Edgar Filing: CANADIAN PACIFIC RAILWAY LTD/CN

Average exchange rates (Canadian dollar/U.S. dollar)

For the three months ended – March 31

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended March 31, 2017


¨	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

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 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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange. 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 the close of business on April 18, 2017, there were 146,694,793 of the registrant’s Common Shares issued and outstanding.

CANADIAN PACIFIC RAILWAY LIMITED

FORM 10-Q

TABLE OF CONTENTS



	PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements:

	Interim Consolidated Statements of Income	3
	For the Three Months Ended March 31, 2017 and 2016

	Interim Consolidated Statements of Comprehensive Income	4
	For the Three Months Ended March 31, 2017 and 2016

	Interim Consolidated Balance Sheets	5
	At March 31, 2017 and December 31, 2016

	Interim Consolidated Statements of Cash Flows	6
	For the Three Months Ended March 31, 2017 and 2016

	Interim Consolidated Statements of Changes in Shareholders' Equity	7
	For the Three Months Ended March 31, 2017 and 2016

	Notes to Interim Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Executive Summary	24
	Performance Indicators	25
	Financial Highlights	27
	Results of Operations	27
	Liquidity and Capital Resources	35
	Share Capital	37
	Non-GAAP Measures	37
	Off-Balance Sheet Arrangements	43
	Contractual Commitments	43
	Critical Accounting Estimates	44
	Forward-Looking Information	46
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	48

	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50

PART I

ITEM 1. FINANCIAL STATEMENTS

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



	For the three months ended March 31
(in millions of Canadian dollars, except share and per share data)	2017			2016
Revenues
Freight	$	1,563		$	1,548
Non-freight	40			43
Total revenues	1,603			1,591
Operating expenses
Compensation and benefits (Note 9)	233			329
Fuel	170			125
Materials	49			56
Equipment rents	36			45
Depreciation and amortization	166			162
Purchased services and other (Note 4)	278			221
Total operating expenses	932			938

Operating income	671			653
Less:
Other income and charges (Note 5)	(28		)	(181		)
Net interest expense	120			124
Income before income tax expense	579			710
Income tax expense (Note 6)	148			170
Net income	$	431		$	540

Earnings per share (Note 7)
Basic earnings per share	$	2.94		$	3.53
Diluted earnings per share	$	2.93		$	3.51

Weighted-average number of shares (millions) (Note 7)
Basic	146.5			153.0
Diluted	147.1			153.8

Dividends declared per share	$	0.5000		$	0.3500

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



	For the three months ended March 31
(in millions of Canadian dollars)	2017			2016
Net income	$	431		$	540
Net gain in foreign currency translation adjustments, net of hedging activities	5			37
Change in derivatives designated as cash flow hedges	5			(47		)
Change in pension and post-retirement defined benefit plans	38			47
Other comprehensive income before income taxes	48			37
Income tax expense on above items	(18		)	(41		)
Other comprehensive income (loss) (Note 3)	30			(4		)
Comprehensive income	$	461		$	536

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED BALANCE SHEETS AS AT

(unaudited)



	March 31			December 31
(in millions of Canadian dollars)	2017			2016
Assets
Current assets
Cash and cash equivalents	$	201		$	164
Accounts receivable, net	631			591
Materials and supplies	201			184
Other current assets	77			70
	1,110			1,009
Investments	183			194
Properties	16,661			16,689
Goodwill and intangible assets	200			202
Pension asset	1,165			1,070
Other assets	78			57
Total assets	$	19,397		$	19,221
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities	$	1,148		$	1,322
Long-term debt maturing within one year	31			25
	1,179			1,347
Pension and other benefit liabilities	730			734
Other long-term liabilities	227			284
Long-term debt	8,583			8,659
Deferred income taxes	3,640			3,571
Total liabilities	14,359			14,595
Shareholders’ equity
Share capital	2,036			2,002
Additional paid-in capital	42			52
Accumulated other comprehensive loss (Note 3)	(1,769		)	(1,799		)
Retained earnings	4,729			4,371
	5,038			4,626
Total liabilities and shareholders’ equity	$	19,397		$	19,221

Contingencies (Note 11)

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



	For the three months ended March 31
(in millions of Canadian dollars)	2017			2016
Operating activities
Net income	$	431		$	540
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization	166			162
Deferred income taxes (Note 6)	67			93
Pension funding in excess of expense (Note 10)	(60		)	(42		)
Foreign exchange gain on long-term debt (Note 5)	(28		)	(181		)
Other operating activities, net	(85		)	(66		)
Change in non-cash working capital balances related to operations	(180		)	(288		)
Cash provided by operating activities	311			218
Investing activities
Additions to properties	(230		)	(278		)
Proceeds from sale of properties and other assets (Note 4)	3			60
Other	5			—
Cash used in investing activities	(222		)	(218		)
Financing activities
Dividends paid	(73		)	(54		)
Issuance of CP Common Shares	28			5
Repayment of long-term debt	(5		)	(11		)
Other	—			(2		)
Cash used in financing activities	(50		)	(62		)

Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	(2		)	(17		)
Cash position
Increase (decrease) in cash and cash equivalents	37			(79		)
Cash and cash equivalents at beginning of period	164			650
Cash and cash equivalents at end of period	$	201		$	571

Supplemental disclosures of cash flow information:
Income taxes paid	$	170		$	192
Interest paid	$	150		$	155

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)



(in millions of Canadian dollars except common share amounts)	Common shares (in millions)	Share capital		Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total shareholders’ equity
Balance at January 1, 2017	146.3	$	2,002	$	52		$	(1,799	)	$	4,371		$	4,626
Net income	—	—		—			—			431			431
Other comprehensive income (Note 3)	—	—		—			30			—			30
Dividends declared	—	—		—			—			(73		)	(73		)
Effect of stock-based compensation recovery	—	—		(3		)	—			—			(3		)
Shares issued under stock option plan	0.4	34		(7		)	—			—			27
Balance at March 31, 2017	146.7	$	2,036	$	42		$	(1,769	)	$	4,729		$	5,038
Balance at January 1, 2016	153.0	$	2,058	$	43		$	(1,477	)	$	4,172		$	4,796
Net income	—	—		—			—			540			540
Other comprehensive loss (Note 3)	—	—		—			(4		)	—			(4		)
Dividends declared	—	—		—			—			(54		)	(54		)
Effect of stock-based compensation expense	—	—		6			—			—			6
Shares issued under stock option plan	—	7		(1		)	—			—			6
Balance at March 31, 2016	153.0	$	2,065	$	48		$	(1,481	)	$	4,658		$	5,290

See Notes to Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(unaudited)

1 Basis of presentation

These unaudited interim consolidated financial statements of Canadian Pacific Railway Limited (“CP”, or “the Company”), expressed in Canadian dollars, reflect management’s estimates and assumptions that are necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America (“GAAP”). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2016 annual consolidated financial statements and notes included in CP's 2016 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 2016 annual consolidated financial statements, except for the newly adopted accounting policies discussed in Note 2.

CP's operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons.

