Edgar Filing: CANADIAN PACIFIC RAILWAY LTD/CN

Title of Each Class

Name of Each Exchange on which Registered

Common Shares, without par value

New York Stock Exchange

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For fiscal year ended December 31, 2016



o	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)



Canada		98-0355078
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

7550 Ogden Dale Road S.E., Calgary, Alberta, Canada		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:

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

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

As of June 30, 2016 the last business day of the registrant'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 $17,823,874,921, 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 14, 2017, there were 146,366,093 shares of the registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement relating to registrant’s 2016 annual and special meeting of shareholders (the “Proxy Statement”) are incorporated by reference in Part III hereof.

CANADIAN PACIFIC RAILWAY LIMITED

FORM 10-K

TABLE OF CONTENTS



	PART I
		Page
Item 1.	Business	4
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
	Executive Officers of the Registrant	26

	PART II
Item 5.	Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of	28
	Equity Securities
Item 6.	Selected Financial Data	30
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	64
Item 8.	Financial Statements and Supplementary Data	65
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	117
Item 9A.	Controls and Procedures	117
Item 9B.	Other Information	119

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	120
Item 11.	Executive Compensation	120
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related	120
	Shareholder Matters
Item 13.	Certain Relationships and Related Transactions, and Director Independence	120
Item 14.	Principal Accounting Fees and Services	120

	PART IV
Item 15.	Exhibits, Financial Statement Schedule	121
	Signatures	127

PART I

ITEM 1. BUSINESS

Company Overview

Canadian Pacific Railway Limited (“CPRL”), together with its subsidiaries (“CP” or the “Company”), owns and operates a transcontinental freight railway in Canada and the United States (“U.S.”). CP's diverse business mix includes bulk commodities, merchandise freight and intermodal traffic over a network of approximately 12,400 miles, serving the principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia ("B.C."), and the U.S. Northeast and Midwest regions. For additional information regarding CP's network and geographical locations, refer to Item 2. Properties.

CPRL was incorporated on June 22, 2001, under the Canada Business Corporations Act and controls and owns all of the Common Shares of Canadian Pacific Railway Company (“CPRC”), which was incorporated in 1881 by Letters Patent pursuant to an Act of the Parliament of Canada. The Company’s registered, executive and corporate head office is located at 7550 Ogden Dale Road S.E., Calgary, Alberta T2C 4X9. CP's 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 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 driving change as it moves through its transformational journey to become the best railroad in North America while creating long-term value for shareholders. The Company is focused on providing customers with industry-leading rail service; driving sustainable, profitable growth; optimizing its assets; and reducing costs while remaining a leader in rail safety. Looking forward, CP continues to execute its strategic plan, focusing on turning productivity into service, and service into revenue growth.

CP’s strategic plan is centred on five key foundations, which are the Company’s performance drivers.

Provide Service: Providing efficient and consistent transportation solutions for the Company’s customers. “Doing what we say we are going to do” is what drives CP 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 sidings, improved asset utilization and increased train lengths, the Company is moving increased volumes with fewer locomotives and cars while unlocking capacity for future growth potential.

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

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

Business Developments

During the third quarter of 2016, the Company and Pershing Square Capital Management L.P. ("Pershing Square") completed a public offering of 9,840,890 of CP Common Shares held by certain funds managed by Pershing Square. CP did not sell any common shares in the offering and did not receive any of the proceeds from the offering of common shares by the funds managed by Pershing Square. After the closing of the sale, funds managed by Pershing Square no longer own any common shares of CP.

During the fourth quarter of 2015, CP proposed a business combination with Norfolk Southern Corporation (“NS”). While CP was firmly of the view that a business combination would deliver improved levels of service to customers and communities while enhancing competition and creating significant shareholder value, NS rejected CP’s proposal. On February 9, 2016, CP notified NS of its intent to submit a resolution to NS shareholders to ask their Board of Directors to engage in good faith discussions with CP regarding a business combination transaction involving CP and NS that would create a true end-to-end transcontinental railroad that would enhance competition, benefit the public and drive economic growth. However, on April 11, 2016, CP announced that it had terminated

efforts to merge with NS, including the withdrawal of a resolution asking NS shareholders to vote in favour of good-faith negotiations between the two companies. No further financial offers or overtures to meet with the NS board of directors are planned at this time.

Change in Executive Officers

On February 14, 2017, the Company appointed Mr. John Brooks as Chief Marketing Officer ("CMO").

On January 27, 2017, Mr. Mark Wallace began a leave of absence from the Company and no longer serves as Vice-President, Corporate Affairs and Chief of Staff of the Company.

On January 18, 2017, the Company announced Mr. Keith Creel as President and Chief Executive Officer ("CEO") of the Company, effective January 31, 2017, following the decision of Mr. E. Hunter Harrison to retire from CP.

On September 8, 2016, the Company announced the resignation of Mr. Mark J. Erceg from his position as Chief Financial Officer ("CFO") effective September 9, 2016. The Company appointed Mr. Nadeem Velani as Vice-President and interim CFO. Mr. Velani joined CP in March 2013 and most recently served as Vice-President, Investor Relations. On October 18, 2016, Mr. Velani was appointed Vice-President and CFO.

On April 20, 2016, the Company appointed Mr. Robert Johnson as Executive Vice-President, Operations.

Change in Board of Directors

As at January 31, 2017, Mr. E. Hunter Harrison resigned as a member of the Company’s Board of Directors.

On December 23, 2016, the Company announced the appointment of Mr. Gordon Trafton to CP's Board of Directors.

On December 14, 2016, the Company announced the appointment of Ms. Jane L. Peverett to CP's Board of Directors.

On September 6, 2016, the Company announced the appointment of Ms. Jill Denham and Mr. William R. Fatt to CP's Board of Directors. The Company also announced Mr. William Ackman's resignation from the Board of Directors.

On July 19, 2016, Dr. Anthony R. Melman resigned as a member of the Company’s Board of Directors.

On January 26, 2016, Mr. Paul C. Hilal resigned from the Board of Directors. Mr. Matthew H. Paull was appointed to the Company's Board of Directors on January 26, 2016 and is currently the Chair of the Audit Committee.

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 25 Segmented and geographic information.

Lines of Business

The Company transports bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, potash, fertilizers and sulphur. Merchandise freight consists of finished vehicles and machinery, as well as forest and industrial and consumer products. Intermodal traffic consists largely of retail goods in overseas containers that can be transported by train, ship and truck and in domestic containers and trailers that can be moved by train and truck.

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 2016:

In 2016, the Company generated freight revenues totalling $6,060 million ($6,552 million in 2015 and $6,464 million in 2014). The following charts compare the percentage of the Company’s total freight revenues derived from each of the three major business lines in 2016, 2015 and 2014:

BULK

The Company’s Bulk business represented approximately 44% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Bulk freight revenues by commodity business in 2016, 2015 and 2014:

Canadian Grain

The Company’s Canadian grain business represented approximately 36% of Bulk revenues, which is 16% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Canadian grain freight revenues generated from regulated grain and non-regulated grain transportation in 2016, 2015 and 2014:

Canadian grain transported by CP consists of both whole grains, such as wheat, corn, soybeans and canola, and processed products such as meals, oils and flour. This business is centred in the Canadian Prairies (Alberta, Saskatchewan and Manitoba), with grain shipped primarily west to the Port of Vancouver in British Columbia (B.C.), and east to the Port of Thunder Bay in Ontario for export. Grain is also shipped to the U.S., to Mexico, and to eastern Canada for domestic consumption.

Canadian grain includes a division of business that is regulated by the Canadian government through the Canada Transportation Act (“CTA”). This regulated business is subject to a maximum revenue entitlement (“MRE”). Under this regulation, railroads can set their own rates for individual movements. However, the MRE governs aggregate revenue earned by the railroad 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

The Company’s U.S. grain business represented approximately 19% of Bulk revenues, which is 8% of total freight revenues in 2016.

The following charts compare the percentage of the Company's U.S. grain freight revenues generated from wheat, soybeans, corn, durum, and other processed products in 2016, 2015 and 2014:

U.S. grain transported by CP consists of both whole grains, such as wheat, soybeans, corn, durum, and processed products such as meals, oils and flour. This business is centred in the states of North Dakota, South Dakota, Minnesota and Iowa. Export grain traffic from this producing region is shipped to ports at Duluth and Superior in Minnesota. In partnership with other railroads, CP also moves grain to export terminals in the U.S. Pacific Northwest and the Gulf of Mexico. Grain destined for domestic consumption

moves east via Chicago, Illinois, to the U.S. Northeast or is interchanged with other carriers to the U.S. Southeast, Pacific Northwest and Californian markets.

Coal

The Company’s Coal business represented approximately 22% of Bulk revenues, which is 10% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Coal freight revenues generated from Canadian and U.S. shipments in 2016, 2015 and 2014:

CP handles mostly metallurgical coal destined for export for use in the steelmaking process. CP’s Canadian coal traffic originates mainly from Teck Resource Limited’s mines in southeastern B.C. CP moves coal west from these mines to port terminals for export to world markets (Pacific Rim, Europe and South America), and east for the U.S. Midwest markets.

In the U.S., CP moves primarily thermal coal from connecting railways, serving the thermal coal fields in the Powder River Basin in Montana and Wyoming, which is delivered to power-generating facilities in the U.S. Midwest. CP also serves petroleum coke operations in Canada and the U.S., where the product is used for power generation and aluminum production.

Potash

The Company's Potash business represented approximately 12% of Bulk revenues, which is 6% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Potash freight revenues generated from domestic and export potash shipments in 2016, 2015 and 2014:

The Company’s Potash traffic moves mainly from Saskatchewan to offshore markets through the ports of Vancouver, Thunder Bay and Portland, Oregon, and to markets in the U.S. All potash shipments for export beyond Canada and the U.S. are marketed by Canpotex Limited, a joint venture among Saskatchewan’s potash producers. 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 11% of Bulk revenues, which is 4% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Fertilizers and sulphur freight revenues generated from wet fertilizers, dry fertilizers, and sulphur transportation in 2016, 2015 and 2014:

Dry fertilizers include: urea, nitrogen solutions, phosphate rock, phosphate fertilizers, ammonium nitrate and ammonium sulphate; wet fertilizers are primarily anhydrous ammonia. Nitrogen fertilizers (dry and wet) are produced at major facilities in Western Canada and shipped within Western Canada and to U.S. Midwest destinations. Phosphate fertilizers are produced in Western Canada or transported from the U.S.

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 34% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Merchandise freight revenue by commodity business in 2016, 2015 and 2014:

Merchandise products move in trains of mixed freight and in a variety of car types. Service involves delivering products to many different customers and destinations. In addition to traditional rail service, CP moves merchandise traffic through a network of truck-rail transload facilities, expanding the reach of CP's network to non-rail served facilities.

Forest Products

The Company’s Forest products business represented approximately 13% of Merchandise revenues, which is 5% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Forest products freight revenues generated from pulp and paper (wood pulp, paper, paperboard, newsprint), lumber and panel, and other shipments in 2016, 2015 and 2014:

Forest products traffic includes pulp and paper, and lumber and panel shipped from key producing areas in B.C., northern Alberta, northern Saskatchewan, Ontario and Quebec to destinations throughout North America.

