earnings per share, Adjusted operating income and Adjusted operating ratio to evaluate the Company’s operating performance and for planning and forecasting future business operations and future profitability. These Non-GAAP measures are presented inFASB ASC Topic 718: Compensation – Stock Compensation. See Item 6. Selected Financial Data and discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These Non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance, allocation of resources and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets, the FX impact of translating the Company's debt and lease liabilities, discrete tax items, and certain items outside the control of management. These items may not be non-recurring. However, excluding these significant items from GAAP results allows for a consistent understanding of the Company's consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results. Accordingly, these Non-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information.

In 2019, there were three significant items included in Net income as follows:
•
in the fourth quarter, a deferred tax expense of $24 million as a result of a provision for an uncertain tax item of a prior period that unfavourably impacted Diluted EPS by 17 cents;


55 /SERVICE EXCELLENCE


•
in the second quarter, a deferred tax recovery of $88 million due to the change in the Alberta provincial corporate income tax rate that favourably impacted Diluted EPS by 63 cents; and
•
during the course of the year, a net non-cash gain of $94 million ($86 million after deferred tax) due to FX translation of debt and lease liabilities as follows:
–
in the fourth quarter, a $37 million gain ($32 million after deferred tax) that favourably impacted Diluted EPS by 22 cents;
–in the third quarter, a $25 million loss ($22 million after deferred tax) that unfavourably impacted Diluted EPS by 15 cents;
–in the second quarter, a $37 million gain ($34 million after deferred tax) that favourably impacted Diluted EPS by 24 cents; and
–in the first quarter, a $45 million gain ($42 million after deferred tax) that favourably impacted Diluted EPS by 30 cents.

In 2018, there were two significant items included in Net income as follows:
•
in the second quarter, a deferred tax recovery of $21 million due to reductions in the Missouri and Iowa state tax rates that favourably impacted Diluted EPS by 15 cents; and
•
during the course of the year, a net non-cash loss of $168 million ($150 million after deferred tax) due to FX translation of debt as follows:
–
in the fourth quarter, a $113 million loss ($103 million after deferred tax) that unfavourably impacted Diluted EPS by 72 cents;
–
in the third quarter, a $38 million gain ($33 million after deferred tax) that favourably impacted Diluted EPS by 23 cents;
–
in the second quarter, a $44 million loss ($38 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents; and
–
in the first quarter, a $49 million loss ($42 million after deferred tax) that unfavourably impacted Diluted EPS by 29 cents.

In 2017, there were five significant items included in Net income as follows:
•
in the second quarter, a charge on hedge roll and de-designation of $13 million ($10 million after deferred tax) that unfavourably impacted Diluted EPS by 7 cents;
•
in the second quarter, an insurance recovery of a legal settlement of $10 million ($7 million after current tax) that favourably impacted Diluted EPS by 5 cents;
•
in the first quarter, a management transition recovery of $51 million related to the retirement of Mr. E. Hunter Harrison as CEO of CP ($39 million after deferred tax) that favourably impacted Diluted EPS by 27 cents;
•
during the course of the year, a net deferred tax recovery of $541 million as a result of changes in income tax rates as follows:
–
in the fourth quarter, a deferred tax recovery of $527 million, primarily due to the U.S. tax reform, that favourably impacted Diluted EPS by $3.63;
–
in the third quarter, a deferred tax expense of $3 million as a result of the change in the Illinois state corporate income tax rate change that unfavourably impacted Diluted EPS by 2 cents;
–
in the second quarter, a deferred tax recovery of $17 million as a result of the change in the Saskatchewan provincial corporate income tax rate that favourably impacted Diluted EPS by 12 cents; and
•
during the course of the year, a net non-cash gain of $186 million ($162 million after deferred tax) due to FX translation of debt as follows:
–
in the fourth quarter, a $14 million loss ($12 million after deferred tax) that unfavourably impacted Diluted EPS by 8, cents;
–
in the third quarter, a $105 million gain ($91 million after deferred tax) that favourably impacted Diluted EPS by 62 cents;
–
in the second quarter, a $67 million gain ($59 million after deferred tax) that favourably impacted Diluted EPS by 40 cents; and
–
in the first quarter, a $28 million gain ($24 million after deferred tax) that favourably impacted Diluted EPS by 16 cents.

In 2016, there were two significant items included in Net income as follows:
•
in the third quarter, a $25 million expense ($18 million after current tax) related to a legal settlement that unfavourably impacted Diluted EPS by 12 cents; and
•
during the course of the year, a net non-cash gain of $79 million ($68 million after deferred tax) due to FX translation of debt as follows:
–
in the fourth quarter, a $74 million loss ($64 million after deferred tax) that unfavourably impacted Diluted EPS by 43 cents;
–
in the third quarter, a $46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents;
–
in the second quarter, an $18 million gain ($16 million after deferred tax) that favourably impacted Diluted EPS by 10 cents; and
–
in the first quarter, a $181 million gain ($156 million after deferred tax) that favourably impacted Diluted EPS by $1.01.

In 2015, there were four significant items included in Net income as follows:
•
in the third quarter, a $68 million gain ($42 million after current tax) related to the sale of Delaware & Hudson Railway Company, Inc. ("D&H") South that favourably impacted Diluted EPS by 26 cents;
•
in the third quarter, a $47 million charge ($35 million after deferred tax) related to the early redemption premium on notes that unfavourably impacted Diluted EPS by 22 cents;
•
in the second quarter, a deferred income tax expense of $23 million as a result of the change in the Alberta provincial corporate income tax rate that unfavourably impacted Diluted EPS by 14 cents; and
•
during the course of the year, a net non-cash loss of $297 million ($257 million after deferred tax) due to FX translation of debt as follows:
–
in the fourth quarter, a $115 million loss ($100 million after deferred tax) that unfavourably impacted Diluted EPS by 64 cents;
–
in the third quarter, a $128 million loss ($111 million after deferred tax) that unfavourably impacted Diluted EPS by 69 cents;
–
in the second quarter, a $10 million gain ($9 million after deferred tax) that favourably impacted Diluted EPS by 5 cents; and
–
in the first quarter, a $64 million loss ($55 million after deferred tax) that unfavourably impacted Diluted EPS by 34 cents.


CP 2019 ANNUAL REPORT/ 56

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

Adjusted income is calculated as Net income reported on a GAAP basis adjusted for significant items.
 For the year ended December 31
(in millions)2019
2018
2017
2016
2015
Net income as reported$2,440
$1,951
$2,405
$1,599
$1,352
Less significant items (pre-tax):     
Legal settlement charge—
—
—
(25)—
Insurance recovery of legal settlement—
—
10
—
—
Charge on hedge roll and de-designation—
—
(13)—
—
Gain on sale of D&H South—
—
—
—
68
Management transition recovery—
—
51
—
—
Impact of FX translation gain (loss) on debt and lease liabilities94
(168)186
79
(297)
Early redemption premium on notes—
—
—
—
(47)
Add:     
Tax effect of adjustments(1)
8
(18)36
4
(26)
Income tax rate changes(88)(21)(541)—
23
Provision for uncertain tax item24
—
—
—
—
Adjusted income$2,290
$2,080
$1,666
$1,549
$1,625
(1) The tax effect of adjustments was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of 8.55%, 10.64%, 15.27%, 7.17% and 9.29% for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

Adjusted diluted earnings per share is calculated using Adjusted income, as defined above, divided by the weighted-average diluted number of Common Shares outstanding during the period as determined in accordance with GAAP.
 For the year ended December 31
 2019
2018
2017
2016
2015
Diluted earnings per share as reported$17.52
$13.61
$16.44
$10.63
$8.40
Less significant items (pre-tax):     
Legal settlement charge—
—
—
(0.17)—
Insurance recovery of legal settlement—
—
0.07
—
—
Charge on hedge roll and de-designation—
—
(0.09)—
—
Gain on sale of D&H South—
—
—
—
0.42
Management transition recovery—
—
0.35
—
—
Impact of FX translation gain (loss) on debt and lease liabilities0.67
(1.17)1.27
0.53
(1.84)
Early redemption premium on notes—
—
—
—
(0.30)
Add:     
Tax effect of adjustments(1)
0.05
(0.12)0.25
0.02
(0.16)
Income tax rate changes(0.63)(0.15)(3.70)—
0.14
Provision for uncertain tax item0.17
—
—
—
—
Adjusted diluted earnings per share$16.44
$14.51
$11.39
$10.29
$10.10
(1) The tax effect of adjustments was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of 8.55%, 10.64%, 15.27%, 7.17% and 9.29% for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.


57 /SERVICE EXCELLENCE


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

Adjusted operating ratio excludes those significant items that are reported within Operating income.
 For the year ended December 31
 2019
2018
2017
2016
2015
Operating ratio as reported59.9%61.3%61.6%61.3%61.0%
Less significant items:     
Gain on sale of D&H South—
—
—
—
(1.0)
Management transition recovery—
—
(0.8)—
—
Adjusted operating ratio59.9%61.3%62.4%61.3%62.0%

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

Calculation of ROIC
 For the year ended December 31
(in millions, except for percentages)2019
2018
2017
2016
2015
Operating income$3,124
$2,831
$2,519
$2,411
$2,618
Less:     
Other (income) expense(89)174
(178)(45)335
Other components of net periodic benefit recovery(381)(384)(274)(167)(70)
Tax(1)
806
749
111
675
728
 $2,788
$2,292
$2,860
$1,948
$1,625
Average invested capital$15,579
$14,964
$13,961
$13,532
$12,561
ROIC17.9%15.3%20.5%14.4%12.9%
(1) Tax was calculated at the annualized effective tax rate of 22.43%, 24.64%, 3.74%, 25.72%, and 30.95% for each of the above items for the years presented, respectively.



CP 2019 ANNUAL REPORT/ 58

Calculation of Adjusted ROIC
 For the year ended December 31
(in millions, except for percentages)2019
2018
2017
2016
2015
Adjusted operating income$3,124
$2,831
$2,468
$2,411
$2,550
Less:     
Other (income) expense(89)174
(178)(45)335
Other components of net periodic benefit recovery(381)(384)(274)(167)(70)
Significant items (pre-tax):     
Legal settlement charge—
—
—
(25)—
Insurance recovery of legal settlement—
—
10
—
—
Charge on hedge roll and de-designation—
—
(13)—
—
Impact of FX translation gain (loss) on debt and lease liabilities94
(168)186
79
(297)
Early redemption premium on notes—
—
—
—
(47)
Tax(1)
874
788
724
673
716
 $2,626
$2,421
$2,013
$1,896
$1,913
Average invested capital$15,579
$14,964
$13,961
$13,532
$12,561
Less impact of periodic significant items net of tax on the above average:     
Income tax recovery from income tax rate changes44
11
270
—
(11)
Provision for uncertain tax item(12)—
—
—
—
Legal settlement charge—
—
—
(9)—
Insurance recovery of legal settlement—
—
4
—
—
Charge on hedge roll and de-designation—
—
(5)—
—
Gain on sale of D&H South—
—
—
—
21
Early redemption premium on notes—
—
—
—
(18)
Management transition recovery—
—
20
—
—
Adjusted average for the 12 months of total shareholders' equity, long-term debt, long-term debt maturing within one year and short-term borrowing$15,547
$14,953
$13,672
$13,541
$12,569
Adjusted ROIC16.9%16.2%14.7%14.0%15.2%
(1) Tax was calculated at the adjusted annualized effective tax rate of 24.96%, 24.55% 26.42% 26.20% and 27.25% for each of the above items for the years presented, respectively.

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



59 /SERVICE EXCELLENCE


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

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

FX adjusted % changes in revenues are further used in calculating FX adjusted % change in freight revenue per carload and RTM. These items are presented in Operating Revenues of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    2019 vs. 2018 2018 vs. 2017
(in millions)Reported 2019
Reported 2018
Reported 2017
Variance
due to 
FX		FX Adjusted 2018FX Adj. % Change Variance
due to 
FX		FX Adjusted 2017FX Adj. % Change
Freight revenues by line of business          
Grain$1,684
$1,566
$1,532
$19
$1,585
6
 $—
$1,532
2
Coal682
673
631
2
675
1
 —
631
7
Potash462
486
411
6
492
(6) (1)410
19
Fertilizers and sulphur250
243
241
4
247
1
 (1)240
1
Forest products304
284
265
5
289
5
 (1)264
8
Energy, chemicals and plastics1,534
1,243
898
17
1,260
22
 (1)897
39
Metals, minerals, and consumer products752
797
739
16
813
(8) (1)738
8
Automotive352
322
293
7
329
7
 (2)291
11
Intermodal1,593
1,538
1,365
10
1,548
3
 (1)1,364
13
Freight revenues7,613
7,152
6,375
86
7,238
5
 (8)6,367
12
Non-freight revenues179
164
179
1
165
8
 —
179
(8)
Total revenues$7,792
$7,316
$6,554
$87
$7,403
5

$(8)$6,546
12



CP 2019 ANNUAL REPORT/ 60

FX adjusted % changes in operating expenses are discussed in Operating Expenses of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    2019 vs. 2018 2018 vs. 2017
(in millions)Reported 2019
Reported 2018
Reported 2017
Variance
due to 
FX		FX Adjusted 2018FX Adj. % Change Variance
due to 
FX		FX Adjusted 2017FX Adj. % Change
Compensation and benefits$1,540
$1,468
$1,309
$11
$1,479
4
 $(1)$1,308
12
Fuel882
918
677
18
936
(6) —
677
36
Materials210
201
190
1
202
4
 —
190
6
Equipment rents137
130
142
3
133
3
 —
142
(8)
Depreciation and amortization706
696
661
4
700
1
 —
661
5
Purchased services and other1,193
1,072
1,056
11
1,083
10
 (3)1,053
2
Total operating expenses$4,668
$4,485
$4,035
$48
$4,533
3

$(4)$4,031
11

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

Calculation of Dividend Payout Ratio
 For the year ended December 31
(in dollars, except for percentages)2019
2018
2017
2016
2015
Dividends declared per share$3.1400
$2.5125
$2.1875
$1.8500
$1.4000
Diluted EPS17.52
13.61
16.44
10.63
8.40
Dividend payout ratio17.9%18.5%13.3%17.4%16.7%

Calculation of Adjusted Dividend Payout Ratio
 For the year ended December 31
(in dollars, except for percentages)2019
2018
2017
2016
2015
Dividends declared per share$3.1400
$2.5125
$2.1875
$1.8500
$1.4000
Adjusted diluted EPS16.44
14.51
11.39
10.29
10.10
Adjusted dividend payout ratio19.1%17.3%19.2%18.0%13.9%

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


61 /SERVICE EXCELLENCE


Calculation of Long-term Debt to Net Income Ratio
(in millions, except for ratios)2019
2018
2017
2016
2015
Long-term debt including long-term debt maturing within one year as at December 31$8,757
$8,696
$8,159
$8,684
$8,957
Net income for the year ended December 312,440
1,951
2,405
1,599
1,352
Long-term debt to Net income ratio3.6
4.5
3.4
5.4
6.6

Reconciliation of Long-term Debt to Adjusted Net Debt
Adjusted net debt is defined as Long-term debt, Long-term debt maturing within one year and Short-term borrowing as reported on the Company’s Consolidated Balance Sheets adjusted for pension plans deficit, operating lease liabilities recognized on the Company's Consolidated Balance Sheets, and Cash and cash equivalents.
(in millions)2019
2018
2017
2016
2015
Long-term debt including long-term debt maturing within one year as at December 31$8,757
$8,696
$8,159
$8,684
$8,957
Add:     
Pension plans deficit(1)
294
266
278
273
295
Operating lease liabilities(2)
354
387
281
361
439
Less:     
Cash and cash equivalents133
61
338
164
650
Adjusted net debt as at December 31$9,272
$9,288
$8,380
$9,154
$9,041
(1) Pension plans deficit is the total funded status of the Pension plans in deficit only.
(2) Current period amount is as reported in compliance with GAAP following the adoption of Accounting Standards Update ("ASU") 2016-02 under the cumulative-effect adjustment transition approach, discussed further in Item 8. Financial Statements and Supplementary Data, Note 2 Accounting changes.24: Stock-based compensation in our Annual Report on Form
10-K
filed with the SEC and securities regulatory authorities in Canada on February 20, 2020 for more details.
We value our PSUs using the Willis Towers Watson binomial lattice model methodology. Using this methodology, the grant date expected fair value on February 14, 2019 was $217.21 on the TSX and US$163.62 on the NYSE, and, on September 3,
43
Table of Contents
2019, the grant date expected fair value was US$190.16 on the NYSE. The comparative periods'Willis Towers Watson expected life binomial methodology for the PSUs are calculated based on the following assumptions:
Assumptions
Willis Towers Watson expected life binomial valuation    
TSX / NYSE    
Term
3 years    
Vesting Schedule
3 year cliff    
Payout Range %
(threshold-target-max)
50-100-200    
Risk of Forfeiture
5%    
PSU Value
(as a % of grant price)
81%    
Mr. Velani’s, Mr. Brooks’ and Mr. Redd’s amounts have not been restated and were calculated asinclude the net present value of operating leases discounted bymatching DSUs granted in 2019.
Option awards
Stock options were granted on January 25, 2019. The grant date fair value of stock option awards granted to each NEO has been calculated in accordance with FASB ASC Topic 718: Compensation—Stock Compensation. We used the Company's effective interest rateBlack-Scholes option-pricing model (with reference to the shares underlying the options). The grant date accounting fair value of the awards shown in the Summary Compensation table shown respectively with reference to the TSX and NYSE are $60.01 or US$50.64 for the period presented.


CPJanuary 25, 2019 ANNUAL REPORT/ 62

Reconciliation of Net Incomegrant. Additional options were granted to EBIT, Adjusted EBITMr. Brooks on February 14, 2019 and Adjusted EBITDA
Earnings before interestMr. Redd on September 3, 2019 to bring them to the Executive Vice-President level. The grant date accounting fair value on the NYSE is US$49.28 for the February 14, 2019 grant and tax ("EBIT") is calculated as Net income before Net interest expense and Income tax expense. Adjusted EBIT excludes significant items reportedUS$50.29 for the September 3, 2019 grant, both were in both Operating income and Other (income) expense. Adjusted EBITDA is calculated as Adjusted EBIT plus operating lease expense and Depreciation and amortization, less Other components of net periodic benefit recovery.
 For the year ended December 31
(in millions)2019
2018
2017
2016
2015
Net income as reported$2,440
$1,951
$2,405
$1,599
$1,352
Add:     
Net interest expense448
453
473
471
394
Income tax expense706
637
93
553
607
EBIT3,594
3,041
2,971
2,623
2,353
Less significant items (pre-tax):     
Legal settlement charge—
—
—
(25)—
Insurance recovery of legal settlement—
—
10
—
—
Charge on hedge roll and de-designation—
—
(13)—
—
Gain on sale of D&H South—
—
—
—
68
Management transition recovery—
—
51
—
—
Impact of FX translation gain (loss) on debt and lease liabilities94
(168)186
79
(297)
Early redemption premium on notes—
—
—
—
(47)
Adjusted EBIT3,500
3,209
2,737
2,569
2,629
Add:     
Operating lease expense83
97
104
111
127
Depreciation and amortization706
696
661
640
595
Less:     
Other components of net periodic benefit recovery381
384
274
167
70
Adjusted EBITDA$3,908
$3,618
$3,228
$3,153
$3,281

Calculation of Adjusted Net Debtreference to Adjusted EBITDA Ratiothe NYSE.
See Incentive plan awards
(in millions, except for ratios)2019
2018
2017
2016
2015
Adjusted net debt as at December 31$9,272
$9,288
$8,380
$9,154
$9,041
Adjusted EBITDA for the year ended December 313,908
3,618
3,228
3,153
3,281
Adjusted net debt to Adjusted EBITDA ratio2.4
2.6
2.6
2.9
2.8

Off-Balance Sheet Arrangements
Guarantees
Refer toon page 47 for details about the 2019 awards. See Item 8.8, Financial Statements and Supplementary Data, Note 27 Guarantees24: Stock-based compensation in our Annual Report on Form
10-K
filed with the SEC and securities regulatory authorities in Canada on February 20, 2020 for more details.

To calculate the number of options that an executive receives, we use Willis Towers Watson’s expected life binomial methodology which is fundamentally similar to the methodology used to determine the accounting fair value; however, some of the underlying assumptions are different. For example, the binomial methodology assumes a slightly lower historical volatility, a higher risk-free rate and includes a discount to account for vesting restrictions.