In management’s opinion, the unaudited interim consolidated financial statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

2 Accounting Changes

Implemented in 2017

Compensation - Stock Compensation

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-based Payment Accounting, under FASB Accounting Standards Codification ("ASC") Topic 718. The amendments clarify the guidance relating to treatment of excess tax benefits and deficiencies, acceptable forfeiture rate policies, and treatment of cash paid by an employer when directly withholding shares for tax-withholding purposes and the requirement to treat such cash flows as a financing activity. As a result of this ASU, excess tax benefits are no longer recorded in Additional paid-in capital and instead are applied against taxes payable or recognized in the interim consolidated statement of income. This ASU was effective for CP beginning on January 1, 2017. The Company has determined that there were no significant changes to disclosure or financial statement presentation and changes in accounting for excess tax benefits and deficiencies were not material as a result of adoption.

Simplifying the Measurement of Inventory

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory under FASB ASC Topic 330. The amendments require that reporting entities measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using the first-in, first-out or average cost basis. This ASU was effective for CP beginning on January 1, 2017 and was applied prospectively. The Company determined there were no changes to disclosure, financial statement presentation, or valuation of inventory as a result of adoption.

Future changes

Leases

In February 2016, the FASB issued ASU 2016-02, Leases under FASB ASC Topic 842 which will supersede the lease recognition and measurement requirements in Topic 840 Leases. This new standard requires recognition of right-of-use assets and lease liabilities by lessees for those leases classified as finance and operating leases with a maximum term exceeding 12 months and will be effective for public entities for fiscal years, and interim periods within those years, beginning on or after December 15, 2018. For CP this will be effective commencing January 1, 2019. Entities are required to use a modified retrospective approach to adopt this new standard meaning there will be no impact to the consolidated statements of income, however, the comparative consolidated balance sheet will be adjusted to reflect the provisions of this standard. The Company has a detailed plan to implement the new standard and is assessing contractual arrangements, through a cross functional team, that may qualify as leases under the new standard. CP is also working with a vendor to implement a lease management system which will assist in delivering the required accounting changes. The impact of the new standard will be a material increase to right of use assets and lease liabilities on the consolidated balance sheet, primarily, as a result of operating leases currently not recognized on the balance sheet. The Company does not anticipate a material impact to the consolidated statement of income and is currently evaluating the impact adoption of this new standard will have on disclosure.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers under FASB ASC Topic 606. In March 2016, the FASB issued amendment ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations as an update under FASB ASC Topic 606. The amendments clarify the principal versus agent guidance in determining whether to recognize revenue on a gross or net basis. The guidance in Topic 606, as amended, will be effective for public entities for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. For CP this new standard will be effective commencing January 1, 2018, and CP has the option of adopting the new standard by either a full retrospective or a modified retrospective approach. CP has analyzed contracts for a significant proportion of the Company’s annual rail freight revenue, which represents greater than 95% of CP’s annual revenues, and has concluded that recognizing these revenues over time as rail freight services are performed continues to be appropriate. Further detailed reviews of a variety of specific contractual terms that could potentially represent additional performance obligations, reassessment of certain arrangements in the context of the new guidance on principal versus agent, and an assessment of required new disclosures is also currently being performed. CP is also continuing to assess whether to apply the full or modified retrospective adoption method on transition. At this time CP does not expect a material change to revenue recognition from adopting this standard.

Intangibles - Goodwill and Other

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment under FASB ASC Topic 350. This is intended to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments are effective for CP beginning on January 1, 2020. Entities are required to apply the amendments in this Update prospectively from the date of adoption. The Company does not anticipate that the adoption of this ASU will impact CP's financial statements as there is a sufficient excess between the fair value and carrying value of CP's goodwill. Furthermore CP expects to continue to apply the Step 0 qualitative assessment when testing for goodwill impairment.

Compensation - Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost under FASB ASC Topic 715. The amendments clarify presentation requirements for net periodic pension cost and net periodic post-retirement benefit cost and require that an employer report the current service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the consolidated statement of income separately from the current service cost component and outside a subtotal of income from operations if one is presented. The amendments also restrict capitalization to the current service cost component when applicable. The amendments are effective for CP beginning on January 1, 2018. The amendments related to presentation are required to be applied retrospectively and the restrictions on capitalization of the current service cost component are applicable prospectively on the date of adoption. Adoption of this ASU will result in a $67 million and $43 million decrease in operating income for the three months ended March 31, 2017 and 2016, respectively, and an estimated corresponding full year decrease of $272 million and $167 million for the years ended December 31, 2017 and 2016, respectively. There will be no change to net income or earnings per share as a result of adoption of this new standard. The new guidance restricting capitalization of pensions to the current service cost component of net periodic benefit cost will have no impact to operating income or amounts capitalized because the Company currently only capitalizes an appropriate portion of current service cost for self-constructed properties. CP is currently assessing the disclosure requirements of this ASU.

3 Changes in accumulated other comprehensive loss ("AOCL") by component



	For the three months ended March 31
(in millions of Canadian dollars)	Foreign currency net of hedging activities⁽¹⁾			Derivatives and other⁽¹⁾			Pension and post-retirement defined benefit plans⁽¹⁾			Total⁽¹⁾
Opening balance, January 1, 2017	$	127		$	(104	)	$	(1,822	)	$	(1,799	)
Other comprehensive (loss) income before reclassifications	(2		)	2			—			—
Amounts reclassified from accumulated other comprehensive loss	—			2			28			30
Net current-period other comprehensive (loss) income	(2		)	4			28			30
Closing balance, March 31, 2017	$	125		$	(100	)	$	(1,794	)	$	(1,769	)
Opening balance, January 1, 2016	$	129		$	(102	)	$	(1,504	)	$	(1,477	)
Other comprehensive (loss) income before reclassifications	(4		)	(36		)	—			(40		)
Amounts reclassified from accumulated other comprehensive loss	—			2			34			36
Net current-period other comprehensive (loss) income	(4		)	(34		)	34			(4		)
Closing balance, March 31, 2016	$	125		$	(136	)	$	(1,470	)	$	(1,481	)

⁽¹⁾Amounts are presented net of tax.

Amounts in Pension and post-retirement defined benefit plans reclassified from AOCL



	For the three months ended March 31
(in millions of Canadian dollars)	2017			2016
Amortization of prior service costs⁽¹⁾	$	(1	)	$	(2	)
Recognition of net actuarial loss⁽¹⁾	39			49
Total before income tax	38			47
Income tax recovery	(10		)	(13		)
Net of income tax	$	28		$	34

⁽¹⁾Impacts Compensation and benefits on the interim consolidated statements of income.

4 Disposition of properties

Gain on sale of Arbutus Corridor

In March 2016, the Company completed the sale of CP’s Arbutus Corridor (the “Arbutus Corridor”) to the City of Vancouver for gross proceeds of $55 million. The agreement allows the Company to share in future proceeds on the eventual development and/or sale of certain parcels of the Arbutus Corridor. The Company recorded a gain on sale of $50 million ($43 million after tax) within "Purchased services and other" from the transaction during the first quarter of 2016.

5 Other income and charges



	For the three months ended March 31
(in millions of Canadian dollars)	2017			2016
Foreign exchange gains on long-term debt	$	(28	)	$	(181	)
Net other foreign exchange gains	(1		)	(7		)
Other	1			7
Total other income and charges	$	(28	)	$	(181	)

6 Income taxes



	For the three months ended March 31
(in millions of Canadian dollars)	2017		2016
Current income tax expense	$	81	$	77
Deferred income tax expense	67		93
Income tax expense	$	148	$	170

The effective tax rate in the first quarter is 25.60%, compared to 23.89% for the same period in 2016.