Chemicals and Plastics

The Company’s Chemicals and plastics business represented approximately 35% of Merchandise revenues, which is 12% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Chemicals and plastics freight revenues generated from energy, biofuels, and chemicals and plastics shipments in 2016, 2015 and 2014:

Energy consists of commodities such as ethanol, liquefied petroleum gas (“LPG”), gasoline, diesel, condensate, asphalt, and lubricant oils. The majority of the Company’s western Canadian energy traffic originates in Saskatchewan and in the Alberta Industrial Heartland, Canada’s largest hydrocarbon processing region. The Bakken formation region in Saskatchewan and North Dakota is another source of condensate, LPG and natural gas liquids. Interchange with several rail interline partners gives the Company access to refineries and export facilities in the Pacific Northwest, Northeast U.S. and the Gulf Coast, as well as the Texas and Louisiana petrochemical corridor and port connections.

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

The Company’s chemical traffic includes products such as ethylene glycol, styrene, sulphuric acid, methanol, sodium chlorate, caustic soda and soda ash. These shipments originate from eastern Canada, Alberta, the U.S. Midwest and the Gulf of Mexico and move to end markets in Canada, the U.S. and overseas.

The most commonly shipped plastics products are polyethylene and polypropylene. Almost half of the Company’s plastics originate in central and northern Alberta and move to various North American destinations.

Crude

The Company's Crude business represented approximately 7% of Merchandise revenues, which is 2% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Crude freight revenues generated from Canadian and U.S. shipments in 2016, 2015 and 2014:

Crude moves from production facilities throughout Alberta, Saskatchewan and North Dakota. CP has connections to these production facilities as well as access to pipeline terminals. CP’s main crude destinations include terminals and refineries in the U.S. East Coast, Gulf Coast and West Coast on CP’s network and through established interline partnerships.

Metals, Minerals and Consumer Products

The Company’s Metals, minerals and consumer products business represented approximately 28% of Merchandise revenues, which is 9% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Metals, minerals and consumer products freight revenues generated from aggregates (sand and stone, and other aggregates), steel, food and consumer products and non-ferrous metals transportation in 2016, 2015 and 2014:

Sand and stone, and cement are the dominant aggregates. Frac sand, within sand and stone, originates at mines located along the Company’s network in Wisconsin and moves to a diverse set of shale formations across North America. The majority of the Company’s cement traffic is shipped directly from production facilities in Alberta, Iowa and Ontario to energy and construction projects in North Dakota, Alberta, Manitoba and the U.S. Midwest.

CP transports steel in various forms from mills in Ontario, Saskatchewan and Iowa to a variety of industrial users. The Company carries base metals such as copper, lead, zinc and aluminum. CP also moves ores from mines to smelters and refineries for processing, and the processed metal to automobile and consumer products manufacturers.

Consumer products traffic consists of a diverse mix of goods, including food products, building materials, packaging products and waste products.

Automotive

The Company’s Automotive business represented approximately 17% of Merchandise revenues, which is 6% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Automotive freight revenues generated by movements of finished vehicles from Canadian, U.S., Mexican, and overseas origins, machinery, and parts and other in 2016, 2015 and 2014:

CP’s Automotive portfolio consists of four finished vehicle traffic components: Canadian-produced vehicles that ship to the U.S. from Ontario production facilities; U.S.-produced vehicles that ship within the U.S. as well as cross border shipments to Canadian markets; vehicles from overseas that move through the Port of Vancouver to eastern Canadian markets; and Mexican-produced vehicles that ship to the U.S. and Canada. In addition to finished vehicles, CP ships machinery, pre-owned vehicles, and automotive parts. A comprehensive network of automotive compounds is utilized to facilitate final delivery of vehicles to dealers throughout Canada and in the U.S.

INTERMODAL

The Company’s Intermodal business represented approximately 22% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Intermodal freight revenues generated from domestic and international intermodal transportation in 2016, 2015 and 2014:

Domestic intermodal freight consists primarily of manufactured consumer products moved in 53-foot containers within North America. International intermodal freight moves in marine containers to and from ports and North American inland markets.

Domestic Intermodal

The Company’s Domestic intermodal business represented approximately 55% of Intermodal revenues, which is 12% of total freight revenues in 2016.

The following charts compare the percentage of the Company's Domestic intermodal freight revenues generated from Canada, U.S., and cross border transportation in 2016, 2015 and 2014:

CP’s Domestic intermodal business moves goods from a broad spectrum of industries including food, retail, less-than truckload, trucking and forest products as well as various other consumer-related products. Key service factors in Domestic intermodal include consistent on-time delivery, the ability to provide door-to-door service and the availability of value-added services. The majority of the Company’s Domestic intermodal business originates in Canada, where CP markets its services directly to retailers and manufacturers, providing complete door-to-door service and maintaining direct relationships with its customers. In the U.S., the Company’s service is delivered mainly through wholesalers.

International Intermodal

The Company’s International intermodal business represented approximately 45% of Intermodal revenues, which is 10% of total freight revenues in 2016.

The following charts compare the percentage of the Company's International intermodal freight revenues generated from the Port of Vancouver, the Port of Montreal and other ports in 2016, 2015 and 2014:

CP’s International intermodal business consists primarily of containerized traffic moving between the ports of Vancouver, Montreal and New York and inland points across Canada and the U.S. Import traffic from the Port of Vancouver is mainly long-haul business destined for eastern Canada and the U.S. Midwest and Northeast. CP works closely with the Port of Montreal, a major year-round East Coast gateway to Europe, to serve markets primarily in Canada and the U.S. Midwest. 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 2% of the Company's total freight revenues in 2016.

Non-freight Revenues

Non-freight revenues accounted for approximately 3% of the Company’s total revenues in 2016. Non-freight revenues are generated from leasing certain assets, switching fees, and other arrangements, including logistical services and contracts with passenger service operators.

Significant Customers

For each of the years ended December 31, 2016, 2015 and 2014, no customer comprised more than 10% of total revenues or accounts receivable.

Competition

The Company is subject to competition from other railways, motor carriers, ship and barge operators, and pipelines. Price is only one factor of importance as shippers and receivers choose a transportation service provider. Service is another factor and requirements, both in terms of transit time and reliability, vary by shipper and commodity. As a result, the Company’s primary competition varies by commodity, geographic location 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 railroads and deregulated motor carriers may exert pressure on price and service levels.

Seasonality

Volumes and revenues from certain goods are stronger during different periods of the year. First-quarter revenues are typically lower mainly due to winter weather conditions, closure of the Great Lakes ports and reduced transportation of retail goods. Second and third quarter revenues generally improve over 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. Net income is also influenced by seasonal fluctuations in customer demand and weather-related issues.

Regulations

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.

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

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

Various other regulators directly and indirectly affect the Company’s operations in areas such as health, safety, security, environmental and other matters.

Regulatory Change

On May 29, 2014, the Government of Canada enacted the Fair Rail for Grain Farmers Act (the “Fair Rail Act”). This legislation authorizes the federal cabinet to require the Company and CN to move a minimum amount of grain, which amount is determined by and may be adjusted by the federal cabinet. There is currently no minimum grain volume required by the federal cabinet. In addition, the Fair Rail Act expands the terms and conditions associated with the inter-switching provisions of the CTA in the provinces of Alberta, Saskatchewan and Manitoba, provides that the Agency make regulations specifying what constitutes operational terms that may be subject to service agreement arbitration, and gives the Agency the power to order a railway to compensate any person who has incurred expenses because of a failure to meet obligations under Sections 113 and 114 of the CTA, or does not meet its obligations under the terms of a confidential contract that includes a compensation clause. Further, the Fair Rail Act amends the Canada Grain Act to permit the regulation of contracts relating to grain and the arbitration of disputes respecting the provisions of those contracts.

After the tragic accident in Lac-Mégantic, Quebec, in July of 2013 involving a non-related short-line railroad, the Government of Canada implemented several measures pursuant to the Rail Safety Act (Canada) and the Transportation of Dangerous Goods Act (Canada). 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 February 20, 2015, the Government of Canada introduced Bill C-52 “An Act to amend the Canada Transportation Act and the Railway Safety Act”, which received Royal Assent on June 18, 2015, and is now in force. Bill C-52 sets out new minimum insurance requirements for federally regulated railways based on: amounts of crude and toxic inhalation hazards/poisonous inhalation hazards moved; imposes strict liability; limits railway liability to the minimum insurance level; mandates the creation of a fund of $250 million paid for by a levy on crude shipments, to be utilized for damages beyond $1 billion (in respect of CP); allows railways and insurers to have existing rights to pursue other parties (subrogation); and prevents shifting liability to shippers from railways except through written agreement. It is too soon for the Company to determine the impact that these amendments to the CTA and the RSA will have on the Company’s financial condition and results from operations.

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 retrofitting schedule for older tank cars used to transport flammable liquids. The development of the new tank car standard was done in coordination between Transport Canada, the U.S. Pipeline and Hazardous Materials Safety Administration (“PHMSA”) and the FRA. This announcement was followed by publishing the new tank car standard in Canada on May 20, 2015. The new tank car standards require new tanks used to move flammable liquids to have: top-fitting protection; thermal protection including a jacket; the use of 9/16 inch normalized steel for the tank car; full head shield; and improved bottom outlet valves. In the U.S., the new standards also included new operational protocols for trains transporting large volumes of flammable liquids such as the use of electronically controlled pneumatic (“ECP”) brakes for trains carrying 70 or more cars of flammable liquids, routing requirements, speed restrictions, and information for local government agencies. The U.S. rule also provides new sampling and testing requirements for the classification of energy products placed into transport. In Canada, operational protocols such as speed restrictions to 40 miles per hour in census metropolitan areas, crude sampling and testing requirements, and sharing information with municipal first

responders, had previously been implemented. CP does not own any tank cars used for commercial transportation of hazardous commodities.

On October 29, 2015, the Surface Transportation Extension Act of 2015 was signed into law. The law extends, by three years, the deadline for the U.S. rail industry to implement Positive Train Control (“PTC”), a set of highly advanced technologies designed to prevent train-to-train collisions, speed-related derailments, and other accidents caused by human error by determining the precise location, direction and speed of trains, warning train operators of potential problems, and taking immediate action if an operator does not respond. Legislation passed by the U.S. Congress in 2008 mandated that PTC systems be put into service by the end of 2015 on rail lines used to transport passengers or toxic-by-inhalation materials. The Surface Transportation Extension Act of 2015 extended the deadline to install and activate PTC to December 31, 2018, or, December 31, 2020 under certain circumstances, allowing the Company additional time to ensure safe and effective implementation of PTC on its rail network.

For further details on the capital expenditures associated with compliance with the PTC regulatory mandate, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

On December 4, 2015, the Fixing America’s Surface Transportation (“FAST”) Act was signed into law, representing the first long-term transportation legislation enacted in the U.S. in over a decade. The FAST Act contains key provisions on safety enhancements for tank cars moving flammable liquids in the U.S. and 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. While the law preserves PHMSA’s May 2015 final rule mandating ECP brakes on certain trains, it requires an independent evaluation of this braking technology and a real-world derailment test. The FAST Act further calls for the U.S. Secretary of Transportation to re-evaluate its ECP final rule within the next year using the results of this evaluation to determine whether ECP braking system requirements are justified.

Finally, the STB Reauthorization Act of 2015 was signed into law on December 18, 2015. The law requires numerous changes to the structure and composition of the STB, removing it from under the Department of Transportation 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. It is too soon for the Company to anticipate the impact that these changes and new investigative authorities might have on CP, since no arbitrations or, to CP's knowledge, investigations have been initiated under recently adopted rules implementing these laws.