The grant price on January 25, 2019 was $271.50 on the TSX with an underlying value of $54.30 and was US$205.31 on the NYSE with an underlying value of US$47.22. The grant price on February 14, 2019 was US$202.00 on the NYSE with an underlying value of US$46.46. The grant price on September 9, 2019 was US$234.76 on the NYSE with an underlying value of US$53.99. The Willis Towers Watson expected life binomial methodology for the stock options are calculated based on the following assumptions:
           
Assumptions  Willis Towers Watson expected life binomial valuation        
                       NYSE                           TSX        
Option Term
 
  
 
 
7 years    
 
 
 
  
 
 
7 years    
 
 
 
  
Vesting Schedule
 
  
 
 
4 year pro-rated    
 
 
 
  
 
 
4 year pro-rated    
 
 
 
  
Expected Life
 
  
 
 
4.75 years    
 
 
 
  
 
 
4.75 years    
 
 
 
  
Dividend Yield
(1-year
historical)
 
  
 
 
1.00%    
 
 
 
  
 
 
0.99%    
 
 
 
  
Volatility
(3-year
daily)
 
  
 
 
24.0%    
 
 
 
  
 
 
21.7%    
 
 
 
  
Risk-free Rate
(yield curve)
 
  
 
 
2.5 - 3.1%    
 
 
 
  
 
 
2.0 - 2.5%    
 
 
 
  
Risk of Forfeiture
 
  
 
 
5%    
 
 
 
  
 
 
5%    
 
 
 
  
Stock Option Value
(as a % of grant price)
 
  
 
 
23%    
 
 
 
  
 
 
20%    
 
 
 
  
Non-equity
incentive plan compensation
Cash bonus earned under our short-term incentive plan for 2019 and paid in February 2020. In respect of their short-term incentive compensation, Mr. Velani, Mr. Brooks and Mr. Redd each elected to receive part of their 2019 bonus in DSUs.
Pension value
Mr. Creel and Mr. Velani participate in the Canadian defined contribution plan (DC plan) and in the defined contribution supplemental plan (DC SERP).
44

Table of Contents
63 /SERVICE EXCELLENCE
Mr. Creel, Mr. Pitz, Mr. Redd and Mr. Johnson participate in the U.S. defined contribution plan and the U.S. supplemental executive retirement plan.
Mr. Brooks participates in the CP Pension Plan for U.S. Management Employees.
See
Retirement plans
on page 51 for more details.
All other compensation
The NEOs also receive certain benefits and perquisites which are competitive with our comparator group. The table below shows the breakdown of all other compensation for 2019. The values in the table have been converted to Canadian dollars using the 2019 average exchange rate of $1.3269.
                                         
   Perquisites   Other
compensation		     
Name  Personal
use of
company
aircraft
($)		   Auto
benefits
($)		   Housing
allowance
($)		   Financial
and tax
planning
($)		   Additional
medical
($)		   Club
benefits
($)		   401K
match
($)		   Employer
share
purchase
plan
match ($)		   Tax
Assistance
($)		   Total
($)		 
Keith Creel
 
   
 
413,422
 
 
 
   
 
28,704
 
 
 
   
 
17,056
 
 
 
   
 
33,173
 
 
 
   
 
1,353
 
 
 
   
 
23,647
 
 
 
   
 
7,165
 
 
 
   
 
30,410
 
 
 
   
 
-
 
 
 
   
 
554,930
 
 
 
Nadeem Velani
 
   
 
-
 
 
 
   
 
33,177
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
11,200
 
 
 
   
 
-
 
 
 
   
 
14,872
 
 
 
   
 
-
 
 
 
   
 
59,249
 
 
 
John Brooks
 
   
 
-
 
 
 
   
 
26,251
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
2,610
 
 
 
   
 
14,861
 
 
 
   
 
9,658
 
 
 
   
 
13,271
 
 
 
   
 
-
 
 
 
   
 
66,651
 
 
 
Laird Pitz
 
   
 
-
 
 
 
   
 
22,543
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
14,861
 
 
 
   
 
8,203
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
45,607
 
 
 
Mark Redd
 
   
 
-
 
 
 
   
 
36,594
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
2,510
 
 
 
   
 
14,861
 
 
 
   
 
7,626
 
 
 
   
 
9,728
 
 
 
   
 
143,305
 
 
 
   
 
214,624
 
 
 
Robert Johnson
 
   
 
-
 
 
 
   
 
53,148
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
-
 
 
 
   
 
14,861
 
 
 
   
 
9,616
 
 
 
   
 
1,949
 
 
 
   
 
-
 
 
 
   
 
79,574
 
 
 
Notes:
Use of company aircraft
The value is calculated by multiplying the variable cost per air hour by the number of hours used for travel and includes costs for fuel, maintenance, landing fees and other miscellaneous costs. As an executive of a Calgary-based company, enabling the CEO to visit his family in the United States is an important retention tool.
Non-corporate
use of the corporate jet has been limited to family visits and limited to the CEO only.
Auto benefits
Includes a company-leased vehicle and reimbursement of related operating costs as well as taxable reimbursement of auto benefits for eligible vehicles. Upon retirement on September 30, 2019, Mr. Johnson received his vehicle as a gift from CP. His auto benefits include the value of the vehicle and the lease payments for the time he was employed in 2019.
Housing allowance
The incremental cost to provide reasonable accommodation for Mr. Creel in Calgary.
Financial and tax planning
For Mr. Creel, financial and tax planning services according to his current employment contract.
Additional medical
CP encourages executives to participate in the executive medical program. Under the U.S. medical benefits plan, available to all U.S. employees, the majority of the cost of a medical examination is covered by the plan. Only additional services for the executive medical are paid for by CP. In Canada, executive medicals are not covered under any general benefit plan.
Club memberships
Included in the perquisites program available to all senior executives.
401K plan
Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson also receive matching contributions to the 401k plan.
ESPP match
Includes company contributions to the employee share purchase plan (ESPP). The NEOs participate in the ESPP on the same terms and using the same formulas as other participants. See page 50 to read more about the ESPP.
Tax assistance
As a U.S. employee relocating to CP’s head office in Canada, Mr. Redd was provided with tax assistance to minimize the tax implications of his cross-border employment on his base salary and any STIP payment up to target. All other income was taxed at full Canadian tax rates. Mr. Redd’s tax assistance is an estimate for 2019. Effective with his promotion to Executive Vice President, Mr. Redd is no longer eligible for tax assistance.
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Table of Contents
Employment agreements
Except for Mr. Creel, employment agreements for executive officers are set out in a standard offer letter template. The letters contain the standard terms as described in the compensation discussion and analysis and include an annual salary, participation in the short and long-term incentive plans as approved annually by the Compensation Committee, participation in the benefit plans or programs generally available to management employees and modest perquisites.
As of the date of this proxy circular, all of our NEOs have a
two-year
non-compete,
non-solicitation
agreement tied to their CP employment.
Mr. Creel’s employment agreement includes:
reasonable living accommodation in Calgary
 

use of the corporate jet for business commuting and family visits within North America

Contractual Commitments
non-disclosure,
non-solicitation
covenants
severance provisions as described on page 54
reimbursement for club memberships of up to US$25,000 annually
reimbursement for financial services of up to US$25,000 annually
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Table of Contents
Incentive plan awards
Outstanding share-based awards and option-based awards
The table below shows all vested and unvested equity incentive awards that were outstanding as of December 31, 2019. See
Long-term
incentive plan
beginning on page 21 for more information about our stock option and share-based awards.
                                   
     Option-based awards    Share-based awards 
Name Grant date  
Number of
securities
underlying
unexercised
options
(#)
  Option
exercise
price
($)		  
Option
expiration
date
  
Value of
unexercised
in-the-money

options
($)
  Grant
type		 
Number of
shares or units
of shares that
have not
vested
(#)
  Market or
payout value of
share-based
awards that
have not vested
($)		  Market or payout
value of vested
share-based
awards not paid
out or distributed
($)		 
Keith Creel
  
31-Jan-2014
   39,900   168.84   
31-Jan-2024
   6,471,381     
  
24-Jul-2014
   47,940   210.32   
24-Jul-2024
   5,786,837     
  
23-Jan-2015
   33,910   175.92   
23-Jan-2025
   3,480,664     
  
22-Jan-2016
   55,250   116.80   
22-Jan-2026
   9,913,464     
  
20-Jan-2017
   33,884   150.99   
20-Jan-2024
   4,575,128     
  
1-Feb-2017
   18,762   151.14   
1-Feb-2024
   2,529,651     
  
1-Feb-2017
   177,225   151.14   
1-Feb-2024
   23,894,968     
  
22-Jan-2018
   43,148   185.85   
22-Jan-2025
   3,872,407     
  
25-Jan-2019
   54,202   205.31   
25-Jan-2026
   3,494,535     
  
6-Feb-2013
      DSU    10,546,127 
  
21-Feb-2017
      PSU    14,138,889 
  
15-Feb-2018
      PSU  18,621   6,166,051  
  
14-Feb-2019
      PSU  22,068   7,307,316  
Total
 
     
 
 
504,221
 
 
 
         
 
 
64,019,035
 
 
 
   
 
 
40,689
 
 
 
 
 
 
13,473,367
 
 
 
 
 
 
24,685,016
 
 
 
Nadeem Velani
  
2-Apr-2013
   2,310   126.34   
2-Apr-2023
   472,834     
  
31-Jan-2014
   1,820   168.84   
31-Jan-2024
   295,186     
  
23-Jan-2015
   1,539   218.78   
23-Jan-2025
   172,753     
  
22-Jan-2016
   2,927   165.74   
22-Jan-2026
   483,804     
  
20-Jan-2017
   4,644   201.49   
20-Jan-2024
   601,584     
  
22-Jan-2018
   13,260   231.66   
22-Jan-2025
   1,317,646     
  
25-Jan-2019
   16,313   271.50   
25-Jan-2026
   971,113     
  
26-Feb-2014
      DSU    223,781 
  
19-Feb-2015
      DSU    113,220 
  
24-Feb-2017
      DSU  124   41,083   164,332 
  
22-Feb-2019
      DSU  270   89,402   357,609 
  
21-Feb-2017
      PSU    2,517,052 
  
15-Feb-2018
      PSU  5,304   1,755,752  
  
14-Feb-2019
      PSU  5,832   1,930,622  
Total
 
     
 
 
42,813
 
 
 
         
 
 
4,314,920
 
 
 
   
 
 
11,530
 
 
 
 
 
 
3,816,859
 
 
 
 
 
 
3,375,994
 
 
 
John Brooks
  
1-Apr-2012
   2,850   75.71   
1-Apr-2022
   727,662     
  
7-Dec-2012
   2,345   97.70   
7-Dec-2022
   547,159     
  
22-Feb-2013
   1,900   119.18   
22-Feb-2023
   402,515     
  
31-Jan-2014
   1,440   168.84   
31-Jan-2024
   233,554     
  
23-Jan-2015
   2,506   175.92   
23-Jan-2025
   257,226     
  
22-Jan-2016
   4,340   116.80   
22-Jan-2026
   778,723     
  
20-Jan-2017
   2,610   150.99   
20-Jan-2024
   352,411     
  
22-Jan-2018
   4,195   185.85   
22-Jan-2025
   376,489     
  
25-Jan-2019
   7,484   205.31   
25-Jan-2026
   482,512     
  
14-Feb-2019
   2,969   202.00   
14-Feb-2026
   204,182     
  
6-Sep-2012
      DSU    334,073 
  
22-Feb-2019
      DSU  166   54,816   219,265 
  
21-Feb-2017
      PSU    1,374,360 
  
15-Feb-2018
      PSU  1,810   599,421  
  
14-Feb-2019
      PSU  4,499   1,489,757  
Total
 
     
 
 
32,639
 
 
 
         
 
 
4,362,433
 
 
 
   
 
 
6,475
 
 
 
 
 
 
2,143,994
 
 
 
 
 
 
1,927,698
 
 
 
Laird Pitz
  
22-Jan-2016
   1,808   116.80   
22-Jan-2026
   324,408     
  
20-Jan-2017
   2,376   150.99   
20-Jan-2024
   320,815     
  
22-Jan-2018
   3,290   185.85   
22-Jan-2025
   295,268     
  
25-Jan-2019
   7,484   205.31   
25-Jan-2026
   482,512     
  
19-Feb-2015
      DSU    592,133 
  
23-Feb-2016
      DSU    876,230 
  
21-Feb-2017
      PSU    1,264,578 
  
15-Feb-2018
      PSU  1,893   626,713  
  
14-Feb-2019
      PSU  3,047   1,008,964  
Total
 
     
 
 
14,958
 
 
 
         
 
 
1,423,003
 
 
 
   
 
 
4,940
 
 
 
 
 
 
1,635,677
 
 
 
 
 
 
2,732,941
 
 
 
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Table of Contents
                                   
     Option-based awards    Share-based awards 
Name Grant date  
Number of
securities
underlying
unexercised
options
(#)
  Option
exercise
price
($)		  
Option
expiration
date
  
Value of
unexercised
in-the-money

options
($)
  Grant
type		 
Number of
shares or units
of shares that
have not
vested
(#)
  Market or
payout value of
share-based
awards that
have not vested
($)		  Market or payout
value of vested
share-based
awards not paid
out or distributed
($)		 
Mark Redd
  
1-Apr-2014
   1,380   166.16   
1-Apr-2024
   227,521     
  
23-Jan-2015
   1,256   175.92   
23-Jan-2025
   128,921     
  
22-Jan-2016
   2,042   116.80   
22-Jan-2026
   366,394     
  
20-Jan-2017
   3,734   150.99   
20-Jan-2024
   504,177     
  
22-Jan-2018
   4,015   185.85   
22-Jan-2025
   360,335     
  
20-Jul-2018
   5,280   194.97   
20-Jul-2025
   411,323     
  
25-Jan-2019
   3,996   205.31   
25-Jan-2026
   257,632     
  
3-Sep-2019
   1,297   234.76   
3-Sep-2026
   34,011     
  
19-Feb-2015
      DSU    144,884 
  
22-Feb-2019
      DSU  140   46,499   185,998 
  
21-Feb-2017
      PSU    1,178,305 
  
15-Feb-2018
      PSU  1,733   573,813  
  
20-Jul-2018
      PSU  1,708   565,642  
  
14-Feb-2019
      PSU  1,627   538,848  
  
3-Sep-2019
      PSU  554   183,289  
Total
 
     
 
 
23,000
 
 
 
         
 
 
2,290,314
 
 
 
   
 
 
5,762
 
 
 
 
 
 
1,908,091
 
 
 
 
 
 
1,509,187
 
 
 
Robert Johnson
  
22-Jan-2016
   2,061   116.80   
22-Jan-2026
   369,804     
  
20-Jan-2017
   5,778   150.99   
20-Jan-2024
   780,164     
  
22-Jan-2018
   7,038   185.85   
22-Jan-2025
   631,640     
  
25-Jan-2019
   9,367   205.31   
25-Jan-2026
   603,913     
  
24-Jun-2013
      DSU    1,879,575 
  
27-Feb-2018
      DSU    213,756 
  
21-Feb-2017
      PSU    3,075,226 
  
15-Feb-2018
      PSU  4,050   1,341,032  
  
14-Feb-2019
      PSU  3,814   1,262,873  
Total
 
     
 
 
24,244
 
 
 
         
 
 
2,385,521
 
 
 
   
 
 
7,864
 
 
 
 
 
 
2,603,905
 
 
 
 
 
 
5,168,557
 
 
 
Notes:
Options
In general, regular options granted before 2017 vest 25% each year for four years beginning on the anniversary of the grant date and expire 10 years from the grant date. Grants made in 2017 and onwards expire 7 years from the grant date.
Mr. Redd received a performance option grant on July 20, 2018 for retention purposes. His 2018 performance option grant will become exercisable on July 20, 2021 upon the achievement of the
pre-determined
performance criteria at the end of the fiscal year ending December 31, 2020 and will expire 7 years from the grant date.
All exercise prices for grants received prior to 2015 are shown in Canadian dollars. With respect to Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson, exercise prices for option awards that were granted in 2015 or later are shown in U.S. dollars. All of Mr. Velani’s exercise prices are shown in Canadian dollars.
Value of unexercised
in-the-money
options at 2019
year-end
Based on $331.03, our closing share price on the TSX on December 31, 2019. For all the NEOs, except Mr. Velani, option awards made in 2015 or later have been valued based on US$254.95, our closing share price on the NYSE on December 31, 2019 and converted into Canadian dollars using a
year-end
exchange rate of $1.2988.
Mr. Creel was awarded 177,225 performance stock options on February 1, 2017. These options will vest on February 1, 2022 provided certain performance metrics are achieved. The amount reflects the market value of these performance stock options based on US$254.95, our closing share price on the NYSE on December 31, 2019 and converted into Canadian dollars using a
year-end
exchange rate of $1.2988.
For Mr. Velani, the value of unvested PSUs and DSUs is based on $331.03, our closing share price on the TSX on December 31, 2019.
For Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson: the value of PSUs or DSUs is based on US$254.95, our closing share price on the NYSE on December 31, 2019, converted into Canadian dollars using a
year-end
exchange rate of $1.2988.
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Table of Contents
PSUs assume a payout at target (100%) for the 2018 and 2019 grants. The 2017 PSU value reflects a payout at 193% on the award which includes dividends earned up to the payment date.
Vested and unvested DSU awards are deferred and cannot be redeemed until the executive leaves the company.
Incentive plan awards – value vested or earned during the year
The table below shows the amount of incentive compensation that vested or was earned in 2019.
             
Name
 
  
Option-based awards -
value vested during the year ($)
 
   
Share-based awards -
value vested during the year ($)
 
   
Non-equity incentive plan compensation -

value earned during the year ($)
 
 
Keith Creel
 
   
 
2,679,271
 
 
 
   
 
14,138,889
 
 
 
   
 
2,978,994
 
 
 
Nadeem Velani
 
   
 
256,072
 
 
 
   
 
2,778,742
 
 
 
   
 
1,095,729
 
 
 
John Brooks
 
   
 
185,799
 
 
 
   
 
1,529,295
 
 
 
   
 
829,259
 
 
 
Laird Pitz
 
   
 
309,653
 
 
 
   
 
1,353,851
 
 
 
   
 
571,230
 
 
 
Mark Redd
 
   
 
133,500
 
 
 
   
 
1,309,733
 
 
 
   
 
592,539
 
 
 
Robert Johnson
 
   
 
462,290
 
 
 
   
 
3,075,226
 
 
 
   
 
523,969
 
 
 
Notes:
Option-based awards – value vested during the year
Option-based awards include the aggregate dollar value that would have been realized if the options were exercised on the date of vest. It is calculated as the difference between the closing price (on each of the stock option vest dates in 2019) and the exercise price, converted to Canadian dollars where applicable using the exchange rate on the vest date.
Share-based awards – value vested during the year
The value includes DSUs that have vested during the year and are valued as of the vest date and converted to Canadian dollars where applicable, as well as the 2017 PSU value which vested at 193% on December 31, 2019.
The accompanying2017 PSU value realized on vesting is calculated by multiplying the number of shares acquired on vesting by $323.56, the average
30-day
trading price of our shares prior to December 31, 2019 on the TSX for Mr. Velani, and US$245.01 on the NYSE for Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson, converted to Canadian dollars using the
year-end
exchange rate of $1.2988 and by multiplying that product by the achieved performance factor.
Option exercises and vested stock awards
The table indicatesbelow shows the Company’s obligationsoptions exercised and commitmentssold by the NEOs in 2019.
             