The estimated 2017 annual effective tax rate for the first quarter, excluding the discrete items of the management transition recovery of $51 million related to the retirement of the Company's Chief Executive Officer and the foreign exchange gain of $28 million ($181 million in 2016) on the Company’s U.S. dollar-denominated debt, is 26.50%, one percent lower compared to 27.50% for the same period in 2016.

7 Earnings per share

At March 31, 2017, the number of shares outstanding was 146.7 million (March 31, 2016 - 153.0 million).

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

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



	For the three months ended March 31
(in millions)	2017	2016
Weighted-average basic shares outstanding	146.5	153.0
Dilutive effect of stock options	0.6	0.8
Weighted-average diluted shares outstanding	147.1	153.8

For the three months ended March 31, 2017, 502,000 options were excluded from the computation of diluted earnings per share because their effects were not dilutive (three months ended March 31, 2016 - 445,991 options).

8 Financial instruments

A. Fair values of financial instruments

The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy established by GAAP that prioritizes those inputs to valuation techniques used to measure fair value based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs, other than quoted prices included within Level 1, are observable for the asset or liability either directly or indirectly; and Level 3 inputs are not observable in the market.

When possible, the estimated fair value is based on quoted market prices and, if not available, estimates from third-party brokers. For non-exchange traded derivatives classified in Level 2, the Company uses standard valuation techniques to calculate fair value. Primary inputs to these techniques include observable market prices (interest, foreign exchange (FX) and commodity) and volatility, depending on the type of derivative and nature of the underlying risk. The Company uses inputs and data used by willing market participants when valuing derivatives and considers its own credit default swap spread as well as those of its counterparties in its determination of fair value.

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of approximately $9,958 million (December 31, 2016 - $9,981 million) and a carrying value of $8,614 million (December 31, 2016 - $8,684 million) at March 31, 2017. The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of interest and principal at estimated interest rates expected to be available to the Company at period end. All derivatives and long-term debt are classified as Level 2.

B. Financial risk management

Derivative financial instruments

Derivative financial instruments may be used to selectively reduce volatility associated with fluctuations in interest rates, FX rates, the price of fuel and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the interim consolidated balance sheets, commitments or forecasted transactions. At the time a derivative contract is entered into, and at least quarterly thereafter, an assessment is made as to whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.

It is not the Company’s intent to use financial derivatives or commodity instruments for trading or speculative purposes.

FX management

The Company conducts business transactions and owns assets in both Canada and the United States. As a result, the Company is exposed to fluctuations in value of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company may enter into FX risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. FX exposure is primarily mitigated through natural offsets created by revenues, expenditures and balance sheet positions incurred in the same currency. Where appropriate, the Company may negotiate with customers and suppliers to reduce the net exposure.

Net investment hedge

The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majority of the Company’s U.S. dollar denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on net income by offsetting long-term FX gains and losses on U.S. dollar denominated long-term debt and gains and losses on its net investment. The effective portion recognized in “Other comprehensive income (loss)” for the three months ended March 31, 2017 was an unrealized FX gain of $46 million (three months ended March 31, 2016 - unrealized FX gain of $308 million). There was no ineffectiveness during the three months ended March 31, 2017 (three months ended March 31, 2016 - $nil).

Interest rate management

The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a result of changes in market interest rates. In order to manage funding needs or capital structure goals, the Company enters into debt or capital lease agreements that are subject to either fixed market interest rates set at the time of issue or floating rates determined by ongoing market conditions. Debt subject to variable interest rates exposes the Company to variability in interest expense, while debt subject to fixed interest rates exposes the Company to variability in the fair value of debt.

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

Forward starting swaps

As at March 31, 2017, the Company had forward starting floating-to-fixed interest rate swap agreements (“forward starting swaps”) totaling a notional U.S. $700 million to fix the benchmark rate on cash flows associated with highly probable forecasted issuances of long-term notes. The effective portion of changes in fair value on the forward starting swaps is recorded in “Accumulated other comprehensive loss”, net of tax, as cash flow hedges until the highly probable forecasted notes are issued. Subsequent to the notes issuance, amounts in “Accumulated other comprehensive loss” are reclassified to “Net interest expense”.

During the second quarter of 2016, the Company rolled the notional U.S. $700 million forward starting swaps. The Company de-designated the hedging relationship for U.S. $700 million of forward starting swaps. The Company did not cash settle these swaps. There was no ineffectiveness to record upon de-designation.

Concurrently the Company re-designated the forward starting swaps totaling U.S. $700 million to fix the benchmark rate on cash

flows associated with a highly probable forecasted debt issuance of long-term notes.

As at March 31, 2017, the total fair value loss of $67 million (December 31, 2016 - fair value loss of $69 million) derived from the forward starting swaps was included in “Accounts payable and accrued liabilities”. Changes in fair value from the forward starting swaps for the three months ended March 31, 2017 was a gain of $2 million (three months ended March 31, 2016 - loss of $52 million). The effective portion for the three months ended March 31, 2017 was a gain of $2 million (three months ended March 31, 2016 - loss of $50 million) and is recorded in “Other comprehensive income”. For the three months ended March 31, 2017, the ineffective portion was a loss of $nil (three months ended March 31, 2016 - loss of $2 million) and is recorded to “Net interest expense” on the interim consolidated statements of income.

For the three months ended March 31, 2017, a loss of $3 million related to previous forward starting swap hedges has been amortized to “Net interest expense” (three months ended March 31, 2016 - a loss of $2 million). The Company expects that during the next 12 months $11 million of losses will be amortized to “Net interest expense”.

9 Stock-based compensation

At March 31, 2017, the Company had several stock-based compensation plans, including stock option plans, various cash settled liability plans and an employee stock savings plan. These plans resulted in a recovery for the three months ended March 31, 2017 of $12 million (three months ended March 31, 2016 - expense $14 million).

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

Effective January 31, 2017, pursuant to the separation agreement, Mr. Harrison forfeited certain pension and post-retirement benefits and agreed to the surrender for cancellation of 22,514 performance share units ("PSU"), 68,612 deferred share units ("DSU"), and 752,145 stock options.

As a result of this agreement, the Company has recognized a recovery of $51 million in "Compensation and benefits" in the first quarter of 2017. Of this amount, $27 million relates to a recovery from cancellation of certain pension benefits.

Stock option plan

In the three months ended March 31, 2017, under CP’s stock option plans, the Company issued 366,930 stock options at the weighted average price of $198.98 per share, based on the closing price on the grant date.

Pursuant to the employee plan, these stock options may be exercised upon vesting, which is between 12 months and 60 months after the grant date, and will expire after 7 years. Certain stock options granted in 2017 vest upon the achievement of specific performance criteria.

Under the fair value method, the value of the stock options at the grant date was approximately $17 million. The weighted average fair value assumptions were approximately:



	For the three months ended March 31, 2017
Grant price	$198.98
Expected option life (years)⁽¹⁾	5.48
Risk-free interest rate⁽²⁾	1.85%
Expected stock price volatility⁽³⁾	26.95%
Expected annual dividends per share⁽⁴⁾	$2.00
Expected forfeiture rate⁽⁵⁾	3.0%
Weighted-average grant date fair value per option granted during the period	$45.78


⁽¹⁾	Represents the period of time that awards are expected to be outstanding. Historical data on exercise behaviour, or when available, specific expectations regarding future exercise behaviour, were used to estimate the expected life of the option.


⁽²⁾	Based on the implied yield available on zero-coupon government issues with an equivalent remaining term at the time of the grant.