Environmental Laws and Regulations

The Company’s operations and real estate assets are subject to extensive federal, provincial, state and local environmental laws and regulations governing emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. If the Company is found to have violated such laws or regulations, it could have a material adverse effect on the Company’s business or operating results. In addition, in operating a railway, it is possible that releases of hazardous materials during derailments or other accidents may occur that could cause harm to human health or to the environment. Costs of remediation, damages and changes in regulations could materially affect the Company’s operating results and reputation.

The Company has implemented an Environmental Management System to facilitate the reduction of environmental risk. CP's Annual Corporate Operations Environmental Plan states the current environmental goals, objectives and strategies.

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

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

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


•	protecting the environment;


•	ensuring compliance with applicable environmental laws and regulations;


•	promoting awareness and training;


•	managing emergencies through preparedness; and


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

Security

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

CP takes the following security measures:

•

CP employs its own police service that works closely with communities and other law enforcement and government agencies to promote railway safety and infrastructure security. As a railway law enforcement agency, CP Police Services are headquartered in Calgary, Alberta, 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 operate 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. The 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, and ensures that proper emergency responders are notified as well as governing bodies.

•

CP’s Security Management Plan is a comprehensive, risk-based plan modelled on and developed in conjunction with the security plan prepared by the Association of American Railroads post-September 11, 2001. Under this plan, CP routinely examines and prioritizes railroad assets, physical and cyber vulnerabilities, and threats, as well as tests and revises measures to provide essential railroad 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 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.

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, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). Also, filings made pursuant to Section 16 of the Securities Exchange Act of 1934 (“Exchange Act”) with the SEC by our executive officers, directors and other reporting persons with respect to the Company's Common Shares are made available free of charge, through our website. Our website also contains charters for 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 CEO and CFO certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as an Exhibit to this report.

ITEM 1A. RISK FACTORS

The risks set forth in the following risk factors could have a materially adverse effect on the Company's financial condition, results of operations, and liquidity, and could cause those results to differ materially from those expressed or implied in the Company's forward-looking statements.

The information set forth in this Item 1A. Risk Factors should be read in conjunction with the rest of the information included in this report, including Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.

As a common carrier, the Company is required by law to transport dangerous goods and hazardous materials, which could expose the Company to significant costs and claims. Railways, including CP, are legally required to transport dangerous goods and hazardous materials as part of their common carrier obligations regardless of risk or potential exposure to loss. CP transports dangerous goods and hazardous materials, including but not limited to crude oil, ethanol and TIH materials such as chlorine gas and anhydrous ammonia. A train accident involving hazardous materials could result in significant claims against CP arising from personal injury and property or natural resource damage, environmental penalties and remediation obligations. Such claims, if insured, could exceed the existing insurance coverage commercially available to CP, which could have a material adverse effect on CP’s financial condition and liquidity. CP is also required to comply with rules and regulations regarding the handling of dangerous goods and hazardous materials in Canada and the U.S. Noncompliance with these rules and regulations can subject the Company to significant penalties and could factor in litigation arising out of a train accident. Changes to these rules and regulations could also increase operating costs, reduce operating efficiencies and impact service delivery.

The Company is subject to significant governmental legislation and regulation over commercial, operating and environmental matters. The Company's railway operations are subject to extensive federal laws, regulations and rules in both Canada and the U.S. Operations are subject to economic and safety regulations in Canada primarily by the Agency and Transport Canada. The Company's U.S. operations are subject to economic and safety regulation by the STB and the FRA. Various other regulators directly and indirectly affect the Company's operations in areas such as health, safety, security, environmental and other matters. Additional economic regulation of the rail industry by these regulators or the Canadian and U.S. legislatures, whether under new or existing laws, could have a significant negative impact on the Company's ability to determine prices for rail services and result in a material adverse effect in the future on the Company's financial position, results of operations, and liquidity in a particular year or quarter. This potential material adverse effect could also result in reduced capital spending on the Company's rail network or in abandonment of lines.

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

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

Global economic conditions could negatively affect demand for commodities and other freight transported by the Company. A decline or disruption in domestic 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 results of operations, financial condition and liquidity. The Company faces significant competition for freight transportation in Canada and the U.S., including competition from other railways, pipelines, trucking and barge companies. Competition is based mainly on 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 railroads must use internal resources to build and maintain their rail networks. Competition with the trucking industry is generally based on freight rates, flexibility of service and transit time

performance. Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, or legislation that eliminates or significantly reduces the burden of the size or weight limitations currently applicable to trucking carriers, could have a material adverse effect on CP's results of operations, financial condition, and liquidity.

The operations of carriers with which the Company interchanges may adversely affect operations. The Company's ability to provide rail services to customers in Canada and the U.S. also depends upon its ability to maintain cooperative relationships with connecting carriers with respect to, among other matters, revenue division, car supply and locomotive availability, data exchange and communications, reciprocal switching, interchange, and trackage rights. Deterioration in the operations or services provided by connecting carriers, or in the Company's relationship with those connecting carriers, could result in CP's inability to meet customers' demands or require the Company to use alternate train routes, which could result in significant additional costs and network inefficiencies.

The availability of qualified personnel could adversely affect the Company's operations. Changes in employee demographics, training requirements, and the availability of qualified personnel, particularly locomotive engineers and trainpersons, could negatively impact the Company’s ability to meet demand for rail services. Unpredictable increases in the demand for rail services may increase the risk of having insufficient numbers of trained personnel, which could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. In addition, changes in operations and other technology improvements may significantly impact the number of employees required to meet the demand for rail services.

Strikes or work stoppages could adversely affect the Company's operations. Class I railroads are party to collective bargaining agreements with various labour unions. The majority of CP's employees belong to labour unions and are subject to these agreements. Disputes with regard to the terms of these agreements or the Company's potential inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns or lockouts, which could cause a significant disruption of the Company's operations and have a material adverse effect on the Company's results of operations, financial condition, and liquidity. Additionally, future national labour agreements, or provisions of labour agreements related to health care, could significantly increase the Company's costs for health and welfare benefits, which could have a material adverse impact on its financial condition and liquidity.

The Company may be subject to various claims and lawsuits that could result in significant expenditures. The Company by the nature of its operation is exposed to the potential for a variety of litigations, lawsuits and other claims, including personal injury claims, labour and employment, commercial and contract disputes, environmental liability, freight claims and property damage claims. In respect of workers' claims in Canada related to occupational health and safety, the Workers' Compensation Act (Canada) covers those matters. In the U.S., the Federal Employers' Liability Act ("FELA") is applicable to railroad employees. A provision for lawsuits or other claims will be accrued according to applicable accounting standards, reflecting the assessment of the actual damages incurred based upon the facts and circumstances known at the time. Any material changes to litigation trends, a catastrophic rail accident or series of accidents involving freight loss, property damage, personal injury, environmental liability or other significant matters could have a material adverse effect on the Company's results of operations, financial position, and liquidity, in each case, to the extent not covered by insurance.

The Company may be affected by acts of terrorism, war, risk of war, or regulatory changes to combat the risk of terrorism or war. CP plays a critical role in the North American transportation system, and therefore could become the target for acts of terrorism or war. CP is also involved in the transportation of hazardous materials, which could result in CP 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 losses 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 and result in increased costs, increased liabilities and decreased revenues, which could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity. Insurance maintained by the Company to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of the Company's damages or damages to others, and this insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of services, the Company may not be able to restore services without a significant interruption in operations.

The Company relies on technology and technological improvements to operate its business. Information technology is critical to all aspects of CP’s business. If the Company were to experience a significant disruption or failure of one or more of the information technology or communications systems (either a result of an intentional cyber or malicious act, or an unintentional error) it could result in service interruptions or other failures, misappropriation of confidential information and deficiencies, which could have a material adverse effect on the Company's results of operations, financial condition, and liquidity. If CP is unable to acquire or implement new technology, the Company may suffer a competitive disadvantage, which could also have an adverse effect on its results of operations, financial condition, and liquidity.

The state of capital markets could adversely affect the Company's liquidity. Weakness in the capital and credit markets could negatively impact the Company’s access to capital. From time to time, the Company relies on the capital markets to provide some of its capital requirements, including the issuance of long-term debt instruments and commercial paper. Significant instability or disruptions of the capital markets and the credit markets, or deterioration of the Company's financial condition due to internal or external factors could restrict or eliminate the Company's access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds. Instability or disruptions of the capital markets and deterioration of the Company's financial condition, alone or in combination, could also result in a reduction in the Company's credit rating to below investment grade, which could also further prohibit or restrict the Company from accessing external sources of short 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 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. The impacts of global climate change may affect the Company both directly and indirectly. There is potential for significant impacts on CP's infrastructure due to changes in temperature and precipitation as well as increases in extreme weather events such as flooding and storms. These changes 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. Government action to address climate change may involve both economic instruments such as carbon taxation as well as restrictions on economic sectors such as cap and trade. The Company is currently subject to carbon taxation systems in some of the jurisdictions in which it operates and there is a possibility that carbon taxation systems will be implemented within other jurisdictions in which CP operates in the future. As a significant consumer of diesel fuel, these carbon taxes increase the Company's business costs. While the Company is not currently subject to a cap on emissions, there is also a possibility in the future. Cap and trade programs or other government restrictions on certain market sectors can also impact current and potential customers including thermal coal and petroleum crude oil.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

CP provides rail and intermodal freight transportation services over a 12,400-mile track network, serving the principal business centres of Canada, from Montreal to Vancouver and the U.S. Midwest and Northeast regions. The Company's railway feeds directly into the U.S. heartland from the east and west coasts. Agreements with other carriers extend the Company's market reach east of Montreal in Canada, through the U.S. and into Mexico.

Network Geography

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

The Company’s network is composed of three primary corridors: Western, Central and Eastern.

The Western Corridor: Vancouver to Thunder Bay

Overview – The Western Corridor links Vancouver with Thunder Bay, which is the Western Canadian terminus of the Company’s Eastern Corridor. With service through Calgary, the Western Corridor is an important part of the Company’s routes between Vancouver and the U.S. Midwest, and between Vancouver and eastern Canada. The Western Corridor provides access to the Port of Thunder Bay, Canada’s primary Great Lakes bulk terminal.

Products – The Western Corridor is the Company’s primary route for bulk and resource products traffic from western Canada to the Port of Vancouver for export. CP also handles significant volumes of international intermodal containers and domestic general merchandise traffic.

Feeder Lines – CP supports its Western Corridor with four significant feeder lines: the “Coal Route”, which links southeastern B.C. coal deposits to the Western Corridor and to coal terminals at the Port of Vancouver; the “Edmonton-Calgary Route”, which provides rail access to Alberta’s Industrial Heartland (north of Edmonton, Alberta) in addition to the petrochemical facilities in central Alberta; the “Pacific CanAm Route”, which connects Calgary and Medicine Hat in Alberta with Pacific Northwest rail routes at Kingsgate, B.C. via the Crowsnest Pass in Alberta; and the “North Main Line Route” that provides rail service to customers between Portage la Prairie, Manitoba and Wetaskiwin, Alberta, including intermediate points Yorkton and Saskatoon in Saskatchewan. This line is an important collector of Canadian grain and fertilizer, serving the potash mines located east and west of Saskatoon and many high-throughput grain elevators and processing facilities. In addition, this line provides direct access to refining and upgrading facilities at Lloydminster, Alberta and western Canada’s largest pipeline terminal at Hardisty, Alberta.