Name
 
  
Number of options exercised and sold
 
   
Option exercise price ($)
 
   
Value realized ($)
 
 
Keith Creel
(1)
   59,325    115.78    12,770,437 
    
 
53,350
 
 
 
   
 
119.18
 
 
 
   
 
11,301,402
 
 
 
John Brooks
(2)
   900    51.17    234,697 
    
 
3,200
 
 
 
   
 
65.06
 
 
 
   
 
787,706
 
 
 
Laird Pitz
   4,584    175.92    393,199 
   3,618    116.80    585,031 
   2,377    150.99    276,409 
    
 
1,097
 
 
 
   
 
185.85
 
 
 
   
 
77,370
 
 
 
Mark Redd
 
   
 
1,410
 
 
 
   
 
168.84
 
 
 
   
 
205,910
 
 
 
Robert Johnson
(3)
   3,640    129.54    669,053 
   5,870    168.84    845,179 
   5,198    175.92    397,230 
   6,183    116.80    953,444 
   5,779    150.99    630,239 
    
 
2,347
 
 
 
   
 
185.85
 
 
 
   
 
147,957
 
 
 
Notes:
(1)
Mr. Creel exercised his 2013 options that would be expiring in the next three years.
(2)
Mr. Brooks exercised his 2010 and 2011 options that would be expiring in 2020 and 2021 respectively.
(3)
Robert Johnson retired September 30, 2019 and exercised all of his vested options upon retirement.
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Table of Contents
Value realized
is calculated using the actual market price of the shares acquired upon exercise of the respective options less the exercise price for those options. All values are displayed in Canadian dollars. The value for exercised options which were granted on the NYSE have been converted to make future paymentsCanadian dollars using the exchange rate applicable on the date of exercise.
Equity compensation plan information
The table below shows the securities authorized for contracts, such as debt, leases, and commercial arrangements asissuance under equity compensation plans at December 31, 2019. These include the issuance of securities upon exercise of options outstanding under the stock option plan and the director stock option plan.
The table also shows the remaining number of shares available for issuance and includes 340,000 shares under the director stock option plan. On July 21, 2003, the Board suspended any additional grants of options under the director stock option plan and there are no outstanding options under that plan.
Payments due by period (in millions)Total
2020
2021 & 2022
2023 & 2024
Thereafter
Contractual commitments









Interest on long-term debt and finance leases$11,117
$431
$804
$690
$9,192
Long-term debt8,692
592
842
568
6,690
Finance leases151
7
113
13
18
Operating leases(1)
395
80
106
79
130
Supplier purchase3,090
699
1,295
727
369
Other long-term liabilities(2)
495
53
102
99
241
Total contractual commitments$23,940
$1,862
$3,262
$2,176
$16,640
             
Plan Category
 
 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 remaining
available for future issuance under equity
compensation plans (excluding securities
reflected in the first column)		 
Equity compensation plans approved by security holders
 
  
 
1,416,346
 
 
 
  
 
199.12
 
 
 
  
 
1,438,707
 
 
 
Equity compensation plans not approved by security holders
 
  
 
-
 
 
 
  
 
-
 
 
 
  
 
-
 
 
 
Total
 
 
 
 
1,416,346
 
 
 
 
 
 
199.12
 
 
 
 
 
 
1,438,707
 
 
 
(1) Residual value guarantees
See page 24 to read more about the stock option plan. You can also read about the two equity compensation plans in our audited consolidated financial statements for the year ended December 31, 2019, available on certain leased equipmentour website (investor.cpr.ca/financials), and on SEDAR (www.sedar.com) and EDGAR (www.sec.gov).
Employee Share Purchase Program (ESPP)
CP’s ESPP is available to all employees and provides the opportunity to purchase voting shares on the open market through payroll deductions which aligns employees’ interests with those of shareholders. Employees may contribute between 1% and 10% of their base salary to the ESPP every pay period. CP provides a maximum exposure33% match on the first 6% of $2 million are not included
non-unionized
and specified unionized employees’ contributions, which vest at the end of the four consecutive quarters. Employees must remain participants of the ESPP at the time of vesting in order to receive the CP match.
As of December 31, 2019, approximately 45% of employees participated in the minimum payments shown above, as management believesESPP.
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Table of Contents
Retirement plans
Canadian pension plans
Mr. Creel and Mr. Velani participated in our DC plan in 2019.
Participants contribute between 4% and 6% of their earnings depending on their age and years of service, and the company contributes between 4% and 8% of earnings. Total contributions are limited to the maximum allowed under the
Income Tax Act
(Canada) ($27,230 for 2019).
Defined contribution plan
             
    
Accumulated value at start of year ($)
 
   
Compensatory ($)
 
   
Accumulated value at year end ($)
 
 
Keith Creel
 
   
 
1,262,991
 
 
 
   
 
543,653
 
 
 
   
 
2,041,957
 
 
 
Nadeem Velani
 
   
 
455,364
 
 
 
   
 
214,043
 
 
 
   
 
774,411
 
 
 
Mr. Creel and Mr. Velani also participate in the DC SERP, a
non-registered
plan that CP will not be required to make payments under these residual guarantees.
(2) Includes expected cash payments for environmental remediation, post-retirementprovides benefits workers’ compensation benefits, long-term disability benefits, pension benefit paymentsin excess of the
Income Tax Act
(Canada) limits for the Company’s non-registered supplemental pension plan,DC Plan. Specifically, the DC SERP provides a company contribution equal to 6% of a participant’s base salary and certain other long-term liabilities. Projected payments for post-retirement benefits, workers’ compensation benefits,annual bonus. Company contributions vest after two years and long-term disability benefits include the anticipated payments for years 2020 to 2029. Pension contributions for the Company’s registered pension plans areemployees do not included duecontribute to the volatility in calculating them. Pension payments are discussed further in Critical Accounting Estimates of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

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

The accompanying table indicates the Company’s commitments to make future payments for letters of credit and capital expenditures as at December 31, 2019.DC SERP.
U.S. retirement plans
Payments due by period (in millions)Total
2020
2021 & 2022
2023 & 2024
Thereafter
Certain other financial commitments     
Letters of credit$80
$80
$—
$—
$—
Capital commitments664
332
200
61
71
Total certain other financial commitments$744
$412
$200
$61
$71

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

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



CP 2019 ANNUAL REPORT/ 64Our U.S. retirement program has five elements:

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

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

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

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

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

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

Net Periodic Benefit Costs
The Company reports the current service cost component of net periodic benefit cost in "Compensation and benefits" for pensions and post-retirement benefits and in "Purchased services and other" for self-insured workers' compensation and long-term disability benefits on the Company's Consolidated Statements of Income. The Other components of net periodic benefit recovery are reported as a separate line item outside of Operating income on the Company's Consolidated Statements of Income. Components of the net periodic benefit costs (credits) are as follows:
 20192018
(in millions of Canadian dollars)Current service cost
Other components
Total
Current service cost
Other components
Total
Defined benefit pensions$107
$(414)$(307)$120
$(405)$(285)
Defined contribution pensions11
—
11
10
—
10
Post-retirement benefits4
16
20
5
18
23
Self-insured workers' compensation and long-term disability benefits7
17
24
7
3
10
All plans$129
$(381)$(252)$142
$(384)$(242)



65 /SERVICE EXCELLENCE


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

Pension Plan Contributions
The Company made contributions of $53 million to the defined benefit pension plans in 2019, compared with $36 million, which is net of a $10 million refund of plan surplus in 2018. The Company’s main Canadianqualified 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 which provides automatic employer contributions (closed plan);
a
non-qualified
defined benefit pension plan. CP has applied $1,324 million of theseplan (closed plan) for certain employees whose compensation exceeds the
U.S. Internal Revenue Code
limits (US$225,000 for 2019);
a voluntary prepayments to reduce its pension funding requirements in 2012–2019, leaving $426 million of the voluntary prepayments still available at December 31, 2019 to reduce CP’s pension funding requirements in 2020 and future years. CP continues to have significant flexibilityqualified 401(k) plan with respect to the rate at which the remaining voluntary prepayments are applied to reduce future years’ pension contribution requirements, which allows CP to manage the volatility of future pension funding requirements. At this time, CP estimates it will not apply any of the remaining voluntary prepayments against its 2020 pension funding requirements.employer match;

CP estimates its aggregate pension contributions, including its defined benefit and
a qualified defined contribution plans, to be inplan which provides automatic employer contributions; and
a
non-qualified
defined contribution plan for certain employees whose compensation exceeds the range of $65 million to $75 million in 2020, and in the range of $50 million to $100 million per year from 2021 to 2023. These estimates reflect the Company’s current intentions with respect to the rate at which
U.S. Internal Revenue Code
limit (US$280,000 for 2019).
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 Risksfor U.S. Management Employees (closed plan)
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
CP sponsors a market-related asset value for the main Canadian defined benefit pension plan’s public equity securitiesplan comprised of a Basic Defined Benefit Pension Plan (Basic DB Plan) and absolute return strategies. The impact of changesa Supplemental Pension (Supplemental Pension Plan) for earnings 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%excess of the plans’ assetsInternal Revenue Service (IRS) compensation limits in the Basic DB Plan, which provides retirement benefits in excess of the benefits payable from the Basic DB Plan. The benefit is based on age, service and a percentage of final average compensation.
The pension formula uses the final average monthly earnings and calculates a benefit of 0.5% up to be investedthe Tier 1 Railroad Retirement Board limit and 1.25% in public equity securities. Asexcess of that limit, and multiplies that by the years of service to a result, stock market performancemaximum of 30 years. An unreduced pension is a key driveravailable for all employees under the Basic DB Plan and the Supplemental Pension Plan as early as age 62 with 30 years of service with the normal retirement benefit payable at age 65.
Mr. Brooks participated in determining the pension funds’ asset performance. IfBasic DB Plan and Supplemental Pension Plan in 2019.
                                 
  Years of credited service  Annual benefits payable  
Opening present
value of defined
benefit obligation
($)
  Compensatory
change
($)		  
Non-compensatory

change
($)
  Closing present
value of defined
benefit
obligation
($)		 
Name At
December 31, 2019		  At age 65  At year end
($)		  At age 65
($)		 
John Brooks
 
  
 
11.17
 
 
 
  
 
27.25
 
 
 
  
 
109,679
 
 
 
  
 
267,571
 
 
 
  
 
571,271
 
 
 
  
 
254,186
 
 
 
  
 
258,866
 
 
 
  
 
1,084,323
 
 
 
Notes:
The values in the table have been converted to Canadian dollars using the 2019 average exchange rate of investment return on the plans’ public equity securities in 2019 had been 10% higher (or lower) than the actual 2019 rate of investment return on such securities, 2020 net periodic benefit costs for pensions would be lower (or higher) by approximately $25 million.$1.3269.

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

The Company estimates that an increase in the discount rate of 0.1% would decrease the defined benefit pension plans’ projected benefit obligations by approximately $176 million, and that a decrease in the discount rate of 0.1% would increase the defined benefit pension plans’ projected benefit obligations by approximately $178 million. Similarly, for every 0.1% the actual return on assets varies above (or below) the estimated return for the year, theclosing present value of the defined benefit pension plans’ assets would increase (or decrease)obligation is based on Mr. Brooks’ $109,679 accrued benefit assumed to be paid at age 65. The present value was determined using a discount rate of 3.15% and mortality adjusted actuarial assumptions.
51
Table of Contents
401(k) plan
Individuals can make
pre-tax
or
post-tax
(Roth) contributions to the 401(k) plan subject to limitations imposed by approximately $13 million.

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

Fluctuationsthe IRS in the post-retirement benefit obligation also can result from changes inU.S. The company provides a matching contribution of 50% on the discount rate used. A 0.1% increase (decrease) in the discount rate would decrease (increase) the obligation by approximately $6 million.first 6% of eligible earnings. All contributions vest immediately.

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.


U.S. Salaried Retirement Income Plan
CP 2019 ANNUAL REPORT/ 66

Property, PlantThe U.S. Salaried Retirement Income Plan is employer-funded with an annual contribution amount equal to 3.5% of eligible earnings, which include base salary and Equipment
The Company follows the group depreciation method under which a single depreciation rate is applied to the total cost in a particular class of property, despite differences in the service life or salvage value of individual properties within the same class. CP performs depreciation studies of each property asset class approximately every three years to update depreciation rates. The studies are conducted with assistance from third-party specialists and analyzed and reviewed by the Company's management. Depreciation studies for U.S. assets are reviewed and approved by the Surface Transportation Board ("STB"). Depreciation studies for Canadian assets are provided to the Canadian Transportation Agency (the "Agency"), but the Agency does not approve depreciation rates. In determining appropriate depreciation rates, management is required to make judgments and assumptions about a variety of key factors thatannual bonus. These earnings are subject to future variability duecompensation limitations imposed by the IRS in the U.S. These amounts are included in the summary compensation table under
All other compensation
.
Supplemental defined contribution plan (U.S. DC SERP)
The U.S. DC SERP is an unfunded,
non-qualified
defined contribution plan that provides an additional company contribution equal to inherent uncertainties. These6% of eligible earnings without regard to the limitations imposed by the IRS. In the U.S., eligible earnings include the following:
Key AssumptionsAssessments
•
Whole and remaining asset lives

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

CP depreciates the cost of properties, net of salvage, on a straight-line basis over the estimated useful lifebase salary and annual bonus. In addition, for earnings in excess of the classlimitations imposed by the U.S. Internal Revenue Code, an additional 3.5% contribution is made. Company contributions cliff vest at the end of property.  three years.
Mr. Creel, Mr. Pitz, Mr. Redd and Mr. Johnson participated in the U.S. DC SERP in 2019.
The estimates of economic lives are uncertaintable below shows the U.S. Salaried Retirement Income Plan and can vary due to changesU.S. DC SERP account information in any of the assessed factors noted2019.
             
    
Accumulated value at start of year ($)
 
   
Compensatory ($)
 
   
Accumulated value at year end ($)
 
 
Keith Creel
 
   
 
841,702
 
 
 
  
 
 
22,690
 
 
 
  
 
 
1,045,509
 
 
 
Laird Pitz
 
   
 
267,437
 
 
 
  
 
 
104,830
 
 
 
  
 
 
406,946
 
 
 
Mark Redd
 
   
 
126,699
 
 
 
   
 
96,231
 
 
 
   
 
246,286
 
 
 
Robert Johnson
 
   
 
401,049
 
 
 
   
 
121,175
 
 
 
   
 
518,583
 
 
 
Notes:
The values in the table abovehave been converted to Canadian dollars using the 2019 average exchange rate of $1.3269.
About deferred compensation
Executive officers and members of senior management who have not met their share ownership requirement can choose to defer all or a portion of their short-term incentive by receiving it as DSUs in the year the bonus is actually paid, which they could receive a 25% match on. The deferred amount, including the match, cannot exceed the amount needed to meet the requirement. The amount is converted to bonus DSUs using the average market price of a CP common share for whole and remaining asset lives. Additionally, the depreciation rates are updated to reflect the change in residual values10 trading days immediately before December 31 of the assetsapplicable performance year. The matching units vest after three years.
The Board approved amendments of the Senior Executives Deferred Share Unit Plan (DSU Plan) in the class.

It is anticipated that there willMay 2019 to further assist senior executives in meeting their ownership requirements by allowing future PSUs to be changes in the estimates of weighted-average useful lives and net salvage for each property asset class as assetsconverted into DSUs, which are acquired, used and retired. Substantial changes in either the useful lives of properties or the salvage assumptions could result in significant changes to depreciation expense. For example, if the estimated average life of track assets, including rail, ties, ballast and other track material, increased (or decreased) by one year, annual depreciation expense would decrease (or increase) by approximately $17 million.

Duesubject to the capital intensive naturesame performance conditions as the corresponding PSU grant. The Performance Share Unit Plan (PSU Plan) was also amended similarly. The PSU Plan permits the eligible executives to elect in respect of their future conditional rights to PSUs prior to the start of the railway industry, depreciation represents a significant partperformance period in order to maximize their opportunity to reach ownership levels.
To defer any compensation, elections must be made by June 30th of operating expenses. the calendar year prior to the new fiscal year.
The estimated useful livestable below shows the number of properties have a direct impactDSUs outstanding and their value based on our closing share price on December 31, 2019.
                 
      
Unvested DSUs (#)
 
     
Vested DSUs (#)
 
     
Total Units
(#)
 
     
Value as at
December 31, 2019 ($)
 
 
Keith Creel
 
     
 
0
 
 
 
     
 
31,849
 
 
 
     
 
31,849
 
 
 
     
 
10,546,129
 
 
 
Nadeem Velani
 
     
 
394
 
 
 
     
 
2,595
 
 
 
     
 
2,989
 
 
 
     
 
989,449
 
 
 
John Brooks
 
     
 
166
 
 
 
     
 
1,671
 
 
 
     
 
1,837
 
 
 
     
 
608,284
 
 
 
Laird Pitz
 
     
 
0
 
 
 
     
 
4,434
 
 
 
     
 
4,434
 
 
 
     
 
1,468,226
 
 
 
Mark Redd
 
     
 
140
 
 
 
     
 
999
 
 
 
     
 
1,139
 
 
 
     
 
377,156
 
 
 
Robert Johnson
 
     
 
0
 
 
 
     
 
6,322
 
 
 
     
 
6,322
 
 
 
     
 
2,093,398
 
 
 
52
Table of Contents
We valued the outstanding DSUs using $331.03, our closing share price on the amount of depreciation recorded as a component of "Properties"TSX on the Company’s Consolidated Balance Sheets. At December 31, 2019 for Mr. Velani, and 2018, accumulated depreciation was $8,099 million and $7,964 million, respectively.

Deferred Income Taxes
CP accounts for deferred income taxes basedUS$254.95, our closing share price on the liability method. This method focuses onNYSE and converted to Canadian dollars using a
year-end
exchange rate of $1.2988 for Mr. Creel, Mr. Brooks, Mr. Pitz, Mr. Redd and Mr. Johnson.
DSUs are redeemed for cash six months after the Company’s balance sheet andexecutive retires or leaves the temporary differences otherwise calculated fromcompany, or up until the comparison of book versus tax values. The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carry forwards. It is assumed that such temporary differences will be settled in the deferred income tax assets and liabilities at the balance sheet date.

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

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

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

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


67 /SERVICE EXCELLENCE


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

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

Other Claims
A provision for litigation matters, equipment damages or other claims will be accrued according to applicable accounting standards and any such accrual will be based on an ongoing assessment of the strengths and weaknesses of the litigation or claim and its likelihood of success, together with an evaluation of the damages or other monetary relief sought. CP accrues for probable claims when the facts of an incident become known and investigation results provide a reasonable basis for estimating the liability. The lower end of the range is accrued iffollowing calendar year for Canadian-resident executives. U.S.-resident executives who participate in the facts and circumstances permit only a range of reasonable estimates and no single amount in that range is a better estimate than any other. Facts and circumstances related to asserted claims can change, and a process is in place to monitor accruals for changes in accounting estimates.DSU Plan must redeem their DSUs after the
six-month

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

This Management's Discussion and Analysis of Financial Condition and Results of Operations and Annual Report on Form 10-K includes forward-looking statements relating, but not limited to statements concerning the Company’s defined benefit pension expectations for 2020 and through 2023, our expectations for 2020 financial and operational performance, including our full-year guidance for expected RTM and adjusted diluted EPS growth, planned capital expenditures (including how such capital expenditures are expectedwaiting period to be financed), expected impacts resulting from changes in compliance with U.S. tax regulations. We use the U.S.-to-Canadian dollar exchange rate,average market price of a share for the 10 trading days immediately before the payment date to calculate the amount, which the participant receives in a lump sum.
53
Table of Contents
Termination and change in control
Termination of employment
We have policies to cover different kinds of termination of employment.
Mr. Creel is covered under the terms of his employment agreement effective tax rate,January 31, 2017, as well as statements concerning the Company’s operations, anticipated financial performance, business prospects amended December 18, 2018, that include
non-competition,
non-solicitation
and strategies, including statements concerning the anticipation that cash flow from operationsconfidentiality restrictions. Mr. Velani, Mr. Brooks, Mr. Pitz and various sources of financing will be sufficient to meet debt repayments and obligations in the foreseeable future and concerning anticipated capital programs, and statements regarding future payments including income taxes and pension contributions. The purpose of the 2020 Adjusted diluted EPS growth projection is to assist readers in understanding our expected and targeted financial results, and this information may not be appropriate for other purposes.

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

Undue reliance should not be placed on forward-looking statements as actual results may differ materially from those expressed or implied by forward-looking statements. By their nature, forward-looking statements involve numerous inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking statements, including but not limited to the following factors: changes in business strategies; general North American and global economic, credit and business conditions; risks associated with agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws, regulations and government policies, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; changes in fuel prices; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; trade restrictions or other changes to international trade arrangements; climate change; and various events that could disrupt operations, including severe weather, such as droughts, floods, avalanches and earthquakes, and cybersecurity attacks, as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive.



CP 2019 ANNUAL REPORT/ 68

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

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


69 /SERVICE EXCELLENCE


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

Share Price Impact on Stock-Based Compensation
Based on information available at December 31, 2019, and expectations for 2020 grants, for every $1.00 change in share price, stock-based compensation expense has a corresponding change of approximately $0.4 million to $0.6 million (2018 – approximately $0.4 million to $0.6 million). This excludes the impact of changescontrol. However, Mr. Velani, Mr. Brooks, Mr. Pitz and Mr. Redd signed
non-competition,
non-solicitation
agreements in share price relative to the S&P/TSX 60 Index, Class I railways, S&P/TSX Capped Industrial Index,2018 and S&P 1500 Road and Rail index, which may trigger different performance share unit payouts. Stock-based compensation may2019 that also be impacted by non-market performance conditions.

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

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

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

had confidentiality restrictions.

CP 2019 ANNUAL REPORT/ 70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
  
Report of Independent Registered Public Accounting Firm
71
 
Consolidated Statements of Income
For the Year Ended December 31, 2019, 2018, and 2017
73
Consolidated Statements of Comprehensive Income
For the Year Ended December 31, 2019, 2018, and 2017
74
Consolidated Balance Sheets
As at December 31, 2019 and 2018
75
Consolidated Statements of Cash Flows
For the Year Ended December 31, 2019, 2018, and 2017
76
Consolidated Statements of Changes in Shareholders' Equity
For the Year Ended December 31, 2019, 2018, and 2017
77
Notes to Consolidated Financial Statements
78



71 /SERVICE EXCELLENCE


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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America ("US GAAP").