⁽³⁾	Based on the historical stock price volatility of the Company’s stock over a period commensurate with the expected term of the option.


⁽⁴⁾	Determined by the current annual dividend at the time of grant. The Company does not employ different dividend yields throughout the contractual term of the option.

⁽⁵⁾ The Company estimated forfeitures based on past experience. This rate is monitored on a periodic basis.

Performance share unit plan

In the three months ended March 31, 2017, the Company issued 133,448 PSUs with a grant date fair value of approximately $27 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s

Common Shares. PSUs vest and are settled in cash, or in CP Common Shares, approximately three years after the grant date, contingent upon CP’s performance ("performance factor"). Grant recipients who are eligible to retire and have provided six months of service during the performance period are entitled to the full award. The fair value of PSUs is measured periodically until settlement, using a lattice-based valuation model.

The performance period for PSUs issued in the three months ended March 31, 2017 is January 1, 2017 to December 31, 2019. The performance factors for these PSUs are Return on Invested Capital, Total Shareholder Return ("TSR") compared to the S&P/TSX Capped Industrial Index, and TSR compared to S&P 1500 Road and Rail Index.

The performance period for the PSUs issued in 2014 was January 1, 2014 to December 31, 2016. The performance factors for these PSUs were Operating Ratio, Free cash flow, TSR compared to the S&P/TSX 60 index, and TSR compared to Class 1 railways. The resulting payout was 118% of the Company's average share price that was calculated using the last 30 trading days preceding December 31, 2016. In the three months ended March 31, 2017, payouts occurred on the total outstanding awards, including dividends reinvested totaling $31 million on 133,728 outstanding awards.

Deferred share unit (“DSU”) plan

In the three months ended March 31, 2017, the Company granted 14,055 DSUs with a grant date fair value of approximately $3 million. DSUs vest over various periods of up to 48 months and are only redeemable for a specified period after employment is terminated. An expense to income for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods.

10 Pension and other benefits

In the three months ended March 31, 2017, the Company made contributions of $12 million (three months ended March 31, 2016 - $20 million) to its defined benefit pension plans. The elements of net periodic benefit cost for defined benefit pension plans and other benefits recognized in the quarter included the following components:



	For the three months ended March 31
	Pensions						Other benefits
(in millions of Canadian dollars)	2017			2016			2017		2016
Current service cost (benefits earned by employees in the period)	$	25		$	27		$	3	$	3
Interest cost on benefit obligation	113			117			5		5
Expected return on fund assets	(223		)	(212		)	—		—
Recognized net actuarial loss	38			48			1		1
Amortization of prior service costs	(1		)	(2		)	—		—
Net periodic benefit (recovery) cost	$	(48	)	$	(22	)	$	9	$	9

11 Contingencies

In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at March 31, 2017 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s financial position or results of operations.

Legal proceedings related to Lac-Mégantic rail accident

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

Following this incident, Québec's Minister of Sustainable Development, Environment, Wildlife and Parks (the "Minister") ordered the named parties to recover the contaminants and to clean up the derailment site. On August 14, 2013, the Minister added CP as a party (the “Amended Cleanup Order”). CP appealed the Amended Cleanup Order to the Administrative Tribunal of Québec. On July 5, 2016, the Minister served a Notice of Claim for nearly $95 million of compensation spent on cleanup, alleging that CP refused or neglected to undertake the work. On September 6, 2016, CP filed a contestation of the Notice of Claim with the Administrative Tribunal of Québec. In October 2016, CP and the Minister agreed to stay the tribunal proceedings pending the outcome of the Province of Québec's action, set out below. The Court's decision to stay the tribunal proceedings is pending, but de facto, the file has been suspended. Directly related to that matter, on July 6, 2015, the Province of Québec sued CP in Québec Superior Court claiming $409 million in derailment damages, including cleanup costs. The Province alleges that CP exercised custody or control over the crude oil lading and that CP was otherwise negligent. Therefore, CP is said to be solidarily (joint and severally) liable with

third parties responsible for the accident. The Province filed a motion for leave to amend its complaint in September 2016, but no date has been fixed for the hearing of this motion, as most of the Attorney General of Québec's lawyers were on strike at that time and until early March 2017. While the strike has ended, the Province has yet to further advance this motion. To date, no timetable governing the conduct of this lawsuit has been ordered by the Quebec Superior Court. This proceeding appears to be duplicative of the administrative proceedings.

A class action lawsuit has also been filed in the Québec Superior Court on behalf of persons and entities residing in, owning or leasing property in, operating a business in or physically present in Lac-Mégantic at the time of the derailment (the “Class Action”). That lawsuit seeks derailment damages, including for wrongful death, personal injury, and property harm. On August 16, 2013, CP was added as a defendant. On May 8, 2015, the Québec Superior Court authorized (certified) the Class Action against CP, the shipper – Western Petroleum, and the shipper’s parent – World Fuel Services (collectively, the “World Fuel Entities”). The World Fuel Entities have since settled. The plaintiffs filed a motion for leave to amend their complaint, but subsequently withdrew it.

On October 24, 2016, the Quebec Superior Court authorized class action proceedings against two additional defendants in the same matter discussed above, i.e. against MMAC and Mr. Thomas Harding. On December 9, 2016, the Superior Court granted CP’s motion seeking to confirm the validity of the opt-outs from this class action by most of the estates of the deceased parties following the train derailment who had opted out to allow them to sue in the United States instead (i.e. the wrongful death cases, filed in the United States, which are further discussed). Draft Case Protocols setting out proposed timetables for the conduct of this lawsuit were submitted to the Superior Court in mid-March 2017 by both the plaintiffs and defendants. On March 27, 2017 the Superior Court adopted several of the steps included in the Case Protocol submitted by CP. Under the Case Protocol, CP’s statement of defense will be submitted by June 2 and thereafter production of documents, examinations for discovery and the exchange of expert reports by the parties is to occur between mid-2017 and the end of 2018. A trial date has yet to be fixed.

On July 4, 2016, eight subrogated insurers served CP with claims of approximately $16 million. On July 11, 2016, two additional subrogated insurers served CP with claims of approximately $3 million. The lawsuits do not identify the parties to which the insurers are subrogated, and therefore the extent of claim overlap and the extent that claims will be satisfied after proof of claim review and distribution from the Plans, referred to below, is difficult to determine. These lawsuits have been stayed until June 2, 2017.

In the wake of the derailment and ensuing litigation, MMAC filed for bankruptcy in Canada (the “Canadian Proceeding”) and MMA filed for bankruptcy in the United States (the “U.S. Proceeding”). Plans of arrangement have been approved in both the Canadian Proceeding and the U.S. Proceeding (the “Plans”). These Plans provide for the distribution of a fund of approximately $440 million amongst those claiming derailment damages. The Plans also provide settling parties broadly worded third-party releases and injunctions preventing lawsuits against settlement contributors. CP has not settled and therefore will not benefit from those provisions. Both Plans do, however, contain judgment reduction provisions, affording CP a credit for the greater of (i) the settlement monies received by the plaintiff(s), or (ii) the amount, in contribution or indemnity, that CP would have been entitled to charge against third parties other than MMA and MMAC, but for the Plans' releases and injunctions. CP may also have judgment reduction rights, as part of the contribution/indemnification credit, for the fault of the MMA Group. Finally, the Plans provide for a potential re-allocation of the MMA Group’s liability among plaintiffs and CP, the only non-settling party.