Connections – The Company’s Western Corridor connects with the Union Pacific Railroad (“UP”) at Kingsgate and with BNSF at Coutts, Alberta, and at New Westminster and Huntingdon in B.C. This corridor also connects with CN at many locations including Thunder Bay, Winnipeg, Manitoba, Regina and Saskatoon in Saskatchewan, Red Deer, Camrose, Calgary and Edmonton in Alberta, Kamloops and several locations in the Greater Vancouver area in B.C.

Yards and Repair Facilities – CP supports rail operations on the Western Corridor with main rail yards at Vancouver, Calgary and Edmonton, Moose Jaw in Saskatchewan, Winnipeg and Thunder Bay. The Company has locomotive and railcar repair facilities at Golden, Vancouver, Calgary, Moose Jaw and Winnipeg. CP also has major intermodal terminals at Vancouver, Calgary, Edmonton, Regina and Winnipeg.

The Central Corridor: Moose Jaw and Winnipeg to Chicago and Kansas City

Overview – The Central Corridor connects with the Western Corridor at Moose Jaw and Winnipeg. By running south to Chicago and Kansas City, through the Twin Cities of Minneapolis and St. Paul, Minnesota, and through Milwaukee, Wisconsin, CP provides a direct, single-carrier route between western Canada and the U.S. Midwest, providing access to Great Lakes and Mississippi River ports. From La Crosse, Wisconsin, the Central Corridor continues south towards Kansas City via the Quad Cities (Davenport and Bettendorf in Iowa, and Rock Island and Moline in Illinois), providing an efficient route for traffic destined for southern U.S. and Mexican markets. CP’s Kansas City line also has a direct connection into Chicago and by extension to points east on CP’s network such as Toronto, Ontario and the Port of Montreal in Quebec.

Products – Traffic transported on the Central Corridor includes intermodal containers from the Port of Vancouver, fertilizers, chemicals, crude, automotive, grain and other agricultural products.

Feeder Lines – The Company has operating rights over BNSF between Minneapolis and 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; it 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 Newtown 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 and at Minot, North Dakota, and with UP at St. Paul and Mankato, Minnesota. CP connects with CN at Milwaukee and Chicago. At Kansas City, CP connects with Kansas City Southern (“KCS”), BNSF, Norfolk Southern Railway ("NS") and UP. CP’s Central Corridor also links to several short-line railways that primarily serve grain and coal producing areas in the U.S., and extend CP’s market reach in the rich agricultural areas of the U.S. Midwest.

Yards and Repair Facilities – The Company supports rail operations on the Central Corridor with main rail yards in Chicago, Milwaukee, St. Paul and Glenwood in Minnesota, and Mason City and Davenport (Nahant yard) in Iowa. In addition, CP has 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 DDG transload facility that complements the service offering in Chicago.

The Eastern Corridor: Thunder Bay to Montreal, Detroit and Albany

Overview – The Eastern Corridor extends from Thunder Bay through to its eastern terminus at Montreal and from Toronto to Chicago via Windsor, Ontario or Detroit. The Company’s Eastern Corridor provides shippers direct rail service from Toronto and Montreal to Calgary and Vancouver via the Company’s Western Corridor and to the U.S. via the Central Corridor. This is a key element of the Company’s transcontinental intermodal service. Other services include truck trailers moving in drive-on/drive-off Expressway service between Montreal and Toronto. The corridor also supports the Company’s market position at the Port of Montreal by providing one of the shortest rail routes for European cargo destined to the U.S. Midwest, using the CP-owned route between Montreal and Detroit, coupled with a trackage rights arrangement on NS tracks between Detroit and Chicago.

Products – Major traffic categories transported in the Eastern Corridor include forest, chemicals and plastics, crude, ethanol, metals, minerals and consumer products, intermodal containers, automotive products and general merchandise.

Feeder Lines – A major feeder line that serves the steel industry at Hamilton, Ontario provides connections and both CSX Corporation (“CSX”) and NS at Buffalo. The Delaware & Hudson Railway Company, Inc. ("D&H") feeder line extends from Montreal to Albany.

Connections – The Eastern Corridor connects with a number of short-line railways including routes from Montreal to Quebec City, Quebec and Montreal to St. John, New Brunswick and Searsport, Maine. Connections are also made with PanAm Southern at Mechanicville, New York for service to the Boston area and New England, and the Vermont Railway at Whitehall, New York. Through haulage arrangements, CP has service to Fresh Pond, New York to connect with New York & Atlantic Railway as well as direct access to the Bronx and Queens. CP can also access Philadelphia as well as a number of short-lines in Pennsylvania. Connections are also made with CN at a number of locations, including Sudbury, North Bay, Windsor, London, Hamilton and Toronto in Ontario, and Montreal in Quebec. CP connects in New York with NS and CSX at Buffalo, NS at Schenectady and CSX at Albany.

Yards and Repair Facilities – CP supports its rail operations in the Eastern Corridor with major rail yards at Sudbury, Toronto, London and Montreal. The Company has locomotive repair facilities at Montreal and Toronto and car repair facilities at Thunder Bay, Toronto and Montreal. The Company’s largest intermodal facility is located in the northern Toronto suburb of Vaughan and serves the Greater Toronto and southwestern Ontario areas. CP also operates intermodal terminals at Montreal and Detroit. Terminals for the Company’s Expressway service are located in Montreal and at Milton, Ontario, in the Greater Toronto area. 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 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 to authorize the movement of trains. CP is currently rolling out its PTC strategy for portions of its U.S. network.

In other corridors, train movements are directed by written instructions transmitted electronically and by radio from rail traffic controllers to train crews. In some specific areas of intermediate traffic density, CP uses an automatic block signalling system in conjunction with written instructions from rail traffic controllers.

Track and Infrastructure

CP operates on a network of approximately 12,400 miles of track, of which CP owns 10,800 miles and has access to 1,600 miles under trackage rights and lease agreements. The Company's owned track miles includes leases with wholly-owned subsidiaries where the term of the lease exceeds 99 years. CP also owns 1,100 miles of track operated by independent short-line railways. CP's track network represents the size of the Company's operations that connects markets, customers and other railroads. Of the total mileage operated, approximately 5,600 miles are located in western Canada, 2,000 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, 2016, the breakdown of CP operated track miles is as follows:



	Total
First main track	12,423
Second and other main track	1,199
Passing sidings and yard track	4,289
Industrial and way track	792
Total track miles	18,703

Rail Facilities

CP operates numerous facilities including: terminals for intermodal 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 fueling; maintenance and repairs of locomotives; and facilities for maintenance of freight cars and other equipment. Typically in all of our major yards, CP Police Services have offices to ensure the safety and security of the yards and operations.

The following table includes our major yards and terminals on CP's network:



Major Classification Yards	Major Intermodal Terminals
Vancouver, British Columbia	Vancouver, British Columbia
Calgary, Alberta	Calgary, Alberta
Edmonton, Alberta	Edmonton, Alberta
Moose Jaw, Saskatchewan	Regina, Saskatchewan
Winnipeg, Manitoba	Winnipeg, Manitoba
Toronto, Ontario	Vaughan, Ontario
Montreal, Quebec	Montreal, Quebec
Chicago, Illinois	Chicago, Illinois
St. Paul, Minnesota	St. Paul, Minnesota

Equipment

CP's equipment includes: owned and leased locomotives and railcars; heavy maintenance equipment and machinery; other equipment and tools in our shops, offices and facilities; and vehicles for maintenance, transportation of crews, and other activities.

The Company’s locomotive fleet is composed of largely high-adhesion alternating current locomotives that are more fuel-efficient and reliable and have superior hauling capacity, compared with standard direct current locomotives. As of December 31, 2016, the Company had 523 locomotives in storage; as a result, the Company does not foresee the need to acquire new locomotives for the next several years. As of December 31, 2016, CP owned or leased the following locomotive units:



Locomotives	Owned	Leased	Total	Average Age (in years)
Road freight
High-adhesion alternating current	784	43	827	13
Standard direct current	297	—	297	30
Road switcher	344	—	344	23
Yard switcher	22	—	22	36
Total locomotives	1,447	43	1,490	19

CP owns and leases a fleet of 37,429 freight cars. Owned freight cars include units acquired by CP, equipment leased to third parties, and held under capital leases. Leased freight cars include all units under a short-term or long-term operating lease or financed equipment. As of December 31, 2016, CP owned and leased the following units of freight cars:



Freight cars	Owned	Leased	Total	Average Age (in years)
Box car	2,402	542	2,944	32
Covered hopper	6,071	13,081	19,152	28
Flat car	1,556	693	2,249	24
Gondola	3,421	1,862	5,283	21
Intermodal	1,331	—	1,331	14
Multi-level autorack	2,879	641	3,520	29
Company service car	2,200	172	2,372	46
Open top hopper	344	32	376	31
Tank car	11	191	202	13
Total freight cars	20,215	17,214	37,429	28

As of December 31, 2016, CP owned and leased the following units of intermodal equipment:



Intermodal equipment	Owned	Leased	Total	Average Age (in years)
Containers	6,869	950	7,819	9
Chassis	5,026	794	5,820	13
Total intermodal equipment	11,895	1,744	13,639	11

Headquarters Office Building

CP owns and operates a multi-building campus in Calgary, encompassing the head office building, a data centre, training facility, and other office and operational buildings.

The Company's main dispatch centre is located in Calgary, and is the primary dispatching facility in Canada. Rail traffic controllers coordinate and dispatch crews, and manage the day-to-day locomotive management along the network, 24 hours a day, and seven days a week. The operations centre has a complete backup system in the event of any power disruption.

In addition to fully operational redundant systems, CP has a fully integrated Business Continuity Centre, should CP's operations centre be affected by any natural disaster, fire, cyber-attack, or hostile threat.

CP also maintains a secondary dispatch centre located in Minneapolis, where a facility similar to the one in Calgary exists. It services the dispatching needs of locomotives and train crews working out of the U.S.

Capital Expenditures

The Company incurs expenditures to expand and enhance its rail network, rolling stock and other infrastructure. These expenditures are aimed at improving efficiency and safety of our operations. Such investments are also an integral part of the Company's multi-year capital program and support growth initiatives. For further details, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

Encumbrances

Refer to Item 8. Financial Statements and Supplementary Data, Note 16 Debt, for information on the Company's capital lease obligations and assets held as collateral under these agreements.