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, 2019, 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 20, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842) and related amendments.

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.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Properties – Direct Costs that are Capitalized to Self-constructed Assets – Refer to Notes 1 and 14 to the Financial Statements
Critical Audit Matter Description
The Company recognizes direct costs as capitalized additions to self-constructed assets, within properties, based on expenditures necessary to make an asset ready for its intended use. The capitalization of self-constructed assets requires management to make significant estimates and assumptions related to the capitalization of direct cost additions to self-constructed assets based on whether the expenditures meet capitalization criteria under US GAAP.

We identified the capitalization of direct cost additions to self-constructed assets as a critical audit matter because the judgments and assumptions management makes could have a significant impact on the capitalization of direct cost additions. As such auditing the capitalization of direct cost additions involves a high degree of auditor judgment.

How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the capitalization of direct cost additions to self-constructed assets included the following, among others:

Evaluated the effectiveness of controls over self-constructed assets, including those over the capitalization of direct cost additions to self-constructed assets.


CP 2019 ANNUAL REPORT/ 72

Selected a sample of direct costs, and obtained evidence to support the capitalized additions to self-constructed assets and assessed whether these expenditures met the capitalization criteria under US GAAP.

Defined Benefit Pension – Refer to Notes 1 and 23 to the Financial Statements
Critical Audit Matter Description
The Company’s accounting of its defined benefit pension plans involves the measurement of the projected benefit obligation and fair value of fund assets. The measurement of the projected-benefit obligation requires management to make significant estimates and assumptions in the determination of the discount rate, which is based on blended market interest rates of high-quality corporate debt instruments with matching cash flows. The measurement of the fair value of fund assets requires management to make significant estimates and assumptions in the determination of the expected return on fund assets, which is calculated using the market-related value of assets.

We identified the determination of the discount rate (for the projected benefit obligation), and the determination of the expected return on fund assets (for the determination of the net period benefit cost) as the critical audit matters because of the significant estimates and assumptions management makes could have a significant impact on the projected benefit obligation and the fair value of fund assets. As such auditing the determination of the discount rate and the expected return on fund assets involves a high degree of auditor judgment as the estimates and assumptions made by management contains significant measurement uncertainty and resulted in an increased extent of effort, which included the need to involve an actuarial specialist.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the determination of the discount rate (for the projected benefit obligation), and the expected return on fund assets (for the determination of the fair value of fund assets) included the following, among others:

Evaluated the effectiveness of controls over defined benefit pension plans, including those over the determination of the discount rate and the expected return on fund assets.
With the assistance of an actuarial specialist, we evaluated the reasonableness of the discount rate by:
–Assessing the methodology used in management’s determination of the discount rate,
–Testing the underlying source information, and
–Developing a range of independent estimates and comparing those to the discount rate selected by management.
With the assistance of an actuarial specialist, we evaluated the reasonableness of the expected return on fund assets by:
–Assessing the methodology used in management’s determination of the expected return on fund assets,
–Testing the underlying source information, and
–Comparing management’s assumptions to historical data and available market trends.
Evaluated management’s ability to accurately forecast the discount rate and expected return on fund assets by comparing actual results to management’s historical forecasts.

/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Canada
February 20, 2020

We have served as the Company's auditor since 2011.


73 /SERVICE EXCELLENCE


CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31 (in millions of Canadian dollars, except per share data)2019
2018
2017
Revenues (Note 3)   
Freight$7,613
$7,152
$6,375
Non-freight179
164
179
Total revenues7,792
7,316
6,554
Operating expenses   
Compensation and benefits (Note 23, 24)1,540
1,468
1,309
Fuel882
918
677
Materials210
201
190
Equipment rents137
130
142
Depreciation and amortization706
696
661
Purchased services and other (Note 12)1,193
1,072
1,056
Total operating expenses4,668
4,485
4,035
Operating income3,124
2,831
2,519
Less:   
Other (income) expense (Note 4)(89)174
(178)
Other components of net periodic benefit recovery (Note 23)(381)(384)(274)
Net interest expense (Note 5)448
453
473
Income before income tax expense3,146
2,588
2,498
Income tax expense (Note 6)706
637
93
Net income$2,440
$1,951
$2,405
Earnings per share (Note 7)  
Basic earnings per share$17.58
$13.65
$16.49
Diluted earnings per share$17.52
$13.61
$16.44
Weighted-average number of shares (millions) (Note 7)  
Basic138.8
142.9
145.9
Diluted139.3
143.3
146.3
See Notes to Consolidated Financial Statements.


CP 2019 ANNUAL REPORT/ 74

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31 (in millions of Canadian dollars)2019
2018
2017
Net income$2,440
$1,951
$2,405
Net gain (loss) in foreign currency translation adjustments, net of hedging activities37
(60)24
Change in derivatives designated as cash flow hedges10
38
19
Change in pension and post-retirement defined benefit plans(661)(449)80
Other comprehensive (loss) income before income taxes(614)(471)123
Income tax recovery (expense) on above items135
169
(65)
Other comprehensive (loss) income (Note 8)(479)(302)58
Comprehensive income$1,961
$1,649
$2,463
See Notes to Consolidated Financial Statements.


75 /SERVICE EXCELLENCE


CONSOLIDATED BALANCE SHEETS
As at December 31 (in millions of Canadian dollars, except Common Shares)2019
2018
Assets  
Current assets  
Cash and cash equivalents$133
$61
Accounts receivable, net (Note 10)805
815
Materials and supplies182
173
Other current assets90
68
 1,210
1,117
Investments (Note 13)341
203
Properties (Note 14, 21)19,156
18,418
Goodwill and intangible assets (Note 11, 15)206
202
Pension asset (Note 23)1,003
1,243
Other assets (Note 16, 21)451
71
Total assets$22,367
$21,254
Liabilities and shareholders’ equity  
Current liabilities  
Accounts payable and accrued liabilities (Note 17, 21)$1,693
$1,449
Long-term debt maturing within one year (Note 18, 19, 21)599
506
 2,292
1,955
Pension and other benefit liabilities (Note 23)785
718
Other long-term liabilities (Note 20, 21)562
237
Long-term debt (Note 18, 19, 21)8,158
8,190
Deferred income taxes (Note 6)3,501
3,518
Total liabilities15,298
14,618
Shareholders’ equity  
Share capital (Note 22)
Authorized unlimited Common Shares without par value. Issued and outstanding are 137.0 million and 140.5 million as at December 31, 2019 and 2018, respectively.		1,993
2,002
Authorized unlimited number of first and second preferred shares; none outstanding.  
Additional paid-in capital48
42
Accumulated other comprehensive loss (Note 8)(2,522)(2,043)
Retained earnings7,550
6,635
 7,069
6,636
Total liabilities and shareholders’ equity$22,367
$21,254
Commitments and contingencies (Note 26).
See Notes to Consolidated Financial Statements.



Approved on behalf of the Board:        
   /s/ ISABELLE COURVILLE
Resignation
Retirement
Termination
with cause
Termination without cause
Change in control
SeveranceNoneNoneNone
Mr. Creel: 24 months of base salary
Other NEOs: per legislative requirements
None
Short-term incentiveForfeitedAward for current year is
pro-rated
to retirement date		Forfeited
Equal to the target award for severance period for Mr. Creel
Other NEOs: award for current year is
pro-rated
to termination date as per plan
None
DSUsUnvested DSUs are forfeitedUnvested DSUs are forfeited
Unvested DSUs are forfeited
Unvested DSUs are forfeited
Unvested units vest early if the holder is terminated following change in control
Performance share unitsForfeited
Award continues to vest based on performance factors and executive is entitled to receive the full value as long as they have worked for six months of the performance period, otherwise the award is forfeited
Forfeited
Pro-rated
based on active service within the performance period
Only vest if the executive is terminated following a change in control
PSUs vest at target,
pro-rated
based on active service within the performance period
Stock options
Vested options are exercisable for 30 days or until the expiry date, whichever comes first
Unvested options are forfeited
Performance stock options are forfeited
Options continue to vest
Award expires five years after the retirement date or the normal expiry date, whichever is earlier
Performance stock options are forfeited
Forfeited
Vested options are exercisable for six months following termination as well as any options that vest during the
six-month
period
Performance stock options are forfeited
Options only vest early if the option holder is terminated following the change in control
Performance stock options are forfeited
Pension
No additional value
No additional value
No additional value
No additional value
No additional value
ESPP shares
Unvested shares are forfeited
Unvested shares vest
Unvested shares are forfeited
Unvested shares vestUnvested shares vest
BenefitsEnd on resignation
Post-retirement life insurance of $50,000 and a health spending account based on years of service (same for all employees)
End on resignationNoneNone
Perquisites
Any unused flex perquisite dollars are forfeited
Any unused flex perquisite dollars are forfeited
Any unused flex perquisite dollars are forfeited
Any unused flex perquisite dollars are forfeitedAny unused flex perquisite dollars are forfeited
The next table shows the estimated incremental amounts that would be paid to Mr. Creel if his employment had been terminated without cause on December 31, 2019. There is no extra tax
gross-up
provision for any termination benefit.
                             
       Severance payment                 
Name
 
  
Severance period
(# of months)
 
   
Base pay
($)
 
   
Short-term

incentive
($)
 
   
Additional
retirement
benefits
($)
 
   
Other
benefits
($)
 
   
Value of vesting
of options and
equity-based
awards
($)
 
   
Payable on
termination
without
cause
($)
 
 
Keith Creel
 
   
 
24
 
 
 
   
 
3,009,969
 
 
 
   
 
3,762,461
 
 
 
   
 
-
 
 
 
   
 
41,912
 
 
 
   
 
12,642,454
 
 
 
   
 
19,456,796
 
 
 
Notes:
Other benefits
include the value of accelerated vesting of shares purchased under the ESPP
Value of vesting of options and equity-based awards
is the value of stock options vesting within six months following termination in accordance with our stock option plan, and the prorated value as of the termination date of PSU awards. It is based on $331.03, our closing share price on the TSX on December 31, 2019 and US$254.95, the closing price of our shares on the NYSE, converted into Canadian dollars using a
year-end
exchange rate of $1.2988.
54
Table of Contents
Director compensation
  /s/ JANE L. PEVERETT
Isabelle Courville, Director,  Jane L. Peverett, Director,
Chair of the Board  
Chair
Our director compensation program shares the same objective as our executive compensation program: to attract and retain qualified directors and to align the interests of the Auditdirectors and Finance Committee
shareholders.


CP 2019 ANNUAL REPORT/ 76

CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in millions of Canadian dollars)2019
2018
2017
Operating activities   
Net income$2,440
$1,951
$2,405
Reconciliation of net income to cash provided by operating activities:   
Depreciation and amortization706
696
661
Deferred income taxes (Note 6)181
256
(210)
Pension recovery and funding (Note 23)(360)(321)(237)
Foreign exchange (gain) loss on debt and lease liabilities (Note 4)(94)168
(186)
Settlement of forward starting swaps on debt issuance (Note 18, 19)—
(24)—
Other operating activities, net143
(79)(113)
Change in non-cash working capital balances related to operations (Note 9)(26)65
(138)
Cash provided by operating activities2,990
2,712
2,182
Investing activities   
Additions to properties(1,647)(1,551)(1,340)
Investment in Central Maine & Québec Railway (Note 11)(174)—
—
Proceeds from sale of properties and other assets (Note 12)26
78
42
Other(8)15
3
Cash used in investing activities(1,803)(1,458)(1,295)
Financing activities   
Dividends paid(412)(348)(310)
Issuance of CP Common Shares (Note 22)26
24
45
Purchase of CP Common shares (Note 22)(1,134)(1,103)(381)
Issuance of long-term debt, excluding commercial paper (Note 18)397
638
—
Repayment of long-term debt, excluding commercial paper (Note 18)(500)(753)(32)
Net issuance of commercial paper (Note 18)524
—
—
Settlement of forward starting swaps on de-designation (Note 19)—
—
(22)
Other(12)—
—
Cash used in financing activities(1,111)(1,542)(700)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents(4)11
(13)
Cash position   
Increase (decrease) in cash and cash equivalents72
(277)174
Cash and cash equivalents at beginning of year61
338
164
Cash and cash equivalents at end of year$133
$61
$338
    
Supplemental disclosures of cash flow information:   
Income taxes paid$506
$318
$425
Interest paid$444
$463
$475
See Notes to Consolidated Financial Statements.


77 /SERVICE EXCELLENCE


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions of Canadian dollars, except per share data)Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders’
equity
Balance at December 31, 2016$2,002
$52
$(1,799)$4,371
$4,626
Net income—
—
—
2,405
2,405
Other comprehensive income (Note 8)—
—
58
—
58
Dividends declared ($2.1875 per share)—
—
—
(319)(319)
Effect of stock-based compensation expense—
3
—
—
3
CP Common Shares repurchased (Note 22)(27)—
—
(354)(381)
Shares issued under stock option plan (Note 22)57
(12)—
—
45
Balance at December 31, 20172,032
43
(1,741)6,103
6,437
Net income—
—
—
1,951
1,951
Other comprehensive loss (Note 8)—
—
(302)—
(302)
Dividends declared ($2.5125 per share)—
—
—
(358)(358)
Effect of stock-based compensation expense—
11
—
—
11
CP Common Shares repurchased (Note 22)(66)—
—
(1,061)(1,127)
Shares issued under stock option plan (Note 22)36
(12)—
—
24
Balance at December 31, 20182,002
42
(2,043)6,635
6,636
Impact of accounting change (Note 2)—
—
—
(5)(5)
Balance at January 1, 2019, as restated2,002
42
(2,043)6,630
6,631
Net income—
—
—
2,440
2,440
Other comprehensive loss (Note 8)—
—
(479)—
(479)
Dividends declared ($3.1400 per share)—
—
—
(434)(434)
Effect of stock-based compensation expense—
15
—
—
15
CP Common Shares repurchased (Note 22)(54)—
—
(1,086)(1,140)
Shares issued under stock option plan (Note 22)45
(9)—
—
36
Balance at December 31, 2019$1,993
$48
$(2,522)$7,550
$7,069
See Notes to Consolidated Financial Statements.



CP 2019 ANNUAL REPORT/ 78

CANADIAN PACIFIC RAILWAY LIMITED
Notes to Consolidated Financial Statements
December 31, 2019

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 12,700 miles, serving the principal business centres of Canada from Montréal, Québec, 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 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, 2019.
Flat fee retainer
We pay directors a flat fee, which reflects the director’s ongoing oversight and responsibilities throughout the year and attendance at Board and committee meetings.
Aligning director and shareholder interests
Directors receive their annual
retainer in deferred share units so they have an ongoing stake in our future success, aligning their interests with those of our shareholders.
About DDSUs
DDSUs are granted to directors under the director deferred share unit plan. Only
non-employee
directors participate in the plan.
A DDSU is a bookkeeping entry that has the same value as one CP common share. DDSUs earn additional units as dividend equivalents at the same rate as dividends paid on our shares. DDSUs vest immediately, and directors receive a cash amount for their DDSUs, one year after they leave the Board, based on the market value of our shares at the time of redemption, less any withholding taxes.
Principal subsidiaryIncorporated under
Directors receive 100% of their annual retainer in DDSUs until they have met their share ownership requirements. After that they must receive at least 50% of their retainer in DDSUs, and can receive the lawsbalance in cash. Directors must make their election before the beginning of
Canadian Pacific Railway CompanyCanada
Soo Line Railroad Company (“Soo Line”)Minnesota
Delaware and Hudson Railway Company, Inc. (“D&H”)Delaware
Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”)Delaware
Mount Stephen Properties Inc. (“MSP”)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


79 /SERVICE EXCELLENCE


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 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. Contracted customer incentives are amortized to income over the term of the related revenue contract.

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 Company's Consolidated Statements of Cash Flows, 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 (loss) income”. 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 (loss) income”.

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 (loss) income”, net of tax.



CP 2019 ANNUAL REPORT/ 80

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".

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


81 /SERVICE EXCELLENCE


using either an indexation methodology, whereby the current replacement cost of the asset is indexed to the estimated year of installation for the asset, or a first-in, first-out approach, or statistical analysis is used to determine the age of the retired asset. CP uses indices that closely correlate to the principal costs of the assets.

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

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

Revisions to the estimated useful lives and net salvage projections constitute a change in accounting estimate and are addressed prospectively by amending depreciation rates.

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

Leases
The Company has leases for rolling stock, buildings, vehicles, railway equipment, and roadway machines. CP has entered into rolling stock leases that are fully variable or contain both fixed and variable components. Variable components are dependent on the hours and miles that the underlying equipment has been used. Fixed term, short-term, and variable operating lease costs are recorded in "Equipment rents" and "Purchased services and other" on the Company's Consolidated Statements of Income. Components of finance lease costs are recorded in "Depreciation and amortization" and "Net interest expense" on the Company's Consolidated Statements of Income.

The Company determines lease existence and classification at the lease inception date. Leases are identified when an agreement conveys the right to control identified property for a period of time in exchange for consideration. The Company recognizes both an operating lease liability and right-of-use (“ROU”) asset for operating leases with fixed terms and in-substance fixed terms. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments include fixed and variable payments that are based on an index or a rate. If the Company's leases do not provide a readily determinable implicit interest rate, the Company uses internal incremental secured borrowing rates for comparable tenor in the same currency at the commencement date in determining the present value of lease payments. Operating and finance lease ROU assets also include lease prepayments and initial direct costs, but are reduced by lease incentives. The lease term may include periods associated with options to extend or exclude periods associated with options to terminate the lease when it is reasonably certain that the Company will exercise these options.

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

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


CP 2019 ANNUAL REPORT/ 82

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 Company's Consolidated Statements of Income in the line item to which the derivative instrument is related.

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 (loss) income”. 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 Company's 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.



83 /SERVICE EXCELLENCE


Investment and other similar tax credits are deferred on the Company's Consolidated Balance Sheets and amortized to “Income tax expense” as the related asset is recognized in income. Income tax recovery or expense on items in "Accumulated other comprehensive loss" are recognized in "Income tax expense" as the related item 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”) that settle in cash 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 gives rise to compensation expense that is recognized using the issue price by amortizing the cost over the vesting period or over the period from the grant date to the date employees become eligible to retire when this is shorter than the vesting period.

2.    Accounting changes
Implemented in 2019
Leases
On January 1, 2019, the Company adopted the new Accounting Standards Update ("ASU") 2016-02, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 842, Leases. Using the cumulative-effect adjustment transition approach, the Company recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Accordingly, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.

In January 2019, the Company implemented a lease management system to assist in delivering the required accounting changes. To facilitate the transition, the Company made 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 for all leases under Topic 840, Leases;
Acceptance of the previous accounting treatment for land easements where Topic 840 was not applied; and
Use of hindsight at transition to determine lease term length.

Operating leases with fixed terms and in-substance fixed terms were transitioned by recognizing both an operating lease liability and ROU asset. Operating lease liabilities and ROU assets were calculated at the present value of remaining lease payments using the Company’s incremental borrowing interest rate as at January 1, 2019. ROU assets were further modified to include previously accrued balances for prepayments and initial direct costs, but reduced for accrued lease incentives. The Company did not recognize operating lease liabilities or ROU assets for leases requiring variable payment not dependent on an index or rate, or short term leases with a term of 12 months or less.

On adoption, the standard had a material impact on the Company's consolidated balance sheet, but did not have a significant impact on its consolidated statement of income. The most significant impact was the recognition of operating lease ROU assets and operating lease liabilities, while the Company's accounting for finance leases remained substantially unchanged.



CP 2019 ANNUAL REPORT/ 84

The impact of the adoption of ASC 842 as at January 1, 2019 was as follows:
(in millions of Canadian dollars)As reported
December 31, 2018
New lease standard
cumulative-effect
As restated
January 1, 2019
Assets   
   Properties$18,418
$(12)$18,406
   Other assets71
399
470
Liabilities   
   Accounts payable and accrued liabilities1,449
58
1,507
   Other long-term liabilities237
337
574
   Deferred income taxes3,518
(3)3,515
Shareholders' equity   
   Retained earnings$6,635
$(5)$6,630


There was no significant impact to lessor accounting upon the adoption of ASC 842.

Future Changes
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. This will replace the current incurred loss methodology used for establishing a provision against financial assets, including accounts receivable, with a forward-looking expected loss methodology for accounts receivable, loans and other financial instruments. The standard is effective as of 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 expects that the adoption of this new accounting standard will not result in any material change to accounts receivable or retained earnings. The Company will estimate its expected credit loss by applying an appropriate expected loss methodology to individual portfolios of the Company’s financial assets with portfolios representing assets with similar risk characteristics.