An Adversary Proceeding filed by the MMA U.S. bankruptcy trustee (now, estate representative) against CP, Irving Oil, and the World Fuel Entities accuses CP of failing to ensure that World Fuel Entities or Irving Oil properly classified the oil lading and of not refusing to ship the misclassified oil as packaged. By that action the estate representative seeks to recover MMA’s going concern value supposedly destroyed by the derailment. The estate representative has since settled with the World Fuel Entities and Irving Oil and now bases CP misfeasance on the railroad’s failure to abide in North Dakota by a Canadian regulation. That regulation supposedly would have caused the railroads to not move the crude oil train because an inaccurate classification was supposedly suspected. In a recently amended complaint, the estate representative named a CP affiliate, Soo Line Railroad Company ("Soo Line"), and asserts that CP and Soo Line breached terms or warranties allegedly contained in the bill of lading. CP’s motion to dismiss this amended complaint was heard on December 20, 2016 and a decision is pending.

In response to one of CP’s motions to withdraw the Adversary Proceedings bankruptcy reference, the estate representative maintained that Canadian law rather than U.S. law controlled. The Article III court that heard the motion found that if U.S. federal regulations governed, the case was not complex enough to warrant withdrawal. Before the bankruptcy court, CP moved to dismiss for want of personal jurisdiction, but the court denied the motion because CP had participated in the bankruptcy proceedings.

Lac-Mégantic residents and wrongful death representatives commenced a class action and a mass action in Texas and wrongful death and personal injury actions in Illinois and Maine. CP removed all of these lawsuits to federal court, and a federal court thereafter consolidated those cases in Maine. These actions generally charge CP with misclassification and mis-packaging (that is, using inappropriate DOT-111 tank cars) negligence. On CP's motion, the Maine court dismissed all wrongful death and personal injury actions on several grounds on September 28, 2016. The plaintiffs’ subsequent motion for reconsideration was denied on January 9, 2017. The plaintiffs filed a notice of appeal on January 19, 2017. The appeal has yet to be docketed by the appellate court. Once docketed, and if not dismissed by the appellate court on its own motion, CP will file a motion to dismiss the appeal. If the ruling is upheld on appeal these cases will be litigated, if anywhere, in Canada. As previously mentioned, many of these plaintiffs had previously opted-out of the Quebec Class Action in order to bring their claims in the United States. CP brought a motion on December 1, 2016 to seek a declaration from the Quebec Superior Court that the plaintiffs who had opted out were precluded from opting back into the Quebec Class Action. CP’s motion was successful. Accordingly, if these plaintiffs seek to sue CP, they would have to do so in Quebec in individual actions (they could also join their individual claims in the same individual action).

CP has received two damage to cargo notices of claims from the shipper of the oil, Western Petroleum. Western Petroleum submitted U.S. and Canadian notices of claims for the same damages and under the Carmack Amendment (49 U.S.C. Section 11706) Western

Petroleum seeks to recover for all injuries associated with, and indemnification for, the derailment. Both jurisdictions permit a shipper to recover the value of damaged lading against any carrier in the delivery chain, subject to limitations in the carrier’s tariffs. CP’s tariffs significantly restrict shipper damage claim rights. Western Petroleum is part of the World Fuel Services Entities, and those companies settled with the trustee. In settlements with the estate representative the World Fuel Services Entities and the consignee (Irving Oil) assigned all claims against CP, if any, including Carmack Amendment claims. The estate representative has since designated a trust formed for the benefit of the wrongful death plaintiff to pursue those claims.

On April 12, 2016, the Trustee (the “WD Trustee”) for a wrongful death trust (the “WD Trust”), as defined and established under the confirmed Plans, sued CP in North Dakota federal court, asserting Carmack Amendment claims. The WD Trustee maintains that the estate representative assigned Carmack Amendment claims to the WD Trustee. The Plan supposedly gave the estate representative Carmack Amendment assignment rights. The WD Trustee seeks to recover amounts for damaged rail cars (approximately $6 million), and the settlement amounts the consignor (i.e., the shipper, the World Fuel Entities) and the consignee (Irving Oil) paid to the bankruptcy estates, alleged to be $110 million and $60 million, respectively. The WD Trustee maintains that Carmack Amendment liability extends beyond lading losses to cover all derailment related damages suffered by the World Fuel Entities or Irving Oil. CP disputes this interpretation of Carmack Amendment exposure and maintains that CP’s tariffs preclude anything except a minimal recovery. CP brought a motion to dismiss the Carmack Amendment claims. On March 24, 2017 the federal court in North Dakota dismissed, with prejudice, these claims. The court determined the claims asserted by the WD Trustee were brought too late. On March 28, 2017, the WD Trustee filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. The appeal is pending.

At this early stage of the proceedings, any potential responsibility and the quantum of potential losses cannot be determined. Nevertheless, CP denies liability and intends to vigorously defend against all derailment-related proceedings.

Environmental liabilities

Environmental remediation accruals, recorded on an undiscounted basis unless a reliable, determinable estimate as to an amount and timing of costs can be established, cover site-specific remediation programs.

The accruals for environmental remediation represent CP’s best estimate of its probable future obligation and include both asserted and unasserted claims, without reduction for anticipated recoveries from third parties. Although the recorded accruals include CP’s best estimate of all probable costs, CP’s total environmental remediation costs cannot be predicted with certainty. Accruals for environmental remediation may change from time to time as new information about previously untested sites becomes known, and as environmental laws and regulations evolve and advances are made in environmental remediation technology. The accruals may also vary as the courts decide legal proceedings against outside parties responsible for contamination. These potential charges, which cannot be quantified at this time, may materially affect income in the particular period in which a charge is recognized. Costs related to existing, but as yet unknown, or future contamination will be accrued in the period in which they become probable and reasonably estimable.

The expense included in “Purchased services and other” for the three months ended March 31, 2017 was $1 million (three months ended March 31, 2016 - $1 million). Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities”. The total amount provided at March 31, 2017 was $89 million (December 31, 2016 - $85 million). Payments are expected to be made over 10 years through 2026.

12 Condensed consolidating financial information

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

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

The tables include all adjustments necessary to reconcile the CCFI on a consolidated basis to CPRL’s consolidated financial statements for the periods presented.

Interim Condensed Consolidating Statements of Income

For the three months ended March 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Revenues
Freight	$	—		$	1,089		$	474		$	—		$	1,563
Non-freight	—			32			93			(85		)	40
Total revenues	—			1,121			567			(85		)	1,603
Operating expenses
Compensation and benefits	—			124			108			1			233
Fuel	—			132			38			—			170
Materials	—			34			9			6			49
Equipment rents	—			36			—			—			36
Depreciation and amortization	—			109			57			—			166
Purchased services and other	—			208			162			(92		)	278
Total operating expenses	—			643			374			(85		)	932
Operating income	—			478			193			—			671
Less:
Other income and charges	(20		)	(7		)	(1		)	—			(28		)
Net interest expense (income)	2			125			(7		)	—			120
Income before income tax expense and equity in net earnings of subsidiaries	18			360			201			—			579
Less: Income tax expense	1			98			49			—			148
Add: Equity in net earnings of subsidiaries	414			152			—			(566		)	—
Net income	$	431		$	414		$	152		$	(566	)	$	431