ITEM 3. LEGAL PROCEEDINGS

For further details, refer to Item 8. Financial Statements and Supplementary Data, Note 23 Commitments and Contingencies.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers generally are elected and designated annually by the Board of Directors at its first meeting held after the annual meeting of shareholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate. There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. As of the date of this filing, the executive officers’ names, ages and business experience are:



Name, Age and Position	Business Experience
Keith Creel, 48 President and Chief Executive Officer	Mr. Creel became President and CEO of CP on January 31, 2017. Previously he was President and Chief Operating Officer ("COO") from February 5, 2013 to January 30, 2017. Prior to joining CP, Mr. Creel was Executive Vice-President and COO at CN from January 2010 to February 2013. During his time at CN, Mr. Creel held various positions including Executive Vice-President, Operations, Senior Vice-President Eastern Region, Senior Vice-President Western Region, and Vice-President of the Prairie Division. Mr. Creel began his railroad career at Burlington Northern Railway in 1992 as an intermodal ramp manager in Birmingham, Alabama. He also spent part of his career at Grand Trunk Western Railroad as a superintendent and general manager, and at Illinois Central Railroad as a trainmaster and director of corridor operations, prior to its merger with CN in 1999.
Robert A. Johnson, 55 Executive Vice-President, Operations	Mr. Johnson has been Executive Vice-President, Operations of CP since April 20, 2016. Previous to this appointment, Mr. Johnson was CP's Senior Vice-President Operations, Southern Region from June 2013 to April 2016. Prior to joining CP, Mr. Johnson's railroad career spanned 32 years with BNSF, where he held roles that progressively added to his responsibilities in operations, transportation, and service excellence. His most recent position at BNSF was General Manager, Northwest Division, overseeing day-to-day operations for that region.
Nadeem Velani, 44 Vice-President and Chief Financial Officer	Mr. Velani has been Vice-President and CFO of CP since October 19, 2016 and was the Vice-President, Investor Relations from October 28, 2015 and Assistant Vice-President, Investor Relations from March 11, 2013. Prior to joining CP, Mr. Velani spent 15 years at CN where he worked in a variety of positions in Strategic and Financial Planning, Investor Relations, Sales and Marketing, and the Office of the President and CEO. Mr. Velani holds an undergraduate degree in Economics from Western University and an MBA in Finance/International Business from McGill University.
John Brooks, 46 Senior Vice-President and Chief Marketing Officer	Mr. Brooks has been CP’s Vice-President and CMO since February 14, 2017. He has worked in senior marketing roles at CP since he joined the company in 2007, most recently as Vice-President, Marketing - Bulk and Intermodal. Mr. Brooks began his railroading career with UP and later helped start I&M Rail Link, LLC, which was purchased by DM&E in 2002. Mr. Brooks was Vice-President, Marketing at DM&E prior to it being acquired by CP in 2007. With more than 20 years in the railroading business, Mr. Brooks brings a breadth of experience to the CMO role that will be pivotal to CP's continued and future success.
James Clements, 47 Vice-President, Strategic Planning and Transportation Services	Mr. Clements has been CP's Vice-President, Strategic Planning and Transportation Services since 2015. Mr. Clements has responsibilities that include strategic network issues, joint facilities agreements, Network Service Centre operations, revenue planning and commercial policy. In addition, he has responsibility for CP Logistics and Transload Services. Mr. Clements has been at CP for 22 years and his previous experience covers a wide range areas of CP’s business including car management, finance, logistics, grain marketing and sales in both Canada and the U.S., as well as Marketing and Sales responsibility for various lines of business at CP. He has an MBA in International business and finance from McGill University and a B.Sc in Computer Science and Mathematics from McMaster University.



John E. Derry, 49 Vice-President, Human Resources	Mr. Derry has been Vice-President, Human Resources ("HR") of CP since October 2016, and was the Assistant Vice-President, HR from October 2014 to October 2016. Prior to joining CP, Mr. Derry has had a long history in the transportation industry, previously working with YRC Freight as Vice-President, Organizational Development and, prior to that, at KCS, where he served as Senior Vice-President, HR and Labour Relations. Mr. Derry holds an undergraduate degree in Leadership Management from Judson University in Elgin, Illinois, a master's in Organizational Development from Bowling Green State University in Bowling Green, Ohio and completed the Negotiation and Dispute Resolution program at Creighton University in Omaha, Nebraska.
Peter J. Edwards, 56 Vice-President, People	Mr. Edwards has been Vice-President, People at CP since October 2016. Prior to that he was the Vice-President, HR and Labour Relations from June 5, 2013 and was the Vice-President, HR and Industrial Relations from May 2010 to June 2013. Before joining CP, Mr. Edwards held senior human resources related positions at Labatt Breweries/Interbrew and CN. He has also co-authored two books on managing a changing railway (How We Work and Why and Change, Leadership, Mud and Why). Mr. Edwards also co-authored "SwitchPoints: Culture Change on the Fast Track to Business Success". Mr. Edwards holds a bachelor's and master's degree in Industrial Relations from Queen's University in Ontario.
Jeffrey J. Ellis, 49 Chief Legal Officer and Corporate Secretary	Mr. Ellis has been the Chief Legal Officer and Corporate Secretary of CP since November 23, 2015. Prior to joining CP, Mr. Ellis held various roles at BMO Financial Group, including Executive Vice-President and U.S. General Counsel from April 2013 to November 2015, Senior Vice-President, Deputy General Counsel and Assistant Corporate Secretary, Personal & Commercial U.S. from November 2011 to April 2013, and Vice-President, Deputy General Counsel and Assistant Corporate Secretary, Personal & Commercial Canada. Mr. Ellis has a JD and LLM from Osgoode Hall Law School, an MBA from the Richard Ivey School of Business at the University of Western Ontario and a BA and MA from the University of Toronto. Prior to joining BMO Financial Group, Mr. Ellis practiced corporate and commercial law at Borden Ladner Gervais LLP.
Mike Foran, 43 Vice-President, Market Strategy and Asset Management	Mr. Foran has been CP’s Vice-President, Market Strategy and Asset Management 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 19-plus 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 J. Redeker, 56 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 J. Pitz, 72 Vice-President and Chief Risk Officer	Mr. Pitz has been Vice-President and Chief Risk Officer of CP since October 29, 2014 and was 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 defense, logistics and transportation.

PART II

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

Share Price and Dividend Information

CP's Common Shares are listed on the TSX and on the NYSE under the symbol "CP". The tables below present, for the quarters indicated, information on the dividends declared and the high and low share price of CP's Common Shares. The decision to declare any future cash dividend, including the amount of any such dividend and the establishment of record and payment dates, will be determined, in each quarter, by the Company's Board of Directors, in its sole discretion.

The following table indicates share data of CP's Common Shares listed on the TSX (in Canadian dollars):



		Q1	Q2	Q3	Q4	YTD
2016	Dividends	$0.3500	$0.5000	$0.5000	$0.5000	$1.8500
	Common Share Price
	High	$178.83	$193.88	$203.29	$209.12	$209.12
	Low	$140.02	$156.01	$165.65	$186.21	$140.02

2015	Dividends	$0.3500	$0.3500	$0.3500	$0.3500	$1.4000
	Common Share Price
	High	$245.05	$241.73	$212.06	$204.40	$245.05
	Low	$205.95	$195.69	$172.01	$168.12	$168.12

The following table indicates share data of CP's Common Shares listed on the NYSE (in U.S. dollars):



		Q1	Q2	Q3	Q4	YTD
2016	Dividends	$0.2670	$0.3900	$0.3790	$0.3680	$1.4040
	Common Share Price
	High	$135.77	$151.38	$157.34	$156.71	$157.34
	Low	$97.09	$119.50	$127.02	$139.29	$97.09

2015	Dividends	$0.2800	$0.2840	$0.2640	$0.2520	$1.0800
	Common Share Price
	High	$194.66	$198.44	$163.39	$157.82	$198.44
	Low	$173.69	$158.04	$129.83	$122.27	$122.27

Share Capital

At February 14, 2017, the latest practicable date, there were 146,366,093 Common Shares and no preferred shares issued and outstanding, which consists of 14,931 holders of record of the Company's Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase CP Common Shares. Each option granted can be exercised for one Common Share. At February 14, 2017, 2.0 million options were outstanding under the Company’s MSOIP and stand-alone option agreements entered into with Mr. Keith Creel and former CEO, Mr. E. Hunter Harrison. There are 1.5 million options available to be issued by the Company’s MSOIP in the future.

CP has a Director's Stock Option Plan (“DSOP”), under which directors are granted options to purchase CP Common Shares. There are no outstanding options under the DSOP, which has 0.3 million options available to be issued in the future.

Securities Authorized for Issuance Under Equity Compensation Plans

For further details, refer to Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information about securities authorized for issuance under our equity compensation plan.

Stock Performance Graph

The following graph provides an indicator of cumulative total shareholder return on the Company’s Common Shares, of an assumed investment of $100, as compared to the TSX 60 Index (“TSX 60”), the Standard & Poor's 500 Stock Index (“S&P 500”), and the peer group index (comprising CN, KCS, UP, NS and CSX) on December 31 for each of the years indicated. The values for the assumed investments depicted on the graph and in the table have been calculated assuming that any dividends are reinvested.

Issuer Purchase of Equity Securities

During 2016, CP repurchased 6.9 million Common Shares for $1,210 million at an average price of $175.08. There were no Common Shares repurchased during each of the months for the fourth quarter of 2016.

For further details, refer to the Share repurchase section in Item 8. Financial Statements and Supplementary Data, Note 19 Shareholders' Equity.

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.



(in millions, except per share data, percentage and ratios)	2016			2015			2014			2013			2012
Financial Performance
Revenues	$	6,232		$	6,712		$	6,620		$	6,133		$	5,695
Operating income	2,578			2,688			2,339			1,420			949
Adjusted operating income⁽¹⁾	2,578			2,620			2,335			1,844			1,309
Net income	1,599			1,352			1,476			875			484
Adjusted income⁽¹⁾	1,549			1,625			1,482			1,132			753
Basic earnings per share ("EPS")	10.69			8.47			8.54			5.00			2.82
Diluted EPS	10.63			8.40			8.46			4.96			2.79
Adjusted diluted EPS⁽¹⁾	10.29			10.10			8.50			6.42			4.34
Dividends declared per share	1.8500			1.4000			1.4000			1.4000			1.3500
Financial Position
Total assets	$	19,221		$	19,637		$	16,550		$	16,680		$	14,433
Total long-term obligations⁽²⁾	8,737			9,012			5,712			4,747			4,696
Shareholders’ equity	4,626			4,796			5,610			7,097			5,097
Cash provided by operating activities	2,089			2,459			2,123			1,950			1,328
Free cash⁽¹⁾	1,007			1,381			969			774			316
Financial Ratios
Return on invested capital (“ROIC”)⁽¹⁾	14.4		%	12.9		%	14.4		%	10.1		%	7.3		%
Adjusted ROIC⁽¹⁾	14.0		%	15.2		%	14.5		%	12.3		%	10.0		%
Operating ratio⁽³⁾	58.6		%	60.0		%	64.7		%	76.8		%	83.3		%
Adjusted operating ratio⁽¹⁾	58.6		%	61.0		%	64.7		%	69.9		%	77.0		%


⁽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⁾	Excludes deferred income taxes of $3,571 million, $3,391 million, $2,717 million, $2,559 million and $1,838 million, and other non-financial deferred liabilities of $940 million, $991 million, $1,100 million, $898 million and $1,574 million at December 31, 2016, 2015, 2014, 2013 and 2012 respectively.


⁽³⁾	Operating ratio is defined as operating expenses divided by revenues.

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

INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS



	Page
Executive Summary	32
2017 Outlook	32
Performance Indicators	33
Results of Operations	34
Impact of Foreign Exchange on Earnings	36
Impact of Fuel Price on Earnings	37
Impact of Share Price on Earnings	37
Operating Revenues	38
Operating Expenses	44
Other Income Statement Items	47
Liquidity and Capital Resources	48
Non-GAAP Measures	51
Off-Balance Sheet Arrangements	58
Critical Accounting Estimates	59
Forward-Looking Information	62

The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes in Item 8. Financial Statements and Supplementary Data, and other information in this report. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

Executive Summary

2016 Results

•

Financial performance – In 2016, CP reported Diluted EPS of $10.63 while Adjusted diluted EPS climbed to a record $10.29, a 2% improvement compared to the Adjusted diluted EPS of $10.10 in 2015. CP’s commitment to operational efficiency produced a best-ever full-year operating ratio of 58.6%, beating the previous record set in 2015, despite a 7% decrease in revenue associated with challenging economic conditions. 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.