3.    Revenues
The following table disaggregates the Company’s revenues from contracts with customers by major source:
(in millions of Canadian dollars)2019
2018
2017
Freight   
Grain$1,684
$1,566
$1,532
Coal682
673
631
Potash462
486
411
Fertilizers and sulphur250
243
241
Forest products304
284
265
Energy, chemicals and plastics1,534
1,243
898
Metals, minerals and consumer products752
797
739
Automotive352
322
293
Intermodal1,593
1,538
1,365
Total freight revenues7,613
7,152
6,375
Non-freight excluding leasing revenues116
102
117
Revenues from contracts with customers7,729
7,254
6,492
Leasing revenues63
62
62
Total revenues$7,792
$7,316
$6,554




85 /SERVICE EXCELLENCE


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

The following table summarizes the changes in contract liabilities for the years ended December 31, 2019 and 2018:
(in millions of Canadian dollars)2019
2018
Opening balance$2
$2
Revenue recognized that was included in the contract liability balance at the beginning of the period(2)(2)
Increases due to consideration received, net of revenue recognized during the period146
2
Closing balance$146
$2


4.    Other (income) expense
(in millions of Canadian dollars)2019
2018
2017
Foreign exchange (gain) loss on debt and lease liabilities$(94)$168
$(186)
Other foreign exchange (gains) losses(4)3
(7)
Insurance recovery of legal settlement—
—
(10)
Charge on hedge roll and de-designation—
—
13
Other9
3
12
Other (income) expense$(89)$174
$(178)


5.    Net interest expense
(in millions of Canadian dollars)2019
2018
2017
Interest cost$471
$475
$491
Interest capitalized to Properties(17)(20)(16)
Interest expense454
455
475
Interest income(6)(2)(2)
Net interest expense$448
$453
$473


Interest expense includes interest on finance leases of $11 million for the year ended December 31, 2019 (2018 – $11 million; 2017 – $11 million).



CP 2019 ANNUAL REPORT/ 86

6.    Income taxes
The following is a summary of the major components of the Company’s income tax expense:
(in millions of Canadian dollars)2019
2018
2017
Current income tax expense$525
$381
$303
Deferred income tax expense   
Origination and reversal of temporary differences316
214
371
Effect of tax rate decrease(95)(21)(541)
Effect of hedge of net investment in foreign subsidiaries(38)64
(42)
Other(2)(1)2
Total deferred income tax expense (recovery)181
256
(210)
Total income taxes$706
$637
$93
Income before income tax expense   
Canada$2,392
$1,788
$1,829
Foreign754
800
669
Total income before income tax expense$3,146
$2,588
$2,498
Income tax expense   
Current   
Canada$410
$336
$257
Foreign115
45
46
Total current income tax expense525
381
303
Deferred   
Canada141
174
256
Foreign40
82
(466)
Total deferred income tax expense (recovery)181
256
(210)
Total income taxes$706
$637
$93

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)2019
2018
Deferred income tax assets  
Amount related to tax losses carried forward$6
$11
Liabilities carrying value in excess of tax basis139
97
Unrealized foreign exchange losses26
85
Environmental remediation costs22
23
Other4
2
Total deferred income tax assets197
218
Valuation allowance—
(5)
Total net deferred income tax assets197
213
Deferred income tax liabilities  
Properties carrying value in excess of tax basis3,524
3,496
Pensions carrying value in excess of tax basis83
164
Other91
71
Total deferred income tax liabilities3,698
3,731
Total net deferred income tax liabilities$3,501
$3,518



87 /SERVICE EXCELLENCE


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)2019
2018
2017
Statutory federal and provincial income tax rate (Canada)26.77%26.86%26.56%
Expected income tax expense at Canadian enacted statutory tax rates$842
$695
$663
(Decrease) increase in taxes resulting from:   
(Gains) losses not subject to tax(19)8
(27)
Canadian tax rate differentials—
—
1
Foreign tax rate differentials(33)(55)(9)
Effect of tax rate decrease(95)(21)(541)
Valuation allowance(5)5
—
Unrecognized tax benefits(1)
33
—
1
Other(1)
(17)5
5
Income tax expense$706
$637
$93

(1) 2017 comparative period figures have been reclassified to conform with current presentation.

In 2019, the Company revalued its deferred income tax balances as a result of a corporate income tax rate decrease in the province of Alberta, resulting in a net recovery of $88 million.

In 2018, the Company revalued its deferred income tax balances as a result of corporate income 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 was 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 tax rates totaled a net recovery of $541 million.

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.

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.

At December 31, 2019, the Company had tax effected operating losses carried forward of $4 million (2018 – $8 million), which have been recognized as a deferred tax asset. The majority of these losses carried forward will begin to expire in 2031, with the remaining expiring between 2034 and 2036. The Company expects to fully utilize these tax effected operating losses before their expiry. The Company did 0t have any minimum tax credits or investment tax credits carried forward.

At December 31, 2019, the Company had $2 million (2018 – $3 million) in tax effected capital losses carried forward recognized as a deferred tax asset. The Company has no unrecognized tax benefits from capital losses at December 31, 2019 and 2018.



CP 2019 ANNUAL REPORT/ 88

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:
(in millions of Canadian dollars)2019
2018
2017
Unrecognized tax benefits at January 1$13
$13
$13
Increase in unrecognized:   
Tax benefits related to the current year9
1
—
Tax benefits related to prior years34
—
—
Dispositions:   
Gross uncertain tax benefits related to prior years—
(1)—
Settlements with taxing authorities(4)—
—
Unrecognized tax benefits at December 31$52
$13
$13


If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2019 would impact the Company’s effective tax rate.

During the fourth quarter of 2019, a tax authority proposed an adjustment for a prior tax year without assessing taxes. Although the Company has commenced action to have the proposal removed, an increase in uncertain tax position has been recorded on deferred income tax liability and expense in the amount of $24 million. The ultimate resolution of this matter may give rise to further favourable or unfavourable adjustments to deferred tax, the timing and amount of which are not determinable at this time.

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 2019 was a $1 million recovery (2018 – $nil; 2017 – $1 million expense). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at December 31, 2019 was $10 million (2018 – $11 million; 2017 – $11 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 2013. The federal and provincial income tax returns filed for 2014 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 2016 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, 2019 with respect to these income tax examinations.

7.     Earnings per share
Basic earnings per share has been calculated using Net income for the year divided by the weighted-average number of shares outstanding during the each calendar year.

Diluted earnings per share has 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, 2019, there were 1.6 million dilutive options outstanding (2018 – 1.3 million; 2017 – 1.4 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)2019
2018
2017
Net income$2,440
$1,951
$2,405
Weighted-average basic shares outstanding (millions)138.8
142.9
145.9
Dilutive effect of stock options (millions)0.5
0.4
0.4
Weighted-average diluted shares outstanding (millions)139.3
143.3
146.3
Earnings per share – basic$17.58
$13.65
$16.49
Earnings per share – diluted$17.52
$13.61
$16.44


In 2019, there were 0 options excluded from the computation of diluted earnings per share (2018 – 0.2 million; 2017 – 0.3 million).




89 /SERVICE EXCELLENCE


8.     Other comprehensive (loss) income and accumulated other comprehensive loss
The components of Other comprehensive (loss) income and the related tax effects are as follows:
(in millions of Canadian dollars)Before
tax amount
Income tax (expense) recovery
Net of tax
amount
For the year ended December 31, 2019   
Unrealized foreign exchange (loss) gain on:   
Translation of the net investment in U.S. subsidiaries$(251)$—
$(251)
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 19)288
(38)250
Realized loss on derivatives designated as cash flow hedges recognized in income10
(2)8
Change in pension and other benefits actuarial gains and losses(661)175
(486)
Other comprehensive loss$(614)$135
$(479)
For the year ended December 31, 2018   
Unrealized foreign exchange gain (loss) on:   
Translation of the net investment in U.S. subsidiaries$419
$—
$419
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 19)(479)64
(415)
Change in derivatives designated as cash flow hedges:   
Realized loss on cash flow hedges recognized in income10
(3)7
Unrealized gain on cash flow hedges and other28
(8)20
Change in pension and other benefits actuarial gains and losses(447)115
(332)
Change in prior service pension and other benefit costs(2)1
(1)
Other comprehensive loss$(471)$169
$(302)
For the year ended December 31, 2017   
Unrealized foreign exchange (loss) gain on:   
Translation of the net investment in U.S. subsidiaries$(295)$—
$(295)
Translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (Note 19)319
(42)277
Change in derivatives designated as cash flow hedges:   
Realized loss on cash flow hedges recognized in income25
(6)19
Unrealized loss on cash flow hedges and other(6)2
(4)
Change in pension and other benefits actuarial gains and losses84
(20)64
Change in prior service pension and other benefit costs(4)1
(3)
Other comprehensive income$123
$(65)$58


The components of Accumulated other comprehensive loss, net of tax, are as follows:
(in millions of Canadian dollars)2019
2018
Unrealized foreign exchange gain on translation of the net investment in U.S. subsidiaries$611
$862
Unrealized foreign exchange loss on translation of the U.S. dollar-denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries(499)(749)
Net deferred losses on derivatives and other(54)(62)
Amounts for defined benefit pension and other post-retirement plans not recognized in income (Note 23)(2,580)(2,094)
Accumulated other comprehensive loss$(2,522)$(2,043)



CP 2019 ANNUAL REPORT/ 90

Changes in Accumulated other comprehensive loss by component are as follows:
(in millions of Canadian dollars)
Foreign currency
net of hedging
activities(1)

Derivatives and
other(1)

Pension and post-
retirement defined
benefit plans(1)

Total(1)

Opening balance, January 1, 2019$113
$(62)$(2,094)$(2,043)
Other comprehensive loss before reclassifications(1)—
(550)(551)
Amounts reclassified from accumulated other comprehensive loss—
8
64
72
Net current-period other comprehensive (loss) income(1)8
(486)(479)
Closing balance, December 31, 2019$112
$(54)$(2,580)$(2,522)
Opening balance, January 1, 2018$109
$(89)$(1,761)$(1,741)
Other comprehensive income (loss) before reclassifications4
19
(417)(394)
Amounts reclassified from accumulated other comprehensive loss—
8
84
92
Net current-period other comprehensive income (loss)4
27
(333)(302)
Closing balance, December 31, 2018$113
$(62)$(2,094)$(2,043)

(1) Amounts are presented net of tax.

Amounts in Pension and post-retirement defined benefit plans reclassified from Accumulated other comprehensive loss are as follows:
(in millions of Canadian dollars)2019
2018
Amortization of prior service costs(1)
$—
$(2)
Recognition of net actuarial loss(1)
84
117
Total before income tax84
115
Income tax recovery(20)(31)
Total net of income tax$64
$84
(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
(in millions of Canadian dollars)2019
2018
2017
Source (use) of cash:   
Accounts receivable, net$27
$(107)$(91)
Materials and supplies(8)(11)9
Other current assets(24)30
(26)
Accounts payable and accrued liabilities(21)153
(30)
Change in non-cash working capital$(26)$65
$(138)


10.     Accounts receivable, net
(in millions of Canadian dollars)2019
2018
Freight$637
$677
Non-freight210
168
 847
845
Allowance for doubtful accounts(42)(30)
Total accounts receivable, net$805
$815



91 /SERVICE EXCELLENCE


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.    Business combination
On December 30, 2019, CP acquired 100% of Central Maine & Québec Railway Canada Inc. (“CMQ Canada”) and Central Maine & Québec Railway U.S. Inc. (“CMQ U.S.”) (together “CMQ”) for cash consideration of $174 million. CMQ owns 237 miles of rail lines in Québec and 244 miles of rail lines in Maine and Vermont.

CMQ Canada
The acquisition of CMQ Canada has been accounted for as a business combination under the acquisition method of accounting. The acquired tangible and intangible assets and assumed liabilities are recorded at their estimated fair values at the date of acquisition.

The purchase price allocation was prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax bases of the net assets acquired. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
The following summarizes the estimated fair values of the acquired assets and liabilities of CMQ Canada:
(in millions of Canadian dollars)2019
Fair value of net assets acquired: 
Accounts receivable, net$7
Properties42
Intangible assets (Note 15)5
Accounts payable and accrued liabilities(2)
Long-term debt maturing within one year (Note 18)(11)
Other long-term liabilities(4)
Total identifiable assets and liabilities$37
Goodwill (Note 15)10
 $47
Consideration: 
Cash, net of cash acquired$47

The goodwill of $10 million relates primarily to expected operating business synergies. The factors that contribute to the goodwill are revenue growth from customers which are currently not served by CP, access to new routes and an assembled workforce. The goodwill recognized is not deductible for tax purposes.

CP has not provided pro forma information relating to the pre-acquisition period as it is not material.

CMQ U.S.
CP currently accounts for its $127 million cost of acquisition of CMQ U.S. using the equity method of accounting as the shares of CMQ U.S. are held in an independent voting trust while the United States Surface Transportation Board (“STB”) considers the Company's control application (see Note 13). Subject to final approval of the transaction by the STB, the acquisition of CMQ U.S. will be accounted for as a business combination using the acquisition method of accounting.

12.     Dispositions of properties
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.



CP 2019 ANNUAL REPORT/ 92

13.     Investments
(in millions of Canadian dollars)2019
2018
Investment in CMQ U.S. accounted for on an equity basis (Note 11)$127
$—
Other rail investments accounted for on an equity basis166
160
Other investments48
43
Total investments$341
$203


14. Properties
(in millions of Canadian dollars except percentages)20192019 2018
 Weighted-average annual depreciation rate
Cost
 Accumulated
depreciation
 Net book
value
 Cost
 Accumulated
depreciation
 Net book
value
Track and roadway2.8%$19,299
 $5,522
 $13,777
 $18,599
 $5,236
 $13,363
Buildings2.9%833
 237
 596
 781
 218
 563
Rolling stock2.8%4,529
 1,445
 3,084
 4,467
 1,613
 2,854
Information systems software(1)
10.0%527
 215
 312
 551
 252
 299
Other5.2%2,067
 680
 1,387
 1,984
 645
 1,339
Total$27,255
 $8,099
 $19,156
 $26,382
 $7,964
 $18,418
(1) During 2019, CP capitalized costs attributable to the design and development of internal-use software in the amount of $55 million (2018 – $53 million; 2017 – $49 million). Current year depreciation expense related to internal use software was $44 million (2018 – $49 million; 2017 – $55 million).

Finance leases included in properties
(in millions of Canadian dollars)20192018
 Cost
Accumulated
depreciation
Net book
value
Cost
Accumulated
depreciation
Net book
value
Buildings$—
$—
$—
$1
$1
$—
Rolling stock303
130
173
311
124
187
Other4
—
4
—
—
—
Total assets held under finance lease$307
$130
$177
$312
$125
$187




93 /SERVICE EXCELLENCE


15.     Goodwill and intangible assets
 Goodwill
 Intangible assets 
(in millions of Canadian dollars)Net
carrying
amount
 Cost
Accumulated
amortization
Net
carrying
amount
Total goodwill and intangible assets
Balance at December 31, 2017$178
 $22
$(13)$9
$187
Amortization—
 —
(1)(1)(1)
Foreign exchange impact16
 —
—
—
16
Balance at December 31, 2018194
 22
(14)8
202
Additions (Note 11)10
 5
—
5
15
Amortization—
 —
(1)(1)(1)
Foreign exchange impact(10) —
—
—
(10)
Balance at December 31, 2019$194
 $27
$(15)$12
$206


16.     Other assets
(in millions of Canadian dollars)2019
2018
Operating lease ROU assets (Note 2, 21)$358
$—
Long-term materials41
26
Contracted customer incentives32
11
Prepaid leases—
10
Other20
24
Total other assets$451
$71


17.     Accounts payable and accrued liabilities
(in millions of Canadian dollars)2019
2018
Trade payables$453
$474
Accrued charges348
360
Contract liabilities(1) (Note 3)
142
2
Income and other taxes payable139
104
Accrued interest131
135
Dividends payable114
91
Stock-based compensation liabilities85
53
Payroll-related accruals78
78
Operating lease liabilities (Note 2, 21)69
—
Accrued vacation60
61
Personal injury and other claims provision55
68
Provision for environmental remediation (Note 20)7
8
Other(1)
12
15
Total accounts payable and accrued liabilities$1,693
$1,449

(1) 2018 comparative period figures have been reclassified to conform with current presentation.


CP 2019 ANNUAL REPORT/ 94

18.     Debt
The following table outlines the Company's outstanding debt instruments and finance lease obligations as at December 31, 2019:
(in millions of Canadian dollars except percentages) MaturityCurrency
in which
payable		2019
2018
7.250%10-year Notes(A)May 2019U.S.$$—
$477
9.450%30-year Debentures(A)Aug 2021U.S.$325
341
5.100%10-year Medium Term Notes(A)Jan 2022CDN$125
125
4.500%10-year Notes(A)Jan 2022U.S.$324
339
4.450%12.5-year Notes(A)Mar 2023U.S.$454
477
2.900%10-year Notes(A)Feb 2025U.S.$909
955
3.700%10.5-year Notes(A)Feb 2026U.S.$324
340
4.000%10-year Notes(A)Jun 2028U.S.$649
682
3.150%10-year Notes(A)Mar 2029CDN$399
—
7.125%30-year Debentures(A)Oct 2031U.S.$454
477
5.750%30-year Debentures(A)Mar 2033U.S.$318
334
4.800%20-year Notes(A)Sep 2035U.S.$388
408
5.950%30-year Notes(A)May 2037U.S.$578
607
6.450%30-year Notes(A)Nov 2039CDN$400
400
5.750%30-year Notes(A)Jan 2042U.S.$319
336
4.800%30-year Notes(A)Aug 2045U.S.$712
748
6.125%100-year Notes(A)Sep 2115U.S.$1,169
1,228
8.000%5-year Promissory Notes(B)up to Jun 2020U.S.$11
—
5.41%Senior Secured Notes(C)Mar 2024U.S.$100
113
6.91%Secured Equipment Notes(D)Oct 2024CDN$91
106
7.49%Equipment Trust Certificates(E)Jan 2021U.S.$55
57
Obligations under finance leases    
2.97% (F)Jun 2020CDN$3
—
6.99% (F)Mar 2022U.S.$99
104
6.57% (F)Dec 2026U.S.$45
52
12.77% (F)Jan 2031CDN$4
4
Commercial Paper 
 U.S.$516
—
   8,771
8,710
Perpetual 4% Consolidated Debenture Stock(G) U.S.$39
41
Perpetual 4% Consolidated Debenture Stock(G) G.B.£6
6
   8,816
8,757
Unamortized fees on long-term debt  (59)(61)
   8,757
8,696
Less: Long-term debt maturing within one year  599
506
   $8,158
$8,190


At December 31, 2019, the gross amount of long-term debt denominated in U.S. dollars was U.S. $6,016 million (2018 – U.S. $5,970 million).

Annual maturities and principal repayment requirements, excluding those pertaining to finance leases, for each of the five years following 2019 are (in millions): 2020 – $592; 2021 – $365; 2022 – $477; 2023 – $484; 2024 – $84.



95 /SERVICE EXCELLENCE


Fees on long-term debt are amortized to income over the term of the related debt.

A.  These debentures and notes are presented net of unamortized discounts, pay interest semi-annually, and are unsecured but carry a negative pledge.

In 2019, the Company repaid U.S. $350 million 7.250% 10-year Notes at maturity for a total of U.S. $350 million ($471 million). The Company also issued $400 million 3.150% 10-year Notes due March 13, 2029 for net proceeds of $397 million.

In 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 19). 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. On December 30, 2019, through its business combination with CMQ Canada, the Company assumed CMQ Canada's obligations under the 8.00% 5-year Promissory Notes totalling U.S. $8 million ($11 million) owing to CMQ U.S. (see Note 11).

C.  The 5.41% Senior Secured Notes are collateralized by specific locomotive units with a carrying value of $102 million at December 31, 2019. The Company pays equal blended semi-annual payments of principal and interest. Final repayment of the remaining principal of U.S. $44 million is due in March 2024.

D.  The 6.91% Secured Equipment Notes are full recourse obligations of the Company collateralized by a first charge on specific locomotive units with a carrying value of $59 million at December 31, 2019. 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.

E.  The 7.49% Equipment Trust Certificates are secured by specific locomotive units with a carrying value of $97 million at December 31, 2019. 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.

F. The carrying value of the assets collateralizing finance lease obligations was $177 million at December 31, 2019.

G.  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 14 highly rated financial institutions for a commitment amount of U.S. $1.3 billion. The facility can accommodate draws of cash and/or letters of credit at market competitive pricing. The agreement requires the Company to maintain a financial covenant in conjunction with the facility. As at December 31, 2019 and 2018, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenant.

Effective September 27, 2019, the Company amended and restated its revolving credit facility agreement to, among other things, increase the total amount available to U.S. $1.3 billion (December 31, 2018 – U.S. $1.0 billion). The amended and restated revolving credit facility consists of a U.S. $1.0 billion tranche maturing September 27, 2024 (extended from June 28, 2023, previously) and a U.S. $300 million tranche maturing September 27, 2021.