Interim Condensed Consolidating Statements of Income

For the three months ended March 31, 2016



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Revenues
Freight	$	—		$	1,097		$	451		$	—		$	1,548
Non-freight	—			33			96			(86		)	43
Total revenues	—			1,130			547			(86		)	1,591
Operating expenses
Compensation and benefits	—			201			126			2			329
Fuel	—			103			22			—			125
Materials	—			38			10			8			56
Equipment rents	—			54			(9		)	—			45
Depreciation and amortization	—			107			55			—			162
Purchased services and other	—			136			181			(96		)	221
Total operating expenses	—			639			385			(86		)	938
Operating income	—			491			162			—			653
Less:
Other income and charges	(69		)	(138		)	26			—			(181		)
Net interest (income) expense	(1		)	131			(6		)	—			124
Income before income tax expense and equity in net earnings of subsidiaries	70			498			142			—			710
Less: Income tax expense	9			111			50			—			170
Add: Equity in net earnings of subsidiaries	479			92			—			(571		)	—
Net income	$	540		$	479		$	92		$	(571	)	$	540

Interim Condensed Consolidating Statements of Comprehensive Income

For the three months ended March 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)		CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Net income	$	431	$	414		$	152		$	(566	)	$	431
Net gain (loss) in foreign currency translation adjustments, net of hedging activities	—		45			(40		)	—			5
Change in derivatives designated as cash flow hedges	—		5			—			—			5
Change in pension and post-retirement defined benefit plans	—		36			2			—			38
Other comprehensive income (loss) before income taxes	—		86			(38		)	—			48
Income tax expense on above items	—		(17		)	(1		)	—			(18		)
Equity accounted investments	30		(39		)	—			9			—
Other comprehensive income (loss)	30		30			(39		)	9			30
Comprehensive income	$	461	$	444		$	113		$	(557	)	$	461

Interim Condensed Consolidating Statements of Comprehensive Income

For the three months ended March 31, 2016



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Net income	$	540		$	479		$	92		$	(571	)	$	540
Net gain (loss) in foreign currency translation adjustments, net of hedging activities	—			310			(273		)	—			37
Change in derivatives designated as cash flow hedges	—			(47		)	—			—			(47		)
Change in pension and post-retirement defined benefit plans	—			45			2			—			47
Other comprehensive income (loss) before income taxes	—			308			(271		)	—			37
Income tax expense on above items	—			(41		)	—			—			(41		)
Equity accounted investments	(4		)	(271		)	—			275			—
Other comprehensive loss	(4		)	(4		)	(271		)	275			(4		)
Comprehensive income (loss)	$	536		$	475		$	(179	)	$	(296	)	$	536

Interim Condensed Consolidating Balance Sheets

As at March 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries		Consolidating Adjustments and Eliminations			CPRL Consolidated
Assets
Current assets
Cash and cash equivalents	$	—		$	83		$	118	$	—		$	201
Accounts receivable, net	—			447			184		—			631
Accounts receivable, inter-company	92			152			194		(438		)	—
Short-term advances to affiliates	500			513			4,167		(5,180		)	—
Materials and supplies	—			167			34		—			201
Other current assets	—			52			25		—			77
	592			1,414			4,722		(5,618		)	1,110
Long-term advances to affiliates	1			—			90		(91		)	—
Investments	—			40			143		—			183
Investments in subsidiaries	8,882			10,404			—		(19,286		)	—
Properties	—			8,763			7,898		—			16,661
Goodwill and intangible assets	—			—			200		—			200
Pension asset	—			1,165			—		—			1,165
Other assets	—			69			9		—			78
Deferred income taxes	11			—			—		(11		)	—
Total assets	$	9,486		$	21,855		$	13,062	$	(25,006	)	$	19,397
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities	$	73		$	804		$	271	$	—		$	1,148
Accounts payable, inter-company	17			281			140		(438		)	—
Short-term advances from affiliates	4,358			813			9		(5,180		)	—
Long-term debt maturing within one year	—			31			—		—			31
	4,448			1,929			420		(5,618		)	1,179
Pension and other benefit liabilities	—			656			74		—			730
Long-term advances from affiliates	—			91			—		(91		)	—
Other long-term liabilities	—			96			131		—			227
Long-term debt	—			8,529			54		—			8,583
Deferred income taxes	—			1,672			1,979		(11		)	3,640
Total liabilities	4,448			12,973			2,658		(5,720		)	14,359
Shareholders’ equity
Share capital	2,036			1,037			5,891		(6,928		)	2,036
Additional paid-in capital	42			1,637			300		(1,937		)	42
Accumulated other comprehensive (loss) income	(1,769		)	(1,770		)	672		1,098			(1,769		)
Retained earnings	4,729			7,978			3,541		(11,519		)	4,729
	5,038			8,882			10,404		(19,286		)	5,038
Total liabilities and shareholders’ equity	$	9,486		$	21,855		$	13,062	$	(25,006	)	$	19,397

Condensed Consolidating Balance Sheets

As At December 31, 2016



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries		Consolidating Adjustments and Eliminations			CPRL Consolidated
Assets
Current assets
Cash and cash equivalents	$	—		$	100		$	64	$	—		$	164
Accounts receivable, net	—			435			156		—			591
Accounts receivable, inter-company	90			113			206		(409		)	—
Short-term advances to affiliates	500			692			4,035		(5,227		)	—
Materials and supplies	—			150			34		—			184
Other current assets	—			38			32		—			70
	590			1,528			4,527		(5,636		)	1,009
Long-term advances to affiliates	1			—			91		(92		)	—
Investments	—			47			147		—			194
Investments in subsidiaries	8,513			10,249			—		(18,762		)	—
Properties	—			8,756			7,933		—			16,689
Goodwill and intangible assets	—			—			202		—			202
Pension asset	—			1,070			—		—			1,070
Other assets	1			48			8		—			57
Deferred income taxes	11			—			—		(11		)	—
Total assets	$	9,116		$	21,698		$	12,908	$	(24,501	)	$	19,221
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities	$	73		$	945		$	304	$	—		$	1,322
Accounts payable, inter-company	14			292			103		(409		)	—
Short-term advances from affiliates	4,403			816			8		(5,227		)	—
Long-term debt maturing within one year	—			25			—		—			25
	4,490			2,078			415		(5,636		)	1,347
Pension and other benefit liabilities	—			658			76		—			734
Long-term advances from affiliates	—			92			—		(92		)	—
Other long-term liabilities	—			152			132		—			284
Long-term debt	—			8,605			54		—			8,659
Deferred income taxes	—			1,600			1,982		(11		)	3,571
Total liabilities	4,490			13,185			2,659		(5,739		)	14,595
Shareholders’ equity
Share capital	2,002			1,037			5,823		(6,860		)	2,002
Additional paid-in capital	52			1,638			298		(1,936		)	52
Accumulated other comprehensive (loss) income	(1,799		)	(1,799		)	712		1,087			(1,799		)
Retained earnings	4,371			7,637			3,416		(11,053		)	4,371
	4,626			8,513			10,249		(18,762		)	4,626
Total liabilities and shareholders’ equity	$	9,116		$	21,698		$	12,908	$	(24,501	)	$	19,221