•

Free cash – In 2016, CP generated Free cash of $1.0 billion, a decrease of 27% over the prior year. The decrease was primarily driven by lower cash from operations and proceeds from the sale of D&H South in 2015, partially offset by lower capital expenditures. Free cash is defined and reconciled in Non-GAAP Measures and discussed further in Liquidity and Capital Resources of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

•

Operating performance – CP’s continued focus on asset utilization and productivity gains resulted in significant improvements to CP’s key operating metrics. In 2016, CP’s network train speed increased by 10% to 23.5 miles per hour, terminal dwell improved by 7% to 6.7 hours, and fuel efficiency improved by 2% to 0.980 U.S. gallons of locomotive fuel consumed per 1,000 gross ton-miles ("GTMs"). These metrics are discussed further in Performance Indicators of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.


•	Safety – The Company does not compromise safety for the sake of productivity gains. This relentless commitment to safety is demonstrated by CP’s safety statistics filed with the FRA. For 2016, CP’s FRA personal injuries frequency improved 11% and FRA train accidents per million train-miles frequency improved 27%, a new record for the Company.

2017 Outlook

For the full year 2017, CP expects Adjusted diluted EPS growth to be in the high single-digit percentages from full-year 2016 Adjusted diluted EPS of $10.29, excluding the impacts of any share repurchases or CEO transition cost recoveries in 2017. CP assumes that, in 2017, the Canadian-to-U.S. dollar exchange rate will be in the range of $1.30 to $1.35 and the average price of West Texas Intermediate ("WTI") crude oil will be approximately U.S. $45 to $55 per barrel. The Company expects a normalized income tax rate of approximately 26.50% for 2017. To further enhance safety and fluidity of the network, CP also plans to invest approximately $1.25 billion in capital programs in 2017, an increase of 6% over the $1.18 billion spent in 2016. Capital programs is 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 Information 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, it is not practicable to provide a reconciliation to a forward-looking reported diluted EPS, the most comparable GAAP measure, due to unknown variables and uncertainty related to future results. However, any such variability in reported diluted EPS may be excluded when determining Adjusted diluted EPS. Please see Forward-Looking Information of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Performance Indicators

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



				% Change
For the year ended December 31	2016	2015⁽¹⁾	2014⁽¹⁾	2016 vs. 2015		2015 vs. 2014
Operations Performance
Gross ton-miles (“GTMs”) (millions)	242,694	263,344	272,862	(8	)	(3	)
Train miles (thousands)	30,373	34,064	36,252	(11	)	(6	)
Average train weight – excluding local traffic (tons)	8,614	8,314	8,076	4		3
Average train length – excluding local traffic (feet)	7,217	6,935	6,682	4		4
Average terminal dwell (hours)	6.7	7.2	8.7	(7	)	(17	)
Average train speed (miles per hour, or "mph")	23.5	21.4	18.0	10		19
Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs)	0.980	0.999	1.035	(2	)	(3	)
Total employees (average)	12,082	13,858	14,604	(13	)	(5	)
Total employees (end of period)	11,653	12,817	14,255	(9	)	(10	)
Workforce (end of period)	11,698	12,899	14,385	(9	)	(10	)
Safety Indicators
FRA personal injuries per 200,000 employee-hours	1.64	1.84	1.67	(11	)	10
FRA train accidents per million train-miles	0.97	1.33	1.26	(27	)	6

⁽¹⁾ Certain figures have been updated to reflect new information or have been revised to conform with current presentation.

Operations Performance

A GTM is the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises of the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs for 2016 were 242,694 million, an 8% decrease compared with 263,344 million in 2015. This decrease was primarily driven by a drop in volume in the Crude, Potash, and Canadian Grain lines of business.

GTMs in 2015 decreased by 3% compared with 272,862 million in 2014. This decline was primarily due to a drop in volumes in the Intermodal, Crude and Metals, minerals and consumer products lines of business.

Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles for 2016 decreased by 11% compared with 2015 and in 2015 decreased by 6% compared with 2014, reflecting continuous improvements in operating efficiency from longer, heavier trains.

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 8,614 tons in 2016 increased by 300 tons, or 4%, from 2015.

The average train length is the sum of each car multiplied by the distance travelled, divided by train miles. Local trains are excluded from this measure. Average train length of 7,217 feet in 2016 increased by 282 feet, or 4%, from 2015.

Average train weight increased in 2015 by 238 tons, or 3%, from 2014. Average train length increased in 2015 by 253 feet, or 4%, from 2014.

Both average train weight and length in 2016 and 2015 benefited from improvements in operating plan efficiency and increased bulk traffic being conveyed in longer, heavier trains.

The average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving in 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 decreased by 7% in 2016 from 7.2 hours in 2015 to 6.7 hours in 2016. Average terminal dwell also decreased by 17% in 2015 to 7.2 hours from 8.7 hours in 2014. These favourable decreases were primarily due to continued improvements in yard operating performance.

The average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It is calculated by dividing the total train miles travelled by the total train hours operated. This calculation excludes delay time related to customer or foreign railways, and also 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 23.5 mph in 2016, an increase of 10%, from 21.4 mph in 2015. Average train speed in 2015 increased by 19%, from 18.0 mph in 2014. These favourable increases were primarily due to improved train design and operating plan execution.

Fuel efficiency improved by 2% in 2016 compared to 2015 and by 3% in 2015 compared to 2014. Improvements in fuel efficiency were a result of increased locomotive productivity, operational fluidity, and execution of the Company's fuel conservation strategies.

Total Employees and Workforce

An employee is defined by the Company as an individual currently engaged in full-time, part-time or seasonal employment with CP. The average number of total employees for 2016 decreased by 1,776, or 13%, compared with 2015. The total number of employees as at December 31, 2016 was 11,653, a decrease of 1,164, or 9%, compared with 12,817 in 2015. These decreases were primarily due to strong operational performance, natural attrition and efficient resource management planning.

The average number of total employees for 2015 decreased by 746, or 5%, compared with 2014. The total number of employees as at December 31, 2015 was 12,817, a decrease of 1,438, or 10%, compared with 14,255 in 2014. These improvements were primarily due to job reductions as a result of continuing strong operational performance and natural attrition.

The workforce is defined as total employees plus contractors and consultants. The workforce as at December 31, 2016 decreased by 1,201, or 9%, compared with December 31, 2015. The workforce as at December 31, 2015 also decreased by 1,486, or 10%, compared with December 31, 2014. These improvements were primarily due to strong operational performance, natural attrition and efficient resource management planning.

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. 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 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 1.64 in 2016, 1.84 in 2015 and 1.67 in 2014.

The FRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold of U.S. $10,500 in damage. The FRA train accidents per million train-miles for CP in 2016 was 0.97, compared with 1.33 in 2015 and 1.26 in 2014.

Results of Operations

Income

Operating income was $2,578 million in 2016, a decrease of $110 million, or 4%, from $2,688 million in 2015. This decrease was primarily due to:


•	lower traffic volumes;


•	the unfavourable impacts of fluctuations in fuel price;


•	a $68 million gain on sale of D&H South in 2015;


•	higher depreciation and amortization; and


•	higher wage and benefit inflation.

This decrease was partially offset by:


•	efficiencies generated from improved operating performance and asset utilization;


•	a change of $122 million in defined benefit pension plan from an expense of $32 million in 2015 to $90 million in income in 2016;


•	the favourable impact of the change in foreign exchange (“FX”) of $69 million; and


•	higher land sales.

Operating income was $2,688 million in 2015, an increase of $349 million, or 15%, from $2,339 million in 2014. This increase was primarily due to:


•	the favourable impact of the change in FX of $247 million;


•	efficiencies generated from improved operating performance and asset utilization;


•	the gain on sale of D&H South of $68 million;


•	lower share-based compensation primarily driven by the change in share price and lower incentive-based compensation;


•	lower fuel price; and


•	higher land sales.

This increase was partially offset by:


•	lower traffic volume;


•	a change of $84 million in defined benefit pension plan from $52 million in income in 2014 to an expense of $32 million in 2015;


•	higher wage and benefit inflation; and


•	higher casualty expenses as a result of more costly incidents.

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 $2,578 million in 2016, a decrease of $42 million, or 2%, from $2,620 million in 2015. This decrease was primarily due to the same factors discussed above for the decrease in Operating income, except that Adjusted operating income excluded the gain on sale of D&H South in 2015.

Adjusted operating income was $2,620 million in 2015, an increase of $285 million, or 12%, from $2,335 million in 2014. This increase was due to the same factors discussed above for the increase in Operating income except that Adjusted operating income excludes the gain on sale of D&H South in 2015.

Net income was $1,599 million in 2016, an increase of $247 million, or 18%, from $1,352 million in 2015. This increase was primarily due to the favourable impact of FX translation on U.S. dollar-denominated debt and a decrease in income tax expense due to the lower effective tax rate compared to 2015. This increase was partially offset by lower operating income and higher interest expense on new debt issued in 2015.

Net income was $1,352 million in 2015, a decrease of $124 million, or 8%, from $1,476 million in 2014. This decrease was primarily due to the unfavourable impact of FX translation on U.S. dollar-denominated debt and higher interest expense on new debt issued in 2015, partially offset by higher operating income.

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 $1,549 million in 2016, a decrease of $76 million, or 5%, from $1,625 million in 2015. This decrease was primarily due to a decrease in Adjusted operating income and higher interest expense on new debt issued in 2015, partially offset by a decrease in income tax expense due to the lower effective tax rate excluding significant items compared to 2015.

Adjusted income was $1,625 million in 2015, an increase of $143 million, or 10%, from $1,482 million in 2014. This increase was primarily due to an increase in Adjusted operating income, partially offset by higher interest expense on new debt issued in 2015 and increased income tax expense.

Diluted Earnings per Share

Diluted EPS was $10.63 in 2016, an increase of $2.23, or 27%, from $8.40 in 2015. This increase was primarily due to higher Net income and the lower average number of outstanding shares due to the Company's share repurchase program.

Diluted EPS was $8.40 in 2015, a decrease of $0.06, or 1%, from $8.46 in 2014. This decrease was primarily due to lower Net income, partially offset by the lower average number of outstanding 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 $10.29 in 2016, an increase of $0.19, or 2%, from $10.10 in 2015. This increase was primarily due to the lower average number of outstanding shares due to the Company’s share repurchase program, partially offset by lower Adjusted income.

Adjusted diluted EPS was $10.10 in 2015, an increase of $1.60, or 19%, from $8.50 in 2014. This increase was primarily due to higher Adjusted income and the lower average number of outstanding shares due to the Company’s share repurchase program.

Operating Ratio

The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s Operating ratio was 58.6% in 2016, a 140 basis point improvement from 60.0% in 2015. This improvement was primarily due to:


•	efficiencies generated from improved operating performance and asset utilization;


•	a change of $122 million in defined benefit pension plan from an expense of $32 million in 2015 to $90 million in income in 2016;


•	higher land sales of $32 million; and


•	the favourable impact of the change in FX of $69 million.

This improvement was partially offset by:


•	lower traffic volumes;


•	a $68 million gain on disposition of D&H South in 2015;


•	higher depreciation and amortization; and


•	higher wage and benefit inflation.

The Company’s Operating ratio was 60.0% in 2015, a 470 basis point improvement from 64.7% in 2014. This improvement was primarily due to:


•	the favourable impact of the change in FX of $247 million;


•	efficiencies generated from improved operating performance and asset utilization;


•	the gain on sale of D&H South;


•	lower share-based compensation primarily driven by the change in share price and lower incentive-based compensation;


•	lower fuel price; and


•	higher land sales.