As at December 31, 2019 and 2018, the facility was undrawn. The amount available under the terms of the credit facility was U.S. $1.3 billion at December 31, 2019 (December 31, 2018 – U.S. $1.0 billion).

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, 2019, theCompany had total commercial paper borrowings of U.S. $397 million ($516 million), included in "Long-term debt maturing within one year" on the Company's Consolidated Balance Sheets (December 31, 2018 – $nil). The weighted-average interest rate on these borrowings was 2.03%. The Company presents issuances and repayments of commercial paper, all of which have a maturity of less than 90 days, in the Company's Consolidated Statements of Cash Flows on a net basis.

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. Effective September 27, 2019, the Company reduced its bilateral letter of credit facilities to $300 million (December 31, 2018 – $600 million). 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, 2019, under its bilateral letter of credit facilities, the Company had no collateral posted (December 31, 2018 – $nil) and letters of credit drawn of $80 million (December 31, 2018 – $60 million) from a total available amount of $300 million (December 31, 2018 – $600 million).


CP 2019 ANNUAL REPORT/ 96

19.    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.

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt:
(in millions of Canadian dollars)December 31, 2019
December 31, 2018
Long-term debt (including current maturities):  
Fair value$10,149
$9,639
Carrying value8,757
8,696


All long-term debt is classified as Level 2. 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.

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 Company's 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.

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.



97 /SERVICE EXCELLENCE


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 foreign subsidiaries with a U.S. dollar functional currency. The majority of the Company’s U.S. dollar-denominated long-term debt has been designated as a hedge of the net investment in these 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 (loss) income” in 2019 was an FX gain of $288 million, the majority of which was unrealized (2018 – unrealized loss of $479 million; 2017 – unrealized gain of $319 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 finance lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.

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

Forward starting swaps
During the 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). The Company no longer has any active forward starting swaps.

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 (income) expense" 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.

The changes in fair value of the forward starting swaps for the year ended December 31, 2019 was $nil (2018 – gain of $31 million). This was recorded in "Accumulated other comprehensive loss”, net of tax, and is being reclassified to "Net interest expense" on the Company's Consolidated Statements of Income until the underlying hedged notes are repaid.

For the year ended December 31, 2019, a net loss of $9 million related to previous forward starting swap hedges has been amortized to “Net interest expense” (2018 – loss of $10 million; 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, 2019, the Company had net unamortized losses related to interest rate locks, which are accounted for as cash flow hedges, settled in previous years totalling $18 million (December 31, 2018 – $19 million). This amount is composed of various unamortized gains and losses related to specific debts which are reflected in “Accumulated other comprehensive loss” and are amortized to “Net interest expense” in the period that interest on the related debt is charged. The amortization of these gains and losses resulted in a $1 million increase to “Net interest expense” and “Other comprehensive (loss) income” in 2019 (2018 – $1 million; 2017 – $1 million). 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”.



CP 2019 ANNUAL REPORT/ 98

20.    Other long-term liabilities
(in millions of Canadian dollars)2019
2018
Operating lease liabilities, net of current portion (Note 2, 21)$285
$—
Stock-based compensation liabilities, net of current portion111
81
Provision for environmental remediation, net of current portion(1)
70
74
Deferred revenue on rights-of-way license agreements, net of current portion(2)
20
24
Deferred gains on sale leaseback transactions(2)
6
13
Other, net of current portion70
45
Total other long-term liabilities$562
$237
(1) As at December 31, 2019, the aggregate provision for environmental remediation, including the current portion was $77 million (2018 – $82 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 17). Payments are expected to be made over 10 years to 2029.

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 2019 was $6 million (2018 – $6 million; 2017 – $5 million).



99 /SERVICE EXCELLENCE


21. Leases
The Company’s leases have remaining terms of less than one year to 15 years, some include options to extend up to an additional 10 years, and some include options to terminate within one year.

Residual value guarantees are provided on certain rolling stock and vehicle operating leases. Cumulatively, these guarantees are limited to $2 million and are not included in lease liabilities as it is not currently probable that any amounts will be owed under these residual value guarantees.

The components of lease expense for the year ended December 31 are as follows:
(in millions of Canadian dollars)2019
Operating lease cost$89
Short-term lease cost10
Variable lease cost13
Sublease income(3)
 
Finance Lease Cost
Amortization of right-of use-assets9
Interest on lease liabilities11
Total lease costs$129


Supplemental balance sheet information related to leases is as follows:
(in millions of Canadian dollars)Classification2019
Assets  
OperatingOther assets$358
FinanceProperties, net book value177
   
Liabilities  
Current  
OperatingAccounts payable and accrued liabilities69
FinanceLong-term debt maturing within one year7
Long-term  
OperatingOther long-term liabilities285
FinanceLong-term debt144


The following table provides the Company's weighted-average remaining lease terms and discount rates:
Directors must meet their share ownership requirements within five years of joining the Board, and must hold their DDSUs for one year after they retire from the Board.
The table below shows the flat fee retainers for 2019. In 2019, Canadian directors’ fees were converted to Canadian dollars and the number of DDSUs received was based on the trading price of our shares on the TSX. U.S. directors were paid in U.S. dollars and the number of DDSUs they received was based on the trading price of our shares on the NYSE.
  2019
Annual Retainer  
Weighted-Average Remaining Lease Term 
Operating leases
Board Chair retainer
7 years
US $395,000  
Finance leases
Director retainer
4 years
US $200,000  
Committee Chair retainer
US $30,000  
We reimburse directors for travel and
out-of-pocket
expenses related to attending their Board and committee meetings and
other business on behalf of CP.
Mr. Creel does not receive any director compensation because he is compensated in his role as President and CEO.
Benchmarking
With input from our compensation advisors, we reviewed and updated our compensation comparator group in 2018. Other than the removal of Goldcorp Inc., which was acquired by Newmont Mining Inc., from the comparator group, we did not make any further changes to our comparator group in 2019. Our comparator group consists of six Class 1 Railroad peers as well as 11 capital-intensive Canadian companies.
BNSF Railway CompanyBCE Inc.
Canadian National Railway CompanyFortis Inc.
CSX CorporationTC Energy Corporation
Kansas City SouthernTELUS Corporation
Norfolk Southern CorporationRogers Communications Inc.
Union Pacific CorporationBarrick Gold Corporation
Cenovus Energy Inc.Kinross Gold Corporation
Enbridge Inc.Suncor Energy Inc.
Imperial Oil Limited
Independent advice
The Governance Committee may engage an independent consultant with respect to director compensation. The Governance Committee makes its own decisions, which may reflect factors and considerations other than the information and recommendations provided by its external consultant. The Governance Committee did not retain a compensation consultant in 2019 with respect to director compensation.
55
Table of Contents
2019 director compensation
The Governance Committee reviews director compensation every two to three years based on the directors’ responsibilities and time commitment and the compensation provided by comparable companies. Each director is paid an annual retainer of US$200,000. Committee chairs receive an additional US$30,000 per year and the Board Chair receives an annual retainer of US$395,000. No changes were made to the director compensation program in 2019.
We paid directors a total of approximately $2,854,492 in 2019 as detailed in the table below. Directors receive a flat fee retainer to cover their ongoing oversight and responsibilities throughout the year and their attendance at Board and committee meetings.
Directors receive 100% of their annual retainer in director deferred share units (DDSUs) until they have met their share ownership requirements. After that, directors are required to receive at least 50% of their compensation in DDSUs. The total represents the approximate dollar value of DDSUs credited to each director’s DDSU account in 2019, based on the closing fair market value of our shares on the grant date plus the cash portion paid where a director elected to receive a portion of compensation in cash.
Mr. Creel does not receive director compensation because he is compensated in his role as President and CEO (see pages 28 and 31 for details).
                             
  Name  
Fees
earned
($)
   
Share-based

awards
(1)(3)
($)
   
Option-based

awards
($)
   
Non-equity incentive

plan compensation
($)
   
Pension
value
($)
   
All other
compensation
(2)(3)
($)
   
Total
($)
 
  John Baird
  
 
-
 
  
 
261,471
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,000
 
  
 
262,471
 
  Isabelle Courville
  
 
-
 
  
 
439,366
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,000
 
  
 
440,366
 
  Jill Denham
  
 
-
 
  
 
261,471
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,000
 
  
 
262,471
 
  Edward Hamberger
(4)
  
 
-
 
  
 
121,403
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,327
 
  
 
122,730
 
  Rebecca MacDonald
  
 
-
 
  
 
300,691
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,000
 
  
 
301,691
 
  Edward Monser
  
 
-
 
  
 
264,765
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,327
 
  
 
266,092
 
  Matthew Paull
  
 
-
 
  
 
304,480
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,327
 
  
 
305,807
 
  Jane Peverett
  
 
-
 
  
 
300,691
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,000
 
  
 
301,691
 
  Andrea Robertson
(4)
  
 
-
 
  
 
119,163
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,000
 
  
 
120,163
 
  Gordon Trafton
  
 
-
 
  
 
284,456
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
1,327
 
  
 
285,783
 
  Andrew Reardon
(5)
  
 
92,154
 
  
 
93,073
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
185,227
 
Notes:
(1)
The value of the share-based awards has been calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC 718) using the grant date fair value, which is prescribed by the DDSU Plan.
(2)
Each director was provided with a $1,000 donation, in local currency, to the charity of their choice in December 2019 in gratitude for their year of service. This amount appears under
All other compensation
.
(3)
All directors were paid in U.S. dollars and the value of their share-based awards, and cash and other payments, as applicable, have been converted to Canadian dollars using the 2019 average exchange rate of $1.3269.
(4)
Mr. Hamberger and Ms. Robertson joined the Board in July 2019. Their 2019 compensation was
pro-rated
accordingly.
(5)
Mr. Reardon retired from the Board and did not stand for
re-election
at our annual meeting held May 7, 2019. In 2019, Mr. Reardon elected to receive 50% of his director compensation in DDSUs with the remaining 50% paid in cash. His 2019 compensation was
pro-rated
accordingly.
56
Table of Contents
Incentive plan awards
Outstanding share-based awards and option-based awards
The table below shows all vested and unvested equity incentive awards that are outstanding as of December 31, 2019.
  
Weighted-Average Discount Rate
Option-based awards
(1)
Share-based awards 
Operating leases  Name3.45%
Number of
securities
underlying
unexercised
options
(#)
Option
exercise
price
($)
Option
expiration
date
Value of
unexercised
in-the-money

options
($)
Grant
type
Number of
shares or units
of shares that
have not
vested
(#)
Market or
payout value of
share-based
awards that
have not vested
($)
Market or payout
value of vested
share-based
awards not paid
out or distributed
($)
(2)
Finance leases
  John Baird
7.07%
-
-
-
-
-
-
-
1,750,818
  Isabelle Courville
-
-
-
-
-
-
-
2,831,962
  Jill Denham
-
-
-
-
-
-
-
1,160,260
  Edward Hamberger
-
-
-
-
-
-
-
126,882
  Rebecca MacDonald
-
-
-
-
-
-
-
3,877,023
  Edward Monser
-
-
-
-
-
-
-
305,632
  Matthew Paull
-
-
-
-
-
-
-
1,888,098
  Jane Peverett
-
-
-
-
-
-
-
1,177,474
  Andrea Robertson
-
-
-
-
-
-
-
126,122
  Gordon Trafton
-
-
-
-
-
-
-
1,163,256
  Andrew Reardon
(3)
-
-
-
-
-
-
-
4,016,927




CP 2019 ANNUAL REPORT/ 100

Supplemental information related to leases is as follows:
(in millions of Canadian dollars)2019
Cash paid for amounts included in measurement of lease liabilities 
Operating cash outflows from operating leases$82
Operating cash outflows from finance leases10
Financing cash outflows from finance leases6
  
Right-of-use assets obtained in exchange for lease liabilities 
Operating leases38
Finance leases4


The following table provides the maturities of lease liabilities for the next five years and thereafter as at December 31, 2019:
(in millions of Canadian dollars)Finance Leases
Operating Leases
2020$11
$80
202110
55
2022108
51
20238
39
20249
40
Thereafter21
130
Total lease payments167
395
Imputed interest(16)(41)
Present value of lease payments$151
$354


22.    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, 2019, 0 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)2019
2018
2017
Share capital, January 1140.5
144.9
146.3
CP Common Shares repurchased(3.8)(4.6)(1.9)
Shares issued under stock option plan0.3
0.2
0.5
Share capital, December 31137.0
140.5
144.9


The change in the “Share capital” balance includes $7 million of stock-based compensation transferred from “Additional paid-in capital” (2018 – $12 million; 2017 – $12 million).

Share repurchases
On May 10, 2017, the Company announced a normal course issuer bid ("NCIB"), commencing May 15, 2017, to purchase up to 4.38 million Common Shares in the open market for cancellation on or before May 14, 2018. The Company completed this NCIB on May 10, 2018.

On October 19, 2018, the Company announced a NCIB, commencing October 24, 2018, to purchase up to 5.68 million Common Shares for cancellation on or before October 23, 2019. The Company completed this NCIB on October 23, 2019.


101 /SERVICE EXCELLENCE
 


On December 17, 2019, the Company announced a new NCIB, commencing December 20, 2019, to purchase up to 4.80 million Common Shares for cancellation on or before December 19, 2020. As at December 31, 2019, the Company had purchased 0.30 million Common Shares for $100 million under this NCIB program.

All purchases were made in accordance with the respective NCIB at prevalent market prices plus brokerage fees, or such other prices that were permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares and any excess allocated to "Retained earnings".

The following table provides the activities under the share repurchase programs for each of the years ended December 31:
 2019
2018
2017
Number of Common Shares repurchased(1)
3,794,149
4,683,162
1,888,100
Weighted-average price per share(2)
$300.65
$240.68
$201.53
Amount of repurchase (in millions)(2)
$1,141
$1,127
$381
(1) Includes shares repurchased but not yet cancelled at year end.
(2) Includes brokerage fees.

23.    Pensions and other benefits
The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans. At December 31, 2019, 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, 2019, the Canadian other benefits plans represent nearly all of total combined other plan obligations.

The Audit and 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.

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.



CP 2019 ANNUAL REPORT/ 102

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:
 Pensions Other benefits
(in millions of Canadian dollars)2019
2018
2017
 2019
2018
2017
Current service cost (benefits earned by employees)$107
$120
$103
 $11
$12
$12
Other components of net periodic benefit cost (recovery):       
Interest cost on benefit obligation450
438
451
 20
19
20
Expected return on fund assets(947)(955)(893) —
—
—
Recognized net actuarial loss84
114
153
 12
2
(1)
Amortization of prior service costs(1)(2)(5) 1
—
1
Total other components of net periodic benefit (recovery) cost(414)(405)(294) 33
21
20
Net periodic benefit (recovery) cost$(307)$(285)$(191) $44
$33
$32


Projected benefit obligation, fund assets, and funded status
Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:
 Pensions Other benefits
(in millions of Canadian dollars)2019
2018
 2019
2018
Change in projected benefit obligation:     
Benefit obligation at January 1$11,372
$11,679
 $501
$518
Current service cost107
120
 11
12
Interest cost450
438
 20
19
Employee contributions41
47
 —
1
Benefits paid(646)(640) (34)(33)
Foreign currency changes(10)20
 —
2
Actuarial loss (gain)1,296
(292) 43
(18)
Projected benefit obligation at December 31$12,610
$11,372
 $541
$501

 Pensions Other benefits
(in millions of Canadian dollars)2019
2018
 2019
2018
Change in fund assets:     
Fair value of fund assets at January 1$12,349
$12,808
 $4
$4
Actual return on fund assets1,528
82
 1
—
Employer contributions53
36
 34
32
Employee contributions41
47
 —
1
Benefits paid(646)(640) (34)(33)
Foreign currency changes(6)16
 —
—
Fair value of fund assets at December 31$13,319
$12,349
 $5
$4
Funded status – plan surplus (deficit)$709
$977
 $(536)$(497)




103 /SERVICE EXCELLENCE
(1)
On July 21, 2003, the Board suspended any additional grants of options under the director stock option plan, and there are no outstanding options under that plan.
 


The table below shows the aggregate pension projected benefit obligation and aggregate fair value of plan assets for pension plans with fair value of plan assets in excess of projected benefit obligations (i.e. surplus), and for pension plans with projected benefit obligations in excess of fair value of plan assets (i.e. deficit):
 2019 2018
(in millions of Canadian dollars)Pension
plans in
surplus
Pension
plans in
deficit
 Pension
plans in
surplus
Pension
plans in
deficit
Projected benefit obligation at December 31$(12,076)$(534) $(10,884)$(488)
Fair value of fund assets at December 3113,079
240
 12,127
222
Funded Status$1,003
$(294) $1,243
$(266)


The DB pension plans’ accumulated benefit obligation as at December 31, 2019 was $12,201 million (2018 – $10,981 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. For pension plans with accumulated benefit obligations in excess of fair value of plan assets (i.e. deficit), the aggregate pension accumulated benefit obligation as at December 31, 2019 was $419 million (2018 – $395 million) and the aggregate fair value of plan assets as at December 31, 2019 was $186 million (2018 – $180 million).

All Other benefits plans were in a deficit position at December 31, 2019 and 2018.

Pension asset and liabilities in the Company’s Consolidated Balance Sheets
Amounts recognized in the Company’s Consolidated Balance Sheets are as follows:
 Pensions Other benefits
(in millions of Canadian dollars)2019
2018
 2019
2018
Pension asset$1,003
$1,243
 $—
$—
Accounts payable and accrued liabilities(11)(11) (34)(34)
Pension and other benefit liabilities(283)(255) (502)(463)
Total amount recognized$709
$977
 $(536)$(497)


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, 2019. During 2020, the Company expects to file with the pension regulator a new valuation performed as at January 1, 2020.

Accumulated other comprehensive loss
Amounts recognized in accumulated other comprehensive loss are as follows:
 Pensions Other benefits
(in millions of Canadian dollars)2019
2018
 2019
2018
Net actuarial loss:     
Other than deferred investment gains$3,434
$2,233
 $91
$61
Deferred investment gains41
611
 —
—
Prior service cost1
—
 1
2
Deferred income tax(964)(797) (24)(16)
Total (Note 8)$2,512
$2,047
 $68
$47

(2)
Calculated based on the closing price of our shares on December 31, 2019 on the TSX ($331.03), in the case of directors resident in Canada, and on the NYSE (US$254.95) which was converted to Canadian dollars using the
year-end
exchange rate of $1.2988, in the case of the directors resident in the U.S.
 
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 2020 are a cost of $176 million and a recovery of $1 million, respectively, for pensions and costs of $3 million and $nil, respectively, for other post-retirement benefits.



CP 2019 ANNUAL REPORT/ 104

Actuarial assumptions
Weighted-average actuarial assumptions used were approximately:
(percentages)2019 2018 2017 
Benefit obligation at December 31:      
Discount rate3.25 4.01 3.80 
Projected future salary increases2.75 2.75 2.75 
Health care cost trend rate5.50
(1) 
6.00
(1) 
7.00
(2) 
Benefit cost for year ended December 31:      
Discount rate4.01 3.80 4.02 
Expected rate of return on fund assets (3)
7.50 7.75 7.75 
Projected future salary increases2.75 2.75 2.75 
Health care cost trend rate6.00
(1) 
7.00
(2) 
7.00
(2) 
(1) The health care cost trend rate was assumed to be 6.00% in 2019, is assumed to be 5.50% in 2020 and 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 expected rate of return on fund assets that will be used to compute the 2020 net periodic benefit credit is 7.25%.

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 and infrastructure values are based on the value of each fund’s assets as calculated by the fund manager, generally using third party appraisals or discounted cash flow analysis and taking 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.

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:
   Percentage of plan assets
at December 31
Asset allocation (percentage)Asset allocation targetPolicy range20192018
Cash and cash equivalents1.20 – 100.91.1
Fixed income24.120 – 4024.625.6
Public equity45.135 – 5554.550.2
Real estate and infrastructure9.84 – 136.87.7
Private debt9.84 – 132.41.3
Absolute return10.04 – 1310.814.1
Total100.0 100.0100.0




105 /SERVICE EXCELLENCE
(3)
Mr. Reardon retired from the Board and did not stand for re-election at our annual meeting held May 7, 2019.
 