Interim Condensed Consolidating Statements of Cash Flows

For the three months ended March 31, 2017



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Cash provided by operating activities	$	63		$	85		$	264		$	(101	)	$	311
Investing activities
Additions to properties	—			(109		)	(121		)	—			(230		)
Proceeds from sale of properties and other assets	—			1			2			—			3
Advances to affiliates	(152		)	—			(134		)	286			—
Capital contributions to affiliates	—			(68		)	—			68			—
Other	—			5			—			—			5
Cash used in investing activities	(152		)	(171		)	(253		)	354			(222		)
Financing activities
Dividends paid	(73		)	(73		)	(28		)	101			(73		)
Issuance of share capital	—			—			68			(68		)	—
Issuance of CP Common Shares	28			—			—			—			28
Repayment of long-term debt, excluding commercial paper	—			(5		)	—			—			(5		)
Advances from affiliates	134			149			3			(286		)	—
Cash provided by (used in) financing activities	89			71			43			(253		)	(50		)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	—			(2		)	—			—			(2		)
Cash position
(Decrease) increase in cash and cash equivalents	—			(17		)	54			—			37
Cash and cash equivalents at beginning of period	—			100			64			—			164
Cash and cash equivalents at end of period	$	—		$	83		$	118		$	—		$	201

Interim Condensed Consolidating Statements of Cash Flows

For the three months ended March 31, 2016



(in millions of Canadian dollars)	CPRL (Parent Guarantor)			CPRC (Subsidiary Issuer)			Non-Guarantor Subsidiaries			Consolidating Adjustments and Eliminations			CPRL Consolidated
Cash provided by operating activities	$	23		$	51		$	198		$	(54	)	$	218
Investing activities
Additions to properties	—			(132		)	(146		)	—			(278		)
Proceeds from sale of properties and other assets	—			57			3			—			60
Advances to affiliates	—			(35		)	—			35			—
Capital contributions to affiliates	—			(9		)	—			9			—
Repurchase of share capital from affiliates	—			6			—			(6		)	—
Cash used in investing activities	—			(113		)	(143		)	38			(218		)
Financing activities
Dividends paid	(54		)	(54		)	—			54			(54		)
Issuance of share capital	—			—			9			(9		)	—
Return of share capital to affiliates	—			—			(6		)	6			—
Issuance of CP Common Shares	5			—			—			—			5
Repayment of long-term debt, excluding commercial paper	—			(4		)	(7		)	—			(11		)
Advances from affiliates	26			—			9			(35		)	—
Other	—			(2		)	—			—			(2		)
Cash (used in) provided by financing activities	(23		)	(60		)	5			16			(62		)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents	—			(4		)	(13		)	—			(17		)
Cash position
(Decrease) increase in cash and cash equivalents	—			(126		)	47			—			(79		)
Cash and cash equivalents at beginning of year	—			502			148			—			650
Cash and cash equivalents at end of year	$	—		$	376		$	195		$	—		$	571

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Company's Interim Consolidated Financial Statements and the related notes for the three months ended March 31, 2017 in Item 1. Financial Statements, the Company's 2016 Annual Report on Form 10-K, and other information in this report. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

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.

Available Information

CP makes available on or through its website www.cpr.ca free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). 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 our Board of Directors and each of its committees, our corporate governance guidelines and our Code of Business Ethics. SEC filings made by CP are also accessible through the SEC’s website at www.sec.gov. The information on our website is not part of this quarterly report on Form 10-Q.

The Company has included the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) certifications regarding the Company's public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as an Exhibit to this report.

Executive Summary

First Quarter 2017 Results

•

Financial performance – In the first quarter of 2017, CP reported Diluted earnings per share ("EPS") of $2.93 down 17% compared to the Diluted EPS of $3.51 for the same period in 2016. The decrease in reported Diluted EPS was primarily due to a reduced foreign exchange ("FX") gain on U.S. dollar-denominated debt in 2017 as compared to 2016. Adjusted diluted EPS was $2.50 in the first quarter of 2017, unchanged from the first quarter of 2016, due to improved performance and lower shares outstanding offsetting a $51 million reduction in gain on land sales.

CP's operating ratio improved by 80 basis points in the first quarter of 2017 to 58.1% from 58.9% in the same period in 2016. The operating ratio in the first quarter of 2017 includes a $51 million recovery associated with management transition. Adjusted operating ratio, which excludes this recovery, increased by 240 basis points in the first quarter of 2017 to 61.3%. No adjustment was made to operating ratio in 2016.

Adjusted diluted EPS and Adjusted operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


•	Operating revenues – Total operating revenues increased by 1% in the first quarter of 2017 to $1,603 million from $1,591 million in the same period in 2016.

•

Operating performance – CP’s continued focus on asset utilization and network investments resulted in incremental improvements to CP’s key operating metrics. CP’s average train weight increased by 2% and average train length increased by 1%. CP's workforce decreased by 5% to 11,829 people. Average terminal dwell increased by 3%, average train speed decreased by 5% and fuel efficiency deteriorated by 1% primarily due to harsher weather conditions. These metrics are discussed further in Performance Indicators of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 future share repurchases and CEO transition cost recoveries in 2017 of $39 million after tax ($51 million before tax). 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 the 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.

Adjusted diluted EPS is defined and discussed further in Non-GAAP Measures and in Forward-Looking Information of this Item 2. 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. These unknown variables may include unpredicted transactions of significant value. In past years, CP has recognized significant asset impairment charges and management transition costs related to senior executives. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the Canadian-to-U.S. dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted diluted EPS. In particular, CP excludes the foreign exchange impact of translating the Company’s U.S. dollar denominated long-term debt from Adjusted diluted EPS. Please see Forward-Looking Information of this Item 2. 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:



For the three months ended March 31	2017	2016⁽¹⁾	% Change
Operations Performance
Gross ton-miles (“GTMs”) (millions)	60,827	62,219	(2	)
Train miles (thousands)	7,511	7,930	(5	)
Average train weight – excluding local traffic (tons)	8,647	8,480	2
Average train length – excluding local traffic (feet)	7,143	7,103	1
Average terminal dwell (hours)	7.1	6.9	3
Average train speed (miles per hour, or "mph")	22.3	23.4	(5	)
Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs)	1.012	1.002	1
Total employees (average)	11,648	12,434	(6	)
Total employees (end of period)	11,794	12,443	(5	)
Workforce (end of period)	11,829	12,508	(5	)
Safety Indicators
FRA personal injuries per 200,000 employee-hours	1.89	1.45	30
FRA train accidents per million train-miles	0.85	0.93	(9	)

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

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 the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs for the first quarter of 2017 were 60,827 million, a 2% decrease compared with 62,219 million in the same period of 2016. This decrease was primarily due to improvements in operating efficiency.

Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles for the first quarter of 2017 decreased by 419 thousand miles, or 5%, compared to the same period of 2016, 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 increased in the first quarter of 2017 by 167 tons, or 2%, from the same period of 2016.

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 increased in the first quarter of 2017 by 40 feet, or 1%, from the same period of 2016.

Both average train weight and length in the first quarter of 2017 benefited from improvements in operating plan efficiency.

The average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving 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 increased by 3% to 7.1 hours in the first quarter of 2017 from 6.9 hours in the same period of 2016.

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 22.3 miles per hour in the first quarter of 2017, a decrease of 5%, from 23.4 miles per hour in the same period of 2016.

Average terminal dwell and average train speed changes in the first quarter of 2017 were primarily due to harsher weather conditions coupled with partner railroad outages that impacted fluidity in key corridors resulting in increased congestion and dwell.

Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs - freight and yard. Fuel efficiency decreased by 1% in the first quarter of 2017 compared to the same period of 2016. This was primarily due to the operational challenges from harsher weather conditions.