This improvement was partially offset by:


•	lower traffic volume;


•	a change of $84 million in defined benefit pension plan from $52 million in income in 2014 to an expense of $32 million in 2015;


•	higher wage and benefit inflation; and


•	higher casualty expenses as a result of more costly incidents.

Adjusted operating ratio, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was 58.6% in 2016, a 240 basis point improvement from 61.0% in 2015. The improvement in Adjusted operating ratio reflects the same factors discussed above for the improvement in Operating ratio except that Adjusted operating ratio excludes the gain on sale of D&H South in 2015.

Adjusted operating ratio was 61.0% in 2015, a 370 basis point improvement from 64.7% in 2014. This improvement in Adjusted operating ratio reflects the same factors discussed above except that Adjusted operating ratio excludes the gain on sale of D&H South in 2015.

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 14.4% in 2016, a 150 basis point increase compared to 12.9% in 2015 due to higher income and the reduction in total Shareholders’ equity, primarily due to the Company's share repurchase program, partially offset by the issuance of long-term debt in 2015. ROIC was 12.9% in 2015, a 150 basis point decrease compared to 14.4% in 2014 due to the issuance of long-term debt in 2015, partially offset by the reduction in total Shareholders’ equity, primarily due to the Company's share repurchase program.

Adjusted ROIC was 14.0% at December 31, 2016, a 120 basis point decrease compared to 15.2% in 2015 due to lower Adjusted income and the issuance of long-term debt in 2015, partially offset by the reductions in total Shareholders’ equity as discussed above. Adjusted ROIC was 15.2% in 2015, a 70 basis point increase compared to 14.5% in 2014 due to higher Adjusted income and the reductions in total Shareholders’ equity as discussed above, partially offset by the issuance of long-term debt in 2015. 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 2016, the impact of a stronger U.S. dollar resulted in an increase in total revenues of $146 million, an increase in total operating expenses of $77 million and an increase in interest expense of $10 million.



Average exchange rates (Canadian to U.S. dollar)	2016		2015		2014
For the year ended – December 31	$	1.33	$	1.28	$	1.10
For the three months ended – December 31	$	1.33	$	1.34	$	1.13



Exchange rates (Canadian to U.S. dollar)	2016		2015		2014
Beginning of year – January 1	$	1.38	$	1.16	$	1.06
Beginning of quarter – April 1	$	1.30	$	1.27	$	1.11
Beginning of quarter – July 1	$	1.29	$	1.25	$	1.07
Beginning of quarter – October 1	$	1.31	$	1.33	$	1.12
End of quarter – December 31	$	1.34	$	1.38	$	1.16

In 2017, CP expects that for every $0.01 the U.S. dollar appreciates (depreciates) relative to the Canadian dollar, it will increase (decrease) revenues by $25 million, operating expenses by $13 million and 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. In 2016, the impact of lower fuel prices resulted in a decrease in total revenues of $178 million and a decrease in total operating expenses of $100 million. The wildfires in northern Alberta negatively impacted fuel input costs by an estimated $9 million without triggering a commensurate offsetting impact on benchmark fuel recovery prices during the second quarter of 2016.



Average Fuel Price (U.S. dollars per U.S. gallon)	2016		2015		2014
For the year ended – December 31	$	1.80	$	2.13	$	3.41
For the three months ended – December 31	$	2.01	$	1.91	$	3.11

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 CP Common Share Price on the TSX and the NYSE for the year ended December 31, 2016, 2015 and 2014.



Toronto Stock Exchange (in Canadian dollars)	2016		2015			2014
Opening Common Share price, as at January 1	$	176.73	$	223.75		$	160.65
Ending Common Share price, as at March 31	$	172.55	$	231.90		$	165.65
Ending Common Share price, as at June 30	$	166.33	$	200.02		$	193.31
Ending Common Share price, as at September 30	$	200.19	$	191.54		$	232.43
Ending Common Share price, as at December 31	$	191.56	$	176.73		$	223.75
Change in Common Share price for the year ended December 31	$	14.83	$	(47.02	)	$	63.10



New York Stock Exchange (in U.S. dollars)	2016		2015			2014
Opening Common Share price, as at January 1	$	127.60	$	192.69		$	151.32
Ending Common Share price, as at March 31	$	132.69	$	182.70		$	150.43
Ending Common Share price, as at June 30	$	128.79	$	160.23		$	181.14
Ending Common Share price, as at September 30	$	152.70	$	143.57		$	207.47
Ending Common Share price, as at December 31	$	142.77	$	127.60		$	192.69
Change in Common Share price for the year ended December 31	$	15.17	$	(65.09	)	$	41.37

In 2016, the impact of the change in Common Share price resulted in an increase in stock-based compensation expense of $9 million compared to a decrease of $36 million in 2015, and an increase of $46 million in 2014.

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



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change⁽²⁾		Total Change			% Change		FX Adjusted % Change⁽²⁾
Freight revenues (in millions)⁽¹⁾	$	6,060	$	6,552	$	6,464	$	(492	)	(8	)	(10	)	$	88		1		(7	)
Non-freight revenues (in millions)	172		160		156		12			8		7		4			3		—
Total revenues (in millions)	$	6,232	$	6,712	$	6,620	$	(480	)	(7	)	(9	)	$	92		1		(6	)
Carloads (in thousands)	2,525		2,628		2,684		(103		)	(4	)	N/A		(56		)	(2	)	N/A
Revenue ton-miles (in millions)	135,952		145,257		149,849		(9,305		)	(6	)	N/A		(4,592		)	(3	)	N/A
Freight revenue per carload (dollars)	$	2,400	$	2,493	$	2,408	$	(93	)	(4	)	N/A		$	85		4		N/A
Freight revenue per revenue ton-miles (cents)	4.46		4.51		4.31		(0.05		)	(1	)	N/A		0.20			5		N/A

⁽¹⁾Freight revenues include fuel surcharge revenues of $117 million in 2016, $293 million in 2015 and $637 million in 2014.

⁽²⁾FX Adjusted % Change does not have any standardized meaning prescribed by GAAP and, therefore is unlikely to be comparable to similar measures presented by other companies. FX adjusted variance is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

Freight Revenues

Freight revenues were $6,060 million in 2016, a decrease of $492 million, or 8%, from $6,552 million in 2015. This decrease was primarily due to lower volumes, as measured by RTMs, in Crude, Canadian grain, Potash, and Metals, minerals, and consumer products and the impact of lower fuel prices on fuel surcharge revenue.

This decrease was partially offset by higher volumes in International intermodal, Chemicals and plastics, and Forest products and the favourable impact of the change in FX of $146 million.

Freight revenues were $6,552 million in 2015, an increase of $88 million, or 1%, from $6,464 million in 2014. This increase was primarily due to the favourable impact of the change in FX of $549 million and an increase in Canadian grain revenue due to increased exports. This increase was partially offset by the impact of lower fuel prices on fuel surcharge revenue of $334 million, and lower volumes of Metals, mineral and consumer products and Crude.

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 2016 were 135,952 million, a decrease of 9,305 million, or 6%, compared with 145,257 million in 2015. This decrease was mainly attributable to decreased shipments of Crude, Canadian grain, Potash, and Metals, minerals and consumer products. This decrease was partially offset by increased shipments of International intermodal, Chemicals and Plastics, Forest products and U.S. grain.

RTMs for 2015 were 145,257 million, a decrease of 3% compared with 149,849 million in 2014. This decrease was primarily due to lower volumes of Crude, Metals, minerals and consumer products, and U.S. Grain. This decrease was partially offset by increased shipments of Potash, Canadian Grain, and Forest products.

Non-freight Revenues

Non-freight revenues were $172 million in 2016, an increase of $12 million, or 8%, from $160 million in 2015. This increase was primarily due to higher transload, leasing, and logistics services revenues.

Non-freight revenues were $160 million in 2015, an increase of $4 million, or 3%, from $156 million in 2014. This increase was primarily due to the favourable impact of the change in FX.

Lines of Business

Canadian Grain



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	962	$	1,068	$	988	$	(106	)	(10	)	(11	)	$	80		8		4
Carloads (in thousands)	270		285		291		(15		)	(5	)	N/A		(6		)	(2	)	N/A
Revenue ton-miles (in millions)	25,994		27,442		26,691		(1,448		)	(5	)	N/A		751			3		N/A
Freight revenue per carload (dollars)	$	3,559	$	3,750	$	3,391	$	(191	)	(5	)	N/A		$	359		11		N/A
Freight revenue per revenue ton-mile (cents)	3.70		3.89		3.70		(0.19		)	(5	)	N/A		0.19			5		N/A

Canadian grain revenue was $962 million in 2016, a decrease of $106 million, or 10%, from $1,068 million in 2015. This decrease was primarily due to a decline in volumes due to lower carryover from prior year and a weather delayed fall harvest, and lower freight rates that reflect the change in the MRE for Canadian regulated grain in the crop year 2015/2016. This decrease was partially offset by the favourable impact of the change in FX, and an increase in volumes due to a larger 2016/2017 crop.

Canadian grain revenue was $1,068 million in 2015, an increase of $80 million, or 8%, from $988 million in 2014. This increase was primarily due to higher freight rates, the favourable impact of the change in FX, and strong export volumes through the Port of Vancouver, partially offset by lower fuel surcharge revenue.

U.S. Grain



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	518	$	522	$	503	$	(4	)	(1	)	(5	)	$	19		4		(12	)
Carloads (in thousands)	162		157		173		5			3		N/A		(16		)	(9	)	N/A
Revenue ton-miles (in millions)	10,898		10,625		11,724		273			3		N/A		(1,099		)	(9	)	N/A
Freight revenue per carload (dollars)	$	3,202	$	3,326	$	2,909	$	(124	)	(4	)	N/A		$	417		14		N/A
Freight revenue per revenue ton-mile (cents)	4.75		4.91		4.29		(0.16		)	(3	)	N/A		0.62			14		N/A

U.S. grain revenue was $518 million in 2016, a decrease of $4 million, or 1%, from $522 million in 2015. The decrease was primarily due to the decrease in average freight revenue per revenue ton-mile, and lower fuel surcharge revenue as a result of lower fuel prices. The decrease was partially offset by the favourable impact of the change in FX, and increased volumes. The decrease in average freight revenue per revenue ton-mile was primarily due to a change in the mix of commodities being shipped.

U.S. grain revenue was $522 million in 2015, an increase of $19 million, or 4%, from $503 million in 2014. The increase was primarily due to the favourable impact of the change in FX, partially offset by a decrease in volumes of 9% primarily due to the reduction in export volumes, and lower fuel surcharge revenue.

Coal



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	606	$	639	$	621	$	(33	)	(5	)	(6	)	$	18		3		1
Carloads (in thousands)	305		323		313		(18		)	(6	)	N/A		10			3		N/A
Revenue ton-miles (in millions)	22,171		22,164		22,443		7			—		N/A		(279		)	(1	)	N/A
Freight revenue per carload (dollars)	$	1,984	$	1,978	$	1,985	$	6		—		N/A		$	(7	)	—		N/A
Freight revenue per revenue ton-mile (cents)	2.73		2.88		2.77		(0.15		)	(5	)	N/A		0.11			4		N/A

Coal revenue was $606 million in 2016, a decrease of $33 million, or 5%, from $639 million in 2015. This decrease was primarily due to the decline in U.S. thermal coal shipments, and lower fuel surcharge revenue as a result of lower fuel prices, partially offset by increased shipments of metallurgical coal, and the favourable impact of the change in FX. The decrease in freight revenue per revenue ton-mile is primarily due to the decrease in U.S. thermal coal, which has a shorter length of haul versus export metallurgical coal.