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, 2019 and 2018. As of December 31, 2019 and 2018, there were no plan assets classified as Level 3 valued investments.
Non-employee
 Assets Measured at Fair Value
Investments
measured at NAV(1)

Total Plan
Assets

(in millions of Canadian dollars)Quoted prices in
active markets
for identical assets (Level 1)
Significant other
observable inputs (Level 2)
December 31, 2019    
Cash and cash equivalents$112
$—
$—
$112
Fixed income    
Government bonds(2)
233
1,857
—
2,090
Corporate bonds(2)
273
819
—
1,092
Mortgages(3)
159
5
—
164
Public equities    
Canada1,351
—
—
1,351
U.S. and international5,883
22
—
5,905
Real estate(4)
—
—
724
724
Infrastructure(5)
—
—
187
187
Private debt(6)
—
—
313
313
Derivative instruments(7)
—
(59)—
(59)
Absolute return(8)
    
Funds of hedge funds—
—
1,418
1,418
Multi-strategy funds—
—
22
22
 $8,011
$2,644
$2,664
$13,319
December 31, 2018    
Cash and cash equivalents$127
$12
$—
$139
Fixed income    
Government bonds(2)
101
1,281
—
1,382
Corporate bonds(2)
128
1,606
—
1,734
Mortgages(3)
41
—
—
41
Public equities    
Canada1,287
—
—
1,287
U.S. and international4,892
24
—
4,916
Real estate(4)
—
—
697
697
Infrastructure(5)
—
—
259
259
Private debt(6)
—
—
162
162
Derivative instruments(7)
—
(7)—
(7)
Absolute return(8)
    
Funds of hedge funds—
—
1,189
1,189
Multi-strategy funds—
—
286
286
Credit funds—
—
32
32
Equity funds—
—
232
232
 $6,576
$2,916
$2,857
$12,349


CP 2019 ANNUAL REPORT/ 106

(1) Investments measured at net asset value ("NAV"):
Amountsdirectors 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.
(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, $606 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2018 – $583 million). The remaining $118 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying real estate investments (2018 – $114 million). As at December 31, 2019, there are $35 million of unfunded commitments for real estate investments (December 31, 2018 – $38 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, $119 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2018 – $130 million). The remaining $68 million is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying infrastructure investments (2018 – $129 million).
(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. Of the total, $154 million is subject to redemption frequencies ranging from monthly to annually and a redemption notice period of 90 days (2018 – $162 million). The remaining $159 million is not subject to redemption and is normally returned through distributions as a result of the repayment of the underlying loans (2018 – $nil). As at December 31, 2019, there are $392 million of unfunded commitments for private debt investments (December 31, 2018 – $608 million).
(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, 2019, there are currency forwards with a notional value of $334 million (December 31, 2018 – $1,226 million) and a fair value of $13 million (December 31, 2018 – $(7) million). The fixed income investment manager utilizes a portfolio of bond forwards for the purpose of reducing asset/liability interest rate exposure. As at December 31, 2019, there are bond forwards with a notional value of $3,269 million and a negative fair value of $72 million (December 31, 2018 – $nil).
(8) Absolute return:
The value of absolute return fund investments is based on the NAV reported by the fund administrators. The funds have different redemption policies with redemption notice periods varying from 60 to 95 days and frequencies ranging from monthly to triennially.

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

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

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

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


107 /SERVICE EXCELLENCE


Estimated future benefit payments
The estimated future DB pension and other benefit payments to be paid by the plans for each of the next five years and the subsequent five-year period are as follows:
(in millions of Canadian dollars)Pensions
Other benefits
2020$620
$34
2021623
32
2022627
31
2023630
30
2024633
30
2025 – 20293,203
144


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

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

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

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

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

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

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

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

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



CP 2019 ANNUAL REPORT/ 108

A. Stock option plan
The following table summarizes the Company’s stock option plan as at December 31, 2019:
 Options outstandingNon-vested options
 Number of
options
Weighted-average
exercise price
Number of
options
Weighted-average
grant date
fair value
Outstanding, January 1, 20191,533,598
$176.02
714,102
$48.94
Granted224,730
$269.99
224,730
$63.69
Exercised(334,127)$125.12
N/A
N/A
VestedN/A
N/A
(169,193)$47.59
Forfeited(7,855)$234.59
(7,855)$54.75
Outstanding, December 31, 20191,416,346
$199.12
761,784
$53.54
Vested or expected to vest at December 31, 2019(1)
1,385,626
$197.89
N/A
N/A
Exercisable, December 31, 2019654,562
$162.59
N/A
N/A
(1) As at December 31, 2019, the weighted-average remaining term of vested or expected to vest options was 4.9 years with an aggregate intrinsic value of $184 million.

The following table provides the number ofgranted stock options outstanding and exercisable as at December 31, 2019 by range of exercise price and their related intrinsic aggregate value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on December 31, 2019 at the Company’s closing stock price of $331.03.
 Options outstandingOptions exercisable
Range of exercise pricesNumber of
options
Weighted-average
years to
expiration		Weighted-average
exercise
price
Aggregate
intrinsic
value
(millions)
Number of
options
Weighted-average
exercise
price
Aggregate
intrinsic
value
(millions)
$51.17 – $167.50354,357
4.1$123.00
$74
303,455
$116.84
$65
$167.51 – $197.05355,040
4.1$188.53
$51
135,532
$175.30
$21
$197.06– $247.87376,654
4.8$222.75
$41
215,465
$218.98
$24
$247.88 – $313.16330,295
5.9$265.23
$22
110
$260.52
$—
Total(1)
1,416,346
4.7$199.12
$187
654,562
$162.59
$110
(1) As at December 31, 2019, the total number of in-the-money stock options outstanding was 1,416,346 with a weighted-average exercise price of $199.12. The weighted-average years to expiration of exercisable stock options is 4.2 years.

Pursuant to the employee plan, options may be exercised upon vesting, which is between 12 months and 48 months after the grant date, and will expire after seven years. Certain stock options granted in 2019 and 2018 vest upon the achievement of specific performance criteria. Under the fair value method, the fair value of the stock options at grant date was approximately $14 million for options issued in 2019 (2018 – $16 million; 2017 – $17 million). The weighted-average fair value assumptions were approximately:
 2019
2018
2017
Expected option life (years)(1)
5.00
5.00
5.48
Risk-free interest rate(2)
2.22%2.22%1.85%
Expected stock price volatility(3)
25.04%24.81%26.94%
Expected annual dividends per share(4) 
$2.6191
$2.3854
$2.0010
Expected forfeiture rate(5)
6.05%4.70%2.80%
Weighted-average grant date fair value of options granted during the year$63.69
$55.63
$45.78
(1) Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour or, when available, specific expectations regarding future exercise behaviour were used to estimate the expected life of the option.
(2) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the option.


109 /SERVICE EXCELLENCE


(3) Based on the historical volatility of the Company’s stock price over a period commensurate with the expected term of the option.
(4) Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option. On May 6, 2019, the Company announced an increase in its quarterly dividend to $0.8300 per share, representing $3.3200 on an annual basis.
(5) The Company estimates forfeitures based on past experience. The rate is monitored on a periodic basis.

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

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

The following table provides information related to all options exercised in the stock option plan during the years ended December 31:plan.
(in millions of Canadian dollars)2019
2018
2017
Total intrinsic value$63
$17
$36
Cash received by the Company upon exercise of options26
24
45


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

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

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

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

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

The following table summarizes information related to the Company’s PSUs as at December 31:
 2019
2018
Outstanding, January 1395,048
334,028
Granted134,260
162,255
Units, in lieu of dividends4,032
3,643
Settled(117,228)(66,243)
Forfeited(12,976)(38,635)
Outstanding, December 31403,136
395,048
57


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


CP 2019 ANNUAL REPORT/ 110

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

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

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

The following table summarizes information related to the DSUs as at December 31:
 2019
2018
Outstanding, January 1152,760
156,547
Granted19,912
16,481
Units, in lieu of dividends1,608
1,551
Settled(12,110)(20,072)
Forfeited(951)(1,747)
Outstanding, December 31161,219
152,760


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

Summary of share-based liabilities paid
The following table summarizes the total share-based liabilities paid for each of the years ended December 31:
(in millions of Canadian dollars)2019
2018
2017
Plan   
PSUs$54
$30
$31
DSUs4
6
6
Other—
1
2
Total$58
$37
$39


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

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

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


111 /SERVICE EXCELLENCE



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

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

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

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

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

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

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

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

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

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

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

(1)
Québec's Minister of Sustainable Development, Environment, Wildlife and Parks ordered various parties, including CP, to clean up the derailment site and served CP with a Notice of Claim for $95 million for those cleanup costs. CP appealed the cleanup order and contested the Notice of Claim with the Administrative Tribunal of Québec. These proceedings are stayed pending determination of the Attorney General of Québec (“AGQ”) action (paragraph 2 below).

(2)
The AGQ sued CP in the Québec Superior Court claiming $409 million in damages, which was amended and reduced to $315 million (the “AGQ Action”). The AGQ Action alleges that: (i) CP exercised custody or control over the petroleum crude oil until its delivery to Irving Oil and was negligent in that custody and control; and (ii) CP is vicariously liable for the acts and omissions of the MMA Group.

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

(4)
NaN subrogated insurers sued CP in the Québec Superior Court claiming approximately $16 million in damages, which was amended and reduced to $14 million (the “Promutuel Action”), and 2 additional subrogated insurers sued CP claiming approximately $3 million in damages (the “Royal Action”). Both actions contain similar allegations as the AGQ Action. The actions do not identify the subrogated parties, and therefore overlap with the claims process under the Plans is unclear. The Royal Action is stayed pending determination of the consolidated proceedings described below.

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

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

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

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


CP 2019 ANNUAL REPORT/ 112

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

(8)
The trustee for the wrongful death trust commenced Carmack Amendment claims against CP in North Dakota Federal Court, seeking to recover approximately U.S. $6 million for damaged rail cars and lost crude and reimbursement for the settlement paid by the consignor and the consignee under the Plans (alleged to be U.S. $110 million and U.S. $60 million, respectively). This action is scheduled for trial in August 2020.

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

27.    Guarantees
In the normal course of operating the railway, the Company enters into contractual arrangements that involve providing certain guarantees, which extend over the term of the contracts. These guarantees include, but are not limited to:
•
a guarantee to uphold an equity investee's credit facility of $19 million at December 31, 2019;
guarantees to pay other parties in the event of the occurrence of specified events, including damage to equipment, in relation to assets used in the operation of the railway through operating leases, rental agreements, easements, trackage, and interline agreements; and
indemnifications of certain tax-related payments incurred by lessors and lenders.

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

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

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

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


Table of Contents

113 /SERVICE EXCELLENCE


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

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

Geographic information
(in millions of Canadian dollars)Canada
United States
Total
2019   
Revenues$5,675
$2,117
$7,792
Long-term assets excluding financial instruments and pension assets13,131
7,020
20,151
2018   
Revenues5,232
2,084
7,316
Long-term assets excluding financial instruments and pension assets12,133
6,759
18,892
2017   
Revenues4,667
1,887
6,554
Long-term assets excluding financial instruments and pension assets11,505
5,947
17,452


29. Selected quarterly data (unaudited)
For the quarter ended20192018
(in millions of Canadian dollars, except per share data)Dec. 31
Sep. 30
Jun. 30
Mar. 31
Dec. 31
Sep. 30
Jun. 30
Mar. 31
Total revenues$2,069
$1,979
$1,977
$1,767
$2,006
$1,898
$1,750
$1,662
Operating income890
869
822
543
874
790
627
540
Net income664
618
724
434
545
622
436
348
Basic earnings per share(1)
$4.84
$4.47
$5.19
$3.10
$3.84
$4.36
$3.05
$2.41
Diluted earnings per share(1)
4.82
4.46
5.17
3.09
3.83
4.35
3.04
2.41
(1) Earnings per share for the four quarters combined may not equal earnings per share for the year due to rounding.

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

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

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



CP 2019 ANNUAL REPORT/ 114

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2019    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$5,527
$2,084
$2
$7,613
Non-freight—
135
570
(526)179
Total revenues—
5,662
2,654
(524)7,792
Operating expenses     
Compensation and benefits—
1,042
490
8
1,540
Fuel—
695
187
—
882
Materials—
142
53
15
210
Equipment rents—
177
(9)(31)137
Depreciation and amortization—
423
283
—
706
Purchased services and other—
967
742
(516)1,193
Total operating expenses—
3,446
1,746
(524)4,668
Operating income—
2,216
908
—
3,124
Less:     
Other (income) expense(12)(86)9
—
(89)
Other components of net periodic benefit (recovery) cost—
(388)7
—
(381)
Net interest (income) expense(1)474
(25)—
448
Income before income tax expense and equity in net earnings of subsidiaries13
2,216
917
—
3,146
Less: Income tax expense3
522
181
—
706
Add: Equity in net earnings of subsidiaries2,430
736
—
(3,166)—
Net income$2,440
$2,430
$736
$(3,166)$2,440



115 /SERVICE EXCELLENCE


CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2018    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$5,098
$2,054
$—
$7,152
Non-freight—
120
361
(317)164
Total revenues—
5,218
2,415
(317)7,316
Operating expenses     
Compensation and benefits—
996
466
6
1,468
Fuel—
716
202
—
918
Materials—
139
49
13
201
Equipment rents—
137
(7)—
130
Depreciation and amortization—
424
272
—
696
Purchased services and other—
886
522
(336)1,072
Total operating expenses—
3,298
1,504
(317)4,485
Operating income—
1,920
911
—
2,831
Less:     
Other expense (income)19
193
(38)—
174
Other components of net periodic benefit (recovery) cost—
(386)2
—
(384)
Net interest expense (income)3
478
(28)—
453
(Loss) income before income tax (recovery) expense and equity in net earnings of subsidiaries(22)1,635
975
—
2,588
Less: Income tax (recovery) expense(4)469
172
—
637
Add: Equity in net earnings of subsidiaries1,969
803
—
(2,772)—
Net income$1,951
$1,969
$803
$(2,772)$1,951





CP 2019 ANNUAL REPORT/ 116

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2017            
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Revenues     
Freight$—
$4,516
$1,859
$—
$6,375
Non-freight—
140
372
(333)179
Total revenues—
4,656
2,231
(333)6,554
Operating expenses     
Compensation and benefits—
879
423
7
1,309
Fuel—
522
155
—
677
Materials—
134
41
15
190
Equipment rents—
143
(1)—
142
Depreciation and amortization—
400
261
—
661
Purchased services and other—
826
585
(355)1,056
Total operating expenses—
2,904
1,464
(333)4,035
Operating income—
1,752
767
—
2,519
Less:     
Other (income) expense(33)(149)4
—
(178)
Other components of net periodic benefit (recovery) cost—
(278)4
—
(274)
Net interest (income) expense(12)517
(32)—
473
Income before income tax expense (recovery) and equity in net earnings of subsidiaries45
1,662
791
—
2,498
Less: Income tax expense (recovery)7
475
(389)—
93
Add: Equity in net earnings of subsidiaries2,367
1,180
—
(3,547)—
Net income$2,405
$2,367
$1,180
$(3,547)$2,405





117 /SERVICE EXCELLENCE


CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2019    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$2,440
$2,430
$736
$(3,166)$2,440
Net gain (loss) in foreign currency translation adjustments, net of hedging activities—
288
(251)—
37
Change in derivatives designated as cash flow hedges—
10
—
—
10
Change in pension and post-retirement defined
benefit plans		—
(651)(10)—
(661)
Other comprehensive loss before income taxes—
(353)(261)—
(614)
Income tax recovery on above items—
132
3
—
135
Equity accounted investments(479)(258)—
737
—
Other comprehensive loss(479)(479)(258)737
(479)
Comprehensive income$1,961
$1,951
$478
$(2,429)$1,961


CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2018    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$1,951
$1,969
$803
$(2,772)$1,951
Net (loss) gain in foreign currency translation adjustments, net of hedging activities—
(479)419
—
(60)
Change in derivatives designated as cash flow hedges—
38
—
—
38
Change in pension and post-retirement defined
benefit plans		—
(455)6
—
(449)
Other comprehensive (loss) income before income taxes—
(896)425
—
(471)
Income tax recovery (expense) on above items—
171
(2)—
169
Equity accounted investments(302)423
—
(121)—
Other comprehensive (loss) income(302)(302)423
(121)(302)
Comprehensive income$1,649
$1,667
$1,226
$(2,893)$1,649




CP 2019 ANNUAL REPORT/ 118

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2017    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Net income$2,405
$2,367
$1,180
$(3,547)$2,405
Net gain (loss) in foreign currency translation adjustments, net of hedging activities—
318
(294)—
24
Change in derivatives designated as cash flow hedges—
19
—
—
19
Change in pension and post-retirement defined
benefit plans		—
82
(2)—
80
Other comprehensive income (loss) before income taxes—
419
(296)—
123
Income tax (expense) recovery on above items—
(66)1
—
(65)
Equity accounted investments58
(295)—
237
—
Other comprehensive income (loss)58
58
(295)237
58
Comprehensive income$2,463
$2,425
$885
$(3,310)$2,463



119 /SERVICE EXCELLENCE


CONDENSED CONSOLIDATING BALANCE SHEETS
AS AT DECEMBER 31, 2019
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Assets     
Current assets     
Cash and cash equivalents$—
$37
$96
$—
$133
Accounts receivable, net24
597
184
—
805
Accounts receivable, intercompany164
313
249
(726)—
Short-term advances to affiliates—
1,387
3,700
(5,087)—
Materials and supplies—
144
38
—
182
Other current assets—
41
49
—
90
 188
2,519
4,316
(5,813)1,210
Long-term advances to affiliates1,090
7
84
(1,181)—
Investments—
32
309
—
341
Investments in subsidiaries10,522
11,165
—
(21,687)—
Properties—
10,287
8,869
—
19,156
Goodwill and intangible assets—
—
206
—
206
Pension asset—
1,003
—
—
1,003
Other assets—
173
278
—
451
Deferred income taxes4
—
—
(4)—
Total assets$11,804
$25,186
$14,062
$(28,685)$22,367
Liabilities and shareholders’ equity     
Current liabilities     
Accounts payable and accrued liabilities$146
$1,189
$358
$—
$1,693
Accounts payable, intercompany6
402
318
(726)—
Short-term advances from affiliates4,583
490
14
(5,087)—
Long-term debt maturing within one year—
548
51
—
599
 4,735
2,629
741
(5,813)2,292
Pension and other benefit liabilities—
698
87
—
785
Long-term advances from affiliates—
1,174
7
(1,181)—
Other long-term liabilities—
206
356
—
562
Long-term debt—
8,145
13
—
8,158
Deferred income taxes—
1,812
1,693
(4)3,501
Total liabilities4,735
14,664
2,897
(6,998)15,298
Shareholders’ equity     
Share capital1,993
538
4,610
(5,148)1,993
Additional paid-in capital48
406
265
(671)48
Accumulated other comprehensive (loss) income(2,522)(2,522)581
1,941
(2,522)
Retained earnings7,550
12,100
5,709
(17,809)7,550
 7,069
10,522
11,165
(21,687)7,069
Total liabilities and shareholders’ equity$11,804
$25,186
$14,062
$(28,685)$22,367



CP 2019 ANNUAL REPORT/ 120

CONDENSED CONSOLIDATING BALANCE SHEETS
AS AT DECEMBER 31, 2018    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Assets     
Current assets     
Cash and cash equivalents$—
$42
$19
$—
$61
Accounts receivable, net—
629
186
—
815
Accounts receivable, intercompany125
167
224
(516)—
Short-term advances to affiliates—
1,602
4,651
(6,253)—
Materials and supplies—
136
37
—
173
Other current assets—
39
29
—
68
 125
2,615
5,146
(6,769)1,117
Long-term advances to affiliates1,090
5
93
(1,188)—
Investments—
24
179
—
203
Investments in subsidiaries11,443
12,003
—
(23,446)—
Properties—
9,579
8,839
—
18,418
Goodwill and intangible assets—
—
202
—
202
Pension asset—
1,243
—
—
1,243
Other assets—
57
14
—
71
Deferred income taxes6
—
—
(6)—
Total assets$12,664
$25,526
$14,473
$(31,409)$21,254
Liabilities and shareholders’ equity     
Current liabilities     
Accounts payable and accrued liabilities$115
$1,017
$317
$—
$1,449
Accounts payable, intercompany4
344
168
(516)—
Short-term advances from affiliates5,909
341
3
(6,253)—
Long-term debt maturing within one year—
506
—
—
506
 6,028
2,208
488
(6,769)1,955
Pension and other benefit liabilities—
639
79
—
718
Long-term advances from affiliates—
1,182
6
(1,188)—
Other long-term liabilities—
120
117
—
237
Long-term debt—
8,135
55
—
8,190
Deferred income taxes—
1,799
1,725
(6)3,518
Total liabilities6,028
14,083
2,470
(7,963)14,618
Shareholders’ equity     
Share capital2,002
538
5,946
(6,484)2,002
Additional paid-in capital42
1,656
92
(1,748)42
Accumulated other comprehensive (loss) income(2,043)(2,043)839
1,204
(2,043)
Retained earnings6,635
11,292
5,126
(16,418)6,635
 6,636
11,443
12,003
(23,446)6,636
Total liabilities and shareholders’ equity$12,664
$25,526
$14,473
$(31,409)$21,254



121 /SERVICE EXCELLENCE


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2019
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Cash provided by operating activities$1,601
$2,133
$1,026
$(1,770)$2,990
Investing activities     
Additions to properties—
(1,243)(404)—
(1,647)
Investment in Central Maine & Québec Railway—
(47)(127)—
(174)
Proceeds from sale of properties and other assets—
21
5
—
26
Advances to affiliates—
(263)(396)659
—
Repayment of advances to affiliates—
468
1,350
(1,818)—
Capital contributions to affiliates—
(125)—
125
—
Repurchase of share capital from affiliates1,246
1,345
—
(2,591)—
Other—
1
(9)—
(8)
Cash provided by (used in) investing activities1,246
157
419
(3,625)(1,803)
Financing activities     
Dividends paid(412)(1,612)(158)1,770
(412)
Issuance of share capital—
—
125
(125)—
Return of share capital to affiliates—
(1,246)(1,345)2,591
—
Issuance of CP Common Shares26
—
—
—
26
Purchase of CP Common Shares(1,132)(2)—
—
(1,134)
Issuance of long-term debt, excluding commercial paper—
397
—
—
397
Repayment of long-term debt, excluding commercial paper—
(500)—
—
(500)
Net issuance of commercial paper—
524
—
—
524
Advances from affiliates495
151
13
(659)—
Repayment of advances from affiliates(1,813)(5)—
1,818
—
Other(11)(1)—
—
(12)
Cash used in financing activities(2,847)(2,294)(1,365)5,395
(1,111)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
(1)(3)—
(4)
Cash position     
(Decrease) increase in cash and cash equivalents—
(5)77
—
72
Cash and cash equivalents at beginning of year—
42
19
—
61
Cash and cash equivalents at end of year$—
$37
$96
$—
$133



CP 2019 ANNUAL REPORT/ 122

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2018    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Cash provided by operating activities$316
$1,968
$1,128
$(700)$2,712
Investing activities     
Additions to properties—
(971)(580)—
(1,551)
Proceeds from sale of properties and other assets—
35
43
—
78
Advances to affiliates—
(611)(209)820
—
Repayment of advances to affiliates—
—
866
(866)—
Repurchase of share capital from affiliates500
964
—
(1,464)—
Other—
18
(3)—
15
Cash provided by (used in) investing activities500
(565)117
(1,510)(1,458)
Financing activities     
Dividends paid(348)(348)(352)700
(348)
Return of share capital to affiliates—
(500)(964)1,464
—
Issuance of CP Common Shares24
—
—
—
24
Purchase of CP Common Shares(1,103)—
—
—
(1,103)
Issuance of long-term debt, excluding commercial paper—
638
—
—
638
Repayment of long-term debt, excluding commercial paper—
(753)—
—
(753)
Advances from affiliates820
—
—
(820)—
Repayment of advances from affiliates(209)(657)—
866
—
Cash used in financing activities(816)(1,620)(1,316)2,210
(1,542)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
18
(7)—
11
Cash position     
Decrease in cash and cash equivalents—
(199)(78)—
(277)
Cash and cash equivalents at beginning of year—
241
97
—
338
Cash and cash equivalents at end of year$—
$42
$19
$—
$61



123 /SERVICE EXCELLENCE


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2017                    
(in millions of Canadian dollars)CPRL (Parent Guarantor)
CPRC (Subsidiary Issuer)
Non-Guarantor Subsidiaries
Consolidating Adjustments and Eliminations
CPRL Consolidated
Cash provided by operating activities$338
$1,334
$989
$(479)$2,182
Investing activities     
Additions to properties—
(950)(390)—
(1,340)
Proceeds from sale of properties and other assets—
29
13
—
42
Advances to affiliates(590)(550)(1,528)2,668
—
Repayment of advances to affiliates—
242
243
(485)—
Capital contributions to affiliates—
(1,039)—
1,039
—
Repurchase of share capital from affiliates—
156
—
(156)—
Other—
5
(2)—
3
Cash used in investing activities(590)(2,107)(1,664)3,066
(1,295)
Financing activities     
Dividends paid(310)(310)(169)479
(310)
Issuance of share capital—
—
1,039
(1,039)—
Return of share capital to affiliates—
—
(156)156
—
Issuance of CP Common Shares45
—
—
—
45
Purchase of CP Common Shares(381)—
—
—
(381)
Repayment of long-term debt, excluding commercial paper—
(32)—
—
(32)
Advances from affiliates1,383
1,285
—
(2,668)—
Repayment of advances from affiliates(485)—
—
485
—
Settlement of forward starting swaps—
(22)—
—
(22)
Cash provided by (used in) financing activities252
921
714
(2,587)(700)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents—
(7)(6)—
(13)
Cash position     
Increase in cash and cash equivalents—
141
33
—
174
Cash and cash equivalents at beginning of year—
100
64
—
164
Cash and cash equivalents at end of year$—
$241
$97
$—
$338



CP 2019 ANNUAL REPORT/ 124

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

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

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

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

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


125 /SERVICE EXCELLENCE


Report of Independent Registered Public Accounting Firm

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

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

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the 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 20, 2020



CP 2019 ANNUAL REPORT/ 126

ITEM 9B. OTHER INFORMATION

None.


127 /SERVICE EXCELLENCE


PART III



CP 2019 ANNUAL REPORT/ 128

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, 2019. This information will also be contained in the management proxy circular that we prepare in accordance with applicable Canadian corporate and securities law requirements.

Executive Officers of Registrant
The information regarding executive officers is included in Part I of this annual report under Information about our Executive Officers, 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, 2019.

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, 2019.


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, 2019. This information will also be contained in the management proxy circular that we prepare in accordance with applicable Canadian corporate and securities law requirements.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information
See Item 11 – “Executive Compensation—Equity Compensation Plan Information” for information regarding our equity compensation plans on page 50.
Beneficial Ownership Table
The table below sets forth the number and percentage of outstanding shares of our common stock beneficially owned by each person, or group of persons, known by Canadian Pacific based on publicly available information required by this Item will be contained in the Company’s Form 10-K/A, which will be filed no lateras of April 20, 2020, to own beneficially more than 120 days after December 31, 2019.five percent of our common stock, each of our directors, each of our NEOs and all directors and executive officers as a group.

         
Name of beneficial owner
1
  Shares of common stock
beneficially owned		   Percent of common stock
outstanding		 
John Baird
(a)
   —    — 
Isabelle Courville
(a)
   900    * 
Jill Denham
(a)
   0    — 
Edward Hamberger
(a)
   0    — 
Rebecca MacDonald
(a)
   0    — 
Edward Monser
(a)
   0    — 
Matthew Paull
(a)
   3,000    * 
Jane Peverett
(a)
   0    — 
Andrea Robertson
(a)
   0    — 
Gordon T. Trafton
(a)
   0    — 
Keith E. Creel
(b)(c)
   269,726    * 
John K. Brooks
(b)(d)
   24,142    * 
Robert A. Johnson
(b)(e)
   9,638    * 
Laird J. Pitz
(b)(f)
   6,041    * 
Mark A. Redd
(b)(g)
   6,534    * 
Nadeem S. Velani
(b)(h)
   23,419    * 
TCI Fund Management Limited
(i)
   10,978,084    8.09% 
All current executive officers and directors as a group
   420,737    * 

*
Represents less than one percent of the outstanding common stock.
(a)
See Directors’ Profiles in “Item 10. Directors, Executive Officers and Corporate Governance” above for disclosure with respect to DDSUs. The address of each director is c/o Canadian Pacific, 7550 Ogden Dale Road S.E., Calgary, Alberta, T2C 4X9.
(b)
See “Compensation Details – Deferred Compensation Plans” in Item 11. Executive Compensation, for disclosure with respect to NEO DSUs. The address of each executive officer is c/o Canadian Pacific, 7550 Ogden Dale Road S.E., Calgary, Alberta, T2C 4X9.
(c)
The shares of common stock owned by Mr. Creel are comprised of (i) 251,610 shares issuable upon the exercise of stock options that have vested or will vest within the next 60 days, and (ii) 18,116 shares held by Mr. Creel directly.
(d)
The shares of common stock owned by Mr. Brooks are comprised of (i) 22,051 shares issuable upon the exercise of stock options that have vested or will vest within the next 60 days, and (ii) 2,091 shares held by Mr. Brooks directly.
(e)
The shares of common stock owned by Mr. Johnson are comprised of 9,638 shares issuable upon the exercise of stock options that have vested or will vest within the next 60 days.
(f)
The shares of common stock owned by Mr. Pitz are comprised of (i) 5,964 shares issuable upon the exercise of stock options that have vested or will vest within the next 60 days, and (ii) 77 shares held by Mr. Pitz directly.
(g)
The shares of common stock owned by Mr. Redd are comprised of (i) 5,643 shares issuable upon the exercise of stock options that have vested or will vest within the next 60 days, and (ii) 891 shares held by Mr. Redd directly.
(h)
The shares of common stock owned by Mr. Velani are comprised of (i) 22,788 shares issuable upon the exercise of stock options that have vested or will vest within the next 60 days, and (ii) 631 shares held by Mr. Velani directly.
(i)
Based upon statements in the Schedule 13G/A filed by TCI Fund Management Limited (“TCI Fund”) and Christopher Hohn on February 14, 2020, TCI Fund and Mr. Hohn have (i) shared voting power over 10,978,084 shares of CP’s common stock; and (ii) shared dispositive power of 10,978,084 shares of CP’s common stock. The Children’s Investment Master Fund (“TCIF”) is the investment manager of TCI Fund and Talos Capital DAC (“Talos”). Mr. Hohn, as managing director of TCIF, may be deemed to beneficially own the shares held by the TCI Fund and Talos. The address of each of TCI Fund and Mr. Hohn is 7 Clifford Street, London W1S 2FT, United Kingdom.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related party transactions
Directors, officers and employees are required to report any related party transactions to comply with our code of business ethics.
In 2019, there were no transactions between CP and a related person as described in Item 404 of Regulation
S-K,
which defines a
related person
as:
a director, nominated director or executive officer of CP,
an immediate family member of a director, nominated director or executive officer, or
someone who beneficially owns more than 5% of our shares or a member of their immediate family.
Any director who has a material interest in a transaction or agreement involving CP must disclose the interest to the CEO and the Chair of the Board immediately, and does not participate in any discussions or votes on the matter.
The Board reviews related party transactions when it does its annual review of director independence. Our accounting and legal departments review any related party transactions reported by officers and employees.
Independence
The Board has adopted standards for director independence based on the criteria of the NYSE, SEC and CSA.
It reviews director independence continually and annually using director questionnaires as well as by reviewing updated biographical information, required by this Item will be contained inmeeting with directors individually, and conducting a comprehensive assessment of all business and other relationships and interests of each director with respect to CP and our subsidiaries. In 2019 and 2020, the Company’s Form 10-K/A, which will be filed no later than 120 days after December 31, 2019. This information will also be contained in the management proxy circularBoard determined that we prepareeach director, except for Mr. Creel, is independent in accordance with applicable Canadian corporatethe standards for independence established by the NYSE and securities law requirements.CSA. Mr. Creel is not independent because of his position as President and CEO.

The Board has also confirmed that each member of the Audit and Finance Committee meets the additional independence standards for audit committee members under Section 10A(m)(3) and Rule
10A-3(b)(1)
of the Exchange Act, and Section 1.5 of NI

52-110
audit committees.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information requiredtable below shows the fees we paid to Deloitte in 2019 and 2018 for audit and
non-audit
services.
         
For the year ended December 31  2019   2018 
Audit fees
for audit of our annual financial statements, reviews of quarterly reports and services relating to statutory and regulatory filings or engagements (including attestation services and audit or interim review of financial statements of certain subsidiaries and certain pension and benefits plans, and advice on accounting and/or disclosure matters)
  $3,576,300   $3,800,200 
Audit-related fees
for assurance and services related to the audit but not included in the audit fees above, including securities filings
  $169,700   $138,800 
Tax fees
for services relating to tax compliance, tax planning and tax advice
  $35,500   $121,000 
All other fees
for services provided relating to CP’s corporate sustainability report and training programs
  $90,500   $54,000 
Total
  $3,872,000   $4,114,000 
Pre-approval
of audit services and fees
The Audit Committee has a written policy for
pre-approving
audit and
non-audit
services 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, 2019. This information will also be contained in the management proxy circular that we prepareindependent auditor and their fees, in accordance with applicable Canadian corporatethe laws and requirements of stock exchanges and securities law requirements.regulatory authorities.


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The policy sets out the following governance procedures:
129 /SERVICE EXCELLENCE
the Audit and Finance Committee
pre-approves
the terms of the annual engagement of the external auditor
the Board
pre-approves
the fees for the annual engagement and budgeted amounts for the audit and the Audit and Finance Committee
pre-approves
the fees for
non-audit
services at least annually
the Vice-President, Financial Planning and Accounting submits reports at least quarterly to the Audit and Finance Committee listing the services that were performed or planned to be performed by the external auditor
any additional
non-audit
services to be provided by the external auditor that were not included in the list of
pre-approved
services or exceed the budgeted amount by more than 10% must each be
pre-approved
by the Audit and Finance Committee or the committee chair. The committee chair must report any additional
pre-approvals
at the next committee meeting
the Audit and Finance Committee reviews the policy as necessary to make sure it continues to reflect our needs
our chief internal auditor monitors compliance with the policy.
The Audit Committee or committee chair must be satisfied that any services it
pre-approves
will not compromise the independence of the external auditor. The committee
pre-approved
all services performed by the external auditor in 2019, in accordance with the policy.
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PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULE
 

Part IV (Item 15) of the 2019 Form
10-K
is hereby amended solely to add the following exhibits required to be filed in connection with this Amendment No. 1.
(b) Exhibits

PART IV



CP 2019 ANNUAL REPORT/ 130

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE

The following documents are filed as part of this annual 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)Beginning balance at January 1
Additions charged to expenses
Payments and other reductions
Impact of FX
Ending
balance at December 31
Accruals for personal injury and other claims provision(1)
2017$130
$66
$(77)$(1)$118
2018$118
$93
$(60)$1
$152
2019$152
$142
$(152)$(1)$141
Environmental liabilities
2017$85
$5
$(8)$(4)$78
2018$78
$6
$(7)$5
$82
2019$82
$6
$(8)$(3)$77

(1) Includes WCB, FELA, occupational, damage and other claims.

(c)
Exhibits

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
Description
Exhibit31.1*Description
3Articles of Incorporation and Bylaws:
CEO Rule 3.113a-14(a)
Restated Certificate and Articles of Incorporation of Canadian Pacific Railway Limited (incorporated by reference Certifications relating 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).
3.2
By-lawthis Amendment No. 1 as amended, of Canadian Pacific Railway Limited (incorporated by reference to Exhibit 1 to Canadian Pacific Railway Limited’son Form 6-K filed with the Securities and Exchange Commission on May 22, 2009, File No. 001-01342).10-K/A
3.3
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).
3.4
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).
4Instruments Defining the Rights of Security Holders, Including Indentures:
4.1
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).
4.2
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).
4.3
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).


131 /SERVICE EXCELLENCE


4.4
31.2*
CFO Rule Third Supplemental Indenture dated as of May 15, 2009 between Canadian Pacific Railway Company and The Bank of New York Mellon (incorporated by reference13a-14(a) Certifications relating to Exhibit 4.4 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, Filethis Amendment No. 001-01342).
4.5
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).
4.6
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).
4.7
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).
4.8
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).
4.9
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).
4.10
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).
4.11
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).
4.12
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).
4.13
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).
4.14
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).
4.15
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).
4.16
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).
4.17
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).
4.18
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).
4.19
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).
4.20
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).10-K/A
4.21
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).
4.22
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 2019 ANNUAL REPORT/ 132

4.23
104*
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).
4.24

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).
4.25
Officers’ Certificate of Canadian Pacific Railway Company dated March 13, 2019 (incorporated by reference to Exhibit 4.1 to Canadian Pacific Railway Limited’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on April 24, 2019, File No. 001-01342).
4.26 **
Description of Securities – Equity Securities
10Material Contracts:
10.1*
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).
10.2
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).
10.3*
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).
10.4*

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).
10.5*
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).
10.6*
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).
10.7
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).
10.8*
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).
10.9*
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).
10.10*
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).
10.11*
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).
10.12*
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).
10.13*
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).
10.14*
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).
10.15*
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).


133 /SERVICE EXCELLENCE


10.16*
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).
10.17*
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).
10.18*
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).
10.19*
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).
10.20*
Short Term 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).
10.21*
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).
10.22*
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).
10.23*
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).
10.24*
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).
10.25*
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).
10.26*
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).
10.27*
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).
10.28*
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).
10.29*
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).
10.30*
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).
10.31*
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).
10.32*
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).
10.33*
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).


CP 2019 ANNUAL REPORT/ 134

10.34*
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).
10.35*
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).
10.36*
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).
10.37*
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).
10.38*
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).
10.39*
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).
10.40*
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).
10.41*
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).
10.42*
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 10.38 to Canadian Pacific Railway Limited’s Form 10-K filed with the Securities and Exchange Commission on February 29, 2016, File No. 001-01342).
10.43*
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).
10.44*
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).
10.45
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).
10.46
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).
10.47
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).
10.48

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.
10.50
Amended and Restated Credit Agreement, dated as of September 27, 2019, 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 Current Report on Form 8-K filed with the Securities and Exchange Commission on October 1, 2019, File No. 001-01342)


135 /SERVICE EXCELLENCE


21.1**
Subsidiaries of the registrant
23.1**
Consent of Independent Registered Public Accounting Firm
24.1**
Power of attorney (included on the signature pages of this Form 10-K)
31.1**
CEO Rule 13a-14(a) Certifications
31.2**
CFO Rule 13a-14(a) Certifications
32.1**
CEO Section 1350 Certifications
32.2**
CFO Section 1350 Certifications
101.INS**Inline XBRL Instance Document
101.SCH**Inline XBRL Taxonomy Extension Schema Document
101.CAL**Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**Inline XBRL Taxonomy Extension Label Linkbase Document
101.DEF**Inline XBRL Taxonomy Extension Definition Linkbase Document
101.PRE**Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 **Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*		The following financial information from Canadian Pacific Railway Limited’s Annual Report
Filed with this Amendment No. 1 on Form 10-K for the year ended December 31, 2019, formatted in Extensible Business Reporting Language (XBRL) includes: (i) the Consolidated Statements of Income of each of the three years ended December 31, 2019, 2018, and 2017; (ii) the Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2019, 2018, and 2017; (iii) the Consolidated Balance Sheets at December 31, 2019 and 2018; (iv) the Consolidated Statements of Cash Flows for each of the three years ended December 31, 2019, 2018, and 2017; (v) the Consolidated Statements of Changes in Shareholders’ Equity for each of the three years ended December 31, 2019, 2018, and 2017; and (vi) the Notes to Consolidated Financial Statements.
10-K/A
* Management contract or compensatory arrangement
** Filed with this Annual Report on Form 10-K



ITEM 16.
FORM
10-K
SUMMARY
CP 2019 ANNUAL REPORT/ 136

ITEM 16. FORM 10-K SUMMARY

Not applicable.


Table of Contents

137 /SERVICE EXCELLENCE
SIGNATURES


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
President and Chief Executive Officer
Dated: February 20,April 29, 2020

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, 2019, 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 20,April 29, 2020.
SignatureTitle
Signature
*
Keith Creel
Title
/s/ KEITH CREELPresident, Chief Executive Officer and Director
Keith Creel(Principal (Principal Executive Officer)
/s/ NADEEM VELANI
Nadeem Velani
Executive Vice-President and Chief Financial Officer
Nadeem Velani(Principal (Principal Financial and Accounting Officer)
/s/ ISABELLE COURVILLE
*
Isabelle Courville
Chair of the Board of Directors
Isabelle Courville
*
John R. Baird
 
/s/ JOHN R. BAIRDDirector
John R. Baird
*
Gillian H. Denham
 
/s/ GILLIAN H. DENHAMDirector
Gillian H. Denham
*
Edward R. Hamberger
 
/s/ EDWARD R. HAMBERGERDirector
Edward R. Hamberger
*
 
/s/ REBECCA MACDONALDDirector
Rebecca MacDonald
*
Edward Monser
 
/s/ EDWARD L. MONSERDirector
Edward L. Monser
*
Matthew H. Paull
 
/s/ MATTHEW H. PAULLDirector
Matthew H. Paull    
*
Jane L. Peverett
 
/s/ JANE L. PEVERETTDirector
Jane L. Peverett
*
Andrea Robertson
 
/s/ ANDREA ROBERTSONDirector
Andrea Robertson
*
Gordon T. Trafton
 
/s/ GORDON T. TRAFTONDirector
Gordon T. Trafton
*By: 
/s/ NADEEM VELANI
Nadeem Velani
Attorney-in-Fact