Total Employees and Workforce

An employee is defined as an individual currently engaged in full-time, part-time or seasonal employment with CP. The average number of total employees for the first quarter of 2017 was 11,648, a decrease of 786, or 6%, compared with the same period of 2016. The total number of employees as at March 31, 2017 was 11,794, a decrease of 649, or 5% compared with 12,443 as at March 31, 2016.

The workforce is defined as total employees plus contractors and consultants. The Company's total workforce as at March 31, 2017 was 11,829, a decrease of 679, or 5%, compared with 12,508 as at March 31, 2016.

The reductions of total employees and workforce were primarily due to 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. Federal Railroad Administration (“FRA”) reporting guidelines.

The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties or obtain medical treatment 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 1.89 in the first quarter of 2017, up from 1.45 in the same period of 2016.

The FRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold of U.S. $10,700 (U.S. $10,500 in 2016) in damage. The FRA train accidents per million train-miles frequency was 0.85 in the first quarter of 2017, down from 0.93 in the same period of 2016.

Financial Highlights

The following table presents selected financial data related to the Company’s financial results as of, and for the first quarter ended March 31, 2017 and the comparative figures in 2016. The financial highlights should be read in conjunction with Item 1. Financial Statements and this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.



For the three months ended March 31
(in millions, except per share data, percentages and ratios)	2017			2016
Financial Performance
Revenues	$	1,603		$	1,591
Operating income	671			653
Adjusted operating income⁽¹⁾	620			653
Net income	431			540
Adjusted income⁽¹⁾	368			384
Basic EPS	2.94			3.53
Diluted EPS	2.93			3.51
Adjusted diluted EPS⁽¹⁾	2.50			2.50
Dividends declared per share	0.5000			0.3500
Financial Position
Total assets⁽²⁾	$	19,397		$	19,221
Total long-term obligations⁽²⁾⁽³⁾	8,661			8,737
Shareholders’ equity⁽²⁾	5,038			4,626
Cash provided by operating activities	311			218
Free cash⁽¹⁾	87			(17		)
Financial Ratios
Operating ratio⁽⁴⁾	58.1		%	58.9		%
Adjusted operating ratio⁽¹⁾	61.3		%	58.9		%
Return on invested capital ("ROIC")⁽¹⁾	13.4		%	14.8		%
Adjusted ROIC⁽¹⁾	13.7		%	15.2		%


⁽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 of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

⁽²⁾2017 information is as at March 31, 2017 and 2016 information is as at December 31, 2016.

⁽³⁾Excludes deferred income taxes: $3,640 million and $3,571 million; and other non-financial deferred liabilities of $879 million and $940 million at March 31, 2017 and December 31, 2016 respectively.

⁽⁴⁾Operating ratio is defined as operating expenses divided by revenues.

Results of Operations

Income

Operating income was $671 million in the first quarter of 2017, an increase of $18 million, or 3%, from $653 million in the same period of 2016. This increase was primarily due to:


•	management transition recovery of $51 million associated with Mr. E. Hunter Harrison's retirement as CEO of CP;


•	higher defined benefit pension plan income of $26 million; and


•	efficiencies generated from improved operating performance and asset utilization.

This increase was partially offset by:


•	the effects of the gain on sale of CP's Arbutus Corridor in 2016 of $50 million;


•	the unfavourable impact of the change in FX of $17 million; and


•	the unfavourable impacts of changes in fuel prices of $15 million.

Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $620 million in the first quarter of 2017, a decrease of $33 million, or 5%, from $653 million in the same period of 2016. This decrease reflects the same factors discussed above except that Adjusted operating income in 2017 excludes management transition recovery of $51 million.

Net income was $431 million in the first quarter of 2017, a decrease of $109 million, or 20%, from $540 million in the same period of 2016. This decrease was primarily due to a reduced favourable impact of FX translation on U.S. dollar-denominated debt compared to the same period in 2016. This decrease was partially offset by a decrease in income tax expense of $22 million, due to lower taxable earnings in addition to a lower effective income tax rate, and higher operating income.

Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $368 million in the first quarter of 2017, a decrease of $16 million, or 4%, from $384 million in the same period of 2016. This decrease was due to lower Adjusted operating income, partially offset by a decrease in income tax expense.

Diluted Earnings per Share

Diluted earnings per share was $2.93 in the first quarter of 2017, a decrease of $0.58, or 17%, from $3.51 in the same period of 2016. This decrease was primarily due to lower Net income, partially offset by lower average outstanding shares due to the Company’s share repurchase program.

Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $2.50 in the first quarter of 2017, unchanged from $2.50 in the same period of 2016. This was due to lower Adjusted income being offset by lower average 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 58.1% in the first quarter of 2017, an 80 basis point improvement from 58.9% in the same period of 2016. This improvement was primarily due to:


•	management transition recovery;


•	higher defined benefit pension plan income; and


•	efficiencies generated from improved operating performance and asset utilization.

This improvement was partially offset by the gain on sale of CP's Arbutus Corridor in 2016 and the unfavourable impacts of changes in fuel prices.

Adjusted operating ratio, defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was 61.3% in the first quarter of 2017, a 240 basis points higher than 58.9% in the same period of 2016. This increase was primarily due to the gain on sale of CP's Arbutus Corridor in 2016 and the unfavourable impacts of changes in fuel prices. This was partially offset by higher defined benefit pension plan income and efficiencies generated from improved operating performance and asset utilization.

Return on Invested Capital

ROIC is a measure of how productively the Company uses its long-term capital investments, representing a critical indicator 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 13.4% for the twelve months ended March 31, 2017, a 140 basis point decrease compared to 14.8% for the twelve months ended March 31, 2016. Adjusted ROIC was 13.7% for the twelve months ended March 31, 2017, a 150 basis point decrease compared to the twelve months ended March 31, 2016. These decreases were due to lower income and new debt issued during the third quarter of 2015, partially offset by lower total shareholders' equity, primarily due to the Company's share repurchase program in 2016 and 2015. ROIC and Adjusted ROIC are defined and reconciled in Non-GAAP Measures of this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Impact of FX 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. The following tables indicate the average and periodic exchange rates when converting U.S. dollars to Canadian dollars for the three months ended March 31, 2017 and the comparative period in 2016.



Exchange rates (Canadian dollar/U.S. dollar)	2017		2016
Beginning of quarter – January 1	$	1.34	$	1.38
End of quarter – March 31	$	1.33	$	1.30

In the first quarter of 2017, the impact of a stronger Canadian dollar resulted in a decrease in total revenues of $33 million, a decrease in total operating expenses of $16 million and a decrease in interest expense of $4 million from the same period in 2016.

The impact of FX on total revenues and operating expenses is discussed further in Item 3. Quantitative and Qualitative Disclosures About Market Risk, in the Foreign Exchange Risk section.

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. The following table indicates the average fuel price for the three months ended March 31, 2017 and the comparative period in 2016.

In the first quarter of 2017, the impact of higher fuel prices resulted in an increase in total revenues of $27 million and an increase in total operating expenses of $42 million from the same period in 2016. This includes the impacts of British Columbia (B.C.) and Alberta carbon taxes recovered and paid, on revenues and expenses, respectively.

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 Toronto Stock Exchange ("TSX") and the New York Stock Exchange for the three months ended March 31, 2017 and the comparative period in 2016.



Toronto Stock Exchange (in Canadian dollars)	2017		2016
Opening Common Share Price, as at January 1	$	191.56	$	176.73
Ending Common Share Price, as at March 31	$	195.35	$	172.55
Change in Common Share Price	$	3.79	$	(4.18	)