Coal revenue was $639 million in 2015, an increase of $18 million, or 3%, from $621 million in 2014. This increase was primarily due to the favourable impact of the change in FX and higher freight rates and volumes of U.S. originated thermal coal, partially offset by lower fuel surcharge revenue and a decline in volume in Canadian coal business.

Potash



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	338	$	359	$	347	$	(21	)	(6	)	(8	)	$	12		3		(4	)
Carloads (in thousands)	116		124		118		(8		)	(6	)	N/A		6			5		N/A
Revenue ton-miles (in millions)	14,175		15,117		14,099		(942		)	(6	)	N/A		1,018			7		N/A
Freight revenue per carload (dollars)	$	2,904	$	2,887	$	2,941	$	17		1		N/A		$	(54	)	(2	)	N/A
Freight revenue per revenue ton-mile (cents)	2.38		2.37		2.46		0.01			—		N/A		(0.09		)	(4	)	N/A

Potash revenue was $338 million in 2016, a decrease of $21 million, or 6%, from $359 million in 2015. This decrease was primarily due to a decline in export potash volumes, and lower fuel surcharge revenue as a result of lower fuel prices. Favourable impact of the change in FX, and an adjustment to freight rates for one customer for prior periods partially offset this decrease. The freight revenue per revenue ton-mile is essentially flat due to the adjustment to freight rates for one customer for prior periods, offset by decreases in export traffic revenue ton-miles.

Potash revenue was $359 million in 2015, an increase of $12 million, or 3%, from $347 million in 2014. This increase was primarily due to the favourable impact of the change in FX and an increase in volumes where growth in export Potash, which has a lower freight revenue per revenue ton-mile, outpaced domestic Potash growth.

Fertilizers and Sulphur



							2016 vs. 2015						2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change	Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	284	$	272	$	234	$	12		4		2	$	38		16		6
Carloads (in thousands)	60		62		61		(2		)	(3	)	N/A	1			2		N/A
Revenue ton-miles (in millions)	4,140		4,044		4,180		96			2		N/A	(136		)	(3	)	N/A
Freight revenue per carload (dollars)	$	4,769	$	4,410	$	3,801	$	359		8		N/A	$	609		16		N/A
Freight revenue per revenue ton-mile (cents)	6.87		6.71		5.59		0.16			2		N/A	1.12			20		N/A

Fertilizers and sulphur revenue was $284 million in 2016, an increase of $12 million, or 4%, from $272 million in 2015. This increase was primarily due to increased freight revenue per carload and the favourable impact of the change in FX, partially offset by lower fuel surcharge revenue as a result of lower fuel prices, and lower carloads. The increase in freight revenue per carload is primarily due to the increase in average length of haul for fertilizers.

Fertilizers and sulphur revenue was $272 million in 2015, an increase of $38 million, or 16%, from $234 million in 2014. This increase was primarily due to the favourable impact of the change in FX, higher freight rates and a shift in mix of traffic to fertilizers, which generally has higher freight rates than sulphur.

Forest Products



							2016 vs. 2015						2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change	Total Change		% Change	FX Adjusted % Change
Freight revenues (in millions)	$	275	$	249	$	206	$	26		10		7	$	43	21	8
Carloads (in thousands)	66		62		59		4			6		N/A	3		5	N/A
Revenue ton-miles (in millions)	4,691		4,201		3,956		490			12		N/A	245		6	N/A
Freight revenue per carload (dollars)	$	4,157	$	4,026	$	3,493	$	131		3		N/A	$	533	15	N/A
Freight revenue per revenue ton-mile (cents)	5.86		5.92		5.20		(0.06		)	(1	)	N/A	0.72		14	N/A

Forest products revenue was $275 million in 2016, an increase of $26 million, or 10%, from $249 million in 2015. This increase was primarily due to higher volumes, particularly of lumber and panel products, which have a longer length of haul than other forest products, and the favourable impact of the change in FX. Lower fuel surcharge revenue as a result of lower fuel prices partially offset this increase.

Forest products revenue was $249 million in 2015, an increase of $43 million, or 21%, from $206 million in 2014. This increase was primarily due to the favourable impact of the change in FX, improved pricing and a change in traffic mix to lumber and panel products, which generally have higher freight rates than pulp and paper.

Chemicals and Plastics



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change	FX Adjusted % Change
Freight revenues (in millions)	$	714	$	709	$	637	$	5		1		(3	)	$	72		11	(2	)
Carloads (in thousands)	212		203		198		9			4		N/A		5			3	N/A
Revenue ton-miles (in millions)	14,294		13,611		13,635		683			5		N/A		(24		)	—	N/A
Freight revenue per carload (dollars)	$	3,368	$	3,483	$	3,214	$	(115	)	(3	)	N/A		$	269		8	N/A
Freight revenue per revenue ton-mile (cents)	4.99		5.21		4.67		(0.22		)	(4	)	N/A		0.54			12	N/A

Chemicals and plastics revenue was $714 million in 2016, an increase of $5 million, or 1%, from $709 million in 2015. This increase was primarily due to an increase in volumes, and the favourable impact of the change in FX. Lower fuel surcharge revenue as a result of lower fuel prices, and lower average freight revenue per revenue ton-mile due to fewer liquefied petroleum gas product shipments, partially offset this increase.

Chemicals and plastics revenue was $709 million in 2015, an increase of $72 million, or 11%, from $637 million in 2014. This increase was primarily due to the favourable impact of the change in FX, partially offset by lower fuel surcharge revenue.

Crude



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	138	$	393	$	484	$	(255	)	(65	)	(66	)	$	(91	)	(19	)	(29	)
Carloads (in thousands)	38		91		110		(53		)	(58	)	N/A		(19		)	(17	)	N/A
Revenue ton-miles (in millions)	4,727		13,280		16,312		(8,553		)	(64	)	N/A		(3,032		)	(19	)	N/A
Freight revenue per carload (dollars)	$	3,646	$	4,309	$	4,419	$	(663	)	(15	)	N/A		$	(110	)	(2	)	N/A
Freight revenue per revenue ton-mile (cents)	2.93		2.96		2.97		(0.03		)	(1	)	N/A		(0.01		)	—		N/A

Crude revenue was $138 million in 2016, a decrease of $255 million, or 65%, from $393 million in 2015. This decrease was primarily due to a decline in volumes as a result of the fall in crude oil prices and an increase in available pipeline capacity, as well as lower fuel surcharge revenue as a result of lower fuel prices. The favourable impact of the change in FX partially offset this decrease.

Crude revenue was $393 million in 2015, a decrease of $91 million, or 19%, from $484 million in 2014. This decrease was primarily due to a decline in volume as a result of the fall in crude oil prices and lower fuel surcharge revenue, partially offset by the favourable impact of the change in FX.

Metals, Minerals and Consumer Products



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	564	$	643	$	712	$	(79	)	(12	)	(15	)	$	(69	)	(10	)	(20	)
Carloads (in thousands)	196		217		253		(21		)	(10	)	N/A		(36		)	(14	)	N/A
Revenue ton-miles (in millions)	8,338		9,020		11,266		(682		)	(8	)	N/A		(2,246		)	(20	)	N/A
Freight revenue per carload (dollars)	$	2,888	$	2,963	$	2,814	$	(75	)	(3	)	N/A		$	149		5		N/A
Freight revenue per revenue ton-mile (cents)	6.77		7.13		6.32		(0.36		)	(5	)	N/A		0.81			13		N/A

Metals, minerals and consumer products revenue was $564 million in 2016, a decrease of $79 million, or 12%, from $643 million in 2015. This decrease was primarily due to declines in the volume of aggregate products, steel, and waste products, and lower fuel surcharge revenue as a result of lower fuel prices, partially offset by the favourable impact of the change in FX. The decrease in average freight revenue per revenue ton-mile is primarily due to a change in mix of commodities.

Metals, minerals and consumer products revenue was $643 million in 2015, a decrease of $69 million, or 10%, from $712 million in 2014. This decrease was primarily due to declines in the volume of frac sand, steel and other aggregates traffic, partially offset by the favourable impact of the change in FX.

Automotive



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	350	$	349	$	357	$	1		—		(3	)	$	(8	)	(2	)	(11	)
Carloads (in thousands)	124		131		134		(7		)	(5	)	N/A		(3		)	(2	)	N/A
Revenue ton-miles (in millions)	1,667		1,750		1,953		(83		)	(5	)	N/A		(203		)	(10	)	N/A
Freight revenue per carload (dollars)	$	2,825	$	2,659	$	2,670	$	166		6		N/A		$	(11	)	—		N/A
Freight revenue per revenue ton-mile (cents)	21.02		19.97		18.26		1.05			5		N/A		1.71			9		N/A

Automotive revenue was $350 million in 2016, a slight increase of $1 million from $349 million in 2015. The increase in average freight rates and the favourable impact of the change in FX were offset by declines in volume, and lower fuel surcharge revenue as a result of lower fuel prices.

Automotive revenue was $349 million in 2015, a decrease of $8 million, or 2%, from $357 million in 2014. This decrease was primarily due to lower fuel surcharge revenue and lower volumes driven by weaker traffic to Western Canada, partially offset by the favourable impact of the change in FX.

Domestic Intermodal



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change			% Change		FX Adjusted % Change
Freight revenues (in millions)	$	721	$	757	$	787	$	(36	)	(5	)	(5	)	$	(30	)	(4	)	(6	)
Carloads (in thousands)	427		414		428		13			3		N/A		(14		)	(3	)	N/A
Revenue ton-miles (in millions)	11,992		12,072		11,867		(80		)	(1	)	N/A		205			2		N/A
Freight revenue per carload (dollars)	$	1,688	$	1,831	$	1,837	$	(143	)	(8	)	N/A		$	(6	)	—		N/A
Freight revenue per revenue ton-mile (cents)	6.01		6.27		6.63		(0.26		)	(4	)	N/A		(0.36		)	(5	)	N/A

Domestic intermodal revenue was $721 million in 2016, a decrease of $36 million, or 5%, from $757 million in 2015. This decrease was primarily due to lower fuel surcharge revenue as a result of lower fuel prices, and lower average freight revenue per revenue ton-mile as a result of fewer shipments using temperature controlled equipment. The favourable impact of the change in FX partially offset this decrease.

Domestic intermodal revenue was $757 million in 2015, a decrease of $30 million, or 4%, from $787 million in 2014. This decrease was primarily due to lower fuel surcharge revenue, partially offset by the favourable impact of the change in FX, and increased transcontinental traffic.

International Intermodal



							2016 vs. 2015							2015 vs. 2014
For the year ended December 31	2016		2015		2014		Total Change			% Change		FX Adjusted % Change		Total Change		% Change	FX Adjusted % Change
Freight revenues (in millions)	$	590	$	592	$	588	$	(2	)	—		(2	)	$	4	1	(5	)
Carloads (in thousands)	549		559		546		(10		)	(2	)	N/A		13		2	N/A
Revenue ton-miles (in millions)	12,865		11,931		11,723		934			8		N/A		208		2	N/A
Freight revenue per carload (dollars)	$	1,074	$	1,061	$	1,077	$	13		1		N/A		$	